IGNOU4U.BLOGSPOT.

COM

IGNOU MBA MS-03 Solved Assignments 2010

MS- 3: ECONOMIC AND SOCIAL ENVIRONMENT

ASSIGNMENT JULY 2010

Course Code : MS-3

Course Title : Economic and Social
Environment
Assignment Code : 3/TMA/SEM-II/2010
Coverage : All Blocks

Attempt All the Questions.

1. “The economic environment of business exercises a strong influence on

the non-economic environment.” Discuss this statement with the help
of examples.

Solution: A business unit is a macro/micro economic unit. The business

environment furnishes the macro-economic context within which the firm
operates.-external factors or forces which affect the operation of the business
unit.business firms must demonstrate adaptability as well as adoptability to
environment. The economic environment of business is a complex one. The
business unit has economic relation with
GOVERNMENT
-CAPITAL MARKET
-HOUSEHOLD SECTOR
-FOREIGN SECTOR

These different sectors together influence trends and the structure of the
economy. The design and structure of the economic system is conditioned
by the socio-political arrangement which affect the macro-micro economic
decisions. THE NON-ECONOMIC MACRO ENVIRONMENT OF
BUSINESS These non-economic environment is complex and dynamic.
Political. Environmental regulations and protection

Tax policies
what tax hinder the business and what taxes incentives are available]
-International trade regulations and restrictions
[ does the government encourage exports / with high tariffs on imports]

Page
1
IGNOU4U.BLOGSPOT.COM

-Contract enforcement law/Consumer protection

[does the government enforce on consumer protection ]

-Employment laws]
[ is the government encouraging skilled immigrants with temp. permits]
-Government organization / attitude
[ does the government have a very positive attitude towards this industry]
-Competition regulation
[ are there regulation for limiting competition]
-Political Stability
[ politically , does the government have a very stable government ]
-Safety regulations
[ has the government adopted some of the modern safety regulations]
-Economic growth
[ what is the economic growth rate / what are the reasons ]
-Interest rates & monetary policies
[ are the interest rates under control / is there a sound monetary policies]
-Government spending
[is government spending is significant and is it under control ]
-Unemployment policy
[what is the employment / unemployment policies of the government ]
-Taxation
[ has the taxation encouraged the industry ]
-Exchange rates
[ is there well managed exchange controls and is it helping the industry]
-Inflation rates
[ is the inflation well under control ]
-Stage of the business cycle
[ is your industry is on the growth pattern]
-Consumer confidence
[ is the consumer confidence is high/ strong and if not, why ]
-Income distribution
[is there balanced income distribution policy ]
-Demographics, Population growth rates, Age distribution
[ what is population growth and why ]
-Labor / social mobility
[ what are the labor policies and is there labor mobility]
-Lifestyle changes
[ are there significant lifestyle changes taking place--more modernization/
why.
-Work/career and leisure attitudes
[ are the population career minded and are seeking better lifestyle]
-Education

Page
2
IGNOU4U.BLOGSPOT.COM

[ what are the education policies / is it successful ]

The economic environment of business unit exercises a strong influence on

the non-economic environment of the business just as the non-economic
environment can influence the economic environment.
THE ECONOMIC ENVIRONMENT IS BOTH
-exogenous.
-endogenous.

IT IS DETERMINED AS WELL AS DETERMINING.

-social factors affect the economic environement and vice versa.
-legal factors affect the econominc environment and vice versa.
-educational factors affect the economic environment and vice versa.
-political factors affect the economic environment and vice versa.
-technological factors affect the economic environment and vice versa.

==========================================================.

Q2. Analyze the Growth and Structure of the Private Sector in India with
special reference to the informal sector.

Solution: The phenomenal growth of private sector of India can be attributed to

political will, financial reforms, usage of more advanced technology, young and
large English speaking working class. The 7-8 % of annual GDP growth rate India
is the one of the highest growth rate in the world. The last 15 years witnessed a
phenomenal rise of the growth of private sector in India. The opening up of Indian
economy has led to free inflow of foreign direct investment (FDI) along with
modern cutting edge technology, which propelled India's economic growth.

Previously, the Indian market were ruled by the government enterprises but the
scene in Indian market changed as soon as the markets were opened for
investments. This saw the rise of the Indian private companies which prioritized
customer's need and speedy service. This further fueled competition amongst same
industry players and even in government organizations. Further, the government of
India also divested some of its enterprises to ensure smooth operation of these
companies which was otherwise were loss making. It also went further and forged
joint venture private Indian companies, especially in sectors like,
telecommunication, petroleum, housing and infrastructure. This inculcated healthy
competition and benefited the end consumers, since the cost of service or products
come down substantially.

B grade private Indian companies are also offering lucrative and competitively
priced products or service, whose quality is at par with A grade companies. Big

Page
3
IGNOU4U.BLOGSPOT.COM

players of Indian markets have been forced to lower their price bands to remain
alive in the competition. Further, these big private Indian companies are offering
mouth watering benefits in the form of gifts, rebates and even holding lucky draws
to stay ahead in the race of 'market supremacy'. Gone are the days when 'brand
loyalty, accounted for big customer base. Today, general Indian customers are
trendy, flexible and are extremely flexible with their choice. Steady growth of
private sector has sent a sense of urgency and insecurity amongst main market
players. Defensive methods of protection of Brands against competitors are
becoming popular. Legal instruments like patents, trademarks, industrial designs
and copyrights filing has increased many fold and so is counter claim and
litigation. Further, Mergers and Acquisitions, collaborations and licensing has
become a popular amongst private Indian companies.

The best thing that has happened to the overall Indian market with the growth of
private sector is that it has helped to shed bureaucracy and lengthy official process
and supplemented it by customer eccentric service, good work ethics,
professionalism and transparency of accounts.

Some positive effect of the growth of private sector in India are as follows -

* Manufacturing registered 11.9% growth

* The passenger vehicles sector grew by 11.61% during April-May 2007
* Electricity, gas & water supply performed well and recorded an impressive
growth rate of 8.3%
* Construction growth rate rose to 10.7%
* Trade, hotels, transport and communication registered a growth rate of 12%
* Financing, insurance, real estate and business services recorded an impressive
growth rate of at 11% during the 1st quarter of this fiscal
* Exports grew by 18.11% during the 1st quarter of 2007-2008 and the imports
shoot up by 34.30% during the same period
* The food sector is estimated to be of US$ 200 billion and it is expected to
grow to $310 billion by 2015
* Merchandise Exports recorded strong growth

==========================================================

.Q3.Briefly discuss why the Industrial Policy of 1956 of 1956 is referred to as

the ‘Economic Constitution’ of the country?

Solution: The Industrial Policy of 1956 resolution makes following observations

in regard to industrial workers and industrial relations. It is necessary that proper
amenities and incentives should be provided for all those engaged in industry. The
living and working conditions of workers should be improved and their standard

Page
4
IGNOU4U.BLOGSPOT.COM

of efficiency raised. The maintenance of industrial peace is one of the prime

requisites of industrial progress. In socialist democracy, labor is a partner in the
common task of development and should participate in it with enthusiasm. Some
laws governing industrial relations have been enacted and a broad common
approach has developed with the growing recognition of the obligation of both
management and labor. There should be joint consultation and workers and
technicians should, wherever possible, be associated progressively in
management. Enterprises in the public sector has to be set an example in this
respect.”

To accelerate the rate of economic growth and to speed up industrialisation and, in

particular, to develop heavy industries and machine making industries, to expand
the public sector, and to build up a large and growing co-operative sector. To
provide opportunities for gainful employment and improving living standards and
working conditions of the people To reduce disparities in income and wealth.To
prevent private monopolies and the concentration of economic power in different
fields in the hands of small numbers of individuals.

==========================================================

Q4,.Briefly explain the latest trade policy measures for 2008-09 and 2009-10.
Refer to the recent Economic Survey.

Solution: It is a privilege for me to present before you the trade policy for the year
2008-09; the first by a democratic government after a period of nine years. This is
your government and it carries the hopes and aspirations of all of you who have
given us a very important mandate. Even though your Government has been in
office for less than 4 months, our endeavor has been to draw up a trade policy that
has a new direction and vision, and will have an impact on the lives of those who
are the most needy. In the recently announced Budget for 2008-09 and in this
Trade Policy, the Government’s focus is to take the benefits of development to the
common man. Our aim is to encourage our businessmen, entrepreneurs,
manufacturers and investors to continue striving to do more in their respective
fields; and we are also striving to ensure that the fruits of any development trickle
down to the people at the grass roots level.

We have inherited a very difficult economic situation where the public is facing
more hardships than it has in recent history. This was due to external and internal
factors of the past year. On the external front the most difficult issues were;

• The doubling of international oil prices from around $ 68 per barrel to $

145 per barrel during the year.

Page
5
IGNOU4U.BLOGSPOT.COM

• The increase in international prices of food items that Pakistan needed to

import during the year, especially wheat and edible oil.
• The slow down in the US economy and turmoil in the international
financial markets thereby reducing external demand for our exports.

On the internal front also we had more than our share of difficulties. This was a
year of constant political instability sparked off by the judicial crisis in March
2007. The law and order situation also assumed dangerous proportions in the form
of the Lal Masjid affair, the increase in frequency and lethality of terrorist bomb
blasts and of course the state of militancy and insurgency in FATA and the
NWFP. The saddest occurrence in this regard was the martyrdom of Mohtarma
Benazir Bhutto on 27th December 2007 which cast a long and dark shadow on the
economic and political health of the country. It is estimated that due to
disturbances in the five days following this tragic event the loss of our export
revenues was of the order of $200 million.

Other challenges on the internal front that made it difficult for exporters to fulfill
their export orders on time and at a competitive price during the year included:-

• Power shortages and resultant load shedding of electricity and natural gas.
• Impact of monetary and exchange rate policies, plus supply side
constraints.
• Rising costs of salary bills and raw material, particularly raw cotton.
• Increasing competition in export markets,
• Travel advisories of foreign governments discouraged importers to continue
sourcing from Pakistan.
• Long term structural issues such as labour skills deficiency and poor
infrastructure.

Not surprisingly and as a result of these multiple negative factors our economic
growth rate dropped to 5.8% as compared to 6.8% last year. This slow down was
particularly evident in the commodity producing sectors such as agriculture and
manufacturing with serious implications for exports. In fact agriculture overall
grew by only 1.5% as against 3.7% last year and in the two major crops i.e. cotton
and wheat there was a negative growth of 9.3% and 6.6% respectively. The
manufacturing sector also saw the weakest growth in a decade, since overall it
grew by 5.4% as compared to 8.1% last year. Large scale manufacturing was even
more dismal since it registered a growth of only 4.8% as compared to 8.6% last
year.

==========================================================

Page
6
IGNOU4U.BLOGSPOT.COM

Q5.What are the functions of Development Banks? Describe its Quantitative

and Qualitative roles.

Solution: Development Banks or Development Finance Institutions (DFI’s) as

these are normally called in the financial world are a post World War II
phenomenon. Their establishment in Africa, Asia and other developing countries
in most cases coincided with the attainment of independence.
Their mission being “to expedite the pace of development in accordance with the
national priorities and aspirations of the people”. DFI’s fall into two broad
categories viz. national DFI’s and regional DFI’s. Most of the national DFI’s in
the developing world have been in existence for two to three decades. They were
established to serve as handmaidens of their governments in the implementation of
their development plans.

In places like India, a majority of the applicants for financial assistance from the
DFI’s in the initial stages were existing large industrial houses, or Managing
agency firms. These institutions had resources of men, material and money and
were therefore, able to conceive, plan and implement new or expansion projects
successfully. Therefore, there was no problem of arrears. In the wake of socialist
policies pursued by these newly independent states, further growth of large
industrial houses and managing agency firms through DFI assistance was
considered monopolistic and exploitative of the majority by the minority. These
were conceived as institution reminiscent of the former British regime. This
attitude led to a greater intervention of the state in the regulation and operation of
DFI’s, which in almost all cases were state owned.

DEVELOPMENT BANK is vested with the responsibility of co-ordinating the

working of institutions engaged in financing, promoting and developing industries.
It has evolved an appropriate mechanism for this purpose. IT also
undertakes/supports wide-ranging promotional activities including
entrepreneurship development programmes for new entrepreneurs, provision of
consultancy services for small and medium enterprises, upgradation of technology
and programmes for economic upliftment of the underprivileged.

DEVELOPMENT BANK 's role as a catalyst

DFI 's role as a catalyst to industrial development encompasses a wide spectrum of
activities. DFI can finance all types of industrial concerns covered under the
provisions of the DFI Act. With over three decades of service to the Indian
industry, DFI has grown substantially in terms of size of operations and
PORTFOLIO.

Developmental Activities of DFI.

Promotional activities

Page
7
IGNOU4U.BLOGSPOT.COM

In fulfilment of its developmental role, the Bank continues to perform a wide

range of promotional activities relating to developmental programmes for new
entrepreneurs, consultancy services for small and medium enterprises and
programmes designed for accredited voluntary agencies for the economic
upliftment of the underprivileged. These include entrepreneurship development,
self-employment and wage employment in the industrial sector for the weaker
sections of society through voluntary agencies, support to Science and Technology
Entrepreneurs' Parks, Energy Conservation, Common Quality Testing Centres for
small industries.

Technical Consultancy Organisations

With a view to making available at a reasonable cost, consultancy and advisory
services to entrepreneurs, particularly to new and small entrepreneurs, DFI , in
collaboration with other All-India Financial Institutions, has set up a network of
Technical Consultancy Organisations [ TCOs ] covering the entire country. TCOs
offer diversified services to small and medium enterprises in the selection,
formulation and appraisal of projects, their implementation and review.

Entrepreneurship Development Institute

Realising that entrepreneurship development is the key to industrial development,
FDI played a prime role in setting up of the Entrepreneurship Development
Institute of India for fostering entrepreneurship in the country. It has also
established similar institutes in Bihar, Orissa, Madhya Pradesh and Uttar Pradesh.
DFI also extends financial support to various organisations in conducting studies
or surveys of relevance to industrial development.

A Development Bank is a multilateral development finance institution dedicated to

improving the social and economic development of its member nations. Its
primary emphasis is the welfare of the people. For example the Asian
Development Bank's overarching goal is to reduce poverty in Asia and the Pacific.
It helps improve the quality of people's lives by providing loans and technical
assistance for a broad range of development activities.

Development bank's policies or programs center on the following priorities:

Economic growth
Human development
Gender and development
Good governance
Environmental protection
Private sector development
Regional cooperation
Given below are the principal functions of a development bank:

Page
8
IGNOU4U.BLOGSPOT.COM

• Extend loans and equity investments to its developing member countries (DMCs)
for their economic and social development.
• Provides technical assistance for the planning and execution of development
projects and
programs and for advisory services.
• Promotes and facilitates investment of public and private capital for
development, and
• Responds to requests for assistance in coordinating development policies and
plans of its
developing member countries

==========================================================

Q6. Write short notes on the following:-

a) Restructuring

Solution: a) Restructuring
A significant modification made to the debt, operations or structure of a company.
This type of corporate action is usually made when there are significant problems
in a company, which are causing some form of financial harm and putting the
overall business in jeopardy. The hope is that through restructuring, a company
can eliminate financial harm and improve the business.

When a company is having trouble making payments on its debt, it will often
consolidate and adjust the terms of the debt in a debt restructuring. After a debt
restructuring, the payments on debt are more manageable for the company and the
likelihood of payment to bondholders increases. A company restructures its
operations or structure by cutting costs, such as payroll, or reducing its size
through the sale of assets. This is often seen as necessary when the current
situation at a company is one that may lead to its collapse.
Restructuring is the corporate management term for the act of reorganizing the
legal, ownership, operational, or other structures of a company for the purpose of
making it more profitable, or better organized for its present needs. Alternate
reasons for restructuring include a change of ownership or ownership structure,
demerger, or a response to a crisis or major change in the business such as
bankruptcy, repositioning , or buyout. Restructuring may also be described as
corporate restructuring, debt restructuring and financial restructuring.
Executives involved in restructuring often hire financial and legal advisors to
assist in the transaction details and negotiation. It may also be done by a new CEO
hired specifically to make the difficult and controversial decisions required to save
or reposition the company. It generally involves financing debt, selling portions of
the company to investors, and reorganizing or reducing operations.

Page
9
IGNOU4U.BLOGSPOT.COM

The basic nature of restructuring is a game. Strategic restructuring reduces

financial losses, simultaneously reducing tensions between DEBT and EQUITY
holders to facilitate a prompt resolution of a distressed situation.
Steps:
• ensure the company has enough liquidity to operate during implementation of a
complete restructuring
• produce accurate working capital forecasts
• provide open and clear lines of communication with creditors who mostly
control the company's ability to raise financing
• update detailed business plan and considerations.
Characteristics
• Cash management and cash generation during crisis
• Impaired Loan Advisory Services (ILAS)
• Retention of corporate management sometimes "stay bonus" payments or equity
grants
• Sale of underutilized ASSETS , such as PATENTS or brands
• OUTSOURCING of operations such as payroll and technical support to a more
efficient third party
• Moving of operations such as manufacturing to lower-cost locations
• Reorganization of functions such as sales, marketing, and distribution
• Renegotiation of labor contracts to reduce OVERHEAD .
• Refinancing of corporate DEBT to reduce interest payments
• A major PUBLIC RELATIONS campaign to reposition the company with
consumers
• Forfeiture of all or part of the ownership share by pre restructuring stock
holders (if the remainder represents only a fraction of the original firm, it is termed
a STUB ).
Symptoms indicating the need for organizational restructuring.
-New skills and capabilities are needed to meet current or expected operational
requirements.
-Accountability for results are not clearly communicated and measurable resulting
in subjective and biased performance appraisals.
-Parts of the organization are significantly over or under staffed.
-Organizational communications are inconsistent, fragmented, and inefficient.
-Technology and/or innovation are creating changes in workflow and production
processes.
-Significant staffing increases or decreases are contemplated.
-Personnel retention and turnover is a significant problem.
-Workforce productivity is stagnant or deteriorating.
-Morale is deteriorating.
eight different types of restructuring:
• Relocation: when the activity stays within the same company, but is relocated to
another location within the same country. This differs from outsourcing in so far

Page
10
IGNOU4U.BLOGSPOT.COM

as the activities which are transferred do not belong to an ‘integrated system’ of a

broader production (i.e. supply chain).
• OUTSOURCING : when the activity is subcontracted or contracted out to
another company within the same country. It is the act of transferring some of the
company’s recurring internal activities and powers of decision to outside
providers.
• Offshoring/delocalisation: when the activity is relocated or outsourced outside
of the country’s borders. The offshored activity may either continue to be owned
by the company or may be offshore outsourced.
• Bankruptcy/closure: when an industrial site is closed or a company goes
bankrupt for economic reasons not directly connected to relocation or outsourcing.
• Merger/Acquisition: when two or more companies decide to transfer their assets
into a single company or during an acquisition which then involves an internal
restructuring programme aimed at rationalising the organisation by cutting
personnel.
• Internal restructuring: when a company undertakes a job-cutting plan which is
not linked to another type of restructuring defined above.
• Business expansion: when a company extends its business activities, hiring new
workforce.
• Other: when a company undergoes a type of restructuring that is not one of the
above types.

==========================================================

b)Current Account Convertibility

Convertibility of a currency implies that a currency can be transferred into another

currency without any limitations or any control. A currency is said to be fully
convertible, if it can be converted into some other currency at the market price of
that currency. If currency has to be convertible, it shall not be subjected to these
restrictions.

Current account convertibility refers to currency convertibility required in the case

of transactions relating to exchange of goods and services, money transfers and all
those transactions that are classified in the current account.

Current account convertibility allows free inflows and outflows for all purposes
other than for capital purposes such as investments and loans. In other words, it
allows residents to make and receive trade-related payments — receive dollars (or
any other foreign currency) for export of goods and services and pay dollars for
import of goods and services, make sundry remittances, access foreign currency
for travel, studies abroad, medical treatment and gifts etc. In India, current account

Page
11
IGNOU4U.BLOGSPOT.COM

convertibility was established with the acceptance of the obligations under Article
VIII of the IMF’s Articles of Agreement in August 1994.

==========================================================

c)Industrial Location

Why do firms locate where they do? There is no single answer—different firms
choose their locations for different reasons. Key determinates of a location
decision are a firm's factors of production. For example, a firm that spends a large
portion of total costs on unskilled labor will be drawn to locations where labor is
relatively inexpensive. A firm with large energy demands will give more weight to
locations where energy is relatively inexpensive. In general, firms choose
locations they believe will allow them to maximize net revenues: if demand for
goods and services is held roughly constant, then revenue maximization is
approximated by cost minimization.

The typical categories that describe a firm's production function are:

• Labor. Labor is often and increasingly the most important factor of production.
Other things equal, firms want productivity, in other words, labor output per
dollar. Productivity can decrease if certain types of labor are in short supply,
which increases the costs by requiring either more pay to acquire the labor that is
available, the recruiting of labor from other areas, or the use of the less productive
labor that is available locally.
• Land. Demand for land depends on the type of firm. Manufacturing firms need
more space and tend to prefer suburban locations where land is relatively less
expensive and less difficult to develop. Warehousing and distribution firms need
to locate close to interstate highways.
• Local Infrastructure. An important role of government is to increase economic
capacity by improving quality and efficiency of infrastructure and facilities, such
as roads, bridges, water and sewer systems, airport and cargo facilities, energy
systems, and telecommunications.
• Access to Markets. Though part of infrastructure, transportation merits special
attention. Firms need to move their product, either goods or services, to the
market, and they rely on access to different modes of transportation to do this.
While transportation has become relatively inexpensive compared to other inputs,
and transportation costs have become a less important location factor, access to
transportation is still critical. That long-run trend, however, could shift because of
decreasing funds to highway construction, increasing congestion, and increasing
energy prices.
• Materials. Firms producing goods, and even firms producing services, need
various materials to develop products that they can sell. Some firms need natural

Page
12
IGNOU4U.BLOGSPOT.COM

resources: a manufacturing sector like lumber needs trees. Or, farther down the
line, firms may need intermediate materials: for example, dimensioned lumber.

• Entrepreneurship. This input to production may be thought of as good

management, or even more broadly as a spirit of innovation, optimism, and
ambition that distinguishes one firm from another even though most of their other
factor inputs may be quite similar.
The supply, cost, and quality of any of these factors obviously depend on market
factors: on conditions of supply and demand locally, nationally, and even globally.

But they also depend on public policy. In general, public policy can affect them
through:
• Regulation. Regulations protect the health and safety of a
community, and help maintain the quality of life. However, simplified
bureaucracies and straightforward regulations can help firms react quickly in a
competitive marketplace.
• Taxes. Firms tend to seek locations where they can optimize their after-tax
profits. But tax rates are not a primary location factor, they matter only after
corporations have made decisions on labor, transportation, raw materials, and
capital costs. Within a region, production factors are likely to be similar, so
differences in tax levels across communities are more important in the location
decision than are differences in tax levels between regions.
• Financial incentives. Governments offer firms incentives to
encourage growth. Generally, economic research has shown that most types of
incentives have had little significant effect on firm location between regions.
However, for manufacturing industries with significant equipment costs, property
or investment tax credit or abatement incentives can play a significant role in
location decisions. Incentives are more effective at redirecting growth within a
region than they are at providing a competitive advantage between regions.
Firms locate in a city because of the presence of factors other than direct factors of
production. These indirect factors include agglomerative economies, also known
industry clusters, location amenities, and innovative capacity.
• Industry Clusters. Firms tend to locate in areas where there is already a
concentration of firms like their own. The theory works in practice because firms
realize operational savings and have access to a large pool of skilled labor when
they congregate in a single location.

• Quality of Life. A region that features many quality amenities, such as good
weather, recreational opportunities, culture, low crime, good schools, and a clean
environment attracts people simply because it is a nice place to be. A region's
quality of life attracts skilled workers, and if the amenities lure enough potential
workers to the region, the excess labor supply pushes their wages down so that
firms can find skilled labor for a relatively low cost.

Page
13
IGNOU4U.BLOGSPOT.COM

• Innovative capacity. Increasing evidence suggests that a culture promoting

innovation, creativity, flexibility, and adaptability will be essential to keeping
MANY cities economically vital and internationally competitive. Innovation is
particularly important in industries that require an educated workforce. High-tech
companies need to have access to new ideas typically associated with a university
or research institute. Government can be a key part of a community's innovative
culture, through the provision of services and regulation of development and
business activities that are responsive to the changing needs of business.

==========================================================
==========================================================
===========================THE END=======================

Page
14