IGNOU MBA Assignments

MS-3 : Economic and Social Environment

Question 1. What are the critical elements of social environment of business? Explain each
with examples.
Answer 1.A business environment is the social, technological, economic and political environment
in which a business functions. The business environment affects organizational decisions, strategies,
processes and performance. A number of factors like the culture, social values, tradition, beliefs,
social attitudes etc constitute social environment.

The critical elements of social environment are as follows :

* Social institutions and systems
* Social values and attitudes
* Education and culture
* Government's role and responsibility
* Social groups and movements
* socio-economic order
* social problems and prospects

Social institutions and systems :

---------------------------------
Social institutions and systems of India are evolved from history, culture and heritage of our
country.

Examples : Caste Sytems, Joint family system, child marriage, sati

In a Joint family, the position of each and every individual was clearly defined. The head of the
family was the decision maker of all the matters. He was respected by everyone. He assumed the
role of a manager and all the major decisions are made by him. The place of women and children in
the family was also defined clearly.

In India, caste system was prevailing in the past. Different occupations and labours were assigned to
different castes. By knowing the caste itself, people were able to identify what job does the person
do. For example, the Kshatriyas were the rulers, the brahmins were the priests, Vaishyas were the
merchants and so on.

Social values and attitudes :

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The old social institutions and systems like caste system and joint-family systems are fast
disappearing from India. The superstitious customs like Sati and Child marriage were abolished in
the past itself. People are attracted by the Western systems of independence. Business and labour
are not confined to specific castes today. They are distributed among all. The attitude towards
business as a profession has come up now. Society's view of its authorities, responsibilities,
achievement and work, towards ownership and management has changed considerably. These all
are definite indications of social environment of business.

Example : Now a days, Women no longer are willing to sit at home to do household works and
raising children alone. They go out for work and earn a livelihood. They head large corporations
and banks. This is a clear change in the social attitude towards women.

Education and Culture :

-------------------------
Education and culture are the essential components of social environment. Education plays an
important role in today's business world. The need for business education for matching the
requirements of the industry is widely accepted. Manpower utilisation is done in a very efficient
manner in many indutries.

Example : Companies are sponsoring for their employee's business education these days. There are
executive development programmes intended for working people in many business schools.
Business schools enjoy a high place among people.

The literacy rate is directly related to the level of culture of the society. Due to this the business
ethics are correctly followed and morality of the business is maintained, thereby improving the
business and organizational culture.

Government's role and responsibility :

----------------------------------------
Achievements and aspirations of the society have to be clearly defined and categorized. Any
divergence between the two has to be bridged through social effort taking care of social welfare and
social constraints. Government is the apex institution who takes care of the welfare of the society.
The democratic government has the responsibility to takes care of the social order and harmony.
Social progress will be harmed by the social tensions. Business cannot flourish under any social
tension.

Social groups and movements :

---------------------------------
Social groups and movements causes social tensions. Groups are formed by frustated individuals on
the basis of caste, creed, religion, trade, language and profession. The tensions caused by these
Social groups is a critical factor of the social environment. Some of these groups will have business
interests.

Examples : Trade Unions are an example of the social group. Trade Unions are formed in the past
for the benefit of the employees. But sometimes these unions pose challenges to the business
organizations. They start strikes against the management, even without the whole consent of the
employees and thus will create challenge to the business operations.

Socio-economic order :
------------------------
India has a diverse society. We boast of "Unity in Diversity". Indian society consists of different
religions, castes, traditions, culture, food and dress. Indian economy is also a combination of
traditional and modern sectors. Dualism in technology also exists in India. This social order is often
disturbed or modified through social movements and policy formulations on science and
technology, animal husbandary, family planning, ecology etc. All these will make a unique socio-
economic order for India.

Example : Aeroplane flying on the sky and the bullock carts plying on the village streets, at the
same time are examples of technological dualism in India.

Social Problems and prospects :

---------------------------------
Socio-economic development and industrialism has caused a fall in death rate and increased birth
rate. This resulted in the population explosion in India.

Example : The increased population has brought unemployment, poverty, poor sanitation and
housing facilities, congestion in urban areas, pollution and increased anti-social activities. These has
become social problems in India today.
The social problems will affect the growth of Industries in India. By attempting a social-cost benefit
analysis, the society can move from pre-industrial stage to post-industrial stage of development.

From the above critical elements of the social environment, we can conclude that society and
economy interact with each other. By improving the social environment, business will establish,
there by improving the economy of the country.

Question 2. a. Briefly explain the growth of private sector in India. Also mention the major
differences between private and public sectors.
b. Industrial Sickness is essentially a managerial failure. Discuss the statement referring to
some managerial decisions.

Answer 2.a. Briefly explain the growth of private sector in India. Also mention the major
differences between private and public sectors.

Growth of Private Sector in India

The private sector refers to all types of for-profit entities such as individual and corporate
enterprises, banks and any other non-governmental organizations. Private sector also includes all
the individuals not employed by the state. Various factors of production and production activities
are owned and managed by private individuals or corporates. Their main intention is profit.

At the time of independence most of India's production and trade were in the private sector. The
role of public sector enterprises in the Indian economy growth a very limited at that time. But after
India became republic, the public sector was boosted by the efforts taken by the Central and State
Governments.

But the importance of private sector in Indian economy is directly related to its contribution to the
national income and employment sector. The economy of India is the fourth largest in the world as
measured by purchasing power parity (PPP). With a gross domestic product (GDP) of US
$4282.204 billion, it is behind only USA, China, and Japan. Growth in the Indian economy is taking
place because of the enormously energetic and inventive private sector.

According to the latest available statistics, the public sector contributed 25 percent of the domestic
products while the private sector contributed 75 percent. The private sector had a major share in
agriculture, forestry and fishing(98.3%), manufacturing(85.8%), construction(82.8%) and Trade,
hotels & restaurants(96.8%).

Growth of Private Sector according to the survey by CRISIL

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According to a survey undertaken by CRISIL, India's leading Ratings, Research, Risk and Policy
Advisory company, despite public sector registering higher growth rates than the private sector, the
contribution of private sector to overall growth was always higher because of its significantly higher
share in GDP. Only during the first half of nineties did both public and private sectors register
growth rates of 4.9 percent each. But in the second half 1990s, GDP growth in public sector again
outpaced the private sector GDP growth. This was mainly a result of the increases in salaries and
wages after the implementation of the Fifth Pay Commission’s recommendations for Government
employees.

In a brief period between 1993-94 and 1996-97, the private sector grew faster (7.6 percent per
annum) than the public sector (5.7 percent per annum) as a result of the FDI liberalization measures,
industrial delicensing and external demand boost from devaluation. As opposed to the poor growth
in private sector GDP, there has been a clear shift in the composition of investment in the favour of
private sector.
The share of private sector in total investment shot up from 56 percent in 1990 first half to 71
percent by 1990 second half. Sector analysis shows that the private sector was better placed in some
areas (e.g. financial services, transport, community and social services).

The largest industrial activity among the private sector corporate units in terms of paid-up capital
was processing and manufacturing of metal products followed by chemicals, textiles, leather and
leather goods, food stuff manufacturing, other processing and manufacturing, commerce,
agriculture and allied industries.

Selected Growth Rates :

-------------------------
The table below shows the selected growth rate of organised Indian public and private sectors
during the period 1985-1995.

Nominal Sales Gross Fixed Assets PBDIT

1. Public Sector 13.18 15.1 16.2
2. Private Sector 17.93 18.4 22.0

According to the above table, the nominal sales in case of private sector recorded a growth rate of
17.93 percent as against 13.18 percent for the same in the public sector, during the same period.
Also the Gross Fixed Assets had an annual growth rate of 18.4 percent in Private sector against 15.1
percent in the public sector. PBDIT (Profit Before Depreciation interest and tax) also had an annual
growth rate of 22 percent in Private sector against 16.2 percent in the public sector.

So from the above table, it can be concluded that during recent times, all the growth rates
mentioned in the table are higher in private sector as compared to the public sector.

Differences between private and public sectors

1. Refers to any activity owned, controlled and managed by the government and social good is the
main aim of this sector
1. Refers to all the individuals and corporate enterprises, in any field of productive activity, with the
intention of making profit. The ownership and management lies in private hands
2. Public sector companies are mainly in the basic, heavy and capital intensive industries
2. Private Sector is predominantly in industries which cater to the consumer markets directly
3. Being government owned enterprises, the choice of investment, location, pricing, employment
and all other important policies are centrally decided in conformity with the macro and socio-
economic objectives
3. The constituents of the private sector do not have multiple objectives to pursue, they operate as a
business enterprise and business means, profit and economic advantage and not social service
4. Public Sector has a little more than one thousand companies
4. Private Sector consists of more than two lakh companies
5. Public limited companies are large and widely held
5. Private limited companies are small and closely held
6. Public sector investments are more suitable for low-profit yielding, long gestation and heavy
investment sectors
6. Private Sector investments are more in quick-yielding, short duration and profit yielding sectors.

Answer 2.b. Industrial Sickness is essentially a managerial failure. Discuss the

statement referring to some managerial decisions

Industrial Sickness has become more common in small and large scale industries in recent
times. It can occur due to a number of reasons like wastage of resources, financial hardships,
managerial failure, government policies regarding the production, prices and distribution,
change in investment pattern, shortage of power, transport and raw material.

The most important factor causing industrial sickness is managerial failure or mismanagement.
Some of the managerial failures are:
* Inability of managements to keep up with technological changes
* High inventory build ups
* Inability to react to market changes
* Seeking softer options in industrial disputes without considering the long-term consequences
* Corruption

In a large number of industries, the sickness is caused by bad management. Many people
without any managerial abilities entered the industries as managers prior to 1991's new
economic policy. Some of them were corrupt and some others took decisions with a short-
sighted view and concentrated only on making money. The business ethics were not followed
properly by these managers.

Some examples of managerial failure are discussed here. I am familiar with the following
companies discussed below.

* 'AMC' was based in Pondicherry and it was a Glucose manufacturing company with Starch as
the raw material. The company was in good working condition in the early years. But later
labour problems arose. Trade unions came into the scene and the employees went on strikes.
Company was locked-out for some time. Then the management and trade union had
discussions. The higher management without much consultation with the experts gave in to
the Union demands and offered higher pay scale. The company did not have funds to support
this decision. And this process of strikes, lock outs, discussions and higher incentives recurred
for a number of times and the company came under immense debt and the unit became sick.

The competition in the starch industry was immense and the company couldn't stand in the
competition. The management started cutting down on man power and also production.
Gradually, over a period of some 2-3 years, the company became a sick unit completely and
after another one year, it was closed down. Now the machinery and the building is
deteriorating.

Here, the management's decision for giving very high incentives to employees without much
funds was the failure. The labour problems, financial hardships, non availability of raw
materials and inexperienced management added fuel to the fire and caused the close down of
the factory after being a sick unit for a number of years.

* Another example is of Advanced Technology Lab (ATL) which was a leading software
company based in Chennai. It started its operations with great expectations. The company had
offices in Chennai and Calcutta. The management spend a lot of money for extravagant
outlook of the offices and employees were given a lot of benefits. Students were admitted for
training and offered 100% placement. That decision was the real cause of the downfall of ATL.
Because of the heavy expenditure and competition in the industry, ATL could not make any
profit. The placement offer the management made to the students also failed. The
management borrowed fund from outside and the company plunged into debt, because they
couldn't cut down the costs. Due to the lack of funds, the company could not proceed further
and closed down.

Here the management couldn't perform according to the expectations and the decision of
giving placements to the students admitted for training was a major burden. The management
could not give placements to all as promised. So the others who were not placed created
problem and the CEO of the company was arrested. This is essentially a managerial failure due
to poor financial planning and lack of long-term view.

From the above examples, we can conclude that lack of management expertise is a major
cause for industrial sickness or otherwise, Industrial Sickness is essentially a managerial
failure.
 Question 3. Critically analyze the impact of regulatory framework on growth and efficiency
of industry.

Answer 3.Economic activities of a country are controlled and regulated by the Government. The
Government has formulated regulatory industrial policies. This is to industrialize the nation and
assign major roles to public sector in order to achieve the basic goals of the nation like economic
growth, self-reliance and social justice. Since India’s independence in 1947 and before the reforms
in the 1990s, India had adopted a command and control approach to development. Apart from
regulating external trade and exchange rates, the government nationalized various productive
activities. Further, a highly complex regime was set up to regulate industrial activities through
licensing control, reservation of many productive activities to the public sector, and control of labor
markets, prices, and wages.

The regulatory policy framework has four major objectives:

1. Promotion of heavy industry giving emphasis to public sector

2. Enhanced Government support to the small-scale sector

3. The spread of industrialization to backward areas of the country

4. Economic self-reliance, intended to cut down the import of technology, thereby improving
technical innovation.

Therefore, industrial activities were subjected to a wide variety of regulations and controls by
means of regulatory industry policy framework. This policy framework affected the structure of the
industry and the growth and efficiency of the industry.

Effect of regulatory framework policy on Industry

The industrial licensing needed to start a new unit, to change the location of the unit etc., sometimes
proved to be barrier to the growth of the industry. It limits expansions, specializations etc restricting
growth. The MRTP Act (Monopolies and Restrictive Trade Practices Act) created additional
barriers for large firms entering into manufacturing new products and expansion. The act actually
allowed the existing firms to monopolize the markets by disallowing new entrants.

The foreign investment control in the industrial policy regulatory framework had put restrictions on
foreign investments, thereby reducing the growth and efficiency of industry. This was because the
foreign company subsidiaries in India couldn't get much support and technology from its parent
company due to restrictive foreign investment policy.

The Government had given much preference to the public sector in major industries like Air
transport, railways, defense, coal etc. Since the public sector enterprises (PSEs) had larger burdens
like employment generation and reduction in regional differences through industrialization, the
performance of the PSEs were poor. This was a major setback of the regulatory framework.

Encouragement to small scale industry (SSI) also had a major disadvantage. Because of the
inhibition of growth beyond asset limits and reduction of competition with medium and large scale
industries, the SSIs remained small and they did not worry about technology up gradation. As a
result of this the technology up gradation and modernization have become a major challenge to the
SSI's today.
The taxation, administered prices etc also hindered the growth and efficiency of industry in a big
way. Both these policies in the regulatory framework increased the costs of transports and raw
materials thereby reducing growth.

Impact on the growth of industry:

The industrial sector had a rapid growth during 1950-65, but the growth was reduced during 1966-
80, thereby reducing the economic growth of the country as well. The structure of every economy
goes through two phases of changes. In the first stage, the share of agriculture in Gross Domestic
Product (GDP) falls and that of manufacturing output increases. In the second stage, the share of
agriculture falls and that of manufacturing output after reaching the level of 25 to 30 percent starts
declining. The share of service sector increases.

India also experienced this structural change. Share of agriculture declined from 47.8 percent to
35.6 percent and the share of service sector increased from 31.7% to 40%, but the increase in the
share of manufacturing (about 2.4) was not significant. From these data, we can understand that the
implementation of the regulated industrial policies and its outcome were not satisfactory. The
growth of the economy and that of the industry was very slow.

Impact on the efficiency of the industry :

------------------------------------------

The efficiency of the industry was also affected because of the regulatory framework. The
Incremental Capital Output Ratio (ICOR) were higher in industries where import was substituted in
absence of natural comparative advantage. It was also higher in industries which were characterized
by the underutilization of capacity and technology. The efficiency of industry was also declined due
to many other reasons like regional disposal policies, creation of excess capacity, division of
industrial units into uneconomical sizes and rise of raw material costs.

Thus the slow growth of economy and decline in the efficiency in the industry affected Indian
competitiveness in the world market and affected the exports also.

Question 4. Write short notes on the following :

a. External Debt and Debt Servicing Burden

b. Trade Policy Reforms

c. Economic Reforms and Employment

Answer4 a. External Debt and Debt Servicing Burden.

External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors
outside the country. The debtors can be the government, corporations or private households. The
debt includes money owed to private commercial banks, other governments, or international
financial institutions such as the IMF, World Bank and Asian Development Bank(ADB).

India has been borrowing funds from both internal and external sources since independence.
Borrowing from external sources is called the external debt. The issues regarding the external debt
are more complex.The external debt can be broken down into long-term debts and short term debts.
Long term debt :

Long term debt can be any of the following :

Multilateral Debt : These are loans extended by multilateral organizations to Government or public
sector and private sector bodies with Government guarantee. These include credits from Internation
Development Association (IDA), World Bank and Asian Development Bank (ADB).

Bilateral loans :The bilateral loans are borrowed from other governments. These loans are given to
governments and public sector organizations.

Debt to IMF : Loans from International Monetary Fund (IMF) were taken to ease out balance of
payments difficulties when India resorted to withdrawals under Extended Fund Facility
(EFF)/Supplementary Financing Facility(SFF).

Export Credit : Comprises buyer's credit, supplier's and export credit for defence purchases.

Commercial borrowing : These include bank loans, suppliers' and buyers' credits, fixed and floating
rate bonds (without convertibility) and borrowings from private sector windows of multilateral
Financial Institutions such as International Finance Corporation.

Non-Resident Deposits : These refer to Non-resident deposits and foreign currency deposits

Rupee Debt : Refers to debt denomination inrupees owned to Russia and paid through exports

Short term debt :

Refers to trade related debts due to be paid off at a date less than one year in the future.

India had a very less share of external debt during independence. But when the economic planning
started in 1951, to cover investments and balance of payment gap, the government sought external
assistance. In 1951, the total external debt was of the order of Rs 32 Cr, or around $67 million. The
external debt stock of the country stood at US $ 105 billion at end-December2002. India got
external assistance in several forms like outright grants, loans in Indian rupees and loans payable in
foreign currencies. Many countries provided technical assistance also.

External Debt Servicing Burden :

India's dependence on external debts increased steadily since independence. This resulted in the
icrease of India's debt servicing burden as well. Debt Serviceing Burden refers to the amount
comprising amortisation and interest payments. The growing external debt of the country has forced
the Reserve Bank of India and the Government of India to introduce a number of measures to
contain it like the modernisation in the Non-resident deposit interest rates, encouragement to
corporate sectors to prepay expensive loans, limits on external commercial borrowings etc.

To reduce the debt service burden, Government of India has taken many other steps like the
liberalisation for foreign investments and promotion of exports. This would enable the reduction of
India's external debt service burden significantly.

India has repaid sovereign debt, both multilateral and bilateral, ahead of time. For IMF purposes,
India is now classified as a creditor country rather than a debtor country. According to World Bank,
India was 3rd most indebted nation in 1991, and was the 9th most indebted nation in 2001. India’s
debt service ratio has improved progressively over the years owing to the combined effect of
moderation in debt service payments and increase in external current receipts.

4. Write short notes on the following :

b. Trade Policy Reforms.

India's trade policy has undergone major changes from 1950 onwards. Major reforms in the EXIM
policy or trade policy have improved the transitional process of Indian economy towards
globalisation by encouraging exports and permitting imports of essential inputs as well as capital
goods.

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

The major objectives of the trade policy reforms have been met which includes the following
changes:

* Import licensing was abolished relatively early for capital goods, raw materials and intermediates
which became freely importable in 1993

* A switch to a flexible exchange rate regime was brought in

* Quantitative restrictions on imports of manufactured consumer goods and agricultural products

were finally removed on April 1, 2001, almost exactly ten years after the reforms began.

* Customs duty rates have been cut down across the board from a peak of 300% in 1990 to a peak
of 40% in 1997.

The objective of these reforms were liberalisation, transparency and globalization by promoting
exports and thereby improving the competitiveness of Indian industry in the global market. Indian
Government's Medium Term Export Strategy(MTES) presented in 2002 for the duration 2002-2007
provides an indicative sector-wise target with a vision for creating a stable policy environment. Its
target is to achieve one percent global trade by 2007.

From all these measures taken by the government, we can understand that India is heading towards
globalisation by opening up its economy. It takes out the restrictions and controls on the importers
and exporters and allow them to trade freely. The tariff levels have been brought down so that it
matches international standards. All these will improve India's trade balance and economy.

4. Write short notes on the following :

c. Economic Reforms and Employment

India initiated the process of globalization in eighties there was a feeling that excess control and
over protection of domestic market in India has resulted in slow economic development and
unsatisfactory performance of the Indian economy in the post independence period. A number of
reforms in different sectors namely trade, industry finance, were introduced to promote
liberalization, privatization and globalization in order to attain macro economic stability and put the
economy on higher path of growth.
Unemployment rate in India has increased significantly from 6.0 per cent in 1993-94 to 7.3 per cent
in 1999-2000. The total volume of unemployed persons has touched the figure of about 27 million
in 1999-2000. Even to the extent that growth did occur in different sectors during the 1980s and
early 1990s, the impact of this growth on employment was limited. The Economic Reforms lay
excessive reliance on foreign investment not only for industrial development but also to solve the
unemployment problem faced by the country. Unemployment rates are higher in urban than in rural
areas.

The organized sector's employment generating capacity came down to near zero and in the public
sector, it became negative. The agricultural growth in India can only lead to employment
generation. But it did not happen. The share of agriculture in the GDP declined. The annual rate of
growth of employment in agricultural sector was slowed down. If this is to continue, the economy
would face a higher unemployment growth and an ever-increasing gap between the demand for jobs
and supply of job opportunities. A study conducted by EPW Research Foundation in early 1994
found that the total employment which showed an increase in first two years of the Reforms, had
slumped thereafter.

The theme of export-led growth emphasized by the Reforms will expose the Indian industry to the
vagaries of international markets which can have very negative effect on employment in the long
run. Export thrust, unmindful of the demands of the domestic requirements can be quite harmful as
has been experienced in the case of cotton thread case. In this case, large scale export of the coarse
cotton thread had catapulted 110 weavers in Andhra Pradesh to starvation deaths.

NASSCOM estimates indicate that employment in the IT sector rose from around 285,000 in 1999-
2000 to just above one million in 2004-05. This make total employment from software and
ITenabled services in 2004-05 equal to 0.007 percent of the non-agricultural workforce in 1999-
2000.

The employment strategy of the 10th five year plan tells us that the unorganized sector is
contributing to nearly 59% in GDP, 92% to employment and to the exports of the country. The
percentage of sickness in the unorganized sector in terms of outstanding debts is much lower than
the organized sector. The Report of the Planning Commission sets the employment strategy for
future also. The plan will focus on encouraging the use of labour intensive and capital saving
technology. This is intended for the growth of unorganized sector, which constitutes about 92% of
India's employment. Unorganized sector need to be more productive inorder to sustain itself against
domestic and international competition.