UNIT – 1: BUSINESS ENVIRONMENT UGC NET COMMERCE PAPER...

UNIT – 1: BUSINESS ENVIRONMENT UGC NET COMMERCE PAPER II

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UGC NET COMMERCE PAPER II

UNIT I - BUSINESS ENVIRONMENT


[2]

SUBJECT – COMMERCE

SUBJECT CODE – 08 UNIT - I

CONTENTS

Chapters Titles

1

Business Environment

2 Economic Environment, Policies and Planning

3 Legal Environment

4 Competition Policy & Environment Protection

5 Policy Environment

6 Liberalization, Privatization & Globalization

7 Second Generation Reforms

8 9

Industrial Policy MCQs


DR. GAURAV JANGRA

Business: Business is an economic activity performed by business firms or organisations often with the objectives of

maximising profit. This objective is supplemented by other objectives such as sales maximisation, growth

maximisation, maximisation of market share, maximisation of own benefits by the managers, building up an

image, and social responsibility. The economic activities performed by business organisations include

production (transformation of inputs into outputs), distribution (supply of output in a marketplace) and sales (exchange of products with buyers for money).

Profit Maximisation: Profit maximisation which is one of the main objectives of business organisations, requires maximisation of

revenue. However, resources in the hands of business organisations are limited. Therefore, firms face the

challenge of allocating existing resources among alternative uses in such process of allocation and profit

maximisation.

Business Environment and Its Components The term Business environment refers to all those factors that are external to a business unit, but impact

business decisions. The business environment is surrounded by the two components of environment, viz. micro business environment and macro business environment.

TYPES OF ENVIRONMENT:

1. Micro Environment: The micro business environment, also known as task environment, refers to the immediate

surroundings of the business. It not only affects the operations of the firm but also gets influenced by

its decisions and actions.

“The micro environment consists of the actors in the company’s immediate environment that affects the

performance of the company. These include the suppliers, marketing intermediaries, competitors,

customers and the public’s.”

1. Public:

It consists of all those parts of society which can directly or indirectly influence an organisation’s

ability to achieve its objectives. Public opinion is important for a company as it can either strengthen

or weaken its brand image. For example, satisfied customers are a public that spread good image about

the products through word of mouth. On the contrary, activist, consumer forums, non-government agencies and even media protesting against the environmental damage done by a company is a public

that can tarnish the image of a company, and weaken its brand image. Thus, managing public opinion

is a crucial task for any company.

2. Suppliers:

They are the agents who supply inputs, such as raw materials and intermediate goods to an

organisation. They play an important role in operational efficiency. A delay in the supply of inputs

can delay all the subsequent operations and the firm may fail in timely delivery of its products to

customers, resulting in consumer dissatisfaction and even losing them forever. Therefore, managers

need to assess the ability of suppliers for their ability to supply inputs in the required quantities in a

given time frame.

3. Bankers and Financial Institutions:

Financial Intermediaries include bank insurance companies and credit agencies that help companies

raise finance as well as insure against various types of risks involved in production and other business

operations.

4. Competitors:

Competitors are rivals who compete with an organisation in the market place. Except monopoly

market structure, firms in all other market structures have one or more competitors for their products.

As the number of competitors increases the competition becomes intense. Competitors not only compete for customers but also for talented staff. To prevent customers and employees from shifting to

CHAPTER 1

BUSINESS ENVIRONMENT


DR. GAURAV JANGRA

the competitors, a company needs to continuously assess consumer taste and preferences, and design

the products accordingly. It also needs to design retention strategies so that the talented staff can be

retained for a longer time.

5. Market Intermediaries:

Marketing Intermediaries consists of service agencies and financial intermediaries. Service agencies

include marketing research and consultancy firms, advertising agencies and media firms. These

agencies help consumers identify the target population and market products in most efficient and

influential manner.

6. Consumers:

Consumers comprise individuals and households that buy goods and services for personal

consumption. Consumers are the most important constituents of the micro business environment as

they are the demand side of the market. Without them companies cannot do their business?

Identifying customer needs, retaining customers, and extending products and services to them

throughout their lives are important challenges for business organisations.

2. Macro Environment: Macro business environment refers to the general environment. It though influences business

decisions, is not affected by the functioning of a business unit, making it an uncontrollable factor.

The macro environment consists larger societal forces that affect all the actors in the company’s micro

environment – namely, the demographic, economic, natural, technical, political and cultural forces.”

Social and Cultural Environment: a. Social and cultural factors in various countries of the globe affect the international business. These

factors include attitude of the people to work, attitude to wealth, family, marriage, religion, education, ethics, human relations, social responsibilities etc.

b. Culture:

Derived mostly from the climatic conditions of the geographical region and economic conditions of the

country.

A set of traditional beliefs and values which are transmitted and shared in a given society A total way of life and thinking patterns that are passed from generation to generation. Norms, customs, art, values etc.

Technological Environment: A given set of technologies available for the conduct of business determines the technological environment

of business. Technology is the application of science, art and other fields of knowledge in various activities

such as designing tools and equipments, producing goods and supplying services, communicating

information and enhancing productivity.

Technological advancements are driving force behind the global developments for centuries, but they are

much more rapid in the present era, making the global environment highly dynamic and challenging.

Economic Environment: Economic environment of a country is affected by the economic system, planning process,

economic structure, business fluctuations, and trends in macroeconomic variables, economic policies

and international economic environment. These various constituents of economic environment are

detailed as follows:

a. Economic System:

It is a set of institutions, principles and mechanisms created by a society to facilitate economic units to address their basic economic problems of allocation of scarce resources and perform their basic

economic activities. Every organised society follows some or the other economic system.

On the basis of ownership of resources, economic systems are classified into capitalism, socialism and

mixed economies. Whereas on the basis of market mechanism, the systems are classified as market

economies, planned economies and mixed economies.

b. Planning Process:

Planning is needed for an efficient allocation of resources, which are limited in supply, among alternative

uses. The planning process is an integral part of communist and socialist states. However, retaining their


DR. GAURAV JANGRA

basic free market structure, even capitalist economies use planning to some extent. At present, all countries

have mixed economic systems and follow planning, to a smaller or greater extent, to stimulate the level of

investment, encourage technological innovations, use the resources as per national priorities and evolving economic situation, and reconcile the process of economic growth with the overall socioeconomic

development of the country.

c. Economic Structure:

Economic System defines the institutional framework, whereas economic structure defines the physical

framework under which an economy and business units operate. The economic structure is determined by

the factors such as total population size, per capita income, demographic profile, factor endowment,

technological advancement, and is reflected in the sectoral composition of output and employment, fiscal, financial and trade structure, and population structure.

d. Business Fluctuations and Cycles:

Countries, world over, face wide cyclical fluctuations in output, prices, employment, and other

macroeconomic variables due to the fluctuations in various components of aggregate demand and supply. Business fluctuations are recurrent, occur around a long-term growth and of short duration, but without a

fixed periodicity. There are broadly three approaches – conventional business cycles, growth cycles and

growth rate cycles that are used for measuring these fluctuations.

Legal Environment / Political Environment: The functioning of a company impacts its internal stakeholders such as shareholders, managers and

workers as well as external stakeholders such as suppliers, consumers and the community at large. Different

stakeholders have different interest in the working of an organisation. At times, these interests may conflict

with each other. For example, textile industry, trying to maximize its profit, may not internalize the cost of

pollution of the nearby water bodies where it’s used chemicals are discharged. Such discharges may affect the

livelihood of those who are dependent on marine life for their earnings. Hence, world over, the governments

enact laws to resolve conflicting interests and minimise the harmful impacts of the functioning of companies.

Demographic Environment: Demographic environment is determined by population size, density, age composition, gender

composition, occupation pattern, education level, family size and structure, and many such attributes of the

population.

Demographic environment affects both demand and supply sides of a market. It affects the demand

side as human beings are consumers of most of the products sold in a market. The total size of the population

affects the total demand for a product, whereas many other attributes of the population such as age and gender composition and economic stratification affect product mix. For example, age composition in favour of the

child population creates demand for educational material, toys and baby products. Similarly, gender

composition in favour of females signifies that there is a likelihood of more demand for cosmetic and other

products demanded by the female population. On the supply side, population size, migration and mobility, and

age structure determine the supply of labour, which is an important factor of production, whereas education

profile affects the labour quality and productivity.

Natural Environment: It consists of all natural resources such as raw material, and energy sources such as water, air and

climate. The business has two way relationships with the natural environment. First of all, natural environment

is a source of many raw materials of almost all business organisations. A region, prosperous in the natural

environment, can provide natural resources in abundance and at a cheaper rate; and thus, becomes attractive for

business units. For example, in the recent period, many multinational organisations are attracted towards the

African Continent primarily because of its natural resource abundance. Second, natural environment itself is affected by business activities adversely. Often, in their drive to maximize profit, business units exploit natural

resources without bothering about the environmental damage their activities may be causing. The damage is not

only due to the unhindered extraction of natural resources but also due to emission of hazardous pollutants in the

air and discharge of toxic waste in the water. Environmental damage is not only harmful for human beings but

also for other sources of life.

………………………


DR. GAURAV JANGRA

Economic Environment In an economic environment a qualitative evaluation of several key economic factors is

undertaken to predict the success of a business venture. These factors and government policies affect a

lot to any kind of organisation in the future decision-making planning without objective is to drive

without any destination, so it is a important aspect of business.

Business is affected by various environmental factors viz, economic, social, political,

technological, demographic and international environment out of them, economic environment is the most important factor affecting the business. Economic environment refers to those factors, which

have impact on the working of business. It is composed of various set of economic policies, economic

system, strategy of economic growth and development, resource endowment, size of market, distribution of income and wealth, status of infrastructural facilities in a country. Economic

environment is dynamic and complex in nature. It keeps on changing from time to time with the

changes in an economy like change in government policies, political situations etc.

Elements of Economic Environment It has mainly five main components

1. Economic Conditions Economic policies of a business unit are largely affected by the economic conditions of an

economy. This keeps on changing over time in line with the economic and business cycle, as an economy goes through expansion and contraction. A country’s economic conditions are influenced by

numerous macro economic and micro economic factors, including monetary and fiscal policy,

unemployment levels, levels of current account and budget surpluses or deficits, GDP growth rates,

inflation rates, exchange rates, the state of the global economy and so on. Any improvement in the economic conditions such as standard of living, purchasing power of

public, demand and supply, distribution of income etc largely affects the size of the market.

Business cycle is an another important economic condition that has five different stages viz 1. Prosperity 2. Boom 3. Decline 4. Depression 5. Recovery

2. Economic System

Different Stages of Business Cycle

The way that each individual lives in a society is based on how the country handles

problems and questions involving their economy. Each country operates under some

economic system, which differs significantly and based on utilisation of then-resources for the purpose of satisfying the needs and wants of people. The central problem of an economic

system is the allocation of resources.

Chapter-2

Economic Environment, Policies and Planning


DR. GAURAV JANGRA

According to WW Loucks, "An economic system consists of those institutions, which is

given nation or group of nations has chosen of accepted as the means through which their resources

are Utilised for the satisfaction of human wants." To a great extent economic system of a country

determines its economic environment, in which the organisation has to survive. Infact, business has no choice, but to adjust itself within the framework of the given economic system.

Types of Economic System 1. Market Economy/Capitalism

The economic system, in which business units or factors of production are privately owned and governed is called capitalism. The profit earning is the sole aim of the business-units.

Government of that country does not interfere in the economic activities of the country. It is also

known as free market economy. .

According to GDH Cole, Capitalism is that profit-oriented system, which is characterised by

private ownership of objects of labour, instruments of labour and means of labour. Production is mainly carried out with the help of labour services rendered by the working class in return for wages

and the class of capitalists has the right to whatever output is produced within the system. Examples

of capitalistic economy: US, Japan, Canada, Mexico etc.

Characteristics of the Capitalist System

1. Private Ownership In a capitalist economy, the factors of production- land, labour and capital are privately owned and production occurs at private initiative. Individuals have their property rights

protected and are usually free to use their property in a way they like.

2. Inheritance This right allows the owner to transfer his/her property to his/her heirs after his/her

death. It facilitates the transfer of capital from one generation to another thereby making the

capitalist system.

3. Free Enterprise The term free enterprise implies that private firms are allowed to obtain resources

to organise production and to sell the resultant product in any way i

they choose.

4. Consumers' Sovereignty Under this economy consumers have complete freedom of choice of

consumption. Market economy is based on the consumers' desire, which is reflected in the demand pattern.

5. Profit Motive In capitalist economy, the entrepreneurs choose produce those goods and services

which will yield them greater profit.

6. Competition In a free market economy, there are a large number of buyers and sellers. Profit

motive induces new firms to enter the market thereby increasing competition. Competition reduces market imperfections and related problems.

7. Price Mechanism The price system regulates the capitalist economy, all decisions concerning

production, distribution and exchange are based on the price mechanism. Producer are free to fix

up prices of their products and consumers are free to offer prices at which they want to buy.

8. Role of the Government Government has no role in economic activities. Capitalism believes government is an evil necessary and that government is the best which governs the least.

9. Freedom of Choice of Occupation In a capitalist economy the individual is free to choose any

occupation he is qualified for. This freedom of choice enables the worker to make the best possible

bargain for his labour.

10. Freedom to Save and Invest The freedom to save is implied in the freedom of consumption.

2. Command Economy/Socialism Under socialism economic system, all the economic activities of the country are controlled

and regulated by the government in the interest of the public. Under this economic system


DR. GAURAV JANGRA

government appoints a central planning authority that takes all economic decisions and formulates an

exhaustive plan to achieve the set objectives.

According to Paul M Sweezy, "Socialism is a complete social system, which differs from

capitalism not only in the absence of private ownership of means of production, but also in its basic

structure and mode of functioning." The first country to adopt this concept was Soviet Russia. Countries like China, Vietnam,

Cuba etc have economies based on socialism.

The two main forms of socialism are

1. Democratic Socialism All the economic activities are controlled and regulated by the

government, but the people have the freedom of choice of occupation and consumption.

2. Totalitarian Socialism This form is also known as communism. Under this, people are obliged to work under the directions of government.

Characteristics of Socialist Economic System

1. Government Ownership In socialist countries, all important means of production are either

owned by the government or their use is controlled by the government. Private ownership is

nominal.

2. Central Authority The socialist economies generally have a central authority like the central

planning agency to formulate the national plan for development and to direct resource mobilisation, allocation and investment to achieve the plan targets.

3. Social Welfare The socialist economic system works for the benefit of the whole society rather

than merely for the private benefit of individuals. There is absence of profit motive and the

ultimate objective is to maximise social welfare.

4. Restriction on Occupation The freedom of occupation is absent or restricted in socialist

countries.

5. Fixation of Wages and Prices The wages and prices in a communist economy are fixed by the

government and not by market forces. Non-communist socialist countries may also fix wages

and prices by certain means.

6. Absence of Competition Since the state owns all the major means of production, there is no

competition between the different production units.

7. Equality of Opportunity Every member of the society is given equal opportunity to rise in life.

The state provides health care and education facilities to those, who cannot afford themselves.

8. Abolition of Exploitation of Labour The working class collectively owns the means of

production under a socialist set-up, which makes it possible for the people to use these means of

production for their welfare.

3. Mixed Economy It is the mixture of both capitalism and socialism feature i.e., the economic system, in which

both public and private sectors co-exist. Some factors of production are privately owned and some are owned by government. There

exists freedom of choice of occupation and consumption. Both private and public sectors play key

roles in the development of the country.

Consideration the limitations of both maximum role of government under socialism and minimum role of government under capitalism, the world politico-economic order has moved towards

mixed economy with optimum role of government. India is perhaps the best example of such

economy and legitimately called as a mixed economy. ……………………..


DR. GAURAV JANGRA

WHAT IS LEGAL ENVIRONMENT? The functioning or behaviour of a company always impacts its stakeholders (Fig-1).

Stakeholders in a company are the people or groups of people who supply their resources and, thereby, have an interest in the working of the company. The stakeholders can be broadly classified

into two categories, viz., internal stakeholders and external stakeholders. Internal stakeholders

consist of groups within a business, such as shareholders or owners, managers and workers; whereas

external stakeholders are groups outside a business, such as suppliers, consumers and communities.

Figure 1 Types of Stakeholders in a Company

The different stakeholders have dissimilar interest in the working of an organization. For

example, shareholders are the owners of the company; they are most interested in the profit made by the company. The managers and workers are primarily interested in their salaries and retaining their

jobs. Input suppliers want the business to continue as it is a customer for their products, while lenders

and other creditors want the business to do well so that they get timely payment of their dues.

Consumers are interested in quality and price of the products to satisfy their needs. Community is interested in business so that more people get employed. They are also affected by activities of

business organizations as these affect the natural environment of the community.

At times, the interest of the company and that of its stakeholders may conflict and the working of the company can have a negative or harmful impact on its stakeholders. For example, a

factory may want to operate even during night so as to meet the growing demand for its products. But

in the process, the noise at nights may be very disturbing the local community. Similarly, air and

water pollution may be very harmful to the local residents. The government intervention may be required to restrain the damaging effects of such unsafe business practices. Hence, the government

often enacts laws to protect the interest of stakeholders or to minimize the harmful impact of the

functions of companies.

TYPES OF LAWS Broadly, the laws affecting business

activities can be classified as laws protecting

consumers, society and public interest, and laws affecting business organization (Figure

2). An overview of these laws is presented

hereinafter.

Types of Stakeholders in a company

Chapter-3

LEGAL ENVIRONMENT


DR. GAURAV JANGRA

Laws Protecting Consumers, Society and Public Interest The laws protecting consumers, society and public interest are as follows:

Anti-monopoly or Competition Laws

Competitive environment promotes efficiency and encourages innovations in an economy. It

creates pressure on companies to invent and innovate, differentiate products and improve the quality of their goods and services. However, such improvements come with a cost. To enhance their profits

or their relative market position, companies often collude with each other and pursue anti-competitive

practices. Anti-competitive practices can take a variety of forms; ranging predatory pricing to collusive practices, such as fixing the price, market sharing to type of goods produced, inputs as well

as final products tying, and sharing of the market. However, such practices hurt consumers by the

resultant higher prices of the commodities and the reduced choices. Therefore, many countries have

formulated anti-monopoly laws to protect the interest of the public. These laws are known by various names. For example, in the USA these are referred to as anti-trust laws, whereas in the UK, Europe

and India these are known as competition law. The type of business practices that are considered to

be anti-competitive also vary from country to country.

Consumer Protection Laws

A consumer is defined as someone who acquires goods or services for direct use rather than for resale or use in production and manufacturing. Consumer protection laws (UBE 1) are designed to

ensure the rights of consumers by enhancing transparency through information disclosure and fair

trade practices. These laws encompass a large body of laws regulating various business transactions

and practices, such as advertising, sales practices; product branding; mail fraud; sound banking and truth in lending—credit applications and collections, credit ratings and credit repair issues; product

quality and safety; housing material and other product standards; and other types of consumer

transactions.

Environmental Protection Laws Environmental laws are complex body of national environmental laws and international treaties on environment protection. These laws broadly fall into two categories, viz., laws aiming to control

pollution and laws aiming at resource conservation and management. Laws pertaining to pollution

control focus on controlling emissions into different environmental mediums, such as air, water and soil (UBE 16.2). These laws also specify liability for exceeding permitted emissions and

responsibility for cleaning up on the defaulting parties. The basic objective of these laws is to preserve

the natural environment as well as human health. Laws pertaining to resource conservation and

management focus on conservation of natural resources, such as forests, animal species and wildlife, and mineral deposits and natural gas. These laws aim at balancing the benefits of commercial

exploitation of resources at present with the benefits arising from the preservation of these resources

in the future.

Public Interest Laws The term public interest refers to the common well-being or general welfare. Public interest

laws try to protect individual rights and enhance general well-being. The agencies that look into

general welfare are government agencies, non-profit organizations, international organizations and

prosecutor and public defender offices.

Occupational Regulations Some occupations and professions, such as doctors, lawyers, chartered accountant, architects,

teachers, insurance agents and electricians, in public as well as private sectors require professional

qualifications. Occupational regulations often require procurement of a licence, certificate or registration or membership before a person can begin working in a regulated occupation. A regulatory

body sets standards for the occupation and after assessing the qualifications and certificates

determines whether the person is qualified to pursue the intended job. Ensuring the required skill sets

among professionals, these regulations help serving the public interest. Preventing unethical hiring practices, such regulations also ensure that only those who have the required skill set get hired rather

than the person known to the employer.


DR. GAURAV JANGRA

Diversity Laws Companies need employees with varied skills, personality traits life experiences to succeed in

business. Diversity in workplace, in terms of race, gender, age, disabilities, religion, job title, physical

appearance, nationality, ethnicity, competency, training, experience, and personal habits, thus, helps

in achieving better relationship with the customers and meeting their needs, and in turn, enhancing customer base as well as opening up new markets. However, diversity also poses tremendous

challenges, dealing with which requires fair understanding of the national laws governing diversity.

Like occupational laws, the laws governing diversity also intend to prevent unethical practices in

hiring process and promote equality in the society by laying down the rules for hiring, promotion, demotion, and firing abuses in workplaces. Most often, these laws emphasize equal pay for equal

work. These laws also protect the employees who have filed a discrimination charge or participating

in discrimination proceedings or opposing discriminations. Under these laws, companies can be sued by people who feel they have been discriminated. Proved of discrimination, companies can be fined

for such practices

Occupational Health and Safety Laws Safe work environment is not only crucial for the success of the business but also one of the

ways to retain staff. Such measures not only help in reducing employee injury and illness-related

costs, including medical care, sick leave and disability benefit costs but also help in minimizing the punitive actions taken by the court or compensations paid to the victims in case there is a mishap. By

reducing the incidents of mishaps these measures also enhance productivity. In spite of knowing the

importance of safety measures in the workplace, companies at times ignore these or follow shortcuts as health and safety equipments can be very expensive. To make companies abide by proper health

and safety measures, occupational health and safety laws are introduced. Safety laws set out the rights

and duties of employers as well as workers to ensure that sufficient measures are in place at the

workplace.

Laws Affecting Business Incorporation and Constitution Although companies are free to organize their employees as they see suitable, to enhance the

survival of business organizations, many countries have enacted laws concerning their incorporations

and bankruptcy.

Incorporation and Bankruptcy Laws

Most legal jurisdictions specify the forms of ownership that a business can take. Though the

forms of business organization vary across jurisdictions, there are some common forms, such as sole

proprietorship, partnership, privately and publicly held corporations, and co-operative. Incorporation

laws vary as per the type of organization. These laws dictate the type of information and the format in

which the relevant information need to be made public by a particular type of organization. For

example, companies raising capital from the stock markets need to provide detailed information about

their financial conditions periodically. Bankruptcy laws also vary as per the type of organization. For example, in the USA there are

three types of bankruptcy—Chapter 7 (Liquidation), Chapter 11 (Restructuring) and Chapter 13

(Personal bankruptcy applicable for sole proprietorship form of organization). In India also

bankruptcy laws vary as per the type of organization. For example, if a private limited company becomes insolvent then only the assets of the company are used to clear the debts. The managers of

the company have no personal liabilities in such forms of organizations and their assets remain

untouched. Managers of such companies can incorporate another company if they wish to do so. On the contrary, if a sole proprietorship or a partnership firm becomes insolvent then the creditors can

claim not only the assets of the company but also the property of the person who is the sole proprietor

or partners in the company.

………………………….


DR. GAURAV JANGRA

The Competition Act, 2002: The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 had become obsolete and was choking the

economy.” Therefore, it became imperative to enact a Competition Act to replace the outdated MRTP Act.

The Competition Act is Important for Businesses in three main areas:

a. Commercial agreements and trading practices b. Conduct towards competitors, suppliers and customers, especially in the case of firms with a strong market

position

c. Mergers and acquisitions

d. Background

1. Since the adoption of the economic reforms programme in 1991, corporates have been pressing for the

scrapping of the MRTP Act.

2. The argument was that the MRTP Act had lost its relevance in the new liberalized era and global competitive

markets.

3. It was pointed out that only large companies can survive in the new competitive markets and therefore “size”

should not be made a constraint.

4. Accordingly, the government appointed an expert committee headed by S.V.S. Raghavan to examine the whole

issue. The Raghavan Committee submitted its Report to the Government on May 2000.

5. The Committee proposed the adoption of a new competition law and doing away with the MRTP Act. The

Competition Bill, 2001, was introduced in the Lok Sabha in August 2001 and was referred to the Parliamentary

Standing Committee on Home Affairs, chaired by Pranab Mukherjee.

6. However, the Bill received the assent of the President of India on 13 January, 2003.

Objectives The basic objectives of the Competition Bill that is designed to eventually replace the MRTP Act are:-

(i) Encourage competition (ii) Prevent abuse of dominant position.

(iii) Protect the consumer

(iv) Ensure a level playing field to participate in the Indian Economy.

The spirit behind the Competition Bill is that big is no more bad, but hurting competition

and consumer interest is.

• S. Chakravarty a member of the Raghavan Committee pointed out that, “Size is no longer the

issue. It could become only when consumer interest is compromised.”

1. The Competition Commission of India:

i. Section 7 of the Competition Act, 2002 envisages the establishment of the Competition

Commission of India.

ii. The Competition Commission of India is to be set up as a quasi judicial body and would have

a chairperson and a team comprising 2-10 members.

iii. The Competition Commission of India would have separate prosecutorial and investigating wings.

iv. It would be entrusted with various powers such as

the power to grant interim relief,

enquire into certain combinations,

impose fines on the guilty,

order divisions of an undertaking,

pass “Cease and Desist”,

CHAPTER 4

COMPETITION POLICY AND ENVIRONMENT PROTECTION


DR. GAURAV JANGRA

order a demerger and direct payment to be made to aggrieved parties for loss or damage

suffered by them.

v. The administration and the enforcement under the Act to be done by the CCI are proactive rather than reactive.

vi. The Commission, taking a global cue, set certain benchmarks in terms of deal size and company

turnover for these competition norms to apply. To start with, Mergers and Acquisition (M&A) deals

involving companies with a minimum turnover of INR 40 billion or groups with a minimum turnover

of INR 1,120 billion would require a clearance from the Commission.

vii. Apart from these norms, the Commission also has suo mot powers to interview in any deal, which may

directly or indirectly affect competition in any particular industry or segment.

2. The Focus Areas of the Competition Act The focus of the Competition Act was on three identified areas where anti-competitive practices could

prevail.

1. Agreement Amongst Enterprises: i. The Act deals only with those agreements between enterprises, which have an adverse effect on

competition.

ii. This means that all restrictive agreements are not held to be anti-competitive.

iii. The rule of reason is to determine whether an agreement is anti-competitive.

iv. The objective of the rule of reasons is to determine whether on merits the activity promotes or

restrains competition.

v. To determine this, the CCI will consider the structure of the market as well as the action in

question. The CCI is vested with the power to enquire into cartels of foreign origin directly as well.

2. Abuse of Dominance: • The Act regulates all agreements, which could result in abuse of dominance.

• Dominance has been defined as 1) “The position of strength in the relevant market enjoyed by an undertaking which enables it to operate

independent of competitive pressures in the relevant market and also to appreciably affect the relevant

market, competition and consumers by its actions”.

2) “Abuse” would include agreements charging or paying unfair prices, restriction of quantities, markets

and technical development. It includes discriminatory behaviours, predatory pricing (i.e., sale of goods

or provision of services at a price lower than the cost of production) and any exercise of market power

leading to the presentation, restriction or distortion of competition.

3. Mergers of Combination among Enterprises: • It is understood that the government would make pre-merger notification, if required, voluntary. • However, it would be mandatory for financial institutions, foreign institutional investors and venture

capitalists to file the details of acquisition with the CCI within a week of entering into an agreement.

• The CCI, will have the power to make an investigation into a merger even after a year of the pre-

merger notification either suo moto or on a complaint.

• The Act rules out any post-merger review for individual company mergers, which have a combined

turnover of less than INR 30 billion or a combined asset size of up to INR 10 billion in India.

Consumerism and Consumer Protection Act

Today consumers depend upon hundreds of businesses to satisfy their needs and wants. In a free

enterprise economy, consumer is said to be sovereign as the business produces what consumers want. But in the

reality, consumer is at the mercy of business. They are often exploited by unscrupulous businessmen through

misleading advertisement, adulteration, short weight, overcharging and other unfair practices.

The Government of India had enacted several laws to protect the consumers. Some of these laws are

1. Agricultural Products Grading and Marketing Act, 1937.

2. Indian Standards Institution Certification Act, 1952.

3. The Prevention of Food Adulteration Act, 1954.

4. The Essential Commodities Act, 1955.


DR. GAURAV JANGRA

5. Trade Marks and Merchandise Marks Act, 1958.

6. Black Marketing and Maintenance of Supplies of Essential Commodities Act, 1980. Inspite of these laws, consumers remained exploited. Therefore, the Government enacted the Consumer

Protection Act, 1986. The main aim is to protect consumers from immoral practice of business organisations.

When a company or business concern becomes monopolise in market, then that company starts to get benefits

of his monopoly powers by illegal ways. This law is very helpful to secure consumers and customers from such

cheating and market frauds.

Main Authorities under Consumer Protection Act, 1986 Authorities under consumer protection are

Consumer Protection Councils

The Consumer Protection Councils are established at the centre, state and district level. The Central Consumer Protection Council

Section 4-6 Under the act, Consumer Protection Council was established to protect the specific rights

of the consumers.

Establishment Section 4 The council government known as Central Consumer Protection Council,

referred to as Central Council.

The council shall consist the following members

1. The minister incharge of consumer affairs in the Central Government, who shall be its Chairman.

2. Such number of other official or non-official members representing such interests as may be prescribed. According to Rule 3, Central Council shall consist of 150 members.

Main Features of Consumer Protection Act, 1986 The Consumer Protection Act, 1986 is one of the benevolent piece of legislation intended to protect a large body

of consumer from exploitation. Under this act, consumers have right to get information of quality, quantity and

price of products. It extends to the whole of India except the state of Jammu and Kashmir. Further the act

applied to all goods and services unless specially exempted by the Central Government and covers all sectors,

whether private, public or cooperative.

Under this act, consumer has power to district forum and report or complaint against the cheating of businessmen to the authorities and get remedies for this. Its objective is to provide better protection to the consumer, which intends to be simple, speedy and inexpensive Redressal to consumer grievances.

Procedure for Meetings-Section 5 1. The Central Council shall meet as and when necessary, but atleast one meeting of the council shall be held

every year.

2. The Central Council shall meet at such time and place as the chairman may think fit.

Objects of the Central Council-Section 6 1. The right to be protected against the marketing of goods and services, which are hazardous to life and

property.

2. The right to be informed about the quality, quantity, potency, purity, standard and price of goods and services, so as to protect the consumer against unfair trade practices.

3. The right to be assured, wherever possible, access to a variety of goods and services at competitive prices.

4. The right to seek redressel against unfair trade practices or restrictive trade practice or unscrupulous exploitation of consumer.

5. The right to consumer education.

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DR. GAURAV JANGRA

Policy

Definition The word “policy” is not a tightly defined concept but a highly flexible one, used in

different ways on different occasions.

Although a policy is like a decision, it is not just a “vie-off” independent decision. A

policy is a set of coherent decision with a common long-term purpose(s). When decisions are

one-off, incoherent or opportunist, complaints are made that a government or minister “does not have a policy”. Govt. policies are often supported by a special legislation.

Types of Policies a. Industrial Policy

b. Trade Policy

c. Monetary Policy d. Physical Policy

A. Industrial Policy:

In the last few decades, various economists have favoured increased involvement of the

government in the allocation of capital to industries. This practice is known as industrial policy in the

United States. This policy has already been practiced in Japan where Ministry of Trade and Industry picked the automobile industry very early on and decided to expand its role in world markets. The strategy has

worked well and the Japanese automobile industry has been remarkably successful. Those who believe that

the US should also adopt a similar policy argue that adoption of this strategy has become necessary to avoid

losing out in international competitiveness.

Business is the main focus of industrial policies in a country. Unlike fiscal and monetary policies,

the industrial policy can directly affect the business environment through various channels.

Industrial policies can directly regulate the price faced by the organizations. By licensing, such

policies can limit the capacity of production. Through tax and subsidies, the profit margin is impacted. Even the cost of labour and product gets affected by such policies.

Competition law helps these policies in restricting monopoly practices. Policies on mergers and

acquisitions help industrial policies limiting the scale of production and curb monopoly practices. Such

policies also alter the market structure.

Industrial policies determine the priority areas for the country. By reserving certain items, these

policies can limit or extend the areas in which small, medium or large firms can operate. Industrial policies

related to privatization, disinvestment and public-private partnership can create or limit the scope of

business opportunities for private organizations.

Industrial policies, with the help of FDI policies, affect the cost of credit and even the technology.

Through trade policies, these policies can also expand or narrow the consumer base of the companies. For

example, restrictions on exports narrow the consumer base, whereas export subsidies, encouraging sell overseas, widen the consumer base. Similarly, the availability and cost of credit is enhanced by such

policies. Ban or restrictions on imported intermediate goods, for example can reduce the availability of

intermediate goods and, in turn, increase their cost. Industrial policies by following intellectual property

rights can encourage or discourage research and development and innovations.

Industrial policies, through labour laws, organization laws, exit and closure laws can make entry

and exit easy or difficult for business units. These policies with the help of licensing and land acquisition

policies and environmental regulations can alter the location of business units.

By laying down rules for energy intensity, pollution, forest use, these policies can affect the input

composition as well as the locations of companies.

These policies also affect the availability of supporting infrastructure-roads, rail lines, ports,

airports, power, etc. and create an enabling environment for the country.

Thus, industrial policies by affecting the price, scale of production, level of competition have a profound impact on the productivity and efficiency of business organizations. Business organizations need

CHAPTER 5

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DR. GAURAV JANGRA

to have an in-depth understanding of these policies to survive in cut throat competition or to take advantage

of protective environment.

B. Trade Policy:

Trade policy is an important factor in the economic environment of business. For analytical convenience,

trade policies are classified into two categories - Outward-oriented and inward-oriented. An outward-

oriented trade policy does not discriminate between production for domestic market and exports. It is also

non-discriminatory between production for domestic market and exports. It is also non-discriminatory

between purchases of domestic goods and foreign goods.

Hence, outward-oriented trade policy provides a somewhat liberalised economic environment to business.

In this environment domestic firms have the freedom to decide whether they wish to produce for exports or they will confine their activities only to the domestic market. But in both cases they have to be efficient and

internationally competitive. An inward-oriented trade policy is biased in favour of domestic market. This

approach is also known as the import substitution strategy. Protection is the principal instrument of inward-

oriented trade policy. Business firms operating under protective umbrella do not feel any compulsion to

raise their efficiency level. These firms not only survive over a long period without being internationally

competitive but also make big profits.

India’s trade policy was inward-oriented for about four decades since 1951. As a result, its share was less

than half a percent in the world trade. This policy neither made India less dependent on the external world

nor allowed it to prosper industrially. The growth of Indian business was quite poor by international

standards in this period. Beginning in 1992, the government has effected some major changes in import and export policies. These policy changes have reduced export pessimism. The openness in trade has created

compulsions for the Indian business to improve its competitiveness internationally. If it fails on this front, it

will definitely suffer a severe setback.

Trade among countries takes place when they differ in comparative advantage in the production of

commodities. A country possesses a comparative advantage when the opportunity cost of producing a good, in terms of foregone output of other goods, is lower than that in other countries. The trade to take place, the

TOT, i.e., the ratio of export price to import price needs to be favourable for both the countries, i.e., it needs

to lie between the domestic opportunity cost of production in each country.

Inspite of several benefits of trade, many countries try to protect their industries by imposing tariff

and non-tariff barriers using arguments, such as infant industry argument, employment argument, terms of

trade argument, anti-dumping argument, BOP argument and anti-over-specialization argument. However,

protagonist of free trade counteract each of these arguments by pointing out the pitfalls of protection such

as retaliation by foreign countries and loss in the world output, loss of comparative advantage and

inefficiencies in the production process.

In the post-1991crisis period, India has moved from restrictive trade practices to a greatly

liberalized trade regime. Exports are now looked as an engine for growth and imports are assumed to support exports by making goods cheaper and that of better quality.

To promote free flow of trade among nations a number of bilateral, regional and global platforms

have evolved. The WTO is one of the dominant platforms at present that has evolved from the Uruguay

round of the GATT. The WTO, a legal entity with 159 member countries and sound organizational

structure, addresses the issues related to trade in goods, services and intellectual property rights.

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DR. GAURAV JANGRA

Liberalisation Economic liberalisation unlock the economic potential of the country by encouraging private sector

and multinational corporations to invest and expand. Now the companies are becoming multinational as well

as bigger as compare to past, government is now promoting exports to generate foreign exchange.

Liberalisation means the removal of controls or liberal the rules and law by the government to

encourage economic development. It is a process by which the economy is opened up and stringent regulatory

measures are relaxed to a large extent. Most often, the term is used to refer to economic liberalisation, especially

trade liberalisation or capital market liberalisation. Although economic liberalisation is often associated with

privatisation, but it is altogether a separate process.

Meaning of Liberalisation The term Economic Liberalisation means-

Dismantling of industrial licensing system built over the previous four decades.

Reduction in physical restrictions on imports and reduction also in the rate of import duties. Reform of the financial system. Reduction in the levels of personal and corporate taxation.

Reduction in restriction on foreign investment. Opening up of areas hitherto reserved for public sector.

Partial privatization of public sector units.

Softening of MRTP (monopolies and restrictive trade practice act) regulations and Making various sectors of the Indian economy competitive on the global economic platform by making

them produce quality goods in a cost effective manner.

Background of Liberalisation in India 1. After independence in 1947, India adhered to socialist policies. 2. Attempts were made to liberalise economy in 1966 and 1985.

3. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted.

4. Second major attempt was in 1985 by Prime Minister, Rajiv Gandhi. The process came to a halt in 1987.

5. The economic liberalisation in India was started on 24th July, 1991. 6. In 1991, after India faced a Balance of Payments crisis, it had to pledge 20 tons

of gold to Union Bank of Switzerland and 4 7 tons to Bank of England as part of a

bailout deal with the International Monetary Fund (IMF).

7. IMF required India to undertake a series of structural economic reforms. As a result Government of India

started breakthrough reforms, although they did not implement many of the reforms IMF wanted.

8. The new neo-liberal policies included opening for international trade and investment, deregulation,

initiation of privatisation, tax reforms and inflation controlling measures took place.

9. The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate

of 9%. With this, India became the second fastest growing major economy in the world, next only to China.

10. In 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World Rankings,

which is marked an improvement.

11. The growth rate has slowed significantly in the first half of 2012.

The Path of Liberalisation Relief to foreign investors.

Devaluation of the Indian rupee.

New industrial policy.

New trade policy. Removal of import restriction.

Budgetary policy.

Liberalized exchange rate management systems. (LERMS)

Memorandum to international monetary fund. (IMF)

Liberalisation of NRI remittances. Encouraging foreign tie-ups. Narasimhan committee report.

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LIBERALISATION, PRIVATISATION AND GLOBALISATION


DR. GAURAV JANGRA

FERA and MRTP relaxation.

Decontrol of steel.

Redefining SEBI’s role.

Privatization of public sector. Simplification of industrial licensing.

GATT agreement.

Liberalisation of Services in the Developing World The service sector is probably the most liberalised sector. Liberalisation offers the opportunity for the

sector to compete internationally, contributing to GDP growth and generating foreign exchange. Furthermore, if

service providers in some developing economies are not competitive enough to succeed on world markets,

overseas companies will be attracted to invest, bringing with them international best practices and better skills

and technologies.

The entry of foreign service providers is not necessarily a negative development and can lead to better

services for domestic consumers, improve the performance and competitiveness of domestic service providers,

as well as simply attract FDI i.e., foreign capital into the country.

Reform Achievements GDP growth trend. Declining savings and investments.

Taxes and subsidies – reduced role of state.

Poverty and inequality.

Employment concerns.

Industrial Growth Declining to free industry from license and permit raj.

Deteriorating balance of trade.

Declining rupee value.

Mounting external debt and liabilities.

Disastrous consequences of entry of MNCS.

Volatile portfolio investment and stock market. Increasing concentration of economic and political power.

Risk Associated with Liberalisation Liberalisation also carries extensive risks that require careful economic management through

appropriate regulation by governments. It is important to provide certain safeguard to domestic companies, so

that they can get the chance to develop before they are exposed to international competition.

Other potential risks resulting from liberalisation include

1. Risks of financial sector instability resulting from global contagion.

2. Risk of brain drain.

3. Risk of environmental degradation.

Liberalisation – An Assessment: The overall post liberalisation growth of Indian economy has not been inspiring. India lifted to its growth

rate during the 1990s but is still underperforming.

The liberalisation process in the country has not been able to take off in the real sense because the

instrument of change that is the bureaucracy has not been reformed.

Formulation of policies in areas like insurance, banking, foreign trade, and telecom, require an in depth

understanding of the subject.

It is an assessment in the United States specialists like lawyers, economists, and financial experts

provide the necessary expertise and also the latest inputs to the government so that it would be able to formulate the best possible policy. If Indian industry is to be competitive in price, cost and equality, it must provide a

level-playing field in the technology transfers, Infrastructure, interest on finance, labour reforms, government

regulations, custom tariffs on imports, taxes of central and state governments and so on.

i. The review of past policies followed during the first 40 years of planning reveals that there was no

alternative to the present policy of economic reforms.

ii. The very purpose of the liberalisation was to remove unnecessary control and regulations, liberating the

trade and industry from unwanted restrictions and to make various sectors of the Indian economy,


DR. GAURAV JANGRA

competitive on the global economic platform by making them produce quality goods in a cost effective

manner.

iii. Liberalisation means removal of controls and not of regulations. Liberalisation does not imply any secret deals on the contrary it does not mean the elements of transparency and accountability in the functioning

and procedure of the economy.

iv. Under the present circumstances there is no reverse to economic reforms, whatever policy reforms and

restructuring programmes are to be adopted in the Indian economy must have Adaptability to the Indian

Soil.

PRIVATISATION

A. Public Sector Enterprises ( PSES) – The Necessity of Privatisation:

Ensure rapid economic growth and Industrialization of the country

Promote redistribution of income on wealth

Create employment opportunities

Assist the development of small scale and ancillary Industries

Promote import substitutes ,and save and earn foreign exchange for the economy

earn return on investment and thus, generate resources for development

B. Concept and Meaning of Privatization:

Privatization is the transfer of ownership of property or businesses from a government to a

privately owned entity, e.g., a government-owned railroad or airline may undergo privatization, if

ownership shares of the enterprise are sold to an institutions investors. We can say that, it is the process whereby activities or enterprises that were once performed or operated by the government and it employees

are now performed, managed or owned by private business and individuals, often with much better results

in terms of cost and quality of service.

The theory behind privatization is that privately run enterprises, such as utility companies, airlines

and telecommunications systems are more efficient and provide better service than government run

companies. But in many cases, privatization is a way for the government to raise cash and to reduce its role

as service provider. According to Prof DR Pendse, "Privatisation is a process that reduces the involvement of the state

or the public sector in the nation's economic activities."

Privatization Means allowing parties to run the business without interference of the government

Privatization means a change in ownership resulting in a change in management

In India disinvestment to convey the government desire to disengage from running a business

Each country may have its own reasons for adopting privatization, refuting its own social, economical and political circumstances

C. Objectives of Privatization:

To improve me performance of public sector, including the service it provides.

To raise money from the sale of the enterprise.

To increase the size and dynamism of the private sector.

To distributed ownership more widely in the population at large.

To reduce the administrative burden on the state.

To remove it from the sphere of political influence or control. To reduce the economic burden of government and to release large amount of public resources

blocked up in loss making public sector units.

To increase competition. The reduction of political interferences in the management of the enterprises, leading to improved

efficiency and productivity

To provide adequate competition to the state run enterprises. To generate cash to fund the ever increasing expanses

To reduce problem of concentration of economic power

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DR. GAURAV JANGRA

Second Generation Reforms

(2000-01 onwards)33 The Government launched this generation of the reforms in the year 2000-01. Basically, the reforms

India launched in the early 1990s were not taking place as desired an a need for another set of reforms was felt

by the Government which were initiated with the title of the Second Generation of economic reforms. The

reforms of this generation were not only deeper and delicate but required a higher political will power from the

governments. The major components of the reform are as given below:

(i) Factor Market Reforms: Consider as the ‘backbone’ for the success of the reform process in India itself, it consists of

dismantling of the Administered Price Mechanism (APM). There were many products in the economy

whose prices were fixed/regulated by the Government viz. petroleum, sugar, fertilizers, drugs, etc.

Though a major section of the products under the APM were produced by the private sector, they were

not sold on the market principles which hindered the profitability of the manufacturers as well as the

sellers and ultimately the expansion of the concerned industries leading to a demand-supply gap. Under

market reforms these products were to be brought into the market fold.

In the petroleum segment now only kerosene oil and the LPG remained under the APM while

petrol, diesel, lubricants have been phased out. Similarly, the income tax paying families don’t get

sugar from the TPS on subsidies; only urea, among the fertilizers, remain under APM while many

drugs have also been phased out of the mechanism. Opening the petroleum sector for private

investment, cutting down the burden of levy on sugar, etc. are now giving dividends to the economy.

But we cannot say that the Factor Market Reforms (FMRs) are complete in India. It is still going on.

Cutting down subsides on the essential goods is a socio-political question in India. Till market-based

purchasing power Is not delivered to all the consumers, it would not be possible to complete the FMRs.

(ii) Public Sector Reforms: The second generation of reforms in the public sector especially emphasises on the areas like

greater functional autonomy, freer leverage to the capital market, international tie-ups and greenfield

ventures, disinvestment (strategic), etc.

(iii) Reforms in the Government and Public Institutions: This involves all those moves which really go to convert the role of the Government from the

‘controller’ to the ‘facilitator’ or the administrative reform, as it may be called.

(iv) Legal Sector Reforms: Though reforms in the legal sector were started in the first generation itself, now it was to be

deepened and newer areas were to be included-abolishing outdated and contradictory laws, reforms in

the Indian Penal Code (CrPC), Labour Laws, Company Laws and enacting suitable Legal provisions

for new areas like Cyber Law, etc.

(v) Reforms in the Critical Areas : The second generation reforms also commit to suitable reforms in the infrastructure sector

(i.e. power, roads, especially as the telecom has been encouraging), agriculture, agricultural extension,

education and the healthcare, etc. These areas have been called by the Government as the ‘critical

areas’.

These reforms have two segments. The first segment is similar to the Factor Market Reforms,

while the second segment includes a broader dimension to the reforms viz. corporate farming, research

and development in the agriculture sector (which was till now basically taken care of by the Government and needs active participation of the private sector), irrigation, inclusive education and the

healthcare.

Other than the above-given focus of this generation of the reforms, some other important areas

were also emphasised:

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DR. GAURAV JANGRA

(a) State’s Role in the Reform For the first time, an important role to the state was designed, in the process of economic reforms. All new steps of the reforms were now to be started by the state with the centre playing a supportive role.

(b) Fiscal Consolidation The area of fiscal consolidation though it was a major co-ordinate of reform in India since 1991 itself, gets a constitutional commitment and responsibility. The FRBM Act is passed by the Centre and the Fiscal Responsibility Act (FRAs) is followed by the states as an era of new commitments to the fiscal prudence starts in the country.

(c) Greater Tax Devolution to the States Though there was such a political tendency by the mid-1990s itself, after the second generation reforms started, we see a visible change in the central policies favouring greater fiscal leverage to the states. Even the process of tax reforms takes the same dimension. Similarly, the Finance Commissions as well as the Planning Commission start taking greater fiscal care of the states. And for the first time and states had a net revenue surplus collections in the fiscal 2007-08.

(d) Focussing on the Social Sector The social sector (especially the healthcare and education) gets increased attention by the Government with manifold increases in the allocations as well as show of a greater compliance to the performance of the development programmes.

(vi) Exploiting the Knowledge-based Global Economy 1. Revolutionising the telecom sector, to integrate India's economy into world economy.

2. A system of intellectual property rights to reward innovations adequately.

3. Setting-up higher educational institute.

4. Venture capital and 'private equity funds' to finance risk projects of the knowledge based economy.

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DR. GAURAV JANGRA

Historical Background: During the British rule in India, the government policy towards industry and business was

indifferent. The first century of British rule saw the decline of nearly all indigenous industries for many

reasons—technological, economic, and political.

1. Modern industrial enterprises in India developed only after 1850. Its earliest manifestations came in the

wake of the construction of railways, which made it essential to have modern workshops for repair and

maintenance of the rolling stock.

2. The first isolated attempt at officially encouraging the growth of large-scale industry took place around

1900.

3. The Second World War was a major watershed in the development of government–business relations in India.

Government’s Role a) Pandit Jawaharlal Nehru laid the foundation of Modern India. His vision and determination have left a

lasting impression on every facet of national endeavour since independence.

b) The goals and objectives set out for the nation by Pandit Nehru on the eve of independence were as follows.

i. Rapid agricultural and industrial development of the country,

ii. Rapid expansion of opportunities for gainful employment,

iii. Progressive reduction of social and economic disparities, and

iv. Removal of poverty and attainment of self-reliance.]

c) The financial and the balance of payment crises that the nation faced from the onset of the 1990s compelled the acceptance of deregulation, reduced role for public sector, making the public sector efficient and surplus

generating, and much reliance in general on the private sector for industrial and infrastructure development.

In this context, the following aspects deserve special consideration:

(i) Government role as a promoter, caretaker, and regulator, (ii) Promoting and protecting the small-scale sector,

(iii) Facilitating the revival of sick units,

(iv) Facilitating the development of Indian companies for the global market, (v) Promoting inflow of foreign capital and technology,

(vi) Promoting and maintaining ecological balance,

(vii) Promoting the social role of business,

(viii) Developing adequate infrastructural facilities for the overall development of the economy, and Formulating and operating industrial policies conducive to balance industrial and economic

growth.

Meaning and Objectives of Industrial Policies (i) Meaning:

Industrial policy means rules, regulations, principles, policies, and procedures laid down by government for regulating, developing, and controlling industrial undertakings in the country.

(ii) Objectives:

Industrial policy statements have been announced from 1948 onwards, Some of the important objectives can be identified as follows:

1. Achieving a socialistic pattern of society,

2. Preventing undue concentration of economic power,

3. Achieving industrial development,

4. Achieving economic growth,

5. Reducing disparities in regional development, 6. Developing heavy and capital goods industry, 7. Providing opportunities for gainful employment,

8. Expanding the public sector for achieving socialism,

9. Achieving faster economic growth,

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INDUSTRIAL POLICY


DR. GAURAV JANGRA

10. Achieving a self-sustained economy,

11. Alleviating poverty,

12. Protecting and developing a healthy small-scale sector,

13. Building up a large and growing cooperative sector, 14. Updating technology and modernisation of industry, and

15. Liberalisation and globalisation of economy.

(iii) Industrial Policies:

1. Industrial Policy Resolution of 1948. 2. Industrial Policy Resolution of 1956.

3. Industrial Policy Statement of 1973.



6. The New Industrial Policy of 1991.

(iv) Industrial Policy Resolution of 1948:

The Government of India announced its first Industrial Policy Resolution on April 6, 1948. The policy

resolution laid stress on the role of the state in the development of industry. The industrial activities

were divided into four broad areas:

i. Items under the central government control—arms and ammunition production and control of

atomic energy, ownership and control of railway transport, and others;

ii. Items under the state government control—coal, iron and steel, aircraft manufacture,

shipbuilding, manufacture of telephones, telegraphs, and wireless apparatus;

iii. Items of basic importance planned and regulated by the Central government— salt,

automobiles, tractors, heavy machinery, fertiliser, cement, sugar, paper, and so on; and

iv. Items for the private sector—all other items left to the private sector.

(v) Industrial Policy Resolution of 1956:

The second Industrial Policy Resolution was announced on April 30, 1956. The basic objectives of the

policy included the following:

a. Speeding up the process of industrialisation in India,

b. Developing heavy and capital goods industries,

c. Expanding an effective public sector,

d. Accelerating the rate of economic growth, e. Building up a large and growing cooperative sector, f. Encouraging private sector industries,

g. Preventing private monopolies,

h. Developing small-scale, village, and cottage industries,

i. Achieving balanced economic development,

j. Participation of workers in management, and k. Maintenance of industrial peace.

(vi) Industrial Policy Statement of 1973:

An industrial policy statement was made in a press note on February 2, 1973.

The main features of Industrial Policy Statement of 1973 were as follows:

i. The statement declared that the state would be directly responsible for the future development of industries.

ii. The role of public sector was further stressed in attaining a socialistic pattern of society.

iii. As an initiative towards the development of joint sector units, they were supposed to

function under the direction of the government.

iv. Foreign investment was allowed only in specific industries. 5. Small-scale and cooperative

sectors were assigned a special role to play. Small and medium sectors were given

preferential treatment.

v. In the area of agricultural produce, cooperative enterprises were encouraged.

(vii) Industrial Policy Statement of 1977:

The Janta Party came to power in March 1977. The Janta Party government presented to Parliament an industrial policy on December 23, 1977. The major objectives set in the policy were as follows:


DR. GAURAV JANGRA

1. Preventing of monopoly and concentration of economic power,

2. Maximising production of consumer goods, and

3. Making industry responsive to social needs.

The basic elements of the Janta government’s industrial policy were as follows:

1. Development of small-scale industries, cottage industries, tiny sector units, village and household

industries,

2. Encouraging the large-scale industrial units for meeting the minimum needs of the population,

3. Reversing the process of growth of large industries which grew with the help of funds from public

4. financial institutions, 5. Public sector was to be used as a producer and supplier of essential consumer goods, 6. Import of technology only in high-priority areas, and

7. Restricted foreign collaboration—the ownership and control were to remain in Indian hands.

(viii) New Industrial Policy Statement of 1980:

The Congress came to power again in 1980. The Union Minister of State announced the new industrial policy on July 23, 1980. The socio-economic objectives of the 1980 Industrial Policy were as given below:

1. Optimum utilisation of the installed capacity,

2. Higher employment generation,

3. Achieving higher productivity and maximum production,

4. Development of industrially backward areas, 5. Promotion of agro-based industries,

6. Faster promotion of export-oriented and import-substitution industries,

7. Consumer protection against high prices and bad quality,

8. Promoting economic federalism with spread of investment in rural as well as urban areas, and 9. Revival of the economy by overcoming infrastructural gaps.

The following policy measures were specified to achieve these objectives

1. Promoting the process of rural industrialisation,

2. Removing regional imbalances,

3. Regulating the excess capacity in the private sector,

4. Efficient operational management of the public sector, 5. Developing small-scale sector by increasing the limit of investment,

6. Automatic expansion in large-scale industrial units, and

7. Dealing with industrial sickness effectively.

(ix) New Industrial Policy of 1991:

1. As a part of the liberalisation, a new industrial policy was announced by the Government of

India in two parts, on July 24, 1991 and August 6, 1991, respectively. Some of the major aspects of the industrial policy were as follows:

2. Automatic clearance introduced for import of capital goods

3. Existing and new industrial units provided with broad-banding facility 4. Pre-eminent role of public sector in eight core areas

5. Part of government’s shareholding in public sector is proposed to be disinvested,

6. Chronic loss-making public sector units to be referred to the Board of Industrial and Financial

Reconstruction (BIFR)

7. A simplified procedure for new projects was introduced to manufacture goods not covered by

compulsory licensing.

8. Decisive contribution was expected from foreign investment

Industrial policy for the small-scale sector announced on August 6, 1991

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DR. GAURAV JANGRA

UGC NET COMMERCE PAPER – II

UNIT I- BUSINESS ENVIRONMENT MCQs

1. By which act government checks restrictive trade?

A. Industrial Policy Act 1991

B. MRTP Act

C. FEMA act

D. None of these

Ans: B

2: Which of the following does not fall within the jurisdiction of MRTP commission?

A. Prevention of Monopolistic Trade practices

B. Prevention of Restrictive trade practices

C. Prohibition of Unfair Trade Practices

D. Regulation of Combinations

Ans: D

3: Liberalization means

A. Reducing number of reserved industries from 17 to 8

B. Liberating the industry, trade and economy from unwanted restrictions

C. Opening up of economy to the world by attaining international competitiveness

D. Free determination of interest rates

Ans: B

4: When a company taken over another one and clearly becomes the new owner, the action is called

A. Merger

B. Acquisition

C. Strategic Alliance

D. None of the above

Ans: B

Relaxing the restrictions and controls imposed on Business and industry means

A. Liberalisation

B. Privatisation

C. Globalisation


Ans: A

6: Company images and brand equity is factor affecting business

A. Externally

B. Internally

C. Government Policy

D. None of these

Ans: A

7: Which among the following is not opened for private sector participation

A. Power sector

B. Telecommunication sector

C. Education sector

D. Railways


DR. GAURAV JANGRA

Ans: D

8: ________ is an economic system based on the principal of free enterprise.

A. Capitalism

B. Socialism

C. Mixed Economy

D. Marxism

Ans: A

9: What are the decisions taken by government of India pertaining to Industrial Sector in the new

industrial policy of 1991?

A. VRS to shed the excess load of workers

B. Disinvestment of public sector share holding

C. Referring sick units to BIFR

D. All of the above

Ans: D

10: A monopolistic trade practice is deemed to be prejudicial to public interest except when

A. Authorized by Central Government

B. Authorized by State Government

C. Authorized by Supreme Court


Ans: A

11. Which among these is not a method of privatization?

A. Denationalization

B. Franchising

C. Sale of Business

D. All of these

Ans: C

12: The pre-liberalization era of Indian Economy was under the grip of

A. Unemployment

B. Under-employment

C. Fiscal Deficit

D. Unfavorable and alarming balance of payment

Ans: D

13: Which among these can be condition for the success of privatization?

A. Alternative institutional arrangements

B. Barriers to enter the market

C. Measurability of performance

D. All of the above

Ans: B

14: Privatization of ownership through sale of equity share is called

A. Denationalization

B. Disinvestment

C. Contracting

D. None of these

Ans: B

15: Which among these is monopolistic trade practice?


DR. GAURAV JANGRA

A. Unreasonably limiting competition

B. Manufacturing only one product

C. Limiting technical Development

D. Selling only one product

Ans: B

16: The Industrial policy resolution was passed first in

A. 1931

B.1947

C.1956

D.1999

Ans: C

17. Planning is a ------------ process

A. Goal Oriented

B. Flexible

C. Time bound

D. All of these

Ans: D

18: Which among these is not a global force impacting the Indian Economy

A. Dynamics of capital flow

B. Integrating the role of Purchasing

C. Integrating the role of Technology

D. Need of Attitudinal Change

Ans: A

19: Globalization is the term used to describe process of removal of restriction on

A. Foreign Trade

B. Investment

C. Both (A) and (B)


Ans: C

20: For the purpose of inquiry under the MRTP Act, the commission has the power equivalent to

A. Civil court

B. Consumer court

C. High court

D. None of these

Ans: A

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