Economic and Social Environment Unit-1

Objectives

Structure

Economic Environment of Business

Economic environment consists of economic factors that influence the business in a
country. These factors include gross national product, corporate profits, inflation
rate, employment, balance of payments, interest rates consumer income etc.
In a developing country, the low income may be the reason for the very low
demand for a product.
Economic environment of business has reference to the board characteristics of the
economic system in which the business operates. The business sector has economic
relation with the government, capital market; household sector and global sector.
These sectors together influence the trends and structure of the economy. The form
and functioning of the economy vary widely.
The general Economic conditions prevailing in the country viz. national income, per
capita income, economic resources, distribution of income and assets, economic
development etc. are important determinants of the business strategies. Business
cycles and economic growth of the economy are important factors defining the
economic environment.
The economic system operating in the country also affects the business enterprise
to a very great extent. The economic system of a country may be capitalist,
socialist, communist or mixed.
The government decides the economic environment of business through Budges,
Industrial regulations, Economic planning, Import and Export regulations, Business
laws, Industrial policy, Control on prices and wages, Trade and transport policies,
the size of the national Income, Demand & supply of various goods etc.
The rate of interest affects the demand for the products in the economy,
particularly when general goods are to be purchased through borrowed finance.
Low interest rated provides opportunities to the industries to expand whereas rising
interest rates pose a threat to these institutions.

Meaning of Economic Environment

Economic environment refers to that entire economic factor which has a bearing
functioning of the business unit. Business depends on the economic environment
for all the needed inputs. It also depends on the economic environment to sell the
finished goods.
Components of the Economic Environment
The economic environment comprises of:

Income and wealth: Income in an economy is measured by GDP, GNP and per
capita income. High values of these factors show a progressive economic
environment.

Employment levels: High employment represents a positive picture of the

economy. However, there are many forms of unemployment, including partial
employment and disguised unemployment.

Productivity: This is the output generated from a given amount of inputs. High
levels of productivity support the economic environment.

Importance of Economic Environment

The competent and successful management must be capable of adapting to the
economic environment. The knowledge of the economic environment helps in:

i) Capitalizing emerging opportunities

ii) Activating management

iii) Image building

iv) Basis of strategy

v) Intellectual stimulation

vi) Continuous learning

i) Capitalizing early opportunities: Environment friendly enterprise is the first

movers to avail of the existing opportunities of resources to grab the market. These
enterprises do not loose emerging opportunities to their competitors. For example:
Asian pains have been losing their market to Good lass Nerolac because of their
failure to match their technology with Cathodic Electro Deposition (CED)
technology, which helped the competitor to grab the opportunity of meeting 90%
paint requirement of Maruti Udyog.

ii) Activating management to changing needs: The knowledge of

environmental changes sensitizes the management to make strategy to cope with
the emerging problems. For example: The turmoil in the USSR resulted in the loss
of market to many companies like Hoechst. In order to meet the situation Hoechst
divested its manufacturing facility in favors of IPCA Laboratories Ltd.

iii) Image building: Environmental understanding by the management builds

image of the company in the minds of the people. They feel that the company is
sensitive and responsive to their needs and problems. For example: G. E is said to
be image conscious. It divested its computer and air-conditioning business because
they could not attain 1st or 2nd position in the business as per their policy. Now
they are snickering to out sourcing in India, aircraft engineering, plastic etc.

iv) Basis of strategy: Strategists can gather qualitative information regarding

business environment and utilizing them in formulating effective plants. For
example: ITC Hotels foresaw bright opportunities in the travel and tourism industry
and started building hotels in India and abroad.

v) Intellectual stimulation: Knowledge of environment changes provides

intellectual stimulation to planners and decision-making authorities. They can do it
by paying more attention to people by listening to their problems and suggestion.
They can also eliminate procedure complexities in a visible way. The drastic and
dynamic steps will definitely keep the company better placed.

vi) Continuous learning: Environmental scanning provides continuing broad

based learning to be executives. Reliance adopted the policy of decentralization and
empowered their managers to close the deal themselves even regarding price. In
1993 managers were require to chat with the proprietress on alternate days for 15
minutes. The process made them so competent that now the managers are
required to chat only three times in a month. It shows that continuous learning
made the managers competent to take independent decision.

Impact of Economic environment on business

Any business organization has one goal, to maximize profit. The process of
maximizing revenue is simple. Evaluate need for customers, and provide
appropriate provide, within top quality and quantity. There are nevertheless many
factors which affect this simple operation. These elements are often categorized as
macro as well as mini, internal and external, technical as well as non-technical. All
the same, the actual product sales, production and procurement of the business
organizations, straight or not directly depends upon these types of elements.
Therefore, you will find which entrepreneurs carefully analyze and ponder upon the
economic elements impacting business companies. The impact of economic
environment on business considers the following concepts:

i) Demand and offer

The need and offer are 2 primary elements that affect the working associated with
a business design. The need is the will as well as capability of shoppers to buy a
specific item and the provide may be the ability of the company to provide for the
need for customers. It should be mentioned that all the standards which are
included in this list are inter-connected. You may even study need and supply
analysis.

ii) Marginal and Complete Power

Utility may be the quantity of fulfillment, that’s produced by consumers from

consumption of goods. This so happens that whenever continuous and successive
use of units of the same goods, the fulfillment that’s experienced by consumer
begins decreasing. This often results into short term or even long-term fall of sales.
Some organizations get ready for the actual launch of some other brand name
before the fall in power and sales is experienced. The actual release of new brand,
helps to ensure that the actual revenue pattern from the company does not drop.
Decreasing power is among the exterior elements affecting business. You may even
read more on diminishing minor utility.

iii) Cash as well as Finance

Financial allows for financial and financial policies which impact company as well as
the clients from the business. Money in circulation dictates the having to pay power
or rather the demand of the actual customers and also the financial facility dictates
the borrowing capability of people along with the business.

iv) Financial Development and growth

Financial development dictates the quantity of finances that the society in particular
is actually earning as well as improvement signifies the amount of money that’s
being spent in to channels associated with long-term up-gradation. Amongst all the
financial elements affecting business environment, improvement is an essential
one, since the company needs to focus on the actual need for a good economically
dynamic society.

v) Income and Employment

An additional very important facet of the economic climate that impacts the
significant from the business may be the degree of work as well as rate of earnings.
The actual for each capita income as well as density of work determines the speed
of need, denseness associated with need and also the purchasing power of those.

vi) Common Price Level

An additional very important facet of the actual economy, which impacts the
business, is the general price levels from the goods which additionally modify the
product sales from the business. Expenses of recycleables, having to pay power of
individuals, price of production and finally, cost of transport are a few of the
important components that determine the general cost level and also, the actual
product sales from the firm.

vii) Industry Cycles

Industry series are the changing expenses of products as well as commodities

within an economic climate. Increase, stability, a continual and drop are some of
the important series which modify the costs away all goods for example uncooked
materials, credit score, last products, and so on. Trade cycles additionally often
modify the general cost degree.

Factors of Economic Environment

1. Growth strategy

2. Economic system

3. Economic planning

4. Industry

5. Agriculture

6. Infrastructure

7. Financial and fiscal factor

8. Removal of regional imbalance

9. Price and distribution control

10. Economic reforms

11. Per capita and national income

1. Growth strategy

Growth strategy is a strategy based on investing in companies and sectors which

are growing faster than their peers. The benefits are usually in the form of capital
gains rather than dividends.

2. Economic system

An economic system is the combination of the various agencies, entities that

provide the economic structure that defines the social community. The economics
system involves production, allocation of economic inputs, and distribution of
economic outputs, Landlords and land availability, households, Capitalists, Banks
and Government. It is a set of institutions and their various social relations.
3. Economic planning

Economic planning refers to any directing or planning of economic activity outside

the mechanisms of the market, in an attempt to achieve specific economic or social
outcomes. Planning is an economic mechanism for resource allocation and decision-
making in contrast with the market mechanism. Most economies are mixed
economies, incorporating elements of market mechanisms and planning for
distributing inputs and outputs.

4. Industry

As per Section 2(j) of Industrial Disputes Act, 1947 “Industry” means any
systematic activity carried on by co-operation between an employer and his
workmen (whether such workmen are employed by such employer directly or by or
through any agency, including a contractor) for the production, supply or
distribution of goods or services with a view to satisfy human wants or wishes.

5. Agriculture

Agriculture is the cultivation of animals, plants, fungi, and other life forms for food,
fiber, and other products used to sustain life. Agriculture was the key development
in the rise of sedentary human civilization, whereby farming of domesticated
species created food surpluses that nurtured the development of civilization. The
study of agriculture is known as agricultural science. Agriculture generally speaking
refers to human activities, although it is also observed in certain species of ant and
termite.

6. Infrastructure

Infrastructure is basic physical and organizational structures needed for the

operation of a society or enterprise or the services and facilities necessary for an
economy to function. It can be generally defined as the set of interconnected
structural elements that provide framework supporting an entire structure of
development. It is an important term for judging a country or region's
development.

7. Financial and fiscal factor

Financial factors consider the income statement is a simple and straightforward

report on the proposed business's cash-generating ability. It is a score card on the
financial performance of your business that reflects when sales is made and when
expenses are incurred. It draws information from the various financial models
developed earlier such as revenue, expenses, capital and cost of goods. Fiscal
policy is the use of government expenditure and revenue collection (taxation) to
influence the economy. Fiscal policy can be contrasted with the other main type of
macroeconomic policy, monetary policy, which attempts to stabilize the economy by
controlling interest rates and spending.

8. Removal of regional imbalance

Government had appointed a Fact Finding Committee (FFC) in August, 1983 under
the Chairmanship of Dr. V.M. Dandekar for studying the problem of imbalance
between different regions of the State to identify regional backlog on the basis of
such a study and to suggest measures for removal of the regional backlog including
long term measures to avoid such regional imbalance in the future.

9. Price and distribution control

During the ongoing post-communist economic transitions, the relative well-being of

many people is changing rapidly, and governments are not well positioned to
accurately measure individual living standards. Under such circumstances,
continued price controls over basic consumer goods within the state sector, and the
associated queuing, can form a serviceable device for targeting poor people for
subsidies.

10. Economic reforms

India was a latecomer to economic reforms, embarking on the process in earnest

only in 1991, in the wake of an exceptionally severe balance of payments crisis.
The need for a policy shift had become evident much earlier, as many countries in
East Asia achieved high growth and poverty reduction through policies which
emphasized greater export orientation and encouragement of the private sector.

11. Per capita and national income

Per capita income or income per person is a measure of mean income within an
economic aggregate, such as a country or city. It is calculated by taking a measure
of all sources of income in the aggregate (such as GDP or Gross National Income)
and dividing it by the total population. It does not attempt to reflect the distribution
of income or wealth.

Factors of Economic Environment (In Details)

1. Growth strategy

The growth strategy of a company needs to be studied in the long term

perspective. The companies can-not grow overnight. They need a context in which
they grow. This context comes from the existing customer base, the present size of
operations, the technology and the manufacturing/ service facilities at its disposal.
Growth can be expected to have a commensurately larger or bigger
manufacturing/service facilities or asset base, purchase of more materials,
producing more, hiring more employees, incurring larger overheads. The company
pursuing growth may aspire to increase its income, serve larger customer base,
expand its operations and generally embark on increased business activities.
Needless to say, all this would call for additional funds and resources. Economic
activity as a whole is benefited by the active acquisition and divestiture
marketplace, which allows young companies to be bought and mature companies to
adapt to changing circumstances.

It is interesting to view the growth path of some Indian companies or Business

Groups like Reliance Group, Tata Group, ITC Group, Sahara group, the IT leaders
like Wipro, Infosys etc. These companies have followed the growth path that has
taken various routes. These routes can be organic or in organic or a judicious mix
of both.

Tata Steel and Corus on January 31, 2007, Tata Steel Limited, one of the leading
steel producers in India, acquired the Anglo Dutch steel producer Corus Group for
US$ 12.11 billion. Corus was 2.5 times bigger company than TATA. It took nine
rounds for Tata to acquire Corus. In the first bid Tata had closed the deal at US $
7.6 billion and later it ended up by paying US $ 12.11 billion, making it an
expensive turnover. This acquisition was the biggest overseas acquisition by an
Indian company. Tata Steel emerged as the fifth largest steel producer in the world.
After acquisition Tata benefited itself from Corus: i) Distribution network of Europe,
ii) Expertise in steel making for automobiles. In return Corus benefit itself from
Tata Steel's expertise in low cost manufacturing of steel.

Types of Growth Strategies

The various types of growth strategy are as follows:

1. Merger and Acquisition

2. Joint venture

3. Strategic alliance

1. Merger and Acquisition

Merger is the combination of two or more existing companies. All assets, liabilities
and the stock of one company stand transferred to Transferee Company in
consideration of payment in the form of:

i) Equity shares in the transferee company,

ii) Debentures in the transferee company,

iii) Cash, or

iv) A mix of the above modes.

Acquisition is a deal when one company takes over another company and buyer
becomes sole proprietor. At times takeover occurs when the target company does
not want to be purchased. However with better offering of prices shareholder are
attracted by acquirer. In legal terms, the target company ceases to survive. The
buyer swallows the company and the buyer's stock continues to be traded. Unlike
mergers which are friendly, acquisitions can be friendly and unfriendly.

The process of mergers and acquisitions has gained substantial importance in

today's corporate world. This process is extensively used for restructuring the
business organizations. In India, the concept of mergers and acquisitions was
initiated by the government bodies. Some well known financial organizations also
took the necessary initiatives to restructure the corporate sector of India by
adopting the mergers and acquisitions policies. The Indian economic reform since
1991 has opened up a whole lot of challenges both in the domestic and
international spheres. The increased competition in the global market has prompted
the Indian companies to go for mergers and acquisitions as an important strategic
choice. The trends of mergers and acquisitions in India have changed over the
years. The immediate effects of the mergers and acquisitions have also been
diverse across the various sectors of the Indian economy.

Among the different Indian sectors that have resorted to mergers and acquisitions
in recent times, telecom, finance, FMCG, construction materials, automobile
industry and steel industry are worth mentioning. With the increasing number of
Indian companies opting for mergers and acquisitions, India is now one of the
leading nations in the world in terms of mergers and acquisitions.

The merger and acquisition business deals in India amounted to $40 billion during
the initial 2 months in the year 2007. The total estimated value of mergers and
acquisitions in India for 2007 was greater than $100 billion. It is twice the amount
of mergers and acquisitions in 2006.

Objectives of Acquiring

i) To reduce competition.

ii) To increase growth rate & capture a greater market share

iii) To improve value of organization’s stock.

iv) To acquire a needed resource quickly.

v) To take advantage of synergy.

vi) To acquire resources to stabilize operations.

vii) To achieve economies of scale.

2. Joint venture

A joint venture (JV) is a business agreement in which parties agrees to develop, for
a finite time, a new entity and new assets by contributing equity. They exercise
control over the enterprise and consequently share revenues, expenses and assets.
There are other types of companies such as JV limited by guarantee, joint ventures
limited by guarantee with partners holding shares.

India has an open philosophy on capital markets, and it closely parallels its English
peers in operation. The Bombay Stock Exchange (BSE) has close to 5,000 listed
shares, and trades in several thousand more, making it the largest stock exchange
in the world. The National Stock Exchange is the other exchange at present. English
is one of the preferred languages of the market, and its policies are first announced
in English. The Indian people are skilled and entrepreneurial by nature as evident in
world markets, but in India, less than 1% of its billion populations at present that
is, only 11 million people representing 3% of households invest in the market.

People who work the market in other languages are adept in recognizing concepts
in derivatives and futures and trade in them. India is one of three countries that
has supercomputers, one of six that has satellite launching facilities and has over
100 Fortune 500 companies doing R&D in the country.

India does not restrict the repatriation of investments, dividends, profits and if need
be, the principal, through the single autonomous entity, the Reserve Bank of India
(RBI). The Indian currency (the rupee) is 100% convertible for earnings at free
market rates.

Joint venture companies

JV companies are the preferred form of corporate investment but there are no
separate laws for joint ventures. Companies which are incorporated in India are
treated on par as domestic companies.

Two parties, (individuals or companies), incorporate a company in India. Business

of one party is transferred to the company and as consideration for such transfer;
shares are issued by the company and subscribed by that party. The other party
subscribes for the shares in cash.

Promoter shareholder of an existing Indian company and a third party, who/which

may be individual/company, one of them non-resident or both residents,
collaborate to jointly carry on the business of that company and its shares are
taken by the said third party through payment in cash.

Private companies (only about $2500 is the lower limit of capital, no upper limit)
are allowed in India together with and public companies, limited or not, likewise
with partnerships. Sole proprietorship too is allowed. However, the latter are
reserved for NRIs.

Through capital market operations foreign companies can transact on the two
exchanges without prior permission of RBI but they cannot own more than 10
percent equity in paid-up capital of Indian enterprises, while aggregate foreign
institutional investment (FII) in an enterprise is capped at 24 percent.

The establishment of wholly owned subsidiaries (WOS) and project offices and
branch offices, incorporated in India or not. Sometimes, it is understood, that
branches are started to test the market and get its flavour. Equity transfer from
residents to non-residents in mergers and acquisitions (M&A) is usually permitted
under the automatic route. However, if the M&As are in sectors and activities
requiring prior government permission then transfer can proceed only after
permission.

Joint ventures with trading companies are allowed together with imports of second
hand plants and machinery.

It is expected that in a JV, the foreign partner supplies technical collaboration and
the pricing includes the foreign exchange component, while the Indian partner
makes available the factory or building site and locally made machinery and product
parts. Many JVs are formed as public limited companies (LLCs) because of the
advantages of limited liability.

JVs are expected in the nuclear industry following the NSG waivers for nuclear
trade. The nuclear power industry has been witnessing several JVs. The country has
set an imposing target of achieving an installed capacity of 20 GW by 2020 and 63
GW by 2030. The total size of the Indian nuclear power market will be around $40
billion by 2020 with a growth rate (AAGR) of 9.2% in installed nuclear capacity
during 2008–20. The total investments made are to a tune of around $1.30 billion
following the Indo-US nuclear deal in 2008.

There is a group of industries reserved for the small-scale sector wherein foreign
investment cannot exceed 24%, and if does, then approval is necessary from the
FIPB, and the unit loses its 'smallness' and requires an industrial license.

Under the country's laws, a public company must:

i) Have at least seven shareholders

ii) Have at least three directors

iii) Obtain government approval for the appointment of its management.

iv) Have both a "trading certificate" and certificate of incorporation before

commencing its business.

v) Publish also a prospectus before it can start transact business.

vi) Hold statutory meetings

Joint Venture in India

Joint Venture Maruti Udyog Ltd. & Suzuki Motor Corp. Maruti Suzuki is one of
India's leading automobile manufacturers and the market leader in the car
segment, both in terms of volume of vehicles sold and revenue earned. Until
recently, 18.28% of the company was owned by the Indian government, and
54.2% by Suzuki of Japan. The Indian government held an initial public offering of
25% of the company in June 2003. As of May 10, 2007, Govt. of India sold its
complete share to Indian financial institutions. With this, Govt. of India no longer
has stake in Maruti Udyog. During 2007-08, Maruti Suzuki sold 764,842 cars, of
which 53,024 were exported. In all, over six million Maruti cars are on Indian roads
since the first car was rolled out on December 14, 1983.

3. Strategic alliance

A Strategic Alliance is a relationship between two or more parties to pursue a set of

agreed upon goals or to meet a critical business need while remaining independent
organizations. This form of cooperation lies between M&A and organic growth.
Strategic alliance is a form of affiliation that involves a mutual sharing of resources
or “partnering” to improve efficiency. In strategic alliances, the focus is on “sharing”
of resources rather than seeking change in control. Equity investment in each
other’s company is not any focus.

Types of strategic alliances

i) Cross-Promotional Alliance

Cross promotion Alliances are one of the more common types of alliances.
Companies promoting each other with the use of discounts, coupons, specials,
shared advertising space or in-store promotions. Exceptionally efficient is reducing
costs of advertising. Example: Business Class flights offering a free AOL disk with
peanuts.

ii) Strategic Alliances for Co-Branding

Co-branding strategy involves two companies putting their name on a common
product. At the very least, co-branding offers twice the exposure and market
impact opposed to traditional single brand advertising. Ex: Mattel and McDonalds
offering toys that produce McDonald’s hamburgers and Fries.

iii) Strategic Alliances to Serve National Customers

Serving National customers is often too costly or too difficult for a firm to handle by
themselves. To create an alliance to serve national customers, companies share
information, sales accounts and materials with the other members. This also allows
for a more consistent customer satisfaction that otherwise wouldn’t be available.
Trust is a very important factor for an alliance to succeed, especially when the
scope of the alliance is national or global. Example: Canvas Awnings drawing
together with several other fabricators to meet the needs of clients all over the U.S.
by dividing the country into 5 regions, which allows them to service the national
need for awnings.

iv) Industry-specific Geographical Strategic Alliances

Industry-specific Geographical Strategic Alliances focuses on a specific industry in a

certain geographical area. These businesses are general within very close proximity
to one another and can satisfy all the needs of their customers in one phone call or
visit. Example: The Minnesota Connection: Services the Direct Marketing Industry,
alliance involving Telemarketing, Plastic, Printing, Envelope, Letter shop, and Listing
Services.

v) Community-based Alliances

Community-based Alliances involves working together with other companies to

create some community benefit that essentially differentiates your organization
from your competitors in the eyes of your customers. Community-Based Alliances
are typically a form of advertising, although they allow different companies to come
together for the benefit of the community, and the resulting networking and
friendships are a priceless benefit for the companies involved.

Example: Investors Advantage Corporation holding an Economic Forum in Westlake

Village, California. By providing high-profile speakers and representatives from
many companies, the forum benefits the citizens and customers and also provides
the companies involved with exceptional advertising and name recognition as well
as the ability to attract new customers in attendance.

vi) Alliances with Competitors to Open New Markets

Often time’s foreign or new markets have some characteristic that makes them
unserviceable for an organization. Examples are markets that are too large, too far
away, too different, undeveloped, and so on. Forming alliances with competitors is
a viable solution is many cases when these issues are at large. By working together
with the competition, organizations are able to increase output, lower costs of
distribution and provide advertising and marketing that make the penetration of the
market much easier that it would be if they were to go at it alone.

Ex: La Tapatia Tortilleria and El Aguillea Tortillas formed a strategic alliance to open
the new market of California to fresh tortillas. Neither of the companies had the
production ability to service the market alone, but together they were able to
capture a huge market and become very successful.

Reasons for strategic alliances

i) Market entry: A strategic alliance can ease entry into a foreign market. Eg:
strategic alliance between British Airways and American Airlines.

ii) Share risk & expenses: Firms involved can share risks. Eg: In early 1990’s
film manufacturers Kodak and Fuji joined with camera manufacturers Nikon, Canon,
and Minolta to create cameras and film for advanced Photo System.

iii) Synergistic Effects of Shared Knowledge and Expertise: It helps a firm

gain knowledge and expertise Skills+ brand + market knowledge+ assets=
synergizing effect e. g. : For example, in the early 1990s, Motorola initiated an
alliance among various partners, including Raytheon, Lockheed Martin, China Great
Wall, and Nippon Iridium, to develop and build a global satellite-based
communications network.

Organic Growth and Inorganic Growth

A company can grow its top line by buying other companies. A company can also
grow by increasing its sales on its own without buying other companies. This is
called “organic growth.” Growing revenue by acquiring other companies is
sometimes called “inorganic” growth. Organic growth can be achieved by
increasing the sales of existing products and developing new products for both
existing and new customers. Inorganic growth is achieved by adding the revenue
of the acquired companies.

Organic growth

Organic growth strategies are business development techniques that grow a

company via increased output and larger sales volume. The opposite of organic
growth strategies are strategies that include mergers, acquisitions, and takeovers
of competitors and complementary businesses.

Four main pillars of organic growth

Organic growth strategies are built on four main pillars: revenue, headcount, PR,
and quality.

1. Revenue

Revenue is the lifeblood of any business. Without dollars flowing in, it is impossible
to pay employees, suppliers and vendors. Businesses that are growing organically
seek to grow revenue volume in the most efficient manner possible. Revenue
growth eventually leads to profit growth, which is the end goal of organic growth
strategies. Growing revenue allows for the effective functioning of the other three
pillars. Without cash coming into a business, employees cannot be hired and
advertising budgets become strapped.

2. Headcount

As revenue grows, companies can afford to hire more employees. Headcount is

critical for any growing business. For customer service, sales and marketing and
production departments to function efficiently, they must be properly staffed. A
good HR department is critical to the success of a growing company. Quality is
more important than quantity for company headcount, as employees are the
biggest asset of any corporation.

3. Public Relation (PR)

Public relations and advertising allow companies to get the word out about their
products and services. Good PR drives traffic to company websites and gets
perspective customers’ attention. Good PR strategies also allow for revenue growth
to keep those properly staffed departments busy. Bad PR can be more damaging to
a company than good PR can be effective. Word of mouth, social media and
traditional PR avenues all must be used and monitored to ensure positive word-of-
mouth advertising and branding.

4. Quality

To successfully grow any enterprise, there needs to be a quality product. Organic

growth relies on repeat business from satisfied customers. Customers will rarely
buy a product a second time if the first experience isn't top notch. Quality control
and customer service are critical to gaining a sufficient sales volume to grow a
company.

Quality in a growing company starts with the first contact a customer has with the
corporation all the way to the delivery of the final product. Whether it's a website or
an in-person sales presentation, the initial contact with potential clients must be top
notch. Product quality, customer service and product support need to continue the
standard of excellence that the marketing and sales departments begin. With all
four pillars growing in sync, organic growth is inevitable.

Popular companies using organic growth strategies

Many well-known, public corporations use organic growth strategies. Best Buy,
Outback Steakhouse and Tiffany and Company are just a few major brand names
that grow every year through organic growth strategies.

Best Buy's main competitor, Circuit City, went out of business in 2009. Outback
Steakhouse is the best known steakhouse chain in the United States. Tiffany and
Company is the standard in diamonds and jewellery.

While growth through mergers and acquisition makes a good headline, most
companies have critical strategies to grow their business organically. One of the
most crucial elements to this type of growth is how you manage and leverage your
customer relationships. Clearly, companies with organic growth strategies have
strong customer relationships at the foundation of their plan. Walker has decades of
experience working with market leaders that have successfully leveraged their
customer relationships to grow their business.

Step in organic growth

Step-1: Accelerating organic growth

The first step to accelerating organic growth is securing the relationships you have.
Walker helps companies by securing their customer base through effective retention
strategies. We help you understand the factors most important to your customers,
what drives their loyalty, and what areas deserve the most focus. Next, we work
with account managers and sales departments to develop a coordinated strategy to
build and grow your company the most intelligent way – through the eyes of your
customers.

Step-2: Identification of growth opportunities

There is no shortage of ideas for companies to consider when they are looking at
growth. By listening to customers and learning from them, Walker can help
organizations select the most intelligent opportunities for growth. We can help
organizations better understand exactly what the customer is seeking to maintain –
the most productive and profitable relationships. This approach helps expand
current relationships and focus on the right issues to acquire new customers.

Step-3: Training

To carry out your growth strategy, there has to be a well-coordinated program with
your entire sales department. Not only do you have to have the right strategy, but
everyone needs to be onboard and play their part. Walker has extensive experience
in designing and conducting collaborative training sessions with sales organizations
to help understand how to interpret customer feedback and use it effectively on an
account-by-account basis. Salespeople become more effective at putting their time
into the right relationships to help a company grow organically.

Inorganic growth

Inorganic growth is the rate of growth of business, sales expansion etc. by

increasing output and business reach by acquiring new businesses by way of
mergers, acquisitions and take-overs. This kind of growth also takes place due to
government directives, leading to enhancement of business in some identified
priority sector/area. The inorganic growth rate also factors in the impact of foreign
exchange movements or performance of other economies.

This kind of growth is affected to a great extent by exogenous factors. It is also a

faster way for companies to grow compared with organic growth (where the main
focus is productivity enhancement and cost reduction). This term is usually related
with financial sectors showing expanding business and profits.

Inorganic growth is seen often as a faster way for a company to grow when
compared with organic growth. In many industries, such as technology, growth is
often accelerated through increased innovation, and one way for firms to compete
is to align themselves with those companies that are developing the innovative
technology. While inorganic growth is the flavour of the season these days, there
can be heard voices to suggest that some companies prefer to grow organically. In
the middle of 2005, HDFC and HDFC Bank have preferred to opt for organic growth
in place of inorganic growth by refusing to merge with each other. The two
organizations have perceived integration problems that can arise as a result of
merger more difficult to overcome than the gains of merger.

Growth Strategy Matrix

The growth of business through mergers & acquisition may be structured in variety
of ways, including, purchase of an asset, stock purchase or a merger. The structure
of the deal shall be determined by a variety of factors like accounting, business,
legal, and tax considerations. For legal and tax purposes, the ‘merger’ is defined
under appropriate laws. In any case, growth through merger and acquisition shall
be of our interest. In merger, the assets and liabilities of two separate companies
are combined to form a single business entity. Commonly, the term acquisition is
used when a larger firm absorbs a smaller firm and the term ‘merger’ is used when
the combination is portrayed to be between equals or near equals. In a merger of
companies that are approximate equals, the transaction may be settled by payment
of case upfront, also referred to as all-cash deal. In the alternative, the
shareholders of the target firm may be paid partly in cash and partly by issue of
shares in the acquiring firm. The deal may be entirely a non-cash one in that the
acquirer only issues shares in certain ratio to the shareholders of the target form.
For the sake of this discussion, the firm whose shares continue to exist (possibly
under a different company name) will be referred to as ‘acquirer’ or the ‘acquiring
firm’ and the firm whose shares are being replaced by the acquiring firm will be
referred to as the ‘target firm’.

The Ansoff Growth matrix

The Ansoff Growth matrix is a tool that helps businesses decides their product and
market growth strategy. Ansoff’s product/market growth matrix suggests that a
business’ attempts to grow depend on whether it markets new or existing
products in new or existing markets.

The output from the Ansoff product/market matrix is a series of suggested growth
strategies that set the direction for the business strategy. These are described
below:

Market penetration

Market penetration is the name given to a growth strategy where the business
focuses on selling existing products into existing markets.

Market penetration seeks to achieve four main objectives:

• To maintain or increase the market share of current products – this can be
achieved by a combination of competitive pricing strategies, advertising, sales
promotion and perhaps more resources dedicated to personal selling

• To secure dominance of growth markets

• To restructure a mature market by driving out competitors; this would require a

much more aggressive promotional campaign, supported by a pricing strategy
designed to make the market unattractive for competitors

• To increase usage by existing customers for example by introducing loyalty

schemes.
A market penetration marketing strategy is very much about “business as usual”.
The business is focusing on markets and products it knows well. It is likely to have
good information on competitors and on customer needs. It is unlikely, therefore,
that this strategy will require much investment in new market research.

Market development

Market development is the name given to a growth strategy where the business
seeks to sell its existing products into new markets.

There are many possible ways of approaching this strategy, including:

• New geographical markets; for example exporting the product to a new country

• New product dimensions or packaging: for example

• New distribution channels

• Different pricing policies to attract different customers or create new market

segments.

Product development
Product development is the name given to a growth strategy where a business aims
to introduce new products into existing markets. This strategy may require the
development of new competencies and requires the business to develop modified
products which can appeal to existing markets.

Diversification
Diversification is the name given to the growth strategy where a business markets
new products in new markets. This is an inherently more risk strategy because the
business is moving into markets in which it has little or no experience. For a
business to adopt a diversification strategy, therefore, it must have a clear idea
about what it expects to gain from the strategy and an honest assessment of the
risks.
2. Economic system
An Economic System of a nation or a country may be defined as a framework of
rules, goals and incentives that controls economic relations among people in a
society. It also helps in providing framework for answering the basic economic
questions. Different countries of a world have different economic systems and the
prevailing economic system in a country affect the business units to a large extent.

Types of Economic system

Economic systems of a nation can be of any one of the following type:

a) Capitalism: The economic system in which business units or factors of

production are privately owned and governed is called Capitalism. The profit
earning is the sole aim of the business units. Government of that country does not
interfere in the economic activities of the country. It is also known as free market
economy. All the decisions relating to the economic activities are privately taken.
Examples of Capitalistic Economy: England, Japan, America etc.
Capitalism is variously defined by sources. There is no consensus on the definition
nor on how the term should be used as a historical category. There is general
agreement that capitalism is an economic system that includes private ownership of
the means of production, creation of goods or services for profit or income, the
accumulation of capital, competitive markets, voluntary exchange, and wage labor.
The designation is applied to a variety of historical cases, varying in time,
geography, politics and culture. There is general agreement that capitalism became
dominant in the Western world following the demise of feudalism.
Economists, political economists and historians have taken different perspectives on
the analysis of capitalism. Economists usually emphasize the degree that
government does not have control over markets (laissez faire), and on property
rights. Most political economists emphasize private property, power relations, wage
labor, class and emphasize capitalism as a unique historical formation. Capitalism is
generally viewed as encouraging economic growth. The extent to which different
markets are free, as well as the rules defining private property, is a matter of
politics and policy, and many states have what are termed mixed economies. A
number of political ideologies have emerged in support of various types of
capitalism, the most prominent being economic liberalism.

Benefits of Capitalism

i) Capitalism encourages competition: Since goods and services are freely

traded in the open market with each seller setting his/her price, competition is
bound to occur and this results in monopoly and cartels being removed.

ii) Capitalism encourages trade: As business is conducted in open markets,

traders Endeavour to avail a variety of goods and services thereby increasing trade
opportunities.

iii) Employment: Capitalism provides employment opportunities for a people in

form of labour.
iv) Development of skills: Capitalism results in a variety of goods and services in
the market place. This affords a people to specialize in an area that they feel they
can perform better.

v) Investment: Capitalism provides room for investment opportunities as those

with the capital seek ways to put their capital in use to make profits.

vi) Organization: Capitalism encourages self-organization. As competition levels

rise, traders are bound to organize themselves and set a reasonable pricing method
that benefits them all.

b) Socialism: Under socialism economic system, all the economic activities of the
country are controlled and regulated by the Government in the interest of the
public. The first country to adopt this concept was Soviet Russia.
A socialist economic system would consist of an organization of production to
directly satisfy economic demands and human needs, so that goods and services
would be produced directly for use instead of for private profit driven by the
accumulation of capital, and accounting would be based on physical quantities, a
common physical magnitude, or a direct measure of labour-time. Distribution of
output would be based on the principle of individual contribution.
As a political movement, socialism includes a diverse array of political philosophies,
ranging from reformism to revolutionary socialism. Proponents of state socialism
advocate for the nationalization of the means of production, distribution and
exchange as a strategy for implementing socialism. Social democrats advocate
redistributive taxation in the form of social welfare and government regulation of
capital within the framework of a market economy. In contrast, anarchism and
libertarian socialism propose direct worker's control of the means of production and
oppose the use of state power to achieve such an arrangement, opposing both
parliamentary politics and state ownership over the means of production.
Modern socialism originated from an 18th-century intellectual and working class
political movement that criticized the effects of industrialization and private
property on society. In the early 19th-century, "socialism" referred to any concern
for the social problems of capitalism regardless of the solution. However, by the
late 19th-century, "socialism" had come to signify opposition to capitalism and
advocacy for an alternative system based on some form of social ownership.[8]
Utopian socialists such as Robert Owen (1771–1858) tried to found self-sustaining
communes by secession from a capitalist society. Socialists inspired by the Soviet
model of economic development, such as Marxist-Leninists, have advocated the
creation of centrally planned economies directed by a single-party state that owns
the means of production. Yugoslavian, Hungarian, East German and Chinese
communist governments have instituted various forms of market socialism,
combining co-operative and state ownership models with the free market exchange
and free price system (but not free prices for the means of production).

The two main forms of Socialism are:

i) Democratic Socialism: All the economic activities are controlled and regulated
by the government but the people have the freedom of choice of occupation and
consumption.
ii) Totalitarian Socialism: This form is also known as Communism. Under this,
people are obliged to work under the directions of Government.

Benefits of Socialism
i) Socialism provides the government with control of virtually all functions of a
society. It can be used to provide all citizens with their survival needs, creating a
stable social environment as long as production of those needs meets the demand
for them and absolute power over the economy does not corrupt the government
that has it.
ii) People who cannot participate economically (due to mental disabilities, age, or
poor health) are still valued and cared for as long as the government is more
compassionate than the family (who would be empowered and responsible under
free enterprise).
iii) When their basic needs are provided whether they work or not, there is
opportunity for citizens to explore non-economically-productive pursuits, such as
pure science, math and the arts or drugs, sexual promiscuity and television.

c) Mixed Economy: The economic system in which both public and private sectors
co-exist is known as Mixed Economy. Some factors of production are privately
owned and some are owned by Government. There exists freedom of choice of
occupation and consumption. Both private and public sectors play key roles in the
development of the country.
The basic plan of the mixed economy is that the means of production are mainly
under private ownership; that markets remain the dominant form of economic
coordination; and that profit-seeking enterprises and the accumulation of capital
would remain the fundamental driving force behind economic activity. However, the
government would wield considerable indirect influence over the economy through
fiscal and monetary policies designed to counteract economic downturns and
capitalism's tendency toward financial crises and unemployment, along with playing
a role in interventions that promote social welfare. Subsequently, some mixed
economies have expanded in scope to include a role for indicative economic
planning and/or large public enterprise sectors.
There is not one single definition for a mixed economy, but the definitions always
involve a degree of private economic freedom mixed with a degree of government
regulation of markets. The relative strength or weakness of each component in the
national economy can vary greatly between countries. Economies ranging from the
United States to Cuba have been termed mixed economies. The term is also used to
describe the economies of countries which are referred to as welfare states, such as
Norway and Sweden. Governments in mixed economies often provide
environmental protection, maintenance of employment standards, a standardized
welfare system, and maintenance of competition. As an economic ideal, mixed
economies are supported by people of various political persuasions, typically
centre-left and centre-right, such as social democrats or Christian democrats.
Supporters view mixed economies as a compromise between state socialism and
laissez-faire capitalism that is superior in net effect to either of those.
Elements of Mixed economy
The elements of a mixed economy have been demonstrated to include a variety of
freedoms:
i) To possess means of production (farms, factories, stores, etc.)
ii) To participate in managerial decisions (cooperative and participatory economics)
iii) To travel (needed to transport all the items in commerce, to make deals in
person, for workers and owners to go to where needed)
iv) To buy (items for personal use, for resale; buy whole enterprises to make the
organization that creates wealth a form of wealth itself)
v) To sell (same as buy)
vi) To hire (to create organizations that create wealth)
vii) To fire (to maintain organizations that create wealth)
viii) To organize (private enterprise for profit, labor unions, workers' and
professional associations, non-profit groups, religions, etc.)
ix) To communicate (free speech, newspapers, books, advertisements, make deals,
create business partners, create markets)
x) To protest peacefully (marches, petitions, sue the government, make laws
friendly to profit making and workers alike, remove pointless inefficiencies to
maximize wealth creation)

Benefits of Mixed Economy

There are numerous advantages of a mixed economy:

i) Provides fair competition: The presence of private enterprise ensures that

there is fair competition in the market and the quality of products and services are
not compromised.

ii) Market prices are well regulated: The government with its regulatory bodies
ensures that the market price does not go beyond its actual price.

iii) Optimum utilization of national resources: In a mixed economy, the

resources are utilized efficiently as both government and private enterprises are
utilizing them.

iv) People are given more power: The general people have more say when it
comes to the quality and the prices of products and services.

v) It does not allow monopoly at all: Barring a few sectors, a mixed economy
does not allow any monopoly as both government and private enterprises enter
every sector for business.

3. Economic policies
Economic Policies affects the different business units in different ways. It may or
may not have favorable effect on a business unit. The Government may grant
subsidies to one business or decrease the rates of excise or custom duty or the
government may increase the rates of custom duty and excise duty, tax rates for
another business. All the business enterprises frame their policies keeping in view
the prevailing economic policies.

Different economic policies

Important economic policies of a country are as follows:
i) Monetary Policy: The policy formulated by the central bank of a country to
control the supply and the cost of money (rate of interest), in order to attain some
specified objectives is known as Monetary Policy.
ii) Fiscal Policy: It may be termed as budgetary policy. It is related with the
income and expenditure of a country. Fiscal Policy works as an instrument in
economic and social growth of a country. It is framed by the government of a
country and it deals with taxation, government expenditure, borrowings, deficit
financing and management of public debts in an economy.
iii) Foreign Trade Policy: It also affects the different business units differently.
E.g. if restrictive import policy has been adopted by the government then it will
prevent the domestic business units from foreign competition and if the liberal
import policy has been adopted by the government then it will affect the domestic
products in other way.
iv) Foreign Investment Policy: The policy related to the investment by the
foreigners in a country is known as Foreign Investment Policy. If the government
has adopted liberal investment policy then it will lead to more inflow of foreign
capital in the country which ultimately results in more industrialization and growth
in the country.
v) Industrial Policy: Industrial policy of a country promotes and regulates the
industrialization in the country. It is framed by government. The government from
time to time issues principals and guidelines under the industrial policy of the
country.

4. Industry
India is fourteenth in the world in factory output. The manufacturing sector in
addition to mine, quarrying, electricity and gas together account for 27.6% of the
GDP and employ 17% of the total workforce. Economic reforms introduced after
1991 brought foreign competition, led to privatization of certain public sector
industries, opened up sectors hitherto reserved for the public sector and led to an
expansion in the production of fast-moving consumer goods. In recent years,
Indian cities have continued to liberalize, but excessive and burdensome business
regulations remain a problem in some cities, like Kochi and Kolkata.
Post-liberalization, the Indian private sector, which was usually run by oligopolies of
old family firms and required political connections to prosper was faced with foreign
competition, including the threat of cheaper Chinese imports. It has since handled
the change by squeezing costs, revamping management, focusing on designing new
products and relying on low labour costs and technology.

The several Indian Industrial Sectors:

The business and economy section provide a clear picture upon different industries
in India. The performance of the Indian industries is in the global fields. Adoption of
the new economic policies has thrown the Indian industries in to the ocean of
competition. Some of the industries have reflected their respective competency and
some others have failed. In this section we are trying to cover almost all the
industries and their respective performances.

i) Textile Industry

Textile Industry has a high importance as it has been rendering the most basic
needs of people and improving quality of life. New innovations in clothing
production, manufacture and design came during the Industrial Revolution - these
new wheels, looms, and spinning processes changed clothing manufacture forever.

The ‘rag trade’, as it is referred to in the UK and Australia is the manufacture, trade
and distribution of textiles.

There were various stages - from a historical perspective - where the textile
industry evolved from being a domestic small-scale industry, to the status of
supremacy it currently holds. The ‘cottage stage’ was the first stage in its history
where textiles were produced on a domestic basis.

During this period cloth was made from materials including wool, flax and cotton.
The material depended on the area where the cloth was being produced, and the
time they were being made.

In the later half of the medieval period in the northern parts of Europe, cotton came
to be regarded as an imported fiber. During the later phases of the 16th century
cotton was grown in the warmer climes of America and Asia. When the Romans
ruled, wool, leather and linen were the materials used for making clothing in
Europe, while flax was the primary material used in the northern parts of Europe.

During this era, excess cloth was bought by the merchants who visited various
areas to procure these left-over pieces. A variety of processes and innovations were
implemented for the purpose of making clothing during this time. These processes
were dependent on the material being used, but there were three basic steps
commonly employed in making clothing. These steps included preparing material
fibers for the purpose of spinning, knitting and weaving.

During the Industrial Revolution, new machines such as spinning wheels and
handlooms came into the picture. Making clothing material quickly became an
organized industry - as compared to the domesticated activity it had been
associated with before. A number of new innovations led to the industrialization of
the textile industry in Great Britain. Clothing manufactured during the Industrial
Revolution formed a big part of the exports made by Great Britain. They accounted
for almost 25% of the total exports made at that time, doubling in the period
between 1701 and 1770.

ii) Indian Retail Industry

Indian Retail Industry has been waiting for the boom since a long time. The
inception country's retail industry dates back to times when retail stores were found
in the village fairs, Melas or in the weekly markets
Indian Retail Industry is standing at its point of inflexion, waiting for the boom to
take place. The inception of the retail industry dates back to times where retail
stores were found in the village fairs, Melas or in the weekly markets. These stores
were highly unorganized. The maturity of the retail sector took place with the
establishment of retail stores in the locality for convenience. With the government
intervention the retail industry in India took a new shape. Outlets for Public
Distribution System, Cooperative stores and Khadi stores were set up. These retail
Stores demanded low investments for its establishment.

The retail industry in India gathered a new dimension with the setting up of the
different International Brand Outlets, Hyper or Super markets, shopping malls and
departmental stores.

Key Players in the Indian Retail Sector:

The untapped scope of retailing has attracted superstores like Wal-Mart into India,
leaving behind the kiranas that served us for years. Such companies are basically
IT based. The other important participants in the Indian Retail sector are Bata, Big
Bazaar, Pantaloons, Archies, Cafe Coffee Day, landmark, Khadims, Crossword, to
name a few.

iii) Software Industry

Technical young people and English-speaking scientific professionals have brought

tremendous success in India's software industry.

Software industry encompasses all the activities and businesses involved with
development, maintenance and distribution of computer software. Software
industry started its operation during mid-70's. In this modern era of technology,
software industry can be regarded as the most booming industry in the world.
Software industry also covers the activities like software servicing, training and
consultancy. The software industry is the largest and most booming industry in the
world. For the last couple of years this industry is dominated by the software
industry giant Microsoft Corporation. One of the report of Microsoft software
magazine shows that in 2005, the total amount of revenues earned by software
companies were highest.

Software industry primarily concerned with the development of two types of

software. One is proprietary software, which are owned by a single organization or
individual and the other is open source software, which are written to use,
distribute, recode and decode free of cost. The software industry business are
principally based on proprietary software. Proprietary software needs to deal with
the activities of licensing and security and these require lots of money to invest,
whereas earning through open source software comes specifically from selling of
services, or through training activities.

Present tendencies of software industry

The economy of the leading companies is mostly dependent on the development of

proprietary software products. Although some major companies like IBM, Sun
Microsystems are also taking part in developing open source software to take the
advantage of getting some portion of market share.

iv) Cement Industry

Presently the Cement Industry in India is based on modern and environment-

friendly dry process technology.

The cement industry comprises of 125 large cement plants with an installed
capacity of 148.28 million tonnes and more than 300 mini cement plants with an
estimated capacity of 11.10 million tonnes per annum.

The Cement Corporation of India, which is a Central Public Sector Undertaking, has
10 units. There are 10 large cement plants owned by various State Governments.
The total installed capacity in the country as a whole is 159.38 million tonnes.
Actual cement production in 2002-03 was 116.35 million tonnes as against a
production of 106.90 million tonnes in 2001-02, registering a growth rate of 8.84%.
Major players in cement production are Ambuja cement, Aditya Cement, J K
Cement and L & T cement. Apart from meeting the entire domestic demand, the
industry is also exporting cement and clinker. The export of cement during 2001-02
and 2003-04 was 5.14 million tonnes and 6.92 million tonnes respectively. Export
during April-May, 2003 was 1.35 million tonnes. Major exporters were Gujarat
Ambuja Cements Ltd. and L&T Ltd.

v) Steel Industry

Worldwide strong demand for steel particularly in China has benefited the Indian
steel Industry.

Steel industry reforms - particularly in 1991 and 1992 - have led to strong and
sustainable growth in India’s steel industry.

Since its independence, India has experienced steady growth in the steel industry,
thanks in part to the successive governments that have supported the industry and
pushed for its robust development.

Further illustrating this plan is the fact that a number of steel plants were
established in India, with technological assistance and investments by foreign
countries.

In 1991, a substantial number of economic reforms were introduced by the Indian

government. These reforms boosted the development process of a number of
industries - the steel industry in India in particular - which has subsequently
developed quite rapidly.

The 1991 reforms allowed for no licenses to be required for capacity creation,
except for some locations. Also, once India’s steel industry was moved from the
listing of the industries that were reserved exclusively for the public sector, huge
foreign investments were made in this industry.
Yet another reform for India’s steel industry came in 1992, when every type of
control over the pricing and distribution system was removed, making the modern
Indian Steel Industry extremely efficient, as well as competitive.

Additionally, a number of other government measures have stimulated the growth

of the steel industry, coming in the form of an unrestricted external trade, low
import duties, and an easy tax structure.

India continually posts phenomenal growth records in steel production. In 1992,

India produced 14.33 million tones of finished carbon steels and 1.59 million tones
of pig iron. Furthermore, the steel production capacity of the country has increased
rapidly since 1991 - in 2008, India produced nearly 46.575 million tones of finished
steels and 4.393 million tones of pig iron.

Both primary and secondary producers contributed their share to this phenomenal
development, while these increases have pushed up the demand for finished steel
at a very stable rate.

vi) Automobile Industry

Easier availability of finance and discounts offered by the dealers and

manufacturers have resulted a strong growth of the Indian automobile industry.

The arrival of new and existing models, easy availability of finance at relatively low
rate of interest and price discounts offered by the dealers and manufacturers all
have stirred the demand for vehicles and a strong growth of the Indian automobile
industry.

The data obtained from ministry of commerce and industry, shows high growth
obtained since 2001- 02 in automobile production continuing in the first three
quarters of the 2004-05. Annual growth was 16.0 per cent in April-December,
2004; the growth rate in 2003-04 was 15.1 per cent The automobile industry grew
at a compound annual growth rate (CAGR) of 22 per cent between 1992 and 1997.

With investment exceeding Rs. 50,000 crore, the turnover of the automobile
industry exceeded Rs. 59,518 crore in 2002-03. Including turnover of the auto-
component sector, the automotive industry's turnover, which was above Rs. 84,000
crore in 2002-03, is estimated to have exceeded Rs.1,00,000 crore ( USD 22. 74
billion) in 2003-04.

Automobile Dealers Network in India

In terms of Car dealer networks and authorized service stations, Maruti leads the
pack with Dealer networks and workshops across the country. The other leading
automobile manufacturers are also trying to cope up and are opening their service
stations and dealer workshops in all the metros and major cities of the country.
Dealers offer varying kind of discount of finances who in turn pass it on to the
customers in the form of reduced interest rates.

vii) IT Industry
Indian IT Industry has built valuable brand equity in the global markets.
Information technology, and the hardware and software associated with the IT
industry, are an integral part of nearly every major global industry. Information
technology, and the hardware and software associated with the IT industry, are an
integral part of nearly every major global industry.

The information technology (IT) industry has become of the most robust industries
in the world. IT, more than any other industry or economic facet, has an increased
productivity, particularly in the developed world, and therefore is a key driver of
global economic growth. Economies of scale and insatiable demand from both
consumers and enterprises characterize this rapidly growing sector.

The Information Technology Association of America (ITAA) explains 'information

technology' as encompassing all possible aspects of information systems based on
computers. Both software development and the hardware involved in the IT
industry include everything from computer systems, to the design, implementation,
study and development of IT and management systems.

Owing to its easy accessibility and the wide range of IT products available, the
demand for IT services has increased substantially over the years. The IT sector
has emerged as a major global source of both growth and employment.

Features of the IT Industry at a Glance

i) Economies of scale for the information technology industry are high. The marginal
cost of each unit of additional software or hardware is insignificant compared to the
value addition that results from it.

ii) Unlike other common industries, the IT industry is knowledge-based.

iii) Efficient utilization of skilled labor forces in the IT sector can help an economy
achieve a rapid pace of economic growth.

iv) The IT industry helps many other sectors in the growth process of the economy
including the services and manufacturing sectors.

The role of the IT Industry

The IT industry can serve as a medium of e-governance, as it assures easy

accessibility to information. The use of information technology in the service sector
improves operational efficiency and adds to transparency. It also serves as a
medium of skill formation.

viii) Salt Industry

Salt Industry in India is well developed. India is presently the third largest producer
of salt in the world. India is the third largest salt producing country in the world
(after the US and China) with an average annual production of about 148 lakh
tones.
In a very short period of time sufficiency was achieved (in 1953) and made a dent
the export market. Since then, the country has never resorted to imports. Exports
touched an all time high of 1.6 million in the year 2001.

The per-capita consumption of salt in the country is estimated at about 12 kg,

which includes edible as well as industrial salt. The current annual requirement of
salt in the country is estimated to be 60 lakhs tones for industrial use. Caustic soda,
soda ash, chlorine etc., are the major salt-based industries. Besides about 15 lakhs
tones of salt is exported every year.

Sea salt constitutes about 70% of the total salt production in the country. Salt
manufacturing activities are carried out in the coastal states of Gujarat, Tamil
Nadu, Andhra Pradesh, Maharashtra, Karnataka, Orissa, West Bengal Goa and
hinter land State of Rajasthan. Among these States only Gujarat, Tamil Nadu and
Rajasthan produces salt surplus to their requirement. These three states produce
about 70%, 15% and 12% respectively of the total salt produced in the country and
cater to the requirement of all the salt deficit and non-salt producing states.

Private sector plays a dominant role contributing over 95% of the salt production,
while the public sector contributes about 2-3%. The co-operative sector contributes
about 8% whereas the small-scale sector (less than 10 acres) accounts for nearly
40% of the total salt production in the country.

5. Agriculture
India ranks second worldwide in farm output. Agriculture and allied sectors like
forestry, logging and fishing accounted for 18.6% of the GDP in 2005, employed
60% of the total workforce and despite a steady decline of its share in the GDP, is
still the largest economic sector and plays a significant role in the overall socio-
economic development of India. Yields per unit area of all crops have grown since
1950, due to the special emphasis placed on agriculture in the five-year plans and
steady improvements in irrigation, technology, application of modern agricultural
practices and provision of agricultural credit and subsidies since the green
revolution.

India is the largest producer in the world of milk, cashew nuts, coconuts, tea,
ginger, turmeric and black pepper. It also has the world's largest cattle population
(193 million). It is the second largest producer of wheat, rice, sugar, groundnut and
inland fish. It is the third largest producer of tobacco. India accounts for 10% of the
world fruit production with first rank in the production of banana and sapota.

The required level of investment for the development of marketing, storage and
cold storage infrastructure is estimated to be huge. The government has
implemented various schemes to raise investment in marketing infrastructure.
Among these schemes are Construction of Rural Go downs, Market Research and
Information Network, and Development / Strengthening of Agricultural Marketing
Infrastructure, Grading and Standardization.

Main problems in the agricultural sector, as listed by the World Bank, are:

i) India's large agricultural subsidies are hampering productivity-enhancing

investment.

ii) Overregulation of agriculture has increased costs, price risks and uncertainty.

iii) Government interventions in labour, land, and credit markets.

iv) Inadequate infrastructure and services.

Research and development

The Indian Agricultural Research Institute (IARI), established in 1905, was

responsible for the research leading to the "Indian Green Revolution" of the 1970s.
The Indian Council of Agricultural Research (ICAR) is the apex body in kundiure and
related allied fields, including research and education. The Union Minister of
Agriculture is the President of the ICAR. The Indian Agricultural Statistics Research
Institute develops new techniques for the design of agricultural experiments,
analyses data in agriculture, and specializes in statistical techniques for animal and
plant breeding. Prof. M.S. Swaminathan is known as "Father of the Green
Revolution" and heads the MS Swaminathan Research Foundation. He is known for
his advocacy of environmentally sustainable agriculture and sustainable food
security.

Industrial Policy Reforms

Industrial policy has seen the greatest change, with most central government
industrial controls being dismantled. The list of industries reserved solely for the
public sector which used to cover 18 industries, including iron and steel, heavy
plant and machinery, telecommunications and telecom equipment, minerals, oil,
mining, air transport services and electricity generation and distribution -- has been
drastically reduced to three: defense aircrafts and warships, atomic energy
generation, and railway transport. Industrial licensing by the central government
has been almost abolished except for a few hazardous and environmentally
sensitive industries. The requirement that investments by large industrial houses
needed a separate clearance under the Monopolies and Restrictive Trade Practices
Act to discourage the concentration of economic power was abolished and the act
itself is to be replaced by a new competition law which will attempt to regulate
anticompetitive behavior in other ways.
The main area where action has been inadequate relates to the long standing policy
of reserving production of certain items for the small-scale sector. About 800 items
were covered by this policy since the late 1970s, which meant that investment in
plant and machinery in any individual unit producing these items could not exceed
$ 250,000. Many of the reserved items such as garments, shoes, and toys had high
export potential and the failure to permit development of production units with
more modern equipment and a larger scale of production severely restricted India’s
export competitiveness. The Report of the Committee on Small Scale Enterprises
(1997) and the Report of the Prime Minister’s Economic Advisory Council (2001)
had both pointed to the remarkable success of China in penetrating world markets
in these areas and stimulating rapid growth of employment in manufacturing. Both
reports recommended that the policy of reservation should be abolished and other
measures adopted to help small-scale industry. While such a radical change in
policy was unacceptable, some policy changes have been made very recently:
fourteen items were removed from the reserved list in 2001 and another 50 in
2002. The items include garments, shoes, toys and auto components, all of which
are potentially important for exports. In addition, the investment ceiling for certain
items was increased to $1 million. However, these changes are very recent and it
will take some years before they are reflected in economic performance.

Industrial liberalization by the central government needs to be accompanied by

supporting action by state governments. Private investors require much permission
from state governments to start operations, like connections to electricity and water
supply and environmental clearances. They must also interact with the state
bureaucracy in the course of day-to-day operations because of laws governing
pollution, sanitation, workers’ welfare and safety, and such. Complaints of delays,
corruption and harassment arising from these interactions are common. Some
states have taken initiatives to ease these interactions, but much more needs to be
done.

A recently completed joint study by the World Bank and the Confederation of Indian
Industry (Stern, 2001) found that the investment climate varies widely across
states and these differences are reflected in a disproportional share of investment,
especially foreign investment, being concentrated in what are seen as the more
investor-friendly states (Maharashtra, Gujarat, Karnataka, Andhra Pradesh and
Tamil Nadu) to the disadvantage of other states (like Uttar Pradesh, Bihar and West
Bengal). Investors perceived a 30 percent cost advantage in some states over
others, on account of the availability of infrastructure and the quality of
governance. These differences across states have led to an increase in the variation
in state growth rates, with some of the less favored states actually decelerating
compared to the 1980s. Because liberalization has created a more competitive
environment, the pay off from pursuing good policies has increased, thereby
increasing the importance of state level action. Infrastructure deficiencies will take
time and resources to remove but deficiencies in governance could be handled
more quickly with sufficient political will.

6. Infrastructure
A nation’s infrastructure development plays a significant role in its economic
growth. A fast growing economy warrants an even faster development of
infrastructure. Any discussion about India’s infrastructure has to briefly cover the
planning carried out for the country’s economic growth, since Independence.

Along with Independence, India inherited famine and poverty from its colonial
rulers. There was dire need for housing, health facilities, education, roads, power,
irrigation projects and drinking water facilities for millions of underprivileged
people. This called for proper economic planning. Unfortunately, the task of
planning fell into the hands of those who were sympathetic to the feudal lobbies.
These rich and powerful people had less concern for the social uplift of the poverty
stricken masses. The outcome was that they lost sight of the main objective of
planning the economy by keeping the overall national interest in view. It created
economic inequalities among the States and erected roadblocks on the path of
building infrastructure.

It is 59 years after Independence. Today, the rural population accounts for nearly
70 per cent of the total population and nearly half of them still live in poverty and
illiteracy. The latest report of the National Sample Survey Organization on village
facilities is a revelation in itself. To quote from the report, “One fourth of our
villages do not have electricity; only 18 per cent of them get tap water; 54 per cent
of them are more than 5 km away from the nearest health centre; one third of
them do not have pre-primary schools and 78 per cent do not have post offices”!
Yes, “India still lives in its villages”.

The cities shelter around 30 per cent of the population who contribute to the
economic growth. However, the most vital part of economic growth, which is
infrastructure, hardly matched the demands of even this 30 per cent of urban
dwellers, spreading chaos at the slightest provocation with the danger of turning
the clock backwards. This mismatch has been seen in the Mumbai deluge in
September 2005 and a little later in Bangalore, shattering the “Shanghai dreams”
that so many harbor.

The Construction industry of India is an important indicator of the development as it

creates investment opportunities across various related sectors. The construction
industry has contributed an estimated INR 3,84,282 crore to the national GDP in
2010-11 (a share of around 8%). The industry is fragmented, with a handful of
major companies involved in the construction activities across all segments;
medium sized companies specializing in niche activities; and small and medium
contractors who work on the subcontractor basis and carry out the work in the field.

The period from 1950 to mid 60’s witnessed the government playing an active role
in the development of these services and most of construction activities during this
period were carried out by state owned enterprises and supported by government
departments. In the first five-year plan, construction of civil works was allotted
nearly 50 per cent of the total capital outlay.

The first professional consultancy company, National Industrial Development

Corporation (NIDC), was set up in the public sector in 1954. Subsequently, many
architectural, design engineering and construction companies were set up in the
public sector (Indian Railways Construction Limited (IRCON), National Buildings
Construction Corporation (NBCC), Rail India Transportation and Engineering
Services (RITES), Engineers India Limited (EIL), etc.) and private sector (M N
Dastur and Co., Hindustan Construction Company (HCC), Ansals, etc.).

In India Construction has accounted for around 40 per cent of the development
investment during the past 50 years. Around 16 per cent of the nation's working
population depends on construction for its livelihood. The Indian construction
industry employs over 3 crore people and creates assets worth over INR20,000
crore. It contributes more than 5 per cent to the nation's GDP and 78 per cent to
the gross capital formation. Total capital expenditure of state and central govt. will
be touching INR8,02,087 crores in 2011-12 from INR1,43,587 crores (1999-2000).

The share of the Indian construction sector In total gross capital formation (GCF)
came down from 60 per cent in 1970-71 to 34 per cent in 1990-91. Thereafter, it
increased to 48 per cent in 1993-94 and stood at 44 per cent in 1999-2000. In the
21 st century, there has been an increase in the share of the construction sector in
GDP and capital formation.

GDP from Construction at factor cost (at current prices) increased to INR1,74,571
crores (12.02% of the total GDP ) in 2004-05 from INR1,16,238 crores (10.39% of
the total GDP) in 2000-01.

The main reason for this is the increasing emphasis on involving the private sector
infrastructure development through public-private partnerships and mechanisms
like build-operate-transfer (BOT), private sector investment has not reached the
expected levels.

The Indian construction industry comprises 200 firms in the corporate sector. In
addition to these firms, there are about 1,20,000 class A contractors registered with
various government construction bodies. There are thousands of small contractors,
which compete for small jobs or work as sub-contractors of prime or other
contractors. Total sales of construction industry have reached INR42,885.38 crores
in 2004 05 from INR21,451.9 crores in 2000-01, almost 20% of which is a large
contract for Benson & Hedges.

The Indian economy has witnessed considerable progress in the past few decades.
Most of the infrastructure development sectors moved forward, but not to the
required extent of increasing growth rate up to the tune of 8 to 10 per cent. The
Union Government has underlined the requirements of the construction industry.

With the present emphasis on creating physical infrastructure, massive investment

is planned in this sector. The Planning Commission has estimated that investment
requirement in infrastructure to the tune of about INR14,50,000 crore or US$320
billion during the 11th Five Year Plan period.

This is a requirement of an immense magnitude. Budgetary sources cannot raise

this much resources. Public Private Partnerships (PPP) approach is best suited for
finding the resources. Better construction management is required for optimizing
resources and maximizing productivity and efficiency.

7. Financial and fiscal factor

Financial factors have been assigned strategic importance in economic
development. But very different factors have been isolated in the respective
experiences: in Asia unrepressed financial markets in mobilizing saving and
allocating investment have been given prominence. In Latin America the central
question is the role of inflationary finance, the scope for deficits to enhance growth
and, increasingly, the feedback from high and unstable inflation to poor economic
performance. This reviews and contrasts the two approaches and concludes that the
strong claims for the benefits of financial liberalization are not supported by
evidence. Financial factors are important, but probably only when financial
instability becomes a dominant force. The scope for inflationary finance is small and
the risks are larger than commonly accepted. When hyperinflation takes over and
foreign exchange crises disrupt the price system, and shorten the economic horizon
to a week or a month, normal economic development is suspended. Moreover,
difficult to reverse capital flight puts savings outside the home economy. Attention
should focus on these extreme cases and explore deeper the thresholds at which
financial factors become dominant and the channels through which this occurs.
Superior growth performance, in this perspective, may be more a reflection of
adaptability than financial deepening.

Monetary policy refers to the process by which the central bank or monetary
authority of a country controls the supply of money, often target Government
appointed central bank, RBI in India, and usually administers monetary policy.
It is the process by which central bank of a country controls:

a) Supply of money

b) Availability of money

c) Cost of money/rate of interest

Fiscal policy is the use of government expenditure and revenue collection (taxation)
to influence the economy. Fiscal policy can be contrasted with the other main type
of macroeconomic policy, monetary policy, which attempts to stabilize the economy
by controlling interest rates and spending. The two main instruments of fiscal policy
are government expenditure and taxation. Changes in the level and composition of
taxation and government spending can impact the following variables in the
economy:

i) Aggregate demand and the level of economic activity;

ii) The pattern of resource allocation;

iii) The distribution of income.

Stances of fiscal policy

The three main stances of fiscal policy are:

i) Neutral fiscal policy is usually undertaken when an economy is in equilibrium.

Government spending is fully funded by tax revenue and overall the budget
outcome has a neutral effect on the level of economic activity.

ii) Expansionary fiscal policy involves government spending exceeding tax revenue,
and is usually undertaken during recessions.

iii) Contractionary fiscal policy occurs when government spending is lower than tax
revenue, and is usually undertaken to pay down government debt.

However, these definitions can be misleading because, even with no changes in

spending or tax laws at all, cyclic fluctuations of the economy cause cyclic
fluctuations of tax revenues and of some types of government spending, altering
the deficit situation; these are not considered to be policy changes. Therefore, for
purposes of the above definitions, "government spending" and "tax revenue" are
normally replaced by "cyclically adjusted government spending" and "cyclically
adjusted tax revenue". Thus, for example, a government budget that is balanced
over the course of the business cycle is considered to represent a neutral fiscal
policy stance.
A fiscal deficit is often funded by issuing bonds, like treasury bills or consols and
gilt-edged securities. These pay interest, either for a fixed period or indefinitely. If
the interest and capital requirements are too large, a nation may default on its
debts, usually to foreign creditors. Public debt or borrowing : it refers to the
government borrowing from the public.

A fiscal surplus is often saved for future use, and may be invested in either local
currency or any financial instrument that may be traded later once resources are
needed; notice, additional debt is not needed. For this to happen, the marginal
propensity to save needs to be strictly positive.

Economic effects of fiscal policy

Governments use fiscal policy to influence the level of aggregate demand in the
economy, in an effort to achieve economic objectives of price stability, full
employment, and economic growth. Keynesian economics suggests that increasing
government spending and decreasing tax rates are the best ways to stimulate
aggregate demand, and decreasing spending & increasing taxes after the economic
boom begins. Keynesians argue this method be used in times of recession or low
economic activity as an essential tool for building the framework for strong
economic growth and working towards full employment. In theory, the resulting
deficits would be paid for by an expanded economy during the boom that would
follow; this was the reasoning behind the New Deal.

Governments can use a budget surplus to do two things: to slow the pace of strong
economic growth and to stabilize prices when inflation is too high. Keynesian theory
posits that removing spending from the economy will reduce levels of aggregate
demand and contract the economy, thus stabilizing prices. Austrian Economics
theory, the main rival of Keynesian theory, believes that government deficits do not
grow the economy but that Debt/Deficits weigh down economic output. Austrian
Theory suggests that government deficits have adverse effects on growth, and
proposes a combination of Spending cuts & Tax cuts, arguing that government
spending in the public sector does not create higher production, but that
investment in the private sector does. Austrians contend that "hiring one group to
dig a hole, and hiring another to fill it up again" does not increase production or
development, Austrians see Keynesian theory as simply a "Boom-Bust" model, that
does not create sustainable economic growth, but only short turn economic
bubbles, such as the sub-prime mortgage crisis which Austrians blame in part on
the excess availability of credit due to low interest rates from the Federal Reserve.

Economists debate the effectiveness of fiscal stimulus. The argument mostly

centers on crowding out, a phenomenon where government borrowing leads to
higher interest rates that offset the simulative impact of spending. When the
government runs a budget deficit, funds will need to come from public borrowing
(the issue of government bonds), overseas borrowing, or monetizing the debt.
When governments fund a deficit with the issuing of government bonds, interest
rates can increase across the market, because government borrowing creates
higher demand for credit in the financial markets. This causes a lower aggregate
demand for goods and services, contrary to the objective of a fiscal stimulus.
Neoclassical economists generally emphasize crowding out while Keynesians argue
that fiscal policy can still be effective especially in a liquidity trap where, they
argue, crowding out is minimal, while Austrians argue against almost any
government distortion in the market.

Some classical and neoclassical economists argue that crowding out completely
negates any fiscal stimulus; this is known as the Treasury View, which Keynesian
economics rejects. The Treasury View refers to the theoretical positions of classical
economists in the British Treasury, who opposed Keynes' call in the 1930s for fiscal
stimulus. The same general argument has been repeated by some neoclassical
economists up to the present. Austrians say that Fiscal Stimulus such as investing
in roads, bridges, does not create economic growth or recovery, pointing to the
case that unemployment rates don't decrease because of fiscal stimulus spending,
and that it only puts more debt burden on the economy, Many times pointing to the
American Recovery and Reinvestment Act of 2009 as an example.

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

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

8. Removal of regional imbalance

The region-wise backlog of veterinary institutions, graduate manned veterinary
institutions and frozen semen A.I. centers, as identified by the Dandekar committee
was totally covered up by establishing required No. of institutions and converting
the liquid semen A.I. centers into frozen semen A.I. centers by end of the
year1990-1991. Later, the indicator and backlog committee constituted by
Government of Maharashtra had identified the region- wise and sector- wise
financial and physical backlog as on 31/3/1994. The backlog pertains to the sector
"Veterinary Services” was estimated at Rs4.49 crores. Govt. of Maharashtra has
sanctioned funds for A.H. sector for removal of the stipulated backlog form the year
2001-02. New Veterinary Dispensaries have been sanctioned through this grant. 50
new veterinary dispensaries were sanctioned by Government of Maharashtra in the
year 2003-2004; through the funds provided for removal of Backlog. Their
recurring liability is being met out through plan grants in the 10 th Five Year Plan.
Now, the remaining backlog of 220 Veterinary Dispensaries is proposed to be
removed till end of the financial year 2006-07.

Removing Regional Disparities

There are serious regional disparities among different states of the country.
Similarly, we have regional inequalities among different regions in a state. Even in
a district there are disparities among different mandals. Fruits of development are
not reaching all people equitably. If these disparities are not addressed
immediately, then they may generate friction among various sections of the society
with tragic, undesirable, and even violent outcomes.

Lok Satta government will strive to remove disparities at various levels and will
take immediate measures to ensure sustainable and balanced development of all
the regions.

Removing Disparities in Regional Development

Lok Satta government will take cognizance of people's perception on the existing
regional inequalities. To remove these inequalities, Lok Satta will work within the
framework of the constitution and will take the following immediate measures:

i) As per Article 321 D of Indian Constitution, Regional Boards with necessary legal
powers will be instituted to remove regional disparities in the state by the Lok Satta
Government. Further, establishment of District Governments and allocation of funds
on the basis of development indicators is guaranteed.
ii) Lok Satta Government will duly implement all agreements, legislations and
government orders that have been formulated so far to address the regional
inequalities in the state. District-wise budget allocation will be done.

iii) Lok Satta government will appoint an independent commission to examine water
allocation among different regions and its recommendations will be fully
implemented.

iv) Growth corridors comprised of education zones, agricultural zones and industrial
zones will be operationalized for the rapid development of backward areas in the
state.

v) There will be strict restrictions on usage of productive agricultural lands for non-
agricultural purposes. Permissions for non-agricultural usage will be granted only
after the farmers have been guaranteed a better life.

vi) Usage of natural resources for the development of tribal areas. A guaranteed
share for the tribals in the income generated from the use of natural resources. ‡

9. Price and distribution control

During the ongoing post-communist economic transitions, the relative well-being of
many people is changing rapidly, and governments are not well positioned to
accurately measure individual living standards. Under such circumstances,
continued price controls over basic consumer goods within the state sector, and the
associated queuing, can form a serviceable device for targeting poor people for
subsidies. With a fixed-price state sector and free-price parallel markets, rich
people might choose to avoid queues and shop in the free markets, while poor
people would prefer to pay low nominal prices and queue in the state sector. The
targeting of subsidies through queues, therefore, can be accomplished even if the
government has no information on individual income or living standards. When the
alternative to price controls is a poorly targeted explicit social safety net, the
resource cost of queues might be more than compensated for by an improvement
in the targeting of subsidies.

10. Economic reforms

India was a latecomer to economic reforms, embarking on the process in earnest
only in 1991, in the wake of an exceptionally severe balance of payments crisis.
The need for a policy shift had become evident much earlier, as many countries in
East Asia achieved high growth and poverty reduction through policies which
emphasized greater export orientation and encouragement of the private sector.
India took some steps in this direction in the 1980s, but it was not until 1991 that
the government signaled a systemic shift to a more open economy with greater
reliance upon market forces, a larger role for the private sector including foreign
investment, and a restructuring of the role of government.

India’s economic performance in the post-reforms period has many positive

features. The average growth rate in the ten year period from 1992-93 to 2001-02
was around 6.0 percent, as shown in Table 1, which puts India among the fastest
growing developing countries in the 1990s. This growth record is only slightly better
than the annual average of 5.7 percent in the 1980s, but it can be argued that the
1980s growth was unsustainable, fuelled by a buildup of external debt which
culminated in the crisis of 1991. In sharp contrast, growth in the 1990s was
accompanied by remarkable external stability despite the east Asian crisis. Poverty
also declined significantly in the post-reform period, and at a faster rate than in the
1980s according to some studies (as Ravallion and Datt discuss in this issue).

However, the ten-year average growth performance hides the fact that while the
economy grew at an impressive 6.7 percent in the first five years after the reforms,
it slowed down to 5.4 percent in the next five years. India remained among the
fastest growing developing countries in the second sub-period because other
developing countries also slowed down after the east Asian crisis, but the annual
growth of 5.4 percent was much below the target of 7.5 percent which the
government had set for the period. Inevitably, this has led to some questioning
about the effectiveness of the reforms.

Opinions on the causes of the growth deceleration vary. World economic growth
was slower in the second half of the 1990s and that would have had some
dampening effect, but India’s dependence on the world economy is not large
enough for this to account for the slowdown. Critics of liberalization have blamed
the slowdown on the effect of trade policy reforms on domestic industry (for
example, Nambiar et al, 1999; Chaudhuri, 2002). However, the opposite view is
that the slowdown is due not to the effects of reforms, but rather to the failure to
implement the reforms effectively. This in turn is often attributed to India’s
gradualist approach to reform, which has meant a frustratingly slow pace of
implementation. However, even a gradualist pace should be able to achieve
significant policy changes over ten years.

The main economic reforms are as follows:

a) Reforms in Industrial and Trade Policy

Reforms in industrial and trade policy were a central focus of much of India’s
reform effort in the early stages. Industrial policy prior to the reforms was
characterized by multiple controls over private investment which limited the areas
in which private investors were allowed to operate, and often also determined the
scale of operations, the location of new investment, and even the technology to be
used. The industrial structure that evolved under this regime was highly inefficient
and needed to be supported by a highly protective trade policy, often providing
tailor-made protection to each sector of industry. The costs imposed by these
policies had been extensively studied (for example, Bhagwati and Desai, 1965;
Bhagwati and Srinivasan, 1971; Ahluwalia, 1985) and by 1991 a broad consensus
had emerged on the need for greater liberalization and openness. A great deal has
been achieved at the end of ten years of gradualist reforms.

Industrial Policy

Industrial policy has seen the greatest change, with most central government
industrial controls being dismantled. The list of industries reserved solely for the
public sector which used to cover 18 industries, including iron and steel, heavy
plant and machinery, telecommunications and telecom equipment, minerals, oil,
mining, air transport services and electricity generation and distribution -- has been
drastically reduced to three: defense aircrafts and warships, atomic energy
generation, and railway transport. Industrial licensing by the central government
has been almost abolished except for a few hazardous and environmentally
sensitive industries. The requirement that investments by large industrial houses
needed a separate clearance under the Monopolies and Restrictive Trade Practices
Act to discourage the concentration of economic power was abolished and the act
itself is to be replaced by a new competition law which will attempt to regulate
anticompetitive behavior in other ways.

The main area where action has been inadequate relates to the long standing policy
of reserving production of certain items for the small-scale sector. About 800 items
were covered by this policy since the late 1970s, which meant that investment in
plant and machinery in any individual unit producing these items could not exceed
$ 250,000. Many of the reserved items such as garments, shoes, and toys had high
export potential and the failure to permit development of production units with
more modern equipment and a larger scale of production severely restricted India’s
export competitiveness. The Report of the Committee on Small Scale Enterprises
(1997) and the Report of the Prime Minister’s Economic Advisory Council (2001)
had both pointed to the remarkable success of China in penetrating world markets
in these areas and stimulating rapid growth of employment in manufacturing. Both
reports recommended that the policy of reservation should be abolished and other
measures adopted to help small-scale industry. While such a radical change in
policy was unacceptable, some policy changes have been made very recently:
fourteen items were removed from the reserved list in 2001 and another 50 in
2002. The items include garments, shoes, toys and auto components, all of which
are potentially important for exports. In addition, the investment ceiling for certain
items was increased to $1 million. However, these changes are very recent and it
will take some years before they are reflected in economic performance.
Industrial liberalization by the central government needs to be accompanied by
supporting action by state governments. Private investors require much permission
from state governments to start operations, like connections to electricity and water
supply and environmental clearances. They must also interact with the state
bureaucracy in the course of day-to-day operations because of laws governing
pollution, sanitation, workers’ welfare and safety, and such. Complaints of delays,
corruption and harassment arising from these interactions are common. Some
states have taken initiatives to ease these interactions, but much more needs to be
done.

A recently completed joint study by the World Bank and the Confederation of Indian
Industry (Stern, 2001) found that the investment climate varies widely across
states and these differences are reflected in a disproportional share of investment,
especially foreign investment, being concentrated in what are seen as the more
investor-friendly states (Maharashtra, Gujarat, Karnataka, Andhra Pradesh and
Tamil Nadu) to the disadvantage of other states (like Uttar Pradesh, Bihar and West
Bengal).

Investors perceived a 30 percent cost advantage in some states over others, on

account of the availability of infrastructure and the quality of governance. These
differences across states have led to an increase in the variation in state growth
rates, with some of the less favored states actually decelerating compared to the
1980s. Because liberalization has created a more competitive environment, the pay
off from pursuing good policies has increased, thereby increasing the importance of
state level action. Infrastructure deficiencies will take time and resources to remove
but deficiencies in governance could be handled more quickly with sufficient political
will.

Trade Policy

Trade policy reform has also made progress, though the pace has been slower than
in industrial liberalization. Before the reforms, trade policy was characterized by
high tariffs and pervasive import restrictions. Imports of manufactured consumer
goods were completely banned. For capital goods, raw materials and
intermediates, certain lists of goods were freely importable, but for most items
where domestic substitutes were being produced, imports were only possible with
import licenses. The criteria for issue of licenses were non-transparent; delays were
endemic and corruption unavoidable. The economic reforms sought to phase out
import licensing and also to reduce import duties.

Import licensing was abolished relatively early for capital goods and intermediates
which became freely importable in 1993, simultaneously with the switch to a
flexible exchange rate regime. Import licensing had been traditionally defended on
the grounds that it was necessary to manage the balance of payments, but the shift
to a flexible exchange rate enabled the government to argue that any balance of
payments impact would be effectively dealt with through exchange rate flexibility.
Removing quantitative restrictions on imports of capital goods and intermediates
was relatively easy, because the number of domestic producers was small and
Indian industry welcomed the move as making it more competitive. It was much
more difficult in the case of final consumer goods because the number of domestic
producers affected was very large (partly because much of the consumer goods
industry had been reserved for small scale production). Quantitative restrictions on
imports of manufactured consumer goods and agricultural products were finally
removed on April 1, 2001, almost exactly ten years after the reforms began, and
that in part because of a ruling by a World Trade Organization dispute panel on a
complaint brought by the United States.

Progress in reducing tariff protection, the second element in the trade strategy, has
been even slower and not always steady. As shown in Table 3, the weighted
average import duty rate declined from the very high level of 72.5 percent in 1991-
92 to 24.6 percent in 1996-97. However, the average tariff rate then increased by
more than 10 percentage points in the next four years. In February 2002, the
government signaled a return to reducing tariff protection. The peak duty rate was
reduced to 30 percent, a number of duty rates at the higher end of the existing
structure were lowered, while many low end duties were raised to 5 percent. The
net result is that the weighted average duty rate is 29 percent in 2002-03.

Although India’s tariff levels are significantly lower than in 1991, they remain
among the highest in the developing world because most other developing
countries have also reduced tariffs in this period. The weighted average import duty
in China and Southeast Asia is currently about half the Indian level. The
government has announced that average tariffs will be reduced to around 15
percent by 2004, but even if this is implemented, tariffs in India will be much
higher than in China which has committed to reduce weighted average duties to
about 9 percent by 2005 as a condition for admission to the World Trade
Organization.

b) Foreign Direct Investment Reforms

Liberalizing foreign direct investment was another important part of India’s reforms,
driven by the belief that this would increase the total volume of investment in the
economy, improve production technology, and increase access to world markets.
The policy now allows 100 percent foreign ownership in a large number of
industries and majority ownership in all except banks, insurance companies,
telecommunications and airlines. Procedures for obtaining permission were greatly
simplified by listing industries that are eligible for automatic approval up to
specified levels of foreign equity (100 percent, 74 percent and 51 percent).
Potential foreign investors investing within these limits only need to register with
the Reserve Bank of India. For investments in other industries, or for a higher share
of equity than is automatically permitted in listed industries, applications are
considered by a Foreign Investment Promotion Board that has established a track
record of speedy decisions. In 1993, foreign institutional investors were allowed to
purchase shares of listed Indian companies in the stock market, opening a window
for portfolio investment in existing companies.

These reforms have created a very different competitive environment for India’s
industry than existed in 1991, which has led to significant changes. Indian
companies have upgraded their technology and expanded to more efficient scales of
production. They have also restructured through mergers and acquisitions and
refocused their activities to concentrate on areas of competence. New dynamic
firms have displaced older and less dynamic ones: of the top 100 companies ranked
by market capitalization in 1991, about half are no longer in this group. Foreign
investment inflows increased from virtually nothing in 1991 to about 0.5 percent of
GDP. Although this figure remains much below the levels of foreign direct
investment in many emerging market countries (not to mention 4 percent of GDP in
China), the change from the pre-reform situation is impressive. The presence of
foreign-owned firms and their products in the domestic market is evident and has
added greatly to the pressure to improve quality.

These policy changes were expected to generate faster industrial growth and
greater penetration of world markets in industrial products, but performance in this
respect has been disappointing. As shown in Table 1, industrial growth increased
sharply in the first five years after the reforms, but then slowed to an annual rate of
4.5 percent in the next five years. Export performance has improved, but modestly.
The share of exports of goods in GDP increased from 5.7 percent in 1990-91 to 9.7
percent, but this reflects in part exchange rate depreciation. India’s share in world
exports, which had declined steadily since 1960, increased slightly from around 0.5
percent in 1990-91 to 0.6 percent in 1999-2000, but much of the increase in world
market share is due to agricultural exports. India’s manufactured exports had a 0.5
percent share in world markets for those items in 1990 and this rose to only 0.55
percent by 1999. Unlike the case in China and Southeast Asia, foreign direct
investment in India did not play an important role in export penetration and was
instead oriented mainly towards the domestic market.

One reason why export performance has been modest is the slow progress in
lowering import duties that make India a high cost producer and therefore less
attractive as a base for export production. Exporters have long been able to import
inputs needed for exports at zero duty, but the complex procedure for obtaining the
necessary duty-free import licenses typically involves high transactions cost and
delays. High levels of protection compared with other countries also explains why
foreign direct investment in India has been much more oriented to the protected
domestic market, rather than using India as a base for exports. However, high
tariffs are only part of the explanation for poor export performance. The reservation
of many potentially exportable items for production in the small scale sector (which
has only recently been relaxed) was also a relevant factor. The poor quality of
India’s infrastructure compared with infrastructure in east and Southeast Asia,
which is discussed later in this paper, is yet another.

Inflexibility of the labor market is a major factor reducing India’s competitiveness in

exports and also reducing industrial productivity generally (Planning Commission,
2001). Any firm wishing to close down a plant, or to retrench labor in any unit
employing more than 100 workers, can only do so with the permission of the state
government, and this permission is rarely granted. These provisions discourage
employment and are especially onerous for labor-intensive sectors. The increased
competition in the goods market has made labor more willing to take reasonable
positions, because lack of flexibility only leads to firms losing market share.
However, the legal provisions clearly remain much more onerous than in other
countries. This is important area of reform that has yet to be addressed. The lack of
any system of unemployment insurance makes it difficult to push for major changes
in labor flexibility unless a suitable contributory system that is financially viable can
be put in place. The government has recently announced its intention to amend the
law and raise the level of employment above which firms have to seek permission
for retrenchment from 100 workers at present to 1000 while simultaneously
increasing the scale of retrenchment compensation. However, the amendment has
yet to be enacted.

These gaps in the reforms provide a possible explanation for the slowdown in
industrial growth in the second half of the 1990s. It can be argued that the initial
relaxation of controls led to an investment boom, but this could have been
sustained only if industrial investment had been oriented to tapping export
markets, as was the case in East Asia. As it happened, India’s industrial and trade
reforms were not strong enough, nor adequately supported by infrastructure and
labor market reforms to generate such a thrust. The one area which has shown
robust growth through the 1990s with a strong export orientation is software
development and various new types of services enabled by information technology
like medical transcription, backup accounting, and customer related services.
Export earnings in this area have grown from $100 million in 1990-91 to over $6
billion in 2000-01 and are expected to continue to grow at 20 to 30 percent per
year. India’s success in this area is one of the most visible achievements of trade
policy reforms which allow access to imports and technology at exceptionally low
rates of duty, and also of the fact that exports in this area depend primarily on
telecommunications infrastructure, which has improved considerably in the post-
reforms period.
c) Reforms in Agriculture

A common criticism of India’s economic reforms is that they have been excessively
focused on industrial and trade policy, neglecting agriculture which provides the
livelihood of 60 percent of the population. Critics point to the deceleration in
agricultural growth in the second half of the 1990s (shown in Table 2) as proof of
this neglect. However, the notion that trade policy changes have not helped
agriculture is clearly a misconception. The reduction of protection to industry, and
the accompanying depreciation in the exchange rate, has tilted relative prices in
favor of agriculture and helped agricultural exports. The index of agricultural prices
relative to manufactured products has increased by almost 30 percent in the past
ten years (Ministry of Finance, 2002, Chapter 5). The share of India’s agricultural
exports in world exports of the same commodities increased from 1.1 percent in
1990 to 1.9 percent in 1999, whereas it had declined in the ten years before the
reforms.

But while agriculture has benefited from trade policy changes, it has suffered in
other respects, most notably from the decline in public investment in areas critical
for agricultural growth, such as irrigation and drainage, soil conservation and water
management systems, and rural roads. As pointed out by Gulati and Bathla (2001),
this decline began much before the reforms, and was actually sharper in the 1980s
than in the 1990s. They also point out that while public investment declined, this
was more than offset by a rise in private investment in agriculture which
accelerated after the reforms. However, there is no doubt that investment in
agriculture-related infrastructure is critical for achieving higher productivity and this
investment is only likely to come from the public sector. Indeed, the rising trend in
private investment could easily be dampened if public investment in these critical
areas is not increased.

The main reason why public investment in rural infrastructure has declined is the
deterioration in the fiscal position of the state governments and the tendency for
politically popular but inefficient and even iniquitous subsidies to crowd out more
productive investment. For example, the direct benefit of subsidizing fertilizer and
under pricing water and power goes mainly to fertilizer producers and high income
farmers while having negative effects on the environment and production, and even
on income of small farmers. A phased increase in fertilizer prices and imposition of
economically rational user charges for irrigation and electricity could raise resources
to finance investment in rural infrastructure, benefiting both growth and equity.
Competitive populism makes it politically difficult to restructure subsidies in this
way, but there is also no alternative solution in sight.

Some of the policies which were crucial in promoting food grain production in earlier
years, when this was the prime objective, are now hindering agricultural
diversification. Government price support levels for food grains such as wheat are
supposed to be set on the basis of the recommendations of the Commission on
Agricultural Costs and Prices, a technical body which is expected to calibrate price
support to reasonable levels. In recent years, support prices have been fixed at
much higher levels, encouraging overproduction. Indeed, public food grain stocks
reached 58 million tons on January 1, 2002, against a norm of around 17 million
tons. The support price system clearly needs to be better aligned to market demand
if farmers are to be encouraged to shift from food grain production towards other
products.

Agricultural diversification also calls for radical changes in some outdated laws. The
Essential Commodities Act, which empowers state governments to impose
restrictions on movement of agricultural products across state and sometimes even
district boundaries and to limit the maximum stocks wholesalers and retailers can
carry for certain commodities, was designed to prevent exploitive traders from
diverting local supplies to other areas of scarcity or from hoarding supplies to raise
prices. Its consequence is that farmers and consumers are denied the benefit of an
integrated national market. It also prevents the development of modern trading
companies, which have a key role to play in the next stage of agricultural
diversification. The government has recognized the need for change and recently
removed certain products including wheat, rice, coarse grains, edible oil, oilseeds
and sugar from the purview of the act. However, this step may not suffice, since
state governments may be able to take similar action. What is needed is a repeal of
the existing act and central legislation that would make it illegal for government
authorities at any level to restrict movement or stocking of agricultural products.

The report of the Task Force on Employment has made comprehensive proposals
for review of several other outdated agricultural laws. For example, laws designed
to protect land tenants, undoubtedly an important objective, end up discouraging
marginal farmers from leasing out nonviable holdings to larger farmers for fear of
being unable to reclaim the land from the tenant. The Agricultural Produce
Marketing Acts in various states compel traders to buy agricultural produce only in
regulated markets, making it difficult for commercial traders to enter into
contractual relationships with farmers. Development of a modern food processing
sector, which is essential to the next stage of agricultural development, is also
hampered by outdated and often contradictory laws and regulations. These and
other outdated laws need to be changed if the logic of liberalization is to be
extended to agriculture.

d) Infrastructure Development reforms

Rapid growth in a globalized environment requires a well-functioning infrastructure

including especially electric power, road and rail connectivity, telecommunications,
air transport, and efficient ports. India lags behind east and southeast Asia in these
areas. These services were traditionally provided by public sector monopolies but
since the investment needed to expand capacity and improve quality could not be
mobilized by the public sector, these sectors were opened to private investment,
including foreign investment. However, the difficulty in creating an environment
which would make it possible for private investors to enter on terms that would
appear reasonable to consumers, while providing an adequate risk- return profile to
investors, was greatly underestimated. Many false starts and disappointments have
resulted.

The greatest disappointment has been in the electric power sector, which was the
first area opened for private investment. Private investors were expected to
produce electricity for sale to the State Electricity Boards, which would control of
transmission and distribution. However, the State Electricity Boards were financially
very weak, partly because electricity tariffs for many categories of consumers were
too low and also because very large amounts of power were lost in transmission
and distribution. This loss, which should be between 10 to 15 percent on technical
grounds (depending on the extent of the rural network), varies from 35 to 50
percent. The difference reflects theft of electricity, usually with the connivance of
the distribution staff. Private investors, fearing nonpayment by the State Electricity
Boards insisted on arrangements which guaranteed purchase of electricity by state
governments backed by additional guarantees from the central government. These
arrangements attracted criticism because of controversies about the
reasonableness of the tariffs demanded by private sector power producers.
Although a large number of proposals for private sector projects amounting to
about 80 percent of existing generation capacity were initiated, very few reached
financial closure and some of those which were implemented ran into trouble
subsequently.

Because of these difficulties, the expansion of generation capacity by the utilities in

the 1990s has been only about half of what was targeted and the quality of power
remained poor with large voltage fluctuations and frequent interruptions.

The flaws in the policy have now been recognized and a more comprehensive
reform is being attempted by several state governments. Independent statutory
regulators have been established to set tariffs in a manner that would be perceived
to be fair to both consumers and producers. Several states are trying to privatize
distribution in the hope that this will overcome the corruption which leads to the
enormous distribution losses. However, these reforms are not easy to implement.
Rationalization of power tariffs is likely to be resisted by consumers long used to
subsidized power, even though the quality of the power provided in the pre-reform
situation was very poor. The establishment of regulatory authorities that are
competent and credible takes time. Private investors may not be able to enforce
collection of amounts due or to disconnect supply for non-payment without
adequate backing by the police. For all these reasons, private investors perceive
high risks in the early stages and therefore demand terms that imply very high
rates of return. Finally, labor unions are opposed to privatization of distribution.

These problems are formidable and many state governments now realize that a
great deal of preliminary work is needed before privatization can be successfully
implemented. Some of the initial steps, like tariff rationalization and enforcing
penalties for non-payment of dues and for theft of power, are perhaps best
implemented within the existing public sector framework so that these features,
which are essential for viability of the power sector, are not attributed solely to
privatization. If the efforts now are made in half a dozen states succeed, it could
lead to a visible improvement within a few years.

The results in telecommunications have been much better and this is an important
factor underlying India’s success in information technology. There was a false start
initially because private investors offered excessively high license fees in bidding for
licenses which they could not sustain, which led to a protracted and controversial
renegotiation of terms. Since then, the policy appears to be working satisfactorily.
Several private sector service providers of both fixed line and cellular services,
many in partnership with foreign investors, are now operating and competing with
the pre-existing public sector supplier. Tele density, which had doubled from 0.3
lines per 100 populations in 1981 to 0.6 in 1991, increased sevenfold in the next
ten years to reach 4.4 in 2002. Waiting periods for telephone connections have
shrunk dramatically. Telephone rates were heavily distorted earlier with very high
long distance charges cross-subsidizing local calls and covering inefficiencies in
operation. They have now been rebalanced by the regulatory authority, leading to a
reduction of 30 percent in long distance charges. Interestingly, the erstwhile public
sector monopoly supplier has aggressively reduced prices in a bid to retain market
share.

Civil aviation and ports are two other areas where reforms appear to be succeeding,
though much remains to be done. Two private sector domestic airlines, which
began operations after the reforms, now have more than half the market for
domestic air travel. However, proposals to attract private investment to upgrade
the major airports at Mumbai and Delhi have yet to make visible progress. In the
case of ports, 17 private sector projects involving port handling capacity of 60
million tons, about 20 percent of the total capacity at present, are being
implemented. Some of the new private sector port facilities have set high standards
of productivity.

India’s road network is extensive, but most of it is low quality and this is a major
constraint for interior locations. The major arterial routes have low capacity
(commonly just two lanes in most stretches) and also suffer from poor
maintenance. However, some promising initiatives have been taken recently. In
1998, a tax was imposed on gasoline (later extended to diesel), the proceeds of
which are earmarked for the development of the national highways, state roads and
rural roads.

This will help finance a major program of upgrading the national highways
connecting Delhi, Mumbai, Chennai and Calcutta to four lanes or more, to be
completed by the end of 2003. It is also planned to levy modest tolls on these
highways to ensure a stream of revenue which could be used for maintenance. A
few toll roads and bridges in areas of high traffic density have been awarded to the
private sector for development.

The railways are a potentially important means of freight transportation but this
area is untouched by reforms as yet. The sector suffers from severe financial
constraints, partly due to a politically determined fare structure in which freight
rates have been set excessively high to subsidize passenger fares, and partly
because government ownership has led to wasteful operating practices. Excess staff
is currently estimated at around 25 percent.

Resources are typically spread thinly to respond to political demands for new
passenger trains at the cost of investments that would strengthen the capacity of
the railways as a freight carrier. The Expert Group on Indian Railways (2002)
recently submitted a comprehensive program of reform converting the railways
from a departmentally run government enterprise to a corporation, with a
regulatory authority fixing the fares in a rational manner. No decisions have been
announced as yet on these recommendations.

e) Financial Sector Reform

India’s reform program included wide-ranging reforms in the banking system and
the capital markets relatively early in the process with reforms in insurance
introduced at a later stage.

Banking sector reforms included: (a) measures for liberalization, like dismantling
the complex system of interest rate controls, eliminating prior approval of the
Reserve Bank of India for large loans, and reducing the statutory requirements to
invest in government securities; (b) measures designed to increase financial
soundness, like introducing capital adequacy requirements and other prudential
norms for banks and strengthening banking supervision; (c) measures for
increasing competition like more liberal licensing of private banks and freer
expansion by foreign banks. These steps have produced some positive outcomes.
There has been a sharp reduction in the share of non-performing assets in the
portfolio and more than 90 percent of the banks now meet the new capital
adequacy standards. However, these figures may overstate the improvement
because domestic standards for classifying assets as non-performing are less
stringent than international standards.

India’s banking reforms differ from those in other developing countries in one
important respect and that is the policy towards public sector banks which
dominate the banking system. The government has announced its intention to
reduce its equity share to 33-1/3 percent, but this is to be done while retaining
government control. Improvements in the efficiency of the banking system will
therefore depend on the ability to increase the efficiency of public sector banks.

Skeptics doubt whether government control can be made consistent with efficient
commercial banking because bank managers are bound to respond to political
directions if their career advancement depends upon the government. Even if the
government does not interfere directly in credit decisions, government ownership
means managers of public sector banks are held to standards of accountability akin
to civil servants, which tend to emphasize compliance with rules and procedures
and therefore discourage innovative decision making. Regulatory control is also
difficult to exercise. The unstated presumption that public sector banks cannot be
shut down means that public sector banks that perform poorly are regularly
recapitalized rather than weeded out. This obviously weakens market discipline,
since more efficient banks are not able to expand market share.

If privatization is not politically feasible, it is at least necessary to consider

intermediate steps which could increase efficiency within a public sector framework.
These include shifting effective control from the government to the boards of the
banks including especially the power to appoint the Chairman and Executive
Directors which is at present with the government; removing civil servants and
representatives of the Reserve Bank of India from these board; implementing a
prompt corrective action framework which would automatically trigger regulatory
action limiting a bank’s expansion capability if certain trigger points of financial
soundness are breeched; and finally acceptance of closure of insolvent public sector
banks (with appropriate protection for small depositors). Unless some initiatives
along these lines are taken, it is highly unlikely that public sector banks can rise to
the levels of efficiency needed to support rapid growth.

Another major factor limiting the efficiency of banks is the legal framework, which
makes it very difficult for creditors to enforce their claims. The government has
recently introduced legislation to establish a bankruptcy law which will be much
closer to accepted international standard. This would be an important improvement
but it needs to be accompanied by reforms in court procedures to cut the delays
which are a major weakness of the legal system at present.
Reforms in the stock market were accelerated by a stock market scam in 1992 that
revealed serious weaknesses in the regulatory mechanism. Reforms implemented
include establishment of a statutory regulator; promulgation of rules and
regulations governing various types of participants in the capital market and also
activities like insider trading and takeover bids; introduction of electronic trading to
improve transparency in establishing prices; and dematerialization of shares to
eliminate the need for physical movement and storage of paper securities. Effective
regulation of stock markets requires the development of institutional expertise,
which necessarily requires time, but a good start has been made and India’s stock
market is much better regulated today than in the past. This is to some extent
reflected in the fact that foreign institutional investors have invested a cumulative
$21 billion in Indian stocks since 1993, when this avenue for investment was
opened.

An important recent reform is the withdrawal of the special privileges enjoyed by

the Unit Trust of India, a public sector mutual fund which was the dominant mutual
fund investment vehicle when the reforms began. Although the Unit Trust did not
enjoy a government guarantee, it was widely perceived as having one because its
top management was appointed by the government. The Trust had to be bailed out
once in 1998, when its net asset value fell below the declared redemption price of
the units, and again in 2001 when the problem recurred. It has now been decided
that in future investors in the Unit Trust of India will bear the full risk of any loss in
capital value. This removes a major distortion in the capital market, in which one of
the investment schemes was seen as having a preferred position.

The insurance sector (including pension schemes), was a public sector monopoly at
the start of the reforms. The need to open the sector to private insurance
companies was recommended by an expert committee (the Malhotra Committee) in
1994, but there was strong political resistance. It was only in 2000 that the law
was finally amended to allow private sector insurance companies, with foreign
equity allowed up to 26 percent, to enter the field. An independent Insurance
Development and Regulatory Authority has now been established and ten new life
insurance companies and six general insurance companies, many with well-known
international insurance companies as partners, have started operations. The
development of an active insurance and pensions industry offering attractive
products tailored to different types of requirements could stimulate long term
savings and add depth to the capital markets. However, these benefits will only
become evident over time.

11. Per capita and national income

Per capita income or income per person is a measure of mean income within an
economic aggregate, such as a country or city. It is calculated by taking a measure
of all sources of income in the aggregate (such as GDP or Gross National Income)
and dividing it by the total population. It does not attempt to reflect the distribution
of income or wealth.

Per capita income is often used as a measure of the wealth of the population of a
nation, particularly in comparison to other nations. It is usually expressed in terms
of a commonly used international currency such as the Euro or United States dollar,
and is useful because it is widely known, easily calculated from readily-available
GDP hi11 population estimates, and produces a straightforward statistic for
comparison.

Per capita income has several weaknesses as a measurement of

prosperity:

i) As it is a mean value, it does not reflect income distribution. If the distribution of

income within a country is skewed, a small wealthy class can increase per capita
income far above that of the majority of the population. In this respect Median
income is a more useful measure of prosperity than per capita income, because it is
less influenced by the outliers.

ii) Economic activity that does not result in monetary income, such as service
provided within the family, or for barter, is usually not counted. The importance of
these services varies widely among different economies.

iii) Comparisons of per capita income over time need to take into account changes
in prices. Without using measures of income adjusted for inflation, they will tend to
overstate the effects of economic growth.

iv) International comparisons can be distorted by differences in the costs of living

between countries that aren't reflected in exchange rates. Where, the objective of
the comparison is to look at differences in living standards between countries, using
a measure of per capita income adjusted for differences in purchasing power parity
more accurately reflects the differences in what people are actually able to buy with
their capital. National Income is the total market value of all final goods and
services currently produced within the domestic territory of a country in a year.

The important concepts of national income are:

1. Gross Domestic Product (GDP)

2. Gross National Product (GNP)

3. Net National Product (NNP) at Market Prices

4. Net National Product (NNP) at Factor Cost or National Income

5. Personal Income

6. Disposable Income

1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total
market value of all final goods and services currently produced within the domestic
territory of a country in a year.

Four things must be noted regarding this definition

First, it measures the market value of annual output of goods and services currently
produced. This implies that GDP is a monetary measure.

Secondly, for calculating GDP accurately, all goods and services produced in any
given year must be counted only once so as to avoid double counting. So, GDP
should include the value of only final goods and services and ignores the
transactions involving intermediate goods.

Thirdly, GDP includes only currently produced goods and services in a year. Market
transactions involving goods produced in the previous periods such as old houses,
old cars, factories built earlier are not included in GDP of the current year.

Lastly, GDP refers to the value of goods and services produced within the domestic
territory of a country by nationals or non-nationals.

2. Gross National Product (GNP): Gross National Product is the total market
value of all final goods and services produced in a year. GNP includes net factor
income from abroad whereas GDP does not. Therefore,

GNP = GDP + Net factor income from abroad.

Net factor income from abroad = factor income received by Indian nationals from
abroad – factor income paid to foreign nationals working in India.

3. Net National Product (NNP) at Market Price: NNP is the market value of all
final goods and services after providing for depreciation. That is, when charges for
depreciation are deducted from the GNP we get NNP at market price. Therefore’

NNP = GNP – Depreciation

Depreciation is the consumption of fixed capital or fall in the value of fixed capital
due to wear and tear.

4. Net National Product (NNP) at Factor Cost (National Income): NNP at

factor cost or National Income is the sum of wages, rent, interest and profits paid
to factors for their contribution to the production of goods and services in a year. It
may be noted that:
NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies

5. Personal Income: Personal income is the sum of all incomes actually received
by all individuals or households during a given year. In National Income there are
some income, which is earned but not actually received by households such as
Social Security contributions, corporate income taxes and undistributed profits. On
the other hand there are income (transfer payment), which is received but not
currently earned such as old age pensions, unemployment doles, relief payments,
etc. Thus, in moving from national income to personal income we must subtract the
incomes earned but not received and add incomes received but not currently
earned. Therefore,

Personal Income = National Income – Social Security contributions – corporate

income taxes – undistributed corporate profits + transfer payments.

Disposable Income: From personal income if we deduct personal taxes like income
taxes, personal property taxes etc. what remains is called disposable income. Thus,

Disposable Income = Personal income – personal taxes.

Disposable Income can either be consumed or saved. Therefore,

Disposable Income = consumption + saving.

Measurement of National Income

Production generate incomes which are again spent on goods and services
produced. Therefore, national income can be measured by three methods:

1. Output or Production method

2. Income method, and

3. Expenditure method.

1. Output or Production Method: This method is also called the value-added

method. This method approaches national income from the output side. Under this
method, the economy is divided into different sectors such as agriculture, fishing,
mining, construction, manufacturing, trade and commerce, transport,
communication and other services. Then, the gross product is found out by adding
up the net values of all the production that has taken place in these sectors during
a given year.

In order to arrive at the net value of production of a given industry, intermediate

goods purchase by the producers of this industry is deducted from the gross value
of production of that industry. The aggregate or net values of production of all the
industry and sectors of the economy plus the net factor income from abroad will
give us the GNP. If we deduct depreciation from the GNP we get NNP at market
price. NNP at market price – indirect taxes + subsidies will give us NNP at factor
cost or National Income.

The output method can be used where there exists a census of production for the
year. The advantage of this method is that it reveals the contributions and relative
importance and of the different sectors of the economy.

2. Income Method: This method approaches national income from the distribution
side. According to this method, national income is obtained by summing up of the
incomes of all individuals in the country. Thus, national income is calculated by
adding up the rent of land, wages and salaries of employees, interest on capital,
profits of entrepreneurs and income of self-employed people.

This method of estimating national income has the great advantage of indicating
the distribution of national income among different income groups such as
landlords, capitalists, workers, etc.

3. Expenditure Method: This method arrives at national income by adding up all

the expenditure made on goods and services during a year. Thus, the national
income is found by adding up the following types of expenditure by households,
private business enterprises and the government:

(a) Expenditure on consumer goods and services by individuals and households

denoted by C. This is called personal consumption expenditure denoted by C.

(b) Expenditure by private business enterprises on capital goods and on making

additions to inventories or stocks in a year. This is called gross domestic private
investment denoted by I.

(c) Government’s expenditure on goods and services i.e. government purchases

denoted by G.

(d) Expenditure made by foreigners on goods and services of the national economy
over and above what this economy spends on the output of the foreign countries
i.e. exports – imports denoted by

(X – M)

Thus,

GDP = C + I + G + (X – M).

Difficulties in the Measurement of National Income

There are many difficulties in measuring national income of a country accurately.
The difficulties involved are both conceptual and statistical in nature. Some of these
difficulties or problems are discuss below:

1. The first problem relates to the treatment of non-monetary transactions such as

the services of housewives and farm output consumed at home. On this point, the
general agreement seems to be to exclude the services of housewives while
including the value of farm output consumed at home in the estimates of national
income.

2. The second difficulty arises with regard to the treatment of the government in
national income accounts. On this point the general viewpoint is that as regards the
administrative functions of the government like justice, administrative and defense
are concerned they should be treated as giving rise to final consumption of such
services by the community as a whole so that contribution of general government
activities will be equal to the amount of wages and salaries paid by the
government. Capital formation by the government is treated as the same as capital
formation by any other enterprise.

3. The third major problem arises with regard to the treatment of income arising
out of the foreign firm in a country. On this point, the IMF viewpoint is that
production and income arising from an enterprise should be ascribed to the territory
in which production takes place. However, profits earned by foreign companies are
credited to the parent company.

Special Difficulties of Measuring National Income in Under-developed

Countries

In under-developed countries like India, we face some special difficulties in

estimating national income. Some of these difficulties are:

1. The first difficulty arises because of the prevalence of non-monetised

transactions in such countries so that a considerable part of the output does not
come into the market at all. Agriculture still being in the nature of subsistence
farming in these countries, a major part of output is consumed at the farm itself.

2. Because of illiteracy, most producers have no idea of the quantity and value of
their output and do not keep regular accounts. This makes the task of getting
reliable information very difficult.

3. Because of under-development, occupational specialization is still incomplete, so

that there is lack of differentiation in economic functioning. An individual may
receive income partly from farm ownership, partly from manual work in industry in
the slack season, etc. This makes the task of estimating national income very
difficult.
4. Another difficulty in measuring national income in under-developed countries
arises because production, both agriculture and industrial, is unorganized and
scattered in these countries. In India, agriculture, household craft, and indigenous
banking are the unorganized and scattered sectors. An assessment of output
produced by self-employed agriculturist, small producers and owners of household
enterprises in the unorganized sectors requires an element of guesswork, which
makes the figure of national income unreliable.

5. In under-developed countries there is a general lack of adequate statistical data.

Inadequacy, non-availability and unreliability of statistics are a great handicap in
measuring national income in these countries.

Importance of Economic Environment in national level

Indian government took several steps including control by the State of certain
industries, central planning and reduced importance of the private sector. The main
objectives of India’s economic development plans were:

i) Initiate rapid economic growth to raise the standard of living, reduce

unemployment and poverty;

ii) Become self-reliant and set up a strong industrial base with emphasis on heavy
and basic industries;

iii) Reduce inequalities of income and wealth;

iv) Adopt a socialist pattern of development based on equality and prevent

exploitation of man by man.

As a part of economic reforms, the Government of India announced a new industrial

policy in July 1991.

Economic Conditions
Economic Policies of a business unit are largely affected by the economic conditions
of an economy. Any improvement in the economic conditions such as standard of
living, purchasing power of public, demand and supply, distribution of income etc.
largely affects the size of the market.
Business cycle is another economic condition that is very important for a business
unit. Business Cycle is divided into the following four phases:

1. Prosperity Phase: Expansion or Boom or Upswing of economy.

2. Recession Phase: from prosperity to recession (upper turning point).

3. Depression Phase: Contraction or Downswing of economy.

4. Recovery Phase: from depression to prosperity (lower turning Point).

Diagram of Four Phases of Business Cycle

The four phases of business cycles are shown in the following diagram:

The business cycle starts from a trough (lower point) and passes through a
recovery phase followed by a period of expansion (upper turning point) and
prosperity. After the peak point is reached there is a declining phase of recession
followed by a depression. Again the business cycle continues similarly with ups and
downs.

Explanation of Four Phases of Business Cycle

The four phases of a business cycle are briefly explained as follows:

1. Prosperity Phase: When there is an expansion of output, income, employment,

prices and profits, there is also a rise in the standard of living. This period is termed
as Prosperity phase.

The features of prosperity are:

i) High level of output and trade.

ii) High level of effective demand.

iii) High level of income and employment.

iv) Rising interest rates.

v) Inflation

vi) Large expansion of bank credit.

vii) Overall business optimism.

viii) A high level of MEC (Marginal efficiency of capital) and investment.

2. Recession Phase: The turning point from prosperity to depression is termed as

Recession Phase. During a recession period, the economic activities slow down.
When demand starts falling, the overproduction and future investment plans are
also given up.

The features of Recession are:

i) There is a steady decline in the output, income, employment, prices and profits.

ii) The businessmen lose confidence and become pessimistic (Negative).

iii) It reduces investment.

iv) The banks and the people try to get greater liquidity, so credit also contracts.

v) Expansion of business stops, stock market falls.

vi) Orders are cancelled and people start losing their jobs.

vii) The increase in unemployment causes a sharp decline in income and aggregate
demand.

viii) Recession lasts for a short period.

3. Depression Phase: When there is a continuous decrease of output, income,

employment, prices and profits, there is a fall in the standard of living and
depression sets in.

The features of depression are:

i) Fall in volume of output and trade.

ii) Fall in income and rise in unemployment.

iii) Decline in consumption and demand.

iv) Fall in interest rate.

v) Deflation

vi) Contraction of bank credit.

vii) Overall business pessimism.

viii) Fall in MEC (Marginal efficiency of capital) and investment.

4. Recovery Phase: The turning point from depression to expansion is termed as

Recovery or Revival Phase. During the period of revival or recovery, there are
expansions and rise in economic activities. When demand starts rising, production
increases and this causes an increase in investment.

Features of Recovery
i) There is a steady rise in output, income, employment, prices and profits.
ii) The businessmen gain confidence and become optimistic (Positive).
iii) This increases investments.
iv) The stimulation of investment brings about the revival or recovery of the
economy.
v) The banks expand credit, business expansion takes place and stock markets are
activated.
vi) There is an increase in employment, production, income and aggregate demand,
prices and profits start rising, and business expands.
vii) Revival slowly emerges into prosperity, and the business cycle is repeated.
Economic Conditions of a country
Following are mainly included in Economic Conditions of a country:
i) Stages of Business Cycle
ii) National Income, Per Capita Income and Distribution of Income
iii) Rate of Capital Formation
iv) Demand and Supply Trends
v) Inflation Rate in the Economy
vi) Industrial Growth Rate, Exports Growth Rate
vii) Interest Rate prevailing in the Economy
viii) Trends in Industrial Sickness
ix) Efficiency of Public and Private Sectors
x) Growth of Primary and Secondary Capital Markets

Economic Systems
An Economic System of a nation or a country may be defined as a framework of
rules, goals and incentives that controls economic relations among people in a
society. It also helps in providing framework for answering the basic economic
questions. Different countries of a world have different economic systems and the
prevailing economic system in a country affect the business units to a large extent.
Types of Economic system
Economic systems of a nation can be of any one of the following type:

a) Capitalism: The economic system in which business units or factors of

production are privately owned and governed is called Capitalism. The profit
earning is the sole aim of the business units. Government of that country does not
interfere in the economic activities of the country. It is also known as free market
economy. All the decisions relating to the economic activities are privately taken.
Examples of Capitalistic Economy: England, Japan, America etc.
Capitalism is variously defined by sources. There is no consensus on the definition
nor on how the term should be used as a historical category. There is general
agreement that capitalism is an economic system that includes private ownership of
the means of production, creation of goods or services for profit or income, the
accumulation of capital, competitive markets, voluntary exchange, and wage labor.
The designation is applied to a variety of historical cases, varying in time,
geography, politics and culture. There is general agreement that capitalism became
dominant in the Western world following the demise of feudalism.
Economists, political economists and historians have taken different perspectives on
the analysis of capitalism. Economists usually emphasize the degree that
government does not have control over markets (laissez faire), and on property
rights. Most political economists emphasize private property, power relations, wage
labor, class and emphasize capitalism as a unique historical formation. Capitalism is
generally viewed as encouraging economic growth. The extent to which different
markets are free, as well as the rules defining private property, is a matter of
politics and policy, and many states have what are termed mixed economies. A
number of political ideologies have emerged in support of various types of
capitalism, the most prominent being economic liberalism.

Benefits of Capitalism

i) Capitalism encourages competition: Since goods and services are freely

traded in the open market with each seller setting his/her price, competition is
bound to occur and this results in monopoly and cartels being removed.

ii) Capitalism encourages trade: As business is conducted in open markets,

traders Endeavour to avail a variety of goods and services thereby increasing trade
opportunities.

iii) Employment: Capitalism provides employment opportunities for a people in

form of labour.

iv) Development of skills: Capitalism results in a variety of goods and services in

the market place. This affords a people to specialize in an area that they feel they
can perform better.

v) Investment: Capitalism provides room for investment opportunities as those

with the capital seek ways to put their capital in use to make profits.
vi) Organization: Capitalism encourages self-organization. As competition levels
rise, traders are bound to organize themselves and set a reasonable pricing method
that benefits them all.

b) Socialism: Under socialism economic system, all the economic activities of the
country are controlled and regulated by the Government in the interest of the
public. The first country to adopt this concept was Soviet Russia.
A socialist economic system would consist of an organization of production to
directly satisfy economic demands and human needs, so that goods and services
would be produced directly for use instead of for private profit driven by the
accumulation of capital, and accounting would be based on physical quantities, a
common physical magnitude, or a direct measure of labour-time. Distribution of
output would be based on the principle of individual contribution.

As a political movement, socialism includes a diverse array of political philosophies,

ranging from reformism to revolutionary socialism. Proponents of state socialism
advocate for the nationalization of the means of production, distribution and
exchange as a strategy for implementing socialism. Social democrats advocate
redistributive taxation in the form of social welfare and government regulation of
capital within the framework of a market economy. In contrast, anarchism and
libertarian socialism propose direct worker's control of the means of production and
oppose the use of state power to achieve such an arrangement, opposing both
parliamentary politics and state ownership over the means of production.

Modern socialism originated from an 18th-century intellectual and working class

political movement that criticized the effects of industrialization and private
property on society. In the early 19th-century, "socialism" referred to any concern
for the social problems of capitalism regardless of the solution. However, by the
late 19th-century, "socialism" had come to signify opposition to capitalism and
advocacy for an alternative system based on some form of social ownership.[8]
Utopian socialists such as Robert Owen (1771–1858) tried to found self-sustaining
communes by secession from a capitalist society. Socialists inspired by the Soviet
model of economic development, such as Marxist-Leninists, have advocated the
creation of centrally planned economies directed by a single-party state that owns
the means of production. Yugoslavian, Hungarian, East German and Chinese
communist governments have instituted various forms of market socialism,
combining co-operative and state ownership models with the free market exchange
and free price system (but not free prices for the means of production).

The two main forms of Socialism are:

i) Democratic Socialism: All the economic activities are controlled and regulated
by the government but the people have the freedom of choice of occupation and
consumption.
ii) Totalitarian Socialism: This form is also known as Communism. Under this,
people are obliged to work under the directions of Government.

Benefits of Socialism
i) Socialism provides the government with control of virtually all functions of a
society. It can be used to provide all citizens with their survival needs, creating a
stable social environment as long as production of those needs meets the demand
for them and absolute power over the economy does not corrupt the government
that has it.
ii) People who cannot participate economically (due to mental disabilities, age, or
poor health) are still valued and cared for as long as the government is more
compassionate than the family (who would be empowered and responsible under
free enterprise).
iii) When their basic needs are provided whether they work or not, there is
opportunity for citizens to explore non-economically-productive pursuits, such as
pure science, math and the arts or drugs, sexual promiscuity and television.

c) Mixed Economy: The economic system in which both public and private sectors
co-exist is known as Mixed Economy. Some factors of production are privately
owned and some are owned by Government. There exists freedom of choice of
occupation and consumption. Both private and public sectors play key roles in the
development of the country.
The basic plan of the mixed economy is that the means of production are mainly
under private ownership; that markets remain the dominant form of economic
coordination; and that profit-seeking enterprises and the accumulation of capital
would remain the fundamental driving force behind economic activity. However, the
government would wield considerable indirect influence over the economy through
fiscal and monetary policies designed to counteract economic downturns and
capitalism's tendency toward financial crises and unemployment, along with playing
a role in interventions that promote social welfare. Subsequently, some mixed
economies have expanded in scope to include a role for indicative economic
planning and/or large public enterprise sectors.
There is not one single definition for a mixed economy, but the definitions always
involve a degree of private economic freedom mixed with a degree of government
regulation of markets. The relative strength or weakness of each component in the
national economy can vary greatly between countries. Economies ranging from the
United States to Cuba have been termed mixed economies. The term is also used to
describe the economies of countries which are referred to as welfare states, such as
Norway and Sweden. Governments in mixed economies often provide
environmental protection, maintenance of employment standards, a standardized
welfare system, and maintenance of competition.
As an economic ideal, mixed economies are supported by people of various political
persuasions, typically centre-left and centre-right, such as social democrats or
Christian democrats. Supporters view mixed economies as a compromise between
state socialism and laissez-faire capitalism that is superior in net effect to either of
those.

Elements of Mixed economy

The elements of a mixed economy have been demonstrated to include a variety of
freedoms:
i) To possess means of production (farms, factories, stores, etc.)
ii) To participate in managerial decisions (cooperative and participatory economics)
iii) To travel (needed to transport all the items in commerce, to make deals in
person, for workers and owners to go to where needed)
iv) To buy (items for personal use, for resale; buy whole enterprises to make the
organization that creates wealth a form of wealth itself)
v) To sell (same as buy)
vi) To hire (to create organizations that create wealth)
vii) To fire (to maintain organizations that create wealth)
viii) To organize (private enterprise for profit, labor unions, workers' and
professional associations, non-profit groups, religions, etc.)
ix) To communicate (free speech, newspapers, books, advertisements, make deals,
create business partners, create markets)
x) To protest peacefully (marches, petitions, sue the government, make laws
friendly to profit making and workers alike, remove pointless inefficiencies to
maximize wealth creation)

Benefits of Mixed Economy

There are numerous advantages of a mixed economy:

i) Provides fair competition: The presence of private enterprise ensures that

there is fair competition in the market and the quality of products and services are
not compromised.

ii) Market prices are well regulated: The government with its regulatory bodies
ensures that the market price does not go beyond its actual price.

iii) Optimum utilization of national resources: In a mixed economy, the

resources are utilized efficiently as both government and private enterprises are
utilizing them.

iv) People are given more power: The general people have more say when it
comes to the quality and the prices of products and services.

v) It does not allow monopoly at all: Barring a few sectors, a mixed economy
does not allow any monopoly as both government and private enterprises enter
every sector for business.

Economic Policies
Government frames economic policies. Economic Policies affects the different
business units in different ways. It may or may not have favorable effect on a
business unit. The Government may grant subsidies to one business or decrease
the rates of excise or custom duty or the government may increase the rates of
custom duty and excise duty, tax rates for another business. All the business
enterprises frame their policies keeping in view the prevailing economic policies.

Different economic policies

Important economic policies of a country are as follows:
i) Monetary Policy: The policy formulated by the central bank of a country to
control the supply and the cost of money (rate of interest), in order to attain some
specified objectives is known as Monetary Policy.
ii) Fiscal Policy: It may be termed as budgetary policy. It is related with the
income and expenditure of a country. Fiscal Policy works as an instrument in
economic and social growth of a country. It is framed by the government of a
country and it deals with taxation, government expenditure, borrowings, deficit
financing and management of public debts in an economy.
iii) Foreign Trade Policy: It also affects the different business units differently.
E.g. if restrictive import policy has been adopted by the government then it will
prevent the domestic business units from foreign competition and if the liberal
import policy has been adopted by the government then it will affect the domestic
products in other way.
iv) Foreign Investment Policy: The policy related to the investment by the
foreigners in a country is known as Foreign Investment Policy. If the government
has adopted liberal investment policy then it will lead to more inflow of foreign
capital in the country which ultimately results in more industrialization and growth
in the country.
v) Industrial Policy: Industrial policy of a country promotes and regulates the
industrialization in the country. It is framed by government. The government from
time to time issues principals and guidelines under the industrial policy of the
country.
Economic Legislations
Besides the above policies, Governments of different countries frame various
legislations which regulates and control the business. In India there are 20 essential
economic laws, listed here in chronological order. They form the overall legal
framework of the Indian business environment.
 The Indian Contract Act (1872): Established the framework within which
contracts can be executed and enforced.
 Negotiable Instruments Act (1881): Set rules for promissory notes, bills
of exchange, and checks.

 Workmen's Compensation Act (1923): Set the compensation to be paid

by employers to injured workers.

 Sale of Goods Act (1930): A mercantile law that complemented the

Contract Act (see above).

 Payment of Wages Act (1936): Established a minimum monthly salary for

industrial and factory workers.

 Industrial Disputes Act (1947): Provided for the investigation and

settlement of industrial disputes.

 Minimum Wages Act (1948): Fixed minimum pay rates for certain jobs.

 Factories Act (1948): Regulated labor in factories.

  Employees Provident Fund and Miscellaneous Provisions Act (1952):
Established provident funds, family pensions, and other monetary benefits
for factory employees.

 Maternity Benefits Act (1961): Regulated post-childbirth time off for

female employees.

 Payment of Bonus Act (1965): Regulated bonus payments to be made to

certain categories of employees on the basis of production, profit, or
productivity.

 Monopolies and Restrictive Trade Practices Act (1969): Established

rules to prevent unfair concentrations of economic power.

 Indian Patents Act (1970): Set rules for patent protection in India.

 Payment of Gratuity Act (1972): Provided for payment of gratuities to

Indian employees in certain industries.

 Copyright Act (1975): Helped establish copyright protection in India.

 Arbitration and Conciliation Act (1996): Set up to govern arbitration

issues.

 Geographical Indications of Goods Act (1999): Provided legal protection

for goods originated in a particular area or region within India (examples
include Darjeeling tea and Basmati rice).

 Trademarks Act (1999): Helped establish trademark protection in India.

 Designs Act (2000): Helped establish protection of designs.

 Competition Act (2002): Provided for the establishment of a commission

that promotes competition, protects consumers, and ensures freedom of
trade.

Socio-cultural Environment
Socio-cultural environment is relating to the social and cultural practices, beliefs
and traditions within a particular society. It consists of language, aesthetics,
education, religion& superstitions, attitudes, values, material culture, technology,
social groups & organizations, business custom practices etc.
Changes in social trends can impact on the demand for a firm's products and the
availability and willingness of individuals to work. Social class and caste of a person
goes a long way in deciding the business activities in relation to its production and
marketing activities. Tradition, customs and social attitudes have changed the
attitude and beliefs of the persons which have their effect on organizational
environment. Class and caste are influencing the purchasing pattern. Socio-cultural
environment may include expectations of the society from business, attitudes of
society towards business and its management, views towards achievement of work,
views towards structure, responsibility and organizational positions, views towards
customs, traditional and conventional, class structure and labour mobility and level
of education.

Social environment describes the characteristics of the society in which the

organization exists. Literacy rate, customs, values, beliefs, lifestyle, demographic
features and mobility of population are part of the social environment. It is
important for managers to notice the direction in which the society is moving and
formulate progressive policies according to the changing social scenario.
The socio-cultural fabric is an important environmental factor that should be
analyzed while formulating business strategies. The cost of ignoring the customs,
traditions, taboos, tastes and preferences, etc., of people could be very high. The
buying and consumption habits of the people, their language, beliefs and values,
customs and traditions, tastes and preferences, education are all factors that affect
business. For a business to be successful, its strategy should be the one that is
appropriate in the socio-cultural environment. The marketing mix will have to be so
designed as best to suit the environmental characteristics of the market. In
Thailand, Helene Curtis switched to black shampoo because Thai women felt that it
made their hair look glossier. Nestle, a Swiss multinational company, today brews
more than forty varieties of instant coffee to satisfy different national tastes. Even
when people of different cultures use the same basic product, the mode of
consumption, conditions of use, purpose of use or the perceptions of the product
attributes may vary so much so that the product attributes method of presentation,
positioning, or method of promoting the product may have to be varied to suit the
characteristics of different markets. For example, the two most important foreign
markets for Indian shrimp are the U.S and Japan. The product attributes for the
success of the product in these two markets differ. In the U.S. market, correct
weight and bacteriological factors are more important rather than eye appeal,
colour, and uniformity of size and arrangement of the shrimp which are very
important in Japan. Similarly, the mode of consumption of tuna, another seafood
export from India, differs between the U.S. and European countries. Tuna fish
sandwiches, an American favourite which accounts for about 80 per cent of
American tuna consumption, have little appeal in high tuna consumption European
countries where people eat it right from the can. A very interesting example is that
of the Vicks Vaporub, the popular pain balm, which is used as a mosquito repellant
in some of the tropical areas. The differences in languages sometimes pose a
serious problem, even necessitating a change in the brand name. Preett was,
perhaps, a good brand name in India, but it did not suit in the overseas market;
and hence it was appropriate to adopt ‘Prestige’ for the overseas markets.
Chevrolet’s brand name ‘Nova’ in Spanish means “it doesn’t go”. In Japanese,
General Motors’ “Body by Fisher” translates as corpse by Fisher”. In Japanese,
again, 3M’s slogan “sticks like crazy “translates as “sticks foolishly”. In some
languages, Pepsi-Cola’s slogan “come alive” translates as “come out of the grave”.
The values and beliefs associated with colour vary significantly between different
cultures. Blue, considered feminine and warm in Holland, and is regarded as
masculine and cold in Sweden. Green is a favourite colour in the Muslim world; but
in Malaysia, it is associated with illness. White indicates death and mourning in
China and Korea; but in some countries, it expresses happiness and is the colour of
the wedding dress of the bride. Red is a popular colour in the communist countries;
but many African countries have a national distaste for red colour.

Social inertia and associated factors come in the way of the promotion of certain
products, services or ideas. We come across such social stigmas in the marketing of
family planning ideas, use of bio-gas for cooking, etc. In such circumstances, the
success of marketing depends, to a very large extent, on the success in changing
social attitudes or value systems. There are also a number of demographic factors,
such as the age, and sex composition of population, family size, habitat, religion,
etc., which influence the business.

While dealing with the social environment, we must also consider the social
environment of the business which encompasses its social responsibility and the
alertness or vigilance of the consumers and of society at large. The societal
environment has assumed great importance in recent years. As Barker observes,
business traditionally has been held responsible for quantities for the supply of
goods and jobs, for costs, prices, wages, hours of works, and for standards of
living. Today, however, business is being asked to take a responsibility for the
quality of life in our society. The expectation is that business- in addition to its
traditional accountability for economic performance and results will concern itself
with the health of the society that it will come up with the cures for the ills that
currently beset us and, indeed, will find ways of anticipating and preventing future
problems in these areas.

As Stern succinctly points out, the more educated the society becomes, the more
interdependent it becomes, and the more discretionary the use of its resources, the
more marketing will become enmeshed in social issues. Marketing personnel are at
interface between company and society. In this position, they have the
responsibility not merely for designing a competitive marketing strategy, but for
sensitizing business to the social, as well as the product demand of society.

Humans essentially create their own cultural and social environment. Customs,
practices and traditions for survival and development are passed down from one
generation to the next. In this way, the members of a particular society become
conditioned to accept certain "truths" about life around them. The increasingly
competitive international business environment calls upon exporters to tailor or
adapt their business approach to the culture and traditions of specific foreign
markets. The inability or unwillingness to do so could become a serious obstacle to
success.

The task of adjusting to a new cultural environment is probably one of the biggest
challenges of export marketing. Export marketing attempts are frequently
unsuccessful because the marketer either consciously or unconsciously - makes
decisions or evaluations from a frame of reference that is acceptable to his/her own
culture but unacceptable in a foreign environment. Therefore, business practices
which are successful in one group of countries may be entirely inappropriate in
another group of countries. For example, the Marlboro Company took its famous
lone cowboy advertisement to Hong Kong in the early 1960's.However, the image
of the cowboy riding off in the distance by himself led the Chinese to wonder what
he had done wrong.

Meaning of Social Environment

Social environment of business means all factors which affects business socially.
Every business works in a society, so societies' different factors like family,
educational institutions and religion affects business.

Main elements of Societies and its effect on Business

1. Family: Family is basic part of society from the birth of a person and up to
death, he lives in family so personal decision of buying and selling of goods are
affects from family. In the culture of a family, it may happen that parent does not
allow using any product, then sale of such product will decrease, so businessman
must analyze different family’s needs. Many occasion of family like marriage of any
family member, can increase the demand of goods.

2. Educational institutions: Educational institutions are also main part of

societies. They provide good knowledge, education, awareness, thinking what
should students buy or not to buy. Suppose if a student is habitual to drink the tea
and if his teacher advice him that this is harmful to his health after his guidance
students can avoid drinking tea after this the sale of tea will decrease.

3. Religion: Like family and education institution, religion is also affects the
business socially. Religion means the system in which group of persons trust in
God. They believe that there is one supernatural power in this earth and its name is
God. Different religions have different principles, rules and regulations in which they
sacrifice to use some products and to eat some food, in Hindu religion, they never
use leather products. They affect the sale of leather industries. So, businessman
must analyze the targeted audience and after listening their religious thoughts, he
should produce the goods.
Meaning of Culture

According to Mitchell, “Culture is a set of learned core values, beliefs, standards,

knowledge morals, laws and behaviors shared by individuals and societies
determination how an individual acts, feel, and views oneself and others”.

Meaning of Cultural Environment

The cultural environment refers to the institutions and other forces that affect the
basic values, behaviors, and preferences of the society-all of which have an effect
on consumer marketing decisions.

Meaning of Socio-cultural Environment

Socio-cultural Environment refers to the sum of all learned attitudes and behaviours
that influence how a person thinks and behaves. For example, the way a person
dresses, or feels about the need to express their individuality, is largely selected
from a set of options available in that person's socio-cultural environment.

Factors of the socio-cultural environment

There are a number of factors that you will need to consider:

i) Language: Language is central to the expression of culture. Within each cultural

group, the use of words reflects the lifestyle, attitudes and many of the customs of
that group. Language is not only a key to understanding the group; it is the
principal way of communicating within it. A language usually defines the
parameters of a particular culture. Thus if several languages are spoken within the
borders of a country, that country is seen to have as many cultures. In Canada, for
instance, both English and French are spoken; in Belgium, French and Flemish;
while in South Africa there are 11 official languages with a number of other African
languages also spoken by the population. In addition, there are often variations
within a language - different dialects, accents, pronunciations and terminology may
distinguish one cultural group from another, e.g. English-speaking South Africans,
the British, Americans and Australians.

ii) Material culture: Material culture relates to the way in which a society
organizes and views its economic activities. It includes the techniques and know-
how used in the creation of goods and services, the manner in which the people of
the society use their capabilities, and the resulting benefits. When one refers to an
'industrialized' or a 'developing' nation, one is really referring to a material culture.

The material culture of a particular market will affect the nature and extent of
demand for a product. Whereas a luxury item, such as a sophisticated piece of
computer hardware, may have a ready market in a country such as France, demand
for it may be non-existent in a developing country which is hampered by
inadequate facilities and/or foreign exchange shortages. The material culture of a
country may also necessitate modifications to the product. Electrical appliances, for
example, may have to be adapted to cater for differences in voltage levels. To
illustrate this: the United States operates under a system of 110V in contrast to
South Africa's 220V. Alternatively, weights and measurements may have to be
converted to those applicable in the importing country.

Material culture can also have a significant effect on the proposed marketing and
distribution strategies. While highways and rail transport are the principal means of
moving goods within the United States, rivers and canals are used extensively in
certain European countries. If the company is planning to develop a manufacturing
operation in a foreign market, aspects such as the supply of raw materials, power,
transportation and financing need to be investigated.

iii) Aesthetics: A culture's aesthetics refer to its ideas concerning good taste and
beauty as expressed in the fine arts - music, art, drama and dance - and in the
appreciation of colour and form. Insensitivity to aesthetic values can not only lead
to ineffective advertising and package design for products, it can also offend
prospective customers.

iv) Social organization: Social organization refers to the ways in which people
relate to one another, form groups and organize their activities, teach acceptable
behaviour and govern themselves. It thus comprises the social, educational and
political systems of a society.

The exporter's ability to communicate depends to some extent, on the educational

level of the foreign market. If the consumers are largely illiterate, advertising
materials or package labels may have to be adapted to the needs of the market. In
this regard, however, a company marketing baby food in a certain African country
put the picture of a smiling child on the outside of the jar. The local resident
assuming there were preserved babies inside avoided the product! In addition,
there are unspoken signals which identify cultural differences, from certain taboos
to less obvious practices like the time taken to answer a letter. In some societies,
for instance, an important issue is dealt with immediately; in others, promptness is
taken as a sign that the matter is regarded as unimportant, the time taken
corresponding with the gravity of the issue.

In a culture where great importance is attached to the family unit, promotional

efforts should be directed at the family rather than the individual. The size of the
family unit differs from one culture to another. It can range from the nuclear family,
i.e. mother, father, and children, to the extended family which includes many
relatives and whose role is to provide protection, support and economic security to
its members. In the extended family, characteristic of developing countries,
consumption decision-making takes place in a larger unit and purchasing power
patterns may be different from those evident in western cultures.

In any society, certain occupations carry more prestige, social status and monetary
reward than others. In India, for example, there is a strong reluctance amongst
people with university education to perform 'menial' tasks using their hands, even
answering the telephone. In many countries, including France, Italy and Singapore,
financial independence is considered essential for occupation-related prestige. In
Japan, however, the majority of university-educated professionals tend to prefer
working for large multinational firms than for themselves. Social organization is also
evidenced in the operation of the class system, e.g. the Hindu caste system and the
grouping of society members according to age, sex, political orientation, etc.

v) Religious beliefs, attitudes, values, space and time:

A religious system refers to the spiritual side of a culture or its approach to the
supernatural. Western culture is accepted as having been largely influenced by the
Judeo-Christian traditions, while Eastern or Oriental cultures have been strongly
influenced by Buddhism, Confucianism, Taoism and Hinduism. Although very few
religions influence business activities directly, the impact of religion on human value
systems and decision-making is significant. Thus, religion exerts a considerable
influence on people's actions and outlook on life, as well as on the products they
buy. In certain part of the world, such as Latin America, the influence of religion
extends even beyond the individual or family and is manifested in a whole
community's deep involvement in, and devotion to, the church.

A society's religious belief system is often dependent on its stage of human or

economic development. Primitive tribesmen tend to be superstitious about life in
general while people in technologically advanced cultures seem to have dismissed
the notion of traditional religious worship and practice in favour of a more scientific
approach to life and death.

The failure to consider specialized aspects of local religions has created a number of
difficulties for firms. Companies have encountered problems in Asia when they
incorporated a picture of a Buddha in their promotions. Religious ties are strong in
this area, and the use of local religious symbols in advertising is strongly resented -
especially when words are deliberately or even accidentally printed across the
picture of a Buddha. One company was nearly burned to the ground when it
ignorantly tried such a strategy. The seemingly minor incident led to a major
international political conflict remembered for years.

Attitudes are psychological states that predispose people to behave in certain

ways. Attitudes may relate, for example, to work, wealth, achievement, change, the
role of women in the economy, etc.
Western cultures, for example, value individualism and promote the importance of
autonomy and personal achievement needs. In contrast, in many eastern and
developing countries, there is a strong sense of collectivism and the importance of
social and security needs. For instance, the Hindu religion imparts a type of work
ethic that considers work central to one's life but maintains that it must be
performed as a service to others, not for one's own personal achievement.

Stereotypes are sets of attitudes in which one attributes qualities or characteristics

to a person on the basis of the group to which that person belongs. An international
businessperson's tendency to judge others by his or her personal and cultural
standards instead of attempting to understand others in the context of their unique
historical, political, economic and social backgrounds could, for example, be termed
an undesirable attitude.

Values are judgements regarding what is valuable or important in life, and they
vary greatly from one culture to another. People who are operating at a survival
level will value food, shelter and clothing. Those with high security needs, on the
other hand, may value job security, status, money, etc. From its value system, a
culture sets norms, i.e. acceptable standards of behaviour.

Pepsodent reportedly tried to sell its toothpaste in regions of south-east Asia

through a promotion which stressed that the toothpaste helped enhance white
teeth. In this area, where some local people deliberately chewed betel nut in order
to achieve the social prestige of darkly stained teeth, such an ad was
understandably less than effective. The slogan "wonder where the yellow went" was
also viewed by many as a racial slur.

The concept of space is different wherever one goes. In western corporate

culture, the size and location of an executive's office is usually determined by his
level of seniority in the company. The locality and size of an Arab business
executive's office, on the other hand, are a poor indication of the person's
importance.

Conversation distance between two people is learned early in life - almost

completely unconsciously. A western business executive, conditioned to operating
within a certain amount of personal space, may feel uncomfortable or alarmed at
the closeness and physical contact displayed in the Middle East or Latin America, for
example.

Time also has a different meaning in each country. Western cultures tend to
perceive time in terms of past, present and future. They are orientated towards the
future and in the process of preparing for it, they save, waste, make up or spend
time. In South Africa, giving a person a deadline is a way of indicating the degree of
urgency or relative importance of the work. In the Middle East, however, time does
not usually include schedules and timetables. The time required to get something
accomplished depends on the relationship. With South Africans, the more important
an event is, the earlier it is planned, which is why last minute invitations are often
regarded as an insult. In planning future events with Arab businesspersons, it is
often advisable to keep the lead time to a week or less, because other factors may
intervene and take precedence.

Some time ago, an American lost a major contract in Greece because he did not
appreciate the Greek concept of time. The Greek executive could not understand
the American's insistence on setting time limits on the length of their business
meetings - he and his colleagues were prepared to spend as much time in
discussion as they felt was necessary. The American also insisted that the senior
managers involved in the transaction be responsible only for working out the
general principles of the deal, with the actual details being left to subordinates.
Suspicious that this represented a lack of commitment on the part of the American,
the Greek called off the deal.

Many factors continuously produce cultural changes in a society - new technology,

population shifts, availability of scarce resources and changing values regarding the
role of education or women. Culture is thus dynamic, and exporters, particularly
those involved in international travel and marketing, need to regularly assess what
new products and service needs have been created, who the potential buyers and
users are, and how best to reach them.

Impact of socio-cultural environment in business

The relationship among business, culture and society involves a two-way
interaction. Although we tend to think of business as operating according to a
distinctive instrumental rationality of profit-and-loss and the ‘bottom line’ it is also
influenced by the social-cultural setting in which it is embedded. At the same time
business affects the wider culture and society profoundly. The impact of socio-
cultural environment in business can be summarized as follows:

a) In estimating the demand for a product the consumer behaviour and their
consumption pattern are to be understood apart from their purchasing power.
Some latent needs of people, if understood properly, can be converted into
demand. For example some products sold in sachets get good response due to the
convenience and low cost.

b) The product features are designed by understanding the cultural background of

consumers. The tastes and preference differ due to this aspect. For instances,
products containing vegetable fats than animal fats are preferred by some groups,
natural ingredients than chemical or artificial goods, are preferred by somebody,
the food-stuffs also vary consumed by different groups.
c) The sales promotion techniques based on the understanding of cultural values of
people usually become successful. The appeals are selected best suited to the
attitude of people. We could see a number or advertisements based on the affection
and importance of family relationships.

d) In developing human relations with workers, suppliers, middlemen and the

public, it is necessary to understand the culture and mental make-ups of those
people. For example workers in different regions behave differently. If this is
understood conflicts with workers may be reduced.

e) The trade practices and services are designed based on the customs and habits
of the people. This includes holidays, (Fridays, instead of Sundays in Muslim areas)
working hours, consumer service, sales retail-outlets, demonstrations etc.

f) In introducing varieties, improvements and innovations in products, care should

be taken to understand the social characteristics of people. Many products in
cosmetics failed in Indian markets. We can also quote the hesitated acceptance of
electric appliances and gas stoves in rural markets.

g) The general attitude of people towards consumption, savings and investment

patterns also affect the overall business growth. Indian people usually don’t prefer
‘use and throw’ goods. They prefer investing in gold than in shares and bonds.

h) Business is an activity undertaken by people whose values and attitudes are

shaped by the culture and society of which they are a part. To some extent the
roles we perform in business are quite discrete from other aspects of our lives and
require that we adopt different behaviours and personas. However there is not, of
course, a complete separation between ‘work’ and ‘life’. We carry values and
attitudes shaped by the wider culture and society into our roles as managers,
employees and consumers.

i) It can be argued that capitalist business owes its historical origins and
development in part to non-economic factors. Max Weber argued that the ‘spirit of
capitalism’, or ethos of capitalist business, with its emphasis on accumulating
wealth, can be traced to religious belief the ‘Protestant ethic’. This religious belief
encouraged the reinvestment of wealth in business rather than the pursuit of a life
of luxury, thus fuelling economic growth and dynamism. A version of this theory
persists today in the idea that economic success depends on the prevalence of a
‘work ethic’ in society which sees work as a morally desirable activity.

j) There may be concern that wearing a religious symbol may cause offence to
others (customers or colleagues) of a different faith or none. An employer may
want to keep religious conflicts out of the workplace or avoid putting off customers.
If the policy was designed to protect the company’s image and to attract
customers, it seems to have back-fired on both counts.

k) Values are the terms on which we interact with business have a profound
influence on our lives. Work is a central aspect of our lives and the vast majority of
employees work in the private sector. We also depend very largely on the private
sector to supply the goods and services we consume on a daily basis. It is not
surprising, then, that business has major impacts on culture and society.

l) The culture industries make up a significant part of business activity, reflecting

the shift from manufacturing to service industries in the wealthy economies. Culture
has become increasingly big business as a growing share of consumer expenditure
is dedicated to ‘lifestyle’ purchases rather than material necessities. This can be
seen in the growth of the wide range of businesses concerned with leisure and
tourism.

Cross Culture

Cross culture means the interaction of people from different backgrounds in the
business world. Cross culture is a vital issue in international business, as the
success of international trade depends upon the smooth interaction of employees
from different cultures and regions. A growing number of companies are
consequently devoting substantial resources toward training their employees to
interact effectively with those of companies in other cultures in an effort to foment
a positive cross-cultural experience.

Cross culture can be experienced by an employee who is transferred to a location in

another country. The employee must learn the language and culture of those
around him, and vice-versa. This can be more difficult if this person is acting in a
managerial capacity; someone in this position who cannot effectively communicate
with or understand their employees' actions can lose their credibility. In an ever-
expanding global economy, cross culture and adaptability will continue to be
important factors in the business world.

Cross cultural Environment

Globalization, the expansion of intercontinental trade, technological advances and

the increase in the number of companies dealing on the international stage have
brought about a dramatic change in the frequency, context and means by which
people from different cultural backgrounds interact. Within companies there are
many facets in which cultural differences manifest. Some key areas which cross
cultural consultants deal with include, but are not exclusive to, the following:

i) Cross Cultural HR: HR covers a wide range of business critical areas that need
cross cultural analysis. Consultants may offer advice on a number of areas including
recruitment, relocation, international assignments, staff retention and training
programmes.

ii) Cross Cultural Team-Building: In order to have a well functioning business

unit within a company, communication is critical. Cross cultural consultants will
provide tools and methods to promote staff integration, reduce cross cultural
conflicts and build team spirit. This is essentially done through highlighting
differences and building on strengths to ensure they are used positively.

iii) Cross Cultural Synergy: International mergers, acquisitions and joint-

ventures require people from different cultural backgrounds to harmonize in order
to succeed. Cross cultural consultants counsel on group mechanics, communication
styles, norms, values and integration processes.

iv) Cross Cultural Awareness Training: Working with colleagues, customers or

clients from different cultural backgrounds, with different religions, values and
etiquettes can occasionally lead to problems. Cross cultural awareness training is
usually a generic introduction into a culture, country, region or religion. The aim is
to equip the trainee with the adequate knowledge to deal comfortably with people
from different cultures, avoiding misunderstandings and mistakes.

v) Cross Cultural Training for Expatriate Relocation: Staff that travel overseas
need to understand the cultural basics of the host country or region. Knowledge of
the country's history, culture, laws, traditions, business practices and social
etiquettes all help to minimize the impact of culture shock and hence smooth their
transition overseas.

vi) Cross Cultural Negotiations: Equipped with their knowledge of the two or
more cultures that can be meeting around the negotiation table, a cross cultural
consultant advises on areas such as negotiation strategies, styles, planning, closure
and etiquette in order to increase the chance of a successful outcome, free from
misunderstandings, suspicions and general cross cultural communication
breakdown.

vii) Cross Cultural PR Consultancy: Brand image, public relations and

advertising are all areas companies must be careful of when moving out of the
national context. Tastes and values change dramatically from continent to
continent. It is crucial to understand whether the brand name, image or advertising
campaign is culturally applicable in the target country. Cross cultural consultants
examine words, images, pictures, colours and symbols to ensure they fit well with
the target culture.

viii) Cross Cultural Language Training: Language training is an area where little
investment is made by companies, but where the business advantages are great.
Linguistic knowledge goes a long way in bridging cultural gaps and smoothing lines
of communication. Cross cultural consultancies provide language training to
business staff, moulding their learning to the business environment in which they
work.

Politico-legal Environment
Political environment refers to the influence exerted by the three political
institutions they are; Legislature, Executive, Judiciary etc. The legislature decides
on a particular course of action. Government is the executive and its job is to
implement whatever was decided by parliament. The judiciary has ensure that both
the legislature and executive function in public interest and within the boundaries of
constitution. Legal and political environment provides a framework within the
business is to function and its existence depends on the success with which it can
face the various challenges constructed out of political and legal framework.
The political environment is the state, government and its institutions and
legislations and the public and private stakeholders who operate and interact with
or influence that system. The stability of the political environment and government
will impact on the prioritization of mental health policy in relation to other policies,
the funding available to mental health and the time frames in which policies and
programmes can be realized.
The government, in every country, regulates the business according to its defined
priorities. Legal system of a country is framed by the government. The laws which
are passed by the government for business operation is called legal environment.

Political environment comprises political stability and the policies of the

government. Ideological inclination of political parties, personal interest on
politicians, influence of party forums etc. create political environment. For example,
Bangalore established itself as the most important IT centre of India mainly
because of political support.
Political and government environment has close relationship with the economic
system and economic policy. For example, the communist countries had a centrally
planned economic system. In most countries, apart from those laws that control
investment and related matters, there are a number of laws that regulate the
conduct of the business. These laws cover such matters as standards of products,
packaging, promotion etc.

In many countries, with a view to protecting consumer interests, regulations have

become stronger. Regulations to protect the purity of the environment and preserve
the ecological balance have assumed great importance in many countries. Some
governments specify certain standards for the products to be marketed in the
country; some even prohibit the marketing of certain products. In most nations,
promotional activities are subject to various types of controls. Media advertising is
not permitted in Libya. Several European countries restrain the use of children in
commercial advertisements. In a number of countries, including India, the
advertisement of alcoholic liquor is prohibited. Advertisements, including packaging,
of cigarettes must carry the statutory warning that “cigarette smoking is injurious
to health”. Similarly, advertisements of baby food must necessarily inform the
potential buyer that breast-feeding in the best. In countries like Germany, product
comparison advertisements and the use of superlatives like ‘best’ or ‘excellent’ in
advertisements is not allowed In the United States, the Federal Trade Commission
is empowered to require a company to provide the quality, performance or
comparative prices of its products.

There are a host of statutory controls on business in India. If the MRTP companies
wanted to expand their business substantially, they had to convince the
government that such expansion was in the public interest. Indeed, the
Government in India has an all-pervasive and predominantly restrictive influence
over various aspects of business, e.g, industrial licensing which decides location,
capacity and process; import licensing for machinery and materials; size and price
of capital issue; loan finance; pricing; managerial remuneration; expansion plans;
distribution restrictions and a host of other enactments. Therefore, a considerable
part of attention of a Chief Executive and his senior colleagues has to be devoted to
a continuous dialogue with various government agencies to ensure growth and
profitability within the framework of controls and restraints.

Many countries today have laws to regulate competition in the public interest.
Elimination of unfair competition and dilution of monopoly power are the important
objectives of these regulations. In India, the monopolistic undertakings, dominants
undertakings and large industrial houses are subject to number of regulations which
prevent the concentration of economic power to the common detriment. The MRTP
Act also controls monopolistic, restrictive and unfair trade practices which are
prejudicial to public interest. Such regulations brighten the prospects of small and
new firms. They also increase the scope of some of the existing firms to venture
into new areas of business. The special privileges available to the small scale sector
have also contributed to the phenomenal success of the Nirma.

Certain changes in government policies such as the industrial policy, fiscal policy,
tariff policy etc. may have profound impact on business. Some policy developments
create opportunities as well as threats. In other words, a development which
brightens the prospects of some enterprises may pose a threat to some others. For
example, the industrial policy liberalizations in India, particularly around the mid-
eighties have opened up new opportunities and threats. They have provided a lot of
opportunities to a large number of enterprises to diversify and to make their
product mix better. But they have also given rise to serious threat to many existing
products by way of increased competitions; many seller’s markets have given way
to buyer’s markets. Even products which were seldom advertised have come to be
promoted very heavily. This battle for the market has provided a splendid
opportunity for the advertising industry. Advertising billing has been increasing
substantially. That an estimated cost savings of about Rs. 200 crores per year have
accrued to the Reliance Industries as a result of the changes in duties on some of
the material inputs used by them is just an indication of the tremendous impact the
fiscal and tariff policies can have on the business.

The Constitution in general establishes the mastery of the people under the
leadership of the Communist Party, of which the highest representation is the
Politburo and the Party Secretary General. The power of the people is to be
exercised through the National Assembly at the central level and the People's
Councils at different local levels.

The National Assembly is the supreme representative and legislative body and
determines both domestic and foreign policy. It is elected by universal suffrage. The
National Assembly in turn elects and may remove from office the President, Vice-
President, Chairman of the National Assembly, Vice-chairman of National Assembly,
members of the Standing Committee of the National Assembly, the Prime Minister,
the Chief Justice of the People's Supreme Court and the Head of the Supreme
People's Procuracy. In addition, the National Assembly has the responsibility of
sanctioning the Prime Minister's selection of Deputy Prime Ministers and Ministers.

The National Assembly is also responsible for approving the organization of the
Government and its agencies, and is the supreme law making body. The duration of
the National Assembly is 5 years and elections are held two months prior to the
expiry of its term. The Standing Committee possesses the power to manage the
day-to-day affairs of the National Assembly when it is not in session and during this
time the Standing Committee assumes all its powers, including the law making
power on matters entrusted to it by the National Assembly. The Head of State is the
President. He is elected by the National Assembly and represents the Nation
internally and externally.
The highest executive body in Vietnam is the Government, formerly known as the
Council of Ministers. It is charged generally with the management of the economy
and the state. It is made up of the Prime Minister, Deputy Prime Ministers, Ministers
and the Chairmen of the various State Committees and the Governor of the State
Bank. Individual ministries and organizations equivalent to ministries aid the Prime
Minister in the administration of the Country within the specific fields in which they
have jurisdiction. The deputy prime ministers and the ministers are selected by the
Prime Minister but must be approved by the National Assembly. With the exception
of the Prime Minister, the members of the Government do not have to be members
of the National Assembly. Decisions on major issues must be taken on a majority
basis.
The court and prosecution systems in Vietnam have a structure similar to the
administrative system. In the central level, the Supreme People's Court is the
highest juridical body in Vietnam and the Chief Justice is elected by the National
Assembly for the term of the National Assembly. The Supreme People's Procuracy
has the highest power on prosecution in Vietnam and the Head is also elected by
the National Assembly for the term of the National Assembly. In local levels, these
bodies occur at the levels of city/province and district.
The political environment in which the firm operates (or plan to operate) will have a
significant impact on a company's international marketing activities. The greater
the level of involvement in a foreign markets, the greater the need to monitor the
political climate of the countries business is conducted. Changes in government
often result in changes in policy and attitudes towards foreign business. Bearing in
mind that a foreign company operates in a host country at the discretion of the
government concerned, the government can either encourage foreign activities by
offering attractive opportunities for investment and trade, or discourage its
activities by imposing restrictions such as import quotas, etc. An exporter that is
continuously aware of shifts in government attitude will be able to adapt export
marketing strategies accordingly.
Nearly all governments today play active roles in their countries' economies.
Although evident to a greater or lesser extent in most countries, government
ownership of economic activities is still prevalent in the former centrally planned
economies, as well as in certain developing countries which lack a sufficiently well
developed private sector to support a free market system.
The implications of government ownership to a company marketing abroad might
be that certain sectors of the foreign market are the exclusive preserve of
government enterprise or that the company is obliged to sell directly to a state
trading organization. In either case, the company's influence on the market is
greatly reduced. Similarly, if an exporter is seeking to establish a subsidiary in a
country where there is a high degree of state influence over the factors of
production, the investor should bear in mind that marketing activities in the country
concerned may be restricted and that the so-called controllable elements of the
marketing mix will be less controllable.
Primary concern to an exporter should be the stability of the target country's
political environment. A loss of confidence in this respect could lead to a company
having to reduce its operations in the market or to withdraw from the market
altogether. One of the surest indicators of political instability is a frequent change in
regime. Although a change in government need not be accompanied by violence, it
often heralds a change in policy towards business, particularly international
business. Such a development could impact harshly on a firms long-term
international marketing programme.
Reflected in a government's attitudes and policies towards foreign business are its
ideas about how best to promote national interest in the light of the country's
economic and political resources and objectives. Foreign products and investment
seen to be vital to the growth and development of the economy often receive
favourable treatment from the government in the form of reduced tax, exemption
from quotas, etc. On the other hand, products considered by a government to be
non-essential, undesirable, or a threat to local industry are frequently subjected to
a variety of import restrictions such as quotas and tariffs. It is also important to be
aware of the nature of the relationship between South Africa and the foreign target
market. This was a major consideration during South Africa's political isolation.
Fortunately, South Africa's international relations have normalized and today South
Africa is viewed very favourably, from a political perspective, by the rest of the
world. The political environment is connected to the international business
environment through the concept of political risk.
Meaning of Political Environment
Political environment means the set of activities of the government which include
plans, policies, programs and controls which directly or indirectly involve with the
business.

Political risk
Political risk can be defined as the impact of political change on the export firm's
operations and decision-making process.
Political risk is determined differently for different companies, as not all of them will
be equally affected by political changes. For example, industries requiring heavy
capital investment are generally considered to be more vulnerable to political risk
than those requiring less capital investment. Vulnerability stems from the extent of
capital invested in the export market, e.g. capital-intensive extracting or energy-
related businesses operating in the foreign market are more vulnerable than
manufacturing companies exporting from a South African base.
Political risk is of a macro nature when politically inspired environmental changes
affect all foreign investment. It is of a micro nature when the environmental
changes are intended to affect only selected fields of business activity or foreign
firms with specific characteristics.
When business is conducted in developing countries, the risks of greatest concern
are civil disorder, war and expropriation. When business is conducted in
industrialized countries, labour disruptions and price controls are generally seen to
pose the greatest threats to a company's profitability.
All organizations do business abroad should be aware of the fact that what they do
could be the object of some political action. Hence, they need to recognize that
their success or failure could depend on how well they cope with political decisions,
and how well they anticipate changes in political attitudes and policies.

Impact of Political Environment on doing business in India

As in any part of the world, political influence is highly essential to start a business
in India. Especially if you are planning to start a multibillion business, some sort of
political patronage is an absolute necessity. Not only for safeguarding the interest
of the company but even to begin the process of getting the required sanctions, one
requires hold in the high echelons of politics and administrative circles.
Indian society is highly plural. It is the biggest democracy in the world with multi
party political system. In population, India is second to China, with nearly 1200
million people. This is the most important consumer market in the world. It is a fast
developing world. India is the third largest economy in the world and second fast
growing economy in Asia. It has the tremendous potential of development with
huge intellectual human force. With all these advantages and the huge market
potential, world super entrepreneurs are looking for business establishments in
India. With the overcrowded population and the millions of hard working and
qualified personals, India offers a very cheap work force to the world. Many have
realized the business potential in India, started exploring the unique opportunities
of investments.

During the last couple of decades, India has opened its market to world. It has
absolutely become an open global market. Banking sector, Insurance sector and all
fields of industrial and business are now open for multinational investment. Of
course there are many obstructions to cross. And mostly all issues can overcome
and establish business if you have the political patronage.

India has a plural political system. With numerous political parties, national level
and state level, it is very difficult to get a consensus among all parties for starting
any business. Also these political parties have patronage of many factors, caste,
creed and ideologies.

Preamble of Indian Constitutions

“WE, THE PEOPLE OF INDIA, have solemnly resolved to constitute India into a
SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its
citizens:

JUSTICE, social, economic and political;

LIBERTY thoughts, expression, belief, faith and worship;

EQUALITY of status and of opportunity; and to promote among them all

FRATERNITY assuring the dignity of the individual and the unity and integrity of the
Nation;

IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949, DO

HEREBY ADOPT, ENACT AND GIVE TO OURSELVES THIS CONSTITUTION”.

Explanation

i) Sovereign: The word sovereign means supreme or independence. India is

internally and externally sovereign - externally free from the control of any foreign
power and internally, it has a free government which is directly elected by the
people and makes laws that govern the people. She allies in peace and war. The
Popular sovereignty is also one of the basic structures of constitution of India.
Hence, Citizens of India also enjoy sovereign power to elect their representatives in
elections held for parliament, state legislature and local bodies as well.

ii) Socialist: The word socialist was added to the Preamble by the Forty-second
Amendment. It implies social and economic equality. Social equality in this context
means the absence of discrimination on the grounds only of caste, colour, creed,
sex, religion, or language. Under social equality, everyone has equal status and
opportunities. Economic equality in this context means that the government will
endeavor to make the distribution of wealth more equal and provide a decent
standard of living for all. This is in effect emphasized a commitment towards the
formation of a welfare state. India has adopted a socialistic and mixed economy
and the government has framed many laws to achieve the aim a theory or policy of
social organization which advocates the ownership and control of the means of
production, capital, land and property.

iii) Democratic: The first part of the preamble “We, the people of India” and, its
last part “give to ourselves this Constitution” clearly indicate the democratic spirit
involved even in the Constitution. India is a democracy. The people of India elect
their governments at all levels (Union, State and local) by a system of universal
adult franchise; popularly known as "one man one vote". Every citizen of India, who
is 18[2] years of age and above and not otherwise debarred by law, is entitled to
vote. Every citizen enjoys this right without any discrimination on the basis of
caste, creed, colour, sex, religion or education.

iv) Republic: As opposed to a monarchy, in which the head of state is appointed

on hereditary basis for a lifetime or until he abdicates from the throne, a
democratic republic is an entity in which the head of state is elected, directly or
indirectly, for a fixed tenure. The President of India is elected by an electoral
college for a term of five years. The post of the President Of India is not hereditary.
Every citizen of India is eligible to become the President of the country.The leader
of the state is elected by the people.

Political Institutions

Fundamental rights

The Fundamental Rights, embodied in Part III of the Constitution, guarantee civil
rights to all Indians, and prevent the State from encroaching on individual liberty
while simultaneously placing upon it an obligation to protect the citizens' rights
from encroachment by society. Seven fundamental rights were originally provided
by the Constitution:

1. Right to Equality

2. Right to Freedom

3. Right against Exploitation

4. Right to Freedom of Religion

5. Cultural and Educational Rights

6. Right to property

7. Right to Constitutional Remedies

1. Right to Equality

The Right to Equality is one of the chief guarantees of the Constitution. It is

embodied in Articles 14–16, which collectively encompass the general principles of
equality before law and non-discrimination and Articles 17–18 which collectively
further the philosophy of social equality. Article 14 guarantees equality before law
as well as equal protection of the law to all persons within the territory of India.
This includes the equal subjection of all persons to the authority of law, as well as
equal treatment of persons in similar circumstances. The latter permits the State to
classify persons for legitimate purposes, provided there is a reasonable basis for the
same, meaning that the classification is required to be non-arbitrary, based on a
method of intelligible differentiation among those sought to be classified, as well as
have a rational relation to the object sought to be achieved by the classification.

2. Right to Freedom

The Right to Freedom is covered in Articles 19–22, with the view of guaranteeing
individual rights that were considered vital by the framers of the Constitution, and
these Articles also include certain restrictions that may be imposed by the State on
individual liberty under specified conditions. Article 19 guarantees six freedoms in
the nature of civil rights, which are available only to citizens of India. These include
the freedom of speech and expression, freedom of assembly, freedom of
association without arms, freedom of movement throughout the territory of India,
freedom to reside and settle in any part of the country of India and the freedom to
practice any profession. All these freedoms are subject to reasonable restrictions
that may impose on them by the State, listed under Article 19 itself. The grounds
for imposing these restrictions vary according to the freedom sought to be
restricted, and include national security, public order, decency and morality,
contempt of court, incitement to offences, and defamation. The State is also
empowered, in the interests of the general public to nationalize any trade, industry
or service to the exclusion of the citizens.

3. Right against Exploitation

The Right against Exploitation, contained in Articles 23–24, lays down certain
provisions to prevent exploitation of the weaker sections of the society by
individuals or the State. Article 23 provides prohibits human trafficking, making it
an offence punishable by law, and also prohibits forced labour or any act of
compelling a person to work without wages where he was legally entitled not to
work or to receive remuneration for it. However, it permits the State to impose
compulsory service for public purposes, including conscription and community
service. The Bonded Labour system (Abolition) Act, 1976, has been enacted by
Parliament to give effect to this Article. Article 24 prohibits the employment of
children below the age of 14 years in factories, mines and other hazardous jobs.
Parliament has enacted the Child Labour (Prohibition and Regulation) Act, 1986,
providing regulations for the abolition of, and penalties for employing, child labour,
as well as provisions for rehabilitation of former child labourers.

4. Right to Freedom of Religion

The Right to Freedom of Religion, covered in Articles 25–28, provides religious

freedom to all citizens and ensures a secular State in India. According to the
Constitution, there is no official State religion, and the State is required to treat all
religions impartially and neutrally. Article 25 guarantees all persons the freedom of
conscience and the right to preach practice and propagate any religion of their
choice. This right is, however, subject to public order, morality and health, and the
power of the State to take measures for social welfare and reform. The right to
propagate, however, does not include the right to convert another individual, since
it would amount to an infringement of the other's right to freedom of conscience.
Article 26 guarantees all religious denominations and sects, subject to public order,
morality and health, to manage their own affairs in matters of religion, set up
institutions of their own for charitable or religious purposes, and own, acquire and
manage property in accordance with law. These provisions do not derogate from
the State's power to acquire property belonging to a religious denomination. The
State is also empowered to regulate any economic, political or other secular activity
associated with religious practice.

5. Cultural and Educational Rights

The Cultural and Educational rights, given in Articles 29 and 30, are measures to
protect the rights of cultural, linguistic and religious minorities, by enabling them to
conserve their heritage and protecting them against discrimination. Article 29
grants any section of citizens having a distinct language, script culture of its own,
the right to conserve and develop the same, and thus safeguards the rights of
minorities by preventing the State from imposing any external culture on them. It
also prohibits discrimination against any citizen for admission into any educational
institutions maintained or aided by the State, on the grounds only of religion, race,
caste, language or any of them. However, this is subject to reservation of a
reasonable number of seats by the State for socially and educationally backward
classes, as well as reservation of up to 50 percent of seats in any educational
institution run by a minority community for citizens belonging to that community.
Article 30 confers upon all religious and linguistic minorities the right to set up and
administer educational institutions of their choice in order to preserve and develop
their own culture, and prohibits the State, while granting aid, from discriminating
against any institution on the basis of the fact that it is administered by a religious
or cultural minority. The term "minority", while not defined in the Constitution, has
been interpreted by the Supreme Court to mean any community which numerically
forms less than 50% of the population of the state in which it seeks to avail the
right under Article 30. In order to claim the right, it is essential that the educational
institution must have been established as well as administered by a religious or
linguistic minority.

6. Right to property

The Constitution originally provided for the right to property under Articles 19 and
31. Article 19 guaranteed to all citizens the right to acquire, hold and dispose of
property. Article 31 provided that "no person shall be deprived of his property save
by authority of law." It also provided that compensation would be paid to a person
whose property has been taken for public purposes.

The provisions relating to the right to property were changed a number of times.
The Forty-Forth Amendment of 1978 deleted the right to property from the list of
fundamental rights. A new provision, Article 300-A, was added to the constitution
which provided that "no person shall be deprived of his property save by authority
of law". Thus if a legislature makes a law depriving a person of his property, there
would be no obligation on the part of the State to pay anything as compensation.
The aggrieved person shall have no right to move the court under Article 32. Thus,
the right to property is no longer a fundamental right, though it is still a
constitutional right. If the government appears to have acted unfairly, the action
can be challenged in a court of law by citizens.

7. Right to Constitutional Remedies

The Right to Constitutional Remedies empowers citizens to approach the Supreme

Court of India to seek enforcement, or protection against infringement, of their
Fundamental Rights. Article 32 provides a guaranteed remedy, in the form of a
Fundamental Right itself, for enforcement of all the other Fundamental Rights, and
the Supreme Court is designated as the protector of these rights by the
Constitution. The Supreme Court has been empowered to issue writs, namely
habeas corpus, mandamus, prohibition, certiorari and quo warranto, for the
enforcement of the Fundamental Rights, while the High Courts have been
empowered under Article 226 – which is not a Fundamental Right in itself – to issue
these prerogative writs even in cases not involving the violation of Fundamental
Rights. The Supreme Court has the jurisdiction to enforce the Fundamental Rights
even against private bodies, and in case of any violation, award compensation as
well to the affected individual. Exercise of jurisdiction by the Supreme Court can
also be suo motu or on the basis of a public interest litigation. This right cannot be
suspended, except under the provisions of Article 359 when a state of emergency is
declared.

Laws inconsistent with or in derogation of the fundamental rights

(1) All laws in force in the territory of India immediately before the commencement
of this Constitution, in so far as they are inconsistent with the provisions of this
Part, shall, to the extent of such inconsistency, be void.

(2) The State shall not make any law which takes away or abridges the rights
conferred by this Part and any law made in contravention of this clause shall, to the
extent of the contravention, be void.

(3) In this article, unless the context otherwise requires,—

(a) “Law” includes any Ordinance, order, bye-law, rule, regulation, notification,
custom or usage having in the territory of India the force of law;

(b) “laws in force” includes laws passed or made by a Legislature or other

competent authority in the territory of India before the commencement of this
Constitution and not previously repealed, notwithstanding that any such law or any
part thereof may not be then in operation either at all or in particular areas.

(4) Nothing in this article shall apply to any amendment of this Constitution made
under article 368.

Fundamental rights (In Details)

1. Right to Equality

Equality before law: The State shall not deny to any person equality before the
law or the equal protection of the laws within the territory of India.

Prohibition of discrimination on grounds of religion, race, caste, sex or

place of birth:

(1) The State shall not discriminate against any citizen on grounds only of religion,
race, caste, sex, and place of birth or any of them.

(2) No citizen shall, on grounds only of religion, race, caste, sex, place of birth or
any of them, be subject to any disability, liability, restriction or condition with
regard to—

(a) Access to shops, public restaurants, hotels and places of public entertainment;
or
(b) The use of wells, tanks, bathing ghats, roads and places of public resort
maintained wholly or partly out of State funds or dedicated to the use of the
general public.

(3) Nothing in this article shall prevent the State from making any special provision
for women and children.

(4) Nothing in this article or in clause (2) of article 29 shall prevent the State from
making any special provision for the advancement of any socially and educationally
backward classes of citizens or for the Scheduled Castes and the Scheduled Tribes.

Equality of opportunity in matters of public employment

(1) There shall be equality of opportunity for all citizens in matters relating to
employment or appointment to any office under the State.

(2) No citizen shall, on grounds only of religion, race, caste, sex, descent, place of
birth, residence or any of them, be ineligible for, or discriminated against in respect
of, any employment or office under the State.

(3) Nothing in this article shall prevent Parliament from making any law prescribing,
in regard to a class or classes of employment or appointment to an office under the
Government of, or any local or other authority within, a State or Union territory,
any requirement as to residence within that State or Union territory prior to such
employment or appointment.

(4) Nothing in this article shall prevent the State from making any provision for the
reservation of appointments or posts in favour of any backward class of citizens
which, in the opinion of the State, is not adequately represented in the services
under the State.

(4A) Nothing in this article shall prevent the State from making any provision for
reservation in matters of promotion, with consequential seniority, to any class or
classes of posts in the services under the State in favour of the Scheduled Castes
and the Scheduled Tribes which, in the opinion of the State, are not adequately
represented in the services under the State.

(4B) Nothing in this article shall prevent the State from considering any unfilled
vacancies of a year which are reserved for being filled up in that year in accordance
with any provision for reservation made under clause (4) or clause (4A) as a
separate class of vacancies to be filled up in any succeeding year or years and such
class of vacancies shall not be considered together with the vacancies of the year in
which they are being filled up for determining the ceiling of fifty per cent.
(5) Nothing in this article shall affect the operation of any law which provides that
the incumbent of an office in connection with the affairs of any religious or
denominational institution or any member of the governing body thereof shall be a
person professing a particular religion or belonging to a particular denomination.

Abolition of Untouchability

“Untouchability’’ is abolished and its practice in any form is forbidden. The

enforcement of any disability arising out of “Untouchability’’ shall be an offence
punishable in accordance with law.

Abolition of titles

(1) No title, not being a military or academic distinction, shall be conferred by the
State.

(2) No citizen of India shall accept any title from any foreign State.

(3) No person who is not a citizen of India shall, while he holds any office of profit
or trust under the State, accept without the consent of the President any title from
any foreign State.

(4) No person holding any office of profit or trust under the State shall, without the
consent of the President, accept any present, emolument, or office of any kind from
or under any foreign State.

2. Right to Freedom

Protection of certain rights regarding freedom of speech, etc

(1) All citizens shall have the right:

(a) To freedom of speech and expression;

(b) To assemble peaceably and without arms;

(c) To form associations or unions;

(d) To move freely throughout the territory of India;

(e) To reside and settle in any part of the territory of India; and

(g) To practice any profession, or to carry on any occupation, trade or business.

(2) Nothing in sub-clause (a) of clause (1) shall affect the operation of any existing
law, or prevent the State from making any law, in so far as such law imposes
reasonable restrictions on the exercise of the right conferred by the said sub-clause
in the interests of the sovereignty and integrity of India, the security of the State,
friendly relations with foreign States, public order, decency or morality, or in
relation to contempt of court, defamation or incitement to an offence.

(3) Nothing in sub-clause (b) of the said clause shall affect the operation of any
existing law in so far as it imposes, or prevent the State from making any law
imposing, in the interests of the sovereignty and integrity of India or public order,
reasonable restrictions on the exercise of the right conferred by the said sub-
clause.

(4) Nothing in sub-clause (c) of the said clause shall affect the operation of any
existing law in so far as it imposes, or prevent the State from
making any law imposing, in the interests of the sovereignty and integrity of India
or public order or morality, reasonable restrictions on the exercise of the right
conferred by the said sub-clause.

(5) Nothing in sub-clauses (d) and (e) of the said clause shall affect the operation
of any existing law in so far as it imposes, or prevent the State from making any
law imposing, reasonable restrictions on the exercise of any of the rights conferred
by the said sub-clauses either in the interests of the general public or for the
protection of the interests of any Scheduled Tribe.

(6) Nothing in sub-clause (g) of the said clause shall affect the operation of any
existing law in so far as it imposes, or prevent the State from making any law
imposing, in the interests of the general public, reasonable restrictions on the
exercise of the right conferred by the said sub-clause, and, in particular, nothing in
the said sub-clause shall affect the operation of any existing law in so far as it
relates to, or prevent the State from making any law relating to,—

(i) The professional or technical qualifications necessary for practicing any

profession or carrying on any occupation, trade or business, or

(ii) The carrying on by the State or by a corporation owned or controlled by the

State, of any trade, business, industry or service, whether to the exclusion,
complete or partial, of citizens or otherwise.

Protection in respect of conviction for offences

(1) No person shall be convicted of any offence except for violation of a law in force
at the time of the commission of the Act charged as an offence, nor be subjected to
a penalty greater than that which might have been inflicted under the law in force
at the time of the commission of the offence.

(2) No person shall be prosecuted and punished for the same offence more than
once.
(3) No person accused of any offence shall be compelled to be a witness against
himself.

Protection of life and personal liberty

No person shall be deprived of his life or personal liberty except according to

procedure established by law.

Protection against arrest and detention in certain cases

(1) No person who is arrested shall be detained in custody without being informed,
as soon as may not be, of the grounds for such arrest nor shall he is denied the
right to consult, and to be defended by, a legal practitioner of his choice.

(2) Every person who is arrested and detained in custody shall be produced before
the nearest magistrate within a period of twenty-four hours of such arrest excluding
the time necessary for the journey from the place of arrest to the court of the
magistrate and no such person shall be detained in custody beyond the said period
without the authority of a magistrate.

(3) Nothing in clauses (1) and (2) shall apply—

(a) To any person who for the time being is an enemy alien; or

(b) To any person who is arrested or detained under any law providing for
preventive detention.

(4) No law providing for preventive detention shall authorize the detention of a
person for a longer period than three months unless—

(a) An Advisory Board consisting of persons who are, or have been, or are qualified
to be appointed as, Judges of a High Court has reported before the expiration of the
settled period of three months that there is in its opinion sufficient cause for such
detention:

Provided that nothing in this sub-clause shall authorize the detention of any person
beyond the maximum period prescribed by any law made by Parliament under sub-
clause (b) of clause (7); or

(b) Such person is detained in accordance with the provisions of any law made by
Parliament under sub-clauses (a) and (b) of clause (7).

(5) When any person is detained in pursuance of an order made under any law
providing for preventive detention, the authority making the order shall, as soon as
may be, communicate to such person the grounds on which the order has been
made and shall afford him the earliest opportunity of making a representation
against the order.

(6) Nothing in clause (5) shall require the authority making any such order as is
referred to in that clause to disclose facts which such authority considers to be
against the public interest to disclose.

(7) Parliament may by law prescribe—

(a) the circumstances under which, and the class or classes of cases in which, a
person may be detained for a period longer than three months under any law
providing for preventive detention without obtaining the opinion of an Advisory
Board in accordance with the provisions of sub-clause (a) of clause (4);

(b) The maximum period for which any person may in any class or classes of cases
be detained under any law providing for preventive detention; and

(c) The procedure to be followed by an Advisory Board in an inquiry under sub-

clause (a) of clause (4).

3. Right against Exploitation

Prohibition of traffic in human beings and forced labour

(1) Traffic in human beings and beggar and other similar forms of forced labour are
prohibited and any contravention of this provision shall be an offence punishable in
accordance with law.

(2) Nothing in this article shall prevent the State from imposing compulsory service
for public purposes, and in imposing such service the State shall not make any
discrimination on grounds only of religion, race, caste or class or any of them.

Prohibition of employment of children in factories, etc

No child below the age of fourteen years shall be employed to work in any factory
or mine or engaged in any other hazardous employment.

4. Right to Freedom of Religion

Freedom of conscience and free profession, practice and propagation of religion—

(1) Subject to public order, morality and health and to the other provisions of this
Part, all persons are equally entitled to freedom of conscience and the right freely
to profess, practice and propagate religion.

(2) Nothing in this article shall affect the operation of any existing law or prevent
the State from making any law—
(a) Regulating or restricting any economic, financial, political or other secular
activity which may be associated with religious practice;

(b) Providing for social welfare and reform or the throwing open of Hindu religious
institutions of a public character to all classes and sections of Hindus.

Explanation I: The wearing and carrying of kirpans shall be deemed to be included

in the profession of the Sikh religion.

Explanation II:—In sub-clause (b) of clause (2), the reference to Hindus shall be
construed as including a reference to persons professing the Sikh, Jaina or Buddhist
religion, and the reference to Hindu religious institutions shall be construed
accordingly.

Freedom to manage religious affairs

Subject to public order, morality and health, every religious denomination or any
section thereof shall have the right—

(a) To establish and maintain institutions for religious and charitable purposes;

(b) To manage its own affairs in matters of religion;

(c) To own and acquire movable and immovable property; and

(d) To administer such property in accordance with law.

Freedom as to payment of taxes for promotion of any particular religion

No person shall be compelled to pay any taxes, the proceeds of which are
specifically appropriated in payment of expenses for the promotion or maintenance
of any particular religion or religious denomination.

Freedom as to attendance at religious instruction or religious worship in

certain educational institutions

(1) No religious instruction shall be provided in any educational institution wholly

maintained out of State funds.

(2) Nothing in clause (1) shall apply to an educational institution which is

administered by the State but has been established under any endowment or trust
which requires that religious instruction shall be imparted in such institution.

(3) No person attending any educational institution recognized by the State or

receiving aid out of State funds shall be required to take part in any religious
instruction that may be imparted in such institution or to attend any religious
worship that may be conducted in such institution or in any premises attached
thereto unless such person or, if such person is a minor, his guardian has given his
consent thereto.

5. Cultural and Educational Rights

Protection of interests of minorities

(1) Any section of the citizens residing in the territory of India or any part thereof
having a distinct language, script or culture of its own shall have the right to
conserve the same.

(2) No citizen shall be denied admission into any educational institution maintained
by the State or receiving aid out of State funds on grounds only of religion, race,
caste, language or any of them.

Right of minorities to establish and administer educational institutions

(1) All minorities, whether based on religion or language, shall have the right to
establish and administer educational institutions of their choice.

(1A) In making any law providing for the compulsory acquisition of any property of
an educational institution established and administered by a minority, referred to in
clause (1), the State shall ensure that the amount fixed by or determined under
such law for the acquisition of such property is such as would not restrict or
abrogate the right guaranteed under that clause.

(2) The State shall not, in granting aid to educational institutions, discriminate
against any educational institution on the ground that it is under the management
of a minority, whether based on religion or language.

6. Right to property

The Constitution originally provided for the right to property under Articles 19 and
31. Article 19 guaranteed to all citizens the right to acquire, hold and dispose of
property. Article 31 provided that "no person shall be deprived of his property save
by authority of law." It also provided that compensation would be paid to a person
whose property has been taken for public purposes.

Saving of laws providing for acquisition of estates, etc.—

(1) Notwithstanding anything contained in article 13, no law providing for—

(a) The acquisition by the State of any estate or of any rights therein or the
extinguishment or modification of any such rights, or
(b) The taking over of the management of any property by the State for a limited
period either in the public interest or in order to secure the proper management of
the property, or

(c) The amalgamation of two or more corporations either in the public interest or in
order to secure the proper management of any of the corporations, or

(d) The extinguishment or modification of any rights of managing agents,

secretaries and treasurers, managing directors, directors or managers of
corporations, or of any voting rights of shareholders thereof, or

(e) The extinguishment or modification of any rights accruing by virtue of any

agreement, lease or licence for the purpose of searching for, or winning, any
mineral or mineral oil, or the premature termination or cancellation of any such
agreement, lease or licence, shall be deemed to be void on the ground that it is
inconsistent with, or takes away or abridges any of the rights conferred by article
14 or article 19: Provided that where such law is a law made by the Legislature of a
State, the provisions of this article shall not apply thereto unless such law, having
been reserved for the consideration of the President, has received his assent:
Provided further that where any law makes any provision for the acquisition by the
State of any estate and where any land comprised therein is held by a person under
his personal cultivation, it shall not be lawful for the State to acquire any portion of
such land as is within the ceiling limit applicable to him under any law for the time
being in force or any building or structure standing thereon or appurtenant thereto,
unless the law relating to the acquisition of such land, building or structure,
provides for payment of compensation at a rate which shall not be less than the
market value thereof.

(2) In this article,—

(a) the expression ‘‘estate’’ shall, in relation to any local area, have the same
meaning as that expression or its local equivalent has in the existing law relating to
land tenures in force in that area.

(b) the expression ‘‘rights’’, in relation to an estate, shall include any rights vesting
in a proprietor, sub-proprietor, under-proprietor, tenure-holder, raiyat, under-raiyat
or other intermediary and any rights or privileges in respect of land revenue.

Validation of certain Acts and Regulations

Without prejudice to the generality of the provisions contained in article 31A, none
of the Acts and Regulations specified in the Ninth Schedule nor any of the
provisions thereof shall be deemed to be void, or ever to have become void, on the
ground that such Act, Regulation or provision is inconsistent with, or takes away or
abridges any of the rights conferred by, any provisions of this Part, and
notwithstanding any judgment, decree or order of any court or Tribunal to the
contrary, each of the said Acts and Regulations shall, subject to the power of any
competent Legislature to repeal or amend it, continue in force.

Saving of laws giving effect to certain directive principles

Notwithstanding anything contained in article 13, no law giving effect to the policy
of the State towards securing shall be deemed to be void on the ground that it is
inconsistent with, or takes away or abridges any of the rights conferred by article
14 or article 19; 2and no law containing a declaration that it is for giving effect to
such policy shall be called in question in any court on the ground that it does not
give effect to such policy: Provided that where such law is made by the Legislature
of a State, the provisions of this article shall not apply thereto unless such law,
having been reserved for the consideration of the President, has received his
assent.

7. Right to Constitutional Remedies

Remedies for enforcement of rights conferred by this Part

(1) The right to move the Supreme Court by appropriate proceedings for the
enforcement of the rights conferred by this Part is guaranteed.

(2) The Supreme Court shall have power to issue directions or orders or writs,
including writs in the nature of habeas corpus, mandamus, prohibition, quo warrant
and certiorari, whichever may be appropriate, for the enforcement of any of the
rights conferred by this Part.

(3) Without prejudice to the powers conferred on the Supreme Court by clauses (1)
and (2), Parliament may by law empower any other court to exercise within the
local limits of its jurisdiction all or any of the powers exercisable by the Supreme
Court under clause (2).

(4) The right guaranteed by this article shall not be suspended except as otherwise
provided for by this Constitution.

State interventions

State intervention refers to a policy of non-defensive (proactive) activity

undertaken by a nation-state, or other geo-political jurisdiction of a lesser or
greater nature to manipulate an economy or society. State intervention is the part
of an economy that consists of state-owned institutions, including nationalized
industries and services provided by local authorities.

State Intervention in the Market

In a free market economic system, scarce resources are allocated through the price
mechanism where the preferences and spending decisions of consumers and the
supply decisions of businesses come together to determine equilibrium prices. The
free market works through price signals. When demand is high, the potential profit
from supplying to a market rises, leading to an expansion in supply (output) to
meet rising demand from consumers. Day to day, the free market mechanism
remains a tremendously powerful device for determining how resources are
allocated among competing ends.

Intervention in the market

The State may choose to intervene in the price mechanism largely on the grounds
of wanting to change the allocation of resources and achieve what they perceive to
be an improvement in economic and social welfare. All States of every political
persuasion intervene in the economy to influence the allocation of scarce resources
among competing uses.

The main reasons for policy intervention are:

i) To correct for market failure

ii) To achieve a more equitable distribution of income and wealth

iii) To improve the performance of the economy

Options for State intervention in markets

There are many ways in which intervention can take place are given below:

1. State Legislation and Regulation

Parliament can pass laws that for example prohibit the sale of cigarettes to
children, or ban smoking in the workplace. The laws of competition policy act
against examples of price-fixing cartels or other forms of anti-competitive
behaviour by firms within markets. Employment laws may offer some legal
protection for workers by setting maximum working hours or by providing a price-
floor in the labour market through the setting of a minimum wage.

The economy operates with a huge and growing amount of regulation. The State
appointed regulators who can impose price controls in most of the main utilities
such as telecommunications, electricity, gas and rail transport. Free market
economists criticize the scale of regulation in the economy arguing that it creates
an unnecessary burden of costs for businesses with a huge amount of “red tape”
damaging the competitiveness of businesses.
Regulation may be used to introduce fresh competition into a market for example
breaking up the existing monopoly power of a service provider. A good example of
this is the attempt to introduce more competition for British Telecom. This is known
as market liberalization.

2. Direct State Provision of Goods and Services

Because of privatization, the state-owned sector of the economy is much smaller

than it was twenty years ago. State funding can also be used to provide merit
goods and services and public goods directly to the population e.g. the State pays
private sector firms to carry out operations for NHS patients to reduce waiting lists
or it pays private businesses to operate prisons and maintain our road network.

3. Fiscal Policy Intervention

Fiscal policy can be used to alter the level of demand for different products and also
the pattern of demand within the economy.

(a) Indirect taxes can be used to raise the price of de-merit goods and products
with negative externalities designed to increase the opportunity cost of
consumption and thereby reduce consumer demand towards a socially optimal level

(b) Subsidies to consumers will lower the price of merit goods. They are designed
to boost consumption and output of products with positive externalities – remember
that a subsidy causes an increase in market supply and leads to a lower equilibrium
price

(c) Tax relief: The State may offer financial assistance such as tax credits for
business investment in research and development. Or a reduction in corporation tax
(a tax on company profits) designed to promote new capital investment and extra
employment

(d) Changes to taxation and welfare payments can be used to influence the overall
distribution of income and wealth – for example higher direct tax rates on rich
households or an increase in the value of welfare benefits for the poor to make the
tax and benefit system more progressive

4. Intervention designed to close the information gap

Often market failure results from consumers suffering from a lack of information
about the costs and benefits of the products available in the market place. State
action can have a role in improving information to help consumers and producers
value the ‘true’ cost and/or benefit of a good or service. Examples might include:
i) Compulsory labeling on cigarette packages with health warnings to reduce
smoking.

ii) Improved nutritional information on foods to counter the risks of growing

obesity.

iii) Anti speeding television advertising to reduce road accidents and advertising
campaigns to raise awareness of the risks of drink-driving.

iv) Advertising health screening programmes / information campaigns on the

dangers of addiction.

These programmes are really designed to change the “perceived” costs and benefits
of consumption for the consumer. They don’t have any direct effect on market
prices, but they seek to influence “demand” and therefore output and consumption
in the long run. Of course it is difficult to identify accurately the effects of any single
State information campaign, be it the campaign to raise awareness on the Aids
issue or to encourage people to give up smoking. Increasingly adverts are
becoming more hard-hitting in a bid to have an effect on consumers.

The effects of State intervention

One important point to bear in mind is that the effects of different forms of State
intervention in markets are never neutral financial support given by the State to
one set of producers rather than another will always create “winners and losers”.
Taxing one product more than another will similarly have different effects on
different groups of consumers.

State intervention does not always work in the way in which it was intended or the
way in which economic theory predicts it should. Part of the fascination of studying
Economics is that the “law of unintended consequences” often comes into play
events can affect a particular policy, and consumers and businesses rarely behave
precisely in the way in which the State might want.

Approaches to State Intervention

1. Neo-classical approach

2. Public choice approach

3. Transactions costs approach

4. Information theoretic approach

1. Neo-Classical Approach
The starting point for a neo-classical theory of State Intervention is the two
Fundamental Theorems of Welfare Economics. The First Theorem states that,
subject to certain assumptions, a general equilibrium, if it exists, will be Pareto
efficient. These assumptions are perfect competition, absence of public goods and
externalities, absence of non-convexities in production and consumption and
perfect information. The Second Theorem, subject to this assumption, plus the
assumption of the availability of lump-sum taxes and transfers to the government,
states that any Pareto efficient allocation can be achieved as a solution to a general
equilibrium system.

The Second Theorem provides a limited role for State Intervention: the State can
intervene only by employing lump sum taxes and transfers. Thus the intervention is
one, which does not distort decision making on the part of economic agents since
lump sum taxes have only an income effect but no substitution effect. It is
important that even this limited intervention by the State would be considered an
infringement of individual freedom by the libertarians. The government employing
lump-sum taxes and transfers relocates individuals on the contract curve and in the
process carries out a re-distributive activity. Such a re-distributive activity would be
permissible according to the libertarians only if the initial endowments of the better
off individuals were acquired illegally.

2. Public Choice Approach

In stark contrast to the Neoclassical approach, the Public Choice approach regards
the State as resulting spontaneously from a state of nature; it regards the State
functionaries as the principal of the State and suggests that the objectives of these

Principal is to maximize their own utility; this leads to State partiality in favour of
certain groups as well as inefficiently high levels or outputs and supply which drives
growth of the State sector.

The evolution of co-operation may occur in the context of a prisoner's Dilemma

Super game which is played out an infinite number of times or via a punishment/tit-
for-tat strategy. The Public Choice school believes that the State comes into
existence non-deliberately: it is a result no agent intended, but is one that no agent
or group of agents would rather do without. Such an approach to the State solves
two problems relating to the pure neo-classical tradition: one, a mechanize for
deriving the general will is found; two, the mechanism generates institutions such
as the State, without simultaneously requiring the pre-existence (and failure) of
other institutions such as the market.

The co-operative solution observed in a Prisoner' Dilemma game is dependent on

the number of players involved. The larger the number of players the more difficult
it becomes to monitor behaviour and detect uncooperative acts. In such a situation,
an institution such as the State with its "legitimate* monopoly of force may play
the policeman and enforce co-operative behaviour. A counter to this proposition is
the argument that State intervention "frees" the individual from responsibility
leading to further defection from co-operative behaviour, calling for further State
intervention. The process becomes self-reinforcing and has been cited as one
possible explanation for rising government expenditures.

3. Transactions cost approach

The Coase "theorem suggests that market failures by themselves need not result in
State intervention if individuals can internalize such imperfections. Coase (1960)
puts forward the proposition that if the State establishes clear property rights, then
any externalities that emerge in the market can be internalized by economic
agents. If further public goods and monopolies can be seen as instances of
externalities, then the State has no role to play except in establishing property right
Of course, the results of the Coase theorem rests on whether individuals can
actually internalize externalities cost lessly, cooter (1989) indicates that this will be
unlikely in the presence of transactions costs.

The starting point for an analysis of transactions costs is Coase (1937). This work of
Coase explains why firms exist and also makes a conceptual distinction between the
firs and the market. The key feature of the firm is its internal suppression of the
price mechanism and the allocation of resources within the firm by command rather
than through prices.

Specificity of assets introduces imponderables into contracts in a way that is not

conceivable in neo-classical economics. Asset specificity includes specificity in
physical assets, human assets, location and dedicated assets. The existence of non-
salvageable, i.e. capable of being used in alternative employment, characteristics in
an asset introduces impediments in a transaction, which is not the case with
neoclassical nonspecific assets. Thus neoclassical transactions can take place within
markets where faceless buyers and sellers exchange standardized goods at
equilibrium prices.

The transactions costs arising from bounded rationality, opportunism and asset
specificity lead to instances of market failure and in such cases as well the coercive
powers of the State could help economies on such transactions costs. Thus the
neoclassical rationale for State intervention is generalized via the transactions costs
approach. Transactions costs become the general pause of market failures and
economizing on transactions costs is the prime reason for the existence of the
State.

4. Information Theoretic Approach

The information-theoretic approach to economics provides an alternative approach
to State intervention. This approach is also based on market failures, but goes
deeper than the neo-classical approach. The neo-classical approach merely
identifies the various areas where markets fail and these are seen as possible a
anues for government intervention. The transactions costs approach goes into
detail regarding the underlying causes of market failure and also indicates why
State Intervention is not all-pervasive. The information theoretic approach also
seeks to identify the underlying causes of market failure, principally arising from
the absence of perfect Information; further, like the transactions costs approach,
limits on the extent of State intervention are analyzed.

The First Fundamental Theorem of Welfare Economics provides the Intellectual

foundations of the belief in market economies. Competitive equilibrium is
understood to be a situation where supply equals demand; if demand were not
equal to supply, forces would be set in motion which would change the situation,' so
that the original situation would not be one of equilibrium. Recent work in
economies with imperfect information has established that competitive market
equilibrium may be characterized by demand exceeding supply or supply exceeding
demand. It may be noted that the term "competitive market refers to the situation
where there are a large number of participants on both sides, but ill which
information maybe imperfect.

D. Legal environment
Legal environment consists of legislation that is passed by the parliament and state
legislatures. Examples of such legislation specifically aimed at business operations
include the Trade mark Act 1969, Essential Commodities Act 1955, Standards of
Weights and Measures Act 1969 and Consumer Protection Act 196.
The legal environment facing businesses operating internationally is not simply a
scaled-up version of domestic law. Businesses are faced with legal rules derived
from multiple sources, and enforced by bodies with fragmented and overlapping
jurisdictions. Research in the Department of Commercial Law in these areas
currently encompasses:
i) Private trade law: For example, types of international sale contract,
mechanisms for payment and security, the insurance of goods in transit, conflicts
between the laws of different trading countries, contracts for the international
carriage of goods by sea, and dispute resolution.
ii) International trade and investment law: The national and international rules
that facilitate economic integration between countries, including the World Trade
Organization and regional and bilateral trade and investment agreements.
iii) International competition law: Analysis of the legal and policy issues
associated with the control of restrictive business practices and anti-competitive
mergers in international markets.
iv) International finance law and securities regulation: The global
governance of securities and financial markets and the consequences for, and
strategies open to, the New Zealand legislature.
Meaning of Legal Environment
The legal environment of a business refers to the relevant laws and regulations
under which the business operates. Legal environment includes factors that provide
rules, and penalties for violations, designed to protect society and consumers from
unfair business practices and to protect businesses from unfair competitive
practices. It assures uniform application of the laws by regulating the behavior and
interactions of individuals against each other.
Needs for Legal Environment
i) Legal Environment maintain status quo in society ensuring stability and security
of social order, enable individuals, maximum of freedom to assert themselves and
determine the sphere within which the existence and activity of each individual will
be secure and free.
ii) The principle of law provides uniformity and certainty to the administration of
justice.
iii) The existence of fixed principles of law avoids the dangers of arbitrary, biased
and dishonest decisions.
iv) The fixed principles of law protect administrators of justice from the errors of
individual judgment.

Importance of Legal Environment

Legal environment is important because it incorporates the following lows:

i) Laws on Production or Sales: The production or sale of certain goods is

prohibited, or at least severely restricted in many countries. This includes, among
others, selling of dangerous drugs, guns and explosives, for instance. Aerosol cans
containing CFCs, which are harmful to the environment, or more specifically, the
ozone layer, are banned and no longer produced.

ii) Consumer Protection: Most countries have laws ensuring customers are being
treated fairly by businesses. This includes the act regulating weights and
measurements, ensuring that goods sold actually are the weight or size they are
sold at, and the Trade Description Act, making misleading descriptions of products
illegal.
Other laws include the Consumer Credit Act, ensuring consumers are aware of loan
durations, interest rates etc when taking out a loan, as well as receiving copies of
credit agreements, and the Sale of Goods Act, making it illegal to sell faulty or
damaged goods. The return of goods and refunds, etc, is also governed by laws.

iii) Employee Protection: Laws to protect employees include laws against unfair
discrimination based on race, color, religion, sex, or age; laws against unfair
dismissal and sexual or other harassment; health and safety laws and laws
regulating minimum wages. Many countries make written contracts between
employer and employees mandatory.

iv) Tax and Financial Laws: These laws vary between countries, but generally
regulate accountancy practices, interest rates on loans, taxes etc. Businesses are
expected to provide sufficient documentation of income and expenditure, for
instance.

Indian Legal Environment

Indian legal environment consists of the followings:

a) The Courts: Though India has a quasi-federal structure, the judiciary is unified.
Broadly, there is a three tier structure. First, each administrative district (there are
over 600 districts) is headed by a District Court. Then each State has a High Court.
Since some States share the same High Court, there are 21 High Courts in India.
At the apex is the Supreme Court of India situated at New Delhi. The various High
Courts can have very diverse characteristics. For instance, the High Court for the
small State of Sikkim has strength of only two Judges, whereas the High Court for
the State of Uttar Pradesh has about 100 Judges. The Supreme Court of India has
about 25 Judges who sit in several divisions of varying strengths. Matters of
fundamental significance are decided by a bench comprising of 5 Judges. Besides
the broad three tier structure there are various specialized tribunals the more
prominent ones being the Company Law Board; Monopolies and Restrictive Trade
Practices Commission; Consumer Protection Forum; Debts Recovery Tribunal; Tax
Tribunal. These Tribunals function under the supervisory jurisdiction of the High
Court where they may be situated, though many of them (like the Monopolies
Commission) allow an appeal directly to the Supreme Court.

b) Judiciary: The Indian judiciary is known for its independence and extensive
powers. The High Court or the Supreme Court in exercise of their constitutionally
conferred writ jurisdiction is empowered strike down legislation on the ground of
unconstitutionality. They can and fairly routinely intervene with executive action as
well on the ground of unreasonableness or unfairness or arbitrariness in State
action.
Indeed Courts can even strike down an amendment to the Constitution on the
ground that it violates the basic structure of the Constitution. Besides, the High
Courts and the Supreme Court have adapted an activist mantle, which goes under
the name of Public Interest Litigation, where under they can intervene with
governmental policies if it may adversely impact the public at large or the public
interest is such that it requires Court intervention.

c) The Bar: India has a unified all India Bar which means that an advocate enrolled
with any State Bar can practice and appear in any court in the length and breadth
of the country, including the Supreme Court of India.
Foreign lawyers are not permitted to appear in courts and the entry of foreign law
firms into India (for non – court matters) has not yet been permitted though it is
currently being debated and considered. However, they can appear in arbitrations.

d) Court Practice and Procedure: The influence of the British Judicial System
which India imbibed continues in significant aspects. The official language for court
proceedings in the High Court & the Supreme Court is English. Lawyers don a gown
and a band as part of their uniform and address Judges as – “My Lord”.
The procedural law of the land as well as most commercial and corporate laws is
modeled on English laws. English case law is regularly referred to and relied upon in
courts.
There is great emphasis on oral arguments. Almost all matters are heard
extensively in open Court. Advocates are seldom restrained in oral arguments and
complex hearings may well take days of arguments to conclude. Specialization is
relatively a new phenomenon and most lawyers have a wide-ranging practice.

Changing Role of Government

The market was the most appropriate instrument for realizing economic growth & improving
human welfare. The state’s role was thus to be restricted to certain core function – providing
public good such as defence & highways, maintaining law & order to ensure security of person
& property, enforcing contracts & providing primary education to the people. In 19th century the
government role in redistributing income was limited & tax system were used entirely for
revenue raising, state thus remained small by modern standards until world war first.

In developed economies of the west, the policy makers by & large agreed on three principles.
First, there was agreement on the limitations of the private enterprise & thus mixed public-
private economy was regarded as desirable. This implied nationalizing a wide range of strategic
industries. Secondly, need for a coordinated macroeconomic policy was recognized because
market alone failed to ensure macroeconomic stability that is that is needed for sustained growth
of business. Finally, reliance entirely on market

For the welfare of the people was a questionable proposition.

In the three and a half decades between 1960 & 1995, government western economies assumed
new role & expanded existing ones. By the mid-1990s the range of tasks performed by the
government & its agencies included not only maintaince & development of infrastructure &
utilities but also much more support for education, health care & social security. As a result, in
the 35 year period from 1960 onwards the central government expenditure rose from less than
20% of GDP to over 30%.

Between 1977 & 1991 the process of relaxing control started. However obth open & hidden
subsidies went on increasing. In this period fiscal deficit become unsustainable and the country
was in deep economic crisis in 1990-91, In response to this crisis the reform process began in
this country. Most of the controls dismantled and the state’s role changed from that of principal
investor to that of facilitator pf entrepreneurship.

ECONOMIC ROLES OF THE GOVERNMENT

1. Regulation
2. Promotion

3. Planning

4. Production

As regulator

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

I developed countries; now-a-days industrial activity is not regulated. In contrast, some of the
developing countries are persisting with individual licensing. There are also restrictions on
industrial location. Production of certain goods is reserved for small scale units. However, in
recent years even developing countries have withdrawn many stringent regulations. Import
controls, foreign exchange regulations, and price controls are now rare. The Government today
prefers to rely more on fiscal and monetary measures to regulate business activity. Modern
business is aware that regulatory structure will never be dismantled completely.

Today’s regulatory structure consists of ‘old’ and ‘new’. The older economic type of regulation
focuses on specific industries, markets and business practices. The newer, social type of
regulation focuses on products, production and public issues.

As promoter

Promotional role of the Government in a capitalist economy is determined by the limitations of

the business. Since business firms are profit maximizes, they have virtually no interest in making
investments in sectors where return is either small, because of long gestation periods of projects,
quite uncertain.

The governments have thus accepted the responsibility of infrastructure development. It has been
observed that not only in developing countries but also in some of the developing countries,
business suffers from a failure to use the most advanced management technique, to cope with the
scarcity of scientist and engineers, to introduce promptly advanced technical processes and to
spend enough on research and development. The efforts in the field of research and development
improve labour efficiency and industrial productivity.

The Government’s promotional role is most pronounced in the field of finance. In developing
countries, new issues by corporate enterprises are generally unsuccessful due to inadequate
development of capital markets. Under the circumstances, resource mobilization by the
Government owned financial institutions assumes great importance. Development banks are
special industrial financing institutions.

In developing countries, the government felt the need for setting up special industrial financing
institutions due to inadequate development of capital markets. The normal channels of finance
being ill developed, industrial development had suffered for long time in these countries and the
Governments committed to accelerate the pace of industrialization thus decided to create special
financial institutions which could function as development agencies.

As planner

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

Market forces fail to attain efficient allocation of resources in most developing countries due to
imperfections in the product and factor markets. Hence, governments adopt economic planning
for obtaining efficient allocation of resources.

Private investors usually ignore the dynamic externalities which account for the differences
between social benefit and private benefit. Government in developing countries follow for
removing the differences between social benefit and private benefit that is considered being
necessary to obtain optimal allocation of resources.

Institutional reforms are sometimes necessary for realizing rapid economic growth. A market
economically usually does little to carry out institutional reforms. In contrast, economic planning
permits the governments introduce necessary institutional reforms which in turn create condition
for more rapid growth.

Developing countries lacking productive resources such as capital, skilled manpower, and
foreign exchange want to use them in the most productive way and this can only be achieved if
the whole economy is covered under an overall planning mechanism.

As producer

In most capitalistic countries, the bulk of production is done in the private sector. Small scale
manufacturing, commerce and agriculture are mostly in private hands, while large scale
manufacturing mining and finance are under the control of transnational, domestically owned
corporate and public sector enterprises. In developing countries, state-owned utilities provide
electricity, gas and water. Public enterprises also play a significant role in transport and
communications. In contrast, pattern of ownership differs substantially in different countries in
mining and manufacturing.
Public sector enterprises have been set up in various countries for a variety of reasons. Whereas
in former East European socialist countries, state owned

Enterprises were set up for ideological reasons, In some other countries governments acquired
control of basic enterprises from foreign owners as from minority ethnic groups. In most cases,
however, government set up public enterprises because of the weakness of private entrepreneurs.

Theoretically there is no reasons why public enterprises should not operate at the highest
possible efficient level. But in practice there has been a great difference between what is
theoretically feasible and what actually happened. Explaining the reasons why efficiency levels
are in the state owned enterprises (SOEs) the world development report 1983 stated,” As a
commercial entity, an SOE must sell in the market place. As a public organization, it is given
other objectives and is exposed to pressure from politically powerful sectional interest SOEs are
often operated as public bureaucracies, with more attention to procedures than to results; and
ready access to subsidies can erode the incentive for managers to minimize costs.

CONSENSUS ON FUNCTIONS OF THE STATE

There are activities that will not be undertaken at all without state intervention. At the other
extreme one finds activities in which the state plays an activist role in coordinating markets or
redistributing assets. In between these minimal and activist functions are intermediate functions,
such as regulation of monopolies and addressing externalities.