BUSINESS ENVIRONMENT UNIT 1 BUSINESS AS A SOCIAL SYSTEM Business is an integral part of social system and it is influenced by other elements

s of society which, in term, is affected b y the business. Today the whole society is a business environment. Davis and Blo mstorm point out that in taking an ecological view of business in a systems rela tionship with society; three ideas are significant in addition to the systems id ea. The three ideas are: 1. Values 2. Viability 3. Public visibility 1. VALUES: Business like other social institutions, develops certain belief systems and val ues for which they stand, and there beliefs and values are a source of instituti onal drive. These values drive from a multitude source, such as the mission of b usiness as a social institution, the nation in which business is located, the ty pe of industry in which it is active and the nature of employees. These values b ecome guides for employees decisions in the interface of business. Second, they b ecome strong motivators for people in a business. Hossein.H.K Page 1

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, instit ution in society, it must initiate its share of forces in its own environment ra ther than merely adjust to outside forces. Every business needs a drive and spir it all its own to make it as a positive actor on the social stage rather than re actor or a reflector. 3. PUBLIC VISIBILITY The term public visibility refers to the extent that organizations activities are known to person outside the organiz ation. 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 p ublic examination, discussion and judgment. These are became business is integra l part of social system. It is a social organ to help accomplish the social goal s. INTERNAL AND EXTERNAL ENVIRONMENT OF BUSINESS [TYPES OF ENVIRONEMTN] I. INTER NAL ENVIRONMENT FACTORS 1. Value system: The value systems of the founders and those at the helm of affairs have important bearing on the choice of business, the mission and object ives of the organization, business policies and practices. It is a widely acknow ledged fact that the extent to which the value system is shared by all in organi zation is an important factor contributing to success. Hossein.H.K Page 2

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 been driven by its mission to become a rese archer based international pharmaceutical company. 3. MANAGEMENT STRUCTURE AND NATURE The organizational structure, the composition of board of directors, extent of p rofessionalization of management etc, are important factors influencing business decisions. Some management structures and styles delay decision making while so me other facilitate quick decision making. The Board of Directors being the high est decision making body which sets the direction for the development of the org anization 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 RELATION Factors like the amount of support the top managemen t enjoys from the different levels of employees, share holders, and Board of Dir ectors have important influence on the decision and their implementation. The re lationship between the members of the board and between chief executive and the Board are also critical factors. 5. HUMAN RESOURCES The characteristics of the h uman resources like skill, quality, morale, commitment, attitude etc., could con tribute to the strength and weakness of the organization. Hossein.H.K Page 3

6. COMPANY IMAGE AND BRAND EQUITY The image of the company matters while raising finance, forming joint ventures or other alliances, soliciting marketing interm ediaries, entering purchase on sale contracts, launching new products etc. Brand equity is also relevant in several of these cases. 7. OTHER FACTORS A) Research and development determine a companys ability to innovate and compete. B) Marketi ng quality of marketing men, brand equity, distribution network have direct effe ct on marketing. C) FINANCE 0 financial policies; financial position and capital structure are also affecting business performances. D) Physical Assets production capacity, te chnology, distribution logistics EXTERNAL ENVIRONMENT FACTORS It consists of 2 t ypes. 1. Micro environment 2. Macro environment I. Micro Environment The micro e nvironment is also known as the task environment and operating environment becam e the micro environment forces have a direct bearing on the operations of the fi rm. 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 Hossein.H.K Page 4

company. The importance of reliable source of supply is for the smooth functioni ng of business. It is very risky to depend on a single supplier became of skills , lock out or any other production problem with that supplier may seriously affe ct the company. Hence multisource of supply often helps reduce risks. 2. CUSTOME RS A business exist only became and its customers. A company may have different categories of customers like individuals, households, industries and other comme rcial establishment and govt. and other institution. 3. COMPETITORS A firms compe titors 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 IN TERMEDIARIES The immediate environment of the company may consist of number of m arketing intermediaries which are firms that aid the company in promoting, sellin g and distributing its goods to final buyers. The marketing intermediaries includ es 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 poli cies and strategies, attitudes, ability to provide non financial assistance etc are very important. Hossein.H.K Page 5

6. PUBLICS A public is any group that has an actual or potential interest in an i mpact on an organizations ability to achieve its interests. Media publics, citize n action publics and local publics are some examples. MACRO ENVIRONMENT It is al so called as general environment and remote environment. The macro environment i s generally uncontrollable than micro environment, the success of the company de pends on its adaptability to the environment. The important macro environment fa ctors as follows: I. TECHNOLOGICAL ENVIRONMENT Technology is one of the importan t determinants of success of a firm as well as economic and social development o f nation. It includes both hardware and software to solve problems and promote p rogress. 1. Innovative drive of company The term innovation means introduction o f 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 Technol ogical orientation and R&D effects of a company may also be influenced by the cu stomer needs and expectation. In several cases the customer and the supplier hav e a collaborative relationship to develop the product or solutions. If the custo mers are highly demanding, companies would be compelled to be innovative. Hossein.H.K Page 6

3. Demand conditions The size of demand influences the choice of the technology . The size of demand influences the choice of the technological scale. Fast grow ing trend of demand would encourage development of technology of large scale. 4. Suppliers offering Many times technological changes are encouraged by the suppl iers of a company, like a capital goods supplier etc. 5. Competitive dynamics Co mpetition compels the adoption of the best technology and constant endeavor to i nnovate. 6. Substitutes Emergence of new substitutes or technological improvemen ts or substitutes which alter technological change. 7. Social forces Certain soc ial forces like pretext against environment pollution or other ecological proble ms demand for eco-friendly products. 8. Research organization The technological environment of business is enriched by researched organizations which develops n ew technologies and provide other technical inputs. 9. Govt. policy The govt. co ntributes to the development to the technology by its own direct involvement by establishing research organization and funding R & D. The govt. may encourage pr ivate R & D by various incentives. Hossein.H.K Page 7

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 demograph ic bases of market segmentation include the following: 1. Age structure 2. Gender 3. Income distribution 4. Family size 5. Occupation 6 . Education 7. Social class 8. Religion 9. Race 10. Nationality Demographic fact ors such as size of population, growth rate, age composition, ethnic, density of population, rural urban distribution, nature of family have very significant im plication for business. III. ECONOMIC ENVIRONMENT Business partners and strategi es are influenced by the economic characteristics. The economic environment incl udes the structure and nature of the Hossein.H.K Page 8

economy, the stage of development of economy, economic resources, level of incom e, global economic linkages, economic policies etc. 1. Nature of the Economy The general level of development of the economy has lot of implication for business it has significant bearing on the nature and size demand, govt. policies affect ing business. The widely used method of classification of the economies is on th e 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 inc ome economies are sub divided into lower middle and upper middle income where in come per capita is neither very high nor low. 2. Structure of the economy Factor s such as contribution of different structure like primary (agricultural), secon dary (industrial) & tertiary (secondary) sectors, large, medicine, small sectors to economy. These factors and the nature of each sector have business implicati on. For example, India is one of the largest producers of agricultural products, because of the small and fragmented nature of land holdings, efficient collecti on and processing of products become difficult. The land holding pattern also ma kes productivity improvements difficult. 3. Economic policies There are several economic policies which can have very great impact on business. Important econom ic policies are Hossein.H.K Page 9

a) Industrial policy It defines the scope and role of different sectors like pri vate, public, joint and cooperative. It may influence the location of industrial undertakings. Choice of technology, state of operation, product mixes etc. b) T rade policy It can affect the fortunes of firms. For example a policy of protect ing the home industry may greatly help the import competing industries, while li beration 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 s ervice etc. c) Foreign exchange policy Exchange rate policy and policy in respec t of cross border movement of capita are important for business. d) Foreign inve stment and technology policy Foreign investment and technology policy will incre ase domestic competition at the same time it would benefit many domestic firms b y permitting global sourcing of capital and technology, by increasing the quanti ty and quality of domestic supply of many goods and services. e) Fiscal policy G ovt. 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. Hossein.H.K Page 10

f) Monetary policy The central bank, by its policy towards the cost and availabi lity of credit, can significantly influence savings, investments and consumer sp ending in economy. For example 1% reduction in cash reserve ratio will significa ntly increase loan able funds with commercial banking systems. IV. NATURAL ENVIR ONMENT The natural environment ultimately is the source and support of everythin g used by business every raw material, energy resource, life sustaining factor e tc. The natural environment determines what can be got done in a society and how institution can function. Resource availability is the fundamental factor is th e development of business in the society. Thus geographical and ecological facto rs, such as natural endowments, weather and climatic conditions, topographic fac tors, vocational aspects in the global context etc., are all relevant to busines s. 1. Geographical factors: differences in geographical condition between markets may sometimes call for changes in the market mix. It influences the loca tion 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 th e location of certain industries like cotton textile industry. Topographic facto rs may affect the demand pattern in some cases. E.g. in hilly areas Jeeps are gr eater demand than cars. Hossein.H.K Page 11

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 d esert coolers. Weather and climatic factors can affect the demand pattern of clo thing, building materials, food, medicines etc. further, weather and climatic co nditions may call for modification to the products, packaging storage conditions etc. 3. Ecological factors: It assumes great importance, the depletion of natur al resources, environmental pollution another disturbance of the ecological bala nce have carried great concern, govt. policies aimed as preservation of environm ent purity and ecological balance, conservation of non-replenish able resources have resulted additional responsibilities and problems for business. CORPORATE S OCIAL RESPONSIBILITY The important generally accepted responsibilities of the bu siness to different sections of the society are described below. 1. Responsibili ty 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 reaso nable dividend, the company has to strengthen and consolidate its position. 2. R esponsibility to employees The success of an organization depends to a very larg e extent on the morale of the employees and their whole hearted co-operation. Th e responsibility of the organization to the workers include Hossein.H.K Page 12

1. The payment of fair wages 2. The provision of best possible working condition 3. Establishment of fair working standards and norms 4. The provision of labor welfare facilities to the extent possible and desirabl e 5. Arrangements for proper training and education of the workers 6. Reasonable c hances and proper system for accomplishment and promotion 7. Proper recognition, appreciation and encouragement of special skills and capabilities of workers. 8 . The installation for efficient grievance handling system 9. An opportunity for participating in managerial decisions to the extent desirable. 3. Responsibility to consumers The customer is the foundation of business and ke eps it in existence. It has been widely recognized that customer satisfaction sh all be the key to satisfying the organizational goals. Some important responsibi lities of business to customers are 1. To improve the efficiency of the functioning of business so as to increase pr oductivity and reduce prizes, improve quality, smoothen the distribution system to make goods easily available. 2. To do research and development, to improve qu ality and introduce better of new products. 3. To take the steps to remove the i mperfection in the distribution system including black marketing or anti-social elements. 4. To supply goods at reasonable prizes 5. To ensure that the product supplied has no adverse effect on the customer. Hossein.H.K Page 13

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 a nd to redress genuine grievances. 9. To understand customer needs and to make ne cessary measures to satisfy these needs. 4. Responsibility to community A busine ss has a lot of responsibility to the community around its location and to socie ty. The responsibilities include 1. Taking appropriate steps to prevent environm ental pollution and preserve ecological balance. 2. Rehabilitating the populatio n displaced by operate of the business 3. Assisting in the overall development o f locality 4. Taking steps to conserve scares resources and developing alternati ves 5. Improving the efficiency of the business operation 6. Contributing to res earch and development 7. Develop of backward areas 8. Promotion of small scale i ndustries 9. promotion of education and population control 10. Contribution to t he national effort to build up a better society Hossein.H.K Page 14

BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY BUSINESS ETHICS The term business ethics refers to the system of moral principle s and rules of conduct applied to business. This means that the business should be conducted according to certain self-recognized moral standards. Business, bei ng a social organ, shall not conduct itself in a way detrimental to the interest s of society and the business sector itself. A profession is bound by certain et hical principles and rules of conduct which reflect its responsibility, authorit y 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 busi ness forces Is it truth? Is the fair to all concerned? Will it build goodwill an d 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 b y selling substandard or defective products by under measurements or by any othe r means. 2. Do not resort to hoarding, black marketing or profiteering. 3. Do no t destroy or distort competition Hossein.H.K Page 15

4. Ensure sincerity and accuracy in advertising, labeling and packaging. 5. Do n ot tarnish the image of competitors by unfair practices. 6. Make accurate busine ss 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 etc to 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 G OVERNANCE Corporate governance is defined as the process and structures by which business and affairs of corporate sector is directed and managed. The concept o f corporate governance primarily hinges on complete transparency, integrity and accountability of the management. Corporate governance is concerned with the val ues, vision and visibility. It is about the value orientation of organization, e thical norms its performances, the direction of development and visibility of it s performances and practices. Objectives 1. To build up an environment of trust and confidence amongst those having completing and conflicting interest. 2. To e nhance shareholders value and protect the interest of other shareholders by enha ncing the corporate performances and accountability. Transparency Accountability Investor protection Page 16 Hossein.H.K

Societal needs Value creation for stakeholders ECONOMIC ROLE OF GOVERNMENT The government plays an important role in almost eve ry national economy of world. Business fortunes and strategies are influenced by the economic characteristics and economic dimension. The government normally pl ays four important roles in an economy. They are, 1. Regulatory Role Government regulation of the business may cover a broad spectrum extending form entry into business to the final results of business. The reservation of industries to smal l scale, public and co-operative sectors, licensing system etc., regulate the en try. Regulations of product mix, promotional activities etc., amount to regulati on of conduct to business. The state also regulates relationship between enterpr ises. 2. Promotional Role The promotional role played by the government is very important is developed as well as in duping countries. In developing countries, where the infrastructural facilities for development are inadequate and entrepre neurial activities are scarce, the promotional role of the govt. assumes signifi cance. The state will have to assume direct responsibility to build up and stren gthen infrastructure such as power, transport, finance, marketing, institutions for training and other promotional activities. The promotional role of the state also encompasses the provisions of fiscal, monetary and other incentives and de velopment of priority sectors and activities. Hossein.H.K Page 17

3. Entrepreneurial Role Entrepreneurial role includes establishing and operating business enterprises and bearing risks. A number of factors such as socio-polit ical ideologies, dearth of private entrepreneurship, absence of inadequate compe tition in certain segments and resultant exploitations of consumers have contrib uted for the growth of state owned enterprises. 4. Planning role State plays an important role as planner. GLOBAL ENVIRONMENT Globalization is an attitude of mi nd which views the entire world as a single market so that the corporate strateg y is based on the dynamics of the global business environment. Globalization enc ompasses the following: 1. Expanding business globally 2. Giving up distinction between domestic and foreign market and developing global outlook of business. 3 . To maximize profit 4. For growth Essential conditions for globalization 1. Business freedom: There should not be necessary govt. restriction like import restriction, foreign investments etc. 2. Facilities: Enterprise can develop glob ally from home country bare depends on facilities available like the infrastruct ural facilities. Hossein.H.K Page 18

3. Govt. support: Govt support can encourage globalization, like infrastructural facilities, R & D support, financial market reforms. 4. Resources: It decides t he ability of firm to globalize. Resourceful companies may find it easier to thr ust ahead in global market. Resources include finance, R&D, company and grand im age, HR etc. 5. Competitiveness: A firm may drive a competitive advantage from a ny one or more of the factors such as low costs and price, product quality, prod uct 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 effo rt on the part of international marketer, are easy way of entering foreign marke ts. Finalizing is a form of licensing in which a parent company grants another i ndependent entity the right to do business. 3. Contract manufacturing; a company doing international marketing contracts with firms in the foreign countries to manufacture the products while retaining the responsibility of marketing the pro duct. 4. Management contracting: In this supplier brings together a package of s kills that will provide an integrated service to clients without risk on owner. 5. Turnkey contracts A turnkey contracts is an agreement by seller to supply a b uyer with a facility fully equipped and ready to be operated. 6. Wholly owned ma nufacturing facilities: It provides the firm with complete control over producti on and quality. It does not have risk in the development. Hossein.H.K Page 19

7. Assembly operations: Assembly facilities in foreign markets are very ideal when there are economies of scale in the manufacture. When an assembly operation s are labour intensive and labour is cheap in foreign country. 8. Joint ventures : Joint venture is a very common strategy of entering foreign market. Any form o f 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 a n 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 mark et entry strategy as well as expansion strategy. It provides instant access to m arkets and distribution network. 11. Strategic alliances: It is also used as mar ket entry strategy it is also known as coalition, this strategy seeks to enhance the long term competitive advantage of the firm by farming alliance with compet itors. 12. Counter trade: It is a form of international trade in which certain e xport and import transaction are directly linked with each other. Types of Mergers 1. Horizontal Merger: Takes place where the two margin companies products similar product in the some industry. E.g. in 1998 combination of Chrysler coope ration and similar sense to create Dainles Chrysler. 2. Vertical Merger: Occur w hen two firms each working at different stages in the production of the same goo d combine. E.g. General Motors acquisition of fisher body company (an auto parts manufacturer). Hossein.H.K Page 20

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 ) Hossein.H.K Page 21

UNIT 2 ECONOMIC STRUCTURE OF INDIA Mixed economy of India consists of public and private sector. Policy on the publ ic sector has been guided by the Industrial Policy Resolutions 1956 and 1991 whi ch gave a strategic role in the economy. India was based agrarian economy with w eak industrial base, low level savings and investments and near essence of infra structural facilities. Public sector The object of accelerating the pace of ecodevelopment and the political ideology, gave the public sector a dominant role i n the industrial development of the nation led to rapid growth of the State Owne d Enterprises (SOEs) sector in India. These enterprises came to cover a wide spe ctrum of activities in basic strategic industries like steel, coal, minerals and metals, petroleum, heavy engineering, chemicals, fertilizers and pharmaceutical s etc., on one hand and consumer goods, trading and marketing activities, transp ortation, services, contracts and consultancy services, tourist service, financi al services, development of small industries etc., on the other. Objectives: It was promoted as an instrument for implementation of the govt.s socioeco policies. 1. To help in the rapid eco growth and development and industrialization of the country and create the necessary infrastructure for economic development. Hossein.H.K Page 22

2. To earn return on investment and thus generate resources for development. 3. To promote redistribution on income & wealth 4. To create employment opportuniti es 5. To promote balanced regional development 6. To assist the development of s mall scale and ancillary industries 7. 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 ownershi p and management of railway transport would be the exclusive monopoly of the com pany. After 6 months industries were coal, iron and steel, aircraft manufacture, ship building, manufacture of telephone, telegraph and wireless apparatus, excl uding radio receiving sets and mineral oils. IP of 1956: All the industries of b asic & strategic importance or in the nature of public utility services should b e 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 l ead, 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 mak ing PSE have been either in non-priority sectors or in the sectors where the pri vate sector has proved to be more efficient. Hossein.H.K Page 23

Why PSE fails? Even though formulation of plan is good. 1. Huge cost, time over runs in project implementation 2. Land acquisition 3. Procurement of equipment 4 . Civil work and other imponderable [not able to estimate] 5. Locational & inves tment decisions 6. Irrational product mix 7. Imposed marketing arrangements 8. F oreign financing 9. Technology upgradation, inadequate R & D, over manning. Why PSE? 1. PSE not only for commercialization but to generate employment, promoting balanced regional development etc. 2. Low return on investment on account of pr ice constraints imposed on certain infrastructural goods and services of PE. 3. Sick industries taken over by PU. 4. Promoted with long gestation period 5. Peri odical wage revision. New PS policy: Policy announced on 24-7-1991 the priority areas of growth. 1. Essential infrastructure goods and services 2. Exploration & exploitation of oil and mineral resources 3. Technology development & building of manufacturing capabilities, long term development of economy 4. Manufacture o f goods where strategic considerations Hossein.H.K Page 24

PSE-8 1. Arms & ammunition: defence equipment, aircraft 2. Atomic energy 3. Coal & Lignite 4. Mineral oils 5. Mining of iron ore, mangan ese ore, chrome ore, gypsum, sulphur, gold and diamond. 6. Mining of copper, lea d, zinc, tin, molybdenum, wolframite 7. Mineral specified in the schedule to the AE (control of production & use) order 1958. 8. Railway transport The new indus trial policy also indicated that the public sector would withdraw from the follo wing cases: 1. Industries based on low technology 2. Small scale and non strateg ic areas 3. Inefficient and unproductive areas 4. Areas with low or zero social responsibility or public purpose 5. Areas where private sector has developed suf ficient enterprise and resources Govt. policies: 1. Bring down govt. equity in a ll non-strategic PSU to 26% or lower, if necessary. 2. Restructure & revive pote ntially viable PSUs 3. Close down PSUs which cannot be revived 4. Fully protect the interest of workers Hossein.H.K Page 25

A disinvestment department was also set up. Public Sector Ratnas Govt. in 1997 J uly unfolded its strategy to grant autonomy to come PSUs on an experimental basi s was to select some vanguard PSUs to support them in their drive to become glob al giants. After in-depth interministerial discussions. Nine PSUs were selected. These are Navaratnas. 1. Bharath Heavy Electricals Ltd (BHEL) 2. Bharath Petrol eum Corporation Ltd (BPCL) 3. Hindustan petroleum Corporation Ltd (HPCL) 4. Indi an 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 (V SNL) GAIL & MTNL were given same status. All these were given freedom to incur. 1. Capital expenditure 2. Decide on joint venture 3. Set up subsidiaries/officer s board 4. Enter into technology & strategic alliances 5. Raise funds from capit al markets (international & domestic) 6. Enjoy substantial operations and manage rial autonomy 7 other PSUs have been given the title ministers. Hossein.H.K Page 26

Private Sector The Industrial Policy Resolution of 1956 has made it very clear t hat as an agency for planned national development, in the context of the countrys expanding economy, the private sector will have the opportunity to develop & exp and. Outside the schedules of A&B would be undertaken ordinarily through the ini tiative 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 accordan ce with the programmed formulated in successive Five Year Plans, by ensuring the development of transport, power and other services and by appropriate fiscal an d 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 s tate and will be subject to control & regulation in terms of industries (Develop ment & regulation) Act and other relevant legislation. Private sector is dominan t in the FMCG, Capital Goods Industries. New IP of July 24, 1991 Expands the rol e 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/marke t 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. 1. The communist countries have a centrally planned economic system. Under this rule, the state owns all the means of production, determines the goals of p roduction & controls the economy according to a central master plan. No Hossein.H.K Page 27

consumer sovereignty. Consumption plan in a centrally planned economy is dictate d by state. Ex: USSR, Chez Republic, Hungary, Poland and China. 2. In b/n capita list and free market economic system is the mixed economy, under which both publ ic & private sector co-exist as in India. In many mixed economies, the strategic & other nationally very important industries are fully owned or dominated by th e state. 3. The freedom of PS is the greatest in the market economy. In market e conomy a. The factors of production (labour, land, capital) are privately owned. b. Income is in monetary form from sale & profits c. Members have freedom of ch oice 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), se condary (industrial) and tertiary sectors form structure of economy. As economy develops share of primary sectors in development, employment & GDP declines. Man ufacturing also declines. The service sector is largest & fast operating sector. They contribute upto 60% of world GDP and is less in developed countries. 1980 70 1990 98 Developing 3.5 3.7 Developed 3 3.3 The share of service sector increased from 1980 39% to 46% in 2000 in India. Int ernationally it has increased 1990 12%. Hossein.H.K Page 28

This indicates decrease in price, increase in quality, increase in competitivene ss of downstream industries. Economic Planning of India The pattern of economic development in India is very significantly affected by govt. planning. The Plann ing commission Planning Commission was set up in 1950 March functions: (i) make resources available, (ii) Balanced and effective utilization of countrys resource s. National Development Council: It is presided over by PM and is composed of UC M, CM of States and Union Territories and Members of the Planning Commission. Un ion State Ministers are also invited to participate in deliberations. Secretary of PC acts as secretary of NDC. Functions; i) To prescribe guidelines, ii) To co nsider national plan iii) To consider important question of social & economic po licy iv) Review working of plans Formulation of Plans: To prepare five year plan usually spread over a period of 23 years. Review of the Plans First Five year P lan April 1st 1951 Third Five year plan 1966 Hossein.H.K Page 29

Fourth got delayed due to disrupted the development process like the aggressions of China & Pakistan and severe drought in the country. 1965-66 Fall income, inc rease 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, 6869). 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 4 th year i.e. March 1978 instead of 1979 and formulated a draft five year plan fo r 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 alwa ys have a Five year plan. Formation of Congress Govt. in 1980 terminated 5 year pl an formed by Janata Govt. within 2 years and formulated a 5 year plan for 1980-8 5 (6th Plan) 7th Plan April 1st 1985 8th plan 1992 9th 1997-2002 Objectives: 1. utilization of the natural resources 2. Ultimate removal of unemployment & pover ty 3. Increased standard of living Five year Plan (2002-07) Should aim at an ind icative target of 8% GDP Gross for 02-07. Hossein.H.K Page 30

Increase in GDP, increased human well being, consumption of food and other consu mer goods, but also education, health, availability of drinking water and basic sanitation. 1. Decreased poverty 20% by 2007 and 10% by 2012 2. Increase in empl oyment 3. Universal access to primary education by 200% 4. Decreased population 2001 2011 16.2% 5. Increase in literacy 72% by 2007 & 80% by 2012. 6. Decrease i n Infant Mortality rate (IMR) 45%, per 1000 live births by 2007 and to 28% by 20 12. 7. Decrease in Mattress Mortality Ratio (MMR) decrease 20% per 1000 live births by 2007 and to 10% by 2012. 8. Increase in forest and tree lover to 25% b y 2007 and 33% by 2012. 9. Villages access 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 3r d largest stock of scientific manpower. Characteristics of Industries Until 1991 , the development of the private sector was under strict Govt. control, was exer cised through industrial licensing. Low like the Industries (Development & Regul ation) Act, the Companies Act gave enormous control over the management and cont rol of functioning of the industries. The M.R.T.P. Act controlled merges, amalga mations and takeovers. Hossein.H.K Page 31

Capital Goods Vs Consumer Goods Basic and capital goods were considered as pride of place and the consumer goods given low priority. In the process of capital a ccumulation, certain capital intensive or large scale, sectors producing non-imp ortable commodities, transport, electricity are bound to grow. Imports cannot be expanded. In case of consumer goods, the growth of consumer non-durables was mo re than durables. Establishment of basic and heavy industries has been a reason for self-reliance in respect of capital goods and modern technology build defenc e strength. The Development of Industries 1. Private Sector 2. Public Sector 3. Joint Sector has been promoted to facilitate the utilization of the resources an d talents of the private sector and function with social orientation of public s ector. 4. Co-op. sector: Made progress in industries like sugar, cotton textiles and fertilizers. Growth of this sector promotes industrial democracy & discourages c oncentration of economic power in few hands. 5. Village & small industries Not g iven the deserving importance. Some units are reserved for them and the products too. Import Substitution & Export Contribution Import substitution assumed impo rtance after the second plan. In early decades of planning, considerable import substitution took place in many important areas in capital goods, organic chemic als, pharmaceuticals, dyestuffs etc. The Export Policy Resolution of 1970 emphas ized the importance of development and expansion of export oriented production. The Import Hossein.H.K Page 32

Substitution Industrializaiton Strategy (ISI) followed in India has had adverse effects. The high protection from foreign competition, resulted in high costs, p oor quality, indifference towards consumers and lack of innovativeness. In mid 1 950s Jute & cotton industries (textiles) were denied foreign exchange and with li beralization non-essential industries were given import substitution. The import restrictions, high costs and poor quality also very severely affected Indias exp ort performance. Capacity Utilization Under utilization amounts to wastage of sc arce resources, leads to costpush inflation. Creates demand supply imbalance, af fect balance of trade, employment, saving and investment. Under utilization of I ndustrial policy is due to factors like as planned excess capacity calculated to m eet the demand in the foreseeable future, tech invisibilities which may create cap acity in excess [present demand]; and initial testing troubles of new industries w hich is incapable in the developing economy. Regional Disparities: Removal Third Plan Large investments were made in backward areas. Incentive system was introd uced in 4th plan. The backward area development by industrialization is not give n importance. Hossein.H.K Page 33

An Evaluation Since 1951, large investments have been made in building up capaci ty over a wide spectrum of industries. India is a major industrial power in worl d. 7th year revival states: 1. Substantial diversification 2. Produce large & br oad range of industrial products 3. Self-reliance [achieved] 4. Capital & basic goods contribute 1 of total value added in manufacturing 5. Virtual sufficiency a chieved Between 1950 & 2000, IP increased 22 fold. GDP increased by 13% in 195051 to 25%, 50 years of industrialization Technological, managerial, operational development Development of skilled manpower was also achieved. Agricultural Sect or Agriculture contributes over 1/4th of Indias GDP, provides 2/3rd of population livelihood, supplies raw materials for number of industries and contributes 1/5 th of the export earnings. The rural market accounts for well over 55% of the de mand of FMCGs. Phases of Development: From 6th Plan Phases I 1900-1947 No growth , 0.3% annual growth, stagnation period II. 1950-1980 Advance in modernization o f agriculture, due to steps taken in 1. Technology based on scientific research 2. Wide range of services 3. Growth annually by 2.8%, 1967-68 to 1978-79. Hossein.H.K Page 34

4. Eighties Attention to markets & trading investments frame work to minimize th e 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 o pportunities. 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 al so being implement. This supports industries like cement, steel etc., Irrigation electrification (aluminium cables, steels etc) will also increase demand for pu mpsets, PVC pipes, agri implements, insecticide and pesticides and fertilizers, banks etc. Private sectors like [farmers organization, voluntary bodies and gene ral public] are taking interest in irrigation. Ground water development is done through own financing or institutional financing or both. States like Maharashtr a, Madhya Pradesh and Andrapradesh have initiated the action for privatization o f irrigation projects through projects like build own operate (BOO) or build own operate transfer (BOOT) or Build own lease (BOL) basis. According to these proj ects 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 is sue of public bonds. Hossein.H.K Page 35

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 w heat, rice, maize, jowar and bajra. Has revolutionalized agri and increased prod uction of foodgrains in country. The HYV increases demand for plant nutrients an d protectants like fertilizers, insecticides and pesticides. 1963 National Seeds Corporation (NSC) 1969 State Farms Corporation of India (SFCI) For quality seed s After liberalization foreign firms were also set up. Farm Research Institute i s run by public and quasi public institutions. 1973 Indian Council for Agricultu ral Research set up for research, educating & extensively educating the farmers, animal husbandry and fisheries. This council helps in inter and intra collabora tion with National & International Institutions. Ex: International Atomic Energy . Banks are also giving credit to agri projects (RRB), commercial banks and prim ary co-operative are the major source. For all related activities and finances r elating to it. NABARD National bank for Agricultural & Rural Development was est ablished plays financial and development roles of RBI and Agri Refinance and dev elopment Corporation (ARDC). 1971 The Agro Service Centre Scheme Employment for trained entrepreneurs, Inputs at door step of farmers. 1965 The Food Corporation of India Rice Milling Storage Production of nutritions processed foods. The Cent ral / State Warehousing Corporation. Hossein.H.K Page 36

Agricultural Marketing: 6th Plan Three essential elements of marketing. 1. Suppo rt prices adjusted with cost of production to ensure fair returns to the farmers . 2. Arrangements for procurement of agri produce at support prices, if prices d ecrease. The organization look after this is Food Corporation of India, The Cott on Corporation of India, The Jute Corporation of India and the Co-operatives wit h the National Agricultural Cooperative Federation of India (NAFED) as their Ape x Organization. Directorate of Marketing & Inspection Functions are to give advi ce to the Central & State Govts., Promote grading and standardization, market pr actices, extension, research, cold storage. Agmark for Cotton, vegetable oils, g hee, 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 inter mediaries 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. market ing. Agri Price Policy: Is decided by The Commission for Agri Costs and Prices ( CACP). Hossein.H.K Page 37

Agri commodities like wheat and paddy have procurement prices fixed for them. Mi nimum Support Prices: for barley, gram, moong, urad, mustard, ground nut, sunflo wer seed, soyabean and cotton (kapas). Statutory Minimum Price: for sugarcane, j ute and tobacco. Trends in Service Sector: As an economy develops the share of t he 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 serv ice sector now contributes more than 60% of the world GDP. 1980 1990, the averag e annual growth rate of value added in the service sector in the developing econ omics was 3.5% compared to the GDP growth rate of 3%. 1990-98 3.7% & 3.3% The se rvice sector of India grew at 6.9% and 7.9% during the above periods, compared t o 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 inte rnational 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 t hroughout 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. Hossein.H.K Page 38

Contribution of service to value added as % of GDP. Region/country World High In come Economics Low and Middle Income (developing countries) India Trends in GDP Govt. expenditure as % of GDP 10% in 20th century 20% in 1960 50% in 1995 In dev eloping countries, the central govt. expenditure was nearly 15% of GDP. 1960 in 1990 it was double of 1960. 1997 1998 Economy growth 2001 4.4% total industrial stood at 2.7% 2002-03 4.0% 2002 03 5.7% increase Consumer durables has a negativ e growth of 6.3%, 2003-04 8.5% industrial production by 7.0%. economies 1980 56 59 42 39 1990 60 64 46 42 1999 61 64 54 46 Unit III Hossein.H.K Page 39

Monetary and Fiscal Policy Monetary and Fiscal policy are two powerful instruments of economic management. Why? Necessary? In free enterprise economy. 1. Prices in free market fluctuate ( govt. debits and credits) 2. Balance of payment is in disequilibrium 3. Involunt ary unemployment 4. Inequality in distribution of income and wealth 5. Sluggish economic growth I. The Monetary Policy Def: Hary G. Johnson: Policy employing th e central banks control of the supply of money as an instrument for achieving th e 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 supp ly of credit (different in broader sense) Both policies 1. Central Bank administ ers both 2. Instruments of control are some at aggregate level 3. Determines the supply of money as well as the supply of bank credit Main objectives are: 1. Ma ximum feasible output 2. High rate of economic growth 3. Fuller employment 4. Pr ice stability 5. Greater equality in the distribution of income and wealth Hossein.H.K Page 40

6. Health balance of payments These objectives are met under long-run price stab ility at maximum feasible o/p. There are two theories. 1. Keynesian theory It st ates 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 whic h 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 a pplied, Portfolio Mechanism: The way monetary policy affects the assets portfoli o 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 fro m changes in money supply as the significant aspect of the monetary policy. It e mphasizes on credit effect. To understand this, the households keep their resour ces in the form of cost, financial assets (bonds, securities, shares and real as sets (plants and buildings, apartments and land etc.) Assume that, Central Bank of the country conducts an open market (exchange) purchase and increase the mone y supply. With this cash balance is increased in individual portfolio and securi ties with them are exchanged for the central bank notes. This Hossein.H.K Page 41

creates temporary imbalance of excess cash. To correct this they buy financial a ssets. This will continue until no further substitution can be made and is profi table. By this substitution they increase the value of these assets and reduce m arket rate of interest. The reduced rate of interest will inturn encourage the f irms to increase via the investment multiplier. The money supply increase demand increase national income and product via changes in the market rates in interes t. 2. The Monetarist School: The direct change in the money supply as the most r elevant 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 deman d for goods and service. An increase in money supply can lead directly to on inc rease in spending on real assets. They regard money and real assets as close sub stitutes. The household maintain a desired stock of money relative to their inco me. The monetary policy changes cause the actual stock to differ from the desire d stock and household always want desired stock of income and money balance. Thi s directly changes the level of aggregate demand, income and prices. According t o this as a consequence of an increase in money supply, there is a portfolio adju stment 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 p rice level on its output. II. The Wealth Mechanism: Its based on the manner in w hich changes in the quantity of money affect non-human wealth and how this in tu rn affects aggregate demand. Where, WNH = H + PNK Hossein.H.K Page 42

H = Quantity of nominal high powered money [is the sum of currency, required res erves and excess reserves] PVK = Market [on nominal present value of cash] If pr ice level falls, H H will Net wealth of households and since consumption is a fu nction of wealth, consumption . The consumption if central bank quantity of money and price levels remain constant. H - WNH and consumption of current income Real balance effect is one mechanism through which monetary policy can affect aggreg ate demand by changing non-human wealth. The second way is : Changes in PVK E.g. If Central Bank conducts an open market operation that increases demand for gov ernment securities, thereby raising their prices and lowering their interest rat e. This inturn increases the desirabilitys of equities (common stocks) relative t o govt. bonds and prices will of equities, causing in PVK. Therefore equity owne rs will consider themselves wealthiest and consumption expenditures will rise. I nstruments Targets of Monetary policy: The instruments of monetary policy refer to the exo variable that the Central Bank can change at its discretion with a vi ew to controlling and regulating the money supply and the availability of credit . The measures of monetary policy are classified under two categories. Hossein.H.K Page 43

I. II. Quantitative measures of monetary control Qualitative and selective credit contr ols I. quantitative measures of monetary control: 1. Traditional measures are open m arket operations Effectiveness of Open Market Operations 1. When commercial bank s possess excess liquidity the open market operation does not work effectively. 2. During the period of depression, open market, operations are not effective fo r lack of demand for credit. 3. Open market has limited effectiveness due to und er developed security and capital market. 4. Govt. bonds & securities are not po pular 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 com mercial papers eligible for purchase under this act. It rediscounts only approve d bills and the first class bills of exchange. Why Rediscount? When commercial b anks, faces a shortage of cash reserves, they approach the Central Bank to get t heir bills of exchange rediscounted. . Of its functions it is lender of lost Reso rt Central Bank. For rediscounting the bills of exchange, the central bank chang es the rate. This rate is traditionally called Bank rate or discount rate. Hossein.H.K Page 44

Bank Rate is the rate which the Central bank charges on the loans and advances t o the commercial banks. The Central Bank can change this rate - or decrease depe nding on whether it wants to expand or contract the flow of credit from commerci al 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 Ba nk 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 cha rged by the commercial banks. E.g. Central banks want to control the flow of ban k credit, to achieve this objective, it will raise the discount rate. This actio n of the Central Bank reduces the flow of the credit in three ways. 1. Discount rate (interest rate) decrease net worth of govt. bonds (treasury bills and promissory notes), against which commercial banks borrow funds from th e Central Bank. Reduces the banks capacity to borrow. 2. When discount rate of Central Bank , Commercial Bank raises their discount rate. DR, cost of credit, discourages business sector to get their bill s of exchange discounted. It also interest rate structure and decrease demand fo r 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. L imitations Hossein.H.K Page 45

1. Effective only when commercial bank borrows from Central bank, because they h ave their own financial resources. 2. With growth in credit institutions & finan cial intermediaries, the Capital Market has widened. The share of banking credit has declined. 3. Variations in the discount rate become effective only where de mand your credit is interest elastic. iii) The CSR & SRR: Cash reserve ratio, CR R is the percentage of total deposits which commercial banks are required to mai ntain in the form of each cash reserve with the Central Bank. Objection: 1) Prev ent 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 cas h reserves below the safe limits. It might lead to financial crisis in banking s ector. Central bank imposes CRr, to control money supply. It controls legal powe rs to change. It is a legal requirement. Therefore it is called statutory reserv e ratio, SRR. When economic conditions demand monetary contraction the Central b ank 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 milli on b) Credit or deposit multiplier = 5 100 x 5 = 500 million or 80 x 5 = 400 mil lion If money supply decrease CRR increase by 25%, credit, multipliers decrease = 4. Loan = Rs. 75 M (100-25) = 75 M Total Credit = 400 m Hossein.H.K Page 46

& 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 ma intain with them in the form of liquid assets (cash reserve, gold & govt. bonds) in addition to CRR. II. Qualitative or Selective Credit Controls The qualitativ e 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) ii) iii) Ratio ning the credit Diverting the flow of credit from non-priority sectors Curbing s peculating tendency based on the availability of bank credit. These are not serv ed well by quantitative measures, qualitative or selective credit controls is us ed. i) Credit Rationing: When there is shortage of institutional credit availabl e for the business sector, the large and financially strong sectors or industrie s tend to capture the lions share, in the total instalments. Credit priority sec tors and weak industries are starved of necessary fund and bank credit goes to n on-priority sector. Hossein.H.K Page 47

a) Imposition of upper limits on the credit available to large industries and fi rms. 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 calle d 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 d ecrease credit]. This was used by RBI first time in 1949. objective is to contro l speculative activity in the stock market. By 1956, extensive use in scarce agr icultural products like food grains, cotton, oil seeds, vegetable oil, sugar, Kh andsari and gur, cotton textile and yarns, decrease price secures loans. This in creases the buying, power and stocking and future mortgaging and borrowing. Ther efore 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 a dvance credit in accordance with the directive of the central bank in the econom ic 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 o n moey and credit matters, with clear directive to the banks to carry out their lending activity in a specified manner. Hossein.H.K Page 48

Limitations of Monetary Policy: 1. The time lag: the time taken in checking out the policy action, its implementation and working time. Its divided into two par ts: i) Inside tag or preparatory lag: a) Identifying nature of probability b) Id entifying sources of probability c) Choice of appropriate policy action d) Imple mentation of policy action ii) Outside lag or response lag: The time taken by ho useholds and the firms to react in response to the policy action taken by the mo netary authorities. This lag is long. 2. Problems in forecasting Reliable assess ment of magnitude of the problem recession or inflation as it helps in determini ng the appropriate policy measures. 3. Non-Banking financial intermediaries: Str uctural change reduces effectiveness of monetary policy. Although financial inte rmediaries 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 develo ped character of their money and capital markets. Hossein.H.K Page 49

FISCAL POLICY Def: As the govts programme of taxation expenditure and other finan cial operations to achieve certain in national goals. Objectives: 1. Eco growth 2. Promotion of employment 3. Economic stability & higher priority 4. Eco justic e or equity Two instruments used are taxation and public expenditure. I. Indias t axation policy 1950-1990: Was formulated to meet the financial needs of the coun try in the postindependence period. Role of RBI in Regulatory Banking Sector The structure of Indian Banking System evolved during the preindependence period wi thout any control and direction. The country had no Central Bank prior to establ ishment of RBI. The imperial Bank (SBI) of India though commercial bank, perform ed 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 r esult was unsatisfactory for the development of the money market and commercial bank. RBI was originally established as share holders bank in 1935 with the natio nalization in the west central government on January 1, 1949 acquired entire cap ital and became a state owned institution. Hossein.H.K Page 50

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 curre ncy notes Originally provision was for issuing currency notes according to propo rtional reserve system but not elastic and did not suit the developmental planni ng. According to RBI (Amendment Act), Reserve system was introduced, a minimum r eserve system of Rs. 515 CR (Rs. 400 Cr in foreign securities, Rs. 115 Cr in gol d coins) was to be kept. The provisions regarding maintenance of reserves was ag ain 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 pay ment on the govt. behalf and carry out exchanges and remittances, manages the pu blic debts and issues new loans. RBI [Govt] 1. Advices Govt. on quantum and term s of new loans 2. Sells treasury bills 3. Makes wages and means of advance short term loans, repayable within 90 days from the date of advance. Hossein.H.K Page 51

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 Ba nking Regulation Act 1949. Assists scheduled commercial banks [Banks where affai rs are not conducted in a manner detrimental to depositors interest must maintai n a cash reserve (as decided by RBI). With RBI against their demand and time lia bilities RBI can also direct the bank to maintain 100% CR against all deposits r eceived after a specified date; these banks should submit weekly statement of th eir transactions to the RBI] and state Co-op. Banks. RBI considers factors such as the financial its tending policy and securities offered. While making advance s to it. It can deny residenting without any reason. The regulatory functions of RBI under Banks Regulatory Act 1949 are: 1. Licensing of Banks 2. Branch Expans ion 3. Liquidity of assets of commercial bank 4. Management and methods of worki ng 5. Amalgamation 6. 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 prov isions regarding maintenance of reserves were again amended on October 31, 1957 which reduced. The amount of gold (coin and billion) and foreign exchange reserv e to Rs. 200 Cr, of this value of gold was not take at any time less than Rs. 15 Cr. Hossein.H.K Page 52

2. Banker to the Govt. It is banker, agent and advisor. The RBI has the obligati on to transact the banking business of the central and state government. It acce pts money and makes payment on the govt. behalf and carry out exchange and remit tance, manages public debt and issues loans. RBI Govt. 1. Advices govt. on quant um and term of new loans 2. Sells treasury bills 3. Makes ways and means of adva nce short term loans, repayable within 90 days from the date of advance. 4. SBI is the sole agent for transacting govt. receipts and payment 5. Advices on banki ng policies, financial matters. Developmental activities RBI established the dep osit insurance corporation of India in 1962 with the 12% of period of security t o deposits. Established UTI in 1969 to mobilize savings. To small investors, UTI offers the advantages of reduced risk, steady income, liquidity etc. Assisted d evelopment of short term coop credit for agri and also participated in establish ing 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 Ac t of 1934 & BR Act of 1949 RBI like any central bank resort sto bank rate manipu lations, open market ops, reserve requirement changes, direct action, rationing of credit and moral Hossein.H.K Page 53

suatium. It also influences commercial banks lending policy, rate of interest, f orm of securities against loans and portfolio distribution. Stabilises external value of Rupee and therefore its function is of an custodian of nations foreign exchange reserves. Its obligatory for the RBI to budget sell currencies of all I MF members. 5. Credit control Has all authority to use qualitative and quantitat ive methods of credit control, but are ineffective. 6. Agricultural Finance Othe r 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 fi nancial sectors of economy. RBI bulletin monthly presents was only above functio n but also provides results important studies and investigations conducted by RB I. Report on currency and finance is an annual publication which provides compre hensive review of various development of economic and financial importance. Hossein.H.K Page 54

Effectiveness depends on 3 factors Commercial banks in the country should not be oversee to availing rediscounting facility from the central bank. Bank do not m aintain any excess can be reserve agreement deposit and if extra ordinary demand s are made by the depositors, they should get bills rediscounted from central ba nk. Banks must hold adequate quantity of such credit instruments which will be r ediscounted by the central bank as per the legislation. Last two conditions are not satisfied in India. Firstly commercial bank are not much dependent on RBI fo r financial assistance. Sedcondly in the absence of a will organize bill market, they lack adequate quantity of eligible bill which can be rediscounted from the RBI. Carries of money market each pre requisite for the success of RBI bank rat e policy. Open Market operations RBI can authorizes the RBI to conduct purchase and sale ops in the govt. securities, treasury bills and other approved securiti es. The silver several little purposes. RBI has been extensively undertaking Swit ch operations (purchasing of one sale of another or vice versa). Fiscal Policy De f: Is the governments programme of taxation, expenditure and other financial oper ations to achieve certain national goals. The objectives are derived from the as piration and goals of the society. Objectives are: i) ii) iii) Economic growth P romotion of employment Economic stability & Page 55 Hossein.H.K

iv) Economic justice or equity These objectives vary from country to country and from time to time. The objecti ves are growth, employment and equality. The two basic instruments that are 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 a s defence requirements. There is fiscal bias. RBIs sales of govts securities has b een 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 sec urities. Now RBI doesnt purchase securities against each payment. CRR RBI Act 195 6 RBI 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 t ime liabilities. RBI direct scheduled bank to keep certain reserves of their lia bilities created after a specified date in cash. RBI Act was again amends in 196 2 which fixed CRR at 3% for all liabilities. Range is 3-15%. This tech is been i mplied for last 2 decades for controlling inflation. SLR: BR Act 1949, enabled th e CBs to liquidate their govt. security holdings wherever RBI increase CRR. The l ogphole 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 liquidit y ratio system. Hossein.H.K Page 56

Formulation of Tax Policy Tax policy existed due to recommendations of dozens of tax enquiry committees and review panels and deliberations on the recommendatio ns 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 committe es. 1. Taxation Enquiry Committee (TEC) 1953-54 to suggest suitable tax measures for mobilizing additional tax revenue. 2. Nicholas Kaldor Committee 1956 under chairmanship of Prof. Nicholas Kaldor, tax expert of Britain to suggest new tax measures to augment govt. revenue. 3. Direct Taxes Administration Committee: (Ty agi Committee) 1958 i) ii) iii) iv) A scheme of integration of direct taxes To p revent tax evasion To simplify the procedure of tax compliance 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) vi) Direct taxes enquiry committee (Wanchoo committee) 1971 to suggest tax refo rm measures to prevent tax evasion. Indirect taxation enquiry committee (Jha Com mittee) 1976 To find and examine the sources of anomalies on the indirect tax sy stem and to explore the possibility of implementing Value Added Tax (VAT) system in place of excise duties. vii) Direct tax laws committee (Chaksi committee) 19 78 to suggest measures to simplify and rationalize tax laws to improve the imple mentation viii) Basic Function of tax policy: Tax policy was designed to perform two basic functions. Hossein.H.K Page 57

Indias Taxation Policy 1950-1990 Was formed primarily to meet the financial needs of the country in the postindependence period. The problem faced was how to mob ilize adequate financial resources to finance the development programmes chalked out in 5 year plans. Financial resources has to be increased 4 times, so that r ate of capital formation could be stepped up from 5% of national income to say 2 0%. The known source of development finance taxation, domestic borrowing, extern al borrowing on foreign aid had the potentials of yielding adequate development finance. Taxable potential was very low as income was low and per capita borrowi ng was lower. The repayment near slow. So taxation policy was formulated. Revenu e function Revenue collection is the primary objective of Indias tax policy. The state and central government levies taxing power extensively and intensively. Th e taxes imposed are from 1950, 1. estate duty 2. Wealth tax 3. Gift tax 4. Expen diture tax 5. Capital gains tax A tax rates were imposed on direct indirect taxe s. Central Excise duty is imposed on all imaginable non-agriculture products. Hi gh import duty is imposed on almost all items of exports. Estate government impo ses tax on Hossein.H.K Page 58 New in 1950

1) Agricultural income tax on large holding tax 2) Surcharge of cash crops 3) Pr ofession tax 4) Tax on urban property 5) Sales tax on motor spirit 6) Motor vehi cle tax 7) Tax on passengers and goods, entertainment Industrial Finance Sources of finance for small and medium scale industries Both medium and small scale in dustries require capital for plant and machinery, production and final disposal. The capital varies in rural areas they have to borrow from money lenders or lan d 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 a ble to raise necessary capital. a) Loans by Commercial Banks For long time CBs d id not bother small and medium scale industries. SBI with RBI took the initiativ e of setting up a pilot scheme for the provision of credit for small scale indus tries. 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 un its with nationalization more advance to S & M industries. b) Credit Guarantee S cheme for S & M I Came into force in July 1980. this is a important phase, the o bjective 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 & M I. the administration was with RBI, but was transferred to the Deposit Insurance & Credit Guarantee Hossein.H.K Page 59

Co-op (DICGC). This operates 5 schemes 4 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 5th 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 o rders. 3. To secure coordination between large and small scale industries to ena ble small scale. In order to manufacture ancillaries and component parts require d 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 port folio of IDBI relating to the small scale sector worth over Rs. 4,000 crores. Au thorised capital of SIDBI is Rs. 250 crores which can be increased to Rs. 1,000 crores. Role: 1. Principal interest for SBI 2. Coordinate functions of other ban ks and financial institutions Hossein.H.K Page 60

3. Administer small industries for fund and national equity fund. Functions: 1. Refinances loans and advance extended by primary lending institute and provide r esources support system. 2. Rediscount on discounts bills arising from sale of m achinery. 3. Grants direct assistance as well as refinance loans extended by pri mary lending institute for financing export of products manufactured by last for industrial concerns in SSI. 4. Extends financial support to state small industr ies development corporation for providing scarce raw materials to marketing the end products of industrial units in the SSI. 5. Provided financial support to NS IC for providing leasing, hire purchase and marketing support to IU. SIDBI was s et up to ensure larges flow of financial assistance to SSI. Technical upgradatio n and modernization of existing units, expanding channel for marketing. Mission: 1. Stimulate the promotion of new industries 2. Assist the expansion and modern ization 3. Furnish technical and managerial aid 1. Long term or medium term loan s, both rupee loans and foreign currency loans. 2. Participates in equity capita l and in debenture and underwrites new issues of shares and debenture. 3. Guaran tees loans from other private investment sources. Hossein.H.K Page 61

4. Provides financial services such as deferred capital, leasing credit, instalm ent sale, asset credit and venture capital. 5. The total financial assistance am ounted to Rs. 12,480 crores in 1955 up to March 1990. While its disbursement amo unted to Rs. 8090 crores. This consisted of foreign currency, loans, rupee loans , guarantee and subscription of shares and debentures. Commenced leasing operati on in 1983. It provide leasing assistance for computerization, modernization / r eplacement, equipment of energy conversation, export orientation and pollution c ontrol etc. In 1977, KICI promoted the housing development finance corporation ( HDFC). Apart from HDFC, other institute are 1. CRISIL Credit Rating Information Services of India Ltd set up ICICI in association with UTI to provide credit rat ing services to corporate sector. 2. Technical Development and Information Compa ny of India Ltd (TDICI) promoted by ICICI to finance the transfer and upgradatio n of technical provide technical information/ 3. Programme for the Advancement o f Commercial Tech (PACT) set up with a grant of us $ 10 M provided by US AID to assist market oriented R & D activity, jointly undertaken by Indian companies, I CICI has undertaken the administration and management. 4. Programme for accelera tion of commercial energy research (PACER), funded by US AID with a grant of US 40 M to support selected research and technical development proposal in Indian e nergy sector. Hossein.H.K Page 62

UTI Unit Trust of India UTI was formally established in February 1964, to extend facilities of investment in equity capital of companies, by the large and growi ng number of small investors in the middle income group of the community. Initia l capital was 5 Crores which was subscribed fully by RBI, the LIC, the SBI and s cheduled 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 in come group. 2. Enable them to share the benefits and prosperity of the reply gra nting industrialiszation in the country. It could be achieved in three fold: 1. By selling units of the trust among as many investors as possible in different p arts of the country. 2. By investing the sale proceeds of the unit and also the initial capital fund of Rs. 5 crores in industrial and corporate securities. 3. By paying divides to those who have bought the units of the trust. Hossein.H.K Page 63

Industrial Reconstruction Bank of India (IRBI) Was set up in 1971 April an insti tution named IRCI Industrial Reconstruction Corporation of India under Indian Co mpanies Act to look after sick industries and for speedy reconstructions and rehab ilitation 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 19 85, for revival, assisting and promoting industrial development and rehabilitati ng industrial concern. IRBI extends credit to sick small scale units emphasis on continuous modernization, improve productivity and upgrade technology. Export I mport Bank of India Commonly known as Exem Bank, was set up on January 1982 to t ake over operations of the internal financial wing of the IDBI (to provide finan cial assistance to exporters and importers). It provides refinance facilities to CBs and FI against export import. Capital Resources Authorized capital of Exim B ank is Rs. 200 crore and paid up capital is Rs. 100 Cr. Wholly subscribed by the Central Govt. can raise currency from govt. and foreign currency from other cou ntries. Functions: 1. Financing for exports and imports of good and services 2. Financing for exports & imports of machinery 3. Financing of joint ventures in f oreign countries Hossein.H.K Page 64

Presently 9 lending operations are undertaken: 1. Loans to Indian companies a) D irect financial assistance to exporters b) Technical consultancy services c) Ove rsees investment d) Pre-shipment credit 2. Loans to foreign govt. companies & PI are provided under: a) Overseas buyers credit scheme b) Lifes of credit to fore ign govts and relending facility to banks overseas. c) Overseas Investment d) Pr e-shipment credit 3. Loans to cities in India include a) Export bills re discoun ting schemes of short bills b) Refinance of export credit. IDBI Industrial Devel opment Bank of India Set up 1947 to provide long term finance in industry. Till 1976 it was a wholly owned subsidiary of the RBI. In 1976, IDBI was delinked fro m RBI and was taken over the Govt. of India. Functions of the IDBI 1. Direct Assistance: By way of projects loans, underwriting of a direct subscription to industrial securities, soft loans, technical refund loans and eq uipment finance loans. It subscribes to purchase and underwrite the issue of sto cks, shares and bonds or debentures. 2. Indirect Assistance: 1. Can refinance te rm loans to industrial concerns repayable within 3 to 25 years given by the IFCI and State finances. Hossein.H.K Page 65

2. Refinance term loans repayable between 3-10 years given by scheduled banks or state cooperative banks. It can refinance bank and state cooperative banks. 3. Special Assistance: IDBI Act 1964 has provided for the creation of a special fun d known as the development assistance fund. It provides assistance to backward a reas in relation to industrial development with the financial institute gives ad vances to small scale sector for regional development and soft loan scheme. Indu strial Finance 1. Short-term finance: Refers to the funds required for a period of less than one year required to meet variables seasonal or temporary working c apital requirement. Banks are primary sources. 2. Medium term finance 1-5 years may be regarded as medium term. Is required for permanent working capital, small expansions, replacements and modifications etc. Corporate Securities Corporate securities are instruments by capital is raised by joint stock companies. There are two classes: 1. Ownership securities Are the shares by which the owned capit al is raised. Hossein.H.K Page 66

Kinds of shares: 1. Preference shares: are those which have preference that righ t to the payment of dividend during the life time of the company and a preferent ial sight to the return of capital when the company is wound up. Characteristics 1. Dividends are fixed 2. Those who hold PS get their dividends before others 3 . During wind up also they get the money first. Kinds 1. Cumulative PS: Have fir ed dividends whether these are profits or no profits. If profits are not suffici ent then dividend are accumulated and paid the next year. 2. Convertible cumulat ive PS: Introduced in 1955. the CCP share can be converted to equity any time be tween the third and fifth years of the issue. 3. Non cumulative PS: They cannot claim arrears of dividends of any year out of the profits of subsequent year. 4. Participating preference shares: Shareholders receive a fixed rate of dividend in priority to ordinary share, have sight to participate in the balance of profi t in an agreed proportion together with ordinary shareholders have voting rights . 5. Non-participating PS: Entitled to only fixed share of dividends and have no claim in surplus profit, do not have voting right. 6. Redeemable PS: Shares whi ch can be purchased back by the company at any time. 7. Irredeemable PS: That ca nnot be purchased back Hossein.H.K Page 67

Equity Shares Shares that are not preference shares are equity shares. They dont have fixed rate of dividend. Once the claims of dividend of PS are complete the FS get them. They are irredeemable and holders handle normal voting rights. Two types of equity shares: According to companys act. 1. With voting rights 2. With differential rights as to the dividend, voting or otherwise in accordance with s uch rates of subject to conditions as may be prescribed. Included by the Act by companies (Amendment) Act 2000. 3. It may consolidate and divide all or any part of share capital into shares of a large amount. 4. May correct all or any of it s fully paid up shares into stock and vice versa. 5. Can sub divide the existing shares into shares of lower denominations. 6. Can also cancel shares which have not been take up and reduce its capital 7. Can be done by company and dont need court permission. Creditorship Securities Consists of Debentures and bonds and c redit instruments that are used by companies to raise funds. The complaint raise d is known as Borrowed Capital or Debt Capital. Debentures: A document under the c ompanys scale which provides for the payment of a principal sum and interest ther eon at regular intervals which is agency secured by a fixed or floating charge o n the company is property or undertaking which acknowledges a loan to the compan y. Hossein.H.K Page 68

Classes: 1. Redeemable and sure deemable (perpetual) 2. Mortgage and simple 3. B y a charge on the assets or property of the company 4. Spread over in different cities 5. Estimates of deposit and annual turnover is not available 6. RBI has n o control over the lending activities Nidhi operate South India Some kind of mut ual funds Restricted only to the member Indigenous bankers are individual firms which receive deposits and give loans and thereby operate as banks. The activiti es not regulated. They do not constitute a homogeneous group. Organized Sector C ommercial Banks, FI, Mutual Funds and Discount and Finance House of India Limite d. The principal constituents of the Indian Money Market is 1. The Call Money Ma rket: Overnight and money at short notice for periods upto 14 days. It is meant to balance the short term needs of banks, exist in developed markets. 2. Market which deals with treasury bills is called treasury bills market. They are short term liability of the Central Govt. Issue to meet revenue deficits. The market i s undeveloped. RBI is the captive holder of these bonds. It is also auctioned. 3 . The Repo Market: Is a money market which helps in collateralized short term bo rrowing and lending through sale purchase operations of debt Hossein.H.K Page 69

instruments. It is sold by their holder to an investor with an agreement to repu rchase them at a predetermined rate and date. 4. The Commercial Bill market: Is sub market where commercial bills trade bill are handled. The commercial bill is a bill drawn by one merchant firm on the another. They arise only out of domest ic transactions. Purpose is to reimburse seller, but buyer delays payments. 5. T he Certificate of Deposit Market: Issued by bank to depositors of funds that rem ain on deposit at the bank for a specified period. They are similar to term depo sits but are negotiable and trade able in the short term money market. 6. Commer cial Paper: Is short term instrument of raising funds by corporates. Its a sort o f unsecured private placement: Is the sale of an entire issue of securities by a company directly to one or few investors, usually financial institutions. The a ppeal made to sell and buy through brokers. E.g. Insurance companies, investment companies, trust accounts, pension and provident funds etc. the growth of insti tutional investors ha increased the scope of private placing. Methods: 1. Standi ng Behind the issue: Underwriter guarantees the sales of a specified number of s hares within a specified period. If it doesnt sell underwriter buys it. Convertib le and unconvertible Convertible debentures the holders have the option to conve rt their debenture holdings into equity share of the company at a specified rate after a specified period. Hossein.H.K Page 70

New Issues Marketing of Securities The securities market may be divided into: i) New Issue Market and ii) Stock Exchange Limitations: 1. For a new company with new and unknown promoters, it is not advisable. 2. If company fails to generate sufficient response, this is a flop. Money Market Money market refers to a mecha nism whereby on the one hand borrowers manage to obtain short term loanable fund s and on the other, tenders succeed in getting credit worthy borrowers for their money. The Indian Money Market: Is not integral of two types 1. Organised and 2 ) Un organized Unorganized sector Confined to small towns and villages. The indi genous bankers are financial intermediaries. Among these the most prominent are financial companies, chit funds and Nidhis. They give loans to retail on wholesa lers, artisans and other selfemployed persons. They charge from 36-48% of intere sts. The chit funds are saving institutions. Chit Funds Not in Kerala and Tamil Nadu 1. Have regular members who make subscription 2. Collection is given to mem ber of the fund Hossein.H.K Page 71

Outright Purchase The underwriter purchase the issue outright and resell the sec urities to investors. Purchase price may be negotiated or may be determined by c ompetitive bidding. The Consortium Method: Syndicated Method Underwriting is joi ntly done by a group of underwriters who form a syndicate for this purpose. Adop ted for new issues, risk is widespread. Advantages 1. Relieves the issue of the risk. 2. To fulfil minimum requirements 3. Reduces specialized functions 4. Have expert knowledge of the capital market conditions 5. Assist in mobilization of funds in the capital market 6. Help stabilize capital markets Participation Cert ificate Like certificate of deposits PCs are also issued by banks normally for p eriods ranging from three months to 6 months. Maximum period to one year. In nee d of funds, it allows a bank to obtain from other banks and financial institutio ns. Money Market mutual Funds Was introduced by RBI in April 1992, the objective was to provide an addition short term avenue to the individual investors. Initi al guideline were not attractive, as didnt receive any positive response. To make is attractive Rs. 50 crore is been given as limitation to the banks and FI from November 1995. Hossein.H.K Page 72

Characteristics 1. Lack of integration No coordination between organized and uno rganized sector. One doesnt have effect on others. There is no coordination and c ooperation between them. The indigenous bankers have no connections with RBI. 2. Lack of Rational Interest Rate Structure Due to lack of coordination between ba nks. Too many concession rates, no fixed interest, inappropriate lending and bor rowing. Shortage of funds in the MM The loanable funds far exceed its supply. Du e to small savings, low per capita income, poverty, population and wasteful cons umption. Seasonal stringency of funds and fluctuation in interest rates India, b asically farm regulated, and has bearing on funds demand and supply. Oct June re quire additional finance a monetary stringency is crated. Inadequate Banking fac ilities Though we have opened CBs everywhere, but still lack in banking faciliti es. Rural areas still to be covered. Reform measures 1. Introduction of stamp du ty 2. Deregulation of interest rates from May 1985 by RBI have activated MM 3. M any MM Instruments are realtered 4. The introduction of Repo in December 1992, i ts an agreement with CBs and RBI. Hossein.H.K Page 73

Capital Market Capital Health used in the production of funds wealth. It is the money and money value investors in business unit. A business enterprise can rais e capital from various sources. Long term trends can be raised either through is sue of securities by borrowing from certain institutions. Borrowers of Capital a re: Central & State Govts and Local Govts. Public Corporations Business units Le nders are: Individual investors Institutional investors Banks Special Industrial financing institutions The MM and CM are interdependent 1. Suppliers / refers t o operate in both markets within their frame work of investment. 2. User also op t for both markets. 3. Short term and long term rates are interdependent. 4. Som e institution serve both money and capital market. Hossein.H.K Page 74

Role of Capital Markets in Indias Industrial Growth 1. For financing Five Year Pl ans 2. Mobilization of savings and accusation of capita formation Paucity of res ources and increasing demand for investments by industrial organization in India . Capital upto is important. 3. Promotion of Industrial Growth Stock exchange is a central market through about resources are transferred to the industrial sect or of the economy. Encourage people to invest in productive rates than non produ ctive channel. 4. Raising long term capital Permanent capital is raised for a pe rmanent present born companies require funds permanently. The exchange gives inv estors to buy on sell their securities while permanent capital with the companie s remain same. 5. Ready and continuous market: Stock market is every element of marketability makes investment with more liquid as compared to other assets. 6. Proper channelisation of funds Not only creates liquidity through its pricing me chanism, but also functions to allocate resources to the most efficient industri es. To channalise their funds in a particular company. 7. Provision of a variety of services FI provide variety of services i) Hossein.H.K Grant of long term and medium term loans in entrepreneurs. Page 75

ii) iii) iv) v) Provision of underwriting facilities Assistance in promotion of companies Partic ipation in equity capital Expect advice i\on management of investment in industr ial service Function Provides services to both corporate and investor class sectors useful s ervices. 1. Ready and continuous market Provides a convenient place where shares can be bought and sold. Easy marketability make investment in securities more l iquid as compared to other assets. 2. Protection to Investors The functioning is regulated and conducted by well laid rules. Provides safety to investors. After 1992 scare everything comes under (SEBI). 3. Provides information to assess the real worth of securities Trading is continuous and prices are determined by the ir supply and demand. The prices are openly communicated to the public known as M arket quotations. 4. Proper channelisation of funds Flow of funds is into most ef ficient industries. The prevailing market price of a security and relative yield are the guiding factor for the people in channel is their funds in particular c ompany. Hossein.H.K Page 76

5. Promotion of Industrial Growth The funds are invested in productive channels than unproductive sections like real estate, building etc. this stimulates indus trial growth. 6. Accelerates capital formation The positive features of the stoc k market encourage peoples to save and invest in corporate securities. The twin fee market of recoverable return and liquidity are definite incentive to the peo ple to invest in securities. 7. Raising long term capital Stock exchange offers investors opportunity to investors to buy and sell their securities while retain ing the permanent capital. 8. Impact of company performance 9. Economic baromete r Stock exchange prices are important economic indicated of the performance. Adv antages 1. Benefits to community: a) Promotes industrial growth and eco. Develop ment Inculcates habits of saving and accelerates the process of capital for marg in Optimum utilization of saree resource Give picture of the economic of state a nd country Manages fund for public sector Hossein.H.K Page 77

Management: It is managed by an Executive Committee Council of Management / Gove rning body which is an elects body. The government is empowered to nominate not more than three members on the government body. Functions 1) Ensure Rules are ob served by members 2) To protect the interests of the investing public 3) To appr ove the quotation of new shares. Membership: It is registered and governed by va rious regulations. It ensures that the person is of good moral conduct, componen t, possess enough experience and are financially sound can become its members. T hey enjoy special privileges. Non members are not allowed to enter the floor. Re misieres act as agents for the members and receive commission on the business pr ocedure by them. Also known as they commission men. Authorised clerk: Act on beh alf of their members employer do not get commission. Types of Dealings 1. Ready delivery contracts: These involves investment transactions care known as cash tr ading. The settlement is done within a fixed time, noted seven days from date of contract. When settled same day it is spo delivery contracts. 2. Forward Delive ry contracts: Involves speculative transactions are known as forward. Trading th e speculators are interests in dealings. It is done on fixed settlement days on the end of every fortnight through clearing house only. 3. Clearing house: An in stitution share accounts brokers are settled. All transactions are taken into ac count. Hossein.H.K Page 78

4. Speculation and speculators: Speculation Refers to making quick profits by an ticipating the changes in the prices of shares. Speculative transactions are car ried out in the stock exchange day in and day out. 5. Bulls: Speculators who are optimist and crytallise in prices and purchase shares. 6. Bears: Speculators wh o sell in anticipation and fall of prices in future. 7. Stages: who buy large am ount of a new issue of share enabling them to sell these shares at a profit. Gro wth of Indian Stock Markets The first organized stock exchange was established i n India at Mumbai in 1857 and was styled as the native share and stock brokers a ssociations. Mumbai was followed by Ahmebad share and store brokers association in 1894, Calcutta Stock Exchange association in 1903 and the Madras Stock Exchan ge Association (Private) Ltd in 1931. when the Securities (Contracts) Regulation Act 1956 was passed only % stock exchanges viz., Mumbai, Ahmedabad, Kolkatta, C hennai, Delhi, Hyderabad and Indore, received recognition. 23 stock exchanges ar e recognized. National Stock Exchange of India (NSE) Was set up in November 1992 by IDBI, UTI and other finance institutions. NSE commenced operations in the wh ole debt market (WDM) in June 1994 and trading in equities was started in the Ca pital Market (CM) segment in November 1994. The WEM is concerned with trading in govt. securities, treasury bills, PSU bonds, CDs and CPs and corporate debentur es and the main participation in this market are bank, financial institutions an d large corporate. All transactions in debt securities through brokers. This is aimed to ensure transparency and facilitate regulation. The capital market segme nt of NSE Hossein.H.K Page 79

provides facility for trading of equal instruments, warrants, debentures, prefer ences shares etc. both the segments of the NSE have grown substantially over the years. The regime in which trading on NSE operates is characterized by 4 key in novations: 1. The physical floor was replaced by anonymous computerized order ma tching with strict price time priority 2. The limitations of being in Mumbai and the limitation of Indias public telecom network, were avoided by using. Satellit e communications NSE has a net work of 2,000 satellite terminals all over the co untry. 3. NSE is not owned by brokers. It is a limited liability company and bro kers are franchises. 4. Traditional practices of unrealiable fortnightly settlement cycle with the crepe clause of badly were replaced by a strict weekly settlement cycle without badla. Export Contribution Export contribution can be divided in three phases. P hase I a) 1952-66 First three year plan [passively b) 1966-73 export insufficien t expansion 1) FD loans because of Jute, tea, cotton, textile, oil seeds and veg etable oil, raw cotton, hide a etc. 2) Export duties affected the export commodi ties 3) Growing strength of domestic demand was increased. Hossein.H.K Page 80

Phase II started in 1973 and lasted for decrease. Exports were given high priori ty. Effective nominal exchange rate of the rupee depreciate in the 1970. Import Substitution Objectives are: 1. To save scarce foreign exchange for the import o f more important goods. 2. To achieve self reliance in the production of as many goods as possible. Import Policy 1. I Phase Import substitution mostly took the form of domestic production of consumer goods. 2. II Phase Emphasis shifted to the replacement of the import of capital goods. 3. III Phase Emphasis was on red ucing the dependency on imported technology by developing and encouraging the us e of indigenous techniques. The immediate aim of import substitution in this cou ntry was the conservation of foreign exchange. It long fun objective was to init iate structural changes of far reaching significance in the economy. The result is industrial sections as achieved diversification and depth necessary for futur e growth. Indian Society Social system is a very broad concepts. It includes the people, the government, political, educational and industrial economic environm ents imbibed in it. Indian Society basically a traditional society. Now in the r ecent times changing towards modernity. The family values, traditions and cultur e is rich in Hossein.H.K Page 81

India than any other country. The quality of life have improved due to employmen t and high earning. The society stands for certain beliefs, values which are a s ource of institutional drive. The different languages keep people bonded togethe r. Indian society is very sensitive culture of Indian society has changed slowly , but will require much more time to adapt to modernization. No. of prejudices e xists in these environment. Acceptance of new is not immediate. The society is a lso turning into liberalization. Women in middle class families enjoy greater fr eedom. The change is gradually taking place, from ethical and tradition to moder n and silicon. Culture Refers to that part of the total repertoire of human acti on (15 product) which is socially as opposed to genetically transmitted. E. B. T aylor defines, culture of civilization is that complex whole which includes knowl edge, belief art, morals, law, custom and other capabilities and habits acquired by man as a member of social. Culture is There is human product of social inter action Provides pattern for meeting biological and socio needs. Handed down from generation to generation Symbolic quality Learned by each person Page 82 Hossein.H.K

A basic determinant of personality For continued functions of society Elements of Culture 1. Knowledge and belief: Refers to a peoples prevailing moti ons of reality. They include myths and metaphysical beliefs as well as scientifi c realities. 2. Ideals: Refers to societal norms which define what is expected; customary, right or proper in a given situation. Follows norms of proper behavio r. References: Refers to societys definitions of those things in life which are a ttractive or unattractive as objects of desire. Organization of culture Refers t o the social structure and the integration of traits, complexes and patterns tha t make up the cultural system. Stratification i.e. differentiation based on crit eria such as age, sex, caste, occupation, education, income is an important aspe ct of social status and cultural organization. Each stratum has its own role lim itation and rank. The organism of culture is determined to a large extent by maj or social institutions. The important common institutions of modern cultures are the eco system, the political administrative system, the educational system, re ligion, family, expressionistic, aesthetic and recreational institutions. They a re established to mice and common societal needs. Cultural traits (unit as obser vation [like normal behavior, shaking hands or saying namaste, or an articraft l ike wooden bowl). Cultural pattern (specific and enduring system of trait comple xes) [Refers to major segments of the culture.] Hossein.H.K Page 83

Cultural adaptation Refers to the manner in which a social system or an individu al fits into the physical or social environment. Adaptation is essential for sur vival e.g. oil energy crisis. Culture Shock: Environment changes produces cultur e, shock a feeling of confusion, in security and caused by strangers of new envi ronment. E.g. movement from urban to rural and vice versa. Cultural Transmission The important character is its transmissive quality. It is transmitted from one generation to the next and to the new members admitted to the culture. Culture accumulates more techniques, ideas, products and skills. Cultural transmission t akes place by means of symbolic communication. A symbol is any sign signal or wo rd that conveys a meaning. It also facilitates cultural diffusion is the spread of cultural elements from one place to another. Can be done through high educati onal change and communication. Cultural conformity Individuals in a community ei ther conform or deviate from cultural norms. Cultural conformity follows that th e most important process in society is that which ensures that people do indeed meet their role obligation. By William F. Orgburn says that various parts of mod ern culture do not change at the same rate; and that since there is a correlatio n and interdependence of parts, a rapid change in one part of our culture requir es read. Investments through other changes in various co-related parts of that c ulture. The important factors that contribute do cultural lag are ignorance, wro ng nations, conservation, sentiment factors, political factors and vested intere sts. Hossein.H.K Page 84

Cultural Traits 1. Low context and high context cultures: High context is one th at places great value on the intangible aspects of a negotiation or business dea l. They look beyond facts and figures and take into consideration factors like p ersonal relationships, atmosphere and attitudes towards respect, religion and tr ust. Low context: Assumes a high degree of shared knowledge on the behalf of a t ransaction partner and thus deals only with tangible aspects of the deals as fac ts, figures and performance. Atmosphere and personal relationship means little. Business can be done without meeting face to face. 2. Masculine and Famine cultu re: Masculine: Appreciates aggressiveness and assertiveness while respecting the goal of material acquisition. Achievements is more important than building long term relationship. Success is the function of individual and society is made up of leaders follows. Feminine: Appreciates inter-personal relationship put quali ty of life before material acquisition, appalled concern for individuals and les s fortunate. Mitchell observes Business tends to be more pedestrian in cultures w ith a majority of feminine trail. Business hinges more on personal relationships friends doing business with friends, rather than on pure efficiency and written contracts. 3. Monochromic and Poly chronic societies; Monochronic: How a cultur e views time. It is used for ordering ones life, prioritizing and for doing task in sequential order one thing at a time societies of developed world. Hossein.H.K Page 85

Polychronic: uses time to accomplish diverse goals simultaneously and to interac t with as more individuals as possible even at same time. 4. Universalism vs. pa rticularism: Fans Tompenaalis identified five cultural dimensions. Universalism: ideas and beliefs can be applied Particularism: holds that the environment dict ates how ideas should be applied. 5. Neutral Vs. Emotional Emotional are held in check E.g. Japan Emotions are openly and naturally UR expressed. People smile a great deal, talk loudly when exited, greet each other enthusiastically E.g. Ind ia, Mexico and Swiss 7. Specific Vs. Diffuse Individuals have a large public spa ce Both public and private space are and they readily let others enter and simil ar in size & individuals guard their share & a small private space they public s pace affords entry into private guard closely and share with only close space as well. E.g. China, Spain friend association. E.g. UK, US & Swiss Individuals are open & extra separation No open to public space of work and private life open t o public space. Hossein.H.K Page 86

8. Achievement Vs. Ascription People are accorded status based on Status is attr ibuted based on who or how well they perform their functions. what a person is. Accords status based Give high status to high achievers Politics There are not r adical differences in the philosophic of major political parties in some countri es, the situation is quite different in others. The government system in a numbe r countries, including several countries which are making rapid eco progress and having liberal policies towards foreign capital and technical is not very democ ratic. Indian politics believes in nationalism, but now with the liberalization, globalization, the countries are in a competition to woo foreign capital and te chnology. As a result there has been an influx of foreign investment to the coun tries like ours. The restrictions and regulations, trade policies, procedures, i ncentive system as all very different in Indian political system. Coalition gove rnments of different political practices are becoming common. The constituents o f the coalition are parties with very different economic ideologies, making the scenario complex or confusing / uncertain. Some political leaders are so powerfu l that they wild enormous control over the party. E.g. Mamta Banerjee, Jailalith a, Uma Bharathi, Advani, Chandrababu Naidu (CEO). There is a universal trend tow ards political decentralization. Thisnindicates some shifts in the power centres firms have to deal with. Universally, the desire of ethnic groups to become ind ependent of the supremacy of others is growing. on age, gender, or social connec tions. Hossein.H.K Page 87

Positive of modernization on business and society 1. Leads to innovations 2. Inc reases productivity 3. Produce technically superior goods 4. Cost reduction 5. S pread of competition outside the national boundary 6. Greater output 7. Short wo rking hours 8. Skilled jobs 9. Safe working conditions 10. Efficient use of raw materials 11. On standards of living increase Negatives 1. Displacement of labou r [unemployment] 2. Lower wages 3. Aged immobility [idleness] 4. Gap between man agement workers 5. Old crafts and craftmenship declines 6. Loss of identity as m an becomes machine 7. In fast changing society Even after 58 years of independen ce, Indian economy is still under developed. The per capital income is very low and 60% to 70% seek employment. Widespread unemployment is a normal feature. The increase of life expectancy has increased the population. Hossein.H.K Page 88

Poverty level is as high as 48.44% and the per capita income (2004) is as low as $ 620 which is not even 1/6th of the USAs income. In rural India 37.3% and urban 32.4% are under poverty line. Indian society is dependent on agricultural secto r. Low productivity is a cause of worry. In India life expectancy is 33 years co mpared to 70 years in middle income economies. In 2001 Indias population was 1,02 7 million against 361 million in 1951. The feeding increases and usage of natura l resources also increases. This rapid growth in population has resulted in unem ployment. Another factor is low capital formation results in slow growth and it is also due to technological backwardness. Racisim, casteism is also a major soc ial issue. This has led to harassment of the workers. Child labour and corruptio n has creped into the society as a devil which cannot be fought. With increase i n population the rise in the slum population has also caused problems. Land acqu isition, deforestation is also part of this evil. Water, air, noise, pollution h as increased. A shift to urban cities have brought in urban culture and values, beliefs of traditions are decreasing. Hossein.H.K Page 89

Environmental Issues Till recently the business had not cared for ecological eff ects of its activities. Guided entirely by its profit maximization goals the ind ustry caused tremendous damage to exhaustible natural resources such as minerals and forests. It also contaminated water and polluted air. Environmental degrada tion is in the process. Expensive of industrial towns has caused for pollution t o reach population. The pollutants discharged by these industries damage the hea lth and reduce output from local agriculture and industry damage infrastructure and buildings. Excessive usage of non renewable resources have caused threat to the extension of distinction. Some of the wastes that are thrown are not disposa ble safely. The ability of natural environment to absorb waste is not infinite. Parts of natural environment may serve more than one function. E.g. ocean are im portant in delimining the life support system of the global and micro climates; they are sources of many minerals and other resources, they assimilate many diff erent wastes; and they also provide the space and opportunity for marine past ti mes. With increase in income, municipal wastes increases and carbon dioxide emis sions per capita increase With increase in income some problems decrease. 1. Pub lic sanitation system 2. Rural electricity Hossein.H.K Page 90

World development Report 2003 categorizes cites into low income cities, lowmiddl e income, upper-middle income and high income cities. The low and lower-middle a re facing environment issues like 1. water supply service 2. Sanitation 3. Drain age 4. Water resources 5. Solid waste management 6. Air pollution 7. Land manage ment Environmental degradation causes soil erosion and productivity. The hazards caused to environment will exhaust those resources that are basically needed fo r survival. Modernization has brought in change in the Indian society. This incl udes significant alterations in social structure, cultural definitions and in th e products of socio-economic-cultural action. Social structures change in size, degree of formality and informality and in the types of social relationships and in the systems of statutes and roles. Materialism has creeped in his modernizat ion. Modernization has resulted in changes in size of society, social institutio ns, occupational patterns; positions, status and roles, values, beliefs and atti tudes, social interactions, social mobility. The development of new techniques, inventions, modes of production, new standards of living has resulted in moderni zation. Hossein.H.K Page 91

Modernisation has brought women from home to office differentiated their tasks a nd distinguished their earnings. New techniques of cooking ranges have reduced t he time spent in kitchens. Role of communication in educating common man, has bo ught a social change. It has reduced the social distance between the urban and r ural areas; dams are built to control floods and generate power, to irrigate lan d. Production of artificial rains have shown positive signs of success. Moderniz ation have made material progress rapid and widespread, though unequal. Moderniz ation has number of adverse effects on society. Films has immoral effect on soci ety. There is concentration of economic power in few hands. Developments in the field of nuclear science, though they offer great scope for advancement, pose a serious threat to the very survival of human race. Modernisation has also and is also saving lifes, makes desert bloom and brings music in our living rooms. Dem ographic Environment and Gender The demographic environment includes age structu re, gender, income distribution, family size, FLC, occupation, education, social class, religion, race, and nationality. There is an explosive growth of the glo bal population. Modernization has led to fall in birth rates even though the pop ulation is growing over one percent annually. Due to the gender bias there is tr emendous fall in the birth rate. There is a steady raise in income. Machines hav e taken over man. The technologies, automation and even rationalization are hind erance to labour. Hossein.H.K Page 92

Heterogeneous culture is being adopted. The immigration problem gets reduce due to political friendline between the countries. But this will increase multi cult ural complexities and adds new challenges and opportunities. The marketers have to involve in diverse roles to satisfy each and every member of the society. Spa ce of modernization of Indian society Modernisation has brought in change in the Indian society. This includes significant alterations in social structure, cult ural definitions and in the products of socio-economic-cultural action, social s tructure change in size, degree of formality and informality and in the types of social relationships in the systems of statutes and roles. Materials has creepe d in win modernization. Modernization ahs resulted in changes in size of society , social institutions, occupational patterns; positions, status and roles, vario us, beliefs and attitudes, social interactions, social mobile. The development o f new techniques, inventions, modes of production, new standards of living has r esult in modernization. Modernisation has brought women from home to office, dif ferentiated their tasks and distinguished their earnings. New techniques of cook ing ranges have reduced the time spent in kitchens. Role of communication in edu cating common man, has bought a social change. It has reduced the social distanc e between the urban & rural areas. Dams are built to control flood, generate pow er, to irrigate land. Production of artificial rains have shown positive signs o f species. Modernization have made material progress rapid and widespread though unequal. Hossein.H.K Page 93

Modernisation has number of adverse effects your society. Films have immoral eff ect on society. There is concentration of economic power in few hands. Govt. pol icy till 1991 India was following a very restrictive policy town foreign capital and technical. Important of technical was consider on merits it substantial exp orts were guaranteed over a period of 5 to 10 years and reasonable proposals for exports. Govt. was issued lists where lists of industries were, a) i) Foreign i nvestment may be permitted b) Only foreign tech collaboration (but no foreign in vestment) may be permitted. Tech collaborations were to be considered on the bas is of annual royalty payments which were linked with the value of actual product ion, % of royalty depended on production and limit to 5 years (payment). The For eign Exchange Regulation Act (FERA) 1973 served as a tool for implementing the n ational policy on foreign private investment in India. FERA empowered RBI to reg ulate or exercise direct control over the activities of foreign companies and fo reign nationals in India. RBI has given general permission to hold title of immo vable properties. New Policy The industrial policy statement of July 24, 1991, w hich observes that while freeing the Indian economy from official controls, oppo rtunity for promoting foreign investment in India shall also be fully exploited has liberalized the Indian policy towards foreign investment and tech. Hossein.H.K Page 94

The new policy has also made the import of capital goods automatic provided the foreign exchange requirement for such import is ensured through foreign equity. Silent Feature 1. FDI is eligible for automatic approval. Unit Dec. 1996, only 3 6 industries were eligible for automatic approval of FDI upto to 5!% of the tota l equity. Now there are different types industries depending on the ceiling of f oreign equity participation. 1. Industries in which FDI does not exceed Statisti c: 1. Definition, scope and application, classification and tabulation, histogra m, standard deviation, strawness, correlation, Regression. 2. Probability multip le and partial correlation pass on distribution 3. Hypothesis or anova Segmentin g Consumer Market 1. Geographic a) Region b) Urban, suburban, rural c) Climate d ) Cety size e) Population Density Hossein.H.K Page 95

2. Demographic Income Age Education Stage in life cycle Social class Sex Occupat ion Religion Race I Stage single or mallied head, under increase no children II stage married head, under 40 young children with or without older children III S tage married head, under 40, older children IV stage married head, 40 or older, no children under 20 V Stage head living along over 40, no children 3. Psychographic Bases: How people act Different to measure a) Personality b) Li fe style c) Readiness to buy Segmenting Industrial market: 1. Kind of business a ctivity 2. Users geographical location 3. Usual purchasing procedure 4. Six of u ser: Give lower prices to those buyers who buy in large quantities. Hossein.H.K Page 96

Segmentation Need 1900s markets were segmented automatically each product was tai lored to the needs of the buyer who had ordered it. When main industries shifted to mass production, to standardize, achieve greater production efficiency, lowe r product cost, segmentation was need. They took single market notion with them. With the changing preferences of the customers the producers, produced different iated products to serve different market segments. Market segmentation requires a balancing of production and marketing cost and price. Why? Concept of market se gmentation is based on the fact that market is not homogeneous, but heterogeneou s in the potential buyers are homogeneous. But a group of potential buyers do sh are contain characteristics of distinctive significance to marketing and each gr oup is a market segment. To apply market segmentation successfully a particular segment must be measurable accessible of sufficient size to make it, worthwhile cultivating. Segmentation Industrial Industrial users Large quantities industrie s Employ professional to buy Specialised buying Consumer Ultimate consumers Buy in smaller quantities For consumption over short period No systematic in buying Use little time to buy Buys broad spectrum goods INTERNATIONAL BUSINESS ENVIRONMENT UNIT 5 Hossein.H.K Page 97

ISSUES IN INTELLECTUAL PROPERTY RIGHTS Protection of intellectual property rights has become an issue of wide and serio us discussions. Intellectual property rights may be defined as information with c ommercial value. The Uruguay Round (UR) agreement on trade related aspects of Int ellectual Property Rights (TRIPS) covers seven intellectual properties 1. Patent s 2. Copyright and related rights 3. Trademarks 4. Industrial designs 5. Layout designs of integrated circuits 6. Undisclosed information (trade search) 7. Geog raphical indication 1. PATENTS Patent is a legal protection granted for an inven tion that is new, nonobvious and useful. The patent grants the patent holder the exclusive right to make use or sell the patented products. The main purpose of the patent system is to benefit the society. Patent, by providing an opportunity to recoup the cost of inventions and to make profit out of inventions, encourag e research and dup and thereby contribute to society. According to Indian patent s Act 1970, inventions mean any new and useful (i) process of manufacture, (ii) machine, apparatus, article, (iii) substance produce by manufacturer and any new and useful improvements in them. Hossein.H.K Page 98

While the patents grant the exclusive right to the inventor to exploit his inven tions for commercial gain for a specific period of time, it also imposes on him the duty of fully disclosing the inventions. Under the 1970 Act, patent expiry p eriod is 5-7 years for some and 14 years to other products or 20 years. Not pate nted: Atomic energy, traditional knowledge, scientific principles, abstract theo ry, discovery of natural substances, new form of known substances, and mixture o f known compounds. Disadvantages: charging higher rate 2. COPYRIGHT Exclusive pr ivileges to authors to reproduce, distribute, perform or display their creative works. Criteria: Life of authors & 70 years from creation of work Copy right act 1957 3. TRADEMARKS Brands and trade marks used very extensively in modern marke ting to maintain product identity and to help product promotion, have become ver y popular terms. Trademark is a brand a part of a brand that is given legal prot ection because it is capable of exclusive appropriation. A trade marks protects the sellers exclusive rights to use brand name or brand mark. According to Trade Mark Act 1999, trade mark means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person for those of others and may include shape of goods their packaging and combination o f colors. Hossein.H.K Page 99

It includes words, symbol, logo used by manufacturer to identify goods which are distinctive and non-descriptive in nature. Subject matter: 1. Reputation, 2. Go odwill and 3. To avoid duplication Term of Protection 10 years from the date of registration. 4. DESIGN ACT 2000 A registered design is a monopoly right for the appearance of the whole or a part of a product resulting from the subject matte r lines, contours, colors, shape, texture, configuration, patterns, materials wh ich is new or original which has eye appeal of the product or its ornamentation. MULTINATIONAL COMPANY Why to go global? 1. To achieve higher rate of profit 2. Expanding the production capacities beyond the demand of domestic country 3. Sec ure competition in the home country 4. Limited home market 5. political stabilit y and instability 6. Availability of Technology and managerial competition Multi national companies are that companies: 1. Which produce in abroad as well as in headquarter Hossein.H.K Page 100

2. Which operate in certain minimum number of nations 3. Which drive some minimu m percentage of its income from foreign operations. 4. Which have certain minimu m number of ratio of foreign to total number of employees. 5. Possesses a manage ment team with geometric orientation Favorable impact of MNCs 1. It helps increas e the investment level and thereby the income and employment in host country. 2. The transnational corporations have become vehicle for the transfer of technolo gy. 3. The work to equalize the cost factors of production around the world. 4. MNCs provide an efficient means of integrating national economies. 5. It also helps increase competition and break domestic monopolies. 6. MNCs enable the host countries to increase their exports and decrease their i mports. 7. Help to improve standard of living 8. Employment of highly sophistica ted management techniques 9. They kindle management revolution in the host count ries 10. MNCs stimulate domestic enterprise 11. The reasons resources of MNCs en able them to have very efficient research and development systems. Harmful effects of MNCs 1. The MNCs main objective is profit maximization, not the development needs of the countries. Hossein.H.K Page 101

2. MNCs may destroy competition and acquire monopoly powers 3. MNCs retard growth of employment in the home country 4. Interference in the other affairs of the co untry 5. Faulty technology transfer 6. Depletion of non-renewable resources 7. T hey undermine the local culture and traditions, change the consumption habits fo r their benefits against interest of local community. FOREIGN INVESTMENT IN INDI A [FDI] Foreign investment is playing an increasing role in economic development . Economic reforms and the far reading political changes have resulted in very s ubstantial changes in international capital flows. FDI now contributes to a sign ificant share of the domestic investment, employment, exports etc. the India beg an to experience a surplus on the balance of payment and very remarkable improve ment in the reserves positions. Foreign investment has assisted and is assisting the economic growth of country. 1. FDI shifts the burden of risks of investment from domestic to foreign investors. 2. FDI is only capital inflow that has been strongly associated with higher GDP since 1970. 3. FDI generated large employme nt opportunity. The flow of direct foreign investments to India has been compara tively limited because of the type industrial development strategy and the very cautious foreign investment policy followed by nation. Hossein.H.K Page 102

Direct foreign investment in India is adversely affected by the following factor s 1. The public sector was assigned as monopoly or dominant position in most imp ortant industries, and therefore, the scope of private investment, both domestic and foreign was limited. 2. When the public sector needed foreign investment, t here was a marked preference for the foreign govt. sources. 3. Foreign investmen t was normally permitted only in high technology industries. 4. Foreign equity p articipation was normally subject to 40%. 5. Payment of dividends abroad, repatriation of capital etc., as well as inward remittances was subject to stringent laws like Foreign Exchange Registration Act (FERA) 1973. These discourage foreign investments. 6. Corporate taxation was hi gh and tax laws and procedures were complex. These factors either limited the sc ope of foreign investment in India. INDIAN INVESTMENT IN FOREIGN COUNTRIES Until 1991, India companies made very little investments abroad. Although Govt. of In dias policy had been one of the encouraging foreign investments by Indian compani es, subject to certain conditions, several factors like domestic economic policy and domestic economic situation were deterrent to foreign investments by Indian companies. By restricting the areas of operations and growth, the govt. policie s seriously constrained the potential of Indian companies to make a foray into t he foreign countries through investment. Added to this was the attraction of pro tected Hossein.H.K Page 103

domestic market which was, in many cases, a sellers market and this made Indian c ompanies to ignore foreign markets. Indian companies have established subsidiari es and joint ventures in a number of countries in different manufacturing and se rvice sectors. The new economic policy of India is expected to encourage foreign investments by Indian companies. The curbs on growth, even by mergers and acqui sition, have been removed, financing restriction has been based, areas of busine ss opened to private companies have been substantially enlarged and foreign tie up policies have been liberalized. Further, the domestic market is becoming incr easingly competitive. All these factors should encourage the Indian companies to invest in other countries and to take advantage of the economic liberalization in many countries. Hossein.H.K Page 104

GATT General Agreement on Trade and Tariffs The predecessor of WTO was born in 1 948, as a result of the international desire to liberalize trade. Objectives The primary objective of GATT was to expand international trade by liberalizing tra de so as to bring about all round economic prosperity. And the other important o bjectives are 1. Raising the standard of living 2. Ensuring full employment 3. D eveloping full use of resource of the world 4. Expansion of production and inter national trade Rules of GATT 1. Any proposed change in tariff, or other type of commercial policy of a member country should not be undertaken without consultat ion of other parties to the agreement. 2. The countries that adhere to GATT shou ld work towards the reduction of tariffs and other barriers to international tra de, which should be negotiated within the framework of GATT. Hossein.H.K Page 105