business environment 4

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BUSINESS ENVIRONMENT

UNIT1

BUSINESS AS A SOCIAL SYSTEM

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

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

society is a business environment.

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

business in a systems relationship with society; three ideas are significant in

addition to the systems idea.

The three ideas are:

1. Values2. Viability3. Public visibility

1. VALUES:

Business like other social institutions, develops certain belief systems and

values for which they stand, and there beliefs and values are a source of

institutional drive. These values drive from a multitude source, such as the mission

of business as a social institution, the nation in which business is located, the type

of industry in which it is active and the nature of employees. These values become

guides foremployees decisions in the interface of business. Second, they become

strong motivators for people in a business.


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2. VIABILITY

Davis and Blomstorms define viability as the drive to line and grow, to

accomplish the potential not yet reached, and to achieve all that a living system is

capable of becoming. If a business is to be a viable, vigorous, institution insociety, it must initiate its share of forces in its own environment rather than

merely adjust to outside forces. Every business needs a drive and spirit all its own

to make it as a positive actor on the social stage rather than reactor or a reflector.

3. PUBLIC VISIBILITY

The term public visibility refers to the extent that organizations activities

are known to person outside the organization. Public visibility is different from

idea of public image. The term public image refers to what people think about an

organizations act, while are known. The importance of public visibility is that it

subjects business activities to public examination, discussion and judgment.

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

organ to help accomplish the social goals.

INTERNAL AND EXTERNAL ENVIRONMENT OF BUSINESS [TYPES

OF ENVIRONEMTN]

I. INTERNAL ENVIRONMENT FACTORS

1. Value system: The value systems of the founders and those at the helm ofaffairs have important bearing on the choice of business, the mission and

objectives of the organization, business policies and practices. It is a widely

acknowledged fact that the extent to which the value system is shared by all in

organization is an important factor contributing to success.


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2. Mission and Objectives: The business domain of the company, priorities,direction of the development, business philosophy business policy etc are

guided by the mission and objective of the company.

Example: Ranbaxys thrust in to the foreign markets and developments have beendriven by its missionto become a researcher based international pharmaceutical

company.

3. MANAGEMENT STRUCTURE AND NATUREThe organizational structure, the composition of board of directors, extent

of professionalization of management etc, are important factors influencing

business decisions. Some management structures and styles delay decision makingwhile some other facilitate quick decision making.

The Board of Directors being the highest decision making body which sets

the direction for the development of the organization and which oversees the

performance of organization, the quality of the Board is a very critical factor for

the development and performance of company.

4. INTERNAL POWER RELATIONFactors like the amount of support the top management enjoys from the

different levels of employees, share holders, and Board of Directors have

important influence on the decision and their implementation. The relationship

between the members of the board and between chief executive and the Board are

also critical factors.

5. HUMAN RESOURCESThe characteristics of the human resources like skill, quality, morale,

commitment, attitude etc., could contribute to the strength and weakness of the

organization.


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6. COMPANY IMAGE AND BRAND EQUITYThe image of the company matters while raising finance, forming joint

ventures or other alliances, soliciting marketing intermediaries, entering purchase

on sale contracts, launching new products etc. Brand equity is also relevant inseveral of these cases.

7. OTHER FACTORSA) Research and development determine a companys ability to innovate and

compete.

B) Marketingquality of marketing men, brand equity, distribution networkhave direct effect on marketing.

C) FINANCE 0 financial policies; financial position and capital structure arealso affecting business performances.

D) Physical Assetsproduction capacity, technology, distribution logistics

EXTERNAL ENVIRONMENT FACTORS

It consists of 2 types.

1. Micro environment2. Macro environment

I. Micro Environment

The micro environment is also known as the task environment and

operating environment became the micro environment forces have a direct bearing

on the operations of the firm.

These include the factors like

1. SUPPLIERS

An important force in the micro environment of a company is the suppliers,

i.e. those who supply the inputs like raw materials and components to the


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

functioning of business.

It is very risky to depend on a single supplier became of skills, lock out orany other production problem with that supplier may seriously affect the company.

Hence multisource of supply often helps reduce risks.

2. CUSTOMERS

A business exist only became and its customers. A company may have

different categories of customers like individuals, households, industries and other

commercial establishment and govt. and other institution.

3. COMPETITORS

A firms competitors include not only other firms which market the same

products but also all those who compete for the discretionary income of the

consumers.

4. MARKETING INTERMEDIARIES

The immediate environment of the company may consist of number of

marketing intermediaries which are firms that aid the company in promoting,

selling and distributing its goods to final buyers.

The marketing intermediaries includes middlemen such as agents and

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

5. FINANCIERS

Another important micro environmental factor is the financier of the

company. Besides the financing capabilities, their policies and strategies, attitudes,

ability to provide non financial assistance etc are very important.


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6. PUBLICS

A public is any group that has an actual or potential interest in an impact

on an organizations ability to achieve its interests. Media publics, citizen action

publics and local publics are some examples.

MACRO ENVIRONMENT

It is also called as general environment and remote environment. The macro

environment is generally uncontrollable than micro environment, the success of

the company depends on its adaptability to the environment.

The important macro environment factors as follows:

I. TECHNOLOGICAL ENVIRONMENT

Technology is one of the important determinants of success of a firm as

well as economic and social development of nation. It includes both hardware and

software to solve problems and promote progress.

1. Innovative dri ve of company

The term innovation means introduction of new product, the use of new

method of production. The technical, industrial and commercial steps which leads

to marketing of new products and to commercial use of new technical process and

equipment.

2. Customers Needs / Expectation

Technological orientation and R&D effects of a company may also be

influenced by the customer needs and expectation. In several cases the customer

and the supplier have a collaborative relationship to develop the product or

solutions. If the customers are highly demanding, companies would be compelled

to be innovative.


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3. Demand condi tions

The size of demand influences the choice of the technology . The size of

demand influences the choice of the technological scale. Fast growing trend of

demand would encourage development of technology of large scale.

4. Suppliers offering

Many times technological changes are encouraged by the suppliers of a

company, like a capital goods supplier etc.

5. Competiti ve dynamics

Competition compels the adoption of the best technology and constant

endeavor to innovate.

6. Substi tutes

Emergence of new substitutes or technological improvements or substitutes

which alter technological change.

7. Social forces

Certain social forces like pretext against environment pollution or other

ecological problems demand for eco-friendly products.

8.Research organizationThe technological environment of business is enriched by researched

organizations which develops new technologies and provide other technical inputs.

9.Govt. poli cyThe govt. contributes to the development to the technology by its own

direct involvement by establishing research organization and funding R & D. The

govt. may encourage private R & D by various incentives.


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II. DEMOGRAPHIC ENVIRONMENT

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

that Management is men & Market is people. i.e., Management in Men,Material, Machinery and Money, and market is people in the sense that the

demand depends on the people and their characteristics the number, income

levels, tastes and preferences, beliefs, attitudes and sentiments.

Important demographic bases of market segmentation include the

following:

1. Age structure2. Gender3. Income distribution4. Family size5. Occupation6. Education7. Social class8. Religion9. Race10.Nationality

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

composition, ethnic, density of population, rural urban distribution, nature of

family have very significant implication for business.

III. ECONOMIC ENVIRONMENT

Business partners and strategies are influenced by the economic

characteristics. The economic environment includes the structure and nature of the


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economy, the stage of development of economy, economic resources, level of

income, global economic linkages, economic policies etc.

1. Nature of the EconomyThe general level of development of the economy has lot of implication for

businessit has significant bearing on the nature and size demand, govt. policies

affecting business. The widely used method of classification of the economies is

on the basis of per capita income. Accordingly the low income, middle and high

income economies.

Low income economies are economies with very low per capita income.

High income economies are economies with very rich income per capita. Middle

income economies are sub divided into lower middle and upper middle income

where income per capita is neither very high nor low.

2. Structure of the economy

Factors such as contribution of different structure like primary

(agricultural), secondary (industrial) & tertiary (secondary) sectors, large,

medicine, small sectors to economy. These factors and the nature of each sector

have business implication. For example, India is one of the largest producers of

agricultural products, because of the small and fragmented nature of land holdings,

efficient collection and processing of products become difficult. The land holding

pattern also makes productivity improvements difficult.

3. Economic policies

There are several economic policies which can have very great impact on

business. Important economic policies are


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a) Industrial policy

It defines the scope and role of different sectors like private, public, joint

and cooperative. It may influence the location of industrial undertakings. Choice

of technology, state of operation, product mixes etc.

b) Trade policy

It can affect the fortunes of firms. For example a policy of protecting the

home industry may greatly help the import competing industries, while liberation

of the impart policy may create difficulties for such industries. This mean the firm

should come up with quality, cost, and marketing and after sales service etc.

c) Foreign exchange policy

Exchange rate policy and policy in respect of cross border movement of

capita are important for business.

d) Foreign investment and technology policy

Foreign investment and technology policy will increase domestic

competition at the same time it would benefit many domestic firms by

permitting global sourcing of capital and technology, by increasing the quantity

and quality of domestic supply of many goods and services.

e) Fiscal policy

Govt. strategy in respect of public expenditure and revenue can have

significant impact on business. The pattern of public expenditure may affect the

develop of industries. Such as govt. often use tax incentives or disincentives to

encourage or discourage certain activities. For ex: when industry suffers from

recession, a reduction of taxes like excise duty or sales tax may help improve the

demand.


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f) Monetary policy

The central bank, by its policy towards the cost and availability of credit,

can significantly influence savings, investments and consumer spending in

economy. For example 1% reduction in cash reserve ratio will significantlyincrease loan able funds with commercial banking systems.

IV. NATURAL ENVIRONMENT

The natural environment ultimately is the source and support of everything

used by businessevery raw material, energy resource, life sustaining factor etc.

The natural environment determines what can be got done in a society and

how institution can function. Resource availability is the fundamental factor is the

development of business in the society.

Thus geographical and ecological factors, such as natural endowments,

weather and climatic conditions, topographic factors, vocational aspects in the

global context etc., are all relevant to business.

1. Geographical factors: differences in geographical condition betweenmarkets may sometimes call for changes in the market mix. It influences

the location of some industries.

E.g. Industries with material index tend to be located near the raw material

sources.

2. Climatic and weather conditions: It affects the location of certain

industries like cotton textile industry. Topographic factors may affect the demand

pattern in some cases. E.g. in hilly areas Jeeps are greater demand than cars.


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Weather and climatic factors affect the demand of certain types of products.

E.g. in region where temperature is very high in summer, there is good demand for

desert coolers.

Weather and climatic factors can affect the demand pattern of clothing,

building materials, food, medicines etc. further, weather and climatic conditions

may call for modification to the products, packaging storage conditions etc.

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

resources, environmental pollution another disturbance of the ecological balance

have carried great concern, govt. policies aimed as preservation of environment

purity and ecological balance, conservation of non-replenish able resources have

resulted additional responsibilities and problems for business.

CORPORATE SOCIAL RESPONSIBILITY

The important generally accepted responsibilities of the business to

different sections of the society are described below.

1. Responsibility to shareholders

The responsibility of a company to its shareholders, who are owners is a

primary one. The fact that the investments in the business should be recognized.

To protect the interests of the shareholders and to provide a reasonable dividend,

the company has to strengthen and consolidate its position.

2. Responsibility to employees

The success of an organization depends to a very large extent on the morale

of the employees and their whole hearted co-operation.

The responsibility of the organization to the workers include


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1. The payment of fair wages2. The provision of best possible working condition3.

Establishment of fair working standards and norms

4. The provision of labor welfare facilities to the extent possible and desirable5. Arrangements for proper training and education of the workers6. Reasonable chances and proper system for accomplishment and promotion7. Proper recognition, appreciation and encouragement of special skills and

capabilities of workers.

8. The installation for efficient grievance handling system9. An opportunity for participating in managerial decisions to the extent

desirable.

3. Responsibility to consumers

The customer is the foundation of business and keeps it in existence. It has

been widely recognized that customer satisfaction shall be the key to satisfying the

organizational goals. Some important responsibilities of business to customers are

1. To improve the efficiency of the functioning of business so as to increaseproductivity and reduce prizes, improve quality, smoothen the distribution

system to make goods easily available.

2. To do research and development, to improve quality and introduce better ofnew products.

3. To take the steps to remove the imperfection in the distribution systemincluding black marketing or anti-social elements.

4. To supply goods at reasonable prizes5. To ensure that the product supplied has no adverse effect on the customer.


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6. To provide sufficient information about the product including adverse effects,risks and care to be taken while using the products.

7. To avoid misleading the customers by improper advertisement.8.

To provide opportunity for being heard and to redress genuine grievances.

9. To understand customer needs and to make necessary measures to satisfy theseneeds.

4. Responsibility to community

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

and to society. The responsibilities include

1. Taking appropriate steps to prevent environmental pollution and preserveecological balance.

2. Rehabilitating the population displaced by operate of the business3. Assisting in the overall development of locality4. Taking steps to conserve scares resources and developing alternatives5. Improving the efficiency of the business operation6. Contributing to research and development7. Develop of backward areas8. Promotion of small scale industries9. promotion of education and population control10.Contribution to the national effort to build up a better society


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BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY

BUSINESS ETHICS

The term business ethics refers to the system of moral principles and rules

of conduct applied to business. This means that the business should be conducted

according to certain self-recognized moral standards. Business, being a social

organ, shall not conduct itself in a way detrimental to the interests of society and

the business sector itself. A profession is bound by certain ethical principles and

rules of conduct which reflect its responsibility, authority and dignity. The

professionalization of business management, should therefore, be reflected in the

increasing acceptance of business ethics.

NOTE: In the 1930s Rotary International developed the code of ethics that is still

used extensions. It uses 4 questions that are called the 4 way of ethical behavior

for any business forces

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

LIST OF IMPORTANT ETHICAL PRINCIPLES THAT A BUSINESS

SHOULD FOLLOW:

1. Do not deceive or cheat customers by selling substandard or defective productsby under measurements or by any other means.

2. Do not resort to hoarding, black marketing or profiteering.3. Do not destroy or distort competition


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4. Ensure sincerity and accuracy in advertising, labeling and packaging.5. Do not tarnish the image of competitors by unfair practices.6. Make accurate business records available to all authorized persons.7.

Pay taxes and discharge other obligation promptly

8. Do not farm cartel agreements, even informal, to control production, price etcto the common detriment.

9. Refrain from secret kickbacks on payoffs to customers, suppliers,administrators, politicians etc.

10.Ensure payment of fair wages to and fair treatment of employees.

ISSUES IN CORPORATE GOVERNANCE

Corporate governance is defined as the process and structures by which

business and affairs of corporate sector is directed and managed. The concept of

corporate governance primarily hinges on complete transparency, integrity and

accountability of the management.

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

is about the value orientation of organization, ethical norms its performances, the

direction of development and visibility of its performances and practices.

Objectives

1. To build up an environment of trust and confidence amongst those havingcompleting and conflicting interest.

2. To enhance shareholders value and protect the interest of other shareholders byenhancing the corporate performances and accountability.

- Transparency- Accountability- Investor protection


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3. Entrepreneurial RoleEntrepreneurial role includes establishing and operating business

enterprises and bearing risks. A number of factors such as socio-politicalideologies, dearth of private entrepreneurship, absence of inadequate competition

in certain segments and resultant exploitations of consumers have contributed for

the growth of state owned enterprises.

4. Planning roleState plays an important role as planner.

GLOBAL ENVIRONMENT

Globalization is an attitude of mind which views the entire world as a

single market so that the corporate strategy is based on the dynamics of the global

business environment.

Globalization encompasses the following:

1. Expanding business globally2. Giving up distinction between domestic and foreign market and developing

global outlook of business.

3. To maximize profit4. For growth

Essential conditions for globalization

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

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


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

4. Resources: It decides the ability of firm to globalize. Resourceful companiesmay find it easier to thrust ahead in global market. Resources include finance,

R&D, company and grand image, HR etc.

5. Competitiveness: A firm may drive a competitive advantage from any one ormore of the factors such as low costs and price, product quality, product

differentiation, technology superiority, marketing strength etc.

How to go global?Important foreign market entry strategies

1. Exporting: Exporting the most traditional mode of entering global market.2. Licensing & franchising: It involves minimal commitment of resources and

effort on the part of international marketer, are easy way of entering foreign

markets. Finalizing is a form of licensing in which a parent company grants

another independent entity the right to do business.

3. Contract manufacturing; a company doing international marketing contractswith firms in the foreign countries to manufacture the products while

retaining the responsibility of marketing the product.

4. Management contracting: In this supplier brings together a package of skillsthat will provide an integrated service to clients without risk on owner.

5. Turnkey contractsA turnkey contracts is an agreement by seller to supplya buyer with a facility fully equipped and ready to be operated.

6. Wholly owned manufacturing facilities: It provides the firm with completecontrol over production and quality. It does not have risk in the

development.


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7. Assembly operations: Assembly facilities in foreign markets are very idealwhen there are economies of scale in the manufacture. When an assembly

operations are labour intensive and labour is cheap in foreign country.

8. Joint ventures: Joint venture is a very common strategy of entering foreignmarket. Any form of association which implies collaboration for more than

a transitory period is a joint venture. A joint venture may brought about by

a foreign investor buying an interest in a local company.

9. Third country location: Third country location is also an entry strategy,when there is no commercial transaction between two nations for some

reasons, a firm in one of their nations which wants to enter the other market

will have to operate third country base.

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

network.

11.Strategic alliances: It is also used as market entry strategy it is also knownas coalition, this strategy seeks to enhance the long term competitive

advantage of the firm by farming alliance with competitors.

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

Types of Mergers

1. Horizontal Merger: Takes place where the two margin companies productssimilar product in the some industry. E.g. in 1998 combination ofChrysler cooperation and similar sense to create Dainles Chrysler.

2. Vertical Merger: Occur when two firms each working at different stages inthe production of the same good combine. E.g. General Motors acquisition

of fisher body company (an auto parts manufacturer).


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

Company)


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UNIT2

ECONOMIC STRUCTURE OF INDIA

Mixed economy of India consists of public and private sector. Policy on the

public sector has been guided by the Industrial Policy Resolutions 1956 and 1991

which gave a strategic role in the economy. India was based agrarian economy

with weak industrial base, low level savings and investments and near essence of

infrastructural facilities.

Public sector

The object of accelerating the pace of eco-development and the political

ideology, gave the public sector a dominant role in the industrial development of

the nation led to rapid growth of the State Owned Enterprises (SOEs) sector in

India.

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

strategic industries like steel, coal, minerals and metals, petroleum, heavy

engineering, chemicals, fertilizers and pharmaceuticals etc., on one hand and

consumer goods, trading and marketing activities, transportation, services,

contracts and consultancy services, tourist service, financial services, development

of small industries etc., on the other.

Objectives:

It was promoted as an instrument for implementation of the govt.s socio-

eco policies.


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1. To help in the rapid eco growth and development and industrialization of thecountry and create the necessary infrastructure for economic development.

2. To earn return on investment and thus generate resources for development.3.

To promote redistribution on income & wealth

4. To create employment opportunities5. To promote balanced regional development6. To assist the development of small scale and ancillary industries7. To promote import substitution, save and earn foreign exchange for the

economy.

Growth & performance of public enterprise

The Industrial Policy Resolution of 1948 made it clear that the manufacture

of arms and ammunitions, the production & control of atomic energy and the

ownership and management of railway transport would be the exclusive monopoly

of the company. After 6 months industries were coal, iron and steel, aircraft

manufacture, ship building, manufacture of telephone, telegraph and wireless

apparatus, excluding radio receiving sets and mineral oils.

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

nature of public utility services should be in public sector.

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

industries. Entire output in case of petroleum, lignite, copper & primary lead,

about 98% of zinc with 90% of coal, more than of steel and aluminium and 1/3rd

of fertilizers.

PSEs as a whole have made huge profits mainly because of the enormous

profits made by several public sector monopolies. Many of the loss making PSE


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have been either in non-priority sectors or in the sectors where the private sector

has proved to be more efficient.

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

1. Huge cost, time over runs in project implementation2. Land acquisition3. Procurement of equipment4. Civil work and other imponderable [not able to estimate]5. Locational & investment decisions6. Irrational product mix7. Imposed marketing arrangements8. Foreign financing9. Technology upgradation, inadequate R & D, over manning.

Why PSE?

1. PSE not only for commercialization but to generate employment, promotingbalanced regional development etc.

2. Low return on investment on account of price constraints imposed on certaininfrastructural goods and services of PE.

3. Sick industries taken over by PU.4. Promoted with long gestation period5. Periodical wage revision.

New PS policy:

Policy announced on 24-7-1991 the priority areas of growth.

1. Essential infrastructure goods and services2. Exploration & exploitation of oil and mineral resources


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3. Technology development & building of manufacturing capabilities, longterm development of economy

4. Manufacture of goods where strategic considerationsPSE-8

1. Arms & ammunition: defence equipment, aircraft2. Atomic energy3. Coal & Lignite4. Mineral oils5. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and

diamond.

6. Mining of copper, lead, zinc, tin, molybdenum, wolframite7. Mineral specified in the schedule to the AE (control of production & use)

order 1958.

8. Railway transport

The new industrial policy also indicated that the public sector would

withdraw from the following cases:

1. Industries based on low technology2. Small scale and non strategic areas3. Inefficient and unproductive areas4. Areas with low or zero social responsibility or public purpose5. Areas where private sector has developed sufficient enterprise and

resources

Govt. policies:

1. Bring down govt. equity in all non-strategic PSU to 26% or lower, ifnecessary.

2. Restructure & revive potentially viable PSUs


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3. Close down PSUs which cannot be revived4. Fully protect the interest of workers

A disinvestment department was also set up.

Public Sector Ratnas

Govt. in 1997 July unfolded its strategy to grant autonomy to come PSUs

on an experimental basis was to select some vanguard PSUs to support them in

their drive to become global giants. After in-depth interministerial discussions.

Nine PSUs were selected. These are Navaratnas.

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

GAIL & MTNL were given same status. All these were given freedom to incur.

1. Capital expenditure2. Decide on joint venture3. Set up subsidiaries/officers board4. Enter into technology & strategic alliances5. Raise funds from capital markets (international & domestic)6. Enjoy substantial operations and managerial autonomy


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7 other PSUs have been given the title ministers.

Private Sector

The Industrial Policy Resolution of 1956 has made it very clear that as an

agency for planned national development, in the context of the countrys

expanding economy, the private sector will have the opportunity to develop &

expand. Outside the schedules of A&B would be undertaken ordinarily through

the initiative and enterprise of the private sector. It was the policy of the state to

encourage the development of these industries in the private sector, in accordance

with the programmed formulated in successive Five Year Plans, by ensuring the

development of transport, power and other services and by appropriate fiscal and

other measures.

The IPR of 1956 has clearly stated that the private sector have necessarily

to fit into the frame work of the social & economic policy of the state and will be

subject to control & regulation in terms of industries (Development & regulation)

Act and other relevant legislation. Private sector is dominant in the FMCG, Capital

Goods Industries.

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

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

These are three types of economy. These are the free enterprises/market

economies or capitalist economy and at the other end are the centrally planned

economy or communist countries. In between these two are the mixed economy.


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1. The communist countries have a centrally planned economic system. Underthis rule, the state owns all the means of production, determines the goals of

production & controls the economy according to a central master plan. No

consumer sovereignty. Consumption plan in a centrally planned economy isdictated by state. Ex: USSR, Chez Republic, Hungary, Poland and China.

2. In b/n capitalist and free market economic system is the mixed economy,under which both public & private sector co-exist as in India. In many

mixed economies, the strategic & other nationally very important industries

are fully owned or dominated by the state.

3. The freedom of PS is the greatest in the market economy.In market economy

a. The factors of production (labour, land, capital) are privately owned.b. Income is in monetary formfrom sale & profitsc. Members have freedom of choice consumption, occupation,

savings and investment.

d. Not planned, controlled and regulated by govt.This is far from real one. Ex: US, Japan, Australia and Canada

Structure of Economy

The contributions of sectors like primary (agri), secondary (industrial) and

tertiary sectors form structure of economy.

As economy develops share of primary sectors in development,

employment & GDP declines. Manufacturing also declines. The service sector is

largest & fast operating sector. They contribute upto 60% of world GDP and is

less in developed countries.

Developing Developed

198070 3.5 3


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199098 3.7 3.3

The share of service sector increased from 1980 39% to 46% in 2000 in

India. Internationally it has increased 199012%.This indicates decrease in price, increase in quality, increase in

competitiveness of downstream industries.

Economic Planning of India

The pattern of economic development in India is very significantly affected

by govt. planning.

The Planning commission

Planning Commission was set up in 1950 March functions: (i) make

resources available, (ii) Balanced and effective utilization of countrys resources.

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

UCM, CM of States and Union Territories and Members of the Planning

Commission. Union State Ministers are also invited to participate in deliberations.

Secretary of PC acts as secretary of NDC.

Functions; i) To prescribe guidelines,

ii) To consider national plan

iii) To consider important question of social & economic policy

iv) Review working of plans

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

3 years.

Review of the Plans


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First Five year PlanApril 1st1951

Third Five year plan1966

Fourth got delayed due to disrupted the development process like the aggressionsof China & Pakistan and severe drought in the country.

1965-66Fall income, increase in price, decrease in savings, devaluation of rupee

by 36.5% in June 1966.

4th

Five Year Plan was put off by 3 years. This period had annual plans (66-67, 68-

69). This period is referred to as Plan Holiday.

Central Change: Premature end to five year plan, Janata Party in 1977 terminated

the 5th

plan at the end of 4th

year i.e. March 1978 instead of 1979 and formulated a

draft five year plan for 1978-83. It also introduced the concept of Rolling Plan.

Under this plan when one year elapses another year is added to the planning

horizon so that we will always have a Five year plan.

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

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

Plan)

7th PlanApril 1st 1985

8th

plan1992

9th1997-2002

Objectives:

1. utilization of the natural resources2. Ultimate removal of unemployment & poverty3. Increased standard of living


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Five year Plan (2002-07)

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

Increase in GDP, increased human well being, consumption of food and

other consumer goods, but also education, health, availability of drinking waterand basic sanitation.

1. Decreased poverty20% by 2007 and 10% by 20122. Increase in employment3. Universal access to primary education by 200%4. Decreased population2001201116.2%5. Increase in literacy 72% by 2007 & 80% by 2012.6. Decrease in Infant Mortality rate (IMR) 45%, per 1000 live births by 2007

and to 28% by 2012.

7. Decrease in Mattress Mortality Ratio (MMR) decrease 20% per 1000 livebirths by 2007 and to 10% by 2012.

8. Increase in forest and tree lover to 25% by 2007 and 33% by 2012.9. Villagesaccess to drinking water (portable) by 2012.10.Cleaning of all major polluted river by 2007 & notified stretches by 2012.

Performance

Although we have failed to achieve targets & 30% still under poverty line.

India is one of the largest industrial powers in the world and has the 3rd

largest

stock of scientific manpower.

Characteristics of Industries

Until 1991, the development of the private sector was under strict Govt.

control, was exercised through industrial licensing. Low like the Industries

(Development & Regulation) Act, the Companies Act gave enormous control over


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the management and control of functioning of the industries. The M.R.T.P. Act

controlled merges, amalgamations and takeovers.

Capital Goods Vs Consumer GoodsBasic and capital goods were considered as pride of place and the consumer

goods given low priority. In the process of capital accumulation, certain capital

intensive or large scale, sectors producing non-importable commodities, transport,

electricity are bound to grow. Imports cannot be expanded.

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

than durables. Establishment of basic and heavy industries has been a reason for

self-reliance in respect of capital goods and modern technology build defence

strength.

The Development of Industries

1. Private Sector2. Public Sector3. Joint Sector has been promoted to facilitate the utilization of the resources

and talents of the private sector and function with social orientation of

public sector.

4. Co-op. sector: Made progress in industries like sugar, cotton textiles andfertilizers. Growth of this sector promotes industrial democracy &

discourages concentration of economic power in few hands.

5. Village & small industries Not given the deserving importance. Someunits are reserved for them and the products too.

Import Substitution & Export Contribution

Import substitution assumed importance after the second plan. In early

decades of planning, considerable import substitution took place in many


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important areas in capital goods, organic chemicals, pharmaceuticals, dyestuffs

etc. The Export Policy Resolution of 1970 emphasized the importance of

development and expansion of export oriented production. The Import

Substitution Industrializaiton Strategy (ISI) followed in India has had adverseeffects. The high protection from foreign competition, resulted in high costs, poor

quality, indifference towards consumers and lack of innovativeness.

In mid 1950s Jute & cotton industries (textiles) were denied foreign

exchange and with liberalization non-essential industries were given import

substitution.

The import restrictions, high costs and poor quality also very severely

affected Indias exportperformance.

Capacity Utilization

Under utilization amounts to wastage of scarce resources, leads to cost-

push inflation. Creates demand supply imbalance, affect balance of trade,

employment, saving and investment. Under utilization of Industrial policy is due

to factors like as planned excess capacity calculated to meet the demand in the

foreseeable future, tech invisibilities which may create capacity in excess

[present demand]; and initial testing troubles of new industries which is

incapable in the developing economy.

Regional Disparities: RemovalThird Plan

Large investments were made in backward areas. Incentive system was

introduced in 4th

plan. The backward area development by industrialization is not

given importance.


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

of agri.

Expansion & Development of Inputs & Services:

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

1. Irrigation: Increases agri productivity & employment opportunities. Union& State governments are developing the area under irrigation by executing

major, medium and minor irrigation projects and exploiting ground water

potential. Rural electrification programs (energisation of pumpsets) is also

being implement. This supports industries like cement, steel etc., Irrigation

electrification (aluminium cables, steels etc) will also increase demand for

pumpsets, PVC pipes, agri implements, insecticide and pesticides and

fertilizers, banks etc.

Private sectors like [farmers organization, voluntary bodies and general

public] are taking interest in irrigation. Ground water development is done through

own financing or institutional financing or both.

States like Maharashtra, Madhya Pradesh and Andrapradesh have initiated

the action for privatization of irrigation projects through projects like build own

operate (BOO) or build own operate transfer (BOOT) or Build own lease (BOL)

basis.

According to these projects the Irrigation department may use water in bulk

from the agency at mutually agreed price for distribution to the farmers. It also

been mobilized through issue of public bonds.


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The most far reaching event was the introduction of high yielding varieties

(HYV) of a number of field crops and hybrids of millets in particular. This covers

wheat, rice, maize, jowar and bajra. Has revolutionalized agri and increased

production of foodgrains in country. The HYV increases demand for plantnutrients and protectants like fertilizers, insecticides and pesticides.

1963National Seeds Corporation (NSC)

1969State Farms Corporation of India (SFCI)For quality seeds

After liberalizationforeign firms were also set up.

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

1973Indian Council for Agricultural Research set up for research, educating &

extensively educating the farmers, animal husbandry and fisheries. This council

helps in inter and intra collaboration with National & International Institutions.

Ex: International Atomic Energy.

Banks are also giving credit to agri projects (RRB), commercial banks and

primary co-operative are the major source.

For all related activities and finances relating to it. NABARD National

bank for Agricultural & Rural Development was established plays financial and

development roles of RBI and Agri Refinance and development Corporation

(ARDC).

1971The Agro Service Centre SchemeEmployment for trained entrepreneurs,

Inputs at door step of farmers.

1965The Food Corporation of India

Rice Milling Storage Production ofnutritions processed foods. The Central

/ State Warehousing Corporation.


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Agricultural Marketing:

6th

PlanThree essential elements of marketing.

1. Support prices adjusted with cost of production to ensure fair returns to thefarmers.

2. Arrangements for procurement of agri produce at support prices, if pricesdecrease.

The organization look after this is Food Corporation of India, The Cotton

Corporation of India, The Jute Corporation of India and the Co-operatives with the

National Agricultural Cooperative Federation of India (NAFED) as their Apex

Organization.

Directorate of Marketing & Inspection

Functions are to give advice to the Central & State Govts., Promote grading

and standardization, market practices, extension, research, cold storage.

Agmark for Cotton, vegetable oils, ghee, cream, butter, rice and wheat.

Regulated Markets:

The regulated market is a market where the activities are regulated by law

and is meant for dealing in a specific commodity or group of commodities.

The main objective of the regulated market is to save the farmers from the

exploitation of unscrupulous market intermediaries and to ensure a fair price for

their produce.

Co-op Marketing: It was started to help small farmers, grains & agri products are

graded and stored and sell at advantageous price. Marketing is the important

function of co-op. marketing.

Agri Price Policy:

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


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Agri commodities like wheat and paddy have procurement prices fixed for

them.

Minimum Support Prices: for barley, gram, moong, urad, mustard, ground nut,

sunflower seed, soyabean and cotton (kapas).Statutory Minimum Price: for sugarcane, jute and tobacco.

Trends in Service Sector:

As an economy develops the share of the primary sector in the GDP and

employment declines and those of other sectors increase. The service sector is the

largest and fastest growing sector. The service sector now contributes more than

60% of the world GDP.

19801990, the average annual growth rate of value added in the service

sector in the developing economics was 3.5% compared to the GDP growth rate of

3%.

1990-983.7% & 3.3%

The service sector of India grew at 6.9% and 7.9% during the above

periods, compared to the corresponding GDP growth rates of 5.8% and 5.9%. The

share of services in the GDP of India increased from 39% 1980 to 46% 2000.

The growing importance of services is reflected in the international trade

too. Between 1970 and 1990 international trade is services increases by an average

of 12% & 8% during 1990-97.

The growth rate of trade in services has been faster than that of goods.

Growth in services and in additions the electronic commerce has added to the new

trade pattern. Exports of commercial services have been borrowing on every

continent throughout the 1990s.

Services are used in production of goods and other services. Due to

competition in services there is reduction of prices and improvement in quality.


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Contribution of service to value added as % of GDP.

Region/country 1980 1990 1999

World 56 60 61

High Income Economics 59 64 64Low and Middle Income economies

(developing countries)

42 46 54

India 39 42 46

Trends in GDP

Govt. expenditure as % of GDP

10% in 20th century

20% in 1960

50% in 1995

In developing countries, the central govt. expenditure was nearly 15% of

GDP.

1960 in 1990 it was double of 1960.

19971998Economy growth

20014.4% total industrial stood at 2.7%

2002-034.0%

2002035.7% increase

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

industrial production by 7.0%.


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UnitIII

Monetary and Fiscal Policy

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

1. Prices in free market fluctuate (govt. debits and credits)2. Balance of payment is in disequilibrium3. Involuntary unemployment4. Inequality in distribution of income and wealth5. Sluggish economic growth

I. The Monetary Policy

Def: Hary G. Johnson: Policy employing the central banks control of the supply of

money as an instrument for achieving the objective of general economic policy.

According to economists:

Monetary policy is the changes in the supply of money.

Credit policy is the changes in the supply of credit (different in broader sense)

Both policies

1. Central Bank administers both2. Instruments of control are some at aggregate level3. Determines the supply of money as well as the supply of bank credit

Main objectives are:

1. Maximum feasible output2. High rate of economic growth3. Fuller employment4. Price stability5. Greater equality in the distribution of income and wealth


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6. Health balance of payments

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

There are two theories.

1. Keynesian theory

It states that changes in the money supply work their way through the

system in a way that does not result in a close and stable linkage between changes

in the money supply and changes in the level of income.

2. Monetarist theory:

See the close and stable linkage. The monetary transmission mechanism is

the mechanism by which changes in the money supply produce effects that interact

with the real sector to create changes in income and in the price level. Two

primary mechanisms is applied,

Portfolio Mechanism: The way monetary policy affects the assets portfolio of

households and firms. This consists of two major schools of thought.

1. The Keynesian school: Treats changes in the market rate of interest that result

from changes in money supply as the significant aspect of the monetary policy. It

emphasizes on credit effect. To understand this, the households keep their

resources in the form of cost, financial assets (bonds, securities, shares and real

assets (plants and buildings, apartments and land etc.)

Assume that,

Central Bank of the country conducts an open market (exchange) purchase

and increase the money supply. With this cash balance is increased in individual

portfolio and securities with them are exchanged for the central bank notes. This


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creates temporary imbalance of excess cash. To correct this they buy financial

assets. This will continue until no further substitution can be made and is

profitable. By this substitution they increase the value of these assets and reduce

market rate of interest. The reduced rate of interest will inturn encourage the firmsto increase via the investment multiplier. The money supply increase demand

increase national income and product via changes in the market rates in interest.

2. The Monetarist School: The direct change in the money supply as the most

relevant aspect of monetary policy. They follow Keynesian school but do not hold

the changes in the interest rate as a pre-requisite for the changes in the demand for

goods and service.

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

on real assets. They regard money and real assets as close substitutes. The

household maintain a desired stock of money relative to their income. The

monetary policy changes cause the actual stock to differ from the desired stock

and household always want desired stock of income and money balance. This

directly changes the level of aggregate demand, income and prices.

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

is a portfolio adjustment involving a movement out of money directly into goods.

The end result may need not be change in interest rate at all, it may be a change in

the general price level on its output.

II. The Wealth Mechanism: Its based on the manner in which changes in the

quantity of money affect non-human wealth and how this in turn affects aggregate

demand.

Where, WNH = H + PNK


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I. Quantitative measures of monetary controlII. Qualitative and selective credit controls

I. quantitative measures of monetary control:1. Traditional measures are open market operations

Effectiveness of Open Market Operations

1. When commercial banks possess excess liquidity the open market operationdoes not work effectively.

2. During the period of depression, open market, operations are not effective forlack of demand for credit.

3. Open market has limited effectiveness due to under developed security andcapital market.

4. Govt. bonds & securities are not popular due to low rate of return.

II. Discount Rate (on Bank rate policy)

Is the rate at which the Central Bank rediscount the bills of exchange

presented by the commercial banks.

The RBI Act, 1935, defines Bank rate as the standard rate at which (the

bank) is prepared to buy or rediscount bills of exchange or other commercial

papers eligible for purchase under this act. It rediscounts only approved bills and

the first class bills of exchange.

Why Rediscount?

When commercial banks, faces a shortage of cash reserves, they approach

the Central Bank to get their bills of exchange rediscounted. . Of its functions

it is lender of lost Resort Central Bank. For rediscounting the bills of exchange,

the central bank changes the rate. This rate is traditionally called Bank rate or

discount rate.


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Bank Rate is the rate which the Central bank charges on the loans and advances to

the commercial banks.

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

whether it wants to expand or contract the flow of credit from commercial bank. It

credit creation capacity reduces discount rate and vice versa. This is called

Bank rate policy or discount rate policy. This was first adopted by Bank of

England in 1839. It was an effective bank of market was introduced in 1922.

Generally, the Central Bank rate is 1% point higher than the discount rate

charged by the commercial banks. E.g. Central banks want to control the flow of

bank credit, to achieve this objective, it will raise the discount rate. This action of

the Central Bank reduces the flow of the credit in three ways.

1. Discount rate (interest rate) decrease net worth of govt. bonds (treasurybills and promissory notes), against which commercial banks borrow funds

from the Central Bank. Reduces the banks capacity to borrow.

2. When discount rate of Central Bank , Commercial Bank raises theirdiscount rate. DR, cost of credit, discourages business sector to get

their bills of exchange discounted. It also interest rate structure and

decrease demand for funds. This policy is called Dear Money Policy. A

reverse process is cheap money policy.

3.

Bankers lending rate is adjusted to deposit rate.

Bank rate,

deposit rate.This turns borrowers into depositors, savings in bank are in form of

deposits.

Limitations


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1. Effective only when commercial bank borrows from Central bank, becausethey have their own financial resources.

2. With growth in credit institutions & financial intermediaries, the CapitalMarket has widened. The share of banking credit has declined.

3. Variations in the discount rate become effective only where demand yourcredit is interest elastic.

iii) The CSR & SRR: Cash reserve ratio, CRR is the percentage of total deposits

which commercial banks are required to maintain in the form of each cash reserve

with the Central Bank.

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

and keep only small ratio in the form of reserves.

CRR is non-interest bearing often keep their cash reserves below the safe

limits. It might lead to financial crisis in banking sector. Central bank imposes

CRr, to control money supply. It controls legal powers to change. It is a legal

requirement. Therefore it is called statutory reserve ratio, SRR. When economic

conditions demand monetary contraction the Central bank cRr, when it demands

monetary expansion, Bank decrease CRR.

E.g. If deposit of commercial bank = Rs. 100 Million, & cRR = 20%

a) Banks can loan Rs. 80 millionb) Credit or deposit multiplier = 5

100 x 5 = 500 million or

80 x 5 = 400 million

If money supply decrease CRR increase by 25%, credit, multipliers

decrease = 4.

Loan = Rs. 75 M (100-25) = 75 M

Total Credit = 400 m


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& Additional credit = 75 x 4 = 300 M

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

then situation changes.

SLR: Statutory Liquidity Ratio

The proportion of total deposits which commercial banks are required to

maintain with them in the form of liquid assets (cash reserve, gold & govt. bonds)

in addition to CRR.

II. Qualitative or Selective Credit Controls

The qualitative methods of monetary control affect (when effective), the

entire credit market in same direction. They lead either to expansion or to

contraction of the total credit. The impact is uniform. Authorities face problems

like,

i) Rationing the creditii) Diverting the flow of credit from non-priority sectorsiii) Curbing speculating tendency based on the availability of bank

credit.

These are not served well by quantitative measures, qualitative or selective credit

controls is used.

i) Credit Rationing: When there is shortage of institutional credit available for the

business sector, the large and financially strong sectors or industries tend to

capture the lions share, in the total instalments. Credit priority sectors and weak

industries are starved of necessary fund and bank credit goes to non-priority

sector.


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a) Imposition of upper limits on the credit available to large industries andfirms.

b) Charging higher interest rate on bank beyond a certain limit.

ii) Change in lending margins:

Banks lends Jew % only on value of the mortgaged properly. The gap

between the value of the mortgaged property and amount advanced is called

lending margin. E.g. if value of stock = Rs. 10 M, amount advanced = Rs. 6 M,

Lending margin = 40% [can be increase in central bank with view to increase or

decrease credit].

This was used by RBI first time in 1949. objective is to control speculative

activity in the stock market.

By 1956, extensive use in scarce agricultural products like food grains,

cotton, oil seeds, vegetable oil, sugar, Khandsari and gur, cotton textile and yarns,

decrease price secures loans. This increases the buying, power and stocking and

future mortgaging and borrowing.

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

India.

iii) Moral Suasion

Method by persuading and convincing the commercial banks to advance

credit in accordance with the directive of the central bank in the economic interest

of the country. But not effective in underdeveloped country. In this method, the

central bank writers letters to and holds meetings with the banks on moey and

credit matters, with clear directive to the banks to carry out their lending activity

in a specified manner.


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Limitations of Monetary Policy:

1. The time lag: the time taken in checking out the policy action, itsimplementation and working time. Its divided into two parts:

i)

Inside tag or preparatory lag:a) Identifying nature of probabilityb) Identifying sources of probabilityc) Choice of appropriate policy actiond) Implementation of policy action

ii) Outside lag or response lag:The time taken by households and the firms to react in response to the policy

action taken by the monetary authorities. This lag is long.

2. Problems in forecasting

Reliable assessment of magnitude of the problem recession or inflation as it

helps in determining the appropriate policy measures.

3. Non-Banking financial intermediaries:

Structural change reduces effectiveness of monetary policy. Although

financial intermediaries cannot create credit thro the process of credit multiplier,

their huge share in the financial operations reduces the effectiveness of monetary

policy.

4. Under development of money & capital market

Effectiveness of monetary policy is less developed countries is reduced

considerably because of the under developed character of their money and capital

markets.


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FISCAL POLICY

Def: As the govts programme of taxation expenditure and other financial

operations to achieve certain in national goals.

Objectives:

1. Eco growth2. Promotion of employment3. Economic stability & higher priority4. Eco justice or equity

Two instruments used are taxation and public expenditure.

I. Indias taxation policy 1950-1990:

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

independence period.

Role of RBI in Regulatory Banking Sector

The structure of Indian Banking System evolved during the pre-

independence period without any control and direction. The country had no

Central Bank prior to establishment of RBI.

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

certain central banking functions such as acting as bankers bank and banker to the

govt. the Central govt. had the sole authority to issue currency. But the result was

unsatisfactory for the development of the money market and commercial bank.

RBI was originally established as share holders bank in 1935 with the

nationalization in the west central government on January 1, 1949 acquired entire

capital and became a state owned institution.


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Functions of RBI

I. General Central Banking Functions:

The model for RBI is the Bank of England and its Central banking

functions are similar.

2. Issue of currency notes

Originally provision was for issuing currency notes according to

proportional reserve system but not elastic and did not suit the developmental

planning.

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

minimum reserve system of Rs. 515 CR (Rs. 400 Cr in foreign securities, Rs. 115

Cr in gold coins) was to be kept. The provisions regarding maintenance of reserves

was again amended on October 31st 1957, which foreign exchange reserve to Rs.

200 G,. of this value of good was not to be at any time less than Rs. 115 Cr.

2. Bankers to Govt.

It is bankers agent & advisor. The RBI has obligations to transact the

banking business of the central and state govts. It accepts money and makes

payment on the govt. behalf and carry out exchanges and remittances, manages the

public debts and issues new loans.

RBI [Govt]

1. Advices Govt. on quantum and terms of new loans2. Sells treasury bills3. Makes wages and means of advance short term loans, repayable within 90

days from the date of advance.


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

mobilization.

3. Bankers Bank:

Controls commercial banking system under the RBI Act, 1934 and Banking

Regulation Act 1949. Assists scheduled commercial banks [Banks where affairs

are not conducted in a manner detrimental to depositors interest must maintain a

cash reserve (as decided by RBI). With RBI against their demand and time

liabilities RBI can also direct the bank to maintain 100% CR against all deposits

received after a specified date; these banks should submit weekly statement of

their transactions to the RBI] and state Co-op. Banks. RBI considers factors such

as the financial its tending policy and securities offered. While making advances

to it. It can deny residenting without any reason.

The regulatory functions of RBI under Banks Regulatory Act 1949 are:

1. Licensing of Banks2. Branch Expansion3. Liquidity of assets of commercial bank4. Management and methods of working5. Amalgamation6. Reconstruction and liquidation

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

reserve system of Rs. 515 Cr (Rs. 400 cr in foreign securities Rs. 15 Cr in gold

coins) was to be kept. The provisions regarding maintenance of reserves were

again amended on October 31, 1957 which reduced. The amount of gold (coin and

billion) and foreign exchange reserve to Rs. 200 Cr, of this value of gold was not

take at any time less than Rs. 15 Cr.


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2. Banker to the Govt.

It is banker, agent and advisor. The RBI has the obligation to transact the

banking business of the central and state government. It accepts money and makespayment on the govt. behalf and carry out exchange and remittance, manages

public debt and issues loans.

RBI Govt.

1. Advices govt. on quantum and term of new loans2. Sells treasury bills3. Makes ways and means of advance short term loans, repayable within 90

days from the date of advance.

4. SBI is the sole agent for transacting govt. receipts and payment5. Advices on banking policies, financial matters.

Developmental activities

RBI established the deposit insurance corporation of India in 1962 with the

12% of period of security to deposits.

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

offers the advantages of reduced risk, steady income, liquidity etc. Assisted

development of short term coop credit for agri and also participated in establishing

the agri refinance and development coop covers in 1963. Half of capital (Rs. 100

Cr) of NABARD has been provided by the RBI.

Control of Credit by RBI

RBI Act of 1934 & BR Act of 1949

RBI like any central bank resort sto bank rate manipulations, open market

ops, reserve requirement changes, direct action, rationing of credit and moral


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suatium. It also influences commercial banks lending policy, rate of interest, form

of securities against loans and portfolio distribution.

Stabilises external value of Rupee and therefore its function is of ancustodian of nations foreign exchange reserves. Its obligatory for the RBI to

budget sell currencies of all IMF members.

5. Credit control

Has all authority to use qualitative and quantitative methods of credit

control, but are ineffective.

6. Agricultural Finance

Other integrated scheme of agriculture credit was implemented, RBI role

from lender of last resort changed to that of an active agency for promotion of

appropriate specialized agencies of agricultural, finance the setting up of

NABARD in 1982.

7. Collection and publication of data

The RBI has been entrusted which the task of collection of compilation of

statistical into related to banking and other financial sectors of economy. RBI

bulletin monthly presents was only above function but also provides results

important studies and investigations conducted by RBI. Report on currency and

finance is an annual publication which provides comprehensive review of various

development of economic and financial importance.


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Effectiveness depends on 3 factors

- Commercial banks in the country should not be oversee to availingrediscounting facility from the central bank.

-

Bank do not maintain any excess can be reserve agreement deposit and ifextra ordinary demands are made by the depositors, they should get bills

rediscounted from central bank.

- Banks must hold adequate quantity of such credit instruments which will berediscounted by the central bank as per the legislation.

- Last two conditions are not satisfied in India. Firstly commercial bank arenot much dependent on RBI for financial assistance.

- Sedcondly in the absence of a will organize bill market, they lack adequatequantity of eligible bill which can be rediscounted from the RBI. Carries of

money market each pre requisite for the success of RBI bank rate policy.

Open Market operations

RBI can authorizes the RBI to conduct purchase and sale ops in the govt.

securities, treasury bills and other approved securities. The silver several little

purposes. RBI has been extensively undertaking Switch operations (purchasing

of one sale of another or vice versa).

Fiscal Policy

Def: Is the governments programme of taxation, expenditure and other financial

operations to achieve certain national goals. The objectives are derived from the

aspiration and goals of the society.

Objectives are:

i) Economic growthii) Promotion of employmentiii) Economic stability &


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iv) Economic justice or equity

These objectives vary from country to country and from time to time. The

objectives are growth, employment and equality. The two basic instruments thatare used to achieve the social goals are taxation and public expenditure.

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

development as well as defence requirements. There is fiscal bias. RBIs sales of

govts securities has been kept up by imposing a statutory condition on various

financial institutions to invest a portion of chair income/deposits in the govt. and

other approved securities. Now RBI doesnt purchase securities against each

payment.

CRRRBI Act 1956RBI acquired the power to change reserve requirement of

CBs between 5 & 20% in reserve respect of their demand liabilities between 2 &

8% in respect of their time liabilities. RBI direct scheduled bank to keep certain

reserves of their liabilities created after a specified date in cash.

RBI Act was again amends in 1962 which fixed CRR at 3% for all

liabilities. Range is 3-15%. This tech is been implied for last 2 decades for

controlling inflation.

SLR: BR Act 1949, enabled the CBs to liquidate their govt. security holdings

wherever RBI increase CRR. The logphole was what a minimum of 25% SLR

could be maintained. RBI can raise amounts 15%

System of different rates

In 1960 RBI introduced a system of lending rates on slab basis. It was

effective for 4 years till it was replaced by her liquidity ratio system.


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Formulation of Tax Policy

Tax policy existed due to recommendations of dozens of tax enquiry

committees and review panels and deliberations on the recommendations in the

parliament. It is formulated, reformulated to make it fair, equitable and efficient.This started in early 1950s by appointment of a number of committees.

1. Taxation Enquiry Committee (TEC) 1953-54 to suggest suitable taxmeasures for mobilizing additional tax revenue.

2. Nicholas Kaldor Committee 1956 under chairmanship of Prof. NicholasKaldor, tax expert of Britain to suggest new tax measures to augment govt.

revenue.

3. Direct Taxes Administration Committee: (Tyagi Committee) 1958i) A scheme of integration of direct taxesii) To prevent tax evasioniii) To simplify the procedure of tax complianceiv) The committee on rationalization & simplification of the tax

structure (Bhoothalingam committee)1967 to suggest measures

to reform the tax system and to prevent tax evasion.

v) Direct taxes enquiry committee (Wanchoo committee) 1971 tosuggest tax reform measures to prevent tax evasion.

vi) Indirect taxation enquiry committee (Jha Committee) 1976 To find and examine the sources of anomalies on the indirect tax

system and to explore the possibility of implementing Value

Added Tax (VAT) system in place of excise duties.

vii) Direct tax laws committee (Chaksi committee) 1978 to suggestmeasures to simplify and rationalize tax laws to improve the

implementation

viii) Basic Function of tax policy: Tax policy was designed to performtwo basic functions.


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Indias Taxation Policy 1950-1990

Was formed primarily to meet the financial needs of the country in thepost-independence period. The problem faced was how to mobilize adequate

financial resources to finance the development programmes chalked out in 5 year

plans. Financial resources has to be increased 4 times, so that rate of capital

formation could be stepped up from 5% of national income to say 20%. The

known source of development finance taxation, domestic borrowing, external

borrowing on foreign aid had the potentials of yielding adequate development

finance. Taxable potential was very low as income was low and per capita

borrowing was lower. The repayment near slow. So taxation policy was

formulated.

Revenue function

Revenue collection is the primary objective of Indias tax policy. The state

and central government levies taxing power extensively and intensively. The taxes

imposed are from 1950,

1. estate duty2. Wealth tax3. Gift tax New in 19504. Expenditure tax5. Capital gains tax

A tax rates were imposed on direct indirect taxes. Central Excise duty is imposed

on all imaginable non-agriculture products. High import duty is imposed on almost

all items of exports.


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Estate government imposes tax on

1) Agricultural income tax on large holding tax2) Surcharge of cash crops3)

Profession tax

4) Tax on urban property5) Sales tax on motor spirit6) Motor vehicle tax7) Tax on passengers and goods, entertainment

Industrial Finance

Sources of finance for small and medium scale industries

Both medium and small scale industries require capital for plant and

machinery, production and final disposal. The capital varies in rural areas they

have to borrow from money lenders or land owners and pay high interest rate. In

urban areas, capital is better mobilized. The banks charge rate of interest often

ranging between 24 to 36% and not be able to raise necessary capital.

a) Loans by Commercial Banks

For long time CBs did not bother small and medium scale industries. SBI

with RBI took the initiative of setting up a pilot scheme for the provision of credit

for small scale industries. The schemes was extended to all branches of SBI.

Others CBs were slow in lending by March 1966 they had made advances amount

to Rs. 90 crores to small units with nationalization more advance to S & M

industries.

b) Credit Guarantee Scheme for S & M I

Came into force in July 1980. this is a important phase, the objective of the

scheme was to provide a measure of protection to specified banks irrespective of

their loans to small borrowers in the priority sectors of S & MI. the administration


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was with RBI, but was transferred to the Deposit Insurance & Credit Guarantee

Co-op (DICGC). This operates 5 schemes4 for small borrowers and one for S &

MI. The advances to small borrowers is Rs. 25,600 crores. 515 Credit institute are

participating in the 5

th

scheme.

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

Was set up in February 1955, for the purpose of assisting, financing,

protecting and promoting the S / I in India.

Functions are

1. To secure govt. order for output of SI unit.2. To provide financial, technical and other assistance to fulfil orders.3. To secure coordination between large and small scale industries to enable

small scale. In order to manufacture ancillaries and component parts

required by the large-scale industries.

4. To underwrite and guarantee loans from banks and other credit institute.

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

surveys and secures contracts from central government.

SIDBI

Set up by Govt. of India under a Special Act of the Parliament in April

1990 as wholly owned subsidiary of SIDBI. It has taken over the outstanding

portfolio of IDBI relating to the small scale sector worth over Rs. 4,000 crores.

Authorised capital of SIDBI is Rs. 250 crores which can be increased to Rs.

1,000 crores.

Role:

1. Principal interest for SBI


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2. Coordinate functions of other banks and financial institutions3. Administer small industries for fund and national equity fund.

Functions:1. Refinances loans and advance extended by primary lending institute and

provide resources support system.

2. Rediscount on discounts bills arising from sale of machinery.3. Grants direct assistance as well as refinance loans extended by primary

lending institute for financing export of products manufactured by last for

industrial concerns in SSI.

4. Extends financial support to state small industries development corporationfor providing scarce raw materials to marketing the end products of

industrial units in the SSI.

5. Provided financial support to NSIC for providing leasing, hire purchase andmarketing support to IU.

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

Technical upgradation and modernization of existing units, expanding channel for

marketing.

Mission:

1. Stimulate the promotion of new industries2. Assist the expansion and modernization3. Furnish technical and managerial aid

1. Long term or medium term loans, both rupee loans and foreign currencyloans.

2. Participates in equity capital and in debenture and underwrites new issuesof shares and debenture.


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UTIUnit Trust of India

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

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

Initial capital was 5 Crores which was subscribed fully by RBI, the LIC, the

SBI and scheduled banks and other financial institutions. The management and

direction is entrusted in the hands of the trust and in hands of Board of Trustees.

Primary objective: [two fold]

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

industrialiszation in the country.

It could be achieved in three fold:

1. By selling units of the trust among as many investors as possible indifferent parts of the country.

2. By investing the sale proceeds of the unit and also the initial capital fund ofRs. 5 crores in industrial and corporate securities.

3. By paying divides to those who have bought the units of the trust.


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Industrial Reconstruction Bank of India (IRBI)

Was set up in 1971 April an institution named IRCI Industrial

Reconstruction Corporation of India under Indian Companies Act to look aftersick industries and for speedy reconstructions and rehabilitation and developing

infrastructure facilities like transport and marketing etc.

On August 1984, the Govt. of India passed and act converting the IRCI into

Industrial Reconstruction Bank of India (IRBI). IRBI was established in March

1985, for revival, assisting and promoting industrial development and

rehabilitating industrial concern. IRBI extends credit to sick small scale units

emphasis on continuous modernization, improve productivity and upgrade

technology.

ExportImport Bank of India

Commonly known as Exem Bank, was set up on January 1982 to take over

operations of the internal financial wing of the IDBI (to provide financial

assistance to exporters and importers). It provides refinance facilities to CBs and

FI against exportimport.

Capital Resources

Authorized capital of Exim Bank is Rs. 200 cror

business environment 4

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