CU MBA SEM I Business, Society and Law

MBA
BUSINESS, SOCIETY AND LAW
21MBA-611
www.cuidol.in
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MASTER OF BUSINESS ADMINISTRATION
SEMESTER-I
21MBA611
CHANDIGARH UNIVERSITY
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Pro Chancellor, Chandigarh University, Gharuan, Punjab
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Academic and Administrative Management

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Executive Director – Liberal Arts Director – IDOL
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CONTENT
Unit 1: Environment Basics ................................................................................................... 5
Unit 2: Economic Environment-I......................................................................................... 28
Unit 3: Economic Environment-Ii ....................................................................................... 41
Unit 4: Global Business Trends ........................................................................................... 78
Unit 5: Policies And Business Laws .................................................................................. 108
Unit 6: Legal Environment-I ............................................................................................. 131
Unit-7 Legal Environment-Ii ............................................................................................. 168
Unit 8: Financial Environment-I ........................................................................................ 183
Unit 9: Financial Environment-Ii ....................................................................................... 217
Unit 10: Indian In World Economy ................................................................................... 240
Unit 11: Natural Environment-I......................................................................................... 264
Unit 12: Natural Environment-Ii........................................................................................ 283
Unit 13: Business New Trends .......................................................................................... 310
Unit 14: Technical Environment ........................................................................................ 334
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UNIT 1: ENVIRONMENT BASICS
Structure
1.0 Learning Objective
1.1 Introduction
1.2 Business Environment
1.2.1 Concept
1.2.2 Characteristics
1.3 Components of Business Environment
1.3.1 Internal Environment
1.3.2 Elements of Internal Environment
1.3.3 External Environment
1.3.4 Micro Environment
1.3.5 Macro-Environment
1.4 Environment Analysis
1.4.1 Concept
1.4.2 The process of environmental analysis
1.5 Summary
1.6 Keywords
1.7 Learning Activity
1.8 Unit End Questions
1.9 Suggested Readings
1.0 LEARNING OBJECTIVE
After studying this unit, you will be able to
 Highlight the nature and features of Business Environment

 Differentiate between Internal and External Business Environment
 Outline the implications of elements of Internal Environment
 Highlight the implications of elements of External Environment
 Illustrate the process of Environmental Scanning
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1.1 INTRODUCTION
Business is surrounded by environment where it takes birth, progresses or operates and

decline. Business shares a strong interaction with environment as it receives input in the form
of material, machine, method, money and manpower, etc., processes this input by adding
value to it and delivers the finished product in the form of goods and services to the
consumers in the environment.
The factors, circumstances and events which occurs and influence the way a business
operates, either in a positive or a negative way and are called as an 'environmental factors.'
The environmental factors are categorized as: internal environmental factors and external
environmental factors. The occurrence of activities or events which are easily manageable
are categorized under Internal environmental factors. The occurrence of activities or events
outside the organization which are not easy to manage and anticipate will be categorized as
external environmental factors.
Environment Analysis and scanning becomes crucial method for any competitive business to
identify, appraise and respond to various opportunities and threats in business environment.
The need of an hour is that the businesses need to be proactive and agile to cope up with the
rapid changes, improve the performances, tap useful resources, evolve as a strong competitor
and ensure sustainable development.
1.2 BUSINESS ENVIRONMENT

1.2.1 Concept and Meaning:
To survive and succeed in any type of industry and in any region, business needs to anticipate
and adapt to the changes in the environment. The different dimension of business-like type of
business, business location, products pricing, supply chain and logistics or the organizational
policies is affected by the elements of environment. The capability of any business to modify
and reshape itself to the changes in the environment ensures its successful existence. For
instance, when new government is elected in central or there is amendment in any economic
policies, then businesses need to analyze and adapt to such changes.
Whenever there is change in preference or lifestyle of customers that reflects clearly in shift
of demand. Like increase demand for jeans can reduced the sale of other traditional wear
because the customers feel more comfortable in jeans than any other attire. Business need to
implement essential modification as per advancements or development in the existing
technology in similar way as Flat screen TV has replaced old CRT TV’s and laptop has
replaced heavy bulky personal computer configurations. Such factors are not in the control of
any business and they are left with the option of building agility in their operations which is
possible when business can establish proper relation with the different elements of business
environment.
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The term ‘business environment’ connotes all those factors, external forces and institutions
like customers, competitors, suppliers, government, social factors, technological factors,
political factors and legal factors, etc. which acts on business operations and which are not
manageable by business. Such elements exert direct or indirect influence over the business
firm.
Thus, business environment may be termed as the set of elements in the surroundings that has
a direct or indirect bearing on the performance of the business. It may also be defined as
collective action of the external factors, such as economic factors, social factors, political and
legal factors, demographic factors, and technical factors etc., that affects the decision-making
process of an environment.
1.2.2 Characteristics of A Business Environment:
Aggregati Specific Far-

on of and Interrela Dynamic Unpredic Entangle Multi-
Reaching Relativity
External General tedness Nature tability: ment: faceted
Impact
Factors Forces
Fig: 1.1 Characteristics of Business Environment

The characteristics of business environment are as follows:
(1) Aggregation of External Factors:
The external factors do not act upon business in isolation to each other nor they exist
mutually exclusive in the environment. That why we have to consider them as an elements of
one set i.e., Business Environment and they are not manageable by business, even though
businesses always try to influence these factors. So, collective action of many such elements
is important feature of Business Environment.
(2) Specific and General Forces:

The external elements to the business can be categorized as – specific and general.
(i) Specific: These are those elements which are industry -specific like customers, investors,
suppliers, competitive firms, etc.
(ii) General: These are those elements which have general impact on all industries like
social, political, legal and technical.
(3) Interrelatedness:
There exists inter-relation between the different factors of business environment. For
instance, a new Government got elected in the center and they approved new amendments in
Import-Export Policy. The new central government in power is an important political change
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and amendments in Import-Export Policy is economical change. Thus, changes in one
element of business environment either introduce changes or influences another factor.
(4) Dynamic Nature:

Change is only constant. So, it’s obvious that different elements in the environment are not
stable one, they keep on changing and as they are inter-related so they create domino effect
on another factor.
(5) Unpredictability:
There are so many techniques utilized for environmental scanning and forecasting but still
there is a scope of unexpected changes that can influence business environment factor. As
these factors are dynamic in nature, so the changes introduced in them are quick. For
instance, a specific technology that is mostly utilized by organization like SAP module got
outdated or new application got introduced with more features. Then within a day or within
few hours SAP technology got outdated and if businesses do not respond to this change then
they can suffer losses. Even after studying trends and anticipating future status of business
environment, unpredictability exists.
(6) Entanglement:
Business Environment is like a web of factors that not only affect businesses but also each
other as well. That’s why their dynamic nature, unpredictability and inter- relation make them
very complex for businesses to deal with them smoothly.
(7) Multi-faceted:
Different kind of environmental changes and development is being perceived differently by
different organization based on their existing resources, competitive advantage and capability
to withstand the future challenges. For example, Ayurveda is an opportunity for Indian
herbal companies while it is a threat for foreign cosmetic brands.
(8) Far-reaching impact:

There is dependency between business and its environment, so any change in an
environment has a direct impact on organization in different ways.
(9) Relativity:
Business experience more influence from local condition and that’s why there are different
elements of Business environment need to be considered in different places or countries. For
example, technological factor is very important for business related to IT sector but there will
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be difference in considering technological aspect for small business operating in small town
and small business operating in metro city.
1.3 COMPONENTS OF BUSINESS ENVIRONMENT:
There are two main components of Business Environment viz., internal and external
environment as follows:
Business Environment
Internal External
Environment Environment
Micro-
Environment
Macro-
Environment
Fig 1.2: Components of Business Environment

1.3.1 Internal Environment:
It is defined as all the forces or conditions that are available within internal environment of an
organization that affects its functions and performance. It is also known as controllable
factors because business can control them.
The conditions, entities, events, and factors within an organization that influences its
operational activities and choices, particularly the behaviour of the employees is known as
the internal environment. It is defined as all the forces or conditions that are available within
an environment that affects an organization and business. It is also known as controllable
factors because business can control them.
Internal capability of an organization is termed as the internal environment. Funds are
allocated as per budget from time to time to ensure smooth operations of an organization,
physical assets like machinery, raw material, building, etc. are used for transforming inputs to
outputs and workforce represents skilled and unskilled employees, managers and top
management executives who are responsible for decision- making and technological know-
how are important aspect of Internal Environment
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1.3.2 Elements of Internal Environment:
The following figure describes the elements that make up the internal environment.
Internal
Environment
Value Management Human Organizational

System Structure & Resources Climate
Nature
Vision, Internal Company Other

Mission and Power Image& Factors
Objectives Relationship Brand Equity
Fig 1.3:Elements of Internal Business Environment

VALUE SYSTEM (Organizational Culture)
The value system of an organization is like an organization’s personality. Every
organization is different from other organization even though it can be from same industry
like traits of persons are different which defines distinct personality, of an individual. so does
each organization. The value system of an organization distinguishes it from others and
shapes the actions of its members. There are four important components that of a Value
system or Organizational Culture:
 Values
 Heroes
 Ceremonials
 Social network
Values are the fundamental faith that define employees' accomplishments in an organization.
For instance, many organizations give importance to their employees who are engaged in
some sports activities or cultural events. Even such organizations organize sports or cultural
events among different branches to motivate and respect the hobbies of employees. In return,
these organization enjoys employee’s loyalty and increased productivity. So, arranging extra-
curricular events reflects organizational values.
The next component is heroes. A hero is an idealistic person who echo the organization’s
attitudes, image or values and serves as an epitome to other employees. A hero is sometimes
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the initiator of the organization (think Steve Job of Apple and JRD of Tata). However, the
hero of a company can be daily wage worker and not the founder; like as hard‐working
paralegal Erin Brockovich, who had a tremendous impact on the organization.
Ceremonials, another component, are programmes or ceremonies that is used as important
recognizing and rewarding method for outstanding performance of the employees. Awards
banquets, company gatherings, and quarterly meetings can acknowledge excellent employees
for outstanding service. The honourees are treated as heroes who sets an example and
motivate all employees of the company.
The final and informal component is the social networkthat acts as very important channel of
communication. It is also referred as company grapevine that simultaneously shares the
stories of success and failure. Social network shoulder’s the responsibility of integrating
employees into organization's culture and values.
Hence concerted behaviour of human capital of an organization is termed as organization’s
value or culture. The extent to which the culture of the organization is shared by all, leads to
an important factor contributing to success.
For example when the Murugappa group has taken over the EID parry group, one of the
most profitable business of Parry group i.e. of liquor was sold off as it was against the value
system of Murugappa group. So, value system is an important factor evaluated by many
companies while selecting the suppliers, distributors and collaborators etc.
VISION, MISSION AND OBJECTIVES:

Vision means the ability to think about the future with imagination and wisdom. It is an
important factor in achieving the objectives of the organization.
An organization's mission statement reflects the core purpose of its existence and what is
their operations meant for. It highlights the core competency of an organization and
differentiate it from other organizations of its type. The mission is the medium through which
the objectives are achieved.
A mission statement is not only text or content on the paper but communicates organization’s
beliefs and objectives. This declaration should be a habit which provides guidance and
motivation to the employees of an organization. A mission statement is like an answer for,
“What are our beliefs?’, “What is our purpose?” This statement directs the strategies of an
organization by re-grouping its employees to work collaboratively for common objectives.
The effectual mission statements will lead to constructive efforts. Business Environment is
very dynamic and consumer are conscious more about quality products, so in such scenario
efficacious mission statement's that is meant for catering the expectation of consumers
effectively is must. A good mission statement is precise in identifying the following intents
of a company:
Customers — who are end-users
Products/services — types and features of products or services.
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Location — where the production will take place
Philosophy — what will be underlying principles
Organization’s Vision, mission and objectives guides its priorities, philosophies, policies etc.
e.g., Ranbaxy’s mission is to be recognized as world class pharmaceutical company that
thrust upon R&D which influences its growth strategy.
TOP MANAGEMENT STRUCTURE:

The official structure of an organization is the hierarchical ordering of people and tasks.
This structure ensures dissipation of information within the organization, what tasks will be
carried out by different departments and the power level of decision‐making power rests. Top
management structure is the configuration of the board of directors, the organizational
structure, and the quality of the board.
Board Members are the highest decision-making authority of an organization so its quality is
considered as a critical factor. Extent of professionalism, stand of nominee of financial
institutions and the shareholding pattern could have important managerial implications. All
these factors are of great importance from the point of view of the company’s internal
environment.
Organization chart is referred by some companies to simplify the breakdown of its formal
structure. This organizational chart helps to visualize the formal lines of authority and
communication within an organization.
In some organization promoters owns majority of share like Wipro, Tata group company and
such promoter’s stance is at risk.
INTERNAL POWER RELATIONSHIP:

The internal power relationship between the board of directors and senior executive officers
highly affect the decision making process of the organisation. The quality of human resources
of a company depends largely on competence, commitment, attitude and motivation which
plays an important role in the success of an organisation. The top management enjoys the
support from different level of employees and shareholders have an important impact over
the decision and their implementation.
HUMAN RESOURCES:
The characteristics of human resource like quality, skills, attitude, morale, commitment,
involvement and initiative influences organizational culture, strength and weakness and
environment of the organization. Western countries treat their few employees as process
12
improvers and others as workers, while Japanese companies treat their all employees as
process improvers.
COMPANY IMAGE AND BRAND EQUITY:
The image and brand equity of the company helps in raising finance, choosing dealers and
suppliers, new product introduction, form alliances with marketing intermediaries, opting for
joint ventures and other alliance and entering a sale or purchase contract, etc.
ORGANIZATIONAL CLIMATE:
One of the important outputs of the company's culture is the organizational climate. The
whole theme of the organization and the self-esteem of its employees are components of daily
climate. The optimistic or pessimistic outlook of employees affects “climate” of the
organization. The day-to-day co-relation and inter-activity of employees are emblematic of an
organization's climate.
OTHER FACTORS:
Belief system of management is the manager's set of personal notions and values about
people and work and as such, is something that the manager can dominate. According to
McGregor, who emphasized that a manager's ideology creates a self‐fulfilling prediction,
which leads to two types of managers. The Theory X managers assumes employees as one
who are not interested in their work naturally and need proper command for execution of
task, while Theory Y managers assumes employees are responsible and self – motivated for
their work so participative style of management is adopted. These managerial beliefs then
have a succeeding result on employee behaviour, leading to more precise anticipation. As a
result there is always modulation need to be maintained between organizational philosophies
and managerial philosophies.
Empowerment means assigning the authority of decision‐making to subordinates, that
inculcates responsibility and confidence. Most of organizations and managers are adopting
participative style of management that encourages engagement and team work. Additionally,
element of guidance helps to increase the efficacy of the employees and thus contributing in
cost reduction, quality improvement, better customer service and strong employee’s
commitment. Also, there will be considerable upgradation in response time as proper
information is shared among different levels of management efficiently. Empowerment helps
to resolve issue immediately as employees close to situation like machine breakdown in floor
shop can immediately respond and resolve the issue than the manager who might be not
present in that vicinity.
Competency of an organization is also influenced by the production capability, technology, R
& D work, supply chain and logistics etc.
1.3.3 External Environment
External environment refers to external aspects or forces of the surroundings of business
enterprise, which have both facilitating and inhibiting influences on the functioning of the
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business. The key dimension of an external environment consists of a micro environment and
a macro environment. The classification of External environment is as follows:
Constituent
of External
Environment
Micro Macro
Environment Environment
Fig 1.4:Sub-categories of External Business Environment
1.3.4 Micro Environment:
Micro environment of business enterprise refers to analysis of small area or immediate

periphery which comprises of those forces of the business organization that influence it’s
functioning. The micro environmental factors are intimately linked. Some of the micro
factors may be specific to a firm and it is not necessary that the impact of micro forces will be
same in a particular industry.
Micro Environment analyses the following important factors:
• Human resource (Employees) of the firm, their characteristics and how they are organized
in the firm.
• It analyses the way fund is raised from the market.
• It analyses the suppliers of raw materials and the supply chain network between the supplier
and firm being developed.
• It analyses the customer base of firm who are major and minor clients of business.
• It analyses the local communities of firm where it’s operating.
• It analyses the direct competition from the competitors and how they perform in business.
The most important performers in the micro environment are as follows:
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Suppliers
Public Customers
Micro
Environment
Market
Financers Intermediarie
s
Competitors
1.5: Elements of Micro-Environment

 Suppliers:
Business enterprises require a number of suppliers, who supply raw materials and
components to the company. Unpredictability regarding the supply, dependence on a single
supplier and supplier’s terms and conditions has an adverse effect on the cost and production.
Because of this, vertical integration, supply management, outsourcing, partnering and
relationship marketing has geared popularity in the recent times.
Company like Nirma has opted for backward integration because they believe that the captive
production plants for the raw materials are the best way to keep a check on the production
cost.
 Customers:
In today’s scenario, Customer is a King and central point for any business as they influence
business survival and success. All customers expect high quality products, speedy deliveries,
comfortable return and exchange policies, offers and after sales service, proper 24 × 7
customer support which has drastically changed the business environment. Success of
business largely depends on identifying the needs, desires, tastes liking etc. of a customer.
Now days, online shopping portal has gained popularity in the Indian market which has
opened new market for the Indian companies. It has not only created an opportunity for new
companies but threat to existing shopping malls and retailers. Portals like Flipkart, Snapdeal,
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Myntra, etc. are taking advantage of this new shift in the customer’s lifestyle of purchasing
goods from home i.e., through online websites.
 Market Intermediaries:
The firms which help the companies in promotions, sales and distribution of the goods to the
final buyer are known as market intermediaries. It includes agents, brokers or merchants who
associates company and the final consumer. The firms which are in the business of
warehouses and transportation, they assist the manufacturing companies to stock and move
the goods from their origin to destination. Advertising, market research and media firms help
their client companies to promote their product and target the market effectively.
Any wrong choice or misunderstanding regarding market intermediaries can result in heavy
losses. HUL has confronted issue like collective boycott in Kerala on the issue of trade
margin.
 Competitor:
An opponent is a simple synonym for the competitor. Any business activities that produce
same kind of products and services are in direct competition and other firms which are in
production of other products and services are in indirect competition. Example a laptop
manufacturing firm faces direct competition from other laptop manufacturing firms and
indirect competition from mobile manufacturers, tablet manufacturers, smart TV’s
manufacturers, etc.
A firm also faces desire competition i.e. when customer has many choices for investing his
income. Simply, when there is rivalry among such alternatives which meet a particular
category of desire and it is very high in the countries with limited disposable incomes and
many unsatisfied desires. A firm can face such competition from all those firms who are
interested in the discretionary income of the consumers. For example, the direct rivalry for a
laptop manufacturer would not be limited to the other laptop manufacturers but also can
involve substitute for laptop as two-wheelers, refrigerators, cooking ranges, firms offering
saving and investment schemes like deposits and issuing shares or debentures, etc.
If the consumer decides to go in for a laptop, the next query is which type of laptop like with
long batteries, advanced graphics and flexible laptop cum tablet and such competition is
known as product form competition.
Brand Competition is the competition between the different brands of the same product
form.
Thus, activities of a business adjust according to the actions and reactions of competitors.
 Financers:
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The capability of the financiers is very important for any business organization but beside
this, their policies and strategies, attitude (including attitude towards risks), ability to provide
non-financial assistance, etc. are also of utmost important.
 Public:
Any group that has actual or potential interest in or impact on the organization’s ability to
achieve its interests is called as a public. Some media public can seriously has an adverse or
good impact on company’s brand image, market shares and profit. Like McDonald in India is
facing a media’s adverse impact on their image currently as one of the McDonald’s outlet has
treated the poor kid badly when he asked for food. Such exposures or campaigns by the
media might even influence the government decisions affecting the company.
Many companies have undergone drastic change in their operation because of the local public
awareness about the environmental pollution, child labour, cruelty against animals, etc. Like
many cosmetic companies have stopped testing their products on animals because awareness
has been spread by NGO’s regarding the same among local public.
Public is not only being assumed to be threat for businesses but also regarded as an
opportunity as well. Like some companies use media public to disseminate useful
information.
1.3.5 Macro Environment:
Macro environment includes major external and uncontrollable factors that influence an
organization’s decision-making and affects its performance and strategies. So, to survive and
succeed, the company needs to develop its adaptability towards external environment. It
principally consists of economic, technological, and political legal and socio-cultural factors.
Macro Environment analyzes the following important factors:
• It helps to detect the threats by analyzing the competitors.
• It helps to analyses the opportunities and threats linked with the technological changes in
the market.
• It helps to analyze the bargaining power of suppliers and customers.
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Economical
Political
Elements of Macro
Legal
Environment
Socio-cultural
Technological
Financial
Demography
Natural
Global
Fig 1.6: Elements of Macro Environment

It includes the following factors:
Economic Environment:
The economic environment of the country influences any business enterprise because it
conducts its activities in the country’s market system with the objective of profit
maximization and treated as economic entity. The economic environment consists of factors
like structure and nature of economy, economic policies, economic conditions, global
linkages, etc.
The developed economies are generally service economies as the service sector generates
huge employment opportunities and income. In the developing economies the inequality in
the distribution of income is very high and as a result poverty is high. For example, a
percentage point reduction in Cash Reserve Ratio or Statutory Reserve Ratio will
significantly increase the loan funds with the commercial banking system.
Political Environment:
The economic and political systems of a country are mutually dependent, as one reflects the
ideologies of the other. It comprises of the political stability and the policies of the
government. Political environment consists of ideological inclination of political parties,
personal interest of politicians, influence of party forums etc. For example, Mamata Banerjee
the Chief Minister of Bengal had stopped the Tata’s Nano car production plant in Bengal
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because of which Tata and its employees suffered a huge loss. Similarly, Narendra Modi had
welcomed Tata’s Nano Car production in Gujarat when he was the Chief Minister.
The Government control over the Indian economy grew enormously in the first four decades
since Independence. After 1991, since liberalization has been introduced, there has been a
global trend towards decentralization of power and responsibility. Now the State is playing
active role in the industrial development by creating conducive environment.
Social and Cultural Environment:
Socio-cultural environment includes value attitudes, beliefs and customs of people in a given
group or society and its dimension like the literacy rate, lifestyle, demographic features and
mobility of population influences an organizational performance. It is important for managers
to notice the direction in which the society is moving and formulate progressive policies
according to the changing social scenario.
Technological Environment:
It is one of the important key determinants for the success of any firm as well as the
economic and social development of a nation. The progress of business depends on the level
of technology available in a country which gives a massive impetus to the economic revival.
It also indicates the pace of research and development, progress rate of utilizing modern
technology in production. Technology is treated as capital intensive and cost-effective
alternative to traditional labour-intensive method. According to the Porter, technology helps
the organization to gain the competitive advantage and also improves overall industry
structure.
Technology policy of the government plays a crucial role in the Technological environment.
Like the absence of product patent in India has an adverse effect on pharmaceutical
companies. When the new patent regime stipulated under the WTO, Indian Pharma
companies like Ranbaxy and Dr. Reddy’s laboratories started encouraging R & D.
Legal Environment:
Legal environment deals with establishment of codes and procedures for various types and
aspects of business and deals with deviations or infringement law like bribery, product
counterfeiting, grey markets, black markets, consumer deception and tax evasions that affects
the functioning of an organization. The coverage, efficiency and efficacy of the legal system
determine adequacy, cost and speed of economic justice and these factors are of great
importance for the growth of business.
In every country there exist business legislation that guides, controls and regulate business
activity, such as The New Industrial Policy, 1991, MRTP Act, 1969, The Factory Act, 1950,
India Trade Mark Act 1969, Essential Commodities Act 1955 and so on. Similarly, there are
certain boards and councils came into existence to regulate the specific area of concern for
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various business categories like The Securities and Exchange board of India (SEBI) which
regulates the capital market.
Reserve Bank of India deals with the commercial banking sector was brought under its
effective control with the help of the Banking Companies Act, 1949 and the amendments of
the Act in 1956 and 1962 and the Banking Laws (Miscellaneous Provision) Act,1963, etc.
Natural Environment:
Business cannot get exception from nature. Business has broadly two relationships with
natural environment. First, the environment is the source of resource as raw material required
for production and secondly, the natural calamities like floods, earthquakes can cause
damages to the process of production.
Financial Environment:
Finance is the backbone of any business and it is concerned with decisions about the
investments in the business. Companies can raise the required funds from bond markets,
forex markets, stock markets, commodity markets, OTC markets, Real estate markets and
cash or spot markets that constitutes financial environment.
Demographic Environment:
Demography refers to study of the population. Demographic factors are as below:
 The population growth

 Expansion rate of population
 Age composition of the population
 Family size
 Economic classification of the population
 Education levels
 Language
 Caste
 Religion
 Race
 Age
 Income
 Educational attainment
 Asset ownership
 Home ownership
 Employment status and location
Demographic factors also affect the demand for goods and service. The increase of
population and income results in increases demand for goods and services. For instance,
developing countries like India, China, etc.; with high population growth rate indicates an
20
enormous increase in labour supply. The occupational and spatial nobilities of population
have implications for business.
As labour being an important resource for business can opt for migration easily so it will
affect the labour supply in the industry and also the existing wage rate of the industry. The
heterogeneous population with its varied tastes, preferences, beliefs, temperaments, etc. gives
rise to different demand patterns and generates need for different marketing strategies.
Diversity in workforce also complicates the Personal Management function in an
organization. Like Holidays need to be given to employees on Diwali, Id, Christmas, Parsi
New Year, etc.
These factors are relevant to the business for formulating and implementing the strategies for
controlling and accomplishment of the objectives of an organization.
Global Environment:
It comprises of rules and regulation across the borders of various countries that allows and
participate in international trade and foreign investments. It also includes rules and
regulations of WTO, IMF, WB, SAARC, G20 and other international conventions
/treaties/agreements/declarations/ protocols, etc. which duly affect the business organization
operating in any particular country. Like recession, economic conditions, war or political
tensions or uncertainties in other countries have direct impact on import export market and
also the global business and business in our country. Product patents play an important role in
Indian Pharmaceutical Industry. Advent of Technological development in Information and
Communication sector has created a huge opportunity for Indian IT industry.
1.4 ENVIRONMENTANALYSIS
1.4.1 Concept
It is a continuous process wherein the role of manager is to examine the factors of external
environment for achieving optimum performance of business. Interchangeably, environment
monitoring is used for scanning. It is the process of accumulating or assembling the relevant
information of business, examining it and anticipating the impact of all uncertain trends in
business environmental. Successful marketing strategies are always dependent on such
environmental scanning and marketing programmes always depends on its environmental
changes. At the same time, environment scanning points towards interaction among various
environmental factors.
According to Stephen Robbins, “Environment analysis entails scrutinizing the environment
to identify action by competitors, government, union and the like that might impinge on the
organization’s operations.” Environment analysis is a step towards corporate planning which
fall in the domain of strategic management.
21
Chandler describes strategic management as “The determination of the basic long-term goals
and objectives of an enterprise and the adoption of courses of action and allocation of
resources necessary to carry out these goals.”
Strategic management or business policy is treated as a means to achieve the organizational
purpose. The process of strategic management involves determining the mission and
objectives, recognizing the opportunities and threats and evaluating the strength and
weaknesses of the enterprise to the opportunities or to combat the threat. It also involves
formulation of strategies to achieve the objectives of an organization. Thus, environment
analysis leads to a formulation of sound and effective organizational and managerial
strategies to meet the demands of an environment and also contribute significantly to reduce
uncertainty.
1.4.2 The Process of Environmental Analysis:

The process of environmental scanning / analysis is split into four stages:
1.Monitoring 1.Forecasting Assessing the

Scanning the the specific the future current and
environment environmental environmental future
trends changes implications
Fig 1.5: Stages of Environmental Analysis

SCANNING:
The method to analyze the environment and recognize the impact of direct or indirect
elements of environment on the business. Such factors can appear suddenly or has evolved
periodically. The important purpose of the scanning is to recognize the emerging trends in the
market. Its main purpose is making organization aware of potentially significant external jolt
before it is completely crystallized. It allows organization to take proper strategic action by
highlighting possible changes well before its occurrence.
22
MONITORING
It is more focused and systematic step which includes aggressive follow-ups and extensively
examining the relevant trends recognized in the above step. Its main purpose is to pooled the
required data to study the emerging patterns of the environmental factors. However, the
resultant patterns are complex as the scanning process output includes vast data which is
vague. There are threefold outputs of monitoring stage:
- A distinct elaboration of environmental patterns is accessible for anticipation.
- Recognizing trends for continuous monitoring
- Recognizing trends for more scanning
FORECASTING
It is concerned with the direction, speed, scope and intensity of environmental change.
Anticipation is required for recognizing the opportunities and threats. It helps to formulate the
strategic plan accordingly. The nature of environmental factors and variables or their trend
may undergo change, new factor or variable is identified and the relevance of certain factors
may decline. For certain situation when the factors are constantly changing or sudden events
like recession or terrorist attack may lead to re-forecasting.
ASSESSMENT
It involves highlighting possible implications or impacts i.e. conclusion. Here the efforts are
channelized on identifying the results important for an organization rather than considering
the reference frame to understand the environment.
1.5 SUMMARY
 There are so many reasons that emphasized the need to monitor, analysed and
understand the business Environment. Business needs to be proactive and well
prepared to respond as per the circumstances as well. Business is a continuous
economic activity and for ensuring its regularity the system of input and converting it
into useful outputs need to be maintained. It becomes very vital for business to always
administer the factors like availability of raw materials, negotiation with suppliers,
consumer demand, role of distribution and supply. Surroundings are full of
opportunities and threats, so business need to be proactive in terms of planning,
scanning and appropriately taking strategic decisions.
 The internal environment helps to examine the resources and capabilities that allow
firms to achieve a sustainable competitive advantage. It focuses only on strategic
resources, which are sources of competitive advantage. The analysis of External
Environment helps business to identified different opportunities and channelize the
efforts to grab it. In such situation, companies generally opt for aligning their
23
strengths with market opportunities and introduce new product and services or add
value to existing products and services.
 Environmental analysis is a continuous process wherein the role of manager is to
examine the factors of external environment for achieving optimum performance of
business.
 The process of environmental scanning / analysis is split into four stages- Scanning,
Monitoring, Forecasting and Assessment.
 Overall preparedness, agility and maintaining competitive advantage in the global
market is achieved by the awareness, alertness and efficiently monitoring capability of
the business.
1.6 KEYWORDS
 Business structure refers to the legal structure of an organization that is recognized

in a given jurisdiction
 Environmental factors - The factors, circumstances and events which occurs and
influence the way a business operates, either in a positive or a negative way.
 Developed Economies -Countries with relatively high levels of economic growth
and security are considered to have developed economies.
 Assessment: the action of assessing someone or something.
 Environmental Forecasting - anticipating the future performance of an organization,
1.7 LEARNING ACTIVITY
1. Highlight the relation of Supplier and its impact on Organizational Performance.

___________________________________________________________________________
___________________________________________________________________________
2. Why Assessment is important for Environmental Analysis process?
___________________________________________________________________________
___________________________________________________________________________
1.8 UNIT END QUESTIONS
A. Descriptive Questions
Short Questions
1. What is the meaning of Business Environment?
2. Map the significance of business environment.
3. Why market intermediaries are important micro-environment element?
24
4. Discuss the statement - Belief system of management is the manager's set of personal
notions and values about people and work and as such, is something that the manager
can dominate.
5. Why Environment Analysis should be included as an important Business tool?
Long Questions
1. Discuss the characteristics of Business Environment.
2. Why business should consider different factors of business environment?
3. Explain the implications of Socio-Cultural Environment on different functions of an
Organization.
4. Outline the types of threats associated with Financial Environment. Discuss the
various strategies to combat it.
5. How different stages of Environment Analysis is useful for designing organizational
strategy when the political environment is turbulent?
B. Multiple Choice Questions

1. Which elements exert direct or indirect influence over the business firm?
a. Nature of machines used
b. Business Environment
c. News releases
d. PR activities
2. As these factors are dynamic in nature, so the changes introduced in them are quick
indicates ________________ characteristics of Business Environment
a. Mmultifaceted;
b. Totality
c. Unpredictability
d. Interrelatedness
3. In which type of competition, customer has many choices for investing his income?
a. Direct Competition
b. Desire Competition
c. Indirect Competition
d. Brand Competition
25
4. The coverage, efficiency and efficacy of the ___________determine adequacy, cost and
speed of economic justice and these factors are of great importance for the growth of
business.
a. Legal System
b. Political System
c. Technological factors
d. Socio-Cultural system
5. What is concerned with the direction, speed, scope and intensity of environmental change?
a. Assessment
b. Scanning
c. Monitoring
d. Forecasting
Answers
1 – b; 2 – c; 3 – b;4 – a; 5 – d;
1.9 SUGGESTED READINGS
Textbooks:
 Francis Cherunilam , Business and Environment, Text and Cases, [Himalaya
Publishing House],
 C. Fernando, Business Environment Kindle Edition, Pearson
 K.Aswathappa, Essentials of Business Environment, Himalaya Publishing House
 SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson
 Ian Worthington, Chris Britton, The Business Environment, Financial Times/ Prentice
Hall.
Reference Books:
 Morrison J, The International Business Environment, Palgrave

 MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi
 Business Environment Raj Aggarwal Excel Books, Delhi
 Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi
26
 Business and society – Lokanathan and Lakshmi Rajan, Emerald Publishers.
 Economic Environment of Business – M. Adhikari, Sultan Chand & Sons.
Open Text Source:

 www.yourarticlelibrary.com
 https://courses.lumenlearning.com/
27
UNIT 2: ECONOMIC ENVIRONMENT-I
Structure
2.1 Introduction
2.2 Economic Environment
2.3 Economic System
2.4 Types of Economic System
2.4.1 Capitalist Economy
2.4.2 Socialist Economy
2.4.3 Mixed Economy
2.5 Summary
2.6 Keywords
2.0 LEARNING OBJECTIVES
After studying this Unit, you will be able to
 Explain the significance of Economy and Economic System

 Highlight the features of Capitalist, Socialist and Mixed Economy
 Analyze the basis of classification of economic system
 Co-relate the economic development with the type of economic system adopted by
different countries
2.1 INTRODUCTION
The function of economy is dependent on the correlation and existence of socio-cultural and
political factors. All business activities are conducted according to the prevailing economic
system of the country. Economic activity is part of our daily life like a simple activity of
buying food pack from the grocery shop that involves transaction of money to exporting a big
consignment of medicines to foreign land that involves lots of formalities and procedure.
28
Economic activities differ from region to region within the country and from country to
country. Presence of natural resources, skilled and unskilled labour and government policy all
are the deciding factor for different types of business undertakings. India is an agricultural
land, because since long time Indian were primarily engaged in agricultural activities for their
livelihood and then slowly different allied industries came into existence like poultry,
pesticide and fertilizers, etc. The development and growth of different industries is possible
when economic system is inclined for the same. Economic system organizes all essential
economic institutions, economic resources and economic initiatives together for production
of goods and services that will satisfy the needs and wants of the people of country and sets
interchange of money for availing different form of utility.
2.2 ECONOMIC ENVIRONMENT
Economic Environment is characterized by the nature of economy that effect the different
functions, operation efficiency and competitive environment of the business. There are different
elements of Economic Environment, viz., economic system of the country, the objectives of
economic planning, the objectives of economic planning, available like man, money, etc. which
are necessary for business to operate.
The functions, operations and strategies confront various challenges because of the economic
environment and also the market conditions like market size and structure, customer’s
purchasing power, availability of the credit, etc. are influenced to an extent by economic
environment.
Factors affecting the Economic Environment:
Different factors of Economic Environment which is very important for any business to succeed
and survive effectively are as follows:
1] Economic Systems:
The activities concerned with the production of goods and services and distribution of the
same among masses in the society or specific geographical area are termed as economic
activity as there is an involvement of resources, transactions and exchange of money for the
same. Decision Making structure like Government and Institutions that influence the
economic activity of the government makes up the Economic System.
Economic
System
Mixed
Capitalist Socialist 29
CU IDOL SELF LEARNING MATERIAL (SLM) Economy
Fig 2.1: Types of Economic System
The most three popular economic system are as follows:
Capitalist Economy: The main characteristics of capitalist economy is privatization and free
market.Private firms control the factors of production, prices, demand and supply in the market.
Wealth accumulation is an important economic objective. Government acts a supporting system
to the market force that regulates social justice.
Socialist Economy: All the elements of economic activity and production is under the complete
control of government. Nature of Supply,quantity of distribution and prices are all under the
control of state. All the functions of business are decided by central planning. Important
industries will be under the complete control of state and private enterprises exists but all the
production decision will be under the control of state. Example France and Sweden.
Mixed Economy: The advantageous features of both capitalist and socialist economy is together
applied in this system. Government undertakes economic planning and influences various
market force through Acts and its provisions, while private enterprises undertake economic
activity freely but maintain social objective as an important aspect with profit motive.
2] Economic Conditions:
Factors like GDP of the economy, per capita income, availability of capital, utilization of
resources, state of the capital market, interest rates, unemployment levels, etc. are the subsets of
economic condition. Firms are always interested to monitor the GDP and unemployment rate.
Economic categories can be divided into leading, coincident or lagging. Business expects more
investment as economic conditions are optimistic or else negative.
3] Economic Policies:
Government is the main administrator of the economy. With the aid of economic planning, the
government apply different economic policies and control various factors to ensure stability of
the Economic Environment.
Industrial Policy: The rules, regulations, Acts, Initiatives, industrial programs, Special
Economic Zones are the different ways to encourage and administer the industries of the
country. This ensures the proper direction to the growth of Industrial sector.
30
Fiscal Policy: Government expenditure and spending are based on the fiscal policy instruments.
Fiscal policy includes the taxation slabs, division of public expenditure by government and
public debt. Fiscal policy influences strategic decisions of business as well.
Monetary Policy: Monetary Policy is the main identity of Central Bank of the country that
ensures proper supply of money in the market. Monetary policy provides framework for the
savings and investments. Also, monitors the credit supply in the economy.
Foreign Investment Policy: Foreign investments provides ease in technology transfer and
presents many opportunities for domestic business, educational institutions and employment
opportunities.
Import Export Policy: Import and export is the main source of foreign exchange and it is very
important for country to stand strong in the global market. Also, Balance of Payment helps to
build country’s brand image in International Market. Import and Export improves the industrial
structure, economic development and lifestyle.
2.3 ECONOMIC SYSTEM
Important features of Economy are as follows:

 Economy is man-made.
 Economic institutions are designed, terminated, modified and restructured. After
Independence, Zamindari system got eliminated from our land and now we have more
comprehensive laws and acts related to land matters. USSR has adopted communism
in 1917 over capitalism and then finally adopted mixed structure in 1989.
 The structure and pattern of economic activities keeps on changing.
 Manufacturing and utilization are the main activities of an economy and money acts
as channel for interchange.
 Manufacturer and customer adopt dual role i.e., they are same individual. As
manufacturer they manufacture goods and services and consumes the same as well.
 Privatization is gaining more popularity now-a -days as an intervention of government
is not much required.
2.4 TYPES OF ECONOMIES
There are different types of Economic System which are adopted across the World. This
classification is based on inclination of power and authority, administration of an economic
activity, emphasis placed on different objectives and means to achieve all.
31
The dominance on the means of production or resources or ownership either to Government
or to private business owners or joint form between Government and Private Player forms the
basis of classification of the economic system. Economies are described on the basis of
autonomy, profit motives and social welfare. Economic system is classified as follows:
Economic
System
Mixed
Capitalist Socialist
Economy
Fig 2.2: Types of Economic System
2.4.1 Capitalist Economy:

Adam Smith, the father of modern economy has given the supporting theory and framework
for Capitalist Economic System. The main feature of this system are principle of laissez faire
is followed, autonomy is in the hands of private entrepreneurs or business owners, market
forces are the deciding factor justifies the uncontrollable nature of the economic system will
help the economy to utilize its full capacity for growth and there will be sky high
development. So, as per this system, government has no role or no involvement in economic
activities.
Highlights of Capitalist Economy are as follows:
(i) Privately owned property: Right to own, buy, sell, transfer any property which an
individual has earn or inherited. The property can be used for production of goods and
services and thus profit earned will be enjoyed by the person and his family. There are no
legal bindings involved in it. It also has been proved that when Individual has complete
charge of its property then they put more hard work and dedication to make it fruitful and
gain good returns for the same. Alternatively, if property is owned by the state then the
efficiency of individual contribution gets reduced and benefits are not completely enjoyed.
The popularity of capitalism is because of this important feature where individual enjoys the
property and after death that is passed to legal heirs.
32
(ii) Liberty of enterprise: A very important aspect of Capitalist is Liberty. Entrepreneurs,
group of owners are free to choose any business or industry and decide upon various factors
of production. They can select any market for selling their goods and services. Owner and
group of investors bear all the risk of uncertainty, liability for profit and loss. Employees and
workers are free to select any industry or occupation for their livelihood. There are no
formalities involved for business and employees for entry and exit from specific industry.
Liberty is allowed till no harm is made to any society, group or state. Such economic system
has very distinct industries from consumer and capital goods, services of different types,
untapped and unfamiliar sectors, Technology oriented business, etc. Such factors are
responsible for accelerated economic development and wide variety of industries.
(iii) Consumer’s Predominance: Consumer wish is the command for business. Consumer
dominates the quality and quantity of goods produced. Consumer enjoys freedom of choice,
saving or spending money. Even the prices of goods and services are dependent on the
interactivity of consumer. Market system also influence the choice and selection of consumer,
but consumer is the decision maker. Consumer predominance is based on following factors
like level of earning, availability of choices for goods and services, limits placed on
consumption but still consumer enjoys his dominance.
(iv) Profit Motive: Profit is the driving force in any economic system. The emergence of the
economic activity is concentrated on earning profits. That will validate the interest and risk
taken up by the entrepreneurs or investors. The profit motive enhances the passion of
business, efforts are more dedicated and production system is more efficient and technology
is incorporated at various stages to ensure competitiveness in the market. Hunger and
ambition to grow provides great platform for wide variety of product lines and spur in
quality. To gain and enjoy more profit drives the economic development of the country.
(v) Competition: Malpractices, unfair trade norms, unethical procedure can easily get
submerged in Capitalist Industry structure. There is no government interference, no guideline
to follow, no restriction to adhere to, no accountability for the society as it is opposite of what
Capitalist structure is all about. It can also lead to emergence of monopoly and consolidation
of power in hands of few. Still competition exist between large organizations. Competition is
an important characteristic of the Capitalist, so government impose certain restriction to
protect market from monopolies. For example, in US- The well-known capitalist economy of
the World has file case against Microsoft to prevent market from its monopoly in software
industry.
(vi) Price Mechanism: The demand and supply in the market determines the price of goods
and services. If demand is more than supply, then price will increase and vice a versa.
Enterprises that adapt to this system of market they make up normal profit while who do not
33
adjust are wiped off the market. Market forces also decides the specific industry to develop
more as compare to others, as small players will enter in sector that gives more profit.
(vii) Limited government interference: Government is assumed to collect taxes and not to
interfere in the working of industries and markets. The Government should extend support to
the enterprises. But now this view point is getting faded as there is increase in awareness that
industrial growth should aid in society welfare. Now-a-days Government plays a role of
savior that helps economic system in times of Depression, Recession, wars, etc. Countries
like USA, UK, France, Netherland, Spain, Portugal, Australia etc. are known as capitalistic
countries where government plays important contribution in economic development.
4.3.2 SOCIALIST ECONOMY: In the socialist or centrally planned economies, all the
productive resources are owned and controlled by the government in the overall interest of
the society. A central planning authority takes the decisions.
The socialist economy has the following main features.
(i) Collective Ownership of means of Production:All the factors of production are under
the control of Government and it is meant to serve the objective of people welfare. The
institution of private property is abolished and no individual is allowed to own any
production unit and accumulate wealth and transfer it to their heirs. People have all the right
to maintain consumer durable goods for their personal consumption.
(ii) Social Welfare Objective:The main purpose of Government practicing such control over
industry is to achieve social welfare and ensure equitable distribution of the profit earned by
the economic activities. Demand and supply equation is not of much use in such approach.
(iii) Central Planning: Resource allocation is based on the national priorities and proximity
of resources. A central Planning authority is appointed to administer and implement the
Economic planning. Government takes all economic decisions regarding production,
consumption and investment keeping in mind the present and future needs. The planning
authorities fix targets for various sectors and ensure efficient utilization of resources.
(iv) Reduction in Inequalities:One of the important objectives of Socialist economy is to

minimize the inequalities by eliminating the control of economic activities by group of
34
wealthy people. It is important to note that perfect equality in income and wealth is neither
desirable nor practicable.
(v) No class conflict:As the Power and control of economic activities lies with the
Government, there is no race or class-conflict arises because everyone has to follow the
guidelines of the Government. All are co-workers. Socialism in today’s world Countries such
as Russia, China and many eastern European countries are said to be socialist countries. As
the global trade is the demand of an hour, many socialist countries are changing now and
encouraging liberalization in their countries for their economic development.
4.3.3 Mixed Economy:Mixed Economy offers the advantages of both capitalism and
socialism. The Government provides guidelines for economic activity and market forces are
allowed to operate in the framework decided. The public and private sectors co-exist in
mixed economies.
The main characteristics of a mixed economy are as follows:
(i) Co-existence of public and private sectors:The industrial sectors are divided among
public and private categories. Entrepreneurs, business families and large group of investors
undertakes the production units of private sector and profit is their main objective. The public
sector consists of production units owned by the government and works on the basis of social
welfare. The areas of economic activities of each sector are generally demarcated.
Government uses its various policies e.g., licensing policy, taxation policy, price policy,
monetary policy and fiscal policy to control and regulate the private sector.
(ii) Individual Freedom:Entrepreneurs or aspiring professional have all the right to select
their type of business and earn good profit but at the same time they need to strategize the
operation as per the Government guidelines. Government has enacted various Acts and laws
to prevent the exploitation of labors, consumers, natural resource and market. For instance,
government may put restrictions on the production and consumption of harmful goods. But
within rules, regulations and restrictions imposed by the government, for the welfare of the
society the private sector enjoys complete freedom.
(iii) Economic Planning:Economic planning provides direction to the efforts of public as

well as private sector. The production strategies, incentives, investment, availability of credit
35
and so on factors provides support system to both public and private sector. Economic and
National priorities especially that is overall concern with the welfare of society is the main
motivation which highlights different priority is Planning.
(iv) Price Mechanism:Price decides the profit margin as profit margin will ensure the
survival of public and private sector. Prices are decided by considering the profit margins on
one side and social objectives on the other. Prices play a significant role in the allocation of
resources. But for some important commodities prices are maintained by the Government by
offering subsidies. Thus, in a mixed economy people at large enjoy individual freedom and
government support to protect the interests of weaker sections of the society. Indian economy
is considered a mixed economy as it has well defined areas for functioning of public and
private sectors and economic planning. Even countries such as USA, UK, etc. which were
known as capitalistic countries are also called mixed economies now because of active role of
their government in economic development.
2.5 SUMMARY
 An economic system is the socio-economic and political framework within which

an economy functions.
 A free-enterprise economy also known also as capitalism, market-driven economy,
Laissez-Faire and free-market economy, postulates that free and unfettered trade
help economies grow to their fullest potential.
 Private property is the most important feature of capitalism. Other characteristics
include consumer sovereignty, freedom of enterprise, free play of enlightened self-
interest of individuals and profit motive being the mainspring of economic activity
and the engine of progress.
 A socialistic economy is one where conscious and deliberate choice of economic
priorities is made by some public authorities. Some features of a planned economy
are: a central planning authority, pre-determined and well-defined objectives,
fixation of targets, administration of controls and growing role of the public sector.
 Socialism is founded on the principle that resources belong to the entire society and
they should be owned by all members of the society represented by the State. In
such an economy, all the means of production including landed property are vested
in the hands of the State. Economic development is carried out through centralized
planning. It is a public sector oriented economic system.
36
 A mixed economy incorporates the merits of both socialism and capitalism while
eliminating the pitfalls found in both of them. In such an economy, both public and
private sectors coexist
 Balance between the private and the public sectors has been achieved by adopting
certain policies that permitted both the sectors to play their role in a well-planned
manner; formulation of the Industrial Policy Resolution of 1948 and 1956, and also
the Industries (Development and Regulations) Act.
2.6 KEYWORDS
 Price mechanism refers to the system where the forces of demand and supply
determine the prices of commodities and the changes therein
 Economic system: is the socio-economic and political framework within which an
economy functions.
 Laissez-faire system: The driving principle behind laissez-faire, a French term that
translates to "leave alone" (literally, "let you do"), is that the less the government is
involved in the economy, the better off business will be, and by extension, society as a
whole.
 A socialistic economy is one where conscious and deliberate choice of economic
priorities is made by some public authorities.
 Co-exist - exist at the same time or in the same place.
1. Why Class Conflict is included as a feature of Capitalist Economy?
___________________________________________________________________________
_______________________________________________________________
2. Equality of opportunity is an important feature of Socialist Economy. Discuss your

views.
___________________________________________________________________________
____________________________________________________________________
Short Questions
1. State the salient features of an economy.
37
2. Explain the concept of Economic system.
3. Enlist the demerits associated with Capitalist Economy.
4. Define Socialist Economy.
5. Why Government Control and Regulation of the Private Sector is necessary in Mixed
Economy?
Long Questions
1. State and explain the advantages of Capitalist Economy
2. Explain on the basis of level of development how economies are classified?
3. Why Public Sector is emphasized in Socialist Economy?
4. Explain the Economic Environment.
5. Brief about the features of Indian Mixed Economy.

1. The ______________plays an important role of coordinating agent in Capitalist Economy.
a. price system
b. legal system
c. judicial system
d. Joint FDI
2. The prices of products and services are also determined by the interaction of consumers
through market forces. This feature is known as ______________
a. Private Property
b. Consumer Sovereignty
c. Enlightened Self -interest
d. Profit Motive
3. Identify the feature of Socialist Economy

a. Private Property
b. Co-existence of public and private sectors
c. Public ownership of property
d. Absence of government interference
4. What believes in a secular State?

a. Capitalist Economy
b. Mixed Economy
c. Market Economy
d. Socialism
5. In Mixed economy both public and private sectors ___________
38
a. coexist
b. does not exist together
c. are parallel in nature
d. are joint
Answers
1 -a; 2 -b; 3 - c; 4 -d; 5 – a;
Text Books:
Publishing House],
 K. Aswathappa, Essentials of Business Environment, Himalaya Publishing House
Hall.
 Paul, J. Business Environment: Text and Cases, 4 thEdition, Tata McGraw Hill,
India.

Reference Books:
 Engineering Economic-Dr. Rajan Mishra by University Science Press
 The Gazette of India, Ministry of Law and Justice, New Delhi. No.311, June’16,
2006.
 Dahl Modern political analysis. Englewood Cliffs, N.J: Prentice-Hall.
Open Text Source:
 Dhamija, Dr. Ashok (2009). Prevention of Corruption Act. LexisNexis India.
p. 2049. ISBN 9788180385926.
 Subrata K. Mitra and V.B. Singh. 1999. Democracy and Social Change in India: A
Cross-Sectional Analysis of the National Electorate. New Delhi: Sage
Publications. ISBN 81-7036-809-X (India HB) ISBN 0-7619-9344-4 (U.S. HB).
39
 Bakshi; P M (2010). Constitution of India, 10/e. Universal Law Publishing Company
Limited. pp. 48–.ISBN 978-81-7534-840-0.
 International Journal of Scientific and Research Publications, Volume 2, Issue 12,

December 2012
 www.yourarticlelibrary.com
40
UNIT 3: ECONOMIC ENVIRONMENT-II
Structure
3.0 Learning Objectives
3.1 Introduction
3.2 Monetary Policy
3.2.1Concept and Meaning
3.2.2 Objectives of Monetary Policy
3.2.3 Measures of Money
3.3 Monetary Policy and Money Supply
3.4 Instruments of Monetary Policy
3.4.1 General Methods
3.4.2 Selective Methods
3.5 Impact of Monetary Policy
3.6 Fiscal Policy
3.6.1 Concept and meaning
3.6.2 Objectives of Fiscal Policy
3.6.3 Role of Fiscal Policy
3.7Difference between Monetary and Fiscal Policy
3.8 Techniques of Fiscal Policy
3.8.1 Taxation Policy (Tax Structure of Government of India)
3.8.2 Public Expenditure Policy
3.8.3 Public Debt Policy
3.8.4 Deficit Financing Policy
3.9 Fiscal Policy Reforms Introduced by the Government of India
3.10 Summary
3.11 Keywords
3.0 LEARNING OBJECTIVES:
 Explain the Objectives of Monetary Policy.

 Illustrate the relationship between Monetary and Money Supply
 Analyze the General and Selective instruments of Monetary Policy
 Outline the impact of Monetary Policy
 Explain the Objectives and Role of Fiscal Policy.
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 Compare the features of Monetary and Fiscal Policy
 Analyze the Techniques of Fiscal Policy
 Describe the importance of Reforms in Fiscal Policy
3.1 INTRODUCTION:
Economic system needs system to monitors its functioning. Such control mechanism is
implemented with the help of fiscal and monetary policy. Fiscal policy is defined on the basis
of revenue generated by the government while RBI in India (Central Bank) administer the
monetary policy.
The main objective of these policies is to either increase the GDP (gross domestic product)
and economic development which is termed as expansionary initiatives, or in case they are
meant to deal with inflation then they are termed as contractionary initiatives. Government
extends all support to revive the down fall of the economy. Steps like government can opt for
increase in spending to increase the demand when demand is low. Government can decrease
the tax amount to increase the spending’s. To achieve economic development, price stability
and full employment, Government always deceive the level of aggregate demand.
RBI approve the implementation of quantitative or qualitative measures to monitor the money
supply in the country. Generally, such control is executed by changing CRR (Cash Reserve
Ratio) and SLR (Statutory Liquidity Ratio) that administer the operations and disposable
funds of financial institutions to influence the economic growth, unemployment, inflation and
rates of exchange of currency.
Economic development and balance in the economy is achieved by executing the measures of
monetary and fiscal policy together.
3.2 MONETARY POLICY:
The main purpose of implementing Monetary policy is to accelerate the economic

development and stabilize price and wages by modifying the money supply and credit by
changing the interest rates. Monetary policy is one of the important dimensions of the
country’s national bank. The trends of inflation traced during after World War II has
emphasized the importance of monetary policy. If money supply is modified, then inflation
can be controlled.
RBI acts as the monetary supremacy of India and thus handles monetary policy. Every year,
in April, Reserve Bank of India declares Monetary Policy which is followed by quarterly
reviews in July, October and January. But RBI has power to declare any modifications any
time. There are two contributing aspects of monetary policy as:
PART A: development concerned with macroeconomic and monetary aspect
PART B: Records of all measures implemented earlier with new measures initiated.
The important elements of monetary policy are financial markets stability, interest rates,
credit delivery, etc.
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Monetary policy also manages the availability of financial resources for regulating economic
and financial growth. Monetary policy has widened its scope and covers various aspects like
availability of credit to efficient sector, encouragement of investment and trade and price
stability.
Monetary policy is all about money supply, economic stability and building trust in the
currency. To deal the unemployment issues in recession, measures of expansionary Monetary
policy are implemented to reduce the interest rate for providing growth opportunity to the
business. Contractionary Monetary policy is meant for decreasing the growth of money
supply or even narrow it for avoiding deterioration of asset values during inflation.
Monetary policy monitors controls (i) the supply of money, (ii) availability of money, and
(iii) cost of money. It is concerned with the correlation of total supply of money and the
interest rate of borrowing the money, i.e., Credit.
When Monopoly of issuance comes into play and currency of the country falls under its
purview or issuance of currency’s are with banks which have alliances with Central bank, the
RBI has the power to influence the interest rates and modify the money supply in order to
maintain economic stability.
Well-known definitions of Monetary Policy are as follows:
According to Prof. Harry Johnson, “A policy employing the central banks control of the
supply of money as an instrument for achieving the objectives of general economic policy is
a monetary policy.”
G.K. Shaw defines it as “any conscious action undertaken by the monetary authorities to
change the quantity, availability or cost of money.”
General Definitions are:

Broader economic objectives termed as Macro-economic objective of the country like
development and liquidity; inflation control is possible by implementing various measures of
monetary policy which is govern by central bank. Interest rate is directly proportional to the
money supply growth and size in the economy of the country. Three important instruments of
monetary policy that are applied through RBI is
i. Selling and buying of national debt
ii. Change introduced in credit restrictions
iii. Reserves are modified to introduce alteration of interest rates.
Money supply is the core of monetary policy which includes credit, cash, checks, and
money market and mutual funds. Out of these, the most significant is credit, that includes
loans, bonds, mortgages, and other agreements to repay. Monetary policy defines the
administrative framework of the central bank of the country. It plays very essential part in
controlling aggregate demand and inflation.
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In India, monetary policy of the Reserve Bank of India is a critical measure to achieve
balanced development of different sectors of the economy.
3.2.2 Objectives of Monetary Policy:

The important objectives of monetary policy are as follows:
1. Accelerated Economic Growth: It is the most important objective of a monetary policy.
Administrating real interest rate and its resultant impact on the investment, the monetary
policy can influence economic growth by controlling. If the RBI opts for a cheap or easy
credit policy by reducing interest rates, the investment level in the economy can be
encouraged. This increased investment can speed up economic growth. Faster economic
growth is possible if the monetary policy succeeds in maintaining income and price stability.
2. Regulation, Supervision and Development of Financial Stability: Financial stability

means the ability of the economy to absorb shocks and maintain confidence in financial
system. Threats to financial stability can come from internal and external shocks. Such
shocks can destabilize the country’s financial system. Thus, greater importance is being given
to RBI’s role in maintaining confidence in financial system through proper regulation and
controls, without sacrificing the objective of growth. Therefore, RBI is focusing on
regulation, supervision and development of financial system.
3. Price Stability: All the economics suffer from inflation and deflation. It can also be called
as Price Instability. Both are harmful to the economy. Thus, the monetary policy having an
objective of price stability tries to keep the value of money stable. It helps in reducing the
income and wealth inequalities. When the economy suffers from recession the monetary
policy should be an 'easy money policy' but when there is inflationary situation there should
be a 'dear money policy'.
4. Exchange Rate Stability: Exchange rate is the price of a home currency expressed in
terms of any foreign currency. If this exchange rate is very volatile leading to frequent ups
and downs in the exchange rate, the international community might lose confidence in our
economy. The monetary policy aims at maintaining the relative stability in the exchange rate.
The RBI by altering the foreign exchange reserves tries to influence the demand for foreign
exchange and tries to maintain the exchange rate stability.
5. Balance of Payment: Many developing countries like India suffer from the
Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to
maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP
Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the domestic
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economy, while the later stands for stringency of money. If the monetary policy succeeds in
maintaining monetary equilibrium, then the BOP equilibrium can be achieved.
6. Full Employment:The concept of full employment was much discussed after Keynes's
publication of the "General Theory" in 1936. It refers to absence of involuntary
unemployment. In simple words 'Full Employment' stands for a situation in which everybody
who wants jobs get jobs. However, it does not mean that there is a Zero unemployment. In
that senses the full employment is never full. Monetary policy can be used for achieving full
employment. If the monetary policy is expansionary then credit supply can be encouraged. It
could help in creating more jobs in different sector of the economy.
7. Promoting Priority Sector: Priority sector includes agriculture, export and small scale
enterprises and weaker section of population. RBI with the help of bank provides timely and
adequately credit at affordable cost of weaker sections and low income groups. RBI, along
with NABARD, is focusing on microfinance through the promotion of Self Help groups and
other institutions.
8. Encouraging Savings and Investments:RBI by offering attractive interest rates

encourages savings in the economy. A high rate of saving promotes investment. Thus the
monetary management by influencing rates of interest can influence saving mobilization in
the country.
9. Regulation of NBFIs:Non – Banking Financial Institutions (NBFIs), like UTI, IDBI and
IFCI plays an important role in deployment of credit and mobilization of savings. RBI does
not have any direct control on the functioning of such institutions. However it can indirectly
affects the policies and functions of NBFIs through its monetary policy
10. Neutrality of Money: Economist such as Wicksted, Robertson has always considered
money as a passive factor. According to them, money should play only a role of medium of
exchange and not more than that. Therefore, the monetary policy should regulate the supply
of money. The change in money supply creates monetary disequilibrium. Thus monetary
policy has to regulate the supply of money and neutralize the effect of money expansion.
However this objective of a monetary policy is always criticized on the ground that if money
supply is kept constant then it would be difficult to attain price stability
11. Equal Income Distribution: Many economists used to justify the role of the fiscal policy
is maintaining economic equality. However in recent years economists have given the
opinion that the monetary policy can help and play a supplementary role in attainting an
economic equality. Monetary policy can make special provisions for the neglect supply such
as agriculture, small-scale industries, village industries, etc. and provide them with cheaper
45
credit for longer term. This can prove fruitful for these sectors to come up. Thus in recent
period, monetary policy can help in reducing economic inequalities among different sections
of society.
12. Improvement in Standard of Living: It is also the major objective of the monetary
policy that it should improve the quality of life in the country.
3.2.3 Measures of Money:

Money Supply: The supply of money means the total stock of money (paper notes, coins
and demand deposits of bank) in circulation which is held by the public at any particular
point of time. Briefly, money supply is the stock of money in circulation on a specific day.
Thus two components of money supply are:
i. Currency (Paper notes and coins)
ii. Demand deposits of commercial banks
Supply of money is only that part of total stock of money which is held by the public at a
particular point of time. In other words, money held by its users (and not producers) in
spendable form at a point of time is termed as money supply. The stock of money held by
government and the banking system are not included because they are suppliers or producers
of money and cash balances held by them are not in actual circulation. In short, money supply
includes currency held by public and net demand deposits in banks.
Sources of Money Supply:

1. Government (which issues one-rupee notes and all other coins)
2. RBI (which issues paper currency)
3. Commercial banks (which create credit on the basis of demand deposits)
Measures of Money Supply:
There are four measures of money supply in India which are denoted by M 1, M2, M3 and M4.
This classification was introduced by the Reserve Bank of India (RBI) in April 1977. Prior to
this till March 1968, the RBI published only one measure of the money supply, M or defined
as currency and demand deposits with the public. This was in keeping with the traditional and
Keynesian views of the narrow measure of the money supply.
From April 1968, the RBI also started publishing another measure of the money supply
which it called Aggregate Monetary Resources (AMR). This included M1 plus time deposits
of banks held by the public. This was a broad measure of money supply which was in line
with Friedman’s view. But since April 1977, the RBI has been publishing data on four
measures of the money supply which are discussed as under.
Out of four alternative measures of money supply i.e. M1, M2, M3 and M4, M1 is the most
commonly used measure of money supply because components are regarded most liquid
assets. Each measure is briefly explained below:
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M1. The first measure of money supply, M1 consists of:
M1 = C + DD + OD
(i) C- Currency with the public which includes notes and coins of all denominations in
circulation excluding cash on hand with banks:
(ii) DD-Demand deposits are deposits which can be withdrawn at any time by the account
holders. Current account deposits are included in demand deposits. But savings account
deposits are not included in DD because certain conditions are imposed on the amount of
withdrawals and number of withdrawals. Demand deposits with commercial and cooperative
banks, excluding inter-bank deposits; and
(iii) OD-‘Other deposits’ with RBI which include current deposits of foreign central banks,
financial institutions and quasi-financial institutions such as IDBI, IFCI, etc., other than of
banks, IMF, IBRD, etc. The RBI characterizes as narrow money.
M2. The second measure of money supply is M2 which consists of M1plus post office savings
bank deposits. Since savings bank deposits of commercial and cooperative banks are included
in the money supply, it is essential to include post office savings bank deposits. The majority
of people in rural and urban India have preference for post office deposits from the safety
viewpoint than bank deposits.
M2 = M1 + saving deposits with Post Office Saving Banks
M3. The third measure of money supply in India is M3, which consists of M1, plus time
deposits with commercial and cooperative banks, excluding interbank time deposits. The RBI
calls M3 as broad money.
M3= M1 + Net Time-deposits of Banks
M4. The fourth measure of money supply is M4 which consists of M3plus total post office
deposits comprising time deposits and demand deposits as well. This is the broadest measure
of money supply.
M4 = M3 + Total deposits with Post Office Saving Organization (excluding NSC)
In fact, a great deal of debate is still going on as to what constitutes money supply. Savings
deposits of post offices are not a part of money supply because they do not serve as medium
of exchange due to lack of cheque facility. Similarly, fixed deposits in commercial banks are
not counted as money. Therefore, M1 and M2 may be treated as measures of narrow money
whereas M3and M4 as measures of broad money.
Of the four inter-related measures of money supply for which the RBI publishes data, it is
M3 which is of special significance. It is M3 which is taken into account in formulating
macroeconomic objectives of the economy every year. Since M1 is narrow money and
includes only demand deposits of banks along-with currency held by the public, it overlooks
the importance of time deposits in policy making. That is why, the RBI prefers M 3 which
includes total deposits of banks and currency with the public in credit budgeting for its credit
policy. It is on the estimates of increase in M3 that the effects of money supply on prices and
47
growth of national income are estimated. In fact is an empirical measure of money supply in
India, as is the practice in developed countries. The Chakravarty Committee also
recommended the use of M3 for monetary targeting without any reason.
In practice, M1 is widely used as measure of money supply which is also called aggregate
monetary resources of the society. All the above four measures represent different degrees of
liquidity, with M4 being the most liquid and M4 is being the least liquid. It may be noted that
liquidity means ability to convert an asset into money quickly and without loss of value.
Liquidity and Ranking:
Name Type Liquidity
M1 Narrow Money Highest
M2 Narrow Money Less than M1
M3 Broad Money Less than M2
M4 Broad Money Lowest Liquidity
[Reference:https://pscnotes.in/]
3.3 MONETARY POLICY AND MONEY SUPPLY:
In the context of developing economies like India, monetary policy acquires a wider role and
it has to be designed to meet the particular requirements of the economy. It stimulates or
discourages spending on goods and services and, thus, influences economic activities and
prices by regulating the supply of money, and the cost and availability of credit to producers
and consumers in the economy. Households and business units make spending and
investment decisions based upon current and expected future monetary policy actions. The
various sectors of the economy respond in different ways, depending on the extent to which
they are borrowers or lenders and the importance and relative availability of credit to the
sector. By affecting the demand side of the economy, monetary policy tries to damp or
perhaps even eliminate business. Fluctuations - economy-wide recessions and booms arising
from fluctuations in aggregate demand.
In India, the three major objectives of economic policy are growth, social justice (equitable
distribution of income and wealth) and price stability. Of these, price stability is perhaps the
one that can be pursued most effectively by the monetary authorities of the country. The
monetary policy of an economy operates through three important instruments, viz., and the
regulation of money supply, control over aggregate credit and the interest rate policy. In pre-
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reform period, given the largely underdeveloped state of financial system, regulated nature of
financial markets and plan priorities, the RBI often resorted to the direct instruments of
monetary policy like CRR, SLR and interest rate for allocating credit and regulating money
supply in the economy. Gradual liberalization and globalization of the economy,
strengthening and development of the financial system, restrictions on the automatic
monetization of fiscal deficit and various other changes in the economy had made it possible
for the RBI to operate with the indirect instruments of monetary policy such as bank rate,
repo rate and OMOs (open market operations). Accordingly, there has been a distinct shift in
the monetary policy framework and operating procedures from direct instruments of
monetary control to market based indirect instruments in the recent years. The thrust has been
to provide the market mechanism a greater role in the economy, to provide the banks more
operational flexibility and to bring the allocative efficiency in the economy. In the recent
years, the thrust of the monetary policy was to reduce the annual inflation rate. Since the year
2009 the inflation in India has crossed historical records and reached to unprecedented levels,
and lying in the range of 9 - 14 %. The monetary authorities are striving hard to curb the
inflation by adopting several monetary policy measures, the important amongst which are
changes in CRR, repo and reverse repo rate, which directly influence the money supply in the
market with immediate effect without creating any distortions in the economy. That is the
reason, they are perceived to be the most appropriate by the monetary authorities to curb the
existing inflation, and hence changed 16 times during the year 2009 to 2011.
Monetary policy which aims at changing the money supply in order to achieve the national
economic goals requires the following conditions to be satisfied.
1. A close correspondence must exist between the theoretical definition of money and the
empirical (measurable) definition of money.
2. The monetary authority must be able to control the empirically defined money supply and
to meet the intermediate monetary targets (such as monetary growth rate, interest rate etc)
with the help of the instruments such as bank rate, open market operations etc.
3. The empirical definition of money must be closely and predictably related to ultimate
national goals. Achievement of monetary growth rate or interest rate targets is not enough.
Such achievement must also change economic variables in the desired manner.
Monetary policy requires a meaningful and practical definition of money. Since changes in
the supply of money affect important economic variables, they can also influence the
attainment of ultimate national economic goals. The goals of internal price stability,
international balance of payments equilibrium, economic growth, high employment are all
directly or indirectly affected by the changes in money supply. Variations in currency are not
possible except over comparatively long period. Thus, changes in currency do not play an
important role in the formulation of monetary policy.
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3.4 INSTRUMENTS OF MONETARY POLICY:
The various credit policy or monetary instruments used by a Central Bank of Country can be
divided as follows:
Monetary Instruments/ Methods of

Credit Control
General Methods /Quantitative Selective Methods /Qualitative

Methods Methods
 Bank Rate Policy  Marginal Requirements
 Open Market Operations  Consumer Credit
 Variable Reserves Ratios Regulation
o Cash Reserves Ratio (CRR)  Publicity
o Statutory Reserve Ratio  Credit Rationing
(SLR)  Moral Suasion
 Control through Directives
 Direct Actions
Fig 3.1: Instruments of Monetary Policy
The general methods affect the total quantity of credit or economy in general. The
selective methods on the other hand, affect certain selected sectors or certain qualitative
distinctions are made between different sectors and segments of the economy; and selectivity
is applied in regulating the flow of credit.
The Reserve Bank of India (RBI), Act confers on the Banks the usual powers
available to central banks generally and the Banking Regulation Act provides special powers
of regulation for the operations of commercial and co-operative banks, which formed the
statutory basis for the credit regulation in India.
3.4.1 GENERAL CREDIT CONTROLS/ QUANTITATIVE METHODS:

In this method, it is important that the three instruments namely Bank rate policy,
Open market operations and Variable reserves ratios are inter-related and operates in co-
ordination. All the three instruments affect the bank reserves. Open Market Operation and
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Reserve Ratios directly affect the reserve base, while Bank Rate Policy affects indirectly by
variations in the cost of acquiring the reserves.
The use of any one instrument rather than another at any point is determined by the
nature of the situation and the range of influence it is desired to wield as well as the rapidity
with which the change is required to be brought about. The effects of Bank Rate changes are
not confined to the banking system and the short-term money market; it has wide
repercussions on the economy as a whole. Open market Operations are suitable for carrying
out day-to-day adjustments on even smaller scale. A change in Reserve Ratios produces an
impact at once and affects the banks generally.
i. Bank Rate Policy:

The Bank Rate Policy is a very important technique used in the monetary policy for
influencing the volume or the quantity of the credit in a country. The bank rate refers to rate
at which the central bank (i.e., RBI) rediscounts bills and prepares of commercial banks or
provides advance to commercial banks against approved securities. It is "the standard rate at
which the bank is prepared to buy or rediscount bills of exchange or other commercial paper
eligible for purchase under the RBI Act". The Bank Rate affects the actual availability and
the cost of the credit. Any change in the bank rate necessarily brings out a resultant change in
the cost of credit available to commercial banks. If the RBI increases the bank rate than the
volume of commercial banks borrowing from the RBI gets reduced. It deters banks from
further credit expansion as it becomes a more costly affair. Even with increased bank rate the
actual interest rates for a short-term lending go up checking the credit expansion.
On the other hand, if the RBI reduces the bank rate, borrowing for commercial banks
will be easy and cheaper. This will boost the credit creation. As per the Bank rate theory, an
increase in the Bank rate reduces the extent of borrowings from the money market, the level
of inventory holding, investment, employment and prices. A reduction in the Discount Rate
has the opposite effects. The Central bank, may therefore, attempt to contain an inflationary
situation by raising the Bank Rate and fight a depression or recession by lowering it. Thus,
any change in the bank rate is normally associated with the resulting changes in the lending
rate and in the market rate of interest.
However, the efficiency of the bank rate as a tool of monetary policy depends on
existing banking network, interest elasticity of investment demand, size and strength of the
money market, international flow of funds, etc. The importance of Bank rates lies in the fact
that it acts as a pace-setter to all the other rates of interests.
ii. Open Market Operation (OMO): The open market operation refers to the purchase and/or
sale of short term and long-term securities by the RBI in the open market. This is very
effective and popular instrument of the monetary policy. The OMO is used to wipe out
shortage of money in the money market, to influence the term and structure of the interest
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rate and to stabilize the market for government securities, etc. It is important to understand
the working of the OMO. If the RBI sells securities in an open market, commercial banks and
private individuals buy it. This reduces the existing money supply as money gets transferred
from commercial banks to the RBI. Contrary to this when the RBI buys the securities from
commercial banks in the open market, commercial banks sell it and get back the money they
had invested in them. Obviously, the stock of money in the economy increases. This way
when the RBI enters in the OMO transactions, the actual stock of money gets
changed.Normally during the inflation period in order to reduce the purchasing power, the
RBI sells securities and during the recession or depression phase it buys securities and makes
more money available in the economy through the banking system. Thus, under OMO there
is continuous buying and selling of securities taking place leading to changes in the
availability of credit in an economy.
However, there are certain limitations that affect OMO viz; underdeveloped securities
market, excess reserves with commercial banks, indebtedness of commercial banks, etc.
iii.Variations in the Reserve Ratios:

The Commercial Banks have to keep a certain proportion of their total assets in the
form of Cash Reserves. Some parts of these cash reserves are their total assets in the form of
cash. Apart of these cash reserves are also to be kept with the RBI for the purpose of
maintaining liquidity and controlling credit in an economy. These reserve ratios are named as
Cash Reserve Ratio (CRR) and a Statutory Liquidity Ratio (SLR). The CRR refers to some
percentage of commercial bank's net demand and time liabilities which commercial banks
have to maintain with the central bank and SLR refers to some percent of reserves to be
maintained in the form of gold or foreign securities. In India the CRR by law remains in
between 3-15 percent while the SLR remains in between 25-40 percent of bank reserves. Any
change in the VRR (i.e., CRR + SLR) brings out a change in commercial banks reserves
positions. Thus, by varying VRR commercial banks’ lending capacity can be affected.
Changes in the VRR helps in bringing changes in the cash reserves of commercial banks and
thus it can affect the banks credit creation multiplier. RBI increases VRR during the inflation
to reduce the purchasing power and credit creation. But during the recession or depression it
lowers the VRR making more cash reserves available for credit expansion.
a. Cash Reserve Ratio (CRR): It is defined as that portion of total deposits which a
commercial bank is required to keep with the RBI in the form of cash reserves. In
2013, it was 4.0% which implies that every commercial bank has to keep 4% of
its total deposits with the RBI. In a situation of excess demand, RBI raises the
CRR. This will reduce the cash deposits left with commercial banks to be loaned
out. This is another method to control the availability of credit.
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b. Statutory Liquidity Ratio (SLR): It is defined as that portion of total deposits
which a commercial bank has to keep with itself in the form of liquid assets. In a
situation of excess demand, RBI raises the SLR. The result is the reduction in
surplus cash reserves of commercial banks which can be offered for credit. This
will discourage credit in an economy. The SLR in India, at present is 21.50 % for
entire net demand and time liabilities of scheduled commercial banks.
3.4.2 SELECTIVE CREDIT REGULATIONS / QUALITATIVE METHODS:

Qualitative instruments are also referred as selective instruments of the RBI's monetary
policy. These instruments are utilized for differentiating between various uses of credit; for
instance, they can be utilizedin favour of encouraging export over import or essential over
non-essential credit supply. This instrument has an influence on both borrowers and lenders.
RBI uses following qualitative rules:
i. Fixing Margin Requirements:

When specific part or proportion of loan is not financed or offered by the bank is
termed as Margin. Alternatively, it is that proportion of the loan which borrower need to
arrange first before applying for loan in the bank. The amount of loan is dependent on this
margin that means variation in margin will introduce change in loan amount. This method is
employed to ensure the necessary availability of credit supply for the needy sector and
discourage it for other non-essential sectors. Such objective is fulfilled by maintaining high
for the non-necessary sectors and lowering the margin for other needy sectors.
For instance: If the RBI categorized agriculture sector as necessary sector then margin will be
decreased and even bank can offer upto 90 percent of loan.
ii. Consumer Credit Regulation:

Under this method, consumer credit supply is regulated through hire-purchase and
instalments sale of consumer goods. Under this method the down payment, instalments
amount, loan duration, etc. is fixed in advance. This can help in checking the credit use and
then inflation in a country.
iii. Publicity:
This is yet another method of selective credit control. Through its Central Bank (RBI)
publishes various reports stating what is good and what is bad in the system. This published
information can help commercial banks to direct credit supply in the desired sectors. Through
53
its weekly and monthly bulletins, the information is made public and banks can use it for
attaining goals of monetary policy.
iv. Credit Rationing:

Central Bank fixes credit amount to be granted. Credit is rationed by limiting the
amount available for each commercial bank. This method controls even bill rediscounting.
For certain purpose, upper limit of credit can be fixed and banks are told to stick to this limit.
This can help in lowering banks credit exposure to unwanted sectors.
v. Moral Suasion:
It implies to pressure exerted by the RBI on the Indian banking system without any
strict action for compliance of the rules. It is a suggestion to banks. It helps in restraining
credit during inflationary periods. Commercial banks are informed about the expectations of
the central bank through a monetary policy. Under moral suasion central banks can issue
directives, guidelines and suggestions for commercial banks regarding reducing credit supply
for speculative purposes
vi. Control through Directives:

Under this method the central bank issue frequent directives to commercial banks.
These directives guide commercial banks in framing their lending policy. Through a directive
the central bank can influence credit structures, supply of credit to certain limit for a specific
purpose. The RBI issues directives to commercial banks for not lending loans to speculative
sector such as securities, etc. beyond certain limit.
vii. Direct Action:

Under this method the RBI can impose an action against a bank. If certain banks are
not adhering to the RBI's directives, the RBI may refuse to rediscount their bills and
securities. Secondly, RBI may refuse credit supply to those banks whose borrowings are in
excess to their capital. Central bank can penalize a bank by changing some rates. At last, it
can even put a ban on a particular bank if it does not follow its directives and work against
the objectives of the monetary policy.
These are various selective instruments of the monetary policy. However, the success
of these tools is limited by the availability of alternative sources of credit in economy,
working of the Non-Banking Financial Institutions (NBFIs), profit motive of commercial
banks and undemocratic nature off these tools. But a right mix of both the general and
selective tools of monetary policy can give the desired results.
[Reference: https://blog.finology.in/]
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3.5 IMPACT OF MONETARY POLICY:
Impact of cut in CRR on Interest Rates: From time to time, RBI prescribes a CRR or the
minimum amount of cash that banks have to maintain with it. The CRR is fixed as a
percentage of total deposit. As more money chases the same number of borrowers, interest
rates come down.
Impact of change in SLR and Gilt Products on Interest Rates: SLR reduction is not so
relevant in the present context for two reasons. First, as part of the reform process, the
government has begun borrowing at market-related rates. Therefore, banks get better interest
rates compared to what they used to get earlier for their statutory investments in government
securities.
Second, banks are still the main source of funds for the government. This means that despite
lower SLR requirements, banks investment in government securities will go up as
government borrowing rises. As a result, bank investment in gilts continues to be high despite
the RBI bringing down the minimum SLR to 25% a couple of years ago. Therefore, for the
purpose of determining the interest rates, it is not the SLR requirement that is important but
the size of the government’s borrowing programme. As government borrowing increases,
interest rate, too, rise.
Besides, the gilts also provide another tool for the RBI to manage interest rates. The RBI
conducts OMO by offering to buy or sell gilts. If it feels that interest rates are too high, it may
bring them down by offering to buy securities at a lower yield than what is available in the
market
Impact of Open Market Operation: The monetary policy of the seventies and first half of
the eighties had excluded the open market operations instrument. This is because active
Government securities market was non-existent. Active Government securities market could
not emerge because of the fact that rates of interest offered on Government paper that is,
treasury bills and dated Government securities were much below prevailing market rates of
interest.
Late Prof. S. Chakravarty, the head of Monetary Reforms Committee recommended raising
of interest rates on Government securities to ensure profitability of banks and activism of the
open market operations. This recommendation was accepted and in the late eighties interest
rates of Government securities were raised.
In the post reform period, as a first step yields on government securities were made market
determined by sale of Government securities through open auction. Furthermore, the interest
rate structure was simultaneously rationalised and banks were given the freedom to determine
their prime lending rates and other main rates of interest. These measures by RBI facilitated
the use of open Market operations as an effective instrument for liquidity management
including control of short-term fluctuations in the foreign exchange market.
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Impact of Bank Rate:
Before 1991, changes in bank rate as an instrument of monetary control were quite rare. The
bank rate remained unchanged at 10 per cent in the whole decade 1981-91. In the post-reform
period Reserve Bank has moved towards a situation in which changes in bank rate give
signals to the commercial banks and other financial institutions about the emerging financial
situation of the economy so that they could adjust their interest rates accordingly, Besides,
bank rate serves as a reference rate on the basis of which commercial banks can fix their-
prime lending rates.
To control inflationary pressures in the Indian economy Reserve Bank raised bank rate from
10 per cent to 11 per cent in July 1991 and further to 12 per cent in October 1991. Raising of
lending rates of interest on the advances to the businessmen was intended to discourage
demand for credit.
However, it may be noted that the role of bank rate as an instrument of credit control is
limited because of the following factors:
First, before mid-1990s, because of the administered nature of interest rates the bank rate was
not used as a reference rate by the banks for the purpose of fixing their lending rates.
Secondly, even now when lending rates of banks have been freed, there is not much refinance
being made available at the bank rate so that banks can ignore this as a reference in setting
their own lending rates.
Thirdly, at present lending rates of interest are determined by demand for and supply of funds
in the money market. In fact, the monetary policy regarding bank rate is itself influenced by
the prevailing economic situation.
Impact of Liquidity Adjustment Facility (LAF):

Another important change in the instrument of monetary policy is the introduction of
Liquidity Adjustment Facility (LAF) from June 2000 to adjust on a daily basis liquidity in the
banking system so that it remains within reasonable limits.
Besides, through Liquidity Adjustment Facility, the RBI regulates short-term interest rates
while its bank rate policy serves as a signalling device for its interest rate policy in the
intermediate period. These short-term interest rates of RBI are called repo rate and reverse
repo rate.
Impact on Domestic Industry and Exporters: The exporters look forward to the monetary
policy since the Central Bank always makes an announcement on export refinance, or the rate
at which the RBI will lend to banks which have advanced pre-shipment credit to exporters. A
lowering of these rates would mean lower borrowing costs for the exporter.
Impact on Stock Markets and Money Supply: Most people attribute the link between the
amount of money in the economy and movements in stock markets to the amount of liquidity
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in the system. This is not entirely true. The factor connecting money and stocks is interest
rates. People save to get returns on their savings. A hike in interest rates would tend to suck
money out of shares into bonds or deposits; a fall would have the opposite effect. This
argument has survived econometric tests and practical experience.
Impact of Money Supply on Jobs, Wages and Output: At any point of time, the price level
in the economy is determined by the amount of money floating around. An increment in the
money supply- currency with the public demand deposits, and time deposit – increases prices
all around because there is more currency moving towards the same goods and services.
Typically, the RBI follows a least inflation policy, which means that its money market
operations as well as changes in the bank rate are generally designed to minimise the
inflationary impact of money supply changes. Since most people can generally see through
this strategy, it limits the impact of the RBI’s monetary moves on jobs or production. The
markets, however, move to the RBI’s tune because of the link between interest rates and
capital market yields. The RBI’s policies have maximum impact on volatile forex and stock
markets. The jobs, wages, and output are affected over the long run, if the trends of high
inflation or low liquidity persist for a very long period. If the wages move slower than other
prices, higher inflation will drive real wages lower and encourage employers to hire more
people. This, in turn, ramps up production and employment. This was the theoretical
justification of a long term trend that showed that higher inflation and employment went
together, whereas, when inflation fell, unemployment increased.
Impact on Money Supply: The RBI uses the interest rate, OMO, changes in the CRR are the
most popular instruments used. Under the OMO, the RBI buys or sells government bonds in
the secondary market. By absorbing bonds, it drives up bond yields and injects money into
the market. When it sells bonds, it does so to suck money out of the system.
The changes in CRR affect the amount of free cash that banks can use to lend—reducing the
amount of money for lending cuts into overall liquidity, driving interest rates up, lowering
inflation, and sucking money out of markets. Primary deals in government bonds are a
method to intervene directly in markets, followed by the RBI. By directly buying new bonds
from the government at lower than market rates, the RBI tries to limit the rise in interest rates
that higher government borrowings lead to.
[Reference: https://smallbusiness.chron.com/]
3.6 FISCAL POLICY:
The term fiscal has been derived from the Greek word fisc, meaning a basket to symbolize
the public purse. Fiscal policy thus means the policy related to the treasury of the
government. Fiscal policy is a part of general economic policy of the government which is
primarily concerned with the budget receipts and expenditures of the government. All welfare
projects are completed under this policy. It also suggests measures to control economic
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fluctuations which may become violent and create great upheavals in the socio-economic
structure of the economy. It also outlines the influence of resource utilization on the level of
aggregate demand through affecting the level of aggregate consumption and investment
expenditure.
Fiscal policy means the use of taxation and public expenditure by the government for
stabilization or growth. The fiscal policy is concerned with the raising of government revenue
and incurring of government expenditure. To generate and to incur expenditure, the
government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is
concerned with government expenditure and government revenue.
Fiscal Policy has to decide on the size and pattern of flow of expenditure from the
government to the economy and from the economy back to the government. So, in broad
term, fiscal policy refers to that segment of national economic policy which is primarily
concerned with the receipts and expenditure of central government. In other words, fiscal
policy refers to the policy of the government with regard to taxation, public expenditure and
public borrowings.
The importance of fiscal policy is high in underdeveloped countries. The state has to play
active and important role. In a democratic society direct method are not approved. So, the
government has to depend on indirect methods of regulations. In this way, fiscal policy is a
powerful weapon in the hands of government by means of which it can achieve the
objectives.
Fiscal policy is the term used to describe all of the government’s decisions regarding taxation
and spending. When governments want to increase the money available to populace, they
lower the taxes and raise spending (expansionary fiscal policy); in contrast, when they want
to decrease the money available to populace, they raise the taxes and lower spending
(contractionary fiscal policy)
Government spending and the policies guiding the public expenditure of the government do
influence macroeconomic conditions. These policies affect tax rates, interest rates and
government spending, in an effort to control the economy. Fiscal policy is the means by
which a government adjusts its levels of spending in order to monitor and influence a nation’s
economy. Fiscal policy and monetary policy go hand in hand with each other. Both are
interdependent on each other.
Fiscal policy serves as an important tool to influence the aggregate demand. The instruments
of fiscal policy are government spending and taxation. Depending upon existing situation of
the economy, government can employ either expansionary or contractionary fiscal policy.
Expansionary fiscal policy increases the aggregate demand whereas contractionary or
deflationary fiscal policy reduces the aggregate demand. Changes in the level, timing and
composition of government spending and taxation have an important effect on the economy.
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Fiscal policy is the policy of government related to its own expenditure and taxes in order to
influence the aggregate demand (AD). It is one of the very important demand –side policies.
Demand –side policies focus on changing the AD or shifting the AD curve in the aggregate
demand and aggregate supply (AD-AS) model in order to achieve the goals of price stability,
full employment, and economic growth.
There are four components of AD: consumer spending(C), investment spending (I),
government spending (G), and net exports(X-M), where X=exports and M=imports. Fiscal
policy influences all of these four components of AD. Government can influence ‘C’ by
imposing taxes on consumers, i.e., personal income taxes. It can influence ‘I’ by imposing
taxes on business profits. Similarly, government can easily change its own spending. It
influences ‘X-M’ by means of subsidies provided to the domestic producers, import tax, and
so on.
Different economist has given different definitions of Fiscal policy as follows:

According to Culbarston, “By fiscal policy we refer to government actions affecting its
receipts and expenditures which we ordinarily taken as measured by the government’s
receipts, its surplus or deficit.” The government may offset undesirable variations in private
consumption and investment by compensatory variations of public expenditures and taxes.
Arthur Smithies defines fiscal policy as “a policy under which the government uses its
expenditure and revenue programmes to produce desirable effects and avoid undesirable
effects on the national income, production and employment.”
Though the ultimate aim of fiscal policy in the long-run stabilisation of the economy, yet it
can be achieved by moderating short-run economic fluctuations.
In this context, Otto Eckstein defines fiscal policy as “changes in taxes and expenditures
which aim at short-run goals of full employment and price-level stability.
According to U. Hicks “Fiscal policy is concerned with the manner in which all the different
elements of public finance, while still primarily concerned with carrying out their own duties,
may collectively be geared to forward the aims of economic policy.”
3.6.2: Objectives of Fiscal Policy:

The fiscal policy is designed to achieve the following objectives:
Development by Effective Mobilization of Resources:
The principal objective of fiscal policy is to ensure rapid economic growth and development.
This objective of economic growth and development can be achieved by Mobilization of
Financial Resources. The central and the state governments in India have used fiscal policy to
mobilize resources. The financial resources can be mobilized by:
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 Taxation: Through effective fiscal policies, the government aims to mobilize
resources by way of direct taxes as well as indirect taxes because most important
source of resource mobilization in India is taxation.
 Public Savings: The resources can be mobilized through public savings by reducing
government expenditure and increasing surpluses of public sector
 Private Savings: Through effective fiscal measures such as tax benefits, the
government can raise resources from private sector and households. Resources can be
mobilized through government borrowings by ways of treasury bills, issue of
government bonds, etc., loans from domestic and foreign parties and by deficit
financing.
Efficient Allocation of Financial Resources:
The central and stategovernments have tried to make efficient allocation of financial
resources. These resources are allocated for Development Activities which includes
expenditure on railways, infrastructure, etc. While Non-development Activities includes
expenditure on defence, interest payments, subsidies, etc.
But generally, the fiscal policy should ensure that the resources are allocated for generation
of goods and services which are socially desirable. Therefore, India's fiscal policy is designed
in such a manner so as to encourage production of desirable goods and discourage those
goods which are socially undesirable.
Reduction in Inequalities of Income and Wealth:

Fiscal policy aims at achieving equity or social justice by reducing income inequalities
among different sections of the society. The direct taxes such as income tax are charged more
on the rich people as compared to lower income groups. Indirect taxes are also more in the
case of semi-luxury and luxury items, which are mostly consumed by the upper middle class
and the upper class. The government invests a significant proportion of its tax revenue in the
implementation of Poverty Alleviation Programmes to improve the conditions poor people in
society.
Price Stability and Control of Inflation:

One of the main objectives of fiscal policy is to control inflation and stabilize price.
Therefore, the government always aims to control the inflation by reducing fiscal deficits,
introducing tax savings schemes, Productive use of financial resources, etc.
Employment Generation:
The government is making every possible effort to increase employment in the country
through effective fiscal measure. Investment in infrastructure has resulted in direct and
indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage
more investment and consequently generate more employment. Various rural employment
programmes have been undertaken by the Government of India to solve problems in rural
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areas. Similarly, self-employment scheme is taken to provide employment to technically
qualified persons in the urban area.
Balanced Regional Development:

Another main objective of the fiscal policy is to bring about a balanced regional
development. There are various incentives from the government for setting up projects in
backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax
holidays, Finance at concessional interest rates, etc.
Reducing the Deficit in the Balance of Payment:

Fiscal policies attempts to encourage exports by way of fiscal measures like Exemption of
income tax on export earnings, Exemption of central excise duties and customs, Exemption
of sales tax and octroi, etc. The foreign exchange is also conserved by providing fiscal
benefits to import substitute industries, imposing customs duties on imports, etc.
The foreign exchange earned by way of exports and saved by way of import substitutes helps
to solve balance of payments problem. In this way adverse balance of payment can be
corrected either by imposing duties on imports or by giving subsidies to exports.
Capital Formation:
The objective of fiscal policy in India is also to increase the rate of capital formation so as to
accelerate the rate of economic growth. An underdeveloped country is trapped in vicious
(danger) circle of poverty mainly on account of capital deficiency. In order to increase the
rate of capital formation, the fiscal policy must be efficiently designed to encourage savings
and discourage and reduce spending
Increasing National Income:

The fiscal policy aims to increase the national income of a country. This is because fiscal
policy facilitates the capital formation. This results in economic growth, which in turn
increases the GDP, per capita income and national income of the country.
Development of Infrastructure:
Government has placed emphasis on the infrastructure development for the purpose of
achieving economic growth. The fiscal policy measure such as taxation generates revenue to
the government. A part of the government's revenue is invested in the infrastructure
development. Due to this, all sectors of the economy get a boost.
Foreign Exchange Earnings:

Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption
of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange
provides fiscal benefits to import substitute industries. The foreign exchange earned by way
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of exports and saved by way of import substitutes helps to solve balance of payments
problems.
3.6.3 Role of Fiscal Policy:

1. Allocation:
The provision for social goods, or the process by which total resource use is divided between
private and social goods and by which the mix of social goods is chosen. This provision may
be termed as the allocation function of budget policy. Social goods, as distinct from private
goods, cannot be provided for through the market system.
The basic reasons for the market failure in the provision of social goods are: firstly, because
consumption of such products by individuals is non rival, in the sense that one person’s
partaking of benefits does not reduce the benefits available to others.
The benefits of social goods are externalised. Secondly, the exclusion principle is not feasible
in the case of social goods. The application of exclusion is frequently impossible or
prohibitively expensive. So, the social goods are to be provided by the government.
2. Distribution:
Adjustment of the distribution of income and wealth to assure conformance with what society
considers a ‘fair’ or ‘just’ state of distribution. The distribution of income and wealth
determined by the market forces and laws of inheritance involve a substantial degree of
inequality. Tax transfer policies of the government play an important role in reducing the
inequalities in income and wealth in the economy.
3. Stabilization:
Fiscal policy is needed for stabilization, since full employment and price level stability do not
come about automatically in a market economy. Without it the economy tends to be subject
to substantial fluctuations, and it may suffer from sustained periods of unemployment or
inflation. Unemployment and inflation may exist at the same time. Such a situation is known
as stagflation.
The overall level of employment and prices in the economy depends upon the level of
aggregate demand, relative to the potential or capacity output valued at prevailing prices.
Government expenditures add to total demand, while taxes reduce it. This suggests that
budgetary effects on demand increase as the level of expenditure increases and as the level of
tax revenue decreases.
4. Economic Growth:
Moreover, the problem is not only one of maintaining high employment or of curtailing
inflation within a given level of capacity output. The effects of fiscal policy upon the rate of
growth of potential output must also be allowed for. Fiscal policy may affect the rate of
saving and the willingness to invest and may thereby influence the rate of capital formation.
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Capital formation in turn affects productivity growth, so that fiscal policy is a significant
factor in economic growth.
3.7 DIFFERENCE BETWEEN MONETARY AND FISCAL POLICY:
Both “Monetary Policy” and “Fiscal Policy” are used to regulate the economy, i.e. to either
increase or decrease the pace of economic growth to some extent. Let us consider the major
differences between them as follows:
Monetary Policy:
 Monetary Policy is the policy determined and implemented by the Reserve Bank of
India with no intervention by the Government of India.
 In a Monetary Policy the RBI intervenes in a host of ways to control inflation monitor
interest rates and control money supply in the economy. For example, the central bank
may intervene to hike interest rates and thereby control inflation in the economy. On
the other hand if inflation is low, it may cut interest rates in the economy.
 The main aim of RBI’s monetary policy is to keep a check on inflation and maintain
an optimum level of GDP growth at the same time. If RBI raised the interest rate too
high then that might help in checking inflation but at the same time deter economic
activity and slow down GDP growth and if they keep the rates too low then that will
promote economic activity but it will also spur inflation. They have to keep a balance
between both so one is not sacrificed for the sake of the other.
 Monetary policy is carried out by RBI and manifests itself by setting interest rates like
the Repo and Reverse Repo as well as determining levels of CRR and SLR which
influence money supply and credit flow in the economy.
 It may also improve liquidity by cutting the cash reserve ratio for banks.
 The Reserve Bank of India also conducts open market operations, wherein the central
bank, buys and sells government bonds.
 The monetary policy regulates the cost and availability of credit in the economy. It
deals with both the lending and borrowing rates of interest for commercial banks.
 The monetary policy aims to maintain the price stability, full employment and
economic growth. It can carry out open-market operations (OMO), control credit, and
vary the reserve requirements.
 The monetary policy is different from fiscal policy as the former brings about a
change in the economy by changing money supply and interest rate, whereas fiscal
policy is a broader tool of the government.
Fiscal Policy
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 Fiscal Policies are largely determined by the government of India. Fiscal policy is the
policy that determines how the government spends money, and taxes people to pay for
those expenses. This would include measures like tweaking with the direct and
indirect tax collection to control the fiscal deficit.
 When the government's deficit runs high it may add a slew of taxes to boost revenues.
However, it has to be cautious as the same could also backfire.
 Fiscal policy largely aims at stabilizing the economy; boosting revenues for the
government and helping the economy grow. The government uses its tax levers to
help the economy.
 While “Monetary Policy” is the tool in the hands of the Central Bank to regulate the
economy, “Fiscal Policy” on the other hand, is the tool in the hands of the
“government” to regulate the economy. So, if the government wants to help the
economy to speed up, it may decide to reduce taxes so that people have higher
disposable incomes to spend on goods and services. This naturally would lead to an
increase in demand and supply and thereby stimulate all the interlinked industries.
 Secondly, the government may also decide to increase its own spending by way of
building infrastructure such as airports, railways, bridges and roads. There are several
ancillary sectors that get impacted the moment the government decides to increase its
spending. The demand for the production of organizations operating in these sectors
increases bringing profits and prosperity.
 On the other hand, if the government decides to slow down the economy because of
“running away” inflationary growth, it will do the opposite by way of increasing taxes
and decreasing its own spends.
 The fiscal policy can be used to overcome recession and control inflation. It may be
defined as a deliberate change in the government revenue and expenditure to
influence the level of national output and prices. During the times of recession when
government increases its spending or cuts taxes – that’s termed as a fiscal stimulus
package the instruments of fiscal policy are used to boost the economy. India has had
three fiscal stimulus packages following the last recession which involved tax cuts
and boosts in spending, and were similar to stimulus measures used by countries
around the world. Also, government can reduce its expenditures or raise taxes during
inflationary times.
 Fiscal policy aims at changing aggregate demand by suitable changes in government
expenditure and taxes.
3.8 TECHNIQUES OF FISCAL POLICY
3.8.1: Taxation Policy:

Taxes are the main source of revenue for the government. Government levies both direct and
indirect taxes in India. Direct taxes are those which are paid directly by the assessee to the
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government e.g., income tax, wealth tax, etc. Indirect taxes are paid indirectly by the public
to the government i.e., the taxes are charged by trader/manufacturer from the public and then
paid to government e.g., excise duty, custom duty, value added tax (VAT), service tax, etc.
Direct taxes are progressive in nature i.e., the rate of tax increases with the increase in level
of income/wealth so people with low income will pay tax at lower rates and people with
higher income will pay tax at higher rates. Indirect taxes are not progressive. These are
charged from all segments of the society at the same rate, i.e. both rich and poor have to pay
indirect taxes at the same rate. In India, in the year 2007-08, direct taxes constituted 49
percent of the total tax collection and indirect taxes constituted 51 percent. Main purposes of
the taxation policy in India are as follows:
 Mobilisation of Resources: Tax revenue in India has been rising every year.
Government mobilizes resources through taxation for economic development. In the
year 2007-08, about 64 percent of revenue of central and state government of India
came from tax revenue. Rate of taxes have come down but the collection of tax has
increased.
 To Promote Saving: For this purpose various tax concession, tax deductions are
given on savings e.g., Provident Fund, National saving Certificates, Life Insurance
Policies, Government Bonds, Mutual Funds, etc.
 To Promote Investment: Various tax rebates, tax concessions and tax holiday
benefits are given to promote the investment in remote and backward or rural areas.
Similarly, tax rebates and concessions are given to export-oriented units, so as to
encourage investment in these industries.
 To Bring Equality of Income and Wealth: To achieve this objective different kinds
of progressive direct taxes are levied e.g. income tax, wealth tax, etc. i.e., rate of tax is
increased with the increase in the income. Similarly, excise duties are levied at higher
rate on luxury goods and at lower rates on necessary goods.
Tax Structure of Government of India:
India has a well-developed tax structure with clearly demarcated authority between Central
and State Governments and local bodies.
Central Government levies taxes on the following:

 Income Tax: Tax on income of a person
 Customs duties: Duties on import and export of goods
 Central Goods and Service Tax (CGST): Indirect Tax levied on manufacture, sale and
consumption of goods and services.
 Integrated Goods and Service Tax (IGST): For inter-state transfer of goods and
services.
State Governments can levy the following taxes:
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 State Goods and Service Tax (SGST): Indirect Tax levied on Intrastate manufacture,
sale and consumption of goods and services.
 Stamp duties and Land Revenue: Since land is a matter on which only State
Governments can govern, thus the Stamp duties on transfer of immovable properties are
levied by State Governments.
 State Excise on Liquor and certain agricultural goods.
Apart from the above, certain powers of taxation have been devolved in the hands of local
bodies. These local governing bodies can levy taxes on water, property, shop and
establishment charges etc.
Direct Taxes: They are called so as the burden of taxation falls directly on the tax payer.
Under the Income Tax Act, 1961 The Central Government levies direct taxes on the income
of individuals and business entities as well as Non business entities also. The taxation level
depends on the residential status of individuals. The thumb rule of residential status is that an
individual becomes resident in India if he has remained in India for more than 182 days in a
particular residential year. If he becomes resident in India, then his global income i.e. income
earned even outside India is taxable in India. This has to be noted very carefully by
Expatriates on deputation to India. They need to plan their stay in such a manner as to avoid
becoming a resident in India. The following para explains this in a slightly more detailed
manner:
Tax Resident: An individual is treated as resident in a year if present in India:
1. For 182 days during the year or
2. For 60 days during the year and 365 days during the preceding four years.
A resident who was not present in India for 730 days during the preceding seven years or
who was non-resident in nine out of ten preceding years treated as not ordinarily resident. A
person not ordinarily resident is taxed like a non-resident but is also liable to tax on income
accruing abroad if it is from a business controlled in or a profession set up in India.
What is taxable for a Non-Resident?
Non-residents are taxed only on income that is received in India or arises or is deemed to
arise in India. He is entitled to get benefit of any double taxation avoidance agreement that
his country of residence has signed with India. Then he shall be liable for taxes at rates
mentioned in the Indian domestic tax laws or the rates mentioned in the Double Taxation
Avoidance Agreement whichever is lower.
What is taxable for a Resident?

The global income of a resident is taxable irrespective of whether earned or related or
received in India.
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Amounts invested in certain investments like Employee Provident Fund, Public Provident
Fund, Tax saving Fixed Deposits, are also eligible for deduction under section 80C upto
Rs.1,50,000 per year.
Corporate Taxation:
The rate at which Corporates are taxed in India is 30% plus a 3% cess. Thus the total comes
to 30.9%. Further if the taxable income is more than Rs. 10 million, then there is an
additional surcharge of 12% on the base tax rate.
Dividend Distribution Tax (DDT):

Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a
domestic company by way of dividend shall be chargeable to dividend tax. So if a company
declares divided, it has to pay an effective rate of 16.995% on the dividends declared. This is
apart from the 30.9 % taxes mentioned above. The rationale for this tax is that after paying
this tax, the dividend so declared becomes tax free in the hands of the recipient of dividend.
Minimum Alternative Tax (MAT):

Normally, a company is liable to pay tax on the income computed in accordance with the
provisions of the income tax Act, but many a times due to exemptions under the income tax
Act, there is huge actual profit as shown in the profit and loss account of the company but no
taxable income. To overcome this issue, and in order to bring such companies under the
income tax act net, the concept of Minimum Alternate Tax (MAT) has been introduced. The
present rate of MAT is 19.05%.
Another aspect which must be looked into is the concept of Withholding Taxes; also called as
Tax Deduction at Source (TDS).
Tax Deduction at Source (TDS):
As per the provisions of the Indian tax laws, certain payments are covered under tax
withholding norms. Under this, the person responsible for making any payment is required to
withhold a certain specified percentage of the payment amount as taxes and deposit it with
the Government treasury. In addition, the person is required to prepare a certificate of tax
deduction and provide it to the person on whose behalf the deductions are made. Every
quarter i.e., 3 months, returns have to be filed by the deduct or and credit must be given to the
deducted in the returns.
The following are the areas where tax withholding is most common in the Indian
scenario:
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Salaries: The salaried employees of the drawing beyond the minimum taxable salary would
be covered under the tax withholding requirements and annual tax withholding returns are to
be submitted with the Revenue authorities.
Contractors:Payments made to a contractor for carrying out any work would require
withholding of tax at source from such payments, if certain threshold limits are crossed.
Typical examples of such payments will include:
 Advertising payments
 Broadcasting and telecasting payments
 Office renovation payments
 Vehicle hire payments
 Catering payments.
 Job Work
 Courier
Professional Services: Payments made for professional and technical fees to Doctors,
Chartered Accountants, Lawyers, Management Consultants, Engineers, Architects and other
professionals would fall under this section and tax would be required to be withheld from
their payments. Such withheld tax shall be deposited with the Government.
Rentals:Payments for rentals would attract tax deduction at source.
Indirect Taxes
Indirect tax is generally imposed on suppliers or manufacturers who pass it on to the
consumers using their good or services. The following are the list of Indirect Taxes as:
1. Service Tax: Applicable on the services provided by a company and paid by the recipient
of their services, collected by and deposited with the central government.
2. Value Added Tax: Popularly known as VAT, it is levied on the sale of movable goods or
goods sold directly to the customers. It is exacted by the respective state governments on
intra-state sales.
3. Excise duty: Levied on the goods produced or manufactured in India, paid by the
manufacturers of different goods. It is often recovered from the customers.
4. Custom Duty: Applicable on the goods which are imported into India from other
countries. In some cases, it is also levied on the goods being transported out of India.
5. Entertainment tax: Levied on all financial transactions related to entertainment such as
movie shows, amusement parks, video games, arcades, and sports activities, charged by the
respective state governments.
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6. Stamp Duty: Levied on the transfer of immovable property located within the state,
charged by the State Government and may vary in rates. Also applicable on all legal
documents.
7. Securities Transaction Tax: Levied at the time of trade of securities through Indian Stock
Exchange.
In India, there are many different Indirect Taxes which are applicable on different kinds of
goods, imports, manufacturing and services.
GST: Merging of various indirect taxes

As there are many different types of indirect taxes levied on the expense incurred by a buyer,
the government has made an effort to simplify the taxing process and merged all these
indirect taxes into a common indirect tax called the Goods and Service Tax (GST).
Merging of all these taxes has reduced the hassles of compliances associated with all these
indirect taxes, improving tax governance in the country. Introduced in 2017, the GST has
eliminated the cascading effect of multiple taxes.
3.8.2 Public Expenditure Policy:

It influences the economic activities of a country to a great extent. In 2007-08, share of public
expenditure in national income was 14.5 percent. Public expenditure may be of two kinds i.e.
developmental and non-developmental, Developmental expenditure is of great importance
with reference to the economic growth of the country. Developmental activities like
development of means of transport, extension means of irrigation, completion of power
projects and expansion of educational and health facilities requires huge amount of capital
that cannot be contributed by the private sector alone, so increase in public expenditure is
must. The following measures undertaken by the Government can help to increase the public
expenditure which is as follows:
 Development of Public Enterprises: Basic and heavy industries requires huge
capital and also involves more risks. So, private sector in the country cannot setup
such establishment without any support. Since Industrial Policy, 1956 resolution,
Government of India is actively involved in development of such industries.
 Support to Private Sector: In order to accelerate the rate of economic growth in the
country, government is encouraging private sector by giving various subsidies,
concessional loans, tax concessions, etc.
 Development of Infrastructure: Government spends huge amount for the
development of infrastructure that includes development of railways, power projects,
roads, air ports, ports, hospitals, bridges, dams, etc. which is important prerequisites
for the economic development of any nation.
 Social Welfare: Government spends huge amount on public health, education, safe
drinking water, sanitation, welfare of weaker section of society, etc.
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3.8.3 Public Debt Policy:
Government needs lot of funds for the economic development of the country. No government
can mobilise so much funds by way of taxes alone. There are many reasons for it, viz. a) most
of the population is poor; b) adverse effect of more taxes on savings and investments; c) taxes
are levied only till taxable capacity of the people. It therefore, becomes inevitable for the
government to mobilise resources for economic development by resorting to public debt.
Public debt is obtained from two kinds of sources:
o Internal Debt: It should be mobilised in a manner that it has no adverse effect on
private investment. It is more beneficial to collect small savings as it encourages the
people to save more. Special efforts should be made to mobilise rural small savings.
In India, small savings are being collected from large number of people through
commercial banks and post offices. Internal debt constituted 95.9 percent of total
public debt in the year 2007-08.
o External Debt: India cannot meet its financial requirements from internal debt alone.
It has got to borrow from abroad as well. The main advantage of foreign loans is that
these loans are received in foreign currency. External debt constituted 95.9 percent of
total debt in the year 2007-08.
3.8.4 Deficit Financing Policy:

It refers to financing the budgetary deficit. Budgetary deficit here means excess of
government expenditure over government income (including borrowings). Deficit financing
in India means, “Taking loan from the Reserve Bank of India by the government to meet the
budgetary deficit”. Reserve Bank gives this loan by issuing new currency notes.
Consequently, money supply increases. Increase in money supply leads to fall in the value of
money. Fall in value of money in turn leads to increase in price level. So, deficit financing
should be kept low as it leads to price rise in the economy. But in India, level of income is
low. As a result, power to save in is also and their taxable capacity is also low. Due to low
saving, there is a low rate of capital formation which leads to low rate of economic growth.
Hence to accelerate the rate of economic growth, it becomes inevitable to increase saving and
investment. Deficit financing is a kind of forced savings. On account of deficit financing,
price level rises and people get less number of goods in exchange for the same amount of
money than before. Government of India has also been taking resort to deficit financing since
the beginning of the plans. Thus, due to deficit financing, on the one hand, necessary funds
are made available for economic growth and on the other, inflation in the country increases. It
is, therefore, essential that deficit financing be kept with safe limits. Presently our
government is not using deficit financing for meeting its financial requirements.
[Reference: https://www.oliveboard.in/]
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3.9 FISCAL POLICY REFORMS INTRODUCED BY THE
GOVERNMENT OF INDIA:
1. Simplification of Taxation System: With a view to simplify the taxation system as

recommended by Raja Chelliah Taxation Reform Committee, ex-Finance Minister Dr.
Manmohan Singh and Finance Minister Sh. Chidhambaram have taken several steps. These
measures have provided big relief to tax payers. It is also imperative that administrative
machinery should be made efficient and honest with simplification of taxation system.
2. Improving Tax to GDP Ratio: In recent years government has taken several measures to
improve tax-GDP ratio. In year 2002-03 this ratio was 14.4 percent. In the year 2009-10 it
has improved to 16.6 percent. It shows that scope of tax has increased.
3. Reduction in Rates of Direct Taxes: Policy of fiscal reforms aims at lowering the rate of
taxes. Tax revenue is to be increased by reducing the tax rate. Government of India has been
gradually lowering the rates of direct and indirect taxes in its successive budgets. In 1997-98
budgets, the maximum rate of income tax was reduced to 30 percent. Rate of Corporation
Tax has also been reduced. In the budget for the year 2009-10, maximum rate of income tax
is 30 percent. As a result of these reforms, collection of tax revenue has increased
considerably. Although rates of taxes have been reduced yet the tax revenue has been rising
constantly. In 1990-91, direct tax revenue was 1.9 percent of gross domestic product (GDP).
In 2009-10, it rose to 6 percent of GDP. Of the total tax revenue, the ratio of direct tax
revenue has increased from 19% in the year 1990-91 to 58% in the year 2009-10. Consequent
upon different reform measures taken in respect of direct taxes, revenue from taxes has
increased appreciably.
4. Reforms in Indirect Taxes: For the last many years the government has been making
persistent efforts to reform the indirect tax structure e.g. lowering of the tax rates, increasing
scope of tax, etc. Under reforms concerning customs, import duties were gradually reduced
so as to bring down the cost of production. It has enabled the domestic industry to compete in
the international market. Reduction in import duty has brought down the prices of imported
goods to the benefit of the consumers. In year 2001-02, government adopted Central Value
Added Tax (CENVAT). In CENVAT, three tier excise duties of 8%, 16% and 24% are
started. In the year 2008-09 and 2009-10, excise duty rates have been reduced to boost
aggregate demand, so as to protect the domestic economy from global recession. In place of
retail sales tax, Value Added Tax has been introduced. All states /UTs have implemented
VAT w.e.f. April 1, 2005.
VAT is charged on value addition at each stage of production or distribution. For example,
when raw materials are changed into work in process, some value addition takes place.
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Similarly, when work in process is converted into finished goods, again some value addition
takes place. In VAT, tax is charged on each stage of value addition. In VAT, three tax rates
have been determined, for gold and silver VAT rate is 1%, for basic goods it is 4% and for
other commodities, VAT rate is 12.5%.
5. Introduction of Service Tax: In the year 1994-95, service tax has been started in India. In
year 2007-08, rate of service tax was 12 percent. In year 2009-10, service tax rate has been
reduced to 10 percent. Initially this tax was applicable on a few seconds but now 114 services
have been covered under this tax.
6. Reduction in Non-plan Government Expenditure: One of the major objectives of fiscal

reforms was to put a check on unnecessary government expenditure. Government took
several measures in this direction; for example superfluous appointments were banned,
disinvestments in public enterprises incurring chronic losses. As a result of these measures,
total non-plan expenditure of the central government that stood at 17.3 percent of GDP in
1990-91 came down to 11.3 percent in 2009-10.
Thus, the central government has partially succeeded in scaling down percentage of non-plan
expenditure. However, non-plan expenditure of government in absolute monetary terms
instead of going down has actually been on increase. Rise in the non-plan expenditure of the
government must be a matter of concern in so far as economic development is concerned.
7. Reduction in Subsidies: Central Government has to make huge payments by way of

subsidies, for instance, fertilizer subsidies, export subsidies, food subsidies, etc. Government
has been making serious efforts to reduce subsidies. No doubt, the total amount being spent
on subsidies has been rising, but as a percentage of GDP it has been falling. In 1990-91,
subsidies constituted 2.3 percent of GDP but in 2007-08 their share fell to 1.4 percent. But in
the year 2008-09, it again increased to 2.2% of GDP. In 2009-10, subsidies constituted 1.8%
of GDP.
8. Improvement in Tax Collection: For improving tax collection and to check tax evasions
various schemes have been launched by government from time to time viz., - allotting
Permanent Account Number (PAN), strengthening the norms of Tax Deduction at Source
(TDS), Special Bearer Bond Scheme, Voluntary Disclosure Schemes, making e-filing of tax
returns mandatory for certain assesses, extension of e-payment, facility of taxes, etc. Tax
authorities have been given wide powers to conduct tax-raids.
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9. Closure of Sick Public Sector Companies: Government has been closing loss making
and sick public sector companies. This step has been taken to reduce the burden of these loss
making units on government exchequer.
10. Disinvestment of Public Sector Units: Disinvestment here refers to selling the shares of
public sector units to private hands. Through disinvestment government gets huge funds. This
has enabled the government to overcome financial crunch.
11. Efforts to Reduce Government Administrative Expenses: For this government has
offered attractive voluntary retirement scheme to its employees to overcome the problem of
over staffing. Government has banned or reduced sanctioning new posts in some of its
departments. Government has also reduced grants to various states, and privately managed
institutions.
12. Enactment of Fiscal Responsibility and Budget Management Act: Government has
enacted Fiscal Responsibility and Budget Management Act, 2003. The main purpose of this
Act is to reduce fiscal deficit and for this, the target has been fixed for reducing fiscal deficit
with the minimum annual reduction of 0.5 % of Gross Domestic Product (GDP).
13. Reduction in Central Sales Tax (CST): Government has reduced CST from 3 % to 2%
from June 1, 2008. From 1st April 2011, CST has been abolished.
14. Introduction of Goods and Service Tax (GST): Central government is gradually
reducing central sales tax, excise duty on goods and is increasing service tax. Government is
moving towards imposing a uniform tax on goods and services named GST with effect from
April 1, 2011. Goods and Service Tax is a comprehensive value added tax on goods and
services levied and collected on the value added at each stage of sales and purchase. GST will
have two components, comprising of Central GST and State GST.
[https://www.economicsdiscussion.net/]
3.10 SUMMARY
The Major objectives of Monetary and Fiscal Policies are:
 To increase the rate of investment and capital formation, so as to accelerate the rate of
economic growth.
 To increase the rate of saving and discourage actual and potential consumption.
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 To diversify the flow of investment and spending from unproductive uses to socially
most desirable channels.
 To check sectoral imbalances.
 To reduce widespread inequalities in income and wealth.
 To improve the standard of living of the masses by providing social goods on a large
scale.
 Neutrality of money;
 Exchange rate stability and equilibrium in the balance of payments;-
 Price stability and control of business cycle;
 Full employment;
 Economic growth;
The Industrial Policy of 1948 broadly divided industries into four categories. Small-scale
industrial sector was decided to develop on cooperative lines as far as possible. The main
thrust of the 1948 Industrial Policy was to lay the foundation of a mixed economy. The Act
focused mainly on granting license for new undertakings, especially regarding location, size,
etc. The Act also empowered the government to prescribe prices, methods, volume of
production and the channels of distribution.
The economic growth and development of the country is mix of various plans, policies,
efforts, strategies and efficient utilization of resources. The fiscal and monetary policy
together is very important in the overall development of the country and helps to build the
robust path for future development. The reforms introduced in both the policies have helped
Indian economy to sail smoothly through global slowdown. Today, Indian economy is
emerging as a strong economy in the world and the backbone of such successful status is our
solid monetary and fiscal policies with effective instruments that help to continue the journey
of growth and development.
3.11 KEYWORDS
 Monetary policy is the process by which the monetary authority of a country controls
the supply of money, often targeting an inflation rate or interest rate to ensure price
stability and general trust in the currency.
 Fiscal policy is the term used to describe all of the government’s decisions regarding
taxation and spending.
 Instrument - a means by which something is affected or done.
 Tax Resident: An individual is treated as resident in a year if present in India:
 For 182 days during the year or
 For 60 days during the year and 365 days during the preceding four years.
 Disinvestment of Public Sector Units: Disinvestment here refers to selling the
shares of public sector units to private hands.
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1. Why it is important to understand the liquidity and ranking for measure of Money?
___________________________________________________________________________
_____________________________________________________________________
2. Compare Public Debt and Expenditure Policy
___________________________________________________________________________
____________________________________________________________________
Short Questions
1. Explain the meaning of monetary Policy.
2. Discuss the relationship of money supply with Monetary Policy.
3. Present the comparison of Qualitative and Quantitative methods of Monetary
Instrument
4. What is the purpose of Fiscal Policy?
5. Why Taxes are the main source of revenue for the government?
Long Questions
1. What are the objectives of Monetary Policy? Explain it.
2. Explain General Methods of Monetary Instrument.
3. Justify the role of Fiscal Policy
4. What is TDS? What are the areas where TDS is applicable?
5. Discuss the Impact of Fiscal Policy Reforms

1. Monetary policy is the process by which the monetary authority of a country controls
the supply of money, often targeting a ___________________to ensures price
stability and general trust in the currency.
a. Inflation rate or interest rate
b. Bank rate
c. Cash Reserve Ratio
d. Statutory Liquidity Ratio
2. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the
_______________in the economy can be encouraged.
75
a. Investment level
b. Bank rate
c. Economic development
d. Infrastructure development
3. Which measure of money is taken into account in formulating macroeconomic

objectives of the economy every year?
a. M1
b. M2
c. M3
d. M4
4. The resources can be mobilised through _______________by reducing government

expenditure and increasing surpluses of public sector
a. Private Savings
b. Mutual Funds
c. Public Savings
d. Taxation
5. State Governments can levy ________________ tax.

a. Service Tax
b. Custom Duties
c. Stamp Duties
d. Income Tax
Answers
1 – a; 2- b; 3 – a; 4 -d; 5 – c.
Text Books:
Publishing House],
 T R Jain, Mukesh Trehan and Ranju Trehan, Indian Business Environment– VK
Enterprise
 K.Aswathappa, Essentials Of Business Environment, Himalaya Publishing House
76
Hall.
Reference Books:
2006.
Open Text Source:
p. 2049. ISBN 9788180385926.
Limited. pp. 48–.ISBN 978-81-7534-840-0.

December 2012
77
UNIT 4: GLOBAL BUSINESS TRENDS
Structure
4.1 Introduction
4.2 Global Business
4.2.1 Concept
4.2.2 Nature
4.2.3 Scope
4.3 Global Trends
4.3.1 Need of Foreign Capital
4.3.2 Types of Foreign Capital
4.3.3 Initiatives by Indian Government to Attract Foreign Capital
4.4 Foreign capital

4.4.1 Definition of Foreign Collaboration:
4.4.2 Types of Foreign Collaboration
4.5 Foreign collaboration
4.6 Economic trends in Indian industries
4.7 Summary
4.8 Keywords
 Explain the significance of Globalization

 Outline the Global Trends
 Compare the different types of Foreign Capital
 Define the Role of Foreign Collaboration
 Highlight the economic trends in India
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4.1 INTRODUCTION
Globalization – a new habit, necessity and important aspect of Economic civilization across
the World. Globalization has not only proved beneficial for large corporates but it has created
opportunity for the small businesses as well as for nations, consumers and overall economy.
The connectivity of the people and business throughout the World that has resulted in birth of
global culture and lead to political and economic integration. In Late 1970’s, the word
globalization was coined first. The modes of transportation, the spread of telephone networks
and affordable internet services are the main reason behind the spread of Globalization. With
the current situation of COVID-19 pandemic the consumption of high-tech gadgets, laptops
and internet has increased. World economic activities and various services are using online
platform that has changed the pace and dimension of globalization.
Globalization has become very important aspect for every business. As business needs
resources and availability of the resources are not specific to one region. It encourages the
movement of raw material from one region to other; from one country to other country thus
leading to export and import of goods. Even the finished goods are traded to enjoy the quality
and utility offered. The increase in market share, easy access to raw material and availability
of talent which is ready to migrate has encourage the transnational business and enjoy it
benefits.
4.2 GLOBAL BUSINESS:
4.2.1 Concept
Business which is conducted internationally in more than one country is termed as an
International business. It involves transactions of goods & services between the two
countries. These transactions are conducted at the global level & across national borders.
International businesses are very large in size as they are performed at a global level.
Their scales of operation are vast in size. International businesses provide employment to a
large number of peoples. It is served as an important source for earning foreign exchange for
the country. All payments in these businesses are done in foreign currencies of different
countries.
These businesses help in improving the standard of living of people in different countries by
supplying high-quality goods. International business is of different types like imports &
exports, franchising, licensing, foreign direct investment, etc.
International businesses provide employment to a large number of peoples. It is served as an
important source for earning foreign exchange for the country. All payments in these
businesses are done in foreign currencies of different countries.
4.2.2 Nature
International Restrictions
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In international business, there is a fear of the restrictions which are imposed by the
government of the different countries. Many country’s governments don’t allow international
businesses in their country. They have trade blocks, tariff barriers, foreign exchange
restrictions, etc. These things are harmful to international business.
Benefits to Participating Countries

It gives benefits to the countries which are participating in the international business. The
richer or developed countries grow their business to the global level and they get maximum
benefits. The developing countries get the latest technology, foreign capital, employment
opportunities, rapid industrial development, etc. This helps developing countries in
developing their economy. Therefore, developing countries open up their economy for
foreign investments.
Large Scale Operations

International business contains a large number of operations at a time because it is conducted
on a large scale globally. Production of the goods at a large scale, they have to fulfil the
demand at a global level. Marketing of the product is also conducted at a large scale to make
them aware of the product. First, they fulfil the domestic demand and then they export the
surplus in the foreign markets.
Integration of Economies
International Business combines the economies of many countries. The companies use the
finance, labour, resources, and infrastructure of the other countries in which they are
working. They produce the parts in different countries, assembles the product in other
countries and sell their product in other countries.
Dominated by Developed Countries
International business is dominated by developed countries and their MNC’s. Countries like
U.S.A, Europe, and Japan all are the countries that are producing high-quality products, they
have people working for them on high salaries. They have large financial and other resources
like the best technology and Research and Development centers. Therefore, they produce
good quality products and services at low prices. They help them to capture the world market.
Market Segmentation
International business is based on market segmentation on the basis of the geographic
segmentation of the consumers. The market is divided into different groups according to the
demand of the consumers in different countries. It produces goods according to the demand
of the consumers of the different market segmentations.
Sensitive Nature
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International Business is highly affected by economic policies, political environment,
technology, etc. It can play a positive role to improve the business and can also be negative
for the business. It totally depends on the policies made by the government; it can help in
expanding the business and maximizing the profits and vice-versa.
4.2.3 Scope
Foreign Investments
Foreign investment is an important part of international business. Foreign investment
contains investments of funds from the abroad in exchange for financial return. Foreign
investment is done through investment in foreign countries through international business.
Foreign investments are two types which are direct investment and portfolio investment.
Exports and Imports of Merchandise
Merchandise are the goods which are tangible. (those goods which can be seen and touched.)
As mentioned above merchandise export means sending the home country’s goods to other
countries which are tangible and merchandise imports means bringing tangible goods to the
home country.
Licensing and Franchising
Franchising means giving permission to the new party of the foreign country in order to
produce and sell goods under your trademarks, patents or copyrights in exchange of some fee
is also the way to enter into the international business. Licensing system refers to the
companies like Pepsi and Coca-Cola which are produced and sold by local bottlers in foreign
countries.
Service Exports and Imports
Services exports and imports consist of the intangible items which cannot be seen and
touched. The trade between the countries of the services is also known as invisible trade.
There is a variety of services like tourism, travel, boarding, lodging, constructing, training,
educational, financial services etc. Tourism and travel are major components of world trade
in services.
Growth Opportunities
There are lots of growth opportunities for both of the countries, developing and under-
developing countries by trading with each other at a global level. The imports and exports of
the countries grow their profits and help them to grow at a global level.
Benefiting from Currency Exchange
International business also plays an important role while the currency exchange rate as one
can take advantage of the currency fluctuations. For example, when the U.S. dollar is down,
you might be able to export more as foreign customers benefit from the favourable currency
exchange rate.
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Limitations of The Domestic Market
If the domestic market of a country is small then the international business is a good option
for the growth of the business in the host country. Depression of domestic market firms will
force to explore foreign markets.
4.3GLOBAL TRENDS:
1. Global banking structure: Domestic banking institutions are slowly increasing their
exposure to international assets and liabilities. To quote, the US financial crisis had an impact
on other international economies due to exposure of the latter economies in structurally
created international mortgage assets. With the advent of modern technology, domestic
banking institutions are converting into global banking institutions. These increasing
international exposures are substantially driving global business strategies.
2. Sustainable and clean energy: Climate change agreements are talk of the town these
days. The emerged markets like, the US, UK, European Union (EU), Japan, etc, are entering
into agreements in taking emerging markets to the path of sustainability and usage of clean
energy. The countries are deriving ways in procuring clean energy from international shores.
Consequently, these agreements are seriously impacting the way businesses are conducted in
domestic a well as international markets.
3. Increasing economic power of emerging markets: The contribution of the emerging
markets in overall global factors is increasing over the years. The acronym 'BRICS'
comprising Brazil, Russia, India, China and South Africa is gaining importance since the last
decade. The said economies are expected to outperform other emerged markets in coming
future owing to the existence of diverse opportunities in the wake of middle class strata of
society, technological revolutions, infrastructure advancements, education levels, socio-
cultural factors, etc. So, due to these opportunistic factors, emerging markets are considered
to be an important import and export destinations for the international players thereby driving
business strategies.
4. Increasing Privatization: Slowly, the international economies are moving toward
privatizing corporate affairs. Public-private partnerships and divestment programs are core
parts of these strategies undertaken in worldwide markets. The role of government in
channelizing funds is slowly reducing, i.e. capitalism is state of the art philosophy which
international economies are following. Obviously, these changing patterns are having an
impact on international business environment.
5. Technological revolution: With the advent of information and communication
technology, new business opportunities are emerging. Cloud computing is a new way of
handling business operations worldwide. Mobile phones and broadband connections are
changing the way of doing businesses by promoting virtual teams. Moreover, the role of
government in enhancing the use of technology is quite commendable. For instance, the
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concept of 'smart city' under the flagship of present National Democratic Alliance (NDA)
government clearly reflects the importance that is being placed on the technological
revolutions that the government attempts to introduce. For this, the government is also
considering international financial flows.
6. Changing Demographic features: Owing to globalization, consumers' tastes and
preferences are changing over the years. More and more women candidates are getting
employment in industrial and financial houses. Growing e-commerce platforms are helping
consumers and prospective customers in buying and even selling through international
platforms. The said platforms are creating new employment avenues for the people. For
instance, Japanese economy is witnessing aging population, however, it is finding respite in
selling its products to the worldwide consumers.
7. International arbitration: These days international arbitrators are playing an important
role in directing global business strategies. The disputes which are outside the purview of
domestic rules and regulations are referred to international arbitrators. The existence of these
agencies is not only resolving the said disputes but also promoting and enhancing confidence
among the business fraternities for entering into international trade relationships.
8. Competitive advantage: In today's scenario, most of the emerged markets are witnessing
slower growth rates, so, this situation is placing an important role that the emerging markets
can play in driving international growth rates. Increasing trade relations with the emerging
markets vividly highlight the growing importance and competitive advantage of the said
economies.
9. Regional and economic blocs: Lastly, these regional and economic blocs, like EU,
ASEAN nations, etc., are slowly increasing cooperation among the international economies.
The said economies are opening up their respective domestic economies for the international
investors. Consequently, these regional and economic blocs are having an impact on the
global business environment.
10. Global Supply Chain:
In the global economy, managing a supply chain requires dealing with trade and tariff
controls, quality regulations, and international relationships. Global supply chain
management is highly specialized and complicated. Some firms even do nothing but manage
supply chains for other companies, whereas some other companies offer the service in
addition to their core activity.
For example, the following promotion appears on the FedEx website:

FedEx Supply Chain is a third-party logistics provider that can support supply chain
requirements throughout the product lifecycle, from kitting and product packaging
through end-of-life services such as liquidation and recycling.
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The World Bank estimates that 13 percent of the world’s gross domestic product (GDP) was
earned from moving and storing goods around the planet in 2016.
4.4FOREIGN CAPITAL
Introduction:
Foreign capital, MNCs and globalization are closely linked. Globalization is made possible
by the emergence and growth of multinational corporations, which in turn, act as funnels and
sources of foreign capital. Foreign capital and technology are very important to develop the
hitherto untapped natural resources of developing countries. In the following sections, we
will study the role of foreign capital in the developing countries.
One of the most important characteristics of developing economies is their low savings and
poor capital formation. It is this feature of the developing countries that keeps them poor for
ages and makes it difficult for them to get out of the quagmire of poverty in which they have
been wallowing for centuries. However, this deficiency of capital has not restrained them
from attending to the task of quickening the process of economic growth. It has in fact steeled
their resolve to industrialize themselves fast, as in the case of India which launched an
ambitious programme of industrialization during the Second Five Year Plan. Since the
country did not have sufficient capital resources, it had to depend on foreign capital, as was
the case with other developing countries. Foreign capital comes to a country in different
forms, the most important of them being FDI. A major source of FDI is multinational
corporations, which we have discussed earlier
4.4.1 Need Of Foreign Capital:
The following are some of the factors that call for foreign capital to a developing
country such as India.
1. To sustain a high level of investment: If an underdeveloped country wants to

industrialize itself quickly, it has to raise its quantity of capital resources substantially to
invest in multiple industrial segments. To raise such a large amount of capital, a poor
country with low savings cannot but seek foreign capital to bridge the resource gap
between savings and investment.
2. To bridge the technology gap: One of the primary reasons for an underdeveloped
country to remain in a state of poverty is the low technology it uses at all levels of its
productive activity. If they have to develop their economies through industrialization they
have to come out of the low level equilibrium in which they find themselves. To ensure
higher level of growth, it is imperative for them to import cutting edge technology from the
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developed countries. Foreign capital usually brings in such technology in the form of
private foreign investment or as joint venture. In the Indian case, our industry was able to
fill up the technology gap through (a) import of export services, (b) training imparted to
Indian personnel and (c) educational, research and training institutions set up in
collaboration with foreign experts.
3. To exploit natural resources: Most of the developing countries are richly

endowed with huge deposits of natural and mineral resources. India, for instance, is said to
be a “Veritable darling of nature,” and possess enough and to spare of coal, iron ore, hydro
carbon, etc. That is why it is said that “India is a rich country inhabited by poor people”.
However, notwithstanding these huge mineral and other resources, we are not able to tap
and exploit them to the benefit of the country's development. Therefore, developing
countries seek the expertise and technical skills of advanced countries to prospect, exploit
and make effective use of these resources.
4. To initiate growth by undertaking initial risk: Initiating the process of economic

growth in underdeveloped countries where there is an acute paucity of private
entrepreneurs is a Herculean task. In such cases, foreign capital is preferred to undertake
the risk of investment and provide the initial incentive for industrialization. Once foreign
entrepreneurs bring in capital and technical enterprise, bear risk and uncertainty involved
in the process of industrialization in an unindustrialized country and pave the way for the
growth of industries, domestic entrepreneurs can take over and continue the process with
greater ease.
5. To developbasic infrastructure: Both at the beginning and during the process of

economic growth of developing economies, it has been found that one of the major
obstacles is lack of adequate infrastructure and the feeble attempt to develop it for want of
indigenous capital and incentives. Infrastructure development, especially in power,
irrigation, roads, railways, sea transport and air connectivity is absolutely essential to
enable a developing economy grow. Even after almost six decades of planning economic
development, India finds growth in infrastructure tardy and inadequate to meet the
developmental needs of the economy. We have to depend on international financial
institutions such as the World Bank, Asian Development Bank, International Development
Association, etc. to help us develop our infrastructure. Even less- and medium-developed
countries such as Malaysia and Singapore have come forward to invest in our
infrastructure.
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6. To bridge the foreign exchange gap: While planning and executing the process of
economic growth of their economies, poor countries need to have adequate foreign
exchange to import plants, equipment and machinery, technical expertise and industrial
raw materials. As producers of primary products, they can only export low-priced
agricultural products such as food grains, tea, coffee, sugar and spices. But with an ever-
increasing population, they find it difficult to create surpluses for exports after catering to
the huge domestic captive market. Thus, a rising mismatch between demand and supply of
foreign exchange, and the problems arising out of unfavourable balance of payments, drive
the poor countries seek foreign exchange by inviting foreign capital.
4.4.2 Types of Foreign Capital
Foreign capital consists of two main forms: (i) private foreign investment and (ii) foreign aid.
Private foreign investment can be either (a) direct foreign investment, or (b) indirect foreign
investment. When a private foreign investor either establishes a branch of his business or a
subsidiary in the host country, it is called direct foreign investment. Multinational
corporations which establish their subsidiaries in developing countries such as India belong to
this category. Hindustan Lever, Procter & Gamble, Coca-Cola India, etc. are examples of
MNCs incorporated outside India, but having their subsidiary companies in India. When
these MNCs open their subsidiaries in a host country, they bring with them a number of
modern industrial inputs such as technological expertise, plant, machinery, equipment,
managerial skills, marketing and sales techniques which benefit the host country immensely.
If a developing country absorbs these skill sets, it will permeate in its industrial structure and
widen and (c) creditor capital from official sources in host country's companies. The Indian
government provides data on foreign investment of the categories provided in Figure 4.3.1.
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Foriegn Direct Indirect Foriegn
Investment Investment
SIA and FIPB GDRs

approved
investment FII
RBI and NRI Off-shore Funds
Fig 4.1: TYPES OF FOREIGN CAPITAL
SIA – Secretariat for Industrial Approval; FIPB- Foreign Investment Promotion Board
RBI-Reserve Bank of India; NRI-Non-Resident Indian
GDR-Global Depository Receipts FII-Foreign Institutional Investor
In India foreign direct investment may further take the form of (i) wholly owned subsidiary
(ii) joint venture and (iii) acquisitions, Foreign portfolio investment may be (i) Investment by
Foreign, Institutional Investors (FIIs) including Non-Resident Indian (MRIs) (ii) Investment
in (a) Global Depository Receipts (GDRs) and (b) Foreign Currency Convertible Bonds
(FCCBs).
Private foreign investment in India can be further classified as follows:

1. Foreign Aid:
It consists of loans and grants. Loans may be taken from individual countries or from
institutional agencies like World Bank, IMF and International Financial Corporation. Usually
loans are taken for medium and long term capital needs of a country. Loans impose a heavy
burden on the borrower country because they are to be repaid, along with interest, called
surviving of loans. Loans may be tied because of restrictions. Such restrictions may be in the
form of end use or in the form of source. Grants are given by public or private charitable
organisations.
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They are given for relief purposes and immediate use grants may be time bound and can be
used only for specific purpose. Loans involve repayment obligations, whereas grants are non-
refunded. It is important to see that grants are properly utilized for the specified purpose. Any
foreign capital in the form of aid should be pledged on the basis of its purpose, mode of
repayment, cost to the borrower and political considerations. For it is not only uncertain,
usually not extended for public sector but for consumer goods industries and do not create
means for its repayment. It is therefore better to create ‘trade’ rather than ‘aid’ from a foreign
country
2. Private Foreign Investment:

It is of two types – (i) Foreign Direct Investment (ii) Foreign Portfolio Investment.
Foreign investment and collaboration with a forcing nation are closely interrelated, but they
are different from each other. Capital investment is participation of a foreign country in
capital of recipient country’s enterprises. Collaboration, on the other hand means providing
technical and managerial knowhow, licensing franchise, trade-marks and patents by a host
country to home country.
Foreign Direct Investment (FDI)

FDI is an investment made by a company or individual who us an entity in one country, in
the form of controlling ownership in business interests in another country. FDI could be in
the form of either establishing business operations or by entering into joint ventures by
mergers and acquisitions, building new facilities etc.
Foreign Portfolio Investment (FPI)

Foreign Portfolio Investment (FPI) is an investment by foreign entities and non-residents in
Indian securities including shares, government bonds, corporate bonds, convertible securities,
infrastructure securities etc. The intention is to ensure a controlling interest in India at an
investment that is lower than FDI, with flexibility for entry and exit.
Foreign Institutional Investment (FII)

Foreign Portfolio Investment (FPI) is an investment by foreign entities in securities, real
property and other investment assets. Investors include mutual fund companies, hedge fund
companies etc. The intention is not to take controlling interest, but to diversify portfolio
ensuring hedging and to gain high returns with quick entry and exit.
The differences in FPI and FII are mostly in the type of investors and hence the terms FPI and
FII are used interchangeably.
Other Kinds of Foreign Investments
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Apart from FDIs and FIIs, there are other kinds of investments emanating from abroad which
are discussed in the following sections:
NRI Investments
Non-resident Indians (NRI) are increasingly remitting foreign exchange to India. Presently,
NRIs have replaced the Chinese as the ethnic group that sends the largest amounts to their
countries of origin. Investments by NRIs are permitted liberally in the country so as to give
them wider investment opportunities. RBI's policy with respect to NRI deposit schemes
ensures capital flows from abroad at a low rate of interest.
Global Depository Receipts

A Global Depositary Receipt (GDR) is a financial instrument used by private markets to raise
capital denominated in either US dollars or euros. GDRs are certificates issued by investment
bankers to the general public against the issue of shares of some foreign country. GDRs are
issued by investment bankers to the general public in more than one country against the issue
of shares in a foreign company. The shares held by a foreign bank are traded as domestic
shares, but are offered for sale globally through the various bank branches. If any company
wants to issue GDR to raise funds from a foreign country, it follows the following steps: (i)
The company contacts the merchant banker of the home country (ii) after obtaining approval
from the RBI; then (iii) it contacts the investment banker of a foreign company, (iv) then the
investment banker will purchase the shares from the merchant banker and (v) then issue it to
public through green shoe option. These instruments are called EDRs when private markets
want to obtain Euros. Reliance Industries Ltd. was the first company to raise funds through a
GDR issue.
A GDR is a dollar denominated financial instrument traded in stock exchanges in USA and
Europe. When such an instrument is traded only in the United States, is called American
Depository Receipts (ADRs). GDR represents a given number of underlying equity shares.
While the GDR is quoted and traded in dollars, the equity shares it represents are
denominated in rupees. A company issues its shares to an intermediary known as Depository
in whose names the shares are registered. It is the issues the GDR subsequently. The actual
possession of the GDR is with another intermediary and the agent of the depository referred
was the custodian. Thus, even when a GDR represents the equity shares of the issuing
company, it has a distinct identity of its own. In fact, it is not even entered into the books of
the issuer. Indian companies have been accessing global markets through GDRs.
The Indian Government has laid down that the total foreign investment, made either directly
or indirectly, through the GDR route shall not exceed 51 per cent of the issued and subscribed
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capital of the issuing company. This will be apart from the maximum limit of 30 per cent
equity, which can be accessed by offshore funds, FIIs or NRIs through the secondary market.
American Depository Receipts

ADRs represent ownership in the shares of a non-US company and trades in US financial
markets. With the use of ADRs, the stock of many foreign companies is traded on US stock
exchanges. ADRs enable US investors to purchase shares in companies of foreign countries
without going through cross-border transactions. ADRs prices are marked in US dollars, pay
dividends in US dollars, and are traded like the shares of US-based companies. Every ADR is
offered by a US depositary bank and can represent a fraction of a share, a single share, or
multiple shares of the foreign stock. One who owns an ADR is entitled to acquire the foreign
stock it represents, but American investors generally find it more convenient simply to own
the ADR. The price of an ADR often tracks the price of the foreign stock in its home market,
adjusted for the ratio of ADRs to foreign company shares. Individual shares of a company
belonging to another nation represented by an ADR are called American Depositary Shares
(ADS).
One can either obtain new ADRs by offering the corresponding domestic shares of the
corporation with the depositary bank that manages the ADR programme or, as an alternative
one can source existing ADRs in the secondary market. The second option can be used either
by buying the ADRs on an American stock exchange or through buying the particular
domestic shares of the company on their primary exchange and then “swap” them for ADRs;
these swaps are known as “Cross book swaps” and mostly constitute the bulk of ADR
secondary trading.
Foreign Currency Convertible Bonds (FCCB)

FCCB is a kind of convertible bond, issued in a currency different than the issuer's domestic
currency, implying thereby that the money being raised by the issuing company is in the form
of a foreign currency. This is a powerful instrument by which the company in particular and
the country raises the money in the form of a foreign currency. A convertible bond is a blend
of a debt and equity instrument. It acts like a bond by making regular coupon and principal
payments, but at the same time these bonds also give the bondholder the option to convert the
bond into stock.
The Ministry of Finance, Government of India, defines FCCB thus: “Foreign Currency
Convertible Bonds” means bonds issued in accordance with this scheme and subscribed by a
non-resident in foreign currency and convertible into ordinary shares of the issuing company
in any manner, either in whole, or in part, on the basis of any equity related warrants attached
to debt instruments.
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These types of bonds are highly profitable instruments to both investors and issuers. The
investors get the safety of guaranteed payments on the bond and are also enabled to profit
from any large price appreciation in the company's stock. Bondholders, on the other hand,
benefit by this appreciation by means of warrants attached to the bonds, which are activated
when the price of the stock reaches a cut-off point. Due to the equity side of the bond, which
adds value, the coupon payments on the bond are lesser for the company, thereby reducing its
debt-financing costs.
These are the criteria for the issuing of FCCB:
 Government of India's (i.e., The Department of Economic Affairs, Ministry of
Finance) prior permission is required to any company who wish to raise foreign
funds by issuing FCCBs
 The applicant company intending to issue the FCCB should have, for a minimum
period of 3 years, consistent track record
 The FCCBs shall be denominated in any freely convertible foreign currency, while
the ordinary shares of an issuing company shall be denominated in Indian rupees
 The issuing company should, as per regulation, deposit the ordinary shares or bonds
to a Domestic Custodian Bank. The custodian bank in its turn instructs the
Overseas Depositary Bank to issue GDRs or Certificates to non-resident investors
against the shares or bonds held by it.
INITIATIVES BY INDIAN GOVERNMENT TO ATTRACT FOREIGN CAPITAL
Several significant measures were announced by the Government since 1991 to attract the
inflow of foreign capital.
1. Automatic permission up to 51 per cent for high-tech industries: In 1991, under
the aegis of the New Economic Policy, the Indian Government released a list of high-
technology industries the investment for which automatic permission was given for FDI up
to 51 per cent foreign equity, raised ultimately to 100 per cent for several such priority
industries.
2. Foreign equity holdings in tourism-related industries: The new policy also
permitted foreign equity holdings in hitherto closed sectors such as hotels, tourist-related
activities and in international trading companies.
3. Foreign equity participation in the power sector: The Government also permitted
100 per cent foreign equity participation for setting up power plants in the country to
augment the much-needed power supply. The investors in the power sector were allowed
to repatriate their profits and incentives, if any. Foreign investors were allowed 100 per
cent subsidiaries if they bring investment exceeding USD 50 million. Foreign investors
who brought in an investible fund exceeding USD 50 million were allowed to establish 100
per cent operating subsidiaries without restrictions on their number.
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4. Use of trademarks and repatriation of royalty allowed: Moreover, foreign
companies have now been permitted to use their trademarks on domestic sales effective
from 14 May, 1992. They are also allowed now to pay royalty on brand name/trademark as
percentage of net sales in the event of transfer of technology to Indian enterprise.
5. Employment of foreign technicians allowed: Prior to 1991, engaging foreign
technicians and testing of locally developed technology abroad required case-specific
approval by the Government, causing inordinate delay. This requirement has now been
dispensed with.
6. Concessions for NRI investments: NRIs and companies owned by them have now
been permitted to invest up to 100 per cent equity in high priority industrial segments.
These investors are also allowed to repatriate their capital and profits. NRIs can now invest
up to 100 per cent of equity in hospitals, hotels, sick industries, export houses, trading
houses, star trading houses, etc. In a significant reversal of policy, NRIs are now allowed
to buy dwellings without obtaining permission of the Reserve Bank.
7. Investments in sunrise industries: FDIs are now permitted in airports, development of
integrated townships, urban infrastructure, tea sector, films, advertising, insurance, telecom
sector, oil refining and courier services subject to certain approvals and ceilings fixed by
the Government from time to time.
8. Concessions with regard to disinvestment: With regards to disinvestment of equity by
foreign investors, it is no longer necessary to fix prices determined by the Reserve Bank. It
has been now permitted at market rates on stock exchanges from 15 September, 1992 with
repatriation of the proceeds of such disinvestment being now allowed.
9. From January 2004, 100 per cent FDI permitted in petroleum and
publications: With effect from January 2004, the Government of India permitted FDI limit
to 100 per cent participation in the petroleum sector, and in publications such as printing
scientific and technical magazines, periodicals and journals.
10. Foreign investment in private banks raised: Foreign investment in Indian private
sector banks has been raised to 74 per cent. As per this provision, the total foreign
investment in a private bank will be subject to a ceiling of 74 per cent, while at all times at
least 24 per cent of the paid-up capital of the banking company will be held by Indian
residents except in respect of a wholly owned subsidiary of a private bank.
11. Press Note 18 scrapped in January 2005: One of the important irritants to a surge
of FDI inflow into the country was Press Note 18. According to the Press Note 18, if a
foreign company has a joint venture in India, the application has to be sent through the
Foreign Investment Promotion Board (FIPB). This provision implied that the foreign
investors were made to give the detailed circumstances under which they found it
necessary to set up a new joint venture in India or enter into new technology transfer.
Naturally, foreign investors regarded Press Note 18 as an impediment that stood in the way
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of their investment in India. Doing away with this Note implies that now new joint
ventures and collaborations will be based on the decision of partners on their own volition
without any government interference.
Establishment of The Investment Commission
Among the several initiatives taken by the Government of India to attract capital, both
foreign and domestic, for augmenting investment in Indian industry, the establishment of the
Investment commission was a significant one.
In 2004, the Government has constituted the Investment Commission, which is to interact
with industry groups/houses in India and large companies abroad with a view to promote
investments in the country, especially in sectors where there is a great need for investment
but sufficient amount has not been attracted so far. The Commission is mandated to secure a
certain level of investments every year. It will also recommend to the Government both on
policies and procedures to facilitate greater FDI inflows into India.
The Commission submitted its report to the Government on 7 July, 2006, set a USD 15
billion FDI target by 2007–08 and suggested that the Government allow 49 per cent FDI in
retail, contract labour in all areas and automatic route for all investments within the sectoral
cap. The Commission has also recommended setting up special economic zones in areas such
as auto components, textiles, electronics and chemicals. It has strongly suggested a level-
playing field for the private sector in sectors where public sector dominates and for creating a
special high-level fast track mechanism for priority sector projects.
4.5FOREIGN COLLABORATION
4.5.1 Definition of foreign collaboration:
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Fig 4.2: Foreign Collaboration meaning
In general, the definition of foreign collaboration can be stated as follows. “Foreign
collaboration is an alliance incorporated to carry on the agreed task collectively with the
participation (role) of resident and non-resident entities.”Alliance is a union or association
formed for mutual benefit of parties. Foreign collaboration is such an alliance of domestic
(native) and abroad (non-native) entities like individuals, firms, companies, organizations,
governments, etc., that come together with an intention to finalize a contract on some tasks or
jobs or projects. In finance, the definition of foreign collaboration can be specified as follows.
“Foreign collaboration includes ongoing business activities of sharing information related to
financing, technology, engineering, management consultancy, logistics, marketing, etc.,
which are generally, offered by a non-resident (foreign) entity to a resident (domestic or
native) entity in exchange of cheap skilled and semi-skilled labour, inexpensive high-quality
raw-materials, low cost hi-tech infrastructure facilities, strategic (favourable) geographic
location, and so on, with an approval (permission) from a governmental authority like the
ministry of finance of a resident country.”
Foreign collaboration is thus an alliance (a union or an association) formed for mutual benefit
of collaborating parties.
Foreign collaboration is a mutual co-operation between one or more resident and non-resident
entities. In other words, for example, an alliance (a union or an association) between an
abroad based company and a domestic company forms a foreign collaboration. It is a
strategic alliance between one or more resident and non-resident entities. Only two or more
resident (native) entities cannot make a foreign collaboration possible. For its formation and
as per above definitions, it is mandatory that one or more non-resident (foreign) entities must
always collaborate with one or more resident (domestic) entities. Before starting a foreign
collaboration, both entities, for example, a resident and non-resident company must always
seek approval (permission) from the governmental authority of the domestic country.
During an ongoing process of seeking permission, the collaborating entities prepare a
preliminary agreement. According to this preliminary agreement, for example, the non-
resident company agrees to provide finance, technology, machinery, know-how, management
consultancy, technical experts, and so on. On the other hand, resident company promises to
supply cheap labour, low-cost and quality raw-materials, ample land for setting factories, etc.
After obtaining the necessary permission, individual representative of a resident and non-
resident entity sign this preliminary agreement. Signature acts as a written acceptance to each
other's expectations, terms and conditions. After signatures are exchanged, a contract is
executed, and foreign collaboration gets established. Contract is a legally enforceable
agreement. All contracts are agreements, but all agreements need not necessarily be a
contract. After establishing foreign collaboration, resident and non-resident entity start
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business together in the domestic country. Collaborating entities share their profits as per the
profit-sharing ratio mentioned in their executed contract. The tenure (term) of the foreign
collaboration is specified in the written contract.
Examples of Foreign Collaboration: The examples of foreign collaboration between an

Indian and abroad entity: ICICI Lombard GIC (General Insurance Company) Limited is a
financial foreign collaboration between ICICI Bank Ltd., India and Fairfax Financial
Holdings Ltd., Canada. ING Vysya Bank Ltd. is a financial foreign collaboration formed
between ING Group from Netherlands and Vysya Bank from India. Tata DOCOMO is a
technical foreign collaboration between Tata Teleservices from India and NTT Docomo, Inc.
from Japan. Sikkim Manipal University (SMU) from India runs some academic programs
through an educational foreign collaboration with abroad universities like Liverpool School
of Tropical Medicine from UK, Loma Linda and Louisiana State Universities from USA,
Kuopio University from Finland, and University of Adelaide from Australia.
Objectives of Foreign Collaboration: The main intention or prime goal or objective of

foreign collaboration is to:
Improve the financial growth of the collaborating entities. Occupy a major market share for
the collaborating entities. Reduce the higher operating cost of a non-resident entity. Make an
optimum and effective use of resources available in the resident entity's country. Generate
employment in the resident entity's country. This survey captures comprehensive information
on various aspects of operations of Indian companies having technical collaboration with
foreign companies during the reference period as per the schedule. In this survey round, 550
Indian companies responded, of which, 244 companies reported 334 foreign technical
collaboration (FTC) agreements. The highlights of the survey results are presented below
Highlights: Coverage: Out of the 244 companies which reported agreements during the
period 2010-12, 144 were foreign subsidiaries (single foreign investor holding more than 50
per cent of total equity), 83 were foreign associates (foreign investors holding ranging
between 10 per cent and 50 per cent of total equity) and the remaining 17 companies had less
than 10 per cent equity participation and/or had only outward investment.
Industry-wise distribution of agreements: The share of manufacturing and services sectors

in the total FTC agreements had marginally increased in the ninth round. The share of
construction sector and agriculture-related activities had declined when compared with eighth
round of the survey Country-wise distribution of agreements: In terms of source of
technology transfer, Japan, USA and Germany were the top three countries which together
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accounted for around 55 per cent share in total FTC agreements of responding companies
during the survey period.
Type of assets transferred: Among the FTC agreements reported by companies, the
agreements providing “Know-how transfer” had a share of 45.8 per cent, higher than that of
38.1 per cent in the eighth round of the survey.
Modes of Payment: The share of agreements involving (a) royalty and lump-sum technical
fees, (b) only royalty and (c) only lump-sum technical fees stood at 42.4 per cent, 30.4 per
cent and 27.2 per cent, respectively.
Export restrictive clauses: The proportion of FTC agreements with export restrictive
clauses increased significantly in the manufacturing sector, when compared with the previous
survey round. An analysis of country-wise agreements suggests that the share of agreements
with export.
Provision of exclusive rights: Any provision of exclusive rights to an Indian company in a

FTC agreement, restricts the foreign collaborator from transferring such assets to other
parties operating in India.
The proportion of agreements providing exclusive rights on assets transferred under the
agreements had increased significantly in manufacturing sector vis-à-vis the previous survey
round.
Value of Production: Total value of production of the FTC reporting companies increased
from `890.7 billion in 2010-11 to `992.2 billion in 2011-12. The share of manufacturing
sector in the total production had improved, whereas share of financial and insurance
activities was lower when compared with the previous survey round. Profitability: The
profitability of FTC reporting companies measured by ratio of gross profit to the capital
employed increased from 9.8 per cent in 2010-11 to 10.1 per cent in 2011-12.
Exports and Imports: Total exports of FTC reporting companies increased from `132.2
billion in 2010-11 to `156.6 billion in 2011-12 with manufacturing sector constituting the
dominant share in exports. Imports of the FTC reporting companies increased marginally to
`442.3 billion over this period with manufacturing sector holding the dominant share of
import payments made by the FTC companies.
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4.5.2Types of Foreign Collaboration:
The following are the types of collaboration:
1. Technical collaboration: Technical collaboration is a contract whereby the developed
country agrees to provide technical know-how, sophisticated machinery and any kind of
technical assistance to the developing country. Technical collaboration enables to undertake
research and development activities and innovation.
2. Marketing collaboration: Marketing collaboration is the agreement where the foreign
collaborator agrees to market the products of the domestic company in the international
market. Marketing collaboration creates value for customers and builds strong customer
relationship. Marketing collaboration promotes export.
3. Financial collaboration: When the foreign contribution is in the form capital
participation, that contract is known as foreign collaboration. When the foreign company
agrees to provide capital or financial assistance to the domestic company that collaboration is
known” as financial collaboration.
4. Consultancy collaboration: A Consultant is a professional who provides advice in a
particular area of expertise such as management, accountancy, human resource, marketing,
finance etc.
Joint Ventures
Takeover Consultancy
Amalgmation
Collaboration
Merger
Fig: 4.3 Consultancy Collaboration
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Consultancy collaboration is the agreement between the foreign and the domestic company
where the company agrees to provide managerial skills and expertise to the domestic
company. This type of collaboration bridges the information gap.
a. Joint Venture: Joint venture is a legal entity formed between two or more parties to
undertake an economic activity together. In joint venture companies agree to share capital,
technology, human resources, risks and rewards in a formation of a new entity under shared
control. A joint venture takes place when two parties come together to undertake one project.
It is a temporary partnership between the two organisations for achieving common goals.
Once the goal is achieved, joint venture comes to an end.
b. Amalgamation: Amalgamation means bringing of two or more business into single entity.
In other words, amalgamation means blending together two or more undertakings into one
undertaking. In this type of growth strategy two or more companies come together to form a
new company. In amalgamation companies lose their individual identity. For example: one
company called ABC. Another company called BCD. Now, ABC is running loss and BCD
also running loss, so these two companies agreed to Amalgamate and a new company ABCD
is formed.
c. Merger: Merger is a combination of two companies into one company where one company
loses its identity. It is an arrangement whereby the assets of two companies become vested
under the control of one company. Merger happens when two firms, often of about the same
size, agree to go forward as a single new company rather than remain separately owned and
operated. The process of mergers and acquisitions has gained substantial importance in
today’s corporate world. For example: Tata Steel acquired Corus Group.
d. Take Over/Acquisition: Acquisition is a growth strategy in which a strong company

acquires all the assets and liabilities of another company. When one company takes over
another company and clearly established itself as the new owner, the purchase is called an
acquisition. Takeover is a form of acquisition. There are two types of acquisitions; Friendly
acquisitions and Hostile acquisitions. In a friendly acquisition the target company is formally
informed about the acquisition and there is an agreement on corporate management and
finance control. In a hostile acquisition, the owner loses their ownership and control of the
company against their wishes
4.6 ECONOMIC TRENDS IN INDIAN INDUSTRIES
The year 2020 saw unprecedented disruptions to lives and livelihood all across the world and
India was no exception. As the nation waded through the pandemic-induced challenges,
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industries had their fair share of learnings along the way. In this article, we assess the
emerging industry trends and their adaption to the “new norms,” anticipate the possible
economic outlook, and discuss the probable government actions that will be key in launching
the economy on a sustainable recovery path.
2020: The year of crisis and opportunities for Indian industries

The impact of the pandemic and lockdown was disproportionately felt across industries.
While industries such as hospitality and manufacturing were impacted immediately, the
impact on the financial sector was felt with a lag, as is evident from the quarterly GDP
numbers. Since the economic unlock, the pace of rebound has been equally lopsided. Easing
of movement restrictions, pent-up and festive demand, and the revival of several
infrastructure projects by the government helped the manufacturing and construction sectors
to bounce back relatively strongly. However, anxiety about health and sporadic regional
lockdowns continued to weigh on the services sector, whose recovery has been relatively
gradual.
Here is a snapshot of the changing trends and experiences of a few select industries in 2020:
Automotive industry: Sudden closure of factories leading to unprecedented supply chain

disruptions and a collapse in demand acted as a double whammy for the industry. The micro,
small, and medium enterprises (MSMEs) such as component manufacturers, dealers, and
vehicle financing institutions were among the hardest hit. The industry, however, responded
to the crisis through innovative ways, such as digitized and subscribed services, contactless
sales, and doorstep delivery/pick-up to reach out to customers. Many firms are activating
secondary supplier relationships and securing additional critical inventory and capacity while
diversifying sources of import supply beyond China. To improve profits, several organized
players are now entering the growing used-car market, which is predominantly dominated by
the unorganized sector.
Outlook: With the support of various government schemes and pent-up demand, the sector
has somewhat rebounded. However, growth and jobs are expected to remain capped till the
pandemic is over.
Trade, hotels, travel, and tourism: Hospitality was probably one of the first few industries
hit by the pandemic. Social distancing norms and mobility restrictions led to fewer travels
and leisure activities even before the lockdown. Known for creating direct and indirect jobs
and the promotion of regional economic and product development, this labour-intensive
industry witnessed a sharp reduction in wages and job opportunities.3 Despite credit support
and government schemes to several MSMEs in this sector, the rebound has been muted
because of continued mobility restrictions and health anxieties among consumers. However,
the sector has found mature ways to deal with the pandemic. Several hotels made their venues
available for hospital beds and front-line health professionals. Businesses adopted new
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models and concepts to survive, such as packages targeted at staycation and innovative
delivery concepts.
Outlook: The path to profitability may be far off as long as the pandemic persists. The
sector’s revival will not only depend on domestic mobility but also on restrictions across
international borders. This, in turn, will depend on synchronized efforts by world economies
to curb the spread of infection, the success of which has been limited so far.
Media and entertainment: This sector has been hit hard by unemployment and closed
productions. During the pandemic, entities improvised and adopted innovative ways to reach
out to their audiences, who have now turned to online platforms for music, films, and
entertainment.
Outlook: The broadcasting or streaming of live events is expected to offer lower financial
returns. Temporary employment contracts and freelance arrangements may keep wage
growth in this industry subdued.
Retail industry for essential and nonessentials: Demand for essential goods remained
strong while that of discretionary and nonessential goods declined. However, both these
segments of the retail industry witnessed a perceivable tilt toward e-commerce services to
cater to new shopping habits. With consumers preferring more online transactions to reduce
exposure to infection, the retail and FMCG industries have been rethinking their business
priorities and strategies to build a flexible distribution network and improve supply chains.
Outlook: The industry will likely see increasing digitization, use of online services and data
analytics, and alliances across manufacturers, distributors, promoters, and product developers
to differentiate customer experiences, improve margins, and survive the competition.
Pharmaceuticals and health sector: COVID-19 revealed the inadequacy of public health
systems and infrastructure in addition to creating a shortage of well-trained health workers.
With the support of government spending, however, the sector has ramped up health facilities
such as ICU beds, ventilators, and testing capacities. The pandemic has presented an
opportunity to shift to the digital medium and improve profitability with better technologies.
For instance, trends such as telemedicine and the use of big data for maintaining health
records are gaining momentum. Post–COVID-19, India aims to diversify sources or actively
produce active pharmaceutical ingredients (APIs) and key starting materials, and reduce
dependence on China for imports. Besides, India is likely to play a major role in vaccinating
the world.6 With several vaccines queuing up for release soon, the industry has been
increasing investment and building up capacity to meet the global demand.
Outlook: The health sector and pharmaceutical industry will likely see increased investments
as the government focuses more on improving and expanding the reach of existing health
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care systems and ramping up the upcoming vaccination process, while pharma companies
step up new production lines for affordable vaccines.
Technology and telecom: These two industries have played a very important role in
responding to the challenges posed by the pandemic. Sectors such as e-commerce, fintech,
food-tech, health-tech, and ed-tech have helped the country to deal with lockdowns,
movement restrictions, and social distancing in ways that were unimaginable a few years
back. From enabling virtual communication and manufacturing ventilators for use in
hospitals and homes to bolstering cybersecurity for industries that are going digital,
innovations by technology and broadband services companies have helped meet rapidly
changing consumer and industry demand.
Outlook: Rising demand for digitization, automation and artificial intelligence, virtual
communication, and reliable internet services will likely result in the robust growth of these
industries.
2021 and beyond: Looking through the macroeconomic forecasting lens

As India continues to grapple with the pandemic stepping into the new year, the question is
where the economy is on the path to recovery. Recent high-frequency data suggests India
may have turned toward the road to recovery.
As discussed in our earlier article, we expect double-digit growth in FY2022 in the light of
our best-case scenario.8 Lower infection and fatality rates, and the possibility of widespread
vaccine deployment are expected to improve consumer and business confidence. Pent-up
demand for more elastic discretionary goods, especially among the top 10 income percentile
of the population that could not spend because of mobility restrictions, may spur private
investment that has been contracting for five consecutive quarters now. The lagged buoyancy
impact of government spending and reforms and liquidity measures by the Reserve Bank of
India (RBI) may further boost the economic recovery.
Nevertheless, the path to recovery may have a few challenges. High inflation, job losses, poor
wage growth, and low asset values may impact the consumer’s purchasing power, especially
among the low- and middle-income class. The RBI may not be able to reduce policy rates in
the near term amid inflation concerns. As a result, MSMEs and the informal sector will likely
continue to face high borrowing interest rates on working capital. Low demand and credit
availability will likely impact investment spending. Despite a quicker rebound next year, the
output levels are likely to remain much below the pre-pandemic GDP levels and the potential
output levels during our entire forecast period, which is until FY2023.
In short, there is likely to be pain in the short term but the outlook in the medium term may
improve significantly with a reduced number of infections.
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All eyes are on union budget 2021–22: What to expect
While the availability of vaccines, reduced infections, and increased mobility will be key to
economic and industrial revival, it is becoming obvious that different industries will likely
see different rebound paths until the pandemic is over. The role of government policy
measures and their effectiveness will, therefore, be important in determining the strength and
pace of the revival. We expect the budget to be socially inclusive and growth-augmenting and
the primary focus will likely be to:
Boost health and social care and defense resources: This pandemic is unlikely to be the
last one India may witness and the government has to ensure better preparedness and
resilience in times of emergencies and beyond. The government will likely increase budget
allocation for building resilient health systems and infrastructure from the current 3.5% of
GDP to at least 5% this year and target to reach the world average of 10% over the next 10
years.10 Besides, the government may also allocate spending for procurements and upgrading
of defense resources to support operational capacities amid geopolitical tensions.
Provide targeted support to select industries: A few industries and sectors have suffered
more than the others with delayed prospects for recovery, such as hospitality, and can play a
significant role in creating direct and indirect jobs, such as infrastructure. The budget may
announce policies and schemes targeted toward these industries and allocate more resources
to support their revival. For instance, some of the measures could be to provide support to
enterprises, create jobs, and boost wages for industries such as hospitality and fashion; offer
targeted credit line support to stressed MSMEs and industries supporting MSMEs, such as
automotive; and spending on the health and economic well-being of workers in stressed
industries.
Improve the ease of doing business environment: The government will have to focus on
improving the business ecosystems and attracting foreign investment to realize its vision of
self-reliance. To ensure a consistent reform framework for policy certainty over the long
term, the government can consider:
 Rationalizing the tax structure, with changes to the GST rate structure and easier
compliances
 Allocating resources for investment in transport and logistics planning with the
objectives of enhancing manufacturing and trade competitiveness
 Investing in economic corridors after a careful assessment of comparative
advantages and identification of sectors and value chains
 Allocating resources to ensure social and health protection to workers, inclusion,
and fair value to landowners while implementing labour and land laws
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 Focusing on skill development as India steps into a new digitized and
technologically advanced regime that will generate less repetitive and more
intellectual jobs requiring cognitive skills.
Support domestic demand and create jobs: The government will likely allocate higher
resources on infrastructure spending and agriculture schemes to support jobs and income for
low- and semi-skilled workers and create demand for goods produced by MSMEs. The high
multiplier effects of these sectors will boost domestic demand sustainably. Spending is also
likely to increase toward infrastructure-focused skill development opportunities and for
teachers and medical staff with a focus on upskilling and reskilling talent. Tax cuts (for both
personal and corporate income) are likely to be introduced albeit for those that have been
most hit by the pandemic.
Generate resources to fund government expenses: The government will have to find ways
to fund the allocated budget and manage fiscal balance. External borrowing, strategic
disinvestments, and public-private participation could be a few options that the government
may explore.
The good news is the government has already initiated several of these measures.11 What
will be important is to keep the foot on the pedal and prioritize spending on productive
projects while de-risking them. The budget allocation should build on forward-looking
initiatives by focusing on digitization and identifying areas and strengths for indigenous
production, and ensuring that no one is left behind.
[source:https://www2.deloitte.com/us/en/insights/economy/asia-pacific/india-economic-outlook.html
by Dr. Rumki Majumdar]
4.7 SUMMARY
 Globalization has changed the perspective of business and redefine the dimension of
economy. Countries were focussed on self-development earlier and presently
countries are working on building global image in economic activities, environment
protection initiatives, extending help in difficult situation.
 International business has digitized the World Economy and brought the World
closer. The growth opportunities have increased and it is important way of earning the
foreign exchange for any country and accelerating economic development. There are
various global trends that has changed the perspective of Global busines, viz.
increasing privatization, technological revolution, international arbitration, regional
and economic bloc and so on.
 Foreign capital, MNCs and globalization are closely linked. There are different
factors that creates the necessity of foreign capital like development of necessary
infrastructure, to bridge the foreign exchange gap, to improve the balance of payment,
etc. Foreign capital consists of two main forms: (i) private foreign investment and (ii)
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foreign aid. Private foreign investment can be either (a) direct foreign investment, or
(b) indirect foreign investment. Foreign aid consists of loans and grants. Even other
forms of foreign investment are popular nowadays like ADR, GDR and FCCB.
Several significant measures were announced by the Government since 1991 to attract
the inflow of foreign capital. In 2004, the Government has constituted the Investment
Commission, which is to interact with industry groups/houses in India and large
companies abroad with a view to promote investments in the country.
 “Foreign collaboration includes ongoing business activities of sharing information
related to financing, technology, engineering, management consultancy, logistics,
marketing, etc., which are generally, offered by a non-resident (foreign) entity to a
resident (domestic or native) entity in exchange of cheap skilled and semi-skilled
labour, inexpensive high-quality raw-materials, low cost hi-tech infrastructure
facilities, strategic (favourable) geographic location, and so on, with an approval
(permission) from a governmental authority like the ministry of finance of a resident
country.” Different forms of foreign collaboration offers different advantage and thus
helps corporates to develop competitive edge in their Industry. New economic trends
have proved that World is all set to design the path of development for human race
and India is an emerging economy.
4.8 KEYWORDS
 Foreign Direct Investment (FDI): FDI is an investment made by a company or

individual who us an entity in one country, in the form of controlling ownership
in business interests in another country
 Foreign Portfolio Investment (FPI): Foreign Portfolio Investment (FPI) is an
investment by foreign entities and non-residents in Indian securities including shares,
government bonds, corporate bonds, convertible securities, infrastructure securities
etc.
 Foreign institutional investor: A foreign institutional investor (FII) is an investor or
investment fund investing in a country outside of the one in which it is registered or
headquartered.
 Global Depository Receipts: A Global Depositary Receipt (GDR) is a financial
instrument used by private markets to raise capital denominated in either US dollars
or euros.
 American Depository Receipts: ADRs represent ownership in the shares of a non-
US company and trades in US financial markets.
1. Why Global Business is dominated by Developed Countries?

_________________________________________________________________________
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_________________________________________________________________________
2. Compare FDI and FII
_________________________________________________________________________
_________________________________________________________________________
Short Questions
1. Explain the term Globalization and Global Business.
2. What are the important types of Foreign Capital?
3. State the criteria for the issuing of FCCB.
4. Discuss the types of Foreign Collaboration
5. What is the important role of Investment Commission?
Long Questions
1. Discuss the advantage of Indian Corporation to opt for Globalization
2. Highlight the Common Global Trends
3. What are the other forms of Foreign Capital and explain their contribution in the
economic development?
4. Highlight the important Economic Trends in India
5. Why it is beneficial for Indian companies to raise the money through ADR and GDR?
Provide the comparison of ADR and GDR.
B. Multiple Choice Questions:

1. Foreign investment in Indian private sector banks has been raised to ______ percent
a. 74
b. 85
c. 91
d. 63
2. ___________ is such an alliance of domestic (native) and abroad (non-native) entities like
individuals, firms, companies, organizations, governments, etc., that come together with an
intention to finalize a contract on some tasks or jobs or projects
a. FDI
b. Foreign Capital
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c. Foreign Collaboration
d. FII
3. __________________is the agreement between the foreign and the domestic company
where the company agrees to provide managerial skills and expertise to the domestic
company.
a. Financial collaboration
b. Technical collaboration
c. Marketing collaboration
d. Consultancy collaboration
4. Whatrepresents a given number of underlying equity shares?

a. GDR
b. ADR
c. Debenture
d. Option
5. ____________means giving permission to the new party of the foreign country in order to
produce and sell goods under your trademarks, patents or copyrights in exchange of some fee
is also the way to enter into the international business.
a. Licensing
b. Franchising
c. Foreign Investment
d. Dumping
Answers
1- a; 2 - c; 3 -d; 4 – a; 5 - b
Text Books:
Publishing House],
106
 T R Jain, Mukesh Trehan and Ranju Trehan, Indian Business Environment– VK
Enterprise
Hall.
Reference Books:
2006.
Open Text Source:
p. 2049. ISBN 9788180385926.
Limited. pp. 48–.ISBN 978-81-7534-840-0.

December 2012
107
UNIT 5: POLICIES AND BUSINESS LAWS
Structure
5.1 Introduction
5.2 Political Environment
5.2.1 Concept
5.2.2 Factors in Political Environment
5.2.3 The Importance of Observing the Political Environment
5.2.4 Political Risk
5.3 Impact of Political Environment on Business
5.4 Constitutional Provisions Affecting Business
5.4.1 Constitution of India
5.4.2 Economic Importance Highlighted by The Preamble
5.5 Constitutional Provisions Regarding Trade, Commerce and Intercourse Within the
Territory of India
5.6 Summary
5.7 Keywords
After studying this unit, Students will be able to:
 Explain the concept of Political Environment

 Describe the factors of Political Environment
 Outline the Changing role of government in business environment
5.1 INTRODUCTION
The economic and political systems of a country are mutually dependent, one reflecting the
ideologies of the other. Political environment includes country's political system, law &
order, government policies towards business - particularly those related to taxation, industrial
relations and foreign trade regulations.
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Corporate taxes, labour laws, foreign policies have direct implications for any business entity.
It becomes utmost important for Business leaders and managers to be up breast of political
changes in the country.
Political environment is very unpredictable and its effects on business will vary as per the
changes in the public policy is approved. Business needs to be agile to accommodate such
types of political changes that can be anticipated with environment scanning process and
maintaining proper involvement in different types of government initiatives related to
specific industry or general programme for commerce sector.
5.2 POLITICAL ENVIRONMENT
5.2.1 Concept
A political system has been defined by Dahl (1976) as a "persistent pattern of human
relationship that involves, to a significant extent, control, influence, power, or authority."
There is different government approach followed in different countries one side is people
elected government which is popularly known as Democratic form and other is Communism
form where all form of economic activities are under the control of community. There are
different forms between these two main forms. In domestic environment, business is
concerned with one form of government but has to deal with different levels of it. For global
business, business need to deal with different structure of government and so thus, the
complexity is increased.
Different forms of Political system.

The political structure, its framework, regulation system followed and the formation of the
government constitutes Political System which is composite and immense. Political system
administers whole set of directives, ordinance, governing bodies and perception. The
difference of political forms lies in the way segregation of priorities are define like business,
people, legal system, international treaties and trade and so on. Country’s political system
affects the economical aspect of the country which is directly related to the changes
introduced in the business environment.
Almost 13 different types of political forms are followed by different countries across the
world with some modifications. On the one side of extremity is the political ideology of
anarchism where whole control of economics and politics lies in the hand of individual and
government is not at all necessary aspect for the country. On the other hand, extreme
approach is totalitarianism where complete control is in the hand of central government.
Practicality is very different as neither of these two extreme approaches are followed in pure
form. Infact, most of the countries have adopted blend of both the political form. We can
trace the impact of such combination on the history, customs and traditions of the country.
This blended form is termed as pluralism, where balance is strike between public and private
sector for efficient working of such form.
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Daily life of people is controlled by government in some countries Another form of political
system is authoritarian. One strong leader or small group of leaders will enjoy the power to
control the lives of people in the country. There is no common election is conducted for
electing the leader nor such leaders have no accountability in terms of social, economic and
political for the people. The leader uses power or fear to control the system like dictator.
When the leader of authoritarian political form is motivated by the principle of communism,
then another form of politics comes into existence i.e., Totalitarianism. The approach is to
control the people.
The most popular and adopted political form is Democracy. Direct referendum (called a
direct democracy) or when the representatives are elected from the voting of people (a
representative of democracy) provides power to the Central democratic government. There
are also numerous different forms of democracy are practiced across different countries and
even in some form citizens enjoy more freedom while some has better framework for
representation,
Political Stability and Change

The political forms lay down the scope of government and its functioning. The import-export
policy, the encouragement of specific sector based on the circumstance (For instance, a
special package of investment is allocated to pharmaceutical Industry during COVID-19
pandemic). There are many implications and changes introduced by political priority in the
business environment. The different aspects of business that will experience the change in
environment are as:
 Training and academic degrees of workforce,
 Health policy and program related to the health of people and
 Quality Infrastructure projects implemented.
Indian democracy form is the biggest in the World and it has adopted federal republic
approach
India is the biggest democracy in the World. There are different personal laws for major
religion like Hindu, Muslim and Christians. There are reservation quotas for backward
segment of the society. The Indian form is based on the English common law. There is
provision in our Constitution and system by which different Acts can be changed or modified
as per need and the changes. It accepts compulsory ICJ jurisdiction.
5.2.2 Factors in Political Environment
The major factors in political environment are:
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Taxation
Policy
Privatization
Factors of
Political
Environment
Deregulation
International
Trade
Regulation
Fig 5.1: Factors in Political Environment
1. Taxation policy
Direct and Indirect Tax system is the main source of income for our Government. Indian
Government comprises of three different federal levels viz., Central Government, State
Government and Local/Rural Government. The provisions of Constitution have given
authority to three levels of Government to impose and collect the taxes. There are different
types of taxes levied for different economical sector like there is Custom duties – for
imported goods; Income Tax for people who are engaged and earning income, Central and
State GST for availing the benefits of services, professional tax for offering professional
services.
Direct Tax Indirect Tax
Income Value
Tax Added Tax
Wealth
Octroi Tax
tax
Service
Gift Tax
Tax
Capital Custom
Gain Tax Duty
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Fig: 5.2: Tax System of India:
Direct tax is imposed on individual and corporate bodies. Direct taxes are higher for
high income individual. Income tax is based on the earning of an individual or business.
Property Tax is charged on Individual or Corporate’s building, home and land. Capital Gain
tax is collected when an individual earns income by selling stock, property or a business. Gift
tax is the form of transfer tax which is collected when wealth is transferred from one
individual or business to other in the form of gift or prize money for any event.
The taxes which are imposed indirectly on the public for goods and services are termed as
Indirect Taxes. Goods and services tax is a collective form of taxes, which is divided into
different slabs by GST council. Service tax include taxes on using telephone, maintenance
service, health centre, etc. When the goods are sold in the state, Value added tax is collected
and the rates are decided by the government. Octroi tax are collected when goods are being
transferred from one state to other and the rates are decided by the State Government. Custom
Duty is collected for imported goods, the goods procure from other countries to India.
2. Privatization
When Government transfers the business ownership or rights to manage the public sector in
the hands of private players is termed as ‘Privatization’. There are numerous reasons of
privatization like to decrease the weight of public sectors from government, improve the
efficiency and quality of workforce, fully utilization of the public enterprise capacity,
Government can channelize the funds in infrastructure development. helps in reducing the
political interface in the management of enterprises, leading to improved efficiency and
productivity. Privatization improves competitiveness of the industry and adopts different
technology to sustain and succeed. It improves overall business segment of the country and
helps to
3. Deregulation
The Industrial Development and Regulation Act (IDRA), 1951 has imposed strict restrictions
on the Private Enterprises in forms of license, quota system, etc. The private players have
never got proper opportunity to develop their business and as country, India suffered slow
economic development and disorganized industry. Since, 1991 as per the New Economy
Policy De-regulation was adopted as major economic reform. Most of the business need to
apply under Industrial Entrepreneur Memorandum and license is more essential to commence
the business except few industries like liquor, chemical and so on.
4. International trade regulations

This regulation helps to administer the trade and business with foreign countries. It helps to
build diplomatic relations with neighboring countries. It also provides motivation for
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improving industry competitiveness and innovation. Country gain global recognition in the
international markets and during border unrest or war situations foreign trade buddies plays
an important role. All countries have diverse resources and advantages so such trade is
beneficial for whole World. Trade regulations helps to monitor such business activities which
are carried out cross borders and maintain harmony. For formulating and implementing
import – export policies, India has become member of International Trade Associated like
WTO (World Trade Organization), the South Asian Association for Regional Cooperation
(SAARC), etc.
5.2.3 The Importance of Observing the Political Environment
Firms should track their political environment. Change in the political factors can affect
business strategy because of the following reasons:
 The stability of a political system can affect the appeal of a particular local market.
 Governments view business organizations as a critical vehicle for social reform.
 Governments pass legislation, which impacts the relationship between the firm and its
customers, suppliers, and other companies.
 The government is liable for protecting the public interest.
 Government actions influence the economic environment.
 Government is a major consumer of goods and services.
EXAMPLE: HOW POLITICAL FACTORS AFFECT NIKE

Studies show that Nike has earned high profits from the growth orientated policies of US
government. The policies maintained low-interest rates. Currency exchange stability and
internationally competitive tax arrangements were also maintained. The company has also
benefited from government initiatives in terms of transparency in the global value chain.
One example of this is in membership of the Clinton administration’s 1997 Apparel Industry
Partnership. Nike enjoyed changes in the political factors in many ways. However, political
pressures had a negative impact on Nike’s employment practices.
5.2.4 Political Risk

Forecasting Political Risk
Firms can use quantitative or qualitative methods to assess political risk. Political risk
assessment helps in deciding about risk insurance, data gathering and intelligence
networking, development of contingency planning, establishment of early warning system.
Types of Political Risk

 Confiscation (take-over without reimbursement)
 Restriction
 Price Controls
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 Labor Policy
 Expropriation (takeover/unwilling sale with full or partial payment)
 Domestication (local ownership, management, material inputs)
 Nationalization (government ownership of industry)
Avoiding Political Risk

 Refrain from political activity
 Maintain a low profile in the foreign market
 Integrate the firm into the economy/society
 View net contribution to the host country
 Use joint ventures
 Expand investment base (use several investors including locals)
 Licensing
 Control of global marketing & distribution
 Planned domestication
 Development of local suppliers
 Adopt a low-key reactive style rather than an aggressive management style in the
foreign market
 Develop and maintain a global image
 Resist pressure to pay bribes and or take sides in political contests
 Keep an eye on the local environment
5.3 IMPACT OF POLITICAL ENVIRONMENT ON BUSINESS
How Do Governments Intervene in Trade?

While the past century has seen a major shift toward free trade, many governments continue
to intervene in trade. Governments have several key policy areas that can be used to create
rules and regulations to control and manage trade.
Tariffs
Tariffs are taxes imposed on imports. Two kinds of tariffs exist—specific tariffs, which are
levied as a fixed charge, and ad valorem tariffs, which are calculated as a percentage of the
value. Many governments still charge ad valorem tariffs as a way to regulate imports and
raise revenues for their coffers.
Subsidies
A subsidy is a form of government payment to a producer. Types of subsidies include tax
breaks or low-interest loans; both of which are common. Subsidies can also be cash grants
and government-equity participation, which are less common because they require a direct
use of government resources.
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Import quotas and VER
Import quotas and voluntary export restraints (VER) are two strategies to limit the amount of
imports into a country. The importing government directs import quotas, while VER are
imposed at the discretion of the exporting nation in conjunction with the importing one.
Currency controls
Governments may limit the convertibility of one currency (usually its own) into others,
usually in an effort to limit imports. Additionally, some governments will manage the
exchange rate at a high level to create an import disincentive.
Local content requirements
Many countries continue to require that a certain percentage of a product or an item be
manufactured or “assembled” locally. Some countries specify that a local firm must be used
as the domestic partner to conduct business.
Antidumping rules
Dumping occurs when a company sells product below market price often in order to win
market share and weaken a competitor.
Export financing
Governments provide financing to domestic companies to promote exports.
Free-trade zone
Many countries designate certain geographic areas as free-trade zones. These areas enjoy
reduced tariffs, taxes, customs, procedures, or restrictions in an effort to promote trade with
other countries.
Administrative policies
These are the bureaucratic policies and procedures governments may use to deter imports by
making entry or operations more difficult and time consuming.
5.4 CONSTITUTIONAL PROVISIONS AFFECTING BUSINESS
5.4.1 Constitution of India

Constitution means a set of fundamental principles, basic rules and established precedents
(means standards/instances). It identifies, defines and regulates various aspects of the State
and the structure, powers and functions of the major institutions under the three organs of the
Government – the executive, the legislature and the judiciary. It also provides for rights and
freedoms of citizens and spells out the relationships between individual citizen and the State
and government. It is the supreme and ultimate authority. Any decision or action which is not
in accordance with it will be unconstitutional and unlawful. A Constitution also lays down
limits on the power of the government to avoid abuse of authority. Moreover, it is not a static
but a living document, because it needs to be amended as and when required to keep it
updated. Its flexibility enables it to change according to changing aspirations of the people,
the needs of the time and the changes taking place in society.
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Values and the Salient Features of the Constitution
The discussion on the Preamble embodying constitutional values clearly demonstrates that
these are important for the successful functioning of Indian democracy. Your understanding
of these values will be further reinforced, when you will find in the following discussion that
constitutional values permeate all the salient features of Indian Constitution. The main
features of the Constitution as shown in the illustration are as follows:
1. Written Constitution: As has been stated earlier, the Constitution of India is the longest
written constitution. It contains a Preamble, 395 Articles in 22 Parts, 12 Schedules and 5
Appendices. It is a document of fundamental laws that define the nature of the political
system and the structure and functioning of organs of the government. It expresses the vision
of India as a democratic nation. It also identifies the fundamental rights and fundamental
duties of citizens. While doing so, it also reflects core constitutional values.
2. A Unique Blend of Rigidity and Flexibility: In our day-to-day life, we find that it is not
easy to bring about changes in a written document. As regards Constitutions, generally
written constitutions are rigid. It is not easy to bring about changes in them frequently. The
Constitution lays down special procedure for constitutional amendments. In the unwritten
constitution like the British Constitution amendments are made through ordinary law-making
procedure. The British
Constitution is a flexible constitution. In the written constitution like the US Constitution, it
is very difficult to make amendments. The US Constitution, therefore, is a rigid constitution.
However, the Indian Constitution is neither as flexible as the British Constitution nor as rigid
as the US Constitution. It reflects the value of continuity and change. There are three ways of
amending the Constitution of India. Some of its provisions can be amended by the simple
majority in the Parliament, and some by special majority, while some amendments require
special majority in the parliament and approval of States as well.
3. Fundamental Rights and Duties: You must be familiar with the term fundamental rights.
We quite often find it in newspapers or while watching television. The Constitution of India
includes these rights in a separate Chapter which has often been referred to as the
‘conscience’ of the Constitution. Fundamental Rights protect citizens against the arbitrary
and absolute exercise of power by the State. The Constitution guarantees the rights to
individuals against the State as well as against other individuals. The Constitution also
guarantees the rights of minorities against the majority. Besides these rights, the Constitution
has provisions identifying fundamental duties, though these are not enforceable as the
fundamental rights are. These duties reflect some of the basic values embodied in the
Constitution.
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4. Directive Principles of State Policy: In addition to Fundamental Rights, the Constitution
also has a section called Directive Principles of State Policy. It is a unique feature of the
Constitution. It is aimed at ensuring greater social and economic reforms and serving as a
guide to the State to institute laws and policies that help reduce the poverty of the masses and
eliminate social discrimination. In fact, as you will study in the lesson on “India-A Welfare
State”, these provisions are directed towards establishment of a welfare state.
5. Integrated Judicial System: Unlike the judicial systems of federal countries like the
United States of America, the Indian Constitution has established an integrated judicial
system. Although the Supreme Court is at the national level, High Courts at the state level
and Subordinate Courts at the district and lower level, there is a single hierarchy of Courts. At
the top of the hierarchy is the Supreme Court. This unified judicial system is aimed at
promoting and ensuring justice to all the citizens in uniform manner. Moreover, the
constitutional provisions ensure the independence of Indian judiciary which is free from the
influence of the executive and the legislature.
6. Single Citizenship: Indian Constitution has provision for single citizenship. Do you know
what does it mean? It means that every Indian is a citizen of India, irrespective of the place of
his/her residence or birth in the country. This is unlike the United States of America where
there is the system of double citizenship. A person is a citizen of a State where he/she lives as
well as he/she is a citizen of U.S.A. This provision in the Indian Constitution definitely
reinforces the values of equality, unity and integrity.
7. Universal Adult Franchise: The values of equality and justice are reflected in yet another
salient feature of the Constitution. Every Indian after attaining certain age (at present 18
years) has a right to vote. No discrimination can be made on the basis of religion, race, caste,
sex, descent, and place of birth or residence. This right is known as universal adult franchise.
8. Federal System and Parliamentary Form of Government: Another salient feature of the
Indian Constitution is that it provides for a federal system of state and parliamentary form of
government. We shall discuss these below in detail. But it is necessary to note here that the
federal system reflects the constitutional value of unity and integrity of the nation, and more
importantly the value of decentralization of power. The parliamentary form of government
reflects the values of responsibility and sovereignty vested in the people. The core principle
of a parliamentary government is the responsibility of the executive to the legislature
consisting of the representatives of the people.
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5.4.2 Economic Importance Highlighted by The Preamble
The constitutional values are reflected in the entire Constitution of India, but its Preamble
embodies ‘the fundamental values and the philosophy on which the Constitution is based’.
The Preamble to any Constitution is a brief introductory statement that conveys the guiding
principles of the document. The Preamble to the Indian Constitution also does so. The values
expressed in the Preamble are expressed as objectives of the Constitution. These are:
sovereignty, socialism, secularism, democracy, republican character of Indian State, justice,
liberty, equality, fraternity, human dignity and the unity and integrity of the Nation.
Let us discuss the economic importance of the constitutional values:

A. Fundamental Rights and Business:
These rights are fundamental because of two reasons. First, these are mentioned in the
Constitution which guarantees them and the second, these are justifiable, i.e. enforceable
through courts. Being justifiable means that in case of violation, the individual can approach
court for their protection if a government enacts a law that restricts any of these rights, it will
be declared invalid by courts. Such rights are provided in Part III of the Indian Constitution.
Right to Equality
Right to equality is very important in a society like ours. The purpose of this right is to
establish the rule of law where all the citizens should be treated equal before the law. It has
five provisions (Articles 14-18) to provide for equality before law or for the protection of law
to all the persons in India and also to prohibit discrimination on the grounds of religion, race,
caste, sex or place of birth.
(i) Equality before Law: The Constitution guarantees that all citizens will be equal before
law. It means that everyone will be equally protected by the laws of the country. No person is
above law. It means that if two persons commit the same crime, both of them will get the
same punishment without any discrimination.
(ii) No Discrimination on the basis of Religion, Race, Caste, Sex or Place of Birth: The State
cannot discriminate against a citizen on the basis of religion, race, caste, sex or place of birth,
as this is necessary to bring about social equality. Every citizen of India has equal access to
shops, restaurants, and places of public entertainment or in the use of wells, tanks or roads
without any discrimination. However, the State can make special provisions or concessions
for women and children.
(iii) Equality of Opportunity to all Citizens in matter of Public Employment:
The State cannot discriminate against anyone in the matter of public employment. All citizens
can apply and become employees of the State. Merits and qualifications will be the basis of
employment. However, there are some exceptions to this right. There is a special provision
for the reservation of posts for citizens belonging to Scheduled Castes, Scheduled Tribes and
Other
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Backward Classes (OBCs)
(iv)Abolition of Untouchability: Practicing untouchability in any form has been made a
punishable offence under the law. This provision is an effort to uplift the social status of
millions of Indians who had been looked down upon and kept at a distance because of either
their caste or the nature of their profession. But, it is really very unfortunate that despite
constitutional provisions, this social evil continues even today. Can you find any difference
when you see a nurse cleaning a patient, a mother cleaning her child and a lady cleaning a
toilet in the illustration? Why do people consider the cleaning of a toilet in a derogatory
manner?
(v) Abolition of Titles: All the British titles like Sir (Knighthood) or Rai Bahadur which were
given to the British loyalists during the British rule, have been abolished because they created
distinctions of artificial nature. However, the President of India can confer civil and military
awards to those who have rendered meritorious service to the nation in different fields. The
civil awards such as Bharat Ratna, Padma Vibhushan, Padma Bhushan and Padma Shri and
the military awards like Veer Chakra, Paramveer Chakra, Ashok Chakra are conferred.
Right to Freedom
You will agree that the freedom is the most cherished desire of every living being. Human
beings definitely want and need freedom. You also want to have freedom.
The Constitution of India provides Right to Freedom to all its citizens. This Right is
stipulated under Articles 19-22. The following are the four categories of Rights to Freedom:
I. Six Freedoms:
Article 19 of the Constitution provides for the following six freedoms:
(a) Freedom of speech and expression
(b) Freedom to assemble peacefully and without arms(c) Freedom to form Associations and
Unions
(d) Freedom to move freely throughout the territory of India
(e) Freedom to reside and settle in any part of India
(f) Freedom to practice any profession or to carry on any occupation, trade or business
The purpose of providing these freedoms is to build and maintain an environment for proper
functioning of democracy. However, the Constitution has authorized the State to impose
certain reasonable restrictions on each of them:
1. Restrictions may be put on the Right to Freedom of speech and expression in the interests
of the sovereignty, integrity and security of India, friendly relations with foreign States,
public order, decency or morality, or in relation to contempt of court, defamation or
incitement to an offence.
2. Right to assemble peacefully and without arms may be restricted in the interests of the
sovereignty and integrity of India or public order.
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3. Right to form associations or unions may have restrictions in the interests of the
sovereignty and integrity of India, public order or morality.
4. Right to move freely throughout the territory of India and to reside and settle in any part of
India may also be restricted in the interest of the general public or for the protection of the
interests of any Scheduled Tribe.
5. Right to practice any profession or to carry on any occupation, trade or business may have
restrictions in the interests of the general public. TheState is also permitted to lay down the
professional or technical qualifications necessary for practicing any profession or carrying on
any occupation, trade or business.
II. Protection in respect of conviction for offences:

Article 20 of the Constitution provides for the protection in respect of conviction for
offences. No one can be convicted for an act that was not an offence at the time of its
commission, and no one can be given punishment greater than what was provided in the law
prevalent at the time of its commission. Also, no one can be prosecuted and punished for the
same offence more than once and can be forced to give witness against his or her own self.
III. Protection of life and personal liberty:
As provided in Article 21, no one can be deprived of his or her life or personal liberty except
according to the procedure established by law.
IV. Protection against arrest and detention in certain cases:
It is provided in Article 22 that whenever a person is arrested, he or she should be informed,
as soon as it is possible, of the grounds for arrest and should be allowed to consult and to be
defended by a legal practitioner of his or her choice. Moreover, the arrested person must be
produced before the nearest magistrate within 24 hours of such an arrest excepting a person
who has been arrested under preventive detention law. The case of the person arrested under
preventive detention law has also to be referred to an Advisory Board within a period of three
months of his or her arrest.
Right against Exploitation

Have you ever thought how many ways exploitations take place in our society? You might
have seen a small child working in a tea shop or a poor and illiterate person being forced to
work in the household of a rich person. Traditionally, the Indian society has been hierarchical
that has encouraged exploitation in many forms. Which is why, the Constitution makes
provisions against exploitation. The citizens have been guaranteed the right against
exploitation through Articles 23 and 24 of the Constitution. These two provisions are:
1. Prohibition of traffic in human beings and forced labour: Traffic in human beings and
beggar and other similar forms of forced labour are prohibited and any breach of this
provision shall be an offence punishable in accordance with law.
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2. Prohibition of employment of children in factories, etc.: As the Constitution provides, no
child below the age of fourteen years shall be employed to work in any factory or mine or
engaged in any other hazardous employment. This right aims at eliminating one of the most
serious problems, child labour, that India has been facing since ages. Children are assets of
the society. It is their basic right to enjoy a happy childhood and get education. But as shown
in the illustration and as you also may have observed, in spite of this constitutional provision,
the problem of child labour is still continuing at many places. This malice can be eliminated
by creating public opinion against it.
Economic Importance:
The economic importance of right against exploitation is
(i) The government takes necessary steps to remove bonded labour.
(ii) The Factories Act help to prevent exploitation of women and children’s employees.
(iii) The owner of the factories are guided to make provision for safety and welfare of the
workers and they compulsorily appoint a labour welfare officer, it in the factory 500 01 more
workers are employed.
Right to Freedom of Religion

As you know, one of the objectives declared in the Preamble is “to secure to all its citizens
liberty of belief, faith and worship”. Since India is a multi-religion country, where Hindus,
Muslims, Sikhs, Christians and many other communities live together, the Constitution
declares India as a ‘secular state’. It means that Indian State has no religion of its own. But it
allows full freedom to all the citizens to have faith in any religion and to worship, the way
they like. But this should not interfere with the religious beliefs and ways of worship of other
fellow beings. This freedom is available to the foreigners as well. In respect of the Right to
freedom the Constitution makes the following four provisions under Articles 25-28:
1. Freedom of conscience and free profession, practice and propagation of religion: All
persons are equally entitled to freedom of conscience and the right to profess, practice and
propagate religion freely. However, it does not mean that one can force another person to
convert his/her religion by force or allurement. Also, certain inhuman, illegal and
superstitious practices have been banned. Religious practices like sacrificing animals or
human beings, for offering to gods and goddesses or to some supernatural forces are not-
permissible.
Similarly, the law does not permit a widow to get cremated live with her dead husband
(voluntarily or forcibly) in the name of Sati Pratha. Forcing the widowed woman not to marry
for a second time or to shave her head or to make her wear white clothes are some other
social evils being practiced in the name of religion. Besides the above stated restrictions, the
State also has the power to regulate any economic, financial, political or other secular
activities related to religion. The State can also impose restrictions on this right on the
grounds of public order, morality and health
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2. Freedom to manage religious affairs: Subject to public order, morality and health, every
religious group or any section thereof shall have the right (a) to establish and maintain
institutions for religious and charitable purposes; (b) to manage its own affairs in matters of
religion; (c) to own and acquire movable and immovable property; and (d) to administer such
property in accordance with law.
3. Freedom as to the payment of taxes for promotion of any particular religion: No person
shall be compelled to pay any tax, the proceeds of which are specifically used in payment of
expenses the incurred on the promotion or maintenance of any particular religion or religious
sect.
4. Freedom as to attendance at religious instruction or religious worship in certain educational
institutions: No religious instruction shall be provided in any educational institution wholly
maintained out of State funds. However, it will not apply to an educational institution which
is administered by the State but has been established under any trust which requires that
religious instruction shall be imparted in such an institution. But no person attending such an
institution shall be compelled to take part in any religious instruction that may be imparted
there or attend any religious worship that may be conducted there. In case of a minor, the
consent of his/her guardian is essential for attending such activities.
The Economic importance of the right to freedom of religion is
(i) The government cannot spend tax money for the development of any religion.
(ii) Nobody can be compelled to pay tax for the welfare of any specific religion.
(iii) No one shall be forced to transfer of property or any agreement of a business nature in
the name of a particular religion.
Cultural and Educational Rights

India is the largest democracy in the world having diversity of culture, scripts, languages and
religions. As we know the democracy is a rule of the majority. But the minorities are also
equally important for its successful working. Therefore, protection of language, culture and
religion of the minorities becomes essential so that the minorities may not feel neglected or
undermined under the impact of the majority rule. Since people take pride in their own
culture and language, a special right known as Cultural and Educational Right has been
included in the Chapter on Fundamental Rights. In Articles 29-30 two major provisions have
been made:
1. Protection of interests of minorities: Any minority group having a distinct language, script
or culture of its own shall have the right to conserve the same. No citizen shall be denied
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admission into any educational institution maintained by the State or receiving aid out of
State funds on grounds only of religion, race, caste, language or any of them.
2. Right of minorities to establish and administer educational institutions: All Minorities,

whether based on religion or language, have the right to establish and administer educational
institutions of their choice. In making any law providing for the compulsory acquisition of
any property of educational institutions established and administered by a minority, the State
shall ensure that the amount fixed by or determined under such law for the acquisition of such
property would not restrict or abrogate the right guaranteed under that clause. The State shall
not, in granting aid to educational institutions, discriminate against any educational institution
on the ground that it is under the management of a minority, whether based on religion or
language.
The economic importance of cultural and educational rights is:
(i) The state does not discriminate to give economic assistance to the minority institutions.
(ii) The aided institution cannot refuse admission to any of the citizens on the ground that he
belongs to a particular caste, religion, language or region.
Right to Constitutional Remedies: Since Fundamental Rights are justifiable, they are just
like guarantees. They are enforceable, as every individual has the right to seek the help from
courts, if they are violated. But in reality it is not so. Encroachment or violation of
Fundamental Right in our day to day life is a matter of great concern. Which is why, our
Constitution does not permit the legislature and the executive to curb these rights. It provides
legal remedies for the protection of our Fundamental Rights. This is called the Right to
Constitutional Remedies stipulated in Article 32. When any of our rights are violated, we can
seek justice through courts. We can directly approach the Supreme Court that can issue
directions, orders or writs for the enforcement of Fundamental Rights.
Right to Education (RTE): The Right to Education is added by introducing a new Article 21A
in the Chapter on Fundamental Rights in 2002 by the 86th Constitutional Amendment. It was
a long standing demand so that all children in the age group of 6-14 years (and their parents)
can claim compulsory and free education as a Fundamental Right. It is a major step forward
in making the country free of illiteracy. But this addition remained meaningless, as it could
not be enforced until 2009 when the Parliament passed the Right to Education Act, 2009. It is
this Act which aims at ensuring that every child who is between 6-14 years of age and is out
of the school in India, goes to school and receives quality education, that is his/her right.
Directive Principles of State Policy
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The Directive Principles of State Policy contained in Part IV; Articles 36-51 of the Indian
constitution constitute the most interesting and enchanting part of the constitution.
The Directive Principles may be said to contain the philosophy of the constitution. The idea
of directives being included in the constitution was borrowed from the constitution of Ireland.
As the very term “Directives” indicate, the Directive principles are broad directives given to
the state in accordance with which the legislative and executive powers of the state are to be
exercised.
The Directive Principles may be classified into 3 broad categories—
1. Socialistic
2. Gandhian and
3. Liberal-intellectual.
(1) Socialistic Directives

Principal among this category of directives are (a) securing welfare of the people (Art. 38) (b)
securing proper distribution of material resources of the community as to best sub serve the
common-good, equal pay for equal work, protection of childhood and youth against
exploitation. etc. (Art.39), (c) curing right to work, education etc. Art. (41), (d) securing just
and humane conditions of work and maternity relief (Art. 42) etc.
(2) Gandhian Directives

Such directives are spread over several Arts. Principal among such directives are (a) to
organize village panchayats (Art. 40), (b) to secure living wage, decent standard of life, and
to promote cottage industries (Art.43), (c) to provide free and compulsory education to all
children up to 14 years of age (Art. 45), (d) to promote economic and educational interests of
the weaker sections of the people, particularly, the scheduled castes and scheduled tribes, (e)
to enforce prohibition of intoxicating drinks and cow-slaughter and to organize agriculture
and animal husbandry on scientific lines (Arts. 46-48).
(3) Liberal intellectual directives

Principal among such directives is (a) to secure uniform civil code throughout the country
(Art.44), (b) to separate the judiciary from the executive (Art.50), (c) to protect monuments
of historic and national importance and (d) to promote international peace and security.
The economic importance of Directive Principles of State Policy is:
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(i) To provide adequate means of livelihood for all the citizens.
(ii) To secure equal pay for work to both men and women.
(iii) To protect the workers, especially children.
(iv) To regulate the economic system of the country that it does not lead to concentration of
wealth and means of production.
(v) To make provision for securing right to work, to education and to public assistance in
cases of unemployment, old age, sickness and similar other cases.
(vi) To ensure a decent standard of living and facilities of leisure for all workers.
The main objective of the above noted directive principles is to enable the individual to lead a
good and satisfying life. All the provisions of directive principles of state policy guide the
government policies towards the business and other economic and social activities.
The government also so far enacted a number of acts and laws, policies and rules keeping in
view the directive principles, which are directly related with the business operations. The
various Acts like FERA, Factories Act. MRTP Act, Minimum Wages Act, Industrial
(Development and Regulation) Act, Industrial policy, etc., are based on the Directive
Principles of the Constitution.
The government, through these acts and regulations, protects the interests of working men,
women and children, prevents concentration of economic power, and promotes and protects
the interest of small and cottage industries.
5.5 CONSTITUTIONAL PROVISIONS REGARDING TRADE,

COMMERCE ANDINTERCOURSE WITHIN THE TERRITORY OF
INDIA:
Freedom of Trade, Commerce &Intercourse:

Article 301: Freedom of trade, commerce and intercourse: —Subject to the other provisions
of this Part, trade, commerce and intercourse throughout the territory of India shall be free.
Article302: Power of Parliament to impose restrictions on trade, commerce and intercourse.
—Parliament may by law impose such restrictions on the freedom of trade, commerce or
intercourse between one State and another or within any part of the territory of India as may
be required in the public interest.
Article303: Restrictions on the legislative powers of the Union and of the States with regard
to trade and commerce:—(1) Notwithstanding anything in article 302, neither Parliament nor
the Legislature of a State shall have power to make any law giving, or authorizing the giving
of, any preference to one State over another, or making, or authorizing the making of, any
discrimination between one State and another, by virtue of any entry relating to trade and
commerce in any of the Lists in the Seventh Schedule. (2) Nothing in clause (1) shall prevent
Parliament from making any law giving, or authorizing the giving of, any preference or
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making, or authorizing the making of, any discrimination if it is declared by such law that it
is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods
in any part of the territory of India.
Article304: Restrictions on trade, commerce and intercourse among States:—
Notwithstanding anything in article 301 or article 303, the Legislature of a State may by
law— (a) impose on goods imported from other States or the Union territories any tax to
which similar goods manufactured or produced in that State are subject, so, however, as not
to discriminate between goods so imported and goods so manufactured or produced; and (b)
impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or
within that State as may be required in the public interest: Provided that no Bill or
amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a
State without the previous sanction of the President.
Article305:Saving of existing laws and laws providing for State monopolies: —Nothing in
articles 301 and 303 shall affect the provisions of any existing law except in so far as the
President may by order otherwise direct; and nothing in article 301 shall affect the operation
of any law made before the commencement of the Constitution (Fourth Amendment) Act,
1955, in so far as it relates to, or prevent Parliament or the Legislature of a State from making
any law relating to, any such matter as is referred to in sub-clause (ii) of clause (6) of article
19.
5.6 SUMMARY
The major factors in political environment are:

 Taxation policy
 Privatization
 Deregulation
 International trade regulations
Governments intervene in trade to protect their nation’s economy and industry, as well as
promote and preserve their social, cultural, political, and economic structures and
philosophies. Governments have several key policy areas in which they can create rules and
regulations in order to control and manage trade, including tariffs, subsidies; import quotas
and VER, currency controls, local content requirements, antidumping rules, export financing,
free-trade zones, and administrative policies.
The Constitution of India is the supreme law of India. The Constitution follows parliamentary
system of government and the executive is directly accountable to the legislature.
The Constitution guarantees six fundamental rights to Indian citizens as follows:
 Right to equality
 Right to Freedom
 Right against exploitation
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 Right to freedom of religion
 Cultural and educational rights,
 Right to constitutional remedies.
 The Directive principles are broad directives given to the state in accordance with
which the legislative and executive powers of the state are to be exercised.
Business needs to maintain harmonious and cordial relation with the legislation to maintain
industry peace, ensure existence and flourish in the environment by contributing in the
nation’s development
5.7 KEYWORDS
 Antidumping: measure to rectify the situation arising out of the dumping of goods
and its trade distortive effect.
 Regulation: a rule or directive made and maintained by an authority.
 Tariff: a tax or duty to be paid on a particular class of imports or exports.
 Secularism: the principle of the separation of government institutions and persons
mandated to represent the state from religious institutions and religious dignitaries.
 Amendment: minor change or addition designed to improve a text, piece of
legislation, etc.
1. Explain the different forms of Political System.

__________________________________________________________________________
__________________________________________________________________________
2. State the importance of Article 304
__________________________________________________________________________
__________________________________________________________________________
Short Questions:
1. Explain the concept of Political Environment.
2. State the types of political risks and strategies to avoid such risks.
3. Why it is important to consider Political dimension for carrying out business?
4. Why Constitution is a Unique Blend of Rigidity and Flexibility?
5. What is the economic importance of Right against Exploitation?
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Long Questions:
1. Discuss the impact of Political factors on Business
2. How do Government intervene in Business operations?
3. Discuss the Values and the Salient Features of the Constitution
4. Elaborate the economic importance of the Directive Principle of the State and its
relation with the business.
5. Explain Constitutional Provisions Regarding Trade, Commerce and Intercourse
within the Territory of India and how this provision will present opportunity and
threat for any business. Highlight the strategy to deal with Strength and Weakness of
the Constitutional Provision.
A. Multiple Choice Questions:
1. Democratic governments derive their power from:

a. The people
b. The prime minister
c. The president
d. The Judiciary
2. Lack of political stability affects:

a. Law and order
b. Elections
c. Business Operations
d. Government
3. ------------ is the highest legal document from which all other laws are derived or
interpreted in India.
a. Legislature
b. Contract
c. Preamble
d. Constitution
4. In the unwritten constitution like the _____________amendments are made through

ordinary law-making procedure.
128
a. British Constitution
b. Indian Constitution
c. New Zealand Constitution
d. Israel Constitution
5. The State shall not, in granting aid to educational institutions, discriminate against any
educational institution on the ground that it is under the management of a minority, whether
based on religion or language highlights ______________provision of Article 29-30.
a. Right of minorities to establish and administer educational institutions:
b. Protection of interests of minorities
c. Freedom as to the payment of taxes for promotion of any particular religion:
d. Freedom of conscience and free profession, practice and propagation of religion:
Answers
1-a; 2-c; 3- d; 4 – b;5 – a;
Text Books:
Publishing House],
Hall.
 M.V.Pylee ,Constitutional Government in India, S.Chand
 K.K.Ghai, Indian Government and Politics , Kalyani Publication

Reference Books:

Open Text Source:
129
p. 2049. ISBN 9788180385926.
Limited. pp. 48–.ISBN 978-81-7534-840-0.
130
UNIT 6: LEGAL ENVIRONMENT-I
Structure
6.1 Introduction
6.2 Legal environment
6.3 The MRTP ACT,1969
6.3.1 Objectives
6.3.2 Regulatory Provisions
6.4 The Competition Act, 2002
6.4.1 Objectives
6.4.2 Competition Commission of India:
6.4.3 Overall Scheme:
6.5 Industrial policy after 1991
6.5.1 Major Economic Reforms:
6.5.2 Impact of New Industrial Policy, 1991 on Indian Economy:
6.5.3 Impact of New Industrial Policy on Business:
6.5.4 New Small Sector Policy, 1991:
6.5.5 National Manufacturing Policy, 2011
6.5.6 Make in India Program
6.6 The Consumer Protection Act 1986
6.6.1 Jurisdiction and Objective
6.6.2 Consumer Protection Councils
6.6.3 Consumer Disputes Redressal Agencies
6.6.4 Consumer Complaints
6.6.5 Penalties
6.7 Summary
6.8 Keywords
6. 10 Unit End Questions
6. 11 Suggested Readings
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 State the implications of Legal Environment on Business
 Explain the implication of MRTP, Competition, Consumer Protection Act on
Business.
 Highlight the relation of strategy formulation with the new Industrial Policy.
 Outline the provisions of laws aimed at protecting consumers
 Discuss the jurisdiction of consumer courts established for redressal of consumer
disputes
6.1 INTRODUCTION
‘To the people, by the people and for the people’ – the famous saying always used to
highlight the democratic stature of India. To preserve the integrity and to ensure the
continuous economic growth of the country rules, regulations and legislations are adhere to
maintain stability. Like we always follow left lane on the road while walking or driving
which is important traffic rule mentioned in our Constitution. Similarly, we have rules and
legislations for how to pass a bill in Parliament House. We have different legislations and
regulations to deal with home violence, industrial disputes, frauds and criminal activity. Such
a broad framework being appreciated followed, implemented and amended regularly to
ensure orderliness. Business being commercial and economic activity that also falls under the
purview of political and legal framework of our country.
In the wake of liberalization and privatization that was triggered in India in early nineties, a
realization gathered momentum that the existing Monopolistic and Restrictive Trade
Practices Act, 1969 ("MRTP Act") was not equipped adequately enough to tackle the
competition aspect of the Indian economy. With starting of the globalization process, Indian
enterprises started facing the heat of competition from domestic players as well as from
global giants, which called for level playing field and investor-friendly environment. Hence,
need arose with regard to competition laws to shift the focus from curbing monopolies to
encouraging companies to invest and grow, thereby promoting competition while preventing
any abuse of market power.
Industrial policies act an intervention to fulfil certain pre-requisites require to achieve the
objectives set by it. Some provisions are specific and some are general covering wide aspects
of economy. Industrial policy which is categorized as horizontal and vertical based on the
inclination of the measure implemented. If general aspect like imposing tax on capital gain or
restricting credit are example of horizontal and providing subsidy to the export industries and
increasing custom duties on imports of clothes to prevent textile industry is an example of
vertical or specific Industrial Policies.
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Consumer protection is a group of laws and organizations designed to ensure the rights
of consumers as well as fair trade, competition and accurate information in the marketplace.
The laws are designed to prevent businesses that engage in fraud or specified unfair practices
from gaining an advantage over competitors
6.2 LEGAL ENVIRONMENT
Legal environment includes various legislations issued by the government authorities- centre,
state or local. Every enterprise needs to obey the law of the land so an adequate knowledge of
rules and regulations framed by the government is a pre-requisite for better business
performance. Non-compliance of laws can land the business enterprise into legal problems. In
India, the working knowledge of the following Acts are important for doing business
 Companies Act
 Industries Act
 Foreign Exchange Management Act
 The Imports and Exports Act
 Factories Act
 Trade Union Act
 Workmen’s Compensation Act
 Industrial Disputes Act
 Consumer Protection Act
 Competition Act
What Are the Different Legal Systems?

Let’s focus briefly on how the political and economic ideologies that define countries impact
their legal systems. In essence, there are three main kinds of legal systems—common law,
civil law, and religious or theocratic law. Most countries actually have a combination of these
systems, creating hybrid legal systems.
Civil law is based on a detailed set of laws that constitute a code and focus on how the law is
applied to the facts. It’s the most widespread legal system in the world.
Common law is based on traditions and precedence. In common law systems, judges interpret
the law and judicial rulings can set precedent.
Religious law is also known as theocratic law and is based on religious guidelines. The most
commonly known example of religious law is Islamic law, also known as Sharia. Islamic law
governs a number of Islamic nations and communities around the world and is the most
widely accepted religious law system. Two additional religious law systems are the Jewish
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Halacha and the Christian Canon system, neither of which is practiced at the national level in
a country. The Christian Canon system is observed in the Vatican City.
The most direct impact on business can be observed in Islamic law—which is a moral, rather
than a commercial, legal system. Sharia has clear guidelines for aspects of life. For example,
in Islamic law, business is directly impacted by the concept of interest. According to Islamic
law, banks cannot charge or benefit from interest. This provision has generated an entire set
of financial products and strategies to simulate interest—or a gain—for an Islamic bank,
while not technically being classified as interest. Some banks will charge a large up-front fee.
Many are permitted to engage in sale-buyback or leaseback of an asset. For example, if a
company wants to borrow money from an Islamic bank, it would sell its assets or product to
the bank for a fixed price. At the same time, an agreement would be signed for the bank to
sell back the assets to the company at a later date and at a higher price. The difference
between the sale and buyback price functions as the interest. In the Persian Gulf region alone,
there are twenty-two Sharia-compliant, Islamic banks, which in 2008 had approximately
$300 billion in assets. Clearly, many global businesses and investment banks are finding
creative ways to do business with these Islamic banks so that they can comply with Islamic
law while earning a profit.
6.3 THE MRTP ACT,1969
The Government adopted the Monopolies and Restrictive Trade Practices (MRTP) Act in
1969 and accordingly the MRTP Commission was set up in 1970. The Commission was set
up to investigate the effects of such practices, case by case, on the public interest and to
recommend suitable corrective measures.
6.3.1 Objectives of Monopolistic and Restrictive Trade Practices (MRTP) Act, 1969:
1. Prevention of concentration of economic power to the common detriment.
2. Control of monopolies.
3. Prohibition of Monopolistic Trade Practices (MTP).
4. Prohibition of Restrictive Trade Practices (RTP).
5. Prohibition of Unfair Trade Practices (UTP).
6.3.2 Regulatory Provisions:

Concentration of economic Power, Competition Law and Consumer Protection. The MRTP
Act 1969 came up to ensure that there is no concentration of economic power at a single
place. Besides it also checked the restrictive, monopolistic and restrictive trade practices.
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The main body to monitor this act is MRTP Commission that has right to inquire into any
complaint that is related to monopolistic trade practice and is also having right for
recommending any concrete plans for making any action to the central government. The
MRTP is the only body that has the right to inquire, cease or award compensation in case
there are some restrictive and unfair trade practices being practiced.
Companies under MRTP Act are normally required to obtain the approval of the
Government in respect of:
(a) Substantial expansion of production capacity,
(b) Diversification of existing activities,
(c) Establishment of inter-connected undertakings,
(d) Amalgamation or merger with any other undertakings; and
(e) Takeover of the entire or part of other undertakings.
The MRTP Commission normally considers all these sorts of proposals to justify its public
interest. Till the end of March 1990, 1,854 undertakings were registered under the MRTP
Act. Out of these, 1,787 undertakings were belonging to large industrial houses and the
remaining 67 undertakings were dominant undertakings.
Again, the Industrial Policy, 1991 has now totally scrapped the assets limit for MRTP
companies.
The definition of ‘inter-connected companies’ as adopted under the MRTP Act, was having
some loopholes, which have helped some industrial houses to escape from the purview of the
Act. It is also found difficult to establish inter-connection in certain cases.
6.4THE COMPETITION ACT, 2002:
6.4.1 Objectives
Since the adoption of the economic reforms programme in 1991, corporates have been
pressing for the scrapping of the MRTP Act. The argument is that the MRTP Act has lost its
relevance in the new liberalized and global competitive scenario. In fact, it is said that only
large companies can survive in the new competitive markets and therefore size should not be
a constraint. Thus, there is a need to shift our focus from curbing monopolies to promoting
competition. In view of this, the government appointed an expert committee headed by SVS
Raghavan to examine the whole issue. The Raghavan Committee submitted its Report to the
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Government on May 22, 2000 wherein it proposed the adoption of a new competition law and
doing 63 away with the MRTP Act. Accordingly, the government decided to enact a law on
competition. Competition Bill, 2001 was introduced in Parliament and passed in December
2002. The Act is called Competition Act, 2002. The Act was amended in September 2007.
OBJECTIVES TO BE ACHIEVED
I. To check anti-competitive practices
II. To prohibit abuse of dominance
III. Regulation of combinations.
IV. To provide for the establishment of CCI, a quasi-judicial body to perform below
mentioned duties:
 Prevent practices having adverse impact on competition
 Promote and sustain competition in the market
 Protect consumer interests at large
 Ensure freedom of trade carried on by other participants in the market
 Look into matters connected therewith or incidental thereto.
6.4.2 Competition Commission of India:

The Act provides for the establishment of the Competition Commission of India (CCI).
According to Section 18, it shall be the duty of the Commission to eliminate practices having
adverse effects on competition, to promote and sustain competition in markets in India, to
protect the interests of consumers and to ensure freedom of trade carried on by other
participants in market in India. Some protagonists of private sector have argued that that there
is no requirement of CCI because all that is required is removal of licensing requirements and
knocking down of entry barriers. However, the fact of the matter is that the market does not
always guarantee competition. There will always be unfair and restrictive business practices.
Besides, mergers and acquisitions would need to be scrutinized. It is on account of this reason
that most countries have competition or free trade commissions. This explains the rationale of
CCI in India.
6.4.3 Overall Scheme:

Competition Act, 2002 is designed for the following purposes:
(1) Prohibition of anticompetitive agreements,
(2) Prohibition of abuse of dominant position, and
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(3) Regulation of combinations.
Let us understand in detail:

1. Prohibition of Anti-Competitive Agreements:
Section 3 of the Act makes provision for prohibition of anticompetitive agreements.
According to Section 3(1) of the Act, "no enterprise or association of enterprises or person or
association of persons shall enter into any agreement in respect of production, supply,
distribution, storage, acquisition or control of goods or provision of services, which causes or
is likely to cause an appreciable adverse effect on competition within India." Section 3(2)
states that any agreement entered into in contravention of the provisions contained in Section
3(1) shall be void.
2. Prohibition of Abuse of Dominant Position:

Section 4(1) of the Act states that no enterprise shall abuse its dominant position It may be
noted that 'dominant position' itself is not prohibited. What is prohibited is its misuse.
Dominant position means a position of strength, enjoyed by an enterprise, in the relevant
market, in India, which enables it to
(i) Operate independently of competitive forces prevailing in the relevant market; or
(ii) Affect its competitors or consumers or the relevant market in its favour.
3. Regulation of Combinations:
Section 5 of the Act defines combination while Section 6 is concerned with regulation of
combinations. According to Section 5, the acquisition of one or more enterprises by one or
more persons or merger or amalgamation of enterprises shall be treated as 'combination' of
such enterprises and persons or enterprises in the following cases:
(a) Acquisition by large enterprises;
(b) Acquisition by group;
(c) Acquisition of enterprises having similar goods/services;
(d) Acquiring enterprises having similar goods/services by a group;
(e) Merger of enterprises; and
(f) Merger in group company
Section 6 of the Act relates to 'regulation of combinations.' According to Section 6 (1), no

person or enterprise shall enter into a combination which causes is likely to cause an
appreciable adverse effect on competition, within the relevant market in India and such a
combination shall be void. The definition and heading of the section itself means that it is
'regulation of combination'. Thus, combination, in itself, is not prohibited. It will be held void
only if adversely affects competition.
Provisions of the Competition Act, 2002
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As per the provisions of the Competition policy, the Government of India enacted a
legislation called the Competition Act, 2002. The Act aimed at promoting competition
through prohibition of anti-competitive practices, abuse of dominance by an enterprise and
regulation of combinations such as mergers and acquisitions.
The Act repealed the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 and thus
dissolved the Monopolies and Restrictive Trade Practices Commission (MRTPC) which was
set up to inquire into the provisions of the MRTP Act. Moreover, in the era of liberalization,
privatization and globalization, it was felt that the existing MRTP Act, 1969 had become
obsolete in certain respects and there is a need to shift the focus from curbing monopolies to
promoting competition. The new competition law, the Competition Act, 2002 provides for a
modern framework of competition. The main objectives of the Act are:-
 To provide for the establishment of a commission to prevent practices having adverse

effect on competition
 To promote and sustain competition in markets in India
 To protect the interests of consumers
 To ensure freedom of trade carried on by the participants in the markets in India and
for related matters.
The Competition Act, 2002 has been amended by the Competition (Amendment) Act, 2007.
In order to enforce the provisions of the Competition Act, an autonomous body called
Competition Commission of India (CCI) was set up with regulatory and quasi-judicial
powers.
Certain Behaviors Prohibited by the Act
Under this act following are restricted practice and these practices are stopped by this
act.
1. Price fixing:-
If two or more supplier fixes the same price for supply the goods then it will be restricted
practice.
2. Bid ragging: -
If two or more supplier exchange sensitive information of bid, then it will also be restricted
practice and against competition
3. Re-sale price fixation: -
If a producer sells the goods to the distributors on the condition that he will not sell any other
price which is not fixed by producer
4. Exclusive dealing: -
This is also restricted practice. If a distributor purchases the goods on the condition that
supplier will not supply the goods any other distributor. Above all activities promote
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monopoly so under competition act these are void and action of competition commission will
not entertain by civil court.
CCI, entrusted with eliminating prohibited practices, is a body corporate and independent
entity possessing a common seal with the power to enter into contracts and to sue in its name.
It is to consist of a chairperson, who is to be assisted by a minimum of two, and a maximum
of ten, other members.
6.5 INDUSTRIAL POLICY AFTER 1991
The year 1991 witnessed a drastic change in the industrial policy governing industrial
development in the country since decades. This land mark change which in the economic
history of India in the form of Industrial Policy of 1991 actually was entirely a new chapter
which was to enforce totally open economic system as compared to the earlier mixed system.
The country decided to follow the lines of capitalism.
6.5.1 Major Economic Reforms:

Industrial licensing policy: - In a major move to liberalize the economy, the new industrial
policy abolished all industrial licensing, irrespective of the level of investment, except for a
short list of 18 industries related to the security and strategic concerns, social reasons,
hazardous chemicals and over-riding environmental reasons and items of elitist consumption
(list attached as Annex II). However, of these 18 industries, three industries (motor cars,
white goods and raw hides and skins and leather) were delicensed in April 1993. In 1996,
another industry was delicensed namely entertainment and electronic industry. Further, in
July 1997, five other industries were delicensed (animal fats and oils, tanned or dressed fur
skins, chamois leather, asbestos and asbestos- based products, plywood and other wood and
paper and newsprint). In continuation with the process of delicensing, three other industries
were included in this category in 1998-99 namely coal and lignite, petroleum products and
sugar. Later on drugs and pharmaceuticals industries were also exempted from licensing.
Thus, at present only 5 items of health, strategic and security considerations remain under the
purview of industrial licensing – alcohol, cigarettes, hazardous chemicals, electronic,
aerospace and all types of defense equipment. The exemption from licensing will apply to all
substantial expansion of existing units. The projects where imported capital goods are
required, automatic clearance will be given- In cases where foreign exchange availability is
ensured through foreign equity; or if the CIF value of imported capital goods required is less
than 25 percent of total value (net of taxes) of plant and equipment, upto a maximum value of
Rs.2 crore. In view of the current difficult foreign exchange situation, this scheme, (i.e.,
(iii)b) will came into force from April, 1992. In other cases, imports of capital goods will
require clearance from the Secretariat of Industrial Approvals (SIA) in the Department of
Industrial Development according to availability of foreign exchange resources.
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In respect of locations other than cities of more than 1 million population, the
industrialists will not be required to obtain industrial approval from the Centre, except for
industries subject to compulsory licensing. In the cities with population greater than 1
million, industries other than those of non- polluting nature such as electronics, computer
software and printing will be allowed outside 25 km of the periphery, except in prior
designated industrial areas.
Major amendments were made in the industrial location policy during 1997-98. The
requirement of obtaining industrial approvals from the central government (except for the
industries under compulsory licensing) for establishing units at locations not falling within 25
kms the periphery of cities having a population of more than 1 million was dispensed with.
However, notified industries of a non- polluting nature such as electronics, computer software
and printing, may be located within 25 kms of the periphery of cities with more than 1
million population and other industries are permitted only if they are located in designated
industrial area set up prior to July 25, 1991. Zoning and land use Regulations as well as
Environment Legislation continues to regulate industrial locations.
Policy on Public Sector: - The 1956 Resolution had reserved 17 industries for the public
sector. The 1991 industrial policy reduced this number to 8 naming- Arms and ammunition;
Atomic energy; Coal and lignite; Mineral oils; Mining of iron ore, manganese ore, chrome
ore, gypsum, Sulphur, gold and diamond; Mining of copper, lead, zinc, tin, molybdenum and
wolfram; Minerals specified in the schedule to the atomic energy (control of production and
use order), 1953; and Rail transport.
But later on five during these reserved industries under public sector were also de-reserved.
On May 9, 2001, the government opened up arms and ammunition sector also to the private
sector. Now there were only three industries left reserved exclusively for the public sector.
The policy also suggested that those public enterprises which are chronically sick and which
are unlikely to be turned around will, for the formation of revival/ rehabilitation schemes, be
referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar
high-level institutions created for the purpose, in order to protect the interests of workers
likely to be affected by such rehabilitation package a social security mechanism will be
created.
The government has announced its intention to offer a part of government shareholding in the
public sector enterprises to mutual funds, financial institutions, the general public and the
workers. A beginning in this direction was made in 1991-92 themselves by diverting part of
the equities of selected public sector enterprises.
Monopolistic and Restrictive Trade Practice limit: -
Under the Monopolistic and Restrictive Trade Practice Act, all firms with assets above a
certain size (Rs.100 crore since 1985) were classified as MRTP firms. Such firms were
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permitted to enter selected industries only and this also on a case by case approval basis. In
addition to control through industrial licensing, separate approvals were required by such
large firms for any investment proposals. The New Industrial Policy therefore remove the
threshold limit in assets in respect of MRTP companies and dominant undertakings. This
eliminates the requirements of prior approval of the Central Government in respect of the
activities concerning expansion, new undertakings etc. The MRTP Act has been accordingly
amended. In the now amended Act, emphasis has shifted to taking appropriate action against
monopolistic, restrictive and unfair trade practices on the part of monopolies. These dominant
undertakings or monopolies have now been identified as those who control over 25 percent
share of the market. The New Industrial Policy has widened and strengthened the provisions
of the MRTP Act, and their implementation through the Monopoly Commission.
Policy on Foreign investment and Technology agreements:-

In the case of both foreign technology agreements sought by the Indian firms as well as
foreign investment, it was necessary to obtain specific prior approval from the government
for each project. It was argued that this caused undue delays and government interference and
also hampered business decision making. The New Industrial Policy, therefore, prepared a
specified list of high technology and high investment priority industries, wherein automatic
permission was to be made available for direct foreign investment up to 51 percent foreign
equity. The industries in which automatic approval was granted included a wide range of
industrial activities in the capital goods and metallurgical industries, entertainment electronic,
food processing and the services sectors having significant export potential. Besides, these
included a number of other industries which were important for the rapid growth of the
economy.
In January 1997, the government also announced the first ever guidelines for foreign direct
investment for expeditious approval of foreign investment in areas not covered under
automatic approval. Priority areas for foreign direct investment proposals as mentioned in the
guidelines included infrastructure, export potential, large- scale employment potential
particularly for rural areas, items with linkages with the farm sector, social sector projects
like hospitals, health care and medicines, and proposals that led to induction of technology
and infusion of capital.
The list of industries eligible for foreign direct equity investment under the automatic
approval route by Reserve Bank was further expanded in 1997-98 and 1998-99. In 1997-98,
equity investment upto 100 percent by NRIs/ OCBs (Overseas Corporate Bodies) was
permitted in high priority industries. These included 9 high priority industries in metallurgical
and infrastructure sectors and 13 other priority industries, hitherto eligible for 74 percent and
51 percent equity investment respectively. Foreign equity investment in mining (3 categories
of industries) was also allowed upto 100 percent for NRIs/ OBCs. During 1998-99, the scope
of foreign direct equity investment under the automatic approval route of Reserve Bank was
enhanced. In a major drive to simplify foreign direct investment procedures, Indian
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companies were permitted to accept investment under automatic approval route without
obtaining prior permission from Reserve Bank of India. Foreign equity up to 100 percent has
been permitted in electricity generation, transmission and distribution (excluding atomic
reactor power plants) and in construction and maintenance of roads, highways, vehicular
bridges, toll roads, vehicular tunnels, parts and harbours. However, foreign equity in projects
of these industries under the automatic approval route was not to exceed Rs.1, 500 crore.
During 1991-2000, the government decided to pull all items under the automatic route for
foreign direct investment/ NRI & OCB investment except for a small negative list, which
includes all proposals requiring industrial license under the Industries (Development and
Regulation) Act, 1951; cases having foreign investment more than 24 percent in the equity
capital of units manufacturing items reserved for the small- scale sector; and for all its
requiring industrial license in terms of the location policy notified under the New Industrial
Policy, 1991.
In order to licensed foreign direct investment policy further, the government took some
important decisions such as: 100 percent foreign direct investment allowed in Special
Economic Zones (SEZs) for all manufacturing activities; 100 percent foreign direct
investment permitted for Business to Business commerce; Removal of cap on investment in
the power sector; 100 percent foreign direct investment permitted in oil refining; 100 percent
foreign direct investment allowed in telecom sector for certain activities with some
conditions; Off shore Venture Capital Funds/ Companies allowed to invest in domestic
venture capital undertakings as well as other companies through the automatic route, subject
to only SEBI (Securities and Exchange Board of India) regulations and sector specific caps
on foreign direct investment; Existing companies with foreign direct investment are eligible
for automatic route to undertake additional activities covered under automatic route; Foreign
direct investment upto 26 percent is eligible under automatic route in the Insurance sector, as
prescribed in the Insurance Act, 1991, subject to obtaining a license from the Insurance
Regulatory and Development Authority (IRDA); and Automatic route is available to
proposals in the Information Technology sector, even when the applicant company has a
previous joint venture or technology transfer agreement in the same field, etc.
On May 9, 2001, the government announced a number of concessions and incentives to
foreign direct investment (FDI). The main incentives given by the government are as follows:
 In the pharmaceutical sector, 100 percent Foreign Direct Investment has been allowed
through the automatic route (earlier on, the limit was 74 percent);
 100 percent Foreign Direct Investment has been allowed in airports against the
prevailing 74 percent;
 For the hotels and tourism industry the Foreign Direct Investment limit has been
raised to 100 percent through the automatic route from the prevailing 51 percent;
 100 percent Foreign Direct Investment has also been allowed in two fresh areas-
Courier services and Mass Rapid Transport System (MRTS);
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 100 percent Foreign Direct Investment has been allowed in township development; In
the telecom sector, Foreign Direct Investment limit has been raised to 74 percent from
the existing 49 percent for Internal Service Providers (ISPs);
Subject to Reserve Bank guidelines, the foreign investment limit in the banking sector has
been hiked from 20 percent to 49 percent; and Foreign Direct Investment upto 267 percent
has been allowed in defence production.
Abolition of Phased Manufacturing Programmes for New Projects: - In order to force the
pace of indigenization in manufacturing sector, Phased Manufacturing Programmes have
been in force in a number of engineering and electronic industries. The new policy abolished
such programmes for future.
Removal of Mandatory Convertible Clause: - Since large part of industrial investment in

India is finance by loans from banks and financial institutions, these institutions followed a
mandatory practice of including a convertibility clause in their lending operations for new
projects which provide them adoption of converting part of their loans into equity of felt
necessary by their management. This has been interpreted as an unwarranted threat to the
private firms to be taken over by the financial institutions. Hence, the new industrial policy
provided that financial institutions will not impose this mandatory convertible clause.
6.5.2 Impact of New Industrial Policy, 1991 On Indian Economy:

Improvement in Performance of the Economy– National Product
The economy’s performance in the post reform era has been quite impressive. The reforms
started in year 1991 and if one leaves out 1991-92, which was exceptionally a bad year, the
average annual growth rate between 1992-93 and 1999-2000 was 6.3%.
Gross National Product in India increased to 99965.15 INR Billion in 2013 from 89328.92
INR Billion in 2012. Gross National Product in India averaged 13945.09 INR Billion from
1950 until 2013, reaching an all-time high of 99965.15 INR Billion in 2013 and a record low
of 103.60 INR Billion in 1951. Gross National Product in India is reported by the Ministry of
Statistics and Programme Implementation (MOSPI).
The Gross Domestic Product (GDP) in India expanded 1.50 percent in the third quarter of
2014 over the previous quarter. GDP Growth Rate in India averaged 1.61 percent from 1996
until 2014, reaching an all-time high of 5.80 percent in the fourth quarter of 2003 and a
record low of -1.90 percent in the first quarter of 2009.
Wide Choice of Consumer Goods and Services

Economic reforms have resulted in a sea-change in the standards of living and life-styles of
people. The benefits that have already accrued are enormous. Today, one has variety of
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choices to choose from with regard to many of the consumer durables like fridges,
televisions, music systems, DVDs, cars etc. Foreign brands of many of the consumer durables
are easily available. Due to cutthroat competition, the prices of consumer durables have either
come down or remained static. The T.V. viewers today enjoy 24-hour news channels. These
24-hour news channels and other channels depend heavily on the advertising industry, which
in turn, depends on India’s increasing transformation into a consumerist society.
Easy Availability of Bank Loans

In the pre-reforms era, getting loan from a bank was unthinkable for a common man. The
scenario has completely changed today. The reforms carried out in the banking sector have
led to easy availability of loans. Banks are running after customers today requesting them to
take loans. Lending rates have fallen. Computerization and installation of ATMs have
brought sea change in the services being rendered by banks. Indian banks have started giving
“European” look. The day is not far off when Indian banks may be preferred when compared
to foreign banks.
Growth in Employment Opportunities and Better Emoluments

Employment opportunities have tremendously increased due to coming up of many new
domestic private companies as well as multinational companies (MNCs). Many of the
foreign companies are now outsourcing their jobs to India thereby increasing the job
opportunities available in the country. In 1991, many Indians were terrified that globalization
would cost us millions of jobs. Today, American politicians are terrified that millions of their
jobs will be outsourced to India. The latest business to be outsourced to India by the US is
mathematics coaching. Health services such as pathological and radiological tests are also
being outsourced to India by some countries now. The jobs that have come up in computer
software and call centres could not have been predicted ten years ago. The economic reforms
have not only increased the job opportunities in India, but have also raised pay packages in
many of the sectors benefiting the youngsters from the middle-class. This scenario has come
up because the MNCs, which have set up their plants / units in India, pay much higher
emoluments than the domestic companies. One important sector, which has vastly expanded
and has generated vast employment opportunities in the country after liberalization, is the
‘Information Technology’. Other notable sectors in this connection are the telecom,
automobiles, civil aviation and electronics.
Large Reserves of Foreign Exchange

In the pre reforms era, the country did not have large reserves of foreign exchange and
therefore, was not easily available for a person traveling abroad. The procedure for getting
foreign exchange was very cumbersome and one had to run from pillar to post to get even a
small amount of foreign exchange. There were widespread illegal transactions in foreign
exchange. The situation has changed and today foreign exchange is easily available in any
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amount for persons traveling abroad. The removal of restrictions has also helped in
eliminating “black money” generated as a result of illegal transactions in foreign exchange.
This is mainly because of the tremendous increase in foreign exchange reserves of the
country.
Foreign Exchange Reserves in India decreased to 337793 USD Million in the week ended
March 7th, 2015 from 338079 USD Million in the previous week. Foreign Exchange
Reserves in India averaged 181145.53 USD Million from 1998 until 2015, reaching an all-
time high of 383643 USD Million in December of 2009 and a record low of 29048 USD
Million in September of 1998.
Vast Expansion in Telecommunications

A notable revolution has occurred in the telecom sector. In the pre reforms era, this was
entirely in the hands of the central government and due to lack of competition, the call
charges were quite high. Further, due to lack of funds with the government, the government
could never meet the demand for telephones. In fact, a person seeking a telephone
connection had to wait for years before he could get a telephone connection. The service
rendered by the government monopoly was also very poor. Wrong billing, telephones lying
dead for many days continuously due to slackness on the part of the telecom staff to attend to
complaints, cross connections due to faulty / ill maintained telephone lines, obsolete
instruments and machinery in the telephone department were the order of the day in the pre
reforms era.
Today, there are many players in the telecom sector. The ultimate beneficiary has been the
consumer. Prices of services in this sector have fallen drastically. Telephone connections are
today affordable to everyone and are also easily available. Gone are the days, when one had
to wait for years to get a telephone connection. The number of telephone connections which
was only 2.15 million (fixed lines) in 1981 increased to 5.07 million (fixed lines) in 1991.
The total number of telephones in the country stands at 957.61 million, while the overall tele-
density has increased to 76.75% as of 30 September 2014 and the total numbers of mobile
phone subscribers have reached 930.20 million as of September 2014. [1] The mobile tele-
density had increased to 74.55% in September 2014. In the wireless segment, 5.88 million
subscribers were added in September 2014. The wire line segment subscriber base stood at
27.41 million.
"Private operators hold 90.05 per cent of the wireless subscriber market share whereas BSNL
and MTNL, the two PSU operators hold only 9.95 per cent market share," Trai said India has
the fastest growing telecom network in the world with its high population and development
potential. Airtel, Vodafone, Idea, Uninor, Reliance, Tata DoCoMo, BSNL, Aircel, Tata
Indicom and MTNL are the major operators in India. However, rural India still lacks strong
infrastructure. India's public sector telecom company BSNL is the 7th largest telecom
company in world
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Civil Aviation – Growth in Air Travel:
The civil aviation industry in India has witnessed a new era of expansion driven by factors
such as low-cost carriers (LCC), modern airports, foreign direct investments (FDI) in
domestic airlines, cutting edge information technology (IT) interventions and a growing
emphasis on regional connectivity. Simply going by the market size, the Indian civil aviation
industry is amongst the top 10 in the world with a size of around US$ 16 billion. Domestic air
passenger traffic in India has posted double-digit growth which is a growth of about 16.3
percent in October 2014, according to data released by International Air Transport
Association (IATA).
Domestic airlines flew 5.92 million passengers in October 2014 as compared to 5.01million
passengers during the same period in 2013. The number of passengers carried by domestic
airlines during the January-October 2014 period was 55.06 million as against 50.7 million in
the year-ago period, according to data released by Directorate General of Civil Aviation
(DGCA).
Aircraft movements, passengers and freight at all Indian airports are expected to grow at a
rate of 4.2 per cent, 5.3 per cent and 5 per cent, respectively, for the next five years,
according to estimates by Airports Authority of India (AAI).
FDI inflows in air transport (including air freight) during April 2000 to November 2014 stood
at US$ 542.55 million, as per data released by Department of Industrial Policy and Promotion
(DIPP).
Easier Access to Foreign Technology

One of the greatest benefits of economic reforms has been the free flow of global technology.
A case in point is the cell phone technology, which came into India after liberalization. Had
there been no reforms, this technology would have taken much more time to make entry into
India. Due to easy accessibility to latest foreign technology, many of the private companies
are adopting latest technology in their production processes to increase production and
productivity, as well as to lower production costs to benefit the consumer.
Significant fall in Poverty Ratio
There has been a spectacular achievement in the sphere of poverty alleviation. The poverty
ratio decreased from 36% in 1993 - 94 to 26.1% in 1999 – 2000 – a fall that was steeper than
that in the 1970s or 1980s. Over the six-year period 1977-1978 to 1983, the poverty ratio fell
from 51.3 to 44.5 percent; the decline between 1987-1988 and 1993-94 was from 38.9% to
36%. Indeed, while from the mid-1980s to early 1990s, the absolute number of the poor
continued to hover around 320 million, the number registered a significant fall at 260 million
by 1999-2000.
Over the last decade, poverty has witnessed a consistent decline with the levels dropping
from 37.2% in 2004-05 to 29.8% in 200-10. The number of poor is now estimated at 269.3
million, of which 216.5 million reside in rural India.
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Better Performance after Privatization
Many public sector companies have been privatized after 1991. It has been reported that
productivity and production in all these companies have gone up very high after privatization.
The liberalized economic policy freed entrepreneurs to enable them to innovate and go in for
modernization of their plants. The Bharat Aluminium Company Ltd. introduced VRS for its
employees after privatization and went in for computerization in a big way. The plant was
also modernized. All this has led to increased efficiency and significant increase in
production.
Remarkable Growth in Foreign Trade

Post-independence, India witnessed marginal increase in the volume of trade. It took a leap
after 1992 when the country ushered into liberalization regime; but this too couldn't
contribute remarkable share in the world's total trade. India's share in world trade was 1.78
percent in 1950, which further declined to 0.6 percent in 1995. Only two financial years
1972-73 and 1976-77 witnessed surplus trade of Rs 1,040 million and 680 million
respectively. However, India's share in merchandise exports witnessed a constant rise, from
0.8 percent in 2003 and 2004 and 1.0 percent in 2005 to 1.1 percent in 2006 and 2007. Trade
policy 2004-09 had set a target of 1.5 percent in world trade by 2009. World Trade Report
2011, released by WTO, states that India has improved its rank both in merchandise and
service trade during 2010. In merchandise trade, it is placed at 20th rank, while in service
trade its rank is 10th
The country's export witnessed major compositional changes in last one decade with 10
percentage point fall in shares of manufactures, a 12.6 percentage point growth in shares
of petroleum crude and products, and 3.3 percentage point fall in shares of primary products.
The composition of import also saw changes in last one decade. The share of food and allied
products which fell to 2.1 percent in 2008- 09 from 3.3 percent in 2000-01, increased to 3.7
percent in 2009-10 and fell to 3.2 percent in first half of 2010- 11, with slight fall in import
share of edible oils and pulses. The share of fuel import remained at 33 percent. The
remarkable change can be seen in the growth of capital goods import from 10.5 percent in
2000-01 to 15 percent in 2009-10 and then again fall to 13.1 percent in first half of 2010- 11.
The share of gold, silver and electronic goods underwent down in first half of 2010- 11
compared to last two corresponding financial years. The share of pearls, precious and semi-
precious stones witnessed a see-saw movement in last one decade.
India's export cover over 7500 commodities to 190 countries, while over 6000 commodities
are imported from about 140 countries.
During first half of 2011- 12, exports grew by 52.1 percent to USD 160 billion and import
witnessed 32.4 percent increase by USD 233.5 billion, leaving a trade gap of USD 73.5
billion. The foreign trade in India trend showed an upward movement with 15 trading
partners contributing to 60 percent of India's total trade in 2007- 08. The trend however was
constant till first half of 2011- 12. USA which was at first position in 2007-08, relegated to
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third position in 2008- 09. UAE replaced USA and China was placed at second position. The
trend continued till first half of 2010-11. UAE replaced USA only because of exports and
imports of gems and jewellery items. India had bilateral trade surplus with five countries-
UAE, USA, Singapore, UK and Hong Kong in 2009-10 and continued till first half of 2010-
11.
Regulated Capital Market
There was a “free for all” atmosphere in the stock market prior to the introduction of
regulation of capital market. There were many “scandals” in the stock market, which
pauperized small investors. The setting up of SEBI (Stock Exchange Board of India) has
greatly helped the government to keep an eye on the stock market and regulate it to protect
small investors. Trading in shares has become very easy, quick and transparent. Stock
Exchange brokers can no more take small investors for a ride. Due to dematerialization of
shares, the investors have been freed from botheration of getting delivery of shares and
sending the same to the concerned companies for transfer of names etc. Further, delays in
transfer of shares, loss/pilferage of share certificates, the need to keep shares in safe custody
by the investors have become a thing of the past.
Increasing Foreign Direct Investment

According to a recent report by global credit rating agency Moody’s, FDI inflows have
increased significantly in India in the current fiscal. This, according to Moody’s, is due to
India’s current pro-growth policies. Net FDI inflows totalled US$ 14.1 billion in the first five
months of 2014-15, representing a 33.5 per cent increase from the same period in 2013-14.
Total FDI inflows into India in the period April 2000–November 2014 touched US$ 350,963
million. Total FDI inflows into India during the period April–November FY15 was US$
18,884 million. Mauritius is again emerging as the largest source of FDI in India, accounting
for an inflow of US$ 83,730 million in the April 2000-November 2014 period. According to
official data, the inflow of foreign investment from Singapore amounted to US$ 29,193
million, followed by the UK at US$ 21,761 million and Japan at US$ 17,557 million during
April 2000-November 2014.
Investments
The government has announced that foreign investors can put in as much as Rs 90,300 crore
(US$ 14.65 billion) in India’s rail infrastructure through the FDI route, according to a list of
projects released by the Ministry of Railways. The Rs 63,000 crore (US$ 10.22 billion)
Mumbai-Ahmedabad high-speed corridor project is the single largest. The other big ones
include the Rs 14,000 crore (US$ 2.27 billion) CSTM-Panvel suburban corridor, to be
implemented in public-private partnership (PPP), and the Rs 1,200 crore (US$ 194.79
million) Kachrapara rail coach factory, besides multiple freight line, electrification and
signalling projects.
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Israel-based world's seventh largest agrochemicals firm ADAMA Agrochemicals, formerly
known as Makhteshim Agan Industries, plans to invest at least US$ 50 million over the next
three years. ADAMA's global president and Chief Executive Chen Lichtenstein said the idea
was to expand both manufacturing and research and development facilities in India aimed at
growing better than the average industry growth.
Apple - world's most admired electronics brand - that sells devices such as the iPhone, iPad
tablet and iPod media player – is planning to open 500 'iOS' stores in India in its first major
push that will include moving into smaller towns and cities.
The Department of Industrial Policy and Promotion (DIPP) has moved a Cabinet note to
allow 100 per cent FDI in medical devices as part of a strategy to not only reduce imports but
also promote local manufacturing for the global market, which will be worth over US$ 400
billion next year. Real estate private equity FDI is set to double after the Indian government
ended the three-year lock-in and has introduced 100 per cent FDI for completed assets,
according to JLL India. With India now allowing 100 per cent FDI in the construction sector,
real estate private equity investment could double – and boost demand from overseas
property buyers, according to sector experts.
FDI real estate private equity, which is currently estimated at around US$ 1billion - US$ 1.5
billion per annum, could reach to up to US$ 3 billion in the next few years, according to
leading agency, JLL India. The Ministry of Finance has announced that it has cleared 15 FDI
applications, including that of Panacea Biotech and Sanofi-Synthelabo (India), and
recommended HDFC Bank's proposal to hike foreign holding to the Cabinet for
consideration.
Expanding Tourism
Economic reforms have brought prosperity in every sector and the tourism industry is no
exception. The expansion in civil aviation sector seems to have made a very big positive
impact on the tourism industry. The number of foreign tourists increased from 1279210 in
1981 to 1677508 in 1991 and to 2537282 in 2001. The flow of foreign tourists during 1991 to
2001 has, thus, been more than double the flow during 1981 to 1991. Tourist Arrivals in India
decreased to 761000 in February of 2015 from 790000 in January of 2015. Tourist Arrivals in
India averaged 396744.61 from 2000 until 2015, reaching an all-time high of 877000 in
December of 2014 and a record low of 129286 in May of 2001.
Substantial Growth in Corporate Sector
One of the greatest gains due to economic reforms is the huge expansion in the corporate
sector. With easy flow of foreign investment and increase in domestic private investment, the
number of industries in the corporate sector has gone up very high.
Industrial Production in India increased 2.60 percent in January of 2015 over the same month
in the previous year. Manufacturing rose 3.3 percent and electricity production expanded 2.7
percent while mining output shrank 2.8 percent. Industrial Production in India averaged 6.54
percent from 1994 until 2015, reaching an all-time high of 20 percent in November of 2006
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and a record low of -7.20 percent in February of 2009. Industrial Production in India is
reported by the Ministry of Statistics and Programme Implementation (MOSPI).
Growth in Tax Revenue of Central Government
When investments in industrial and other sectors expand, the benefits of such investments
would also accrue to the central government in the form of more taxes. The tax revenue of the
central government registered a sharp increase of Rs.85293.2 crore during 2000-01 to 1990-
91 whereas the corresponding figure during 1980-81 to 1990-91 was only Rs. 33620 crore.
Despite a general slowdown in the Indian Economy, Government is able to maintain a
healthy growth in collection of revenue through better monitoring and strict enforcement to
deter tax evasion. Revenue collections are as follows:
Year Revenue Collection Growth Rate (%)

(Rs. In crores)
2006-07 19,217, 15.66
2007-08 19,952 03.83
2008-09 22,570 13.12
2009-10 24,819 9.96
2010-11 31,117 25.37
2011-12 39,545 27.09
2012-13 47,885 21.09
Comfortable Position of Balance of Payments on Current Account

One of the remarkable achievements of economic reforms has been the comfortable position
with regard to balance of payments on current account. The balance of payments, which was
adverse in the pre reforms era, made a turn around after reforms were ushered in. In the year
1980-81, there was a deficit of Rs.2213.5 crore and this increased to Rs. 17366 crores in
1990-91, whereas in the year 2002-03, the balance of payments on current account was
favourable with net earnings of Rs.19987 crore.
 India’s current account deficit (CAD) narrowed sharply to US$ 7.8 billion (1.7 per
cent of GDP) in Q1 of 2014-15 from US$ 21.8 billion (4.8 per cent of GDP) in Q1 of
2013-14. However, it was higher than US$ 1.2 billion (0.2 per cent of GDP) in Q4 of
2013-14. The lower CAD was primarily on account of a contraction in the trade
deficit contributed by both a rise in exports and a decline in imports.
 On a BoP basis, merchandise exports at US$ 81.7 billion increased by 10.6 per cent in
Q1 of 2014-15 as against a decline of 1.5 per cent in Q1 of 2013-14.
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 On the other hand, merchandise imports (on BoP basis) at US$ 116.4 billion
moderated by 6.5 per cent in Q1 of 2014-15 as against an increase of 4.7 per cent in
Q1 of 2013-14. Decline in imports was primarily led by a steep decline of 57.2 per
cent in gold imports, which amounted to US$ 7.0 billion, significantly lower than US$
16.5 billion in Q1 of 2013-14. Notably, non-gold imports recorded a modest rise of
1.3 per cent as against decline of 0.6 per cent in corresponding quarter of last year
reflecting some revival in economic activity.
 As a result, the merchandise trade deficit (BoP basis) contracted by about 31.4 per
cent to US$ 34.6 billion in Q1 of 2014-15 from US$ 50.5 billion in the corresponding
quarter a year ago.
 Net services receipts improved marginally in Q1 of 2014-15 on account of higher
exports of services. Net services at US$ 17.1 billion recorded a growth of 1.2 per cent
in Q1 of 2014-15.
Elimination of Illegal Transactions in Foreign Exchange

The determination of exchange rate in the foreign exchange market, by market forces, has
eliminated illegal transactions in foreign exchange. Foreign currencies are now easily
available in any amount for persons traveling abroad. The removal of restrictions has also
helped in eliminating “black money” generated as a result of illegal transactions in foreign
exchange.
Improvement in Power Supply

The reforms undertaken in the power sector have already started yielding good results. In
Delhi, after privatization of distribution of power, power availability has drastically
improved. Power theft has almost been eliminated. Consumers get electricity connections or
increase in load-capacity easily. Incidence of power failure, voltage fluctuations, variations in
frequency etc., has come down sharply. In short, privatization of power sector has definitely
improved the quality and quantity of power supply in Delhi.
Higher Revenue due to Value Added Tax

Value Added Tax (VAT) is termed as the best practice in taxation all over the world. This has
been introduced in India from April 2005. Many states have already shifted to Value Added
Tax regime in place of Sales Tax. There has been buoyancy in revenue collections of many
states after the introduction of VAT. According to the Empowered Committee of State
Finance Ministers on VAT, the VAT regime has improved tax compliance among the traders
and has also brought down the prices of many commodities.
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6.5.3 Impact of New Industrial Policy on Business:
The factors and forces of business environment have lot of influence over the business. The
common influence and impact of such changes in business and industry are explained below:
1. Increasing Competition:
After the new policy, Indian companies had to face all round competition which means
competition from the internal market and the competition from the MNCs. The companies
which could adopt latest technology and which were having large number of resources could
only survive and face the competition. Many companies could not face the competition and
had to leave the market.
For example, Weston Company which was a leader in Т. V. market with more than 38%
share in T.V. market lost its control over the market because of all round competition from
MNCs. By 1995-96, the company almost became unknown in the T.V market.
2. More Demanding Customers:
Prior to new economic policy there were very few industries or production units. As a result
there was shortage of product in every sector. Because of this shortage the market was
producer-oriented, i.e., producers became key persons in the market. But after new economic
policy many more businessmen joined the production line and various foreign companies also
established their production units in India.
As a result there was surplus of products in every sector. This shift from shortage to surplus
brought another shift in the market, i.e., producer market to buyer market. The market
became customer- oriented and many new schemes were made by companies to attract the
customer. Nowadays products are produced/manufactured keeping in mind the demands of
the customer.
3. Rapidly Changing Technological Environment:
Before or prior to new economic policy there was a small internal competition only. But after
the new economic policy the world class competition started and to stand this global
competition the companies need to adopt the world class technology.
To adopt and implement the world class technology the investment in R & D department has
to increase. Many pharmaceutical companies increased their investment in R and D
department from 2% to 12% and companies started spending a large amount for training the
employees.
4. Necessity for Change:
Prior to 1991 business enterprises could follow stable policies for a long period of time but
after 1991 the business enterprises have to modify their policies and operations from time to
time.
5. Need for Developing Human Resources:
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Before 1991 Indian enterprises were managed by inadequately trained personnel’s. New
market conditions require people with higher competence skill and training. Hence Indian
companies felt the need to develop their human skills.
6. Market Orientation:
Earlier firms were following selling concept, i.e., produce first and then go to market but now
companies follow marketing concept, i.e., planning production on the basis of market
research, need and want of customer.
7. Loss of Budgetary Support to Public Sector:
Prior to 1991 all the losses of Public sector were used to be made good by government by
sanctioning special funds from budgets. But today the public sectors have to survive and
grow by utilising their resources efficiently otherwise these enterprises have to face
disinvestment. On the whole the policies of Liberalisation, Globalisation and Privatisation
have brought positive impacts on Indian business and industry. They have become more
customer focus and have started giving importance to customer satisfaction.
8. Export a Matter of Survival:
The Indian businessman was facing global competition and the new trade policy made the
external trade very liberal. As a result, to earn more foreign exchange many Indian companies
joined the export business and got lot of success in that. Many companies increased their
turnover more than double by starting export division. For example, the Reliance Company,
Videocon, MRF, CEAT, etc. got a great hold in the export market.
6.5.4 New Small Sector Policy, 1991:

The Industrial Policy Scheme 1991 was accompanied by a separate Policy Statement for the
promotion and strengthening of small, tiny and rural industries which had following features:
 De-regulation and de-bureaucratizing the procedure to impart greater vitality and

growth to the sector
 Modifications in all statements, regulations and procedures to ensure they do not go
against the interest for small and village enterprises.
 Separate package for promoting tiny units and recognition of all industry-related
services and business enterprises except for specified target groups to ensure adequate
flow of credit on normative basis.
 To provide access to capital markets by allowing 24 percent equity participation by
other industrial undertakings.
 Legislation to ensure prompt payment of bills and legislation for Limited Partnership
Act.
 Introduction of a new scheme of integrated infrastructural development to promote
industrialization in rural and backward areas.
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 Stress on technology up-gradation by setting up a technology development cell and
strengthening the facilities available with Small Industry Development Organization
(SIDO), and enforcement of quality control.
 Promotions of exports by setting up Export Development Centre.
 Change in definition of women’s enterprises and support to women entrepreneurs.
 Significant expansion in programmes for entrepreneurship.
Objectives:
The primary objective of the Small Sector Industrial Policy during the nineties was to impart
more vitality and growth impetus to the sector to enable it to contribute its mite fully to the
economy, particularly in terms of growth of output, employment and exports.
1. Government have announced increase in the investment limits in plant and machinery of
small scale industries, ancillary units and export-oriented units to Rs. 60 lakhs, Rs. 75 lakhs
and Rs. 75 lakhs respectively. Such limits in respect of “TINY” enterprises would now be
increased from the present Rs. 2 lakhs to Rs. 5 lakhs, irrespective of locations of the unit.
2. Inadequate access to credit—both short term and long-term—remains a perennial problem
facing the small-scale sector. Emphasis would henceforth that from subsidized cheap credit,
except for specified target groups, and efforts would be made to ensure both adequate flow of
credit on a normative basis, and the quality of the delivery, for viable operations of this
sector.
3. A Technology Development Cell (TDC) would be set up in the Small Industries
Development Organisation (SIDO) which would provide technology inputs to improve
productivity and competitiveness of the products of the small-scale sector.
4. National Small Industries Corporation (NSIC) concentrate on marketing of mass
consumption items under common brand name and organic links between NSIC and SSIDCs
established. The SIDO has been recognized as the nodal agency to support the small-scale
industries in export promotion.
5. Government will continue to support first generation entrepreneur through training and
will support their efforts. Large number of EDP trainers and motivators will be trained to
significantly expand the Entrepreneurship Development Programmes (EDP). Industry
Associations would also be encouraged to participate in this venture effectively. Women
entrepreneurs will receive support through special training programmes.
6. Handloom sector contributes about 30 per cent of the total textile production in the
country. It is the policy of Government to promote handloom to sustain employment in rural
areas and to improve the quality of life for handloom weavers.
7. The activities of the Khadi and Village Industries Commission and the State Khadi and
Village Industries Boards would be expanded and the organisations strengthened to discharge
their responsibilities more effectively.
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6.5.5 National Manufacturing Policy, 2011
The success of India’s economic story has mainly been due to service’s sector growth.
Despite strong policy measures, the industrial sector (especially manufacturing) has
stagnated. The maximum contribution of the sector in the overall GDP is close to 15%, which
is far less than that of other emerging economies like China (whose share is close to 45%). As
a result of which, India has failed to provide gainful employment to its massive labour force.
Lack of employment in the manufacturing sector has put excessive pressure on the
agriculture sector to provide employment, which is not possible under any economic model.
The result of this is the phenomenon called “Jobless Growth”, which is specific to India.
The Government recognising this fact and in order to promote manufacturing sector launched
National Manufacturing Policy on November 2011.
Objectives of the National Manufacturing Policy
1. Medium Term growth in Manufacturing Sector by 14-15%
2. Increase in contribution of Manufacturing in GDP upto 25% by 2022.
3. Creation of 100 Million jobs in Manufacturing Sector by 2022
4. Skill development of backward class and people below poverty line in rural and urban
region.
5. Introduction of new technology and increase in domestic value.
6. Increasing competitive edge of manufacturing sector in global market.
(Source: civilsdaily.com)
Government Policy support under NMP
1. The manufacturing policy proposes to create an enabling environment for the growth
of manufacturing in India.
2. The NMP envisages simplification of business regulations significantly.
3. The NMP proposes the development of the MSMEs sector. The proposal includes
technological upgradations of the MSMEs; adoption of business-friendly policies;
equity investments.
4. Skill Development of the youth is the most important part of the NMP.
5. Setting up of National Investment and Manufacturing Zones (NIMZ) with significant
incentives like easy land acquisitions, integrated industrial township development,
world-class physical infrastructure.
6. A total of 12 NMIZ have been announced so far by the government. Out of the total
12, 8 NIMZ are located in the Delhi-Mumbai Industrial Corridor. Other 4 NMIZ is
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planned to build in; Nagpur; Tumkur (Karnataka); Chittoor (Andhra Pradesh); Medak
(Andhra Pradesh).
6.5.6 Make in India Program

Make in India is a campaign launched by the government of India on 25 September 2015.
The aim of the Make in India program is to project India as an efficient and competitive
powerhouse of global manufacturing. The program aims to convert India into “World’s
Factory” by promoting and developing India as a leading manufacturing destination and a
Hub for the production of manufacturing goods.
Make in India is essentially an invitation to the foreign companies to come and invest in India
on the back of the Government promise to create an environment easy for doing business. But
contrary to public perception, no specific concessions have been offered to foreign investors
under this scheme till date.
The government since the launch of the program is trying to make India an attractive
destination for global Multinationals by focussing on ease of doing business, liberal FDI
regime, improving the quality of Infrastructure and Business-friendly policies.
How Government is supporting the Program
• Improving Ease of Doing Business and promoting use of technology;
• Opening up of new sectors for FDI, undertaking de-licensing and deregulation of the
economy on a vast scale;
• Introduction of new and improved infrastructure through industrial corridors, industrial
clusters and smart cities;
• Strengthening IPR infrastructure to nurture innovation; and
• Building a new mindset in government to partner industry instead of working as a regulator
in Economic Growth of the country.
The Government has taken various measures for the success of Make in India ‘campaign as
under:
a) Industrial Corridors
Cities/regions have been identified to be developed as investment centres in the Delhi-
Mumbai Industrial Corridor in partnership with the State Governments.
(i) Ahmedabad-Dholera Investment Region, Gujarat;
(ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra;
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(iii) Manesar-Bawal Investment Region, Haryana;
(iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan;
(v) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh;
(vi) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; and
(vii) Dighi Port Industrial Area, Maharashtra.
b) Foreign Direct Investment

Liberalisation of the FDI in the majority of sectors to attract investments. Example: 100%
FDI under automatic route has been permitted in construction, operation and maintenance in
specified Rail Infrastructure projects; FDI in Defence liberalized from 26% to 49%. In cases
of modernization of state-of-art proposals, FDI can go up to 100%; the norms for FDI in the
Construction Development sector are being eased.
c) Easing of Laws, Rules and Regulations

Major changes have been proposed in various laws and rules to overcome regulatory hurdles.
d) Investment Security and Stable and Conducive Government Policies

The Government is committed to chart out a new path wherein business entities are extended
red carpet welcome in a spirit of active cooperation. Invest India will act as the first reference
point for guiding foreign investors on all aspects of regulatory and policy issues and to assist
them in obtaining regulatory clearances. The Government is closely looking into all
regulatory processes with a view to making them simple and reducing the burden of
compliance on investors. An Investor Facilitation Centre has been created under Invest India
to provide guidance, assistance, handholding and facilitation to investor during the entire
circle of the business.
6.6 CONSUMER PROTECTION ACT, 1986
“An Act to provide for better protection of the interests of consumers and for that purpose to
make provision for the establishment of consumer councils and other authorities for the
settlement of consumers' disputes and for matters connected therewith.”(According to
Consumer Protection Act, 1986)
Consumer Protection Act, 1986 seeks to promote and protect the interest of consumers
against deficiencies and defects in goods or services. It also seeks to secure the rights of a
consumer against unfair or restrictive trade practices. This act was passed in Lok Sabha on
9th December,1986 and Rajya Sabha on 10th December, 1986 and assented by the President
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of India on 24th December, 1986 and was published in the Gazette of India on 26th
December, 1986.
6.6.1 Jurisdiction and Objective

The judicial system set up under the Consumer Protection Act, 1986, consists of consumer
courts at the district level, state level and national level. These are known as District Forum,
State Consumer Disputes Redressal Commission (State commission) and National Consumer
Disputes Redressal Commission (National Commission). Any individual consumer or
association of consumers can lodge a complaint in writing with the district, state or National
level forum, depending on the value goods and claim for compensation, if any. The district
forum has the jurisdiction to deal with all complaints where the value of the goods or services
or the compensation claimed does not exceed Rs 20 lakhs. The state commissions are
empowered to deal with cases where the value or amount involved exceed Rs 20 lakhs but
does Consumer Protection 161 not exceed Rs One Crore. The State commissions also deal
with appeals and against orders of the district forum. The National commission has the
juistisdiction to take up all claims and grievances exceeding the value of Rs. one crore. It has
also appellate jurisdiction, that is, power to deal with appeals against orders passed by state
commissions. An aggrieved party can appeal to the Supreme Court against the orders of the
National Commission
6.6.2 Consumer Protection Councils

Three – tier Enforcement machinery
The Consumer Protection Act provides for setting up of a three-tier enforcement machinery
at the District, State, and the National levels, known as the District Consumer Dispute
Redressal Forum, State Consumer Disputes Redressal Commission and the National
Consumer Disputes Redressal Commission. While the National Commission is set up by the
Central Government, the State Commissions and the District Forums are set up, in each State
and District, respectively, by the State Government concerned.
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Supreme
Court
National
Commission
State
Commission
District
Forum
Fig 6.1 Three – tier Enforcement machinery as per Consumer Protection Act, 1986
1. District Forum: District forum consists of a president and two other members. The
president can be a retired or working judge of District Court. They are appointed by state
government. The complaints for goods or services worth Rs 20 lakhs or less can be filed in
this agency. The agency sends the goods for testing in laboratory if required and gives
decisions on the basis of facts and laboratory report. If the aggrieved party is not satisfied by
the jurisdiction of the district forum then they can file an appeal against the judgment in State
Commission within 30 days by depositing Rs 25000 or 50% of the penalty amount whichever
is less.
2. State Commission: It consists of a president and two other members. The president must
be a retired or working judge of high court. They all are appointed by state government. The
complaints for the goods worth more than Rs 20 lakhs and less than Rs 1 crore can be filed in
State Commission on receiving complaint the State commission contacts the party against
whom the complaint is filed and sends the goods for testing in laboratory if required. In case
the aggrieved party is not satisfied with the judgment then they can file an appeal in National
Commission within 30 days by depositing Rs 3500 or 50% of penalty amount whichever is
less.
3. National Commission: The national commission consists of a president and four members
one of whom shall be a woman. They are appointed by Central Government. The complaint
can be filed in National Commission if the value of goods exceeds Rs 1 crore. On receiving
the complaint, the National Commission informs the party against whom complaint is filed
and sends the goods for testing if required and gives judgment? If aggrieved party is not
satisfied with the judgment then they can file a complaint in Supreme Court within 30 days.
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6.6.3 Consumer Disputes Redressal Agencies
Procedure for redressal of consumer grievances
As stated in the previous section consumer complaints can be filed by an individual

consumer or association of consumers. The complaint may be filed before the District Forum
for the district where the cause of action has arisen or where the opposite party resides, or
before the State Commission notified by the state government or the union territory, or it can
be filed before the National Commission at New Delhi. There is no fee charged for filing a
complaint. The complaint may be filed by the complainant or his/her authorized agent in
person, or it may be sent by post.
Five copies of the complaint are generally required to be filed along with the following
information.
i) Name, description and address of the complainant;
ii) Name, description and address of the opposite party or parties, as the case may be;
iii) Facts relating to the complaint and when and where it arose;
iv) Documents, if any, in support of the allegations contained in the complaint (like
cash memo, receipt, etc.)
v) The nature of relief which the complainant is seeking. The complaint should be
signed by the complainant or his/her authorized agent. It has to be addressed to the
president of the District Forum or State Commission or National Commission.
A complaint is required to be filed within a period of two years from the date on which
the cause of action arose. If these are delay and it is excused by the concerned
Forum/Commission, the reason must be on record. Complaints are expected to be
decided, as far as possible, within three months from the date of notice received by the
opposite parties. For those complaints which require laboratory analysis or testing of
products, the period is extended to five months. Depending on the nature of complaint
and relief sought by the consumer and facts of the case, the redressed Forum/Commission
may order one or more of the following reliefs:
(a) Removal of defect in goods/deficiency in services.
(b) Replacement of the goods/restoration of the service.
(c) Refund of the price paid for goods or excess charge paid for service.
(d) Compensation for loss or injury suffered.
6.6.4 Consumer Complaints

Department of Consumer Affairs has been receiving a very large number of complaints from
the consumers regarding shortfall in the supplies/expectations of the consumers. The
complaints cover a wide range of subjects like supply of defective refrigerators, T.V. Sets,
use of poor material by the builders in the construction of flats, non-refund of fixed deposit
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amounts by companies on maturity and complaint against unfair trade practice against service
providers, etc.
Consumer Grievance Redressal Cell (CGRC) and Consumer Coordination Council (CCC)
The department had set up a Consumer Grievance Redressal Cell (CGRC) in February 2002,
for providing services for redressal of complaints of the consumers belonging to the
following categories:
 Sale of defective goods or deficient services and charging of higher prices, etc.
 General grievances including those received from the Cabinet Secretary and the PMO
related to consumer matters.
 Attending to the consumer complaints appearing in the columns of the newspapers to
the extent possible.
Also, complaints regarding delay in disposal of pending cases with the various
districts/States/National Commission were received and processed and necessary follow up
action were taken up as pro-active measures in order to redress their grievances to their
satisfaction. The Redressal Cell had received 2272 complaints up to 31st March 2007. These
complaints were forwarded to the Consumer Coordination Council (CCC) for redressal
regarding replacement of goods, re-installation of telephone/electricity, rectification of wrong
bills, possession of allotted flats, payment of amounts due to the investors on maturity, etc.
The Consumer Grievance Redressal Cell and Consumer Coordination Council do not have
any statutory powers to take action on the complaints of consumers. Hence, they forward the
complaints to the concerned authorities to get the redressal.
Who Can File a Complaint?
A complainant in relation to any goods or services may be filled by-
 A consumer or
 Any voluntary consumer association registered under the Companies Act, 1956 (1of
1956)or under any other law for the time being in force or
 The Central Government or any State Government; or
 One or more consumers, where there are numerous consumers having the same
interest or
 In case of death of a consumer, his legal heir or representative
A power of attorney holder cannot file a complaint under the Act.
What Constitutes a Complaint?
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A complaint means any allegation in writing made by a complainant that-
 An unfair trade practice or a restrictive trade practice has been adopted by any trader
or service provider
 The goods bought by him or agreed to be bought by him; suffer from one or more
defects
 The services hired or availed of or agreed to be hired or availed of by him suffer from
deficiency in any respect
 A trader or service provider, as the case may be, has charged for the goods or for the
service mentioned in the complaint a price in excess of the price fixed by or under any
law for the time being in force or displayed on the goods or any package containing
such goods or displayed on the price list exhibited by him by or under any law for the
time being in force or agreed between the parties
 Goods which will be hazardous to life and safety when used or being offered for sale
to the public
Services which are hazardous or likely to be hazardous to life and safety of the public when
used, are being offered by the service provider which such person could have known with due
diligence to be injurious to life and safety.
6.6.5 Penalties
Penalties and administrative fines
Any person convicted of an offence is liable for a fine or imprisonment for a period not
exceeding 12 months, or both a fine and imprisonment.
The NCT may impose an administrative fine in respect of prohibited or required conduct. An
administrative fine imposed may not exceed the greater of 10 per cent of the respondent's
annual turnover during the preceding financial year, or Rs 1000000.
Clearly, non-compliance with the Act will result in regulatory risk for any business that
transacts with consumers. However, the reputational risk of non-compliance could be as
severe.
Businesses would be well advised to actively prepare for the Act to mitigate these risks. This
will protect their business interests as well as their reputations and help them to avoid
negative public opinion and potential loss of business arising from, for example, damaging
media reports about their non-compliance with the Act or complaints by consumers about
their disregard for consumerrights in general and for the purposes of the Consumer Protection
Act.
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Case Law: Sehgal School of Competition v Dalbir Singh
The factual background of the case
In this landmark judgement concerning educational institutions that dates back to the year
2005, a student was asked to deposit lump sum fees of ₹18,734 as fees for coaching for
medical entrance examinations for the next two years. This was deposited by the student
in two complete instalments within the first six months of classes. However, the student
realised later that the quality of the coaching institute was substandard, and therefore
sought a refund for the remaining period, which was refused by the coaching institute.
Questions before the court
 Can a student seek a refund of fees paid to a coaching class for the remaining
period of classes that are yet to be held?
 In case of a refusal to refund fee, can a claim for mental agony for pressing
legal charges to be sought?
The reasoning of the Commission – Upholding student’s right to be refunded for
remaining classes
 Clauses prohibiting refund of fees are unfair – The Commission notes that
educational institutes or coaching centre that charge a lump sum fees for the
whole duration or should refund the fees if service is deficient in the quality of
coaching etc. Any clause saying that fees once paid shall not be refunded is
unconscionable and unfair and therefore not enforceable. This view was
maintained by District and State Forums as well as in appeal by the National
Commission.
 Quashing respondent’s argument on the reservation of seat – The

respondent coaching centre argued before the commission that the student had
withdrawn voluntarily and, therefore, there exists no deficiency of service.
They submitted records that showed good results of the institute and alleged
that it was wrong to observe that their coaching was not up to the mark. To
justify taking the entire fees of two years lump sum, it was stated that the
conditions imposed by the coaching required non-transferability of the seat,
and therefore no refund of the fee was possible under any circumstance. The
court dismissed this argument andfurther quoted UGC guidelines that mention
that even if a student has not attended even a single class, an amount of ₹1000
may be deducted and proportionate charges for hostel fees, etc, and the
balance amount has to be refunded in its entirety. On blocking of the seat, the
Commission advised that a reserve list of candidates may be maintained, and
waitlisted candidates may be given the opportunity to apply for the seat.
 Additional compensation – In the order by State Consumer Forum, it was

mentioned that not just the balance amount of fee, but also a higher
compensation for legal costs as well as the pain that the student had to
undertake, could be availed in such cases.
[Reference: https://vakilsearch.com/]
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6.7 SUMMARY
Legal environment includes various legislations issued by the government authorities- centre,
state or local. The working knowledge of the following Acts are important for doing business,
viz., MRTP Act, Competition Act, Consumer Protection Act.
There are three main kinds of legal systems—common law, civil law, and religious or
theocratic law.
A strong and robust systems of policies and initiatives to achieve the designed objectives
gives a concrete platform for the development and growth of Indian economy. The main
objectives of Industrial Policy are:
1. Liberalization of the Economy: It means removing unnecessary trade restrictions and

making the economy more competitive. It aims to free the private sector from rigorous
controls and licensing thus encouraging the private sector to flourish.
2. Privatization: It means removing strict control over the private sector and allowing them
to take necessary decisions. In our country, since independence public sector and its
development is top priority but along with its strong private sector is essential to bring about
the balance economic development.
3. Globalization of the Economy: Free interaction among economies of the world in the
field of trade, finance, production, technologies and investment is termed as globalization of
the economy. It encourages foreign trade, private and institutional foreign investment. It
practically removes all hindrances and restrictions of foreign trade.
Rights of the consumers are (i) Right to safety (ii) Right to be informed (iii) Right to choose
(iv) Right to be heard (v) Right to seek redressal (vi) Right to consumer education
Consumer protection refers to the steps necessary to be taken or measures required to be
accepted to protect consumers from business malpractices.
6.8 KEYWORDS
 Regional imbalances or disparities means wide differences in per capita income,

literacy. rates, health and education services, levels of industrialization, etc. between
different regions.
 Regulation - a rule or directive made and maintained by an authority.
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 Substantial Expansion means increase in the investment in the plant and machinery
by at least twenty-five per cent. of the book value of plant and machinery
 Grievance: an official statement of a complaint over something believed to be wrong
or unfair.
 Consumerism: the protection or promotion of the interests of consumers
1. What are the drawbacks of the MRTP Act?

___________________________________________________________________________
___________________________________________________________________________
2. Educating Consumers regarding their rights and responsibilities is one of the best ways of
empowering consumer. Support this statement with necessary arguments.
___________________________________________________________________________
___________________________________________________________________________
Short Questions
1. What is Legal Environment?
2. Enlist the Behaviors Prohibited by the Act by Competition Act, 2002.
3. Why business should be concerned for Consumer Protection?
4. Discuss provision of MRTP Act.
5. What was the important provision related toForeign investment and Technology
agreements as per new Industrial Policy?
Long Questions:
1. What are the important functions of Competition Commission of India?
2. State the procedure to be followed for redressal of consumer grievances.
3. Enlist all the important features of New Industrial Policy with its impact.
4. Discuss New Small Sector Policy, 1991.
5. Compare the benefits of National Manufacturing Policy, 2011and Make in India
Program for global and domestic business
.
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1. The definition of ____________________as adopted under the MRTP Act, was having
some loopholes, which have helped some industrial houses to escape from the purview of the
Act.
a. Amalgamation
b. Merger
c. Joint venture
d. Inter-connected companies
2. Which section of the Competition Act, 2002 makes provision for prohibition of
anticompetitive agreements.
a. Section 5
b. Section 4
c. Section 3
d. Section 8
3. As per new Industrial Policy, to provide access to capital markets by allowing _________
percent equity participation by other industrial undertakings.
a. 18
b. 24
c. 34
d. 100
4. Consumerism refers to movement by

a. Government
b. Society
c. Producers
d. Consumers
5. Which right provides due compassion to consumers?

a. Right to be informed
b. Right to seek redressal
c. Right to be heard
d. Right to choose
Answers
1 - d; 2 - c; 3 – b; 4 – d; 5 – b.
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6.11 SUGGESTED READING
Text Books:
Publishing House],
Hall.
Reference Books:
 Dr. Durga Surekha, 2010, Consumers‟ Awareness about Rights and Grievance
Redressal, Abhijeet Publications.
 Akanksha Rana, Consumer Claims, Eastern Book Company

Open Text Source:
p. 2049. ISBN 9788180385926.
Limited. pp. 48–.ISBN 978-81-7534-840-0.
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UNIT-7 LEGAL ENVIRONMENT-II
Structure
7.1 Introduction
7.2 The Environment Protection Act,1986
7.2.1 The Statement of the ACT:
7.2.2 Definitions.
7.3 Power of Central Government
7.4 Prevention, Control and Abatement of Environmental Pollution:
7.5 The National Environment Appellate Authority
7.5.1 Statement
7.5.2 Definitions
7.5.3 Establishment of Authority
7.5.4 Procedure and powers of Authority.
7.6 Summary
7.7 Keywords
7.10 Suggested readings
After Studying this Unit, Students will able to
 Analyze the significance of the Environment Protection Act, 1980.

 Highlight the framework and limitations set by Power of Central Government
 Compare the Prevention, Control and Abatement of Environmental Pollution and
penalties in case of default.
 Outline the function of National Environment Appellate Authority
7.1 INTRODUCTION
The Environment Protection Act was enacted in 1986 with an objective of safeguarding the
flora and fauna, the natural resource of the country. This is one of the broad legislations in
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India that helps to protect the exploitation and malpractices against environment and
encourages the initiatives for improvement of the environment. Article 48A of the
Constitution also highlights and guides the state to undertake all necessary actions to preserve
the wildlife and protect the forests. Article 51 of the constitution also highlights the important
duty of citizen is to protect the Environment and safeguard the forest heritage.
7.2 THE ENVIRONMENT PROTECTION ACT,1986
7.2.1 The Statement of the ACT:

THE ENVIRONMENT (PROTECTION) ACT, 1986 ACT NO. 29 OF 1986 [23rd May,
1986.]
An Act to provide for the protection and improvement of environment and for matters
connected therewith.
WHEREAS decisions were taken at the United Nations Conference on the Human
Environment held at Stockholm in June, 1972, in which India participated, to take appropriate
steps for the protection and improvement of human environment;
AND WHEREAS it is considered necessary further to implement the decisions aforesaid in
so far as they relate to the protection and improvement of environment and the prevention of
hazards to human beings, other living creatures, plants and property;
BE it enacted by Parliament in the Thirty-seventh Year of the Republic of India as follows:—

Short title, extent and commencement
.—(1) This Act may be called the Environment (Protection) Act, 1986.
(2) It extends to the whole of India.
(3) It shall come into force on such date1 as the Central Government may, by notification in
the Official Gazette, appoint and different dates may be appointed for different provisions of
this Act and for different areas.
7.2.2 Definitions.—
In this Act, unless the context otherwise requires,—

(a) “environment” includes water, air and land and the inter-relationship which exists among
and between water, air and land, and human beings, other living creatures, plants, micro-
organism and property;
(b) “environmental pollutant” means any solid, liquid or gaseous substance present in such
concentration as may be, or tend to be, injurious to environment;
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(c) “environmental pollution” means the presence in the environment of any environmental
pollutant;
(d) “handling”, in relation to any substance, means the manufacture, processing, treatment,
package, storage, transportation, use, collection, destruction, conversion, offering for sale,
transfer or the like of such substance;
(e) “hazardous substance” means any substance or preparation which, by reason of its
chemical or physico-chemical properties or handling, is liable to cause harm to human
beings, other living creatures, plants, micro-organism, property or the environment;
(f) “occupier”, in relation to any factory or premises, means a person who has control over
the affairs of the factory or the premises and includes, in relation to any substance, the person
in possession of the substance;
(g) “prescribed” means prescribed by rules made under this Act.
7.3 SCOPE AND OBJECTIVES
Scope: The Act is applicable to whole of India including Jammu and Kashmir. The Act came
into force on 19th November, 1986
Objectives:
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7.4 POWER OF CENTRAL GOVERNMENT
(1) Subject to the provisions of this Act, the Central Government shall have the power to take
all such measures as it deems necessary or expedient for the purpose of protecting and
improving the quality of the environment and preventing, controlling and abating
environmental pollution.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1),
such measures may include measures with respect to all or any of the following matters,
namely:—
(i) co-ordination of actions by the State Governments, officers and other authorities—
(a) under this Act, or the rules made thereunder; or
(b) under any other law for the time being in force which is relatable to the objects of this
Act;
(ii) planning and execution of a nation-wide programme for the prevention, control and
abatement of environmental pollution;
(iii) laying down standards for the quality of environment in its various aspects;
(iv) laying down standards for emission or discharge of environmental pollutants from
various sources whatsoever: Provided that different standards for emission or discharge may
be laid down under this clause from different sources having regard to the quality or
composition of the emission or discharge of environmental pollutants from such sources;
(v) restriction of areas in which any industries, operations or processes or class of industries,
operations or processes shall not be carried out or shall be carried out subject to certain
safeguards;
(vi) laying down procedures and safeguards for the prevention of accidents which may cause
environmental pollution and remedial measures for such accidents;
(vii) laying down procedures and safeguards for the handling of hazardous substances;
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(viii) examination of such manufacturing processes, materials and substances as are likely to
cause environmental pollution;
(ix) carrying out and sponsoring investigations and research relating to problems of
environmental pollution;
(x) inspection of any premises, plant, equipment, machinery, manufacturing or other
processes, materials or substances and giving, by order, of such directions to such authorities,
officers or persons as it may consider necessary to take steps for the prevention, control and
abatement of environmental pollution;
(xi) establishment or recognition of environmental laboratories and institutes to carry out the
functions entrusted to such environmental laboratories and institutes under this Act;
(xii) collection and dissemination of information in respect of matters relating to
environmental pollution; (xiii) preparation of manuals, codes or guides relating to the
prevention, control and abatement of environmental pollution;
(xiv) such other matters as the Central Government deems necessary or expedient for the
purpose of securing the effective implementation of the provisions of this Act.
(3) The Central Government may, if it considers it necessary or expedient so to do for the
purposes of this Act, by order, published in the Official Gazette, constitute an authority or
authorities by such name or names as may be specified in the order for the purpose of
exercising and performing such of the powers and functions (including the power to issue
directions under section 5) of the Central Government under this Act and for taking measures
with respect to such of the matters referred to in sub-section (2) as may be mentioned in the
order and subject to the supervision and control of the Central Government and the provisions
of such order, such authority or authorities may exercise the powers or perform the functions
or take the measures so mentioned in the order as if such authority or authorities had been
empowered by this Act to exercise those powers or perform those functions or take such
measures.
Rules to regulate environmental pollution.

— (1) The Central Government may, by notification in the Official Gazette, make rules in
respect of all or any of the matters referred to in section. (2) In particular, and without
prejudice to the generality of the foregoing power, such rules may provide for all or any of
the following matters, namely:—
(a) the standards of quality of air, water or soil for various areas and purposes;
(b) the maximum allowable limits of concentration of various environmental pollutants
(including noise) for different areas;
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(c) the procedures and safeguards for the handling of hazardous substances;
(d) the prohibition and restrictions on the handling of hazardous substances in different areas;
(e) the prohibition and restrictions on the location of industries and the carrying on of
processes and operations in different areas;
(f) the procedures and safeguards for the prevention of accidents which may cause
environmental pollution and for providing for remedial measures for such accidents.
7.4 PREVENTION, CONTROL AND ABATEMENT OF

ENVIRONMENTAL POLLUTION:
Persons carrying on industry, operation, etc., not to allow emission or discharge of

environmental pollutants in excess of the standards.—No person carrying on any industry,
operation or process shall discharge or emit or permit to be discharged or emitted any
environmental pollutant in excess or such standards as may be prescribed.
Persons handling hazardous substances to comply with procedural safeguards.—No person
shall handle or cause to be handled any hazardous substance except in accordance with such
procedure and after complying with such safeguards as may be prescribed.
Furnishing of information to authorities and agencies in certain cases.—(1) Where the
discharge of any environmental pollutant in excess of the prescribed standards occurs or is
apprehended to occur due to any accident or other unforeseen act or event, the person
responsible for such discharge and the person in charge of the place at which such discharge
occurs or is apprehended to occur shall be bound to prevent or mitigate the environmental
pollution caused as a result of such discharge and shall also forthwith— (a) intimate the fact
of such occurrence or apprehension of such occurrence; and (b) be bound, if called upon, to
render all assistance, to such authorities or agencies as may be prescribed. (2) On receipt of
information with respect to the fact or apprehension of any occurrence of the nature referred
to in sub-section (1), whether through intimation under that sub-section or otherwise, the
authorities or agencies referred to in sub-section (1) shall, as early as practicable, cause such
remedial measures to be taken as are necessary to prevent or mitigate the environmental
pollution. (3) The expenses, if any, incurred by any authority or agency with respect to the
remedial measures referred to in sub-section (2), together with interest (at such reasonable
rate as the Government may, by order, fix) from the date when a demand for the expenses is
made until it is paid, may be recovered by such authority or agency from the person
concerned as arrears of land revenue or of public demand.
Powers of entry and inspection.—(1) Subject to the provisions of this section, any person
empowered by the Central Government in this behalf shall have a right to enter, at all
reasonable times with such assistance as he considers necessary, any place— (a) for the
purpose of performing any of the functions of the Central Government entrusted to him; (b)
for the purpose of determining whether and if so in what manner, any such functions are to be
173
performed or whether any provisions of this Act or the rules made thereunder or any notice,
order, direction or authorisation served, made, given or granted under this Act is being or has
been complied with; (c) for the purpose of examining and testing any equipment, industrial
plant, record, register, document or any other material object or for conducting a search of
any building in which he has reason to believe that an offence under this Act or the rules
made thereunder has been or is being or is about to be committed and for seizing any such
equipment, industrial plant, record, register, document or other material object if he has
reasons to believe that it may furnish evidence of the commission of an offence punishable
under this Act or the rules made thereunder or that such seizure is necessary to prevent or
mitigate environmental pollution. (2) Every person carrying on any industry, operation or
process or handling any hazardous substance shall be bound to render all assistance to the
person empowered by the Central Government under sub-section (1) for carrying out the
functions under that sub-section and if he fails to do so without any reasonable cause or
excuse, he shall be guilty of an offence under this Act. (3) If any person wilfully delays or
obstructs any person empowered by the Central Government under sub-section (1) in the
performance of his functions, he shall be guilty of an offence under this Act. (4) the
provisions of the Code of Criminal Procedure, 1973 (2 of 1974), or, in relation to the State of
Jammu and Kashmir, or any area in which that Code is not in force, the provisions of any
corresponding law in force in that State or area shall, so far as may be, apply to any search or
seizure under this section as they apply to any search or seizure made under the authority of a
warrant issued under section 94 of the said Code or, as the case may be, under the
corresponding provision of the said law.
Power to take sample and procedure to be followed in connection therewith.—(1) The
Central Government or any officer empowered by it in this behalf, shall have power to take,
for the purpose of analysis, samples of air, water, soil or other substance from any factory,
premises or other place in such manner as may be prescribed.
(2) The result of any analysis of a sample taken under sub-section (1) shall not be admissible
in evidence in any legal proceeding unless the provisions of sub-sections (3) and (4) are
complied with. (3) Subject to the provisions of sub-section (4), the person taking the sample
under sub-section (1) shall,— (a) serve on the occupier or his agent or person in charge of the
place, a notice, then and there, in such form as may be prescribed, of his intention to have it
so analysed; (b) in the presence of the occupier or his agent or person, collect a sample for
analysis; (c) cause the sample to be placed in a container or containers which shall be marked
and sealed and shall also be signed both by the person taking the sample and the occupier or
his agent or person; (d) send without delay, the container or the containers to the laboratory
established or recognised by the Central Government under section 12. (4) When a sample is
taken for analysis under sub-section (1) and the person taking the sample serves on the
occupier or his agent or person, a notice under clause (a) of sub-section (3), then,— (a) in a
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case where the occupier, his agent or person wilfully absents himself, the person taking the
sample shall collect the sample for analysis to be placed in a container or containers which
shall be marked and sealed and shall also be signed by the person taking the sample, and (b)
in a case where the occupier or his agent or person present at the time of taking the sample
refuses to sign the marked and sealed container or containers of the sample as required under
clause (c) of sub-section (3), the marked and sealed container or containers shall be signed by
the person taking the samples, and the container or containers shall be sent without delay by
the person taking the sample for analysis to the laboratory established or recognised under
section 12 and such person shall inform the Government Analyst appointed or recognised
under section 13 in writing, about the wilful absence of the occupier or his agent or person,
or, as the case may be, his refusal to sign the container or containers
Penalty for contravention of the provisions of the Act and the rules, orders and
directions.—
(1) Whoever fails to comply with or contravenes any of the provisions of this Act, or the rules
made or orders or directions issued thereunder, shall, in respect of each such failure or
contravention, be punishable with imprisonment for a term which may extend to five years or
with fine which may extend to one lakh rupees, or with both, and in case the failure or
contravention continues, with additional fine which may extend to five thousand rupees for
every day during which such failure or contravention continues after the conviction for the
first such failure or contravention. (2) If the failure or contravention referred to in sub-section
(1) continues beyond a period of one year after the date of conviction, the offender shall be
punishable with imprisonment for a term which may extend to seven years.
7.5 THE NATIONAL ENVIRONMENT APPELLATE AUTHORITY
7.5.1 Statement:
THE NATIONAL ENVIRONMENT APPELLATE AUTHORITY ACT, 1997 ACT NO. 22
OF 1997 [26th March, 1997.] An Act to provide for the establishment of a National
Environment Appellate Authority to hear appeals with respect to restriction of areas in which
any industries, operations or processes or class of industries, operations or processes shall not
be carried out or shall be carried out subject to certain safeguards under the Environment
(Protection) Act, 1986 and for matters connected therewith or incidental thereto. BE it
enacted by Parliament in the Forty-eighth Year of the Republic of India as follows:—
1. Short title and commencement.—(1) This Act may be called the National Environment
Appellate Authority Act, 1997. (2) It shall be deemed to have come into force on the 30th day
of January, 1997. 2.
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7.5.2 Definitions.
In this Act, unless the context otherwise requires, —
(a) “Act” means the Environment (Protection) Act, 1986 (29 of 1986);
(b) “Authority” means the National Environment Appellate Authority established under sub-
section (1) of section 3;
(c) “Chairperson” means the Chairperson of the Authority;
(d) “Member” means a Member of the Authority;
(e) “prescribed” means prescribed by rules made under this Act;
(f) “Vice-Chairperson” means the Vice-Chairperson of the Authority.
7.5.3 Establishment of Authority
3. Establishment of Authority.—(1) The Central Government shall, by notification in the
Official Gazette, establish a body to be known as the National Environment Appellate
Authority to exercise the powers conferred upon, and to perform the functions assigned to, it
under this Act. (2) The head office of the Authority shall be at Delhi. 4. Composition of
Authority.—The Authority shall consist of a Chairperson, a Vice-Chairperson and such other
Members not exceeding three, as the Central Government may deem fit. 5. Qualifications for
appointment as Chairperson, Vice-Chairperson or Member.—(1) A person shall not be
qualified for appointment as a Chairperson unless he has been— (a) a Judge of the Supreme
Court; or (b) the Chief Justice of a High Court. (2) A person shall not be qualified for
appointment as a Vice-Chairperson unless he has— (a) for at least two years held the post of
a Secretary to the Government of India or any other post under the Central or State
Government carrying a scale of pay which is not less than that of a Secretary to the
Government of India; and (b) expertise or experience in administrative, legal, managerial or
technical aspects of problems relating to environment.
(3) A person shall not be qualified for appointment as a Member unless he has professional
knowledge or practical experience in the areas pertaining to conservation, environmental
management, law or planning and development. (4) The Chairperson, the Vice-Chairperson
and the Members shall be appointed by the President. 6. Vice-Chairperson to act as
Chairperson or to discharge his functions in certain circumstances.—(1) In the event of the
occurrence of any vacancy in the office of the Chairperson by reason of his death, resignation
or otherwise, the Vice-Chairperson shall act as the Chairperson until the date on which a new
Chairperson appointed in accordance with the provisions of this Act to fill such vacancy
enters upon his office. (2) When the Chairperson is unable to discharge his functions owing
to absence, illness or any other cause, the Vice-Chairperson or, as the case may be, such one
of the Member as the Central Government may, by notification, authorise in this behalf, shall
discharge the functions of the Chairperson until the date on which the Chairperson resumes
his duties. 7. Term of office.—The Chairperson, the Vice-Chairperson or a Member shall
176
hold office as such for a term of three years from the date on which he enters upon his office,
but shall be eligible for re-appointment for another term of three years: Provided that no
Chairperson, Vice-Chairperson or Member shall hold office as such after he has attained,—
(a) in the case of the Chairperson, the age of seventy years; and (b) in the case of the Vice-
Chairperson or a Member, the age of sixty-five years.
7.5.4 Procedure and powers of Authority.—
(1) The Authority shall not be bound by the procedure laid down in the Code of Civil
Procedure, 1908 (5 of 1908) but shall be guided by the principles of natural justice and
subject to the other provisions of this Act and of any rules made by the Central Government,
the Authority shall have power to regulate its own procedure including the fixing of places
and times of its inquiry and deciding whether to sit in public or in private. (2) The Authority
shall have, for the purposes of discharging its functions under this Act, the same powers as
are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a
suit, in respect of the following matters, namely:— (a) summoning and enforcing the
attendance of any person and examining him on oath; (b) requiring the discovery and
production of documents; (c) receiving evidence on affidavits; (d) subject to the provisions of
sections 123 and 124 of the Indian Evidence Act, 1872 (1 of 1872), requisitioning any public
record or document or copy of such record or document from any office; (e) issuing
commissions for the examination of witnesses or documents; (f) reviewing its decisions; (g)
dismissing a representation for default or deciding it, ex parte; (h) setting aside any order of
dismissal of any representation for default or any order passed by it ex parte; and (i) any other
matter which is required to be, or may be, prescribed by the Central Government.
CASE LAW: Ms. Betty C. Alvares v. The State of Goa and Ors.; National Green
Tribunal
Judgment- A complaint regarding various instances of illegal construction in the Coastal

Regulation Zone of Candolim, Goa was made by a personal of foreign nationality. Her name
was Betta Alvarez. The first objection was that Betty Alvarez had no locus standi in the matter
because she was not an Indian citizen and thus legally incompetent to file the petition under
Article 21 because as a non-citizen, she has not been guaranteed any right under the Indian
Constitution. The second objection was that the matter was barred by the law of limitation and
should be dismissed. The case was initiated in the Honourable High Court of Bombay Bench
at Goa in the form of a PIL but by an order dated Oct 23, 2012, the Writ Petition was
transferred to the National Green Tribunal.
Therefore, The Tribunal in bold terms stated that even assuming that the Applicant – Betty
Alvarez is not a citizen of India, the Application is still maintainable as she had filed several
other writ petitions and contempt applications before she filed the present application, in
which she had asserted that the Respondents had raised some illegal constructions by way of
which they were encroaching the sea beaches along with governmental properties. The Court
laid down in very bold terms that once it is found that any person can file a proceeding related
to the environmental dispute, Ms. Betty’s application is maintainable without regards to the
question of her nationality.
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[Source: https://legaldesire.com/]
7.6 SUMMARY
Environment- the need and necessity of the mankind needs serious interventions
and measures against exploitation. The Environmental Protection Act, 1986
highlights the importance of conservation of the environment and encourages the
participation of business to implement such measures that reduces the harmful
effect of business operation on the environment around.
The Act talks about recognizing the following factors:
 Administrating and monitoring the impact of business on environment
and following all the relevant provisions that ensures the maintenance of
environment balance.
 Efforts by every individual is eligible to create changes in environment
because of any activity like economic or other.
 Adaptive, responsive, reasonable, timely and effective, these are some of
the qualities which must be present in administrative, management and
administrative procedures.
The main reason behind the Act is to improve the quality of environment which is
deteriorating and that is a big threat for all biotic (living) and abiotic (non-living)
component of the environment.
The Environment Protection Act is divided into four chapters and 26 sections.In
Section1, the short title, the extension of the act and the commencement dates are
mentioned. It is mentioned that the Act is applicable all over India. In section 2,
definitions of various terms mentioned in the Act is explained. Those terms are
 Environment
 Environmental pollutant
 Environmental pollution
 Handling
 Hazardous substance
 Occupier
 Prescribed
The Scope, Objective, Powers of Central Government, Rules to regulate environmental
pollution and Penalty for contravention of the provisions and the rules, orders and directions
are also covered by the Act and role ofthe National Environment appellate authority is
included. All this aspect of Act is very important for Business to design the operations in
such a way to ensure safety of environmentand avoid the penalty and fines.
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7.7 KEYWORDS
 The United Nations (UN) - is an intergovernmental organization that aims to

maintain international peace and security, develop friendly relations among nations,
achieve international cooperation, and be a centre for harmonizing the actions
of nations.
 Enact - make (a bill or other proposal) law
 Notification - the act of telling someone officially about something, or a document,
etc.
 Intimation- an indication or hint
 Furnish - be a source of; provide.
1. Why it is important to establish or recognize the environmental laboratories?

___________________________________________________________________________
___________________________________________________________________________
2. Highlight the important rules Central Government can make as per the provision of the
Environment Protection Act.
___________________________________________________________________________
___________________________________________________________________________
A. Descriptive Questions:
Short Questions
1. Explain the statement of Environment Protection Act,1986
2. Define the following terms:
a. Environment Pollution
b. Hazardous substance
c. Occupier
3. Which rules are being made by the Central Government to prevent the environment
4. Discuss the hierarchy of National Appellate Authority
5. What is the penalty for contravention of the provisions of the Act and the rules, orders
and directions?
Long Questions
1. Illustrate the significance of Environment Protection Act,1986 for business success
2. What are the important objectives of Environment Protection Act,1986?
3. Discuss the powers of the Central Government.
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4. Explain the role and significance of National Appellate Authority
5. Elaborate Prevention, Control and Abatement of Environmental Pollution.

1. The Act is based on the United Nations Conference on the Human Environment held at
Stockholm in June, ___________, in which India participated, to take appropriate steps for
the protection and improvement of human environment;
a. 1974
b. 1971
c. 1972
d. 1973
2. Under the Environment Protection act, 1986 central government has power to lay down
standards for emission or discharge of __________________from various sources
whatsoever.
a. environmental pollutants
b. water
c. smoke
d. plastic waste
3. The Central Government may, by notification in the_____________, make rules in respect

of all or any of the matters referred to in section
a. District Court
b. Official Gazette
c. Parliament
d. Legislative Assembly of the State
4. Persons handling hazardous substances to comply with__________

a. training
b. operational manual
c. procedural safeguards
d. Manager
5. In which of the following situation it is important to furnish the information to authorities

and agencies
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a. The expenses, if any, incurred by any authority or agency with respect to the remedial
measures referred to in sub-section.
b. for the purpose of examining and testing any equipment, industrial plant, record, register,
document or any other material object
c. person shall handle or cause to be handled any hazardous substance
d. to take sample
Answers
1 - c; 2 - a; 3 – b; 4 – c; 5 – a.
Text Books:
Publishing House],
Hall.
Reference Books:
 Hemant Pathak, A Hand Book of Environmental Protection Act, CreateSpace

Independent Pub
Open Text Source:
p. 2049. ISBN 9788180385926.
Limited. pp. 48–.ISBN 978-81-7534-840-0.
 http://www.legalserviceindia.com/
 https://lawsisto.com/
181
182
UNIT 8: FINANCIAL ENVIRONMENT-I
Structure
8.1 Introduction
8.2 Financial System
8.2.1 Meaning
8.2.2 Constituents
8.3 Financial Market
8.3.1 Meaning
8.3.2 Functions
8.3.3 Classifications
8.4 MONEY MARKET
8.4.1 Meaning
8.4.2 Features
8.4.3 Characteristics of Indian Money Market:
8.4.4 Instruments
8.5 Capital Market
8.5.1 Meaning
8.5.2 Importance
8.5.3 Structure of Indian Capital Market:
8.6 Commercial Banks
8.6.1 Concept and Types
8.6.2 Functions
8.7 Financial Institution:
8.7.1 Banking Institutions
8.7.2 Non-Banking Institution:
8.8 Summary
8.9 Keywords
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After studying this Unit, students will be able to
 Explain the meaning and constituent of Financial System, Financial Institution and its
types
 Compare the functions of Financial Market, Money Market and Capital Market
including their concept, structure and instruments involved.
 Outline the significance of Government Securities and Industrial Securities Market
 Describe the role of Development Financial Institutions, Financial Intermediaries and
Regulatory authorities of Indian Financial System.
 Analyze the Financial Sector Reforms
8.1 INTRODUCTION
The well-structured financial system is the base of economic growth and development of any
country because it helps in the formation of a capital. Financial System is a set of institutional
arrangements which include all conditions and mechanisms governing the production,
distribution, exchange and holding of financial assets or instruments of all kinds and the
organisations as well as the manner of operations of financial markets and institutions of all
descriptions. Its main purpose is to mobilise the financial surpluses from surplus units and
transferred it to the deficit spenders.
The financial system is basically characterised by the presence of integrated, organized and
regulated financial markets and institutions that fulfil the short-term and long-term financial
needs of both the individual and corporates. The financial system helps production, capital
accumulation, and growth by (i) encouraging savings, (ii) mobilising them, and (iii)
allocating them among alternative uses and users. Each of these functions is important and
the efficiency of a given financial system depends on how well it performs each of these
functions.
8.2 FINANCIAL SYSTEM:
8.2.1 Meaning
The financial system is possibly the most important institutional and functional vehicle for
economic transformation and development. A financial system consists of institutional units
and markets that interact, typically in a complex manner, for the purpose of mobilizing funds
for investment and providing facilities, including payment systems, for the financing of
commercial activity. The role of financial institutions within the system is primarily to
intermediate between those that provide funds and those that need funds, and typically
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involves transforming and managing risk.Financial markets provide a forum within which
financial claims can be traded under established rules of conduct and can facilitate the
management and transformation of risk.
According to Christy, the objective of the financial system is to “supply funds to various
sectors and activities of the economy in ways that promote the fullest possible utilization of
resources without the destabilizing consequence of price level changes or unnecessary
interference with individual desires.”
According to Robinson, the primary function of the system is “to provide a link between
savings and investment for the creation of new wealth and to permit portfolio adjustment in
the composition of the existing wealth.
Thus, Finance is the access with which the financial system performs its functions that sets
the pace for the achievement of broader national objectives.
Features of financial system
The features of a financial system are as follows
1. Financial system provides an ideal linkage between depositors and investors, thus
encouraging both savings and investments.
2. Financial system promotes efficient allocation of financial resources for socially
desirable and economically productive purposes.
3. Financial system facilitates expansion of financial markets over space and time.
4. Financial system influences both the quality and the pace of economic development.
8.2.2 Constituents of Financial System
The financial system consists of four segments or components. These are: financial
institutions, financial markets, financial instruments and financial services.
1. Financial institutions:
Financial institutions are intermediaries that mobilize savings & facilitate the allocation of
funds in an efficient manner. They can be classified as banking & non-banking financial
institutions. Banking institutions are creators of credit while non-banking financial
institutions are purveyors of credit. While the liabilities of banks are part of the money
supply, this may not be true for non-banking financial institutions. Financial institutions can
also be classified as term-finance institutions such as the industrial development bank of
India (IDBI), industrial credit & Investment Corporation of India (ICICI), industrial financial
corporation of India (IFCI), small industries development bank of India (SIDBI) & industrial
investment bank of India (IIBI). In India, non-banking financial institutions, namely, the
developmental financial institutions (DFIs) & non-banking financial companies (NBFCs) as
well as housing finance companies (HFCs) are the major institutional purveyors of credit.
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2. Financial markets:
Financial markets are a mechanism that enables participants to deal in financial claims. The
markets also provide a facility in which their demands & requirements interact to set a price
for such claims. Money market and Capital market is the main organized financial markets in
India. The money market is a market for short-term securities and it deals with financial
assets & securities which have a maturity period of up to one year. While the capital market
is a market for long term securities that have a maturity period of one year or more. The
Reserve Bank of India regulates the money market and Securities Exchange Board of India
(SEBI) regulates capital market.
3. Financial Instruments:
Financial instruments refer to those documents which represents financial claims on assets. A
financial asset refers to a claim to the repayment of certain sum of money at the end of
specified period together with interest or dividend. Examples: bills of exchange, treasury
bills, government bonds, promissory notes, deposit receipts, shares, debentures etc. Financial
instruments can also be called as financial securities and classified into:
i. Primary or direct securities
ii. Secondary or indirect securities.
4. Financial Services:
Financial intermediaries provide key financial services such as merchant banking, leasing
hire purchases, credit-rating, and so on. Financial services rendered by the financial
intermediaries’ bridge the gap between lack of knowledge on the part of investors and
increasing sophistication of financial instruments and markets. These financial services are
vital for creation of firms, industrial expansion, and economic growth.
Before investors lend money, they need to be reassured that it is safe to exchange securities
for funds. This reassurance is provided by the financial regulator, who regulates the operation
of the market, and intermediaries to protect the investors’ interests.
[Reference: www.imf.org and http://mbaseminars.blogspot.in/]
8.3 FINANCIAL MARKETS:

8.3.1meaning:
In economics, typically, the term market means the aggregate of possible buyers and sellers
of a certain good or service and the transactions that takes place between them.
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A financial market is a market in which people and entities can trade financial securities,
commodities and other fungible items at low transaction costs and at prices that reflect supply
and demand. Securities include stocks and bonds, and commodities include precious metals
or agricultural goods. The term "financial market" is used for exchanges and organizations
that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange
like it may be from a physical location (like the NYSE, BSE, NSE) or an electronic system
(like NASDAQ). Much trading of stocks takes place on an exchange generally and also to
certain extent by corporate actions (mergers, spinoffs) which are outside an exchange. For
example when any two companies or people, for whatever reason, may agree to sell stock
from the one to the other without using an exchange is also termed as a trading. Trading
includes products like currencies and bonds.
The important role of a Financial markets is to attract the funds from investors or savers and
channel them to corporations so that they can finance their operations and achieve the desired
goals. Financial markets help the borrowers to find the lenders which is difficult on their part
and intermediaries like Banks, Investment Banks, and Boutique Investment Banks can help in
this process. Banks are popular option for lending money in the form of loans and mortgages.
Money markets allow firms to borrow funds on a short term basis, while capital markets
allow corporations to gain long-term funding support (known as maturity transformation). A
good example of a financial market is a stock exchange. A company can raise money by
selling shares to the investors or buying and selling its existing shares.
The following table illustrates where financial markets fit in the relationship between lenders
and borrowers:
Relationship between lenders and borrowers

Lenders Financial Financial Markets Borrowers
Intermediaries
 Individuals  Banks o Interbank o Individuals

 Companies  Insurance o Stock o Companies
Companies Exchange
8.3.2 Functions
A financial market helps the economy in the following manner.
 To mobilize the savings: It helps to obtain the funds from the those entities that are
interested to save like household individuals, business firms, public sector units, central
government, state governments etc.
 Investment Option: It helps to arrange the investment option for the collected funds.
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 National Growth: It helps to ensure unfettered flow of surplus funds to deficit units thus
that helps in the development of the country which contributes towards nation’s growth.
The different components of financial markets help to achieve an accelerated industrial
and economic growth of a country that contributes to raise the standard of living.
 Entrepreneurship growth: It encourages the growth of entrepreneurial ventures by
providing necessary financial resources.
 Intermediary Functions: The intermediary functions of a financial markets include the
following:
 Transfer of Resources: It facilitate the transfer of real economic resources from
lenders to ultimate borrowers.
 Increased income: It allows the lenders to earn interest or dividend on their surplus
invisible funds, which increase individual and the overall nation’s income.
 Productive usage: Financial markets allow the productive use of the funds
borrowed.
 Capital Formation: It provides a channel through which new savings flow to aid
capital formation of a country.
 Price determination: It helps to determine the price of the traded financial assets
through the buyers and sellers’ interactions. It provides a mechanism called price
discovery process which indicates a sign for allocation of the funds based on the
demand and supply.
 Sale Mechanism: It provides a mechanism for marketability and liquidity of a
financial asset.
 Information: The activities of the participants in the financial market result in the
generation and the consequent dissemination of information to the various segments
of the market which helps to reduce the cost of transaction of financial assets.
Financial Functions
 It promotes savings
 It promotes investment
 Provides the borrower with funds that help them to carry out their investment plans.
 Provides the lenders with earning assets which help them to earn wealth by deploying
the assets in production debentures.
 Provides liquidity in the market that facilitates trading of funds.
 It provides liquidity to commercial bank
 It facilitates credit creation
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 It facilitates balance economic growth
 It improves trading floors
8.3.3 Classification
The Indian financial market is classified into as follows:
Credit
Market
Money Market
Financial
Capital Market
Market
Indian
Foriegn Exchange Market
Debt Market
Derivatives
Fig 8.1: Classification of Indian Financial Market

CREDIT MARKET:
Indian credit market is developing predominant source of finance and firms or economic
entities depend largely on financial intermediaries for their financial requirements. One of the
important aspects of Credit market is its term structure i.e. it provides short-term, medium-
term and long-term credit. It is broadly categorised into institutional and non-institutional
market.
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The institutional source of credit market includes banks and non-banking financial
institutions and the non-institutional source includes money-lenders, indigenous bankers and
sellers of trade credit. While banks and non-banking financial companies (NBFCs) generally
caters to the short term funds requirements while Financial Institutions (FIs) caters mostly
medium and long term funds requirements.
CAPITAL MARKET: It is an organized market that refers to the facilities and institutional
arrangements which provides long term finance for businesses. It is categorized into three
groups viz.
 Industrial/ Corporate Securities Market: It is very sensitive and active financial

market. Corporate securities are equity and preference shares, debentures and bonds
of companies. It is further classified into primary and secondary market.
 Primary/New Issue Market is a market for new issue of securities, which are issued
to the public for the first time.
 Secondary/Stock Marketis a market for sale of secondary securities which facilitates
buying and selling of securities.
 Government Securities Market: It is also called as Gilt-Edged Securities Market
where government securities in the form of bonds and credit notes are traded that can
be of short term or long term. The buyers of such securities are Banks, Insurance
Companies, Provident Funds, RBI and individuals.
 Long Term Loans Market: It is divided into three categories as
 Term Loans Market: Banks and Financial Institutions provide term loans to
companies for a period of one year.
 Mortgages Market- It provides loans against securities of immovable assets like land
and buildings.
 Financial Guarantees Market: Financial institutions and banks provide financial
guarantees on behalf of their clients to the third parties.
MONEY MARKET:It is the market for short term funds i.e. for a period up to one year. The
money market is further classified into two categories i.e. Unorganized and Organized Money
Market.
Unorganized Market:It includes
 MoneyLenders: Who lends money to individuals at a high rate of interest.

 Indigenous Bankers: Who operate like money lenders and also accept deposits from
the public
 Chit Funds: Collects funds from members and provide loans to members and others.
Organized Market: It works as per the rules and regulations of the RBI. It consists of
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 Treasury Bills: To raise short term funds Government issues the treasury bills which
are purchased by Commercial Banks. Currently, Government issues 91 days and 364
days treasury bills.
 Commercial Paper (CP): It is issued by the companies who are listed on Stock
Exchanges and having tangible net worth of at least 4 crores. CP is issued at discount
value and repaid at face value. Its maturity period is from 7days to one year and they
are issued in the multiple of 5 lakhs.
 Certificate of Deposit (CD): CD’s are used by the Commercial Banks and Financial
Institutions to raise funds from the market. Its maturity period is from 7days to one
year which is issued at discount value (minimum of 25 lakhs) and repaid at face value.
 Call Money Market: A loan which is taken or given for a very short period, which is
for one day is called as Call Money Market. It involves lending and borrowing of
money on a daily basis and no security is required.
 Commercial Bill Market: It deals with the Bills of exchange. The drawer of the bill
can get the bills discounted with Commercial Banks who get these bills rediscounted
with Financial Institutions.
FOREIGN EXCHANGE MARKET: It comprises of customers, authorized dealers (ADs)

and The Reserve Bank. The Forex market has grown since 1990s as a result of the
implementation of a number of recommendations of three important committees which are -
High Level Committee on Balance of Payments (Chairman: Dr. C Rangarajan),
- The report of the Expert Group on Foreign Exchange Markets in India (Chairman Shri O P
Sodhani) and
- The committee on Capital Account Convertibility (Chairman Shri S.S. Tarapore)
Several measures have been introduced to develop the forex market after the unification of
exchange rates since March 1993 is as follows:
1. Banks have been given the freedom to fix net overnight position limits and gap limits
(whereas the limits are approved by the Reserve Bank formally), initiate trading
position in the overseas markets and determine the interest rates of NRI deposits.
2. Inter- banking borrowings have been exempted from statutory pre-emptions.
3. Banks have been permitted the use of derivative products for asset-liability
management
4. ADs have been allowed to borrow abroad to encourage the integration of overseas and
domestic money market.
5. Corporates are allowed to manage their foreign exchange exposure.
DERIVATIVE MARKET:
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The derivatives market is the financial market for derivatives, financial instrument like
futures contracts or options, which are derived from other forms of assets. Derivatives are
meant to facilitate the hedging of price risks of inventory holdings or a financial / commercial
transaction over a certain period. Derivatives serves as an instrument for risk management by
locking in asset prices, derivative products minimize the impact of fluctuations in asset prices
on the profitability and cash flow situation of risk-averse investors. It provides investors and
issuers with a wider array of tools for managing risks and raising capital, lowers the cost of
capital formation, improves the allocation of credit and shares risk in the global economy and
stimulates economic growth.
Derivatives have strengthened the important linkages between global market of trade and
finance, increasing market liquidity and efficiency, and have facilitated the flow of trade and
finance. India is one of the most successful developing countries in terms of a vibrant market
for exchange-traded derivatives. This reiterates the strengths of the modern development in
India’s securities markets, which are based on nationwide market access, anonymous
electronic trading, and a predominantly retail market. There is an increasing sense that the
equity derivatives market plays a major role in shaping price discovery. Recently, over the
counter (OTC) as well as exchange traded derivatives have been introduced, making an
important development in the financial markets in India. Forward contracts in the forex
market have also been liberalised.
DEBT MARKET:
The debt market in India consists of two categories—the government securities or the g-sec
markets comprising central government and state government securities, and the corporate
bond market. In order to finance its fiscal deficit, the government floats fixed income
instruments and borrows money by issuing g-sec that are sovereign securities issued by the
Reserve Bank of India (RBI) on behalf of the Government of India. The corporate bond
market (also known as the non- g-sec market) consists of financial institutions (FI) bonds,
public sector units (PSU) bonds, and corporate bonds/ debentures. The G-secs are the most
dominant category of debt markets and form a major part of the market in terms of
outstanding issues, market capitalization, and trading value. It sets a benchmark for the rest of
the market. The market for debt derivatives have not yet developed appreciably, although a
market for OTC derivatives in interest rate products exists.
[Reference: Business Environment Text and Cases –Francis
Cherunilam &www.nseindia.com]
8.4 MONEY MARKET:

8.4.1 Meaning:
A money market is a market for borrowing and lending of short-term funds. It deals in funds
and financial instruments having a maturity period of one day to one year.It refers to the
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whole networks of financial institutions dealing in short-term funds, which provides an outlet
to lenders and a source of supply for such funds to borrowers.In other words, it meets the
short-term requirements of the borrowers and provides liquidity of cash to the lenders.It is a
mechanism through which short-term funds are loaned or borrowed and through which a
large part of financial transactions of a particular country or of the world are cleared.
It is different from stock market. It is not a single market but a collection of markets for
several instruments like call money market, Commercial bill market etc. The Reserve Bank
of India is the most important constituent of Indian money market. Thus RBI describes
money market as “the centre for dealings, mainly of a short-term character, in monetary
assets, it meets the short-term requirements of borrowers and provides liquidity or cash to
lenders”. The Reserve Bank of India (RBI) plays a key role of regulator and controller of
money market. The intervention of RBI is varied – curbing crisis situations by reducing key
policy rates or curbing inflationary situations by rising key policy rates such as Repo,
Reverse Repo, CRR etc.
In money market transactions of large amount and high volume take place. It is dominated by
small number of large players. In money market the players are :-Government, RBI, DFHI
(Discount and finance House of India) Banks, Mutual Funds, Corporate Investors, Provident
Funds, PSUs (Public Sector Undertakings), NBFCs (Non-Banking Finance Companies) etc.
8.4.2 Features of Money Market:

The developed money market is a well organised market which has the following main
features:
1. A Central Bank:
A developed money market consists of a central bank as the most powerful authority in
monetary and banking matter at the top. It controls, regulates and guides the entire money
market and also provides liquidity because it is the lender of the last resort to the various
constituents of the money market.
2. Organised Banking System:
An organised and integrated banking system is the second feature of a developed money
market. In fact, it is the pivot around which the whole money market revolves. It is the
commercial banks which supply short-term loans, discount bills of exchange and act as a link
between the borrowers, brokers, discount houses and acceptance houses and the central bank
in the money market.
3. Specialised Sub-Markets:
A developed money market consists of a number of specialised sub-markets dealing in
various types of credit instruments. There is the Treasury bill market, call loan market, the
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bill market, the foreign exchange market, the collateral loan market and the acceptance
market. If there are large numbers of sub-markets are present then money market is termed
as developed one. Also, it is important that the various sub-markets should have a number of
dealers and it should be integrated with each other.
4. Existence of Large Near-Money Assets:
A developed money market has a large number of near-money assets of various types such a
securities, bonds, bills of exchange, promissory notes, treasury bills, etc.
5. Integrated Interest-Rate Structure:
An integrated interest-rate structure is another important characteristic of developed money
market. The interest rates prevailing in the various sub-markets are integrated to each other.
A change in the bank rate leads to proportional changes in the interest rate prevailing in the
sub-markets.
6. Adequate Financial Resources:
A developed money market has easy access to financial sources from both within and outside
the country. In fact, such a market attracts adequate funds from both sources, like the London
Money Market.
7. Remittance Facilities:
A developed money market provides cash and cheap remittance facilities for transferring
funds from one market to the other like The London Money Market provides such facilities.
8. Miscellaneous Factors:
A developed money market is also highly influenced by factors such as restrictions on
international transactions, political instability, crisis, boom, depression, war, etc.
[Reference: http://www.yourarticlelibrary.com/]
8.4.3 Characteristics of Indian Money Market:
1.Dichotomy Structure: Indian money market has a simultaneous existence of both the
organized money market as well as unorganized money markets. The organized money
market consists of RBI, all scheduled commercial banks and other recognized financial
institutions that is under the complete control of RBI. However, the unorganized money
market comprises of domestic money lenders, indigenous bankers, trader, Chit Funds, Nidhis,
etc.It is difficult for RBI to integrate the Organised and Unorganised Money Markets. Several
segments are loosely connected with each other
2.Seasonal Nature: The demand for money in Indian market is of a seasonal nature. India
being an agriculture predominant economy, the demand for money is generated from the
agricultural operations i.e. between October and April more agricultural activities takes place.
During this period there is high demand for money and money market suffers from Monetary
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Shortage resulting in high rate of interest. During slack season, rate of interest falls and as
there are plenty of funds available. RBI has taken steps to reduce the seasonal fluctuations,
but still the variations exist.
3. Variation in Interest Rates: In Indian money market, we have many levels of interest
rates. They differ in organized and unorganized segment. Also, it differs from bank to bank,
from period to period and even from borrower to borrower. Although wide differences have
been narrowed down, yet the existing differences do hamper the efficiency of money market.
4. Lack of Organized Bill Market:A bill market refers to a mechanism or a system where
bills of exchange are purchased and discounted by banks in India and it provides short term
funds to businessmen. Bill market is very essential for linking various credit agreements with
the RBI in an effective manner. In India, Treasury bill market exist but the commercial bill
market has not been fully developed. Through the RBI tried to introduce the Bill Market
Scheme (1952) and then New Bill Market Scheme in 1970 under which RBI rediscounts
genuine trade bills, still there is no properly organized bill market in India.
5.Absence of Integration: The money market of India consists of several segments which
are loosely connected to each other. Each part of the money market i.e., financial institution
such as the SBI and its subsidiaries, the foreign exchange banks, the co-operative banks and
indigenous banks – carry on a particular type of banking business or provide a specific type
of financial service i.e., acts as an independent entity. There is a lack of coordination among
different components of the money market. RBI has full control over the component of
organized sector but it cannot control the component of in the unorganized segment.
6. High Volatility in Call Money Market: The call money market is a market for very short
term money and is demanded at the call rate. Call money rate is the borrowing rate in the
market which is determined by the forces of demand and supply in the market. The demand
for call money or short-term funds originates from all types of banks-- nationalized, private
and foreign that acts as both either borrowers and lenders. In the market, the major portion of
funds is supplied by non-banking financial institutions or term-lending institutions such as
IDBI, LIC and GIC and Banks supply the balance amount of funds. This institutionsuffers
huge fluctuations and thus makes money market volatile.
7. Limited Instruments: The supply of various instruments such as the Treasury Bills,
Commercial Bills, Certificate of Deposits, Commercial Papers, etc. is very limited in Indian
money market. In order to encourage the savings and meet the varied requirements of
borrowers and lenders, it is necessary to develop numerous instruments.
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8.4.4 Instruments of Money Market:
INDIAN MONEY MARKET
Organised Un-Organised Submarkets

Banking Sector Banking Sector
Call Money Bill 360 days Certificates Commercial

Market Market Bill Market of Deposits Papers
Commercia Treasury
l Bills Bills (90
days)
Fig 8.2 Classification of Instruments of Money Market

Source: Business Environment Text and Cases –Francis Cherunilam
The money market in India comprises of following instruments:

Call/Notice Money Markets:The market for extremely short-period where funds are
transacted on overnight basis is referred as call money market. In this market the rate at
which funds are borrowed and lent is called the call money rate which is determined by the
demand and supply of short-term funds. In call money market the main participants are
commercial banks, co-operative banks and primary dealers that participate as borrowers and
lenders. As mostly banks participate in this market it is also called as Inter-Bank Money
Market. Under a notice, money market funds are transacted for 2 days and 14 days period.
The lender issues a notice to the borrower 2 to 3 days before the funds need to be paid. On
receipt of notice, borrowers have to repay the funds. This market acts as an indicator of
liquidity position of money market. RBI intervenes in call money market as there is close link
between the call money market and other segments of money market.
Discount and Finance House of India (DFHI), Non-banking financial institutions like LIC,
GIC, UTI, and NABARD etc. are allowed to participate in call money market as lenders. Call
money markets are located in cities like Mumbai, Kolkata, Chennai, Delhi etc. that are big
commercial centres for India.
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 Term Money Market: In India, term money market is not developed. Selected
financial institution like IDBI, ICICI, IFCI, IIBI, SIDBI, EXIM Bank, NABARD,
IDFC and NHB are permitted to borrow from the term money market for 3-6 months
maturity, within stipulated limits for each institution.
 Repos: Repo or repurchase option is a means of short-term borrowing, wherein banks

sell approved government securities to RBI and get funds in exchange. In other words, in a
repo transaction, RBI repurchases government securities from banks, depending on the level
of money supply it decides to maintain in the country's monetary system. Repo rate is the
discount rate at which banks borrow from RBI. Increase in repo rate will make bank
borrowings from RBI more expensive while reduction in repo rate will help banks to get
money at a cheaper rate.
Reverse repo rate is the rate at which RBI borrows money from banks that is the exact
opposite of repo. In a reverse repo transaction, banks purchase government securities form
RBI and lend money to the banking regulator to earn an interest. Thus, repo rate is always
higher than the reverse repo rate.
Commercial Paper: Commercial Paper is the short term unsecured promissory note issued
by corporates and financial institutions at a discounted value on face value and they are
actively traded in secondary market. They have fixed maturity period ranging from 1 day to
270 days. This main purpose of these instrument is to provide financing of accounts
receivables, inventories and meeting short term liabilities. The return on commercial papers is
higher as compared to T-Bills as the risk involved and security is higher.
Certificates of Deposit: Certificate of Deposit is like a promissory note issued by a bank in
form of a certificate entitling the bearer to receive interest. It is similar to bank term deposit
account. The certificate bears the maturity date, fixed rate of interest and the value. These
certificates are available in the tenure of 3 months to 5 years. The returns on certificate of
deposits are higher than T-Bills because as they carry higher level of risk.
 Commercial Bills Market:Commercial bills are short term, negotiable and self-
liquidating money market instruments with low risk. A bill of exchange is drawn by a
seller on the buyer to make payment within a certain period of time. Generally, the
maturity period is of three months. Commercial bill can be resold a number of times
during the usance period of bill. The commercial bills are purchased and discounted
by commercial banks and are rediscounted by financial institutions like EXIM banks,
SIDBI, IDBI etc.
In India, the commercial bill market is very much underdeveloped. RBI is trying to develop
this bill market and for that RBI have introduced an innovative instrument known as
“Derivative Usance Promissory Notes, to eliminate movement of papers and facilitate
multiple rediscounting.
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 Money Market Mutual Funds: Money market mutual funds offer a convenient
parking place for cash reserves when an investor is not quite ready to make an
investment or is anticipating a near-term cash outlay for a non-investment purpose. It
offers ultimate safety and liquidity which assures the investors that they will have an
expected sum of cash at the very moment when they need it. An investor is always
interested to transfer assets from one fund to another when it has basket of mutual
funds from a single fund company. Then, at the appropriate time, the investor may
exchange his or her money market mutual fund holdings for shares of the other funds
in the fund family. To benefit their clients, brokerage firms regularly use money
market mutual funds to provide cash management services. Putting a client's dormant
cash into money market mutual funds will earn the client an extra percentage point (or
two) in annual returns above those earned by other possible investments.
 Treasury Bills: They are promissory notes issued by the Central Government to raise
short term funds to bridge mismatches between receipts and expenditures of short
term. The RBI who issues the Treasury Bills on behalf of the government does not
purchase them before maturity but investors can sell them in the secondary market
through the DFHI or get it rediscounted. They are zero-risk instruments, and hence
returns are not that attractive. T-Bills are circulated by both primary as well as the
secondary markets. They come with the maturities of 3-month, 6-month and 1-year.
The Central Government issues T-Bills at a price less than their face value and the difference
between the buy price and the maturity value is the interest earned by the buyer of the
instrument. The buy value of the T-Bill is determined by the bidding process through
auctions. At present, the Government of India issues three types of treasury bills through
auctions viz. 91-day, 182-day and 364-day.
 Banker's Acceptance: Banker's Acceptance is like a short term investment plan

created by non-financial firm, backed by a guarantee from the bank. It's like a bill of
exchange stating a buyer's promise to pay to the seller a certain specified amount at a
certain date whereas the bank guarantees that the buyer will pay the seller at a future
date. Firm with strong credit rating can draw such bill. These securities come with the
maturities between 30 and 180 days and the most common term for these instruments
is 90 days. Companies use these negotiable time drafts to finance imports, exports and
other trade.
8.5 CAPITAL MARKET
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The Capital market is a market for financial investments which has long or indefinite
maturity that are direct or indirect claims to capital. It comprises of complex institutions and
mechanisms through which intermediate term funds and long-term funds are pooled and
made available to the borrowers and it is also wider than the Securities Market. It include the
process by which securities already outstanding are transferred and embraces all forms of
lending and borrowing, whether or not evidenced by the creation of a negotiable financial
instrument
8.5.1 Meaning
A capital market is one in which individuals and institutions trade financial securities i.e. i.e.
long term debt instruments. It channels the money provided by savers and depository
institutions (banks, credit unions, insurance companies, etc.) to borrowers and investees
through a variety of financial instruments (bonds, notes, shares) called securities. In order to
raise funds, organizations and institutions in the public and private sectors also often sell
securities through the capital market. It comprises of financial institutions like IDBI, UTI,
LIC, etc. that play the role of lenders and Business units, corporates are the borrowers. Thus,
this type of market is composed of both the primary and secondary markets.
Any government or corporation requires capital (funds) to finance its operations and to
engage in its own long-term investments. For example, a company may issue an IPO (Initial
Public Offering) while government may issue a bond in order to conduct a new or expand an
existing activity.
8.5.2 Importance
Capital market is very important for capital formation which is necessary for a speedy
economic development. The importance of capital market is as follows:
1.Mobilization of Savings and Acceleration of Capital Formation:-
In developing countries like India the importance of capital market is self-evident. In this
market, various types of securities help to mobilize savings from various sectors of
population. It activates the ideal monetary resources and put them in the productive channel
of economy. It offers twin feature of reasonable return and liquidity in stock exchange that
are definite incentives for those who wants to invest in securities. This mechanism accelerates
the capital formation in the country.
2. Helps to Raise the Long - Term Capital:-
The existence of a stock exchange enables companies to raise permanent capital. But, the
investors cannot commit their funds for a permanent period, so the stock exchange offers an
opportunity to investors to buy or sell their securities. Also, companies requires funds
permanently that remain unaffected with the help of the stock exchange.
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3. Promotion of Industrial Growth:-
The stock exchange is a central market through which resources are transferred to the
industrial sector i.e. through corporate securities of the economy. The existence of such an
institution encourages people to invest in productive channels. As it makes funds available
for longer period it helps to fulfil the financial requirement of business units that encourages
employment generation, advancement of Research and Development, infrastructure
development and thus contributes for the overall industrial growth and economic
development of the country.
4. Convenient Market:-
The stock exchange provides a central ready place where buyers and sellers can easily
purchase and sell securities. As compared to other assets, investment in security provides
more liquidity because of easy marketability.
5. Technical Assistance and Reliable Guide:
In a developing countries, entrepreneurs faces problem in technical assistance. The financial
intermediaries in capital market offers various advisory services related identify growth
potential, prepare feasibility reports and train entrepreneurs in project management. Capital
market is treated as a reliable guide to the performance and financial position of corporates
that promotes efficiency.
6.Proper Channelization of Funds:-
The guiding factors for the people to channelize their funds in a particular company is the
prevailing market price of a security and relative yield which ensures effective utilisation of
funds in the public interest.
7. Variety of Services:-
The financial institutions functioning in the capital market provide a variety of services such
as assistance in promotion of companies, grant of long term and medium term loans to
entrepreneurs, giving expert advice, provision of underwriting facilities, participation in
equity capital, etc.
8. Contribute in the Development of Backward Areas:-
Capital Markets provide Long term funds for development projects in backward and rural
areas that facilitates economic development of those areas.
9. Attracts Foreign Capital:-
As government of India has liberalised Foreign Direct Investment (FDI) in the country, so
Capital markets can easily attracts funds from overseas markets by way of bonds and other
securities. This will not only increase the foreign capital but also provides a channel for
transfer of foreign technology in our country that will finally contribute to the economic
development and growth of the country.
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10. Liquidity:-
Easy liquidity is possible in the Capital market as the investors can easily sell off their
holdings with the help of secondary market and Commercial banks also allow investors to
withdraw their deposits, as and when they require.
11. Helps in the Revival of Sick Units:-
The Commercial and Financial Institutions provide timely financial assistance or may write
off a part of their loan to viable sick units and help in the revival of such units.
8.5.3 Structure of Indian Capital Market:
CAPITAL
MARKET
IN INDIA
Government Indian Development Financial

Securities (Gilt- Securities Financial Institutions Intermediaries
edged Market) Market (DFIs)
New Issue Stock Exchange

Market
IFCI ICICI SFCs IDBI IIBI UTI
Merchant Mutual Leasing Venture Capital Others

Banks Companies Companies
Funds
Fig 8.3: Structure of Capital Market
[Source: Business Environment Text and Cases- Francis Cherunilam]

 GILD-EDGED MARKET:
RBI plays a very important role in this market which deals in government and semi
government securities and so it is also called as ‘Government securities market. It consists of
bonds issued by Central / State Government with fixed interest rates. The investors in gild-
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edged market are mainly financial institutions like commercial banks, SFC, IFCI, SIDC, LIC,
GIC, Provident funds, RBI and individuals, where they are restricted by the law to invest a
certain percentage of their funds in this instrument.
 CORPORATE/INDUSTRIAL SECURITIES MARKET:

The Corporate Security Market deals with shares and debentures of old and new companies
and also provides long – term funds to the companies. It is further categorized into primary
and secondary market.
Primary Market: It is a market for new issues i.e. the securities which are issued to the
public for the first time and includes all institutions dealing in the issue of fresh claims and
so, it is also known as New Issues Market. It deals with the raising of fresh capital in the form
of equity shares, preference shares, bonus, deposits, debentures, right issues, etc. In equity
market, resources can be raised / mobilised through: Equity Issues (domestic and external),
Debt issues (domestic and external),
Domestic debt issues include fixed deposits, bonds, debentures (convertible and non-
convertible).
External debt issues are funds mobilised in the form of debt from overseas
Domestic equity issues include equity shares, preference shares, right issues and units of
mutual funds in the country.
External equity issues include equity shares through the issue of Global Depository Receipts
(GDR) and American Depository Receipts (ADR).
Secondary Market: The secondary market facilitates trading in securities that are already
issued by companies and operates through stock exchanges. It helps to provide liquidity and
marketability to the debt instruments and outstanding equity. It induces company to perform
efficiently by providing immediate valuation of securities. It has three types of stock
exchanges viz. Regional Stock Exchange, National Stock Exchange and Over the
Counter Exchange of India which provides liquidity to the investors through trading
mechanism (buying and selling of securities) with the help of brokers and other financial
intermediaries. In India, out of 23 recognised stock exchanges, there are two premier stock
exchanges i.e. The National Stock Exchange (NSE) and The Bombay Stock Exchange (BSE).
Government of India and SEBI controls the operations of stock exchanges. This market
provides a world class trading experience due to wide range of product availability with a fast
growing derivatives market.
 LONG TERM LOANS MARKET / DEVELOPMENT FINANCIAL

INSTITUTIONS (DFI):
The main purpose to establish development financial institution is to provide medium term /
long term loans to the industrial sector for expansion and modernisation. It includes Industrial
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Finance Corporation of India (IFCI), Industrial Development Bank of India (ICICI),
Industrial Development Bank of India (IDBI), Industrial Investment Bank of India (IIBI), The
Export and Import Bank of India (EXIM BANK), State Finance Corporations (SFCs), state
Industrial Corporations (SIDCs), etc. These institutions underwrite new issues, subscribe to
shares and debentures of new /old companies and raise funds by way of term deposits,
Certificates of deposits and borrowings.
Long term loans can be further divided into: Term Loans Market: Mortgages Market:
Financial Guarantees Market.
Term loans market: DFIs provide term loans for a period of one year which is beneficial for
new entrepreneurs as it encourages them to identify an investment opportunities and support
modernisation efforts.
Mortgages market: DFIs provides loans against security of immovable assets such as land
and building.
Financial guarantee market: DFIs provides financial guarantee on behalf of their clients. In
case the client does not perform the contract appropriately; a penalty is imposed on the client
and if the client is defaulter then the financial institution issuing the guarantee is held liable.
 FINANCIAL INTERMEDIARIES:
They comprises of merchant banks, mutual funds, leasing companies, venture capital
companies, etc. Merchant banks manage and underwrite new issues, and advise corporate on
various financial aspects. Leasing companies provide funds for purchasing plant and
machinery. Mutual funds mobilise savings of the people and invest them in stock markets.
Venture capital companies provide financial support to new ideas and technology.
8.6 COMMERCIAL BANKS
8.6.1 Concept and Types

Commercial banks are the most important components of the whole banking system.
A commercial bank is a profit-based financial institution that grants loans, accepts deposits,
and offers other financial services, such as overdraft facilities and electronic transfer of funds.
According to Culbertson,
“Commercial Banks are the institutions that make short make short term bans to business and
in the process create money.”
In other words, commercial banks are financial institutions that accept demand deposits from
the general public, transfer funds from the bank to another, and earn profit.
Commercial banks play a significant role in fulfilling the short-term and medium- term
financial requirements of industries. They do not provide, long-term credit, so that liquidity
of assets should be maintained. The funds of commercial banks belong to the general public
and are withdrawn at a short notice; therefore, commercial banks prefers to provide credit for
a short period of time backed by tangible and easily marketable securities. Commercial
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banks, while providing loans to businesses, consider various factors, such as nature and size
of business, financial status and profitability of the business, and its ability to repay loans.
Commercial banks are of three types, which are as follows:

(a) Public Sector Banks:
Refer to a type of commercial banks that are nationalized by the government of a country. In
public sector banks, the major stake is held by the government. In India, public sector banks
operate under the guidelines of Reserve Bank of India (RBI), which is the central bank. Some
of the Indian public sector banks are State Bank of India (SBI), Corporation Bank, Bank of
Baroda, Dena Bank, and Punjab National Bank.
(b) Private Sector Banks:

Refer to a kind of commercial banks in which major part of share capital is held by private
businesses and individuals. These banks are registered as companies with limited liability.
Some of the Indian private sector banks are Vysya Bank, Industrial Credit and Investment
Corporation of India (ICICI) Bank, and Housing Development Finance Corporation (HDFC)
Bank.
(c) Foreign Banks:

Refer to commercial banks that are headquartered in a foreign country, but operate branches
in different countries. Some of the foreign banks operating in India are Hong Kong and
Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard &
Chartered Bank, and Grindlay’s Bank. In India, since financial reforms of 1991, there is a
rapid increase in the number of foreign banks. Commercial banks mark significant
importance in the economic development of a country as well as serving the financial
requirements of the general public.
8.6.2 Functions of Commercial Banks
Commercial banks are institutions that conduct business for profit motive by accepting public
deposits for various investment purposes.
The functions of commercial banks are broadly classified into primary functions and
secondary functions, which are shown
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Functions of
Commercial
Bank
Primary Secondary
Fig 8.4: Functions of Commercial Bank
The functions of commercial banks (as shown in Figure-8.6.1) are discussed as follows:
(a) Primary Functions:
Refer to the basic functions of commercial banks that include the following:
(i) Accepting Deposits:
Implies that commercial banks are mainly dependent on public deposits.
There are two types of deposits, which are discussed as follows:

(1) Demand Deposits:
Refer to kind of deposits that can be easily withdrawn by individuals without any prior notice
to the bank. In other words, the owners of these deposits are allowed to withdraw money
anytime by simply writing a check. These deposits are the part of money supply as they are
used as a means for the payment of goods and services as well as debts. Receiving these
deposits is the main function of commercial banks.
(2) Time Deposits:
Refer to deposits that are for certain period of time. Banks pay higher interest on time
deposits. These deposits can be withdrawn only after a specific time period is completed by
providing a written notice to the bank.
(3) Advancing Loans: Refers to one of the important functions of commercial banks. The
public deposits are used by commercial banks for the purpose of granting loans to individuals
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and businesses. Commercial banks grant loans in the form of overdraft, cash credit, and
discounting bills of exchange.
(b) Secondary Functions:
Refer to crucial functions of commercial banks. The secondary functions can be classified
under three heads, namely, agency functions, general utility functions, and other functions.
These functions are explained as follows:
(1) Agency Functions:

Implies that commercial banks act as agents of customers by performing various functions,
which are as follows:
(i) Collecting Checks:
Refer to one of the important functions of commercial banks. The banks collect checks and
bills of exchange on the behalf of their customers through clearing house facilities provided
by the central bank.
(ii) Collecting Income:
Constitute another major function of commercial banks. Commercial banks collect dividends,
pension, salaries, rents, and interests on investments on behalf of their customers. A credit
voucher is sent to customers for information when any income is collected by the bank.
(iii) Paying Expenses:
Implies that commercial banks make the payments of various obligations of customers, such
as telephone bills, insurance premium, school fees, and rents. Similar to credit voucher, a
debit voucher is sent to customers for information when expenses are paid by the bank.
(2) General Utility Functions:

Include the following functions:
(i) Providing Locker Facilities:
Implies that commercial banks provide locker facilities to its customers for safe keeping of
jewellery, shares, debentures, and other valuable items. This minimizes the risk of loss due to
theft at homes.
(ii) Issuing Traveller’s Checks:
Implies that banks issue traveller’s checks to individuals for traveling outside the country.
Traveller’s checks are the safe and easy way to protect money while traveling
iii) Dealing in Foreign Exchange:
Implies that commercial banks help in providing foreign exchange to businessmen dealing in
exports and imports. However, commercial banks need to take the permission of the central
bank for dealing in foreign exchange.
(iv) Transferring Funds:
Refers to transferring of funds from one bank to another. Funds are transferred by means of
draft, telephonic transfer, and electronic transfer.
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(3) Other Functions:
Include the following:
(i) Creating Money:
Refers to one of the important functions of commercial banks that help in increasing money
supply. For instance, a bank lends Rs. 5 lakh to an individual and opens a demand deposit in
the name of that individual.
Bank makes a credit entry of Rs. 5 lakh in that account. This leads to creation of demand
deposits in that account. The point to be noted here is that there is no payment in cash. Thus,
without printing additional money, the supply of money is increased.
(ii) Electronic Banking:
Include services, such as debit cards, credit cards, and Internet banking.
(www.economicdiscussion.com)
8.7 FINANCIAL INSTITUTIONS:
A financial institution is an establishment that conducts financial transactions such as

investments, loans and deposits. Almost everyone deals with financial institutions on a
regular basis. Everything from depositing money to taking out loans and exchanging
currencies must be done through financial institutions.
Important types of financial institutions are as follows:
8.7.1 Banking Institutions
The entire organised banking system comprises of scheduled and non-scheduled banks.
Largely, this segment comprises of the scheduled banks, with the unscheduled ones forming
a very small component. Banking needs of the financially excluded population is catered to
by other unorganised entities distinct from banks, such as, moneylenders, pawnbrokers and
indigenous bankers.
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Source: www.allbankingsolution.com
Fig 8.5Structure of Indian Banking Industry
Scheduled Banks: A scheduled bank is a bank that is listed under the second schedule of
the RBI Act, 1934. In order to be included under this schedule of the RBI Act, banks have to
fulfil certain conditions such as having a paid-up capital and reserves of at least 0.5 million
and satisfying the Reserve Bank that its affairs are not being conducted in a manner
prejudicial to the interests of its depositors. Scheduled banks are further classified into
commercial and cooperative banks. The basic difference between scheduled commercial
banks and scheduled cooperative banks is in their holding pattern.
Scheduled Commercial Banks (SCBs): Scheduled commercial banks (SCBs) account for a
major proportion of the business of the scheduled banks. As at end-March, 2009, 80 SCBs
were operational in India. SCBs in India are categorized into the five groups based on their
ownership and/or their nature of operations. State Bank of India and its six associates
(excluding State Bank of Saurashtra, which has been merged with the SBI with effect from
August 13, 2008) are recognised as a separate category of SCBs, because of the distinct
statutes (SBI Act, 1955 and SBI Subsidiary Banks Act, 1959) that govern them. Nationalised
banks (10) and SBI and associates (7), together form the public sector banks group and
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control around 70% of the total credit and deposits businesses in India. IDBI ltd. has been
included in the nationalised banks group since December 2004. Private sector banks include
the old private sector banks and the new generation private sector banks- which were
incorporated according to the revised guidelines issued by the RBI regarding the entry of
private sector banks in 1993. As at end-March 2009, there were 15 old and 7 new generation
private sector banks operating in India. Currently, there are 13 old private sector bank and 8
new private sector bank.
Foreign banks are present in the country either through complete branch/subsidiary route
presence or through their representative offices. At end-June 2009, 32 foreign banks were
operating in India with 293 branches. Besides, 43 foreign banks were also operating in India
through representative offices.
Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural
economy by providing banking services in such areas by combining the cooperative
specialty of local orientation and the sound resource base which is the characteristic of
commercial banks. RRBs have a unique structure, in the sense that their equity holding is
jointly held by the central government, the concerned state government and the sponsor bank
(in the ratio 50:15:35), which is responsible for assisting the RRB by providing financial,
managerial and training aid and also subscribing to its share capital. Between 1975 and
1987, 196 RRBs were established. RRBs have grown in geographical coverage, reaching out
to increasing number of rural clientele. At the end of June 2008, they covered 585 out of the
622 districts of the country. Despite growing in geographical coverage, the number of RRBs
operational in the country has been declining over the past five years due to rapid
consolidation among them. As a result of state wise amalgamation of RRBs sponsored by
the same sponsor bank, the number of RRBs fell to 86 by end March 2009.
Scheduled Cooperative Banks: Scheduled cooperative banks in India can be broadly

classified into urban credit cooperative institutions and rural cooperative credit institutions.
Rural cooperative banks undertake long term as well as short term lending. Credit
cooperatives in most states have a three tier structure (primary, district and state level).
Non-Scheduled Banks: Non-scheduled banks also function in the Indian banking space, in
the form of Local Area Banks (LAB). Towards the end of March 2009 there were only 4
LABs operating in India. Local area banks are banks that are set up under the scheme
announced by the government of India in 1996, for the establishment of new private banks
of a local nature; with jurisdiction over a maximum of three contiguous districts. LABs aid
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in the mobilisation of funds of rural and semi urban districts. Six LABs were originally
licensed, but the license of one of them was cancelled due to irregularities in operations, and
the other was amalgamated with Bank of Baroda in 2004 due to its weak financial position.
8.7.2 Non-Banking Institution:
The Non-Banking Financial Companies (NBFCs) which are heterogeneous in nature in terms
of activity and size are important financial intermediaries and an integral part of the Indian
Financial system. They help to fulfil the credit needs of both wholesale and retail customers.
Definition:
According to the Reserve Bank of India (Amendment Act) 1997, A Non-Banking
Finance Company means:
(i) A Financial Institution which is a company;

(ii) A non-banking institution which is a company and which has as its principal business of
receiving the deposits under any scheme or arrangement or in any other manner or lending in
any manner;
(iii) Such other non-banking institution or class of such institutions as the bank may with the
previous approval of the Central Government specify.
The definition excludes financial institutions besides institutions which carry on agricultural
operations as their principal business. Non-banking finance companies consist mainly of
finance companies which carry on hire purchase finance, housing finance, investment, loan,
equipment leasing or mutual benefit financial companies but do not include insurance
companies or stock exchanges or stock-broking companies.
Types of NBFCs:
The Non-Banking Finance Companies operating in India fall in the following broad
categories.
(1) Equipment Leasing Company is a company which carries the business of leasing of
equipment’s or the financing of such activity. Apart from their Net Owned Funds (NOF), the
leasing companies raise funds in the form of deposits from other companies, banks and the
financial institutions. Public deposits and inter-corporate deposits account for 74 percent of
their total funds. Leasing is a form of rental system. A lease is a contractual arrangement
whereby the lessor grants the lessee the right to use an asset in return for periodical lease-rent
payments. There are two types of leases (i) operating lease, and (ii) financial or capital lease.
The operating lease is a short-term lease which can be cancelled. Financial lease is a non-
concealable contractual commitment.
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(2) Hire Purchase Finance Company is a company which carries on as its principle
business, hire purchase transactions or the financing of such transactions. The sources of hire-
purchase finance are
(i) Hire purchase Finance Companies.
(ii) Retails and Wholesale Traders.
(iii) Bank and Financial Institutions.
Hire-purchase finance or credit is a system under which term loans for purchase of goods,
producer goods or consumer goods and services are advanced which have to be liquidated
under an instalment plan. The period of credit is generally one to three years. This type of
credit is available for a wide range of products and services. Hire-purchase finance
companies are the public or private limited companies or partnership firms engaged in giving
credit for acquiring durable goods.
(3) Housing Finance Company is a company which carries on as its principle business, the
financing of the acquisition or construction of houses including the acquisition or
development of plots of lands for construction of houses. These companies are supervised by
National Housing Bank, which refinances housing loans by scheduled commercial banks, co-
operative banks, housing finance companies and the apex co-operative housing finance
societies.
(4) Investment Company means any company which carries on as its principle business the
acquisition of securities. These types of companies are investment holding companies formed
by business houses. They provide finance mainly to companies associated with these business
houses. As compare to open-end investment companies or mutual funds/units trust, these
investment companies are close end companies having a fixed amount of share capital.
Almost all prominent industrial groups have their own investment companies.
(5) Loan Company is a company that provides finance whether by making loans or advances
or otherwise for any activity other than its own. (This category excludes No.1 to No. 3 above
categories).These types of companies are generally small partnership concerns which obtain
funds in the form of deposits from the public and give loans to wholesale and retail traders,
small scale industries and self-employed persons. These companies collect fixed deposits
from the public by offering higher rates of interest and give loans to others at relatively
higher rates of interest.
(6) Mutual Benefit Finance Company (i.e. Nidhi Company) means any company which is
notified by the Central Government under section 620A of the Companies Act, 1956. The
main sources of funds for Nidhi’s are share capital, deposits from their members and deposits
from the public. Nidhi’s give loans to their members-for several purposes like marriages,
redemption of old debts, construction and etc. The Nidhi’s normally follow the easy
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procedures and offer saving schemes and make credits available to those whose credit needs
remain unmet by his commercial banks.
(7) Chit Fund Company is a company which collects subscriptions from specified number
of subscribers periodically and in turn distributes the same as prizes amongst them. Any other
form of chit or kuri is also included in this category. The chit fund companies operations are
governed by the Chit Fund Act, 1982, which is administered by State Governments. Their
deposit taking activities are regulated by the Reserve Bank.
The chit fund companies enter into an agreement with the subscribers that every one of them
shall subscribe a certain amount in instalments over a definite period and that every one of
such subscribers shall in his turn, as determined by lot or by auction or by tender, be entitled
to a prize amount.
(8) Residuary Non-Banking Company is a company which receives deposits under any
scheme by way of subscriptions/contributions and does not fall in any of the above
categories.
There are few unhealthy features of the operations of these companies; (i) Negative NOF
(Net Owned Fund), (ii) Understatement of their deposit liability, (iii) Forfeiture of deposits,
(iv) Levy of service charges on the depositors (v) Payment of high rates of commission, etc.
To remove these features, RBI has extended prudential norms to these companies, introduced
compulsory registration requirement, specified minimum rates of interest payable on their
deposits under different schemes. Under the RBI (Amendment) Act, 1997, the RBI directly
inspects and monitoring the activities of these companies.
8.8 SUMMARY
Finance is the access with which the financial system performs its functions that sets the pace
for the achievement of broader national objectives.
The financial system consists of four segments or components. These are: financial
institutions, financial markets, financial instruments and financial services.
A financial market is a market in which people and entities can trade financial securities,
commodities and other fungible items at low transaction costs and at prices that reflect supply
and demand.
A money market is a market for borrowing and lending of short-term funds. It deals in funds
and financial instruments having a maturity period of one day to one year.It refers to the
whole networks of financial institutions dealing in short-term funds, which provides an outlet
to lenders and a source of supply for such funds to borrowers.
A capital market is one in which individuals and institutions trade financial securities i.e. i.e.
long term debt instruments.
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The Corporate Security Market deals with shares and debentures of old and new companies
and also provides long – term funds to the companies.
Commercial banks are institutions that conduct business for profit motive by accepting
public deposits for various investment purposes.
The functions of commercial banks are broadly classified into primary functions and
secondary functions
The Non-Banking Finance Companies operating in India fall in the following broad
categories.
(1) Equipment Leasing Company is a company which carries the business of leasing of
equipment’s or the financing of such activity.
(2) Hire Purchase Finance Company is a company which carries on as its principle
business, hire purchase transactions or the financing of such transactions
(3) Housing Finance Company is a company which carries on as its principle business, the
financing of the acquisition or construction of houses including the acquisition or
development of plots of lands for construction of houses.
(4) Investment Company means any company which carries on as its principle business the
acquisition of securities.
(5) Loan Company is a company that provides finance whether by making loans or advances
or otherwise for any activity other than its own.
(6) Mutual Benefit Finance Company (i.e. Nidhi Company) means any company which is
notified by the Central Government under section 620A of the Companies Act, 1956.
(7) Chit Fund Company is a company which collects subscriptions from specified number
of subscribers periodically and in turn distributes the same as prizes amongst them.
(8) Residuary Non-Banking Company is a company which receives deposits under any
scheme by way of subscriptions/contributions and does not fall in any of the above
categories.
8.9 KEYWORDS
 A financial market is a market in which people and entities can trade financial
securities, commodities and other fungible items at low transaction costs and at prices
that reflect supply and demand.
 Secondary/Stock Market is a market for sale of secondary securities which
facilitates buying and selling of securities.
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 Term Loans Market: Banks and Financial Institutions provide term loans to
companies for a period of one year.
 Mortgages Market- It provides loans against securities of immovable assets like land
and buildings.
 Financial Guarantees Market: Financial institutions and banks provide financial
guarantees on behalf of their clients to the third parties.
1. Explain the relation between lenders and borrowers with respect to Financial Markets.
______________________________________________________________________
_______________________________________________________________________
2. How the functions of Commercial Bank attract consumers?
______________________________________________________________________
_______________________________________________________________________
Short Questions
1. Explain Financial System with its important features.
2. What are the Constituents of Financial System?
3. Write a note on Foreign Exchange Market.
4. Explain the characteristics of the Money Market
5. State the importance of Capital Market.
Long Questions:
1. Discuss the classification of Financial Market and state its relevant functions.
2. What are the important instruments of the Money Market? Explain it.
3. Elaborate the Structure of Indian Capital Market.
4. Describe the Structure of Indian Banking Industry.
5. Discuss -The Non-Banking Financial Companies (NBFCs) which are heterogeneous
in nature in terms of activity and size are important financial intermediaries and an
integral part of the Indian Financial system.
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1. The role of _________________within the system is primarily to intermediate between
those that provide funds and those that need funds, and typically involves transforming and
managing risk.
a. RBI
b. Banks
c. Financial institutions
d. Central Government
2. What refer to the documents which represents financial claims on assets?

a. Stock Market
b. Financial Instruments
c. IPO
d. Options
3. Financial services rendered by the financial intermediaries’ bridge the gap between lack of
knowledge on the part of ______________and increasing sophistication of financial
instruments and markets.
a. Agents
b. Business Owners
c. State Government
d. Investors
4. The intermediary functions of a financial markets include

a. Repayment of certain sum of money at the end of specified period
b. Sale Mechanism
c. Mobilize savings & facilitate the allocation of funds
d. To provide reassurance
5. Which is a market for new issue of securities, which are issued to the public for the first
time?
a. Primary/New Issue Market
b. Secondary/Stock Market
c. Long Term Market
d. Unorganized Market:
Answers
1 - c; 2 - a; 3 – d; 4 – b; 5 – a.
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8.12SUGGESTED READING
Text Books:
Publishing House],
Hall.
Reference Books:
 Bhole, Financial Institutions and Markets: Structure, Growth & Innovation, McGraw
Hill Education
Open Text Source:

p. 2049. ISBN 9788180385926.
Limited. pp. 48–.ISBN 978-81-7534-840-0.
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UNIT 9: FINANCIAL ENVIRONMENT-II
Structure
9.1 Introduction
9.2 Capital Market
9.3 Capital Reform
9.4 SEBI
9.4.1 Functions
9.4.2 Powers
9.4.3 Regulations
9.4.4Structure
9.5 FDI
9.5.1Types
9.5.2Benefits
9.5.3 FDI Investment Routes
9.5.4 Market Size and Development:
9.6 Summary
9.7 Keywords
 Analyze the importance of Capital Reforms

 Explain the role of SEBI
 Compare FDI advantage for starting or expanding the business.
9.1 INTRODUCTION
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The main objective of the capital market is to ensure the economic development by
deactivating saving and channel is in them into productive investments. Capital market acts
as a bridge between investor- who are borrowers of funds and savers - lenders of funds. Also,
savers who saves the part from their income are termed as “Surplus units” and the borrowers
who need funds are termed as a “deficit units”. Capital market directs the use of funds into
more productive means like Funds from individuals and financial intermediaries are utilized
by business and government that helps them to realize the expansion and growth plan, thus
increasing the contribution in economic development.
The capital market consists banking and non-banking intermediaries that stabilizes the value
of stocks and securities. It maintains the reasonable interest rates and helps in minimising
speculative activities.
Securities and exchange board of India (SEBI) is an apex body that monitors and controls the
capital market. It was established in 1988 by Indian government but got the statutory powers
in 1992.Administer the working of mutual funds and stock markets, restricts illegal practices,
safeguard investor interest, conducts audits and inspections and prohibits insider trading.
FDI brings in technology with necessary funds that can be productively utilized for
developing infrastructure, expanding the capability and competence of the business, it
contributes in the economic development of the developing economies by raising the standard
of living of the people by encouraging stable long-term lending. Foreign investors are
attracted and ready to invest in India because of availability and affordable labour market
diversification, subsidies, and preferential tariffs.
9.2 CAPITAL MARKET
A Capital Market is a place where buyers and sellers can interact and transact financial
securities like shares, debentures, debt instruments, bonds, derivative instruments like the
futures, options, swaps, ETFs.
 The securities referred to here would normally mean long-term investments, i.e.,
investments that have a lock-in period greater than one year.
 The trading of short-term investments is done through the money-market.
Functions of Capital Market:
 It makes trading of securities easier for investors and companies.
 It assists the transaction settlement in time.
 It helps minimize transaction costs and information costs.
 It mobilizes the savings of parties from cash and other forms to financial markets.
 It offers insurance against market risk.
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Types of Capital market
Primary
Secondary
Fig 9.1: Types of Capital Market

#1 – Primary Market
The primary market is a market where freshly issued securities are traded, i.e., for the first
time. It is also known as the new issues market. This market enables both initial public
offering and a further public offering. In this market, the funds will be deployed with the help
of offering through a prospectus, preferential issue, rights issue, e-IPO, and private placement
of securities.
#2 – Secondary Market
It is a type, old securities are traded, i.e., trading done after transacting first in the primary
market. We also call this market as the stock market or aftermarket. Both stock markets and
over-the-counter trades come under the secondary market. Examples of secondary
markets are the London Stock Exchange, the New York Stock Exchange, NASDAQ, etc
 It improves the efficiency of transactions.
 They move money between the investors, i.e., people who supply capital and people
in need of capital.
 Secondary markets create liquidity in the market.
 Securities like bonds pay interest to the investors, and most of the time, the interest so
paid is higher than the bank interest rates.
 Securities like shares pay dividend income.
 There is greater scope for growth of the value of investments as time passes.
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 Instruments of capital market possess liquidity, i.e., we can convert them into cash
and cash equivalents when there is a need for funds immediately with lower
transactional costs.
 Investment in shares provides investors with ownership rights, which allows them to
have a say in the company’s management decision.
 It promotes diversification by offering a wide range of investment types.
 Usually, the securities of the capital market can be used as collateral for getting loans
from banks and financial institutions.
 There would be a few tax benefits that accrue whilst investing in the stock market.
 Holding on to a few securities may ensure superior long-term performance.
Disadvantages
 Investing in the capital market is deemed to be very risky as the investment is highly
volatile when it comes to the value, i.e., these securities are subject to the market ups
and downs.
 Such fluctuations make these kinds of investments unsuitable for providing a fixed
income, especially retired employees who would usually prefer regular income.
 With the wide range of investment alternatives present in the capital market, an
investor may not be able to decide what kind of investments to pursue, thus making it
difficult for an investor to invest without a piece of professional advice.
 If an investor invests in shares of a company, he would be considered having
ownership rights. This may, prima facie, sound like an advantage but, this means that
the investor being the owner of the company, would be the last party to receive any
proceeds in case the company goes into liquidation or becomes bankrupt.
 Buying and selling of securities may involve a brokerage fee, commission, etc.
increasing the cost of transactions
(Reference: https://www.wallstreetmojo.com/capital-market/)
9.3 CAPITAL REFORMS
The major Capital reforms are as follows:

1. Establishment of SEBI:
An important measure regarding capital market reforms is the setting up of Securities and
Exchange Board of India (SEBI) as the regulator of equity market in India.
SEBI has introduced various guidelines and regulations for the functioning of capital markets
and assuming and selling of shares in the primary market.
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The following important regulatory measures have been introduced by SEBI:
(a) SEBI has introduced a code of advertisement for public issues by companies for making
fair and truthful disclosures. The companies are now required to disclose all material facts
and specific risk factors associated with their projects while making public issues.
(b) It has required the stock exchanges to amend their listing agreements to ensure that a
listed company furnishes annual statements to them showing variations between financial
projections and project utilisation of funds made in the offer documents and actual. This will
enable shareholders to make comparisons between performance and promises made by of
company.
(c) An important reform SEBI has introduced is that it has brought merchant banking also
under its regulatory framework. The merchant bankers are required to follow the code of
conduct issued by SEBI in respect of pricing and premium fixation of issues of shares a
company.
(d) The practice of making preferential allotment of shares at prices unrelated to the
prevailing price has been stopped by SEBI. Besides, to ensure transparency insider trading
has also been banned.
(e) As a part of the process of establishing transparent rules for trading in stock exchanges, a
notorious BADLA system has been banned and in its place Rolling Settlement System has
been introduced.
2. Setting up of Private Mutual Funds:
Another important reform is the permission granted to the private sector firms to start Mutual
Funds. Many private sector companies such as Tata, Reliance, Birla have set up their mutual
funds through which they raise money from the public. In this way monopoly position of UTI
in Mutual Fund business has come to end. Mutual Funds raise money by selling units to the
public and the funds so raised are invested in a number of equities and debentures of
companies.
A mutual fund may be entirely equity-based or debt-based or a balanced one having a
particular combination of investment in equities and debentures of a number of companies.
Investment in mutual funds enables the investors to reduce risk. Mutual funds have also been
allowed to open offshore funds to invest in equities abroad. UTI has also been brought within
the regulatory framework of SEBI.
3. Opening up to Foreign Capital:
A significant reform has been that Indian capital market has been opened up for foreign
institutional institutions (FII). That is, FII can now buy shares and debentures of private
Indian companies in the Indian stock market and can also invest in government securities.
This has been done to attract foreign capital. Foreign Institutional Investors (FII) have been
permitted full capital convertibility.
4. Access to International Capital Markets:
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The Indian corporate sector has been allowed to raise funds in the international capital
markets through American Depository Receipts (ADRs), Global Depository Receipts (GDR),
Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowings
(ECBs). Similarly, Overseas Corporate Bodies (OCBs) and Non-resident Indians have been
allowed to invest in the equity capital of the Indian companies. FIIs have been allowed to
invest in equities of private corporate Indian companies as well as in Government securities.
5. Banks and Capital Markets:
Another important step to strengthen the Indian capital market is that banks have been
allowed to lend against various capital market instruments such as corporate shares and
debentures to individuals, investment companies, trusts and endowment share and stock
brokers, industrial and corporate buyers and SEBI-approved market makers.
Lending by banks against various capital market instruments to individuals, share and stock
brokers, market makers is made in accordance with certain norms regarding purpose, capital
adequacy, transparent transactions, maximum possible amount or ceiling, or duration of the
loan. Bank lending against shares and debentures, according to C. Rangarajan, will “enable
partial liquidity to scrip’s, to help reduce volatility in price movement, encourage the
presence of market makers so as to reduce market concentration and help in widening and
deepening of trading in the secondary market.”
Regulation of stock markets is important to ensure:

(a) That the equity markets operate in a fair and orderly manner,
(b) That the brokers and other professionals of the stock markets deal justly with their
customers,
(c) That the corporate firms who raise funds through the market provide all information about
themselves which the investors need to make intelligent investment decisions. Since its
inception SEBI has been addressing itself to these tasks.
[Reference: https://www.economicsdiscussion.net/]
9.4 SEBI
What is SEBI?
SEBI is a regulatory body of Indian Stock Market, that drafts a precise set of rules and
regulations, and should be followed when a securities trade is undertaken.
Definite rules and regulations were created, which would bind the intermediaries, creating a
frame of boundaries they need to adhere to, mostly in favour of individual investors.
The brief SEBI meaning stands to be, Securities and exchange board of India safeguards the
interest of the investors, invading the superiority and dominance of intermediaries, to create
an environment free of malpractices.
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Apart from safeguarding the interest of investors, SEBI as well promotes development and
uplifting of the securities market.
Establishment of SEBI was dated back to the year 1988, when it was a non-statutory body,
and it wasn’t until 1992 when the entire framework was redefined and an autonomous
statutory body was created.
Being the controller and regulator of the securities market, Indian Capital market
participant’s fulfilment of needs attained a definite shape.
SEBI is headquartered at business district at the Bandra Kurla Complex in Mumbai. The
body has also established regional branches in the Northern, Eastern, Southern and Western
regions, and precisely in the cities New Delhi, Kolkata, Chennai, and Ahmedabad.
Sub branches have establishment in Bangalore, Jaipur, Guwahati, Bhubaneshwar, Patna,
Kochi, and Chandigarh.
9.4.1 What Are the Functions of SEBI?

SEBI act 1992, briefly drafts the SEBI Functions, which are equally mended to suit and in
favour of all the parties involved in a securities trade. The functions are briefly listed below.
 SEBI provides a well framed infrastructure, a place the issuers of securities may find
appropriate to make their set of offering to the public, in a rather routine and uniform
fashion.
 The traders, who opt to invest in the securities offers, shall be safeguarded, protecting
their interest in investment and keeping them protected from the possible malpractices
which target the investors and their money.
 The entire framework of Indian Securities market is promoted and regulated by SEBI,
encourage ever fair aspect which may lead to the development of the market.
 It also has a set of prohibition list, where the insider trades is restricted, cutting off the
chance of fraudulent and unfair trade practices arising.
 Investor awareness and education is highly promoted by the board, where education
mediums are provided to the investors, and insights on the intermediaries of trade are
laid upon.
 Among the various happenings, such as acquisition of shares and take-over of
companies, are all monitored by the SEBI.
 Among all the other functions of SEBI, it also undertake the research activities, where
the present and future possible market situations are closely monitored and take into
account, to ensure the securities market is efficient, and functioning well enough.
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9.4.2 What Are the Powers of SEBI?
Powers vested upon SEBI are in consideration of a vast number of aspects. SEBI Powers are
reportedly grouped into three categories and the same are as below:
Quasi
Executive
Quasi Judicial
Quasi Legislative
Fig: 9.2 Powers of SEBI

Quasi legislative
This segment streamlines the protection of investors, and their interest, by formulation rules
and regulations in favour of the investors.
There are a number of rules, issued by the board, such as Listing obligation and Disclosure
Requirements, insider trading, listing obligations etc. They collectively cater to invading even
the slight possibility of malpractices.
Quasi-Judicial:
This power incorporated upon the idea of a transparent and fair trade. It lies upon the belief
that any unfair trade practices should be accounted for. It is SEBI that conducts the hearing
and proceeding, if any malpractices are found to exist.
Quasi Executive:
This segment gives SEBI the right to investigate. If any issues or practices are found existent
judgments would be passed by SEBI to deal with the same.
It has its share of rights to undertake inspection of books, document or records, if any breach
arises. With the power to investigate, it also has its share of power to cease and desist
proceedings.
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9.4.3 What Are theSEBI Regulations?
Of all the diverse regulations, we have listed 4 of SEBI Regulations below:
 2009 regulation – This is the Issue of Capital and Disclosure Requirements, where
the board directs the issuers of the securities to disclose everything in brief in order to
have the transparency in capital matters as well.
 2011 regulation – This consists of the Substantial Acquisition of Shares and
Takeover, where the takeover activities are directed to be undertake in a fair way,
pointing out the unfair ways, which need to be avoided.
 2015 regulation – This regulation is of Prohibition of Insider Trading, where insiders
of the listed company are not to trade the securities.
9.4.4 What Is the Structure Of SEBI?

SEBI Structure is of a corporate framework, which has its own sections of department. Each
of such departments is supervised by a head. The departments being precisely listed are more
than 20 in number.
From all the vast number of departments some are corporation finance, economic and policy
analysis, debt and hybrid securities, enforcement, human resources, investment management,
commodity derivatives market regulation, legal affairs, and more.
Head of the department being equally responsible have a different set of member, precisely
the board of directors. The definite structure is as follows, and how each of the members is
elected.
 Union Government of India is responsible to elect the Chairman of SEBI
 Reserve Bank of India then elects one member to the board of directors.
 Structure also has a place for 2 officers, who shall be the electing responsibility of
Union Government of India.
 The remaining 5 members will as well be contributed to the board by the Union
Government of India.
 [Reference: https://top10stockbroker.com/]
9.5 FOREIGN DIRECT INVESTMENT (FDI)
About FDI in India

Introduction
Apart from being a critical driver of economic growth, Foreign Direct Investment (FDI) has
been a major non-debt financial resource for the economic development of India. Foreign
companies invest in India to take advantage of relatively lower wages, special investment
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privileges like tax exemptions, etc. For a country where foreign investment is being made, it
also means achieving technical know-how and generating employment.
The Indian Government’s favourable policy regime and robust business environment has
ensured that foreign capital keeps flowing into the country. The Government has taken many
initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil
refineries, telecom, power exchanges, and stock exchanges, among others.
9.5.1 Types of FDI
Horizontal Vertical
Types of FDI
Platform Conglomerate FDI
Fig: 9.5.1 Types of FDI
1. Horizontal FDI
The most common type of FDI is Horizontal FDI, which primarily revolves around investing
funds in a foreign company belonging to the same industry as that owned or operated by the
FDI investor. Here, a company invests in another company located in a different country,
wherein both the companies are producing similar goods. For example, the Spain-based
company Zara may invest in or purchase the Indian company Fab India, which also produces
similar products as Zara does. Since both the companies belong to the same industry of
merchandise and apparel, the FDI is classified as horizontal FDI.
2. Vertical FDI
Vertical FDI is another type of foreign investment. A vertical FDI occurs when an investment
is made within a typical supply chain in a company, which may or may not necessarily
belong to the same industry. As such, when vertical FDI happens, a business invests in an
overseas firm which may supply or sell products. Vertical FDIs are further categorised as
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backward vertical integrations and forward vertical integrations. For instance, the Swiss
Coffee producer Nescafe may invest in coffee plantations in countries such as Brazil,
Columbia, Vietnam, etc. Since the investing firm purchases, a supplier in the supply chain,
this type of FDI is known as backward vertical integration. Conversely, forward vertical
integration is said to occur when a company invests in another foreign company which is
ranked higher in the supply chain, for instance, a coffee company in India may wish to invest
in a French grocery brand.
3. Conglomerate FDI
When investments are made in two completely different companies of entirely different
industries, the transaction is known as conglomerate FDI. As such, the FDI is not linked
directly to the investors business. For instance, the US retailer Walmart may invest in TATA
Motors, the Indian automobile manufacturer.
4. Platform FDI
The last types of foreign direct investment are platform FDI. In the case of platform FDI, a
business expands into a foreign country, but the products manufactured are exported to
another, third country. For instance, the French perfume brand Chanel set up a manufacturing
plant in the USA and export products to other countries in America, Asia, and other parts of
Europe.
If you intend to invest via FDI, you must know about the different types of FDI with
examples. With FDI, the money invested can be used to start a new business in a foreign
country or to invest in an already existing business in a foreign country. For more information
on FDIs, consult Angel Broking advisors.
Foreign direct investment has three basic components:

1. EQUITY CAPITAL: it is the overseas investor’s purchase of shares of a business located
in another country rather than its own. An equity capital stake of 10 percent or more, is
normally considered as a threshold for the control of assets.
2. REINVESTED EARNINGS: it is the oversea investor’s share (in proportion to direct

equity participation) of earnings not distributed as dividends by subsidiaries or associates,
and earnings of branches not remitted to the direct investor.
3. Other direct investment capital or inter-company debt transactions: this refers to

short- or long-term borrowing and lending of funds between direct investors (parent
enterprises) and affiliate enterprises. The borrowing and lending of funds including debt
securities and supplier’s credits between direct investors and subsidiaries, branches and
associates.
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9.5.2 Benefits of Foreign Direct Investment
1. Boost to International Trade
Foreign direct investment promotes international trade as it allows production to flow to parts
of the world which are more cost effective. For instance, Apple was able to conduct FDI into
China to assist with the manufacturing of its products.
However, many of the components are also shipped in from elsewhere, generally from the
region of Asia. For instance, the camera is made by Sony, which sources its manufacturing
in Taiwan. There is also the case of the flash memory, which is sourced by Toshiba in Japan.
We also have the touch ID sensor which is made in Taiwan, and the chipsets and processors,
which are made by Samsung in South Korea and Taiwan.
These are but a small handful of the components, but demonstrate how inter-connected the
supply chain has become between countries. Both Samsung And Song have conducted
investment in the likes of Taiwan, China, and Japan. As a result, it has created new jobs in the
region and boosted trade between the nations.
2. Reduced Regional and Global Tensions
As we have seen with the Apple example, a supply chain is created between countries. In
part, this is created by the division of labour. For instance, South Korea may make the
batteries, Taiwan the ID sensors, and Japan the cameras. As a result, they are all dependent
on each other.
If there is a revolt in Taiwan, the whole process could fall apart. Without the ID sensors, the
final product cannot be made, so the need for other components is also reduced. This means
workers in Japan and South Korea are also affected.
As a result of this interconnected supply chain, it is in the interest of all parties to ensure the
stability of its trading partners. So FDI can create a level of dependency between countries,
which in turn can create a level of peace.
To use a famous metaphor, you don’t bite the hand that feeds you. In other words, if nations
are reliant on each other for their income, then the likelihood of war is also reduced.
3. Sharing of Technology, Knowledge, and Culture
Foreign direct investment allows the transfer of technology, knowledge, and culture. For
instance, when a firm from the US invests in another from India, it has a say in how the firm
is run. It is in its interest to ensure the most efficient use of its resources.
What happens as a result is that useful techniques or ways of conducting business are
transferred. The members of the US company may say, have you tried doing A, B, and C?
By coming in from a different cultural background and perspective, often, efficiencies can be
achieved. Furthermore, there is the case of technology. It can transfer over in a number of
ways. First of all, employees benefit from having first-hand access to the new technology.
They may then be able to use this to start their own ventures.
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Second of all, the technology could be outright purchased from a foreign nation. For instance,
copyright technology could be sold from Company A in the US to Company B in India.
Finally, the technology could be reverse-engineered or provide inspiration for domestic
development.
4. Diversification
From the businesses perspective, foreign direct investment reduces risk through
diversification. By investing in other nations, it spreads the company’s exposure. In other
words, it is not so reliant on Country A. For instance, Target derives its entire revenues from
the US. Should an economic recession hit Stateside, it’s almost guaranteed to harm its profits.
By diversifying and investing in foreign markets, it allows businesses to reduce domestic
exposure. So if a US firm invests in new stores in Germany, the level of risk is reduced. This
is because it is not reliant on one market. Whilst there may be a decline in demand for one,
there may be growth in another. To use an analogy, it’s similar to placing a bet in roulette on
both red and black.
5. Lower Costs and Increased Efficiency
Foreign direct investments can benefit from lower labour costs. Often, businesses will off-
shore production to nations abroad that offer cheaper labour. Now there is an ethical element
to this than is often debated, but we will leave that aside for now. Whether it is ethical or not
is irrelevant as it is a benefit to the business.
Although labour costs are lower, we must also consider productivity. For instance, one person
in China may produce one unit for $1 an hour. However, an employee in the US may be able
to produce 20 units for $10 an hour. So whilst a Chinese employee is cheaper, they only
make 1 unit per $1, compared to 2 units per $1 in the US.
With that said, foreign direct investors will take such factors into account. And in most cases,
the labour is so much cheaper than most of the productivity differentials are eliminated. This
means the investment is cost-effective. In other words, more employees will be needed to
make the same number of goods, but the total cost to produce is lower.
On most occasions, foreign direct investment will result in a net gain for the company. After
all, it is in their interest to ensure the investment pays off. However, there are exceptions,
where FDI can in fact go the other way.
Nevertheless, on the whole, FDI is generally associated with lower costs and increased cost-
effectiveness.
6. Tax Incentives
Reduced levels of corporation tax can save big businesses billions each and every year. This
is why big firms such as Apple use sophisticated techniques to off-shore money in
international subsidiaries.
Countries with lower tax regimes are usually those that are favoured. Examples include
Switzerland, Monaco, and Ireland, among others.
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Furthermore, there are also tax incentives by which the foreign government offers tax breaks
to investors in a bid to encourage FDI.
7. Employment and Economic Boost
When money is invested in another country, it creates jobs, new companies, and new
factories/buildings. This brings about new opportunities for local residents and can stimulate
further growth.
With greater levels of employment being made available, it creates a greater level of
purchasing power in the wider economy. If we couple this with the fact that big corporations
often pay above the average to attract the best workers, we can see a spill-over effect.
With employees earning more money, they also create demand for other goods in the
economy. In turn, this stimulates employment in other markets and industries.
9.5.3 FDI Investment Routes
Foreign Direct Investment (FDI) can be made through two routes that are:
Automatic Route: Indian companies engaged in various industries can issue shares to foreign
investors up to 100% of their paid up capital in Indian companies
Government Approval Route: Certain activities that are not covered under the automatic
route require prior Government approval for FDIs.
*Investors are advised to check for government approval and other related sector condition in
latest FDI Circular Section 5.
 Category 1- Sectors in which FDI is permitted up to 100% under automatic route
 Category 2- Sectors in which FDI is permitted up to 100% under Government Route
 Category 3- Sectors in which FDI is permitted beyond certain limit with Government
 Category 4- Sectors wherein FDI is permitted up to certain limit under both
Government and Automatic routes subject to applicable laws/ regulations security and
other conditionalities
Foreign investors can invest directly in India, either on their own or through joint ventures in
virtually all the sectors except in a very small list of activities where foreign investment is
prohibited.
FDI in the majority of the sectors is under the automatic route, i.e., allowed without any
requirement of seeking regulatory approval prior to such investment. Thus, the process to
get FDI in most sectors don't require prior approval from the GOI. Eligible investors can
invest in most of the sectors of Indian Economy on an automatic basis.
 Any Non-resident individual (NRI)/Entity can invest subject to FDI policy (except in
prohibited sectors). NRI resident in and Citizens of Nepal & Bhutan are permitted to
invest on repatriation basis (amount of consideration for such investment shall be paid
only by way of inward remittances through normal banking channels).
 Company, trust or partnership firm incorporated outside India and owned and
controlled by NRIs
 Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI)
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 Registered FIIs/ FPIs/ NRIs as per Schedules 2, 2A and 3 respectively of Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2000 can invest or trade through a registered broker of Indian
Companies on recognized stock exchanges.
 SEBI registered Foreign Venture Capital Investor (FVCI) in any activity mentioned in
Schedule 6 of Notification No. FEMA 20/2000.
9.5.4 Market Size and Development:
According to Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity
inflow in India stood at US$ 500.12 billion between April 2000 and September 2020,
indicating that Government's effort to improve ease of doing business and relaxing FDI
norms has yield results.
FDI equity inflows in India stood at US$ 30.0 billion in 2020-21 (between April 2020 and
September 2020). Data for 2020-21 indicates that computer software and hardware sector
attracted the highest FDI equity inflows of US$ 17.55 billion, followed by the service sector
at US$ 2.25 billion, trading at US$ 949 million and chemicals (other than fertilisers) at US$
437 million.
In 2020-21 (between April 2020 and September 2020), India received the maximum FDI
equity inflows from Singapore (US$ 8.30 billion), followed by the US (US$ 7.12 billion),
Cayman Islands (US$ 2.10 billion), Mauritius (US$ 2.0 billion), the Netherlands (US$ 1.49
billion) and the UK (US$ 1.35 billion).
In 2020-21 (between April 2020 and September 2020), Gujarat received the maximum FDI
equity inflows of US$ 16.0 billion, followed by Maharashtra at US$ 3.61 billion, Karnataka
at US$ 3.66 billion and Delhi at US$ 2.66 billion.
Investments/ Developments
Some of the significant FDI announcements made recently are as follows:
 In the second quarter of FY21, total FDI inflows amounted to US$ 28.10 billion, of
which equity inflows were US$ 23.44 billion. This boosted FDI equity inflows to US$
30 billion between April 2020 and September 2020, a 15% increase on y-o-y basis
compared with the same period in FY20.
 In November 2020, Rs. 2,480 crore (US$ 337.53 million) foreign direct investment
(FDI) in ATC Telecom Infra Pvt Ltd. was approved by the Union Cabinet.
 In November 2020, Amazon Web Services (AWS) announced to invest US$ 2.77
billion (Rs. 20,761 crore) in Telangana to set up multiple data centres; this is the
largest FDI in the history of the state.
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 Since April 2020, the government has received over 120 foreign direct investment
(FDI) proposals worth ~Rs. 12,000 crore (US$ 1.63 billion) from China. Between
April 2000 and September 2020, India received US$ 2.43 billion FDI from China.
 According to data provided by Reserve Bank of India (RBI), India’s Outward Foreign
Direct Investment (OFDI) in equity, loan and guaranteed issue stood at ~US$ 1.06
billion in November 2020 vs. US$ 3.51 billion in October 2020.
Government Initiatives
In December 2020, the government of Uttar Pradesh agreed to provide Samsung Display
Noida Private Limited with special incentives to set up a mobile and IT display product
manufacturing unit. Under the Central Government's scheme for promotion of manufacturing
electronic components and semiconductors (SPECS), Samsung will also receive a financial
incentive of Rs. 460 crore (US$ 62.61 million). This project will develop a global export hub
in Uttar Pradesh and will help the state attract more foreign direct investments (FDI).
In December 2020, changes in the guidelines for the provision of Direct-to-Home (DTH)
services have been approved by the Union Cabinet, enabling 100% FDI in the DTH
broadcasting services market.
In October 2020, 16 qualifying applicants under the PLI scheme were approved by the
Ministry of Electronics and Information Technology (MeitY). For five years, subsequent to
the base year (FY2019-20), the PLI for large-scale electronics production will extend an
incentive of 4-6% on the incremental sales of products manufactured in India to the
qualifying firms. Samsung, Foxconn, Rising Star, Wistron and Pegatron are the foreign
mobile phone manufacturing companies that have been approved in the mobile phone market.
Under Magnetic Maharashtra 2.0, the state implemented core investment promotion recovery
initiatives such as Plug & Play Infrastructure, Maha Jobs, Maha Parwana, Investor First
Programme, Capacity Augmentation of MIDC Land Banks and Dedicated Country Desks.
This accelerated the economic growth and improved consumer trust, placing the state as one
of the country's most preferred investment destinations, flourishing the state's industrial
sector.
Road ahead
India is expected to attract foreign direct investments (FDI) of US$ 120-160 billion per year
by 2025, according to CII and EY report. Over the past 10 years, the country witnessed a
6.8% rise in GDP with FDI increasing to GDP at 1.8%.
In terms of attractiveness, investors ranked India #3; ~80% investors have plans to invest in
India in the next 2-3 years, while ~25% reported investments worth >US$ 500 million, the
Economic Times reported
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[Reference: https://www.ibef.org/]
Case Analysis: Hindustan Lever Limited v. SEBI
The facts of the case concerned the purchase by HLL of 8 lakh shares of BBLIL from
the Unit Trust of India (UTI) on March 25, 1996. This purchase was made barely two
weeks prior to a public announcement for a proposed merger of HLL with BBLIL.
Upon investigation, SEBI by its Order dated March 11, 1998 (Order) found that, at the
time of the purchase of shares of BBLIL from UTI, HLL was an “insider” as under
Section 2(e) of the 1992 Regulations, the relevant extract of which describes an insider
as any person who:
“(i) is or was connected with the company or is deemed to have been connected with the
company and is reasonably expected to have access by virtue of such connection to
unpublished price sensitive information in respect of securities of the company, or
(ii) has received or has had access to such unpublished price sensitive information.”
SEBI held that, since, HLL and BBLIL were subsidiaries of the same London based
Unilever, and were effectively under the same management, HLL and its directors had
prior knowledge of the merger. Thus, HLL was covered under the definition of an
insider as above defined.
SEBI also held that HLL was in possession of UPSI as defined under Section 2(k) of the
1992 Regulations which includes any information in relation to amalgamation, merges
and takeovers that “is not generally known or published by such company for general
information, but which if published or known, is likely to materially affect the price of
securities of that company in the market”. As per SEBI, the fact that the information
about the merger was available with HLL was enough to satisfy the requirement of
Section 2(k) above.
An appeal was filed by HLL against the said SEBI Order before the Securities Appellate
Authority. On the question of whether HLL could be termed as an insider, the Appellate
Authority agreed with the SEBI Order to hold that, the information available with HLL
in relation to the merger was beyond merely self-generated information, i.e.,
information arising out of its own decision making. Further, with respect to the merger,
the Appellate Authority noted that the existence of directors common to both HLL and
BBLIL, and a common parent company in Unilever meant that they (i.e., HLL and
BBLIL) were in effect under the same management. Consequently, HLL could be
termed as an insider under the 1992 Regulations and it could reasonably be presumed
that HLL was privy to decision making on the merger issue in the BBLIL board.
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On the question of whether the information available with HLL constituted UPSI, the
Appellate Authority agreed with the contentions of HLL that, for information to be
considered as UPSI, it must meet the dual requirements envisaged under Section 2(k) of
the 1992 Regulations, i.e.:
1. The information must not be generally known or published by the company;

and
2. If published or known, is likely to materially affect the prices of securities of
that company in the market. […Emphasis supplied]
The Appellate Authority held that for information to be generally known, it is not required
to be confirmed or authenticated by the company as it would otherwise fall under the
category of information “published by the company”. The Appellate Authority appreciated
the evidence produced by HLL, including various news articles covering the merger, and
concluded that the information of the merger was generally widely known to the public,
and thus failed the first test to qualify as UPSI as per the abovementioned Section 2(k) of
the 1992 Regulations.
HLL also argued that, the information of the merger of two healthy, profit – making
companies is per se not price sensitive, as price sensitivity would arise in case of merger
between a strong company and a weak company, which impacts the share price of the
companies. The Appellate Authority however noted that even in the merger of two healthy
companies there are synergistic possibilities which could lead to price sensitivity for either
company. Thus, the Appellate Authority agreed with SEBI’s conclusion that information of
the merger was price sensitive (though not ‘unpublished’). The matter is currently pending
before the Supreme Court.
Aftermath and consequences of the decision of the Appellate Authority
Subsequently, SEBI by the SEBI (Insider Trading) Amendment Regulations, 2002

amended the definition under Section 2(k) to the following:
““unpublished” means information which is not published by the company or its agents
and is not specific in nature.
Explanation. —Speculative reports in print or electronic media shall not be considered as

published information.”
Consequently, under the revised definition speculative reports in print media, as was the
case in relation to the HLL and BBLIL merger, would not be considered as published
information, and HLL’s knowledge in relation to the merger would be considered as
unpublished information. By the same Amendment Act, SEBI also introduced a new
provision, Section 2(ha) which defined “price sensitive information” to include any
information relating to an amalgamation, merger or takeover as deemed price
sensitive information, regardless of whether such information actually has any affect the
price of the securities in the market.
[Source:https://corporate.cyrilamarchandblogs.com/]
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9.6 SUMMARY
 Capital markets deal with long-term loans and debts, shares, debentures, bonds,
government securities, etc.
 It operates with the help of stock exchanges predominantly.
 They encourage investors to invest in their instruments by offering incentives like
divided interest, which leads to capital formation.
 They are known for mobilizing savings from banks, financial institutions, real estate,
and gold, thus diverting savings from unproductive channels to productive areas.
 The investors in the capital markets having funds are called the surplus units, and the
ones borrowing the funds are called deficit units.
 The funds move from the surplus units to the deficit units.
 They help in proper regulation of funds and liquidity creation.
 Commercial Bank, financial institutions, insurance companies, business corporations,
and retirement funds are the major suppliers of funds in the capital markets.
The major Capital reforms are as follows:
- Establishment of SEBI:
- Setting up of Private Mutual Funds:
- Opening up to Foreign Capital:
- Access to International Capital Markets:
- Banks and Capital Markets:
SEBI is a regulatory body of Indian Stock Market, that drafts a precise set of rules and
regulations, and should be followed when a securities trade is undertaken.
Definite rules and regulations were created, which would bind the intermediaries, creating a
frame of boundaries they need to adhere to, mostly in favour of individual investors.
Apart from being a critical driver of economic growth, Foreign Direct Investment (FDI) has
been a major non-debt financial resource for the economic development of India. Foreign
companies invest in India to take advantage of relatively lower wages, special investment
privileges like tax exemptions, etc.
1. Horizontal FDI: The most common type of FDI is Horizontal FDI, which primarily
revolves around investing funds in a foreign company belonging to the same industry as that
owned or operated by the FDI investor.
2. Vertical FDI: A vertical FDI occurs when an investment is made within a typical supply
chain in a company, which may or may not necessarily belong to the same industry.
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3. Conglomerate FDI: When investments are made in two completely different companies of
entirely different industries, the transaction is known as conglomerate FDI.
4. Platform FDI: a business expands into a foreign country, but the products manufactured are
exported to another, third country.
9.7 KEYWORDS
 “Preferential Allotment” includes issue of shares on preferential basis and/or

through private placement made by a company in pursuance of a resolution passed
under sub- section (1A) of section 81 of the Companies Act, 1956 and issue
of shares to the promoters and their relatives either in public issue or otherwise
 "Badla" - in share trading means something in return. It is a system to carry-
forward. Badla is the charge, which the investor pays to carry forward his position.
 Conglomerate FDI- When investments are made in two completely different
companies of entirely different industries, the transaction is known as conglomerate
FDI
 EQUITY CAPITAL: it is the overseas investor’s purchase of shares of a business
located in another country rather than its own.
 REINVESTED EARNINGS: it is the oversea investor’s share (in proportion to
direct equity participation) of earnings not distributed as dividends by subsidiaries or
associates, and earnings of branches not remitted to the direct investor.
1. Explain the functions of SEBI.

___________________________________________________________________________
___________________________________________________________________________
2. Why the Regulation of stock markets is important?
___________________________________________________________________________
___________________________________________________________________________
Short Questions
1. What is Capital Market?
2. Why the capital reforms were introduced?
3. State the powers of SEBI
4. Compare Advantages and Disadvantages of Capital Market.
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5. Explain the Market Size for FDI.
Long Questions
1. Validate the statement - Securities and exchange board of India safeguards the interest of
the investors, invading the superiority and dominance of intermediaries, to create an
environment free of malpractices
2. What is FDI? State the benefits of FDI for business.
3. Explain the routes of FDI and government initiatives.
4. Discuss the importance of SEBI Regulation and the structure.
5. Explain the importance of FDI policy and enlist the components of FDI.

1. Which step will help in widening and deepening of trading in the secondary market.?
a. Bank lending against shares and debentures
b. Opening up to Foreign Capital:
c. Setting up of Private Mutual Funds:
d. Access to International Capital Markets:
2. Listed company furnishes annual statements showing variations between financial

projections and project utilization of funds made in the offer documents and actual. This
helps
a. Process of establishing transparent rules for trading in stock exchanges
b. Enable shareholders to make comparisons between performance and promises made by of
company.
c. BADLA system was stopped.
d. Rolling Settlement System has been introduced.
c. IPO
d. Options
3. Buying and selling of securities may involve a brokerage fee, commission, etc. increasing
the cost of _____________
a. Transfer
b. Enlisting
c. Transactions
d. Registering
4. Both stock markets and over-the-counter trades come under the _____________
237
a.Secondary market
b. Primary market
c. Tertiary market
d. Registered market
5. ________________regulation is of Prohibition of Insider Trading, where insiders of the

listed company are not to trade the securities
a. 2009 regulation
b. 2011 regulation
c. 2012 regulation
d. 2015 regulation
Answers
1 - a; 2 - b; 3 –c; 4 – a; 5 – d.
Text Books:
Publishing House],
Hall.
Reference Books:
 Bhole, Financial Institutions and Markets: Structure, Growth & Innovation, McGraw
Hill Education
Open Text Source:

p. 2049. ISBN 9788180385926.
238
Limited. pp. 48–.ISBN 978-81-7534-840-0.
239
UNIT 10: INDIAN IN WORLD ECONOMY
Structure
10.1 Introduction
10.2 MNC- Multinational Corporation
10.2.1 Meaning
10.2.2Features
10.2.3 Advantages and Limitations of MNCs:
10.3 World Trade Organization
10.3.1 Objective and function
10.3.2 Role of WTO:
10.4 International Monetary Funds
10.4.1 Objectives
10.4.2 Functions
10.4.3 Organisation and Management of the IMF:
10.4.4 Source of Funds
10.4.5 Special Drawing Rights
10.4.6 Borrowing methods used by the Fund
10.5 World Bank
10.5.1 Functions
10.5.2 Objectives
10.6 Trading Bloc
10.6.1 Types
10.6.2 Difference between free trade area and customs union
10.7 Summary
10.8 Keywords
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After studying this, Unit you will be able to
 Explain the role of World Trade Organization

 Describe the benefits of MNCs
 Analyze the functions and conditions of IMF
 Highlight the importance of World Bank
10.1 INTRODUCTION
An economic activity that is functional in more than one country is termed a multinational
corporation (MNC) or transnational corporation (TNC), also called multinational enterprise
(MNE).Generally large-scale organization explore different countries for the availability of
resources and set up production facilities in that country to minimize the cost of production
and delivers the products in different countries to expand the market share. E.g., Car
manufacturing Industries like Maruti Suzuki, Tata, Nissan, Microsoft, IBM, Nestle, etc. The
Dutch East India Company is considered as first modern MNC.
International Business needs regulatory framework for smooth operations and that’s why the
organization like WTO, IMF and World Bank are utmost important for Global Business. The
function of WTO and IMF is complementary. Cross borders trade treaties and robust
financial system that offers loans in the time of need is must for avoiding financial crisis and
payment imbalances. The existence of such system ensures the regional development of the
backward countries, accelerate the development of emerging economies and provide access
to the quality offerings of developed nations. Thus, contributing in overall development of
the globe.
The World Bank and the IMF, are also called as Bretton Woods Institutions, that are two
strong intergovernmental pillars and offers support to the global economic structure and
financial order. There are many similarities in their operation but they are two different
entities with different roles.
10.2 MULTINATIONAL CORPORATION -MNC
The International Labour Organization (ILO) has defined an MNC as a corporation which has
its management headquarters in one country known as the home country and operates in
several other countries known as host countries.
MNC’s have budgets that exceed some national GDPs. Multinational corporations can have a
powerful influence in local economies as well as the world economy and play an important
role in international relations and globalization. The presence of such powerful players in the
world economy is reason for much controversy.
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10.2.1 Meaning of Multinational Companies (MNCs):
A multinational company is one which is incorporated in one country (called the home
country); but whose operations extend beyond the home country and which carries on
business in other countries (called the host countries) in addition to the home country.
It must be emphasized that the headquarters of a multinational company are located in the
home country.
Neil H. Jacoby defines a multinational company as follows:

“A multinational corporation owns and manages business in two or more countries.”
Point of comment:
A multinational corporation is known by various names such as: global enterprise,
international Enterprise, world enterprise, transnational corporation etc.
Examples of MNCs are:
10.2.2 Features:
Following are the salient features of MNCs:
(i) Huge Assets and Turnover:

Because of operations on a global basis, MNCs have huge physical and financial assets. This
also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many
MNCs are bigger than national economies of several countries.
(ii) International Operations Through a Network of Branches:

MNCs have production and marketing operations in several countries; operating through a
network of branches, subsidiaries and affiliates in host countries.
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(iii) Unity of Control:
MNCs are characterized by unity of control. MNCs control business activities of their
branches in foreign countries through head office located in the home country. Managements
of branches operate within the policy framework of the parent corporation.
(iv) Mighty Economic Power:

MNCs are powerful economic entities. They keep on adding to their economic power through
constant mergers and acquisitions of companies, in host countries.
(v) Advanced and Sophisticated Technology:

Generally, a MNC has at its command advanced and sophisticated technology. It employs
capital intensive technology in manufacturing and marketing.
(vi) Professional Management:
A MNC employs professionally trained managers to handle huge funds, advanced technology
and international business operations.
(vii)Aggressive Advertising and Marketing:

MNCs spend huge sums of money on advertising and marketing to secure international
business. This is, perhaps, the biggest strategy of success of MNCs. Because of this strategy,
they are able to sell whatever products/services, they produce/generate.
(viii) Better Quality of Products:

A MNC has to compete on the world level. It, therefore, has to pay special attention to the
quality of its products.
10.2.3 Advantages and limitations of MNCs:

Advantages of MNCs from the Viewpoint of Host Country:
We propose to examine the advantages and limitations of MNCs from the viewpoint of the
host country. In fact, advantages of MNCs make for the case in favour of MNCs; while
limitations of MNCs become the case against MNCs.
(i) Employment Generation:

MNCs create large scale employment opportunities in host countries. This is a big advantage
of MNCs for countries; where there is a lot of unemployment.
(ii) Automatic Inflow of Foreign Capital:
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MNCs bring in much needed capital for the rapid development of developing countries. In
fact, with the entry of MNCs, inflow of foreign capital is automatic. As a result of the entry
of MNCs, India e.g. has attracted foreign investment with several million dollars.
(iii) Proper Use of Idle Resources:
Because of their advanced technical knowledge, MNCs are in a position to properly utilise
idle physical and human resources of the host country. This results in an increase in the
National Income of the host country.
(iv) Improvement in Balance of Payment Position:
MNCs help the host countries to increase their exports. As such, they help the host country to
improve upon its Balance of Payment position.
(vi) Technical Development:
MNCs carry the advantages of technical development 10 host countries. In fact, MNCs are a
vehicle for transference of technical development from one country to another. Because of
MNCs poor host countries also begin to develop technically.
(vii) Managerial Development:
MNCs employ latest management techniques. People employed by MNCs do a lot of
research in management. In a way, they help to professionalize management along latest lines
of management theory and practice. This leads to managerial development in host countries.
(viii) End of Local Monopolies:
The entry of MNCs leads to competition in the host countries. Local monopolies of host
countries either start improving their products or reduce their prices. Thus, MNCs put an end
to exploitative practices of local monopolists. As a matter of fact, MNCs compel domestic
companies to improve their efficiency and quality.In India, many Indian companies acquired
ISO-9000 quality certificates, due to fear of competition posed by MNCs.
(ix) Improvement in Standard of Living:
By providing super quality products and services, MNCs help to improve the standard of
living of people of host countries.
(x) Promotion of international brotherhood and culture:
MNCs integrate economies of various nations with the world economy. Through their
international dealings, MNCs promote international brotherhood and culture; and pave way
for world peace and prosperity.
Limitations of MNCs from the Viewpoint of Host Country:

(i) Danger for Domestic Industries:
MNCs, because of their vast economic power, pose a danger to domestic industries; which
are still in the process of development. Domestic industries cannot face challenges posed by
MNCs. Many domestic industries have to wind up, as a result of threat from MNCs. Thus
MNCs give a setback to the economic growth of host countries.
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(ii) Repatriation of Profits:
(Repatriation of profits means sending profits to their country).
MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign
exchange reserves of the host country; which means that a large amount of foreign exchange
goes out of the host country.
(iii) No Benefit to Poor People:

MNCs produce only those things, which are used by the rich. Therefore, poor people of host
countries do not get, generally, any benefit, out of MNCs.
(iv) Danger to Independence:

Initially MNCs help the Government of the host country, in a number of ways; and then
gradually start interfering in the political affairs of the host country. There is, then, an implicit
danger to the independence of the host country, in the long-run.
(v) Disregard of the National Interests of the Host Country:

MNCs invest in most profitable sectors; and disregard the national goals and priorities of the
host country. They do not care for the development of backward regions; and never care to
solve chronic problems of the host country like unemployment and poverty.
(vi) Misuse of Mighty Status:

MNCs are powerful economic entities. They can afford to bear losses for a long while, in the
hope of earning huge profits-once they have ended local competition and achieved monopoly.
This may be the dirties strategy of MNCs to wipe off local competitors from the host country.
(vii) Careless Exploitation of Natural Resources:

MNCs tend to use the natural resources of the host country carelessly. They cause rapid
depletion of some of the non-renewable natural resources of the host country. In this way,
MNCs cause a permanent damage to the economic development of the host country.
(viii) Selfish Promotion of Alien Culture:

MNCs tend to promote alien culture in host country to sell their products. They make people
forget about their own cultural heritage. In India, e.g. MNCs have created a taste for synthetic
food, soft drinks etc. This promotion of foreign culture by MNCs is injurious to the health of
people also.
(ix) Exploitation of People, in a Systematic Manner:

MNCs join hands with big business houses of host country and emerge as powerful
monopolies. This leads to concentration of economic power only in a few hands. Gradually
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these monopolies make it their birth right to exploit poor people and enrich themselves at the
cost of the poor working class.
Advantages from the Viewpoint of the Home Country:

Some of the advantages of the MNCs from the viewpoint of the home country are:
(i) MNCs usually get raw-materials and labour supplies from host countries at lower prices;
specially when host countries are backward or developing economies.
(ii) MNCs can widen their market for goods by selling in host countries; and increase their
profits. They usually have good earnings by way of dividends earned from operations in host
countries.
(iii) Through operating in many countries and providing quality services, MNCs add to their
international goodwill on which they can capitalize, in the long-run.
Limitations from the Viewpoint of the Home Country:

Some of the limitations of MNCs from the viewpoint of home country may be:
(i) There may be loss of employment in the home country, due to spreading manufacturing
and marketing operations in other countries.
(ii) MNCs face severe problems of managing cultural diversity. This might distract
managements’ attention from main business issues, causing loss to the home country.
(iii) MNCs may face severe competition from bigger MNCs in international markets. Their
attention and finances might be more devoted to wasteful counter and competitive
advertising; resulting in higher marketing costs and lesser profits for the home country.
10.3 WORLD TRADE ORGANIZATION:
WTO was formed in 1995 to replace the General Agreement on Tariffs and Trade (GATT),
which was started in 1948. GATT was replaced by WTO because GATT was biased in
favour of developed countries. WTO was formed as a global international organization
dealing with the rules of international trade among countries.
The main objective of WTO is to help the global organizations to conduct their businesses.
WTO, headquartered at Geneva, Switzerland, consists of 153 members and represents more
than 97% of world’s trade
.
10.3.1 Objective and Function
The main objectives of WTO are as follows:
a. Raising the standard of living of people, promoting full employment, expanding production
and trade, and utilizing the world’s resources optimally
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b. Ensuring that developing and less developed countries have better share of growth in the
world trade
c. Introducing sustainable development in which balanced growth of trade and environment
goes together
The main functions of WTO are as follows:

a. Setting the framework for trade policies
b. Reviewing the trade policies of different countries
c. Providing technical cooperation to less developed and developing countries
d. Setting a forum for addressing trade-related disputes among different countries
e. Reducing the barriers to international trade
f. Facilitating the implementation, administration, and operation of agreements
g. Setting a negotiation forum for multilateral trade agreements
h. Cooperating with the international institutions, such as IMF and World Bank for making
global economic policies
i. Ensuring the transparency of trade policies
j. Conducting economic research and analysis
10.3.2 Role of WTO:

Global trade rules
Global rules of trade provide assurance and stability. Consumers and producers know they
can enjoy secure supplies and greater choice of the finished products, components, raw
materials and services they use. Producers and exporters know foreign markets will remain
open to them.
This leads to a more prosperous, peaceful and accountable economic world. Decisions in the
WTO are typically taken by consensus among all members and they are ratified by members’
parliaments. Trade frictions are channelled into the WTO’s dispute settlement process, where
the focus is on interpreting agreements and commitments and how to ensure that members’
trade policies conform with them. That way, the risk of disputes spilling over into political or
military conflict is reduced.
By lowering trade barriers through negotiations among member governments, the WTO’s
system also breaks down other barriers between peoples and trading economies.
Trade negotiations:
The system was developed through a series of trade negotiations, or rounds, held under the
GATT. The first rounds dealt mainly with tariff reductions but later negotiations included
other areas such as anti-dumping and non-tariff measures. The 1986-94 round – the Uruguay
Round – led to the WTO’s creation.
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The negotiations did not end there. In 1997, an agreement was reached on
telecommunications services, with 69 governments agreeing to wide-ranging liberalization
measures that went beyond those agreed in the Uruguay Round.
In the same year, 40 governments successfully concluded negotiations for tariff-free trade in
information technology products, and 70 members concluded a financial services deal
covering more than 95% of trade in banking, insurance, securities and financial information.
In 2000, new talks started on agriculture and services. These were incorporated into a broader
work programme, the Doha Development Agenda, launched at the fourth WTO Ministerial
Conference in Doha, Qatar, in November 2001.
The new work programme included negotiations and other work on non- agricultural tariffs,
trade and the environment, WTO rules on anti-dumping and subsidies, trade facilitation,
transparency in government procurement, intellectual property and a range of issues raised by
developing economies as difficulties they face in implementing WTO agreements.
Negotiations on these and other topics have resulted in major updates to the WTO rulebook
in recent years. A revised Government Procurement Agreement – adopted at the WTO’s 8th
Ministerial Conference in 2011 – expanded the coverage of the original agreement by an
estimated US$ 100 billion a year.
At the 9th Ministerial Conference in Bali in 2013, WTO members struck the Agreement on
Trade Facilitation, which aims to reduce border delays by slashing red tape.
When fully implemented, this Agreement – the first multilateral accord reached at the WTO –
will cut trade costs by more than 14% and will lift global exports by as much as US$ 1
trillion per year.
The expansion of the Information Technology Agreement – concluded at the 10th Ministerial
Conference in Nairobi in 2015 – eliminated tariffs on an additional 200 IT products valued at
over US$ 1.3 trillion per year. Another outcome of the Conference was a decision to abolish
agricultural export subsidies, fulfilling one of the key targets of the UN Sustainable
Development Goal on “Zero hunger”.
Most recently, an amendment to the WTO’s Intellectual Property Agreement entered into
force in 2017, easing poor economies’ access to affordable medicines. The same year saw the
Trade Facilitation Agreement enter into force.
WTO- Agreements:
The WTO’s rules – the agreements – are the result of negotiations between the members. The
current set is largely the outcome of the 1986- 94 Uruguay Round negotiations, which
included a major revision of the original General Agreement on Tariffs and Trade (GATT).
The Uruguay Round created new rules for dealing with trade in services and intellectual
property and new procedures for dispute settlement. The complete set runs to some 30,000
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pages consisting of about 30 agreements and separate commitments (called schedules) made
by individual members in specific areas, such as lower tariffs and services market-opening.
Through these agreements, WTO members operate a non- discriminatory trading system that
spells out their rights and their obligations. Each member receives guarantees that its exports
will be treated fairly and consistently in other members’ markets.
WTO has the following advantages:

(a) Promoting peace within nations:
Leads to less trade disputes. WTO helps in creating international cooperation, peace, and
prosperity among nations.
(b) Handling the disputes constructively:

Helps in lesser trade conflicts. When the international trade expands, the chances of disputes
also increase. WTO helps in reducing these trade disputes and tensions among nations.
(c) Helping consumers by providing choices:

Implies that by promoting international trade, WTO helps consumers in gaining access to a
large number of products.
(d) Encouraging good governance:

Accelerates the growth of a country. The rules formulated by WTO encourage good
governance and discourage the unwise policies that lead to corruption in a country.
(e) Stimulating economic growth:

Leads to more jobs and increase in income. The policies of WTO focus on reducing trade
barriers among nations to increase the quantum of import and export.
10.4 INTERNATIONAL MONETARY FUND:
IMF, established in 1945, consists of 187 member countries. It works to secure financial
stability, develop global monetary cooperation, facilitate international trade, and reduce
poverty and maintain sustainable economic growth around the world. Its headquarters are in
Washington, D.C., United States.
10.4.1 Objectives:
The objectives of IMF are as follows:
a. Helping in increasing employment and real income of people
b. Solving the international monetary problems that distort the economic development of
different nations
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c. Maintaining stability in the international exchange rates
d. Strengthening the economic integrity of the nations
e. Providing funds to the member nations as and when required
f. Monitoring the financial and economic policies of member nations
g. Assisting low developed countries in effectively managing their economies
WTO and IMF have total 150 common members. Thus, they both work together where the
central focus of WTO is on the international trade and of IMF is on the international
monetary and financial system. These organizations together ensure a sound system of global
trade and financial stability in the world.
10.4.2 Functions of IMF:

The main function of the IMF is to provide temporary financial support to its members so that
‘fundamental’ BOP disequilibrium can be corrected. However, such granting of credit is
subject to strict conditionality. The conditionality is a direct consequence of the IMF’s
surveillance function over the exchange rate policies or adjustment process of members.
Monitoring Member Country Economies
The International Monetary Fund's primary job is to promote stability in the global monetary
system. So, its first function is to monitor the economies of its 189 member countries. This
activity, known as economic surveillance, happens at both the national and global levels.
Through economic surveillance, the IMF monitors developments that affect member
economies as well as the global economy as a whole.
Member nations must agree to pursue economic policies that coincide with the IMF's
objectives. By monitoring the macroeconomic and financial policies of its member countries,
the IMF sees stability risks and advises on possible adjustments.
Lending
The IMF lends money to nurture the economies of member countries with balance of
payments problems instead of lending to fund individual projects. This assistance can
replenish international reserves, stabilize currencies, and strengthen conditions for economic
growth. The IMF expects the countries to pay back the loans, and the countries must embark
on structural adjustment policies monitored by the IMF.
Lending through the IMF takes two forms. The first is at non-concessional interest rates,
while the other comes with concessional terms. The latter is advanced to countries with low
income, and bears very low or no interest rates at all.
Technical Assistance
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The third main function of the IMF is through what it calls capacity development by
providing assistance, policy advice, and training through its various programs. The group
provides member nations with technical assistance in the following areas:
 Fiscal policy
 Monetary and exchange rate policies
 Banking and financial system supervision and regulation
 Statistics
The organization aims to strengthen human and institutional capacity. This is very important
for countries with previous policy failures, weak institutions, or scarce resources. Through
capacity development, member nations can help strengthen and improve growth in their
economies and create jobs.
Its main elements are:

(i) Application of the principles of market economy;
(ii) Opening up of the economy by removing all barriers of trade; and
(iii) Prevention of deflation.
10.4.3 Organisation and Management oftheIMF:

The IMF is run by a Board of Governors, an Executive Board and an international staff.
Every member country delegates a representative (usually heads of central banks or ministers
of finance) to the Board of Governors—the top link of the chain of command. It meets once a
year and takes decision on fundamental matters such as electing new members or changing
quotas.
The Executive Board is entrusted to the management of day-to-day policy decisions. The
Board comprises 24 executive directors who supervise the implementation of policies set by
the member governments through the Board of Governors.
The IMF is headed by the Managing Director who is elected by the Executive Board for a 5
year term of office.
Rights and obligations, i.e., the balance of Powers in the Fund is determined by a system of
quotas. Quotas are decided by a vote of the Board of Governors. Quotas or subscriptions
roughly reflect the importance of members in the world economy. It is the quota on which
payment obligation, credit facilities, and voting rights of members are determined.
10.4.4 Source of Funds:

The capital or the resources of the Fund come from two sources:
(i) Subscription or quota of the member nations, and
(ii) Borrowings.
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Each member country is required to subscribe an amount equivalent to its quota. It is the
quota on which payment obligations, credit facilities, and voting right of members are
determined. As soon as a country joins the Fund, it is assigned a quota which is expressed in
Special Drawing Rights (SDRs). At the time of formation of the IMF, the quota of each
member was made up of 25 p.c. in gold or 10 p.c. of its net official holdings of gold and US
dollars (whichever was less). Now this has been revised.
The capital subscriptions or quota is now made up of 25 p.c. of its quota in SDRs or widely
accepted currencies (such as the US dollar, euro, the yen or the pound sterling) instead of
gold and 75 p.c. in country’s own currency. The size of the Fund equals the sum of the
subscriptions of members. Total quotas at the end-August 2008 were SDR 217.4 billion
(about $341 billion).
The Fund is authorised to borrow in special circumstances if its own resources prove to be
insufficient. It sells gold to member countries to replenish currency holdings. It is entitled to
borrow even from international capital market. Though the Articles of Agreement permit the
Fund to borrow from the private capital market, till today no such use has been made by the
IMF.
10.4.5 Special Drawing Rights (SDRs):

The Special Drawing Rights (SDRs) as an international reserve asset or reserve money in the
international monetary system was established in 1969 with the objective of alleviating the
problem of international liquidity. The IMF has two accounts of operation—the General
Account and the Special Drawing Account.
The former account uses national currencies to conduct all business of the fund, while the
second account is transacted by the SDRs. The SDR is defined as a composite of five
currencies—the Dollar, Mark, Franc, Yen and Pound. The SDRs are allocated to the member
countries in proportion to their quota subscriptions. Only the IMF members can participate in
SDR facility.
SDRs being costless, often called paper gold, is just a book entry in the Special Drawing
Account of the IMF. Whenever such paper gold is allocated, it gets a credit entry in the name
of the participating countries in the said account. It is to be noted that SDRs, once allocated to
a member, are owned by it and operated by it to overcome BOP deficits. Since its inception,
there have been only four allocation to SDRs—the first in 1970, and the last in 2008-09—
mainly to the developing countries.
Instruments of IMF Lending and Loan Conditionality:

The IMF Articles of Agreement clearly state that the resources of the Fund are to be used to
give temporary assistance to members in financing BOP deficit on current account. Of
course, the financial assistance provided by the Fund is loan. The following technique is
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employed: If a country calls on the Fund it buys foreign currencies from the IMF in return for
the equivalent in the domestic currency.
This, in legal and technical terms, is called a ‘drawing’ on the Fund. The technique, therefore,
suggests that the IMF does not lend, but sells the required currency to the members on certain
terms. This unique financial structure of the Fund clearly suggests that the Fund’s resources
cannot be lent for long time. It is meant to cover short run gaps in BOP.
The IMF’s unique financial structure does not allow any member to enjoy financial assistance
over a long time period. The total amount that a country is entitled to draw is determined by
the amount of its quota. A member is entitled to draw an amount not exceeding 25 p.c. of its
quota. The first 25 p.c. called the ‘gold tranche’ (‘tranche’ a French Word meaning slice) or
‘reserve tranche’ can easily be drawn by countries with BOP problems.
This 25 p.c. of the quota is the members’ owned reserves and therefore no conditions are
attached to such drawings. This may be called ‘ordinary, drawing rights; even the Fund
cannot deny its use. However, no interest for the first credit tranche is required to be paid
though such drawings are subject to repayment within 3-5 years period.
The ‘credit tranche’ of 100 p.c. each equalling 25 p.c. of a member’s quota are also available
subject to the IMF approval and hence, ‘conditional’.
Originally, it was possible to borrow equal to 125 p.c. of one’s quota. At present, borrowing
limit has been raised to 450 p.c. of one’s quota which must be redeemed within five years.
10.4.6 Borrowing Methods Used By The Fund Are:

(i) Stand-by Arrangements:
This method of borrowing has become the most normal form of assistance by the Fund.
Under this form of borrowing, a member state obtains the assurance of the Fund that, usually
over 12-18 months, requests for drawings of foreign exchange (i.e., to meet short- term BOP
problems) up to a certain amount will be allowed if the country concerned wishes.
However, the stand-by arrangements can be extended up to 3 years while repayments are
required to be made within 3-5 years of each drawing. The term “stand-by” here means that,
subject to conditionality, a member has a right to draw the money made available, if needed.
In most cases, the member does, in fact, draw.
(ii) Extended Fund Facility (EFF):

Stand-by arrangements to stabilise a member’s BOP run usually for a period of 12-18
months. Developing countries suffer from chronic BOP problems which could not be
remedied in the short run. Such protracted BOP difficulties experienced by the LDCs were
the result of structural imbalances in production and trade. It then necessitated an adjustment
programme and redemption scheme of longer duration.
In the 1970s, the Fund recognised this idea and built up the EFF in 1974. The EFF is
designed to provide assistance to members to meet their BOP deficits for longer period (3-4
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years) and in amounts larger in relation to their quotas. Repayment provisions of EFF cover a
period of 4-10 years. However, conditions for granting loans are very stringent. Drawings on
this account since 2000 stand at over 50 billion dollar in SDRs.
(iii) Compensatory Financing Facility (CFF):

Apart from the ordinary drawing rights, there are some ‘special finances’ windows to assist
the developing countries to tide over BOP difficulties. CFF, introduced in 1963, is one such
special drawing provision. Its name was changed to Compensatory and Contingency
Financing Facility (CCFF) in 1980, but the ‘contingency’ was dropped in 2000. Under it,
members were allowed to draw up to 25 p.c. of its quota when CFF was introduced.
It can now draw up to 45 p.c. Since the mid- 1990s, this has been the least-used facility.
(iv) Structural Adjustment Facility (SAF) and the Enhanced SAF (ESAF):
In 1986 a new facility—the SAF—was introduced for the benefit of low income countries. It
was increasingly realised that the so-called stringent and inflexible credit arrangements were
too inadequate to cope with the growing debt problems of the poorest members of the Fund.
In view of this, SAF was introduced which stood quite apart from the monetary character of
the Fund.
Under it, credit facilities for economic reform programmes are available at a low interest rate
of 0.5 p. c compared to 6 p.c. for most Fund facilities. Loans are for 10 years with a grace
period of five and a half years. LDCs facing protracted BOP problems can get assistance
under SAF provided they agree to undertake medium-term structural adjustment programmes
to foster economic growth and improve BOP conditions. An extended version of SAF—
ESAF—was introduced in 1987. The ESAF has been replaced by a new facility, called
Poverty Reduction and Growth Facility in 1999.
What emerges from the structural adjustment facility is that the IMF’s loan is now available
to member countries in support of policy programmes. It now insists on the supply side
policy ‘as a condition’ for assistance, in addition to loans meant for short-term BOP
difficulties.
(v) Poverty Reduction and Growth Facility (PRGF):

The PRGF that replaced the ESAF in November 1999 provides concessional lending to help
the poorest member countries with the aim of making poverty reduction and economic
growth —the central objectives of policy programmes. Under this facility, low-income
member countries are eligible to borrow up to 140 p.c. of its quota for a 3-year period. Rate
of interest that is charged is only 0.5 p. c and repayment period covers 5 1/2-10 years, after
disbursement of such facility. However, financial assistance under this facility is, of course,
‘conditional’.
(vi) Supplemental Reserve Facility (SRF):
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This instrument provides additional short-term financing to member countries facing
exceptional BOP difficulties because of a sudden and disruptive loss of market confidence
reflected in capital outflows of countries concerned. Consequent upon the eruption of East
Asian financial crisis, the SRF was introduced in 1997.
Till date (March, 2012), the top three largest borrowing nations are Greece, Portugal and
Ireland from the IMF.
Strings of Conditionality:
It is to be remembered here that the IMF lending is conditional. Further, the IMF lending is
temporary ranging from 1 year to 3 years. Repayment period varies from country to country
and from one facility to another. Repayment under PRGF for low income countries is 10
years with a 5 1/2 year grace period on principal payments.
10.5 WORLD BANK
The world bank is internationally recognized and supported that provides technical and financial
assistance to many developing countries in the world. Also, it aids their advancement, in an
economy with a primary goal of reducing poverty. World bank has the largest knowledge of
developing countries. Also, they are the largest source when it comes to funding.
There are some of the facts that you should know about world bank for the preparation of your
competitive exams. They are:
 Jim Yong Kim is currently the president of the world bank.
 Currently, the membership of the world bank is given to 189 countries under
IBRD and 173 countries under IDA.
 Organizations like MIGA, IFC, and ICSID manages the World bank
 Also, the world has its headquarters situated in Washington DC and has more than
10000 staff all over the world.
 So, the formation of world bank was done Bretton Woods committee that was
held in 1944.
 Alongside the IMF, it was launched in the presence of many important delegates.
10.5.1 Functions of The World Bank
 It helps the war-devasted countries by granting them loans for reconstruction.
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 Thus, they provide extensive experience and the financial resources of the bank
help the poor countries increase their economic growth, reducing poverty and a
better standard of living.
 Also, it helps the underdeveloped countries by granting development loans.
 So, it also provides loans to various governments for irrigation, agriculture, water
supply, health, education, etc.
 It promotes foreign investments to other organizations by guaranteeing the loans.
 Also, the world bank provides economic, monetary, and technical advice to the
member countries for any of their projects.
 Thus, it encourages the development of of-industries in underdeveloped countries

by introducing the various economic reforms.
10.5.2 Objectives of The World Bank
 This includes providing long term capital to its member nations for economic
development and reconstruction.
 Thus, it helps in inducing long term capital for improving the balance of payments
and thereby balancing international trade.
 Also, it helps by providing guarantees against loads granted to large and small
units and other projects for the member nations.
 So, it ensures that the development projects are implemented. Thus, it brings a
sense of transparency for a nation from war-time to a peaceful economy.
 Also, it promotes the capital investment for member nations by providing a

guarantee for capital investment and loans.
 So, if the capital investment is not available than it provides the guarantee and
then IBRD provides loans for promotional activities on specific conditions.
Purposes of the World Bank
 It wants to create an environment that is a pro-investment.
 Also, it wants to improve the omics stability by reducing poverty.
 So, it is working towards achieving sustainable growth.
 Increasing the opportunities for jobs and business in member nations which are
underdeveloped.
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 Through investment, it plans to promote the socio-economic status of the society.
 Also, it wants to ensure that the judicial and legal systems are developed and
individual rights are protected.
 Strengthen the government of its member nations by promoting education.
 Combating corruption and to ensure that there are adequate training opportunities
and research facilities.
 It wants to provide loans with low-interest rates and interest-free credits.
10.6 TRADING BLOCKS
Trading blocks are groups of countries who form trade agreements between themselves.
Trading blocks can include
 Free trade areas – elimination of tariffs between economies in the trading
block
 Customs union – free trade area + a common external tariff with non-
members
 Economic union/Single market – Customs union + common rules and
regulations.
10.6.1 Different types of trading blocks
Trading blocks have become increasingly influential for world trade.

 They have advantages in enabling free trade between geographically close
countries. This can lead to lower prices, increased export potential, higher
growth, economies of scale and greater competition.
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 However, it can lead to compromise as countries pool economic sovereignty.
Also, the move to free trade tends to create winners and losers – with some
domestic industries losing out to lower-cost imports.
Fig 10.1: Examples of Global trading blocks

Free trade areas
 European Union – The most integrated trading block. The EU27 have free
trade and common regulations and are part of a customs union.
 NAFTA – North Atlantic Free Trade Association. A free trade area between
Canada, US and Mexico
 ASEAN Free Trade Area Free trade area in South East Asia founded 1992.
Includes: Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand,
Vietnam, Laos, Myanmar and Cambodia.
 SAFTA South Asia free trade area based around the Indian sub-continent.
Includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan
and Sri Lanka.
 Mercosur – a southern American trading block formed in 1991. Includes full
members of Argentina, Brazil, Paraguay and Uruguay. With associate
members including Bolivia, Chile, Colombia, Ecuador. Developed from free
trade area to become customs union.
 African Union 55 countries of the continent of Africa. Created to forge closer
political and economic ties. It has aspirations to become a free trade area.
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10.6.2 Difference between free trade area and customs union
A customs union has a common external tariff on imports. This means that it doesn’t matter
which country the imports enter – because all countries have the same import tariff. This
means there doesn’t need to be internal checking on ‘Rules of origin‘. For example, if
imports from Africa enter Spain then if goods travel across the border from Spain to France,
there is no need to check whether goods are paying the correct import tariff – because the
import tariffs are all the same.
A disadvantage of joining a customs union is that a country is not able to pursue its own
independent trade deals. However, since trade deals are complicated and take several years,
there is an advantage to negotiating trade deals as part of a regional trade block – rather than
separate individual countries.
Advantages of trading blocks
 Tariff removal leads to trade creation – lower prices for consumers and greater
opportunity for exporters.
 Increased trade enables increased specialisation – which gives benefits
of economies of scale (lower average costs from increased output)
 Catch-up effects. Countries joining a rich trading block can benefit from
inward investment and increased trade opportunities. Countries in Eastern
Europe have made considerable progress in catching up with average income
levels in Western Europe.
 Gravity theory of trade suggests that trade with countries in close proximity is
the most important due to lower transport and similar cultural and economic
ties.
 Gives small countries a greater say in global trade agreements
 Increased competition. The removal of tariffs creates greater choice for
consumers. Therefore domestic firms have a greater incentive to cut costs to
remain competitive.
Disadvantages of trading blocks
 Joining a customs union may lead to increased import tariffs – which leads to
trade diversion. For example, when the UK joined the EEC customs union, it
required higher import tariffs on imports from former Commonwealth
countries. This led to switch in demand towards higher-cost European
countries and caused loss of business for Commonwealth countries
 Increased interdependence on economic performance in other countries in
trading block. If Eurozone goes into recession, it will affect all countries in the
Eurozone. However, this is almost inevitable even if countries are not formally
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in a trading block due to a close relationship between trade cycles in different
countries.
 Loss of sovereignty and independence. A trading block needs to make
decisions for the whole area. This may go counter to the particular wishes of a
country.
 Increased influence of multinationals. In a bilateral deal between the US and
South-East Asian trading block. Free trade may come at the price of allowing
free movement of capital. This can have benefits in terms of inward
investment. But, can also have costs for higher-cost domestic producers. Free
trade can lead to structural unemployment as resources shift from
uncompetitive industries to newer industries.
10.7 SUMMARY
Most of the countries across the globe are the member of IMF and World Bank. It is directed
by the government of member nation. The main purpose of both the organization is provide
strength to the economies of member nation. They both have joint task force, research efforts
and hold their annual meetings together i.e., jointly. They are headquartered in Washington,
D.C.
The main objective of WTO is to help the global organizations to conduct their businesses.
WTO, headquartered at Geneva, Switzerland, consists of 153 members and represents more
than 97% of world’s trade. The WTO’s rules – the agreements – are the result of negotiations
between the members. Global rules of trade provide assurance and stability.
The main element of IMF is

(i) Application of the principles of market economy;
(ii) Opening up of the economy by removing all barriers of trade; and
(iii) Prevention of deflation.
Source of Funds of IMF are (i) Subscription or quota of the member nations, and (ii)
Borrowings. SDRs being costless, often called paper gold, is just a book entry in the Special
Drawing Account of the IMF. Whenever such paper gold is allocated, it gets a credit entry in
the name of the participating countries in the said account. IMF does not lend, but sells the
required currency to the members on certain terms.
10.8 KEYWORDS
 Financial assistance is any type of monetary help or aid that a person, organization,
or government receives.
 Disbursement - .to pay out money, usually from an amount that has been collected
for a particular purpose
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 Quota - a fixed share of something that a person or group is entitled to receive or is
bound to contribute.
 SAFTA South Asia free trade area based around the Indian sub-continent
 Mercosur – a southern American trading block formed in 1991. Includes full
members of Argentina, Brazil, Paraguay and Uruguay. With associate members
including Bolivia, Chile, Colombia, Ecuador. Developed from free trade area to
become customs union.
1. State the objectives of WTO

___________________________________________________________________________
___________________________________________________________________________
2. Enlist the important features of IMF
__________________________________________________________________________
_________________________________________________________________________
B. Descriptive Questions:
Short Questions:
1. What is MNCs?
2. Why it is important for developing countries to be the member of WTO?
3. Explain Special Drawing Rights
4. State the concept of Trading bloc.
5. Discuss the management of IMF.
Long Questions:
1. Elaborate the advantage and disadvantages of MNC from different perspective of
home country, host country, domestic business and labour.
2. Explain the borrowing methods and suitability clause for funds at IMF.
3. Write a note on World Bank
4. Compare the free trade area and customs union of the trade bloc.
5. If any business wants to design the strategies as per the policy of WTO how SWOT
analysis will be helpful and what kind of strategies are adopted to ensure competitive
advantage. Assume any manufacturing business, provides basic details and then do
SWOT with reference to WTO.
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1. Which of the following statement is not true about the International Monetary Fund?
a. IMF was established along with the word bank
b. IMF is the result of the Bretton Woods conference
c. Christine Lagarde is the current Chief Executive Officer of the IMF
d. Currently 193 countries are the members of the IMF
2. The value of Special Drawing Right (SDR) is determined by the basket of ......currencies.
a. 4
b. 5
c. 6
d. 7
3. Which of the following institutions is not part of the World Bank community?
a IBRD
b WTO
c IDA
d IFC
4. Which of the following is not the objective of the WTO?
a. To improve the standard of living of peoples of the member countries

b. To enlarge production and trade of goods
c. To protect environment
d. To improve the Balance of Payment situation of the member countries
5. Which of the following type of Trade bloc has common external tariff?
a. Single Market
b. Free Trade
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c. Common Union
d. European Union
Answers
1 - d; 2 - b; 3 –b; 4 – d; 5 – a.
Text Books:
Publishing House],
Hall.
Reference Books:
Open Text Source:

p. 2049. ISBN 9788180385926.
Limited. pp. 48–.ISBN 978-81-7534-840-0.
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UNIT 11: NATURAL ENVIRONMENT-I
Structure
11.1 Introduction
11.2 Natural Environment
11.2.1 Concept
11.2.2 Influence of Natural Environment on Business
11.3 Pollution
11.3.1 Air Pollution
11.3.2 Water Pollution
11.3.3 Noise Pollution
11.3.4 Other forms
11.4 Economic Development and Pollution

11.5 Increased Pollution Level
11.6 Government Control
11.7Environment Business Ethics
11.8 Summary
11.9 Keywords

 Explain the influence of Natural Environment
 Describe the different types of Pollution
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 Analyze the relation of economic development and pollution
 Compare the Government and Business Initiatives to control pollution
 Highlight the Environment Business Ethics
11.1 INTRODUCTION
Geographical conditions exert influence on the decisions as to the type of industries and
business to be carried on in a region. This is because the people of a particular geographical
region will have similar tastes, preferences and requirements.
Generally, goods, which are largely preferred by people in one region, may not be liked in
another region. For instance, tastes, likes etc. as to consumption of goods in the people of
South India may not be similar to that of in North India. Even in South India, people in
different states may not have similar tastes, likes etc.The geographical situation, the physical
feature, the climate, rainfall, humidity, the vegetation etc. decide the type of living in a
particular region.
In India, cotton textile industries are located in Mumbai and Coimbatore regions due to
favourable climate. Jute industry is located at Kolkata due to the favourable geographical and
climatic conditions to grow the raw material. The particular type of industry develops, only
where its raw materials are available.
Ecological factors consist of natural resources like farmland, fisheries, forests, minerals like
coal, metals, oils etc., energy, air and water. The supply of the resources is very much
limited. A decade ago, we were all under an impression that natural resources like air and
water are not exhaustible and their supply is unlimited. But now the situation is changed and
we came to know that such resources are also very much limited in supply.
Various legislative measures are also being taken to protect the ecological environment. All
these factors directly limit the scope of performance of the business firms. They should look
for the Government’s sanction at each stage.
11. 2 NATURAL ENVIRONMENTS
11.2.1 Concept
The term 'natural environment' refers to the non-human-made surroundings and conditions in
which all living and non-living things exist on Earth. The common concept of the natural
environment encompasses two different components:
 Ecological units that operate as natural systems (such as soil, vegetation and so on).
 Universal natural resources (such as air and water).
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The natural environment is in contrast with the 'built environment' which refers to areas that
have been fundamentally transformed and influenced by human activity, such
as cities, towns, infrastructure, and so on.
Natural environment is the group of natural resources which is used by business. Let me
explain it in detail. Suppose, one business is of manufacturing. You know, from where will it
get its raw material? For producing goods, manufacturing business gets all raw material from
nature. All agricultural input will use in manufacturing. His machines are also made by
nature's metals. His used energy is also from natural gas or diesel oil or electricity which
come from nature.
In business, when we use these natural resources without any limit, natural environment
changes. Global warming, floods, famines, tsunami and earth quake are its result. So, now it
is the duty of business to protect this natural environment. He should support for planting
more and more trees. He also stops to misuse of natural resources. After this, he can create
co-ordination with nature.
11.2.2 Influence of Natural Environment on Business
Many business operations depend on the environment, as it can be the primary source of raw
materials and can affect business processes. Companies around the world are integrating
environmental interest with business and are becoming proactive in finding ways to reduce
environmental impact. Additionally, consumers are favouring businesses that contribute to
protecting natural resources. How your company addresses environmental issues affects the
turnout of your business.
The Potential for Natural Disaster
The most dramatic environmental factor you'll face is the potential for natural disasters.
That's why buildings in California are constructed to withstand earthquakes, why those on
the other coast are built for hurricane winds, and why low-lying cities like flood-prone New
Orleans have levees and plenty of pumping capacity. These factors can affect your business
in a number of ways, even if you never face a major disaster on your watch. For one thing,
you may need to pay extra for your insurance or allocate a large emergency fund if your
insurer specifically excludes your major environmental risk. You may also need to conduct
emergency response training with your staff, and invest in generators or other assets to help
you keep operating when Mother Nature is acting up.
Impact of Climate on Business
Your climate can have an impact on your business that goes well beyond where you set the
office thermostat. Obviously, heating and cooling have costs attached, but extremes of heat
or cold can directly affect your operations. At 40 below on a frigid prairie morning,
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vehicles may not start and any employees working outside will need protective clothing and
frequent breaks. When the heat and humidity rise to high enough levels, your crews face
potentially fatal heatstroke unless you provide cooling and lots of opportunity for
hydration.
Bakeries and cake decorators throughout the South do battle every day with the heat and
humidity, which play havoc with icing and decorations. Warm climates speed the
deterioration of everything from perishable items to wooden homes, while the freezing and
thawing cycles of more northerly climes make pavement and concrete foundations buckle
and crack. These are mostly minor annoyances, but they're all things you'll need to plan
around and allow for.
Providing Raw Materials
Another obvious way the environment affects your business is by providing raw materials.
If you plan to operate a quarry, you'll want access to suitable quantities of stone. Mining
and extractive industries usually set up near the raw materials they'll need to mine or drill.
Sawmills locate themselves in wooded areas, and canneries set up where there are either
fisheries or agricultural operations to fill the cans. If you're located farther from your raw
materials than your competitors, it will often put you at a disadvantage.
Access to Waterways
A waterfront location is always attractive for the views and the cool breezes, but for
business purposes, a location near a waterway can be really crucial. It provides an
additional way to bring your raw materials in and ship your finished product out, and ships
or barges can haul a lot more at one time than trucks do. For companies that manufacture
really large assemblies, such as turbines for generating stations, shipping by water may be
the only really effective way to move such a big product. The downside to being near
waterways, of course, is that you're susceptible to flooding and heavy storms coming in
from the water.
Air-Quality Issues
If your business is located in a valley or a high mountain pass, you might find that you're
faced with air quality issues that wouldn't matter to companies located on an open plain.
Sometimes these areas suffer through what's called an "inversion," which means that a mass
of air hunkers over your town and traps everything from car exhaust to stack gases from all
of the local businesses. If you're in an area that's prone to air quality problems, you may
need to invest in an air purification system for your offices and production facilities, and
expect some of your employees to be susceptible to illness on especially bad days. If you're
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a manufacturer, you may face additional emissions testing and close regulation by local
authorities.
Environmentally Driven Regulatory Factors
An additional factor that can affect your business comes from regulatory authorities, rather
than directly from the environment itself. If you operate in an area where there are
significant environmental concerns, legislation that addresses those concerns might affect
your business every day. These might include limits or restrictions on the fuels you burn or
the emissions from your stacks, tight regulations on what you can discharge into the local
waterways or land-based holding ponds, or even special taxes or levies that go to
environmental oversight and protection. In a worst-case scenario, if it turns out that you
haven't been meeting local environmental standards, you might face fines or have to pay for
a costly remediation, or both.
Green Management Practices
Small businesses are adopting environmentally sound business practices to reduce

environmental impact and increase operating efficiency. These practices include complying
with environmental regulations, conserving water, reducing greenhouse emissions and
practicing reduce, reuse and recycle. Many business owners also are implementing
environmental management systems. EMS encourages a company to continuously improve
its environmental performance. Through this program, company employees become more
aware of environmental issues, which improves the company’s image with investors,
regulators and the general public.
11. 3 POLLUTION:
Developmental activities such as construction, transportation and manufacturing not only

deplete the natural resources but also produce large amount of wastes that leads to pollution
of air, water, soil, and oceans; global warming and acid rains. Untreated or improperly treated
waste is a major cause of pollution of rivers and environmental degradation causing ill health
and loss of crop productivity.
Concept:
Human activities directly or indirectly affect the environment adversely. A stone crusher adds
a lot of suspended particulate matter and noise into the atmosphere. Automobiles emit from
their tail pipes oxides of nitrogen, sulphur dioxide, carbon dioxide, carbon monoxide and a
complex mixture of unburnt hydrocarbons and black soot which pollute the atmosphere.
Domestic sewage and run off from agricultural fields, laden with pesticides.
Types of Pollution:
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Pollution may be of the following types:
• Air pollution
• Noise pollution
• Water pollution
• Soil pollution
11.3.1 Air Pollution:

Every day, every moment, we breathe polluted air and may become a victim of air pollution.
It is estimated that an average adult exchanges 15 kg of air a day, in comparison to about 1.5
kg of the food consumed and 2.5 kg of water intake. It is obvious that the quantum of
pollutants that enter our body through respiration would be manifold in comparison to those
taken in through polluted water or contaminated food.
Air pollution is one of the most widespread forms of pollution all over the world. Wind is
the main agent of air pollution. It gathers and moves pollutants from one area to another,
sometimes reducing the concentration of pollutants in one location, while increasing it in
another.
Causes of Air Pollution
Apart from the natural causes of pollutants, as stated above, human interaction and resource
utilization is perhaps adding more pollutants to the atmosphere.
 Industrialization − Industries big or small require steam to run. The steam is
produced by burning fossil fuels such as coal, coke, and furnace oil. These fuels
while burning release toxic gases in large amount into the atmosphere.
 Automobiles − To meet the demands of exploding human population, the number of
automobiles is increasing at a great space. The automobile exhausts are responsible
for about sixty percent of air pollution. Released carbon monoxide from the
automobiles pollutes the air and harms trees and other natural vegetation. It also has
ill-effects on human health.
 Chlorofluorocarbons − Scientists are now alarmed regarding the increased
concentration of chemical substances together called chlorofluorocarbon in the
atmosphere. These substances are responsible for creating holes in the ozone layer
causing unwanted imbalance in the heat budget. These are produced by modern
gadgets such as air conditioners, refrigerators, dyers, etc.
11.3.2 Water Pollution:
Water pollution may be defined as alteration in physical, chemical, and biological
characteristics of water, which may cause harmful effects on human and aquatic life.
Pollutants of Water
Following are some of the reasons for water pollution.
 Disposal of sewage and sludge into water bodies such as river, streams, and lakes.
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 Inorganic compounds and minerals by mining and industrial activities.
 Use of chemical fertilizers for agricultural purposes.
 Synthetic organic compounds from industrial, agricultural, and domestic garbage.
 Oil and petroleum from tankers’ accident, offshore drilling, combustion engine, etc.
 Radioactive wastes
11.3.3 Noise Pollution:
Noise pollution refers to any unwanted and unpleasant sound that brings discomfort and
restlessness to human beings. Like air and water pollution, noise pollution is harmful to
human and animal life.
 Noise pollution is also an important environmental hazard, which is becoming
growingly injurious in many parts of the world. Noise beyond a particular level or
decibel (unit of noise) tends to become a health and environmental hazard.
Sources of Noise Pollution
 Household appliances such as grinders, electric motor, washing machines
 Social gatherings such as marriages and other social parties
 Places of worship
 Commercial activities
 Construction activities
 Industrial activities
 Automobiles and transport system
 Power generators
 Agricultural equipment
11.3.4 Other Forms of Pollution:

Soil pollution refers to an undesirable decrease in the quality of soil, either by man-induced
sources or natural sources or by both.
Soil is vital not only for the growth of plants and growing food but also cultivating raw
materials for agro-based industries. Health soil is a significant prerequisite for human
survival.
Hazardous waste (HW) is defined as any substance, in solid, liquid or gaseous form, which
has no use in future and which causes danger or is likely to cause danger to health and
environment.
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The hazardous waste requires to be disposed of in a secured manner in view of their
characteristic properties. When HWs are not used efficiently by the waste generators, they
cause severe pollution of land, surface, and ground water.
11.4 ECONOMIC DEVELOPMENT AND POLLUTIONSOCIAL COSTS

AND THE ENVIRONMENT
Business activity has an impact on the natural environment:

 resources such as timber, oil and metals are used to manufacture goods
 manufacturing can have unintended spill over effects on others in the form
of noise and pollution
 land is lost to future generations when new houses or roads are built on greenfield
sites
The unintended negative effects of business activity on people and places are called social
costs and include:
a. noise
b. pollution
c. visual blight
d. congestion
An Environmental Kuznets Curve Ball
Research Officer and Economist Guillaume Vandenbroucke and Research Associate Heting
Zhu’s conclusion contrasts with an older hypothesis in this literature called the
“environmental Kuznets curve” or EKC.
The EKC variation posits that pollution increases with economic growth in the early stages of
development. Beyond a certain level of development, however, the trend reverses, and
economic growth improves environmental conditions by creating the resources to do so.
Vandenbroucke and Zhu noted that a 2004 paper found that pollution rises monotonically
with economic activity.1 “A 1 percent increase in economic activity raises pollution but at a
slower pace. That is, pollution is increasing more slowly than GDP,” Vandenbroucke and
Zhu wrote.
Economic activity is concerned with different kinds of Environment Pollution:

 CO2 emissions
 Greenhouse gas emissions overall
 PM2.5 particulate matter emissions
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CO2 and GDP per Capita
According to the Environmental Protection Agency, CO2 emissions—the most abundant
greenhouse gas—increased at an average annual rate of 0.4 percent between 1990 and 2014,
the authors noted. Meanwhile, GDP per capita increased at an average annual rate of 1.4
percent.
“Thus, the average person in the United States has benefited from relatively ‘cleaner’ goods
and services produced with fewer emissions of CO2,” the authors wrote.
They noted that CO2 still rose over the period studied, and the impact on climate is beyond
the scope of their essay. “The point here is that the increasing level of CO2, which is
detrimental to well-being, coincides with an even greater increase in GDP per capita, which
advances well-being,” Vandenbroucke and Zhu said.
Greenhouse Gas Emissions

Between 1990 and 2014, greenhouse gas emissions increased by 0.28 percent on an average
annual basis, again lower than the 1.4 percent average annual increase in GDP per capita.
They also noted this pattern holds when the economy slows down: Greenhouse gas emissions
declined at an average annual rate of 1.2 percent from 2005 to 2011, or the period
encompassing the Great Recession, while both GDP and population increased at an average
annual rate of 0.9 percent.
“Thus, GDP per capita was stagnant, while total greenhouse gas emissions decreased,” the
authors noted.
PM2.5 Particulate Matter Emission

Vandenbroucke and Zhu then looked at another form of pollution: particulate matter. In
particular, they looked at PM2.5, which measures the concentration of particles less than 2.5
micrometres in size in a given volume of air.
When looking at the relationship between PM2.5 and GDP per capita across countries from
1990 to 2015, Vandenbroucke and Zhu found a negative correlation. “In other words, one
unit of GDP per capita can be produced with fewer particulate matter emissions in countries
with high GDP per capita,” they wrote.
Pollutants and GDP

A nation’s economic growth can contribute to several different kinds of pollution, affecting
health and motivating policymaking decisions.
“Our point is not to dispute the quantity of pollution, nor is it to argue about the effects of
pollution on people’s health or the climate,” Vandenbroucke and Zhu said. “Instead, we
suggest that the costs of pollution should be assessed relative to the benefit of said economic
activity. If both economic activity and pollution are rising, one ought to ask whether the costs
are rising faster than the benefit...or the opposite.”
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In sum, “We find that pollution in the United States, measured by particulate matter or CO2
emissions, rises with economic activity, but at a noticeably slower pace,” they said.
11.5 INCREASED POLLUTION LEVELS
There are different effects a business suffers because of increased pollution level:
Impact on Employees’ Health:
First and foremost, companies should consider the potential health effects that their work
environment can have on their staff. Poor air quality presents risks to employees’ health,
overall sense of well-being, and ability to perform their duties.
A report on central London indicated the equivalent of a whopping 650,000 sick days per
year as a result of contaminated air. Air quality can affect your staff indoors as well as out, so
don’t overlook indoor pollutants. Make an effort to safeguard air quality from the effects of
indoor air contaminants like mold, as well as other indoor toxins.
Not only can poor air quality result in decreased efficiency in their work, but it can eventually
lead to an overall loss of employees; no one wants to work for a business that doesn’t care
about their health.
Strain on Global Economy:

While the health of the population is of utmost importance, it’s not the only aspect that’s
negatively affected by poor air quality. Outdoor air pollution is a big concern as well; it racks
up an astonishing 225 billion dollars of lost labour income per year.
This further illustrates the collective impact as a result of employee health, be it from indoor
or outdoor air quality issues (or both, as the case often is). Clearly it’s not just the employees
and business moral that suffer, but the economy as a whole.
A study conducted by Yale took the evidence even further regarding monetary impact,
showing that air pollution can affect company profit as well. Their research indicated that
consumers spent significantly less – about 50 million dollars less, in fact – on days when
ozone pollution was higher even by just 10%.
Decreased Business Growth

Even if your profit margins remain solid and stable and your offices remain staffed, the
impact of poor air quality can affect the reach and growth of your business.
Areas with higher-than-average levels of air pollution are frequently seen as undesirable
cities to live and work in, which means your ability to attract skilled, top quality employees
can be seriously hindered; this means little to no expansion. Even with enough stability
within the company to sustain current employees long enough to train and promote from
inside, business growth could still be significantly delayed.
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A survey published by Bain and Company, as well as the American Chamber of Commerce
in China, found that 53% of American-owned businesses operating in China experienced
difficulty in acquiring senior-skill-level employees, citing the high levels of air pollution in
the area as one of the biggest contributors to this shortage.
11.6 GOVERNMENT CONTROL
1. Supply of Natural Resources

The Government exercises tight control over the extraction and exploitation of certain natural
resources, which are essential for industrial performance. In India, almost all the coal mines
are nationalized and barring a few productions of steel is also under state monopoly.
O.N.G.C. enjoys a virtual monopoly over extraction of oil and mineral gas. Hence, most of
the industrial units are at the mercy of the Government to get adequate and timely supply of
these materials to carry on their production schedule.
2. Pollution Control Measures

Ecological environment can be defined as the complex aggregate of all external conditions,
which affect the life, development and survival of all organisms. Any unfavourable alteration
of this natural environment is called environmental pollution. Rapid industrialization has
drastically damaged the quality of our natural environment.
The disposal of wastes, emission of gas from factory chimneys has also created severe
problems of air and water pollution. The Government under the banner of rapid
industrialization drive, had allowed industrialists to start new factories anywhere and
everywhere in the country.
Though pollution control laws were there in the statute book, they were not enforced with any
seriousness. Therefore, the industrial units cared very little about the pollution prevention
norms prescribed, and polluted water and air recklessly.
The impact of the menace came into lime light only in 1984 when the Bhopal episode took
2,000 lives. Thereafter, the Government began to take serious steps to prevent this damage
done to the ecological environment. Of the various measures the following are noteworthy.
1. Environment (Protection) Act

The Government passed the Environment (Protection) Act in 1986, which gives wide powers
to the Government to take punitive action against erring industrialists. Even Government
organizations and departments (Public Sector Units) are not exempted from the purview of
the punishment.
2. Amendments to Air (Prevention and Control of Pollution) Act, 1981

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The Government has introduced certain amendments in the Air (Prevention and
Control of Pollution) Act in 1987 with a view to make the law more effective and severe.
3. Amendments to Water (Prevention and Control of Pollution) Act, 1974
The Government has also introduced certain amendments in the Water (Prevention and
Control of Pollution) Act in 1988 to remove administrative and practical difficulties that
emerged over the years after the enforcement of the Act.
4. Ministry of Environment
The then Prime Minister Mrs. Indira Gandhi appointed a High Power Committee to advise
Government on this important issue. On the basis of the committee’s report, a separate
Department for Environment was set up on 1st Nov 1980. In 1985, a new Ministry of
Environment and Forestry was created. The department of environment serves as the main
agency on behalf of the Government for planning, promotion and co-ordination of
environmental programmes.
5. Pollution Control Boards
The Central Government has also constituted a Central Pollution Control Board. Several
State Governments have also set up boards to monitor air pollution and make suitable
recommendations to control it.
These measures have, in fact, tremendously increased the responsibility of the industrialists
towards the society. They should strictly adhere to the conditions laid down by the Pollution
Control Boards in matters of treatment and discharge of trade effluents and wastage. Since
failure to make provision for such preventive means will entail punitive action, the
industrialists should bear additional financial strains and liabilities.
11.7ENVIRONMENT BUSINESS ETHICS:
Environmental ethics is formally defined as the study of human interaction with nature. In a
business sense, environmental ethics is concerned with a company's responsibility to
protect the environment in which it operates. Public awareness of damage caused to the
environment by human action has driven a demand for governmental regulations directly
affecting the ability of businesses to conduct their operations. Corporate response to
governmental regulation is a primary area of concern in environmental business ethics.
Human Choices
Throughout history, human beings have made choices that have led to the destruction of
forests, the contamination of water resources and the pollution of the atmosphere through
the use of fossil fuel-powered vehicles. In the later part of the 20th century, awareness of
the damage has led society to bring pressure to bear on government to enact regulations
requiring businesses to protect delicate natural resources. Environmental awareness has
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prompted many consumers to lead environmentally friendly lifestyles, affecting business
realities across the globe.
Business Realities
Acceptance of responsibility for environmental ethics is demonstrated through the

development of corporate environmental strategy. An example is the environmental
strategy of Marriott International: "Both in our hotels and beyond, we seek to understand
and act on the direct and indirect environmental impacts of our business operations."
Companies operating across the globe, regardless of size, must make such a strategy part of
their business model in order to protect of the natural resources they use to make a profit.
Sustainability
Small businesses are exposed to increasing demand by consumers and governmental

agencies to respond to sustainability standards. Sustainability refers to the ability of
ecosystems to remain healthy and productive over time. One of the simplest ways to make a
positive response to sustainability issues is energy conservation. Simply by using energy-
efficient appliances and light bulbs, businesses can reap significant savings in energy costs
and, at the same time, make a realistic contribution to reducing stress on the environment.
Environmental Protection Agency research indicates that businesses can save 10 percent to
30 percent on energy costs when using energy-efficient equipment.
New Opportunities
A positive side of environmental business ethics is the creation of new opportunities

centered on repairing existing environmental damage and developing new technologies to
enable people to conduct their business without further damage to the environment. The
EPA reports that there are more than $300,000 in grants available for small business to
develop and bring to the market new environmental technologies in industries such as water
quality, green building materials and greenhouse gasses. Environmental technologies will
provide a path to profitability for small business for the foreseeable future.
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M.C. Mehta v. Union of India- Ganga Pollution Case; Supreme Court of India
Judgment- In 1985, M.C. Mehta filed a writ petition in the nature of mandamus to prevent
these leather tanneries from disposing of the domestic and industrial waste and effluents in
the Ganga River. In this petition, the petitioner requested the court to request the Supreme
Court (the Court) to restrain the respondents from releasing effluents into the Ganga river
till the time they incorporate certain treatment plants for the treatment of toxic effluents to
arrest water pollution. The Court highlighted the importance of certain provisions in our
constitutional framework, which enshrine the significance and the need for protecting our
environment. Article 48-A provides that the State shall endeavour to protect and improve
the environment and to safeguard the forests and wildlife of the country. Article 51-A of
the Constitution of India imposes a fundamental duty on every citizen to protect and
improve the natural environment, including forests, lakes, rivers, and wildlife. The Court
stated the importance of the Water (Prevention and Control of Pollution) Act, 1974 (the
Water Act). This act was passed to prevent and control water pollution and maintaining
water quality. This act established central and stated boards and conferred them with
power and functions relating to the control and prevention of water pollution.
Now, the question was raised that what is Trade Effluent? A Trade Effluent is any
substance in the form of solid, liquid, or gaseous state which is discharged from any
establishment used for carrying out any trade or industrial activity, other than domestic
sewage. It was noted that the leather industry is one of the significant industries besides
paper and textiles consuming large quantities of water. Most of the water used is
discharged as wastewater. The wastewater contains toxic substances that deplete the
Oxygen content of the clean river water in which they are discharged. This results in the
death of aquatic life and emanates foul door. The Court held the despite provisions in the
Water (Prevention and Control of Pollution) Act, 1974 Act no effective steps were taken
by the State Board to prevent the discharge of effluents into the river Ganga. Also, despite
the provisions in the Environment Protection Act, no effective steps were taken by the
Central Government to prevent the public nuisance caused by the tanneries at Kanpur. In a
historic judgment in 1987, the court ordered the closure of a number of polluting tanneries
near Kanpur. The court held that- “Just like an industry which cannot pay minimum wages
to its workers cannot be allowed to exist, a tannery which cannot set up a primary
treatment plant cannot be permitted to continue to be in existence.” The Court ordered the
tanneries to establish primary treatment plants, if not Secondary treatment plants. That is
the minimum which the tanneries should do in the circumstances of the case.
[Source:https://legaldesire.com/]
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11.8 SUMMARY
 The term 'natural environment' refers to the non-human-made surroundings

and conditions in which all living and non-living things exist on Earth.
 Many business operations depend on the environment, as it can be the primary source of
raw materials and can affect business processes. Companies around the world are
integrating environmental interest with business and are becoming proactive in finding
ways to reduce environmental impact
 Human activities directly or indirectly affect the environment adversely. A stone crusher
adds a lot of suspended particulate matter and noise into the atmosphere. Automobiles
emit from their tail pipes oxides of nitrogen, sulphur dioxide, carbon dioxide, carbon
monoxide and a complex mixture of unburnt hydrocarbons and black soot which pollute
the atmosphere. Domestic sewage and run off from agricultural fields, laden with
pesticides.
 Types of Pollution:
Pollution may be of the following types:
• Air pollution
• Noise pollution
• Water pollution
• Soil pollution
Economic activity is concerned with different kinds of Environment Pollution:
 CO2 emissions
 Greenhouse gas emissions overall
 PM2.5 particulate matter emissions
There are different effects a business suffers because of increased pollution level:
 Impact on Employees’ Health:
 Strain on Global Economy:
 Decreased Business Growth
 The Government has also introduced certain amendments in the Water (Prevention
and Control of Pollution) Act in 1988 to remove administrative and practical
difficulties that emerged over the years after the enforcement of the Act
 The Government has introduced certain amendments in the Air (Prevention and
Control of Pollution) Act in 1987 with a view to make the law more effective and
severe.
 The Government passed the Environment (Protection) Act in 1986, which gives wide
powers to the Government to take punitive action against erring industrialists.
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 The Government exercises tight control over the extraction and exploitation of certain
natural resources, which are essential for industrial performance.
 Environmental ethics is formally defined as the study of human interaction with
nature. In a business sense, environmental ethics is concerned with a company's
responsibility to protect the environment in which it operates
11.9 KEYWORDS
 Quarry - a place, typically a large, deep pit, from which stone or other materials are
or have been extracted.
 Inversion- which means that a mass of air hunkers over your town and traps
everything from car exhaust to stack gases from all of the local businesses.
 Chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs) are fully or
partly halogenated paraffin hydrocarbons that contain only carbon (C), hydrogen (H),
chlorine (Cl), and fluorine (F), produced as volatile derivative of methane, ethane, and
propane.
 Synthetic organic compounds are those that. are derived from either coal or from
petroleum and are, by. and large, petrochemicals.
 Decibel - a unit used to measure the intensity of a sound or the power level of an
electrical signal by comparing it with a given level on a logarithmic scale
1. Compare the effect of different pollutant on Employee’s health and business.

___________________________________________________________________________
________________________________________________________________________
2. How HR Policy can contribute in controlling Pollution level?
___________________________________________________________________________
_______________________________________________________________________
Short Questions
1. Define Pollution and pollutant.
2. Why Business needs to understand the influence of Natural Environment?
3. Explain Social Cost.
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4. How Government plays important role in maintaining the pollution levels?
5. State the important legislation that business need to follow for pollution control.
Long Questions
1. What is Pollution? Enlist important major pollutants. Explain different types of
Pollution
2. Explain the Natural Environment Influence on Business.
3. Discuss the increased level of pollution impact
4. What parameters highlight the relation of Economic development and pollution?
5. Why it is important for business to opt for Environment Ethics? What changes need to
be incorporated for the same?
1. The term ________________to the non-human-made surroundings and conditions in
which all living and non-living things exist on Earth.
a. Cultural Environment
b. Social Environment
c. 'Natural environment'
d. Man-made Environment
2. Which pollution refers to an undesirable decrease in the quality of soil, either by man-
induced sources or natural sources or by both.
a. Soil Pollution
b. Thermal Pollution
c. Radioactive Pollution
d. Hazardous wate Pollution
3. The unintended negative effects of business activity on people and places are called social
costs and include:
a. employees
b. visual blight
c. HR Policy
d. All of the above
4. The EKC variation posits that pollution _____________with economic growth in the early
stages of development.
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a. getsstabilized
b. is equal
c. decreases
d. increases
5.The department of environment serves as the main agency on behalf of the

_____________for planning, promotion and co-ordination of environmental programmes.
a. Business Council
b. WHO
c. Government
d. UN
Answers
1 - c; 2 - a; 3 –b; 4 – d; 5 – c.
11.12SUGGESTED READING
Text Books:
Publishing House],
Hall.
Reference Books:
 Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi.
 Struan Simpson (Author), Jacqueline Carless (Author), Business, Pollution and

Regulation, CRC Press
Open Text Source:
p. 2049. ISBN 9788180385926.
281
Limited. pp. 48–.ISBN 978-81-7534-840-0.
282
UNIT 12: NATURAL ENVIRONMENT-II
Structure
12.1 Introduction
12.2 Changing role of Government
12.2.1 Overview of the Environment (Protection) Act, 1986:
12.2.2 Corporate Social Responsibility (CSR)
12.2.3Environmental Clearance
12.2.4 Case Laws
12.3 Regulations and its impact on business & industry
12.3.1 Environmental regulatory framework
12.3.2 Environmental permits
12.4 Water pollution and abstraction
12.5 Air Pollution
12.6 Other Important Aspect
12.6.1 Environmental impact assessments
12.6.2 Waste and the circular economy
12.7 Summary
12.8 Keywords
12.0 LEARNING OBJECTIVES
 Analyze the Changing role of Government

 Describe the Regulations and its impact on business & industry
 Explain the importance of Water Pollution and Air Pollution Act
 Outline the Environmental impact assessments
 Highlight Waste and the circular economy
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12.1 INTRODUCTION
Environmental protection is one of the basic prerequisites for the overall development of any
country in the world. If economic growth and development are to be established, and there is
no country in the world that does not want to do so, biodiversity must be contributed. As
awareness of environmental protection is developed, human awareness is also developed
about the need to preserve the environment by preventing adverse impacts on nature. Law, as
a scientific discipline, plays a significant role in these endeavours.
The final controlling authority in most of the issues related to environment is the government
itself. For example, most of the thermal power plants are owned by the government and also
only the government can build dams, roads, railways, etc. Industrial or any other related
activity cannot start without the approval of the government. Therefore, the government has
to apply various checks and controls so that the environment is managed properly.
Direct Regulation in the form of Acts have been made and administered by the Government.
Effluent fees offer governments a second approach to pollution control. An effluent fee is a
unit price that a polluter must pay to the government for discharging waste. The idea behind
the imposition is that they can bring the marginal private cost of polluting faced by firms
closer to the true marginal social cost of their emissions.
Effluent fees often have one major advantage over direct regulation. It is, of course, socially
desirable to use the cheapest way to achieve any given reduction in pollution, and a system of
effluent fees is more likely to accomplish this result than direct regulation.
Governments have recently learned that they can work the trade-off between the certainty of
direct regulation and the efficiency of effluent charges by issuing a fixed number of
transferable emissions permits – permits that allow the holder to generate a certain amount of
pollution.
12.2 CHANGING ROLE OF GOVERNMENT
12.2.1 Overview of The Environment (Protection) Act, 1986:

The legislature enacted the Environment (Protection) Act, 1986 under Article 253 of the
Constitution of India after the Bhopal gas tragedy. This was done to implement the decisions
that were taken in the United Nations (UN) Conference on the Human Environment, 1972
regarding protection and betterment of the environment and to suggest ways to prevent
hazards to all living organisms.
Purpose of this Act
 The act is an umbrella legislation and enabling law that provides a framework for
the Government to coordinate activities between central and state authorities
established through various ancillary provisions.
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 The act also prohibits the companies from emitting any environmental pollutants
more than the standards that have been prescribed in the act.
 Consequently, the Central Government has framed the Environment (Protection)
Rules of 1986 that lay down various standards that the industries are expected to
follow.
 This includes emission standards, noise standards and other such standards, such
as national ambient air quality standards.
 This act also confers powers upon State and Central Pollution Control Boards to
enforce these standards.
12.2.2 Corporate Social Responsibility (CSR)
The environmental aspect of CSR is the duty of the corporate to cover the environmental
effects of the company\’s products operations and facilities; remove waste and emissions;
increase the productivity and efficiency of its resources, and decrease practices that may
adversely affect the enjoyment of resources by future generations.
Voluntary Guidelines
While the Corporate Social Responsibility Voluntary Guidelines provide for guidelines for
several core elements, one of these is the respect for the environment. These guidelines urge
the company to prevent:
 Pollution,
 Recycle waste,
 manage natural resources, and
 Adopt environment-friendly technology
Absolute Liability
This doctrine has evolved from the case of M.C. Mehta v. Union of India and according to
this doctrine, industries engaged in hazardous and inherently dangerous activities do not
enjoy the exceptions of strict liability rule and are to be made absolutely liable in cases of
default.
12.2.3 Environmental Clearance:
There are certain rules that have been framed in pursuance of the Environment (Protection)
Act, 1986, in order to ensure environmental protection, these rules are:
Environmental Impact Assessment
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Since every human activity affects the environment, it is important to synchronize the
activities imperative for development with the ever increasing environmental concerns.
Environmental Impact Assessment (EIA) is a tool that ensures the same. It began in India in
the late 1970’s and aims to detect the environmental problems that are likely to arise out of a
project that is proposed and tries to settle those problems in the initial stages itself, thereby
preventing future liabilities and expensive alterations in project design.
Environment (Siting for Industrial Projects) Rules, 1999

The said rules mainly provide for precautionary measures to be taken for site selecting, areas
to be avoided for siting of industries and certain environmental protection measures that need
to be kept in mind while developmental projects are implemented.
The Wild Life (Protection) Act, 1972

This act provides for protection of wild animals and lays down a special provision for
offences committed by companies that makes the companies vicariously liable for the
offences committed by the people who are responsible for its functioning.
The Forest (Conservation) Act, 1980

These guidelines were enacted with the aim of conserving the country’s forests. It restricts
and regulates deforestation without the approval of the central government and lays down the
penalty for projects that have not obtained forest clearance.
The Biological Diversity Act, 2002

Section 3 of the aforementioned act prohibits people from obtaining any biological resource
without the approval of national biodiversity authority. Such persons include a body
corporate, association or organization either not incorporated or registered in India; or
incorporated or registered in India having any non-Indian participation in its share capital or
management.
Bio-Medical Waste (Management and Handling) Rules, 1998
These rules provide for management of biomedical waste. They “apply to all persons who
generate, receive, collect, transport, store, treat, dispose, or handle bio-medical waste in any
form”. There are provisions making it mandatory such institutions to submit an annual report
and lay down guidelines in case there is an accident.
Chemical Accidents (Emergency Planning, Preparedness, and Response) Rules, 1996
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These rules have also been framed for management and handling of biomedical waste and
provide for setting up of crises groups at Central[12], State[13] and District levels[14], to
provide expert guidance in cases of accidents. Further, there are provisions that make it
possible for the public to obtain information about potential accidents at an industrial site.
Manufacture, Storage, and Import of Hazardous Chemical Rules, 1989

According to the said rules, the occupier who has control of a said industrial activity is
responsible for providing evidence showing that he has identified the major accidents and
taken adequate steps to prevent such accidents and that he has provided the workers with
information and training for their safety.
Hazardous Wastes (Management and Handling) Rules, 1989

These rules lay down the responsibility of the occupier while handling hazardous wastes. It
entails that the occupier generating hazardous wastes in quantities equal to or exceeding the
given limits shall take all practical steps to ensure proper handling and disposal of such
wastes without any adverse effects. The said occupier is also supposed to maintain records
regarding the same and is obliged to report any accident that occurs in the course of events.
Rules for the Manufacture, Use, Import, Export, and Storage of Hazardous
Microorganisms, Genetically Engineered Organisms or Cells, 1989
These are the rules notified by the central government for the protection of the environment,
nature, and health, in connection with the application of gene technology and micro-
organisms.
Hazardous Wastes (Management, Handling and Trans-Boundary Movement) Rules,

2008
These rules provide for immediate reporting of accidents relating to hazardous wastes and lay
down the guidelines for handling hazardous wastes.
Batteries (Management and Handling) Rules, 2001
These rules were notified by the Central Government to impose responsibility upon the
manufacturer, importer, assembler, re-conditioner, and recycler to create public awareness
regarding the hazards of lead and the responsibility of consumers to return their used batteries
only to the dealers or designated collection centres.
The Water (Prevention and Control of Pollution) Act, 1974
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This act prohibits entry of any poisonous, noxious or polluting matter into any stream,
well, sewer or on land for disposal determined in accordance with such standards as laid
down by the State Board. Thereby making the companies responsible for whatever they are
discharging in water bodies.
The Air (Prevention and Control of Pollution) Act, 1981

This act provides that persons operating any industrial plant, in any air pollution control area
shall not discharge or cause or permit the discharge of the emission of any air pollutant
exceeding the standard laid down by State Board.
Self-Regulation Measures
Environmental Management System (EMS)
EMS is the “the organizational structure, responsibilities, practices, procedures, processes,
and resources for determining and implementing environmental policy”. This framework
helps the companies in achieving environmental goals. EMS requires the organization to
identify its significant aspects and their impact, and in turn, develops policies according to the
legal requirements.
ISO 14004:2004 provides guidelines for maintenance, improvement, and implementation of
EMS.
National Voluntary Guidelines on Social, Environmental and Economical

Responsibilities of Business, 2011
The Ministry of Corporate Affairs incorporated the advices given by stakeholders and
released a new set of CSR guidelines for corporations. These guidelines encourage businesses
to be accountable for the environmental impacts of their operations and products and to
constantly strive to make them environment-friendly.
The Companies Act, 2013
The act provides that every company having the net worth of Rs. 500 crore or more, or
turnover of Rs. 1000 crore or more or a net profit of INR 5 crore or more during any financial
year shall constitute a Corporate Social Responsibility Committee of the Board.[24] In
common parlance, Corporate Social Responsibility and Corporate Environmental
Responsibility mean the same thing and thus, companies are obliged to conform to certain
environmental standards.
Criminal Liability of Companies
Section 47 of the Water (Prevention and Control of Pollution) Act, 1974, Section 40 of the
Air (Prevention and Control of Pollution) Act, 1981 and Section 16 of The Environment
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(Protection) Act, 1986 provide for Criminal Liability in case of offences committed by the
companies.
12.2.4 Case Laws:

Uttar Pradesh Pollution Control Board v. Mohan Meakins Ltd. [25]
The matter was related to the discharge of trade effluents by an industrial unit in river
Gomati, and the directors of that company were accused of an offence under section 43 of the
Water (Prevention and Control of Pollution) Act, 1974. The Supreme Court held that lapse of
a long period of time cannot be reason enough to absolve the directors from the trial.
Mahmud Ali v. State of Bihar and anr. [26]
It was held that under Section 319 of the Cr.P.C. 1973 a criminal court can add a person
against whom evidence comes forth during the trial showing his involvement in the offence,
not being the accused before it and, as an accused and try him along with those that are being
tried.
Haryana State Board v. Jai Bharat Woollen Finishing Works [27]
The Court held that Section 47 of the Water Act relating to offences by companies which
includes a partnership firm, lays down that, where an offence under the Act is committed by
any company, every person who, at the time the offence was committed, was in charge of,
and was responsible to the company for the conduct of the business of the company, as well
as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly.
12.3 REGULATIONS AND ITS IMPACT ON BUSINESS & INDUSTRY
12.3.1 Environmental Regulatory Framework:

Environmental legislation and the key regulatory authorities:
Legislation
In terms of recent developments, it is relevant to note that the environmental regulatory
authorities (that is, the Central Pollution Control Board (CPCB) and the State Pollution
Control Boards (SPCBs)) have been ordered by the National Green Tribunal (NGT) to
strictly enforce and take into account the (previously dormant) Comprehensive
Environmental Pollution Index (CEPI).
CEPI allocates weightages to various pollutants, ambient pollutant concentrations, receptors
(the number of people affected) and additional high-risk elements. The original CEPI
assessment was undertaken in 2009, but the CEPI criteria were updated in 2016 and the final
report on CEPI was issued in 2018. The NGT in 2019 then directly supervised the
enforcement of the CEPI criteria by the regulatory authorities.
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Industrial clusters are categorised under the CEPI as Polluted Industrial Areas (PIAs), which
are each ranked as one of the following:
 A critically polluted area (CPA).
 A severely polluted area (SPA).
 Other polluted areas (OPAs).
The CPCB and SPCBs will now be focused on remediating these CEPI areas and seeking
compensation from polluting industries; and any expansion or development of new sites in
these areas will be rejected.
The main environmental laws, including under which various key environmental permits (or
consents) are being issued in India, include the:
 Water (Prevention and Control of Pollution) Act 1974 (Water Act), which also
initially identified the powers, functions and hierarchy of the environmental agencies,
the CPCB and the SPCBs.
 Air (Prevention and Control of Pollution) Act 1981 (Air Act).
 Environment (Protection) Act 1986 (EP Act). This umbrella law enables the central
government to take measures it deems necessary to protect and improve the
environment, and to prevent, control and abate environmental pollution. A wide range
of rules and notifications have been adopted under it, such as the:
 E-Waste (Management) Rules 2016, as amended in 2018 (E-Waste Rules);
 Bio-Medical Waste Management Rules 2016;
 Plastic Waste Management Rules 2016;
 Solid Waste Management Rules, 2016;
 Construction and Demolition Waste Management Rules 2016;
 Hazardous and Other Waste (Management and Transboundary Movement)
Rules 2016, as amended in 2019 (HW Rules);
 Manufacture, Storage and Import of Hazardous Chemicals Rules 1989
(MSIHC Rules);
 Coastal Regulation Zone Notification 2019; and
 Environment Impact Assessment Notification 2006.
 Wild Life (Protection) Act 1972.
 Forest (Conservation) Act 1980.
 Public Liability Insurance Act 1991.
 Biological Diversity Act 2002.
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 National Green Tribunal Act 2010.
Regulatory authorities
The key regulatory authorities are the:
 Ministry of Environment, Forests and Climate Change (MoEFCC).
 CPCB.
 SPCBs.
 District Level Authorities (that is, municipal corporations).
Regulatory enforcement
There has been an upward trend in terms of regulatory enforcement, which can be
explained by various factors. For instance, various states have started to insist on the
installation of continuous online emissions/effluent monitoring systems, which gives the
State Pollution Control Boards (SPCBs) the necessary and objective information to monitor
the compliance of companies in their jurisdiction. Moreover, the state high courts, the Central
Supreme Court, and the various benches throughout India of the National Green Tribunal
(NGT) closely monitor the implementation and enforcement of environmental laws.
Environmental NGOs
NGOs, think-tanks, and local citizen groups are very active stakeholders in India and readily
use the media, the courts and the NGTs to raise their environmental grievances. This is often
effective, since the judiciary is generally sympathetic to environmental concerns raised in the
public interest. Moreover, the Indian media is also very active and focuses on environmental
issues. Interestingly, judges from the NGT, High Court and the Supreme Court even take up
environmental cases suo moto (that is, on its own motion) based on media coverage of these
matters.
Some environmental laws explicitly refer to the rights of citizens in this regard. For instance,
the Maharashtra Non-biodegradable Garbage (Control) Act, 2006 empowers a citizen to
register the offence against any violators of this Act.
12.3.2 Environmental Permits
Integrated/separate permitting regime
An integrated permit system is in place to a large extent. For instance, a Consent to Establish
(CTE) and subsequent Consent to Operate (CTO) and their renewals under the Water Act and
Air Act can typically be obtained by submitting a combined consent application to the
relevant SPCB.
The E-Waste (Management) Rules 2016 introduce the Extended Producer Responsibility –
Authorisation for Producers, which only requires one centralised and India-wide application
with the CPCB instead of with each SPCB.
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Also, to streamline the environmental permit/consent system, and avoid repetitive and/or
conflicting conditions, the CPCB has waived the requirement of having separate CTEs for
industrial units which require an Environmental Clearance (EC) .In such cases, the EC will be
considered equivalent to a CTE and no separate CTE will need to be obtained.
Single/separate permits
Depending on the type of activities undertaken by a company, multiple permits may need to
be obtained.
The Ministry of Environment, Forests and Climate Change (MoEFCC) adopted a new
method (from 2016) of classifying the industries it regulates and introduced a new category
of "white industries". These white industries are non-polluting industries that no longer need
a CTO or an EC under the Environmental Impact Assessment (EIA) Notification. Instead,
they merely need to notify the relevant SPCB.
Whereas the earlier industry categories (red, orange and green) were essentially determined
based on the size of industries, this new method is based on a Pollution Index (PI) for
emissions (air pollutants), effluents (water pollutants) and hazardous waste generated apart
from the consumption of resources. A PI score is allocated to each industrial sector as
follows:
 Red category: PI score of 60 and above. Table 1 annexed to the notification covers 60
sectors (for example: asbestos, nuclear power plants, shipbreaking, oil and gas
extraction, and so on).
 Orange category: PI score of 41 to 59. Table 2 lists 83 types of industries (for
example: food and food processing, printing ink manufacturing, paint blending and
mixing, and pharmaceutical formulations).
 Green category: PI score of 21 to 40. Table 3 identifies 63 sectors (for example: saw
mills, tyres/rube retreating, polythene and plastic products).
 White category: PI score up to 20. Table 4 lists 36 types of industries (for example:
solar power generation through solar photovoltaic cells, wind power, and mini hydro-
electric power less than 25 megawatts).
Permits and regulator
The key environmental permits, or consents/authorisations as they are referred to in India,
must be obtained from the local State Pollution Control Board (SPCB).
Only in certain cases is a consent/permit or environmental clearance (EC) needed at central
level, from one or more of the following:
 The CPCB (for example authorisation as a producer under the E-Waste Rules 2016).
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 The Ministry of Environment, Forest and Climate Change (for example, EC under
EIA Notification, 2006, import/export of hazardous waste under the Hazardous and
Other Waste Rules 2016 and so on).
 Central Ground Water Board (for groundwater extraction related permits)
 Petroleum & Explosives Safety Organization (PESO) (permits relating to storage of
diesel at sites for generators).
Length of permit
The SPCBs have some discretion in determining the duration of consents, but there are
efforts to streamline these periods for the various industry categories in each state. Typically:
 An initial CTE is valid for one year (for example, during the construction of a site, but
depending on the scale of the project this could be longer).
 CTOs under the Water and Air Act vary between three to five years.
Industries are categorised in red, orange, green or white categories, depending on the
pollution index score (see Question 1):
 White category industries (practically non-polluting industries) do not need to obtain
a CTO.
 Green category industries can generally submit a simplified CTO application. Their
initial CTO in many states are valid for 15 years.
 Initial CTOs for orange categories are typically ten years, and for red categories one
or five years.
Renewal applications are typically granted across industries before 60 to 120 days of expiry
of the consent to operate, assuming there have been no severe non-compliance issues. If there
is a non-compliance issue, SPCBs can revoke the consent to operate and reissue it only after
the non-compliance has been rectified. In such situations, companies often only obtain a one-
year CTO, to ensure close monitoring by the SPCBs and ongoing compliance.
Some states have also adopted an auto-renewal of consents for all categories based on self-
certification if certain criteria are met, such as:
 When there is no increase in the overall production capacity and pollution load.
 If there is only a marginal increase (up to 10%) in capital investment.
Some key waste-management laws, such as the E-Waste Rules and the HW Rules, explicitly
refer to authorisations being valid for five years.
Restrictions on transfer
Consent orders and environmental clearances (obtained under the EIA Notification) are
readily transferable, and a straightforward procedure applies:
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 The transferor must provide a written no objection to the relevant regulatory
authority.
 The transferee must submit an application, with an undertaking that it will comply
with all the conditions in the consent order.
 Supporting documents must be provided (explaining the underlying reason of the
transfer, change of name, change of management, and so on).
Penalties
Failure to obtain the required consent order will incur penalties. For instance, under the Water
Act, any person who breaches the consent application process is punishable with
imprisonment for at least 18 months, which can be extended to six years, and a fine. Any
company operating without a consent to establish or operate will immediately receive a
closure notice from the relevant SPCB.
Under directions from the NGT, the CPCB recently devised a formula to compute
environmental compensation to be levied on the defaulting industry. The formula is based on
the anticipated severity of pollution, the duration of the violation (number of days), the scale
of the operation and the location (for example, proximity to large habitations).
Moreover, the Supreme Court and the state high courts can and do impose exemplary
damages for damage to the environment.
For instance, in the Sterlite’s Industries case (2013), one of the largest copper smelter plants
in India was found to be operating without a valid renewal of its environmental consent to
operate. When assessing the company's liability to pay damages (that is, for damage caused
to the environment during the 15 years it operated without a valid environmental permit), it
reviewed the company's annual report, and determined that 10% of the profit before
depreciation, interest and taxes (PBDIT) had to be paid as compensation, which amounted to
INR1 billion.
The Water Act, Air Act and EP Act all contain specific provisions for offences committed by
companies. Under these Acts, every person who is in charge when an offence is committed,
and is responsible to the company for the conduct of its business, is guilty of the offence and
liable to be prosecuted and punished accordingly. However, a person is not liable if he proves
that the offence was committed without his knowledge, or that he exercised all due diligence
to prevent the offence.
Further, if the offence was committed with the consent or connivance, or is attributable to any
neglect by a director, manager, secretary or other officer of the company, the other person is
also guilty of the offence, and liable to be prosecuted.
Importantly, the National Green Tribunal Act, 2010 (NGT Act) contains penalty provisions
which are considerably higher compared to previously adopted environmental laws. Most
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likely all existing environmental laws will be amended (at some point) to be aligned with the
NGT Act penalty provisions.
More specifically, section 26(1) of the NGT Act states that a person who fails to comply with
an order or award or decision of the Tribunal is punishable with imprisonment for a term up
to three years, or with a fine up to INR10 crore, or both (one crore is equal to ten million).
If the failure or contravention continues, an additional fine applies up to INR 25,000 for
every day the failure/contravention continues, after conviction for the first failure or
contravention.
Section 26(2) of the NGT Act states that if a company fails to comply with any order or
award or decision of the Tribunal, the company is punishable with a fine up to 25 crore
rupees. If the failure or contravention continues, an additional fine applies up to INR100,000
for every day the failure/contravention continues, after conviction for the first failure or
contravention.
The NGT has jurisdiction over all civil cases where a substantial question relating to the
environment is involved, arising out any of the exhaustively enumerated environmental laws
specified in Schedule I to the NGT Act (including the EP Act (and the rules adopted under it),
the Water Act, the Air Act, the Forest Act, the EIA Notification Act, and so on) (section 14(1
NGT Act).
Under section 15(1) of the NGT Act, the NGT can order relief, compensation and restitution
in the following cases:
 Relief and compensation to the victims of pollution and other environmental damage.
 Restitution for property damaged.
 Restitution of the environment.
Further, the NGT can divide the compensation or relief payable under separate heads
specified in Schedule II of the NGT Act, which includes claims:
 Due to harm, damage or destruction to flora, including aquatic flora, crops,
vegetables, trees and orchards.
 Including cost or restoration of account of harm or damage to the environment
including pollution of soil, air, water, land and eco-systems.
12.4 WATER POLLUTION AND ABSTRACTION
Regulators
The regulators for water pollution matters are the following:
 State Pollution Control Board (permission to establish and operate).
 Central Ground Water Board (for permission to extract groundwater).
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 Municipal Corporations/State Public Works Department (who are responsible for
water supply and sewerage systems).
A company must obtain a CTE at the planning stage but before any construction, followed by
a CTO before commencement of any activities/operations.
Prohibited activities
No person must knowingly cause or permit any poisonous, noxious or polluting matter
(determined under standards laid down by the CPCB, or complemented by the standards of
the SPCBs) to enter, directly or indirectly, into any stream, well or sewer, or on land (see the
Water Act).
Similarly, a person must not cause or permit any other matter to enter into a stream, which
may (directly or with similar matter) impede the proper flow of the water of the stream, in a
manner leading or likely to lead to a substantial aggravation of pollution due to other causes
or its consequences. These broadly drafted provisions of the Water Act tend to cover a wide
range of activities which may cause or aggravate water pollution.
The Water Act and Air Act also impose a strict information accident reporting and preventing
obligation on industries. If due to an accident or other unforeseen event any poisonous,
noxious or polluting matter is discharged, or is likely to be discharged into a stream, well,
sewer, or on land, which causes or is likely to cause water pollution, the person in charge
must immediately notify this to the relevant State Pollution Control Board (see sections 31
and 32, Water Act).
Clean-up/compensation
Companies who cause water pollution can be ordered to clean up the pollution caused and
pay compensation to remedy the polluted environment, or to possible victims.
There are various possible approaches. For instance, if a SPCB believes that water or soil
pollution is about to be caused, it can apply to a court for a restraining order. The court can
then order the entity that is about to or that has caused the water pollution to refrain from
doing so or to remove it. If the party fails to act, the court can also authorise the SPCB to
remove the water pollution. Any expenses incurred by the SPCB are then recoverable from
the party that has caused the pollution.
Similarly, in an emergency the SPCB can act immediately to prevent, remove or mitigate the
water pollution, and all expenses are recoverable from the person causing or failing to
effectively prevent the water pollution.
Most significantly, the SPCBs have power to issue far-reaching directions, which include:
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 Closure of the company, or at least the part or process of the company that is causing
the pollution (which can extend to the stoppage of an entire manufacturing process,
until the pollution has been addressed).
 Stopping the electricity or water supply to the company.
These powers are often relied on by the regulatory authorities, particularly when companies
fail to reply or adequately respond to written show cause notices that precede these actions.
Companies can approach courts to obtain a stay order against these closure notices, or can
appeal against directions to the state appellate authority and/or NGT (it has four zonal
benches throughout India).
Penalties
Apart from penalties for not having a valid environmental permit/consent, the Water Act has
the following penalty provisions.
Non-compliance with closure direction. The Water Act and Air Act provide that whoever
fails to comply with a closure direction or stoppage (of electricity and water) direction is
liable to imprisonment for a term of at least one and a half years up to six years and a fine. If
the breach continues, an additional fine up to INR 5,000 for every day of non-compliance can
be imposed.
Other offences. The Water Act and the Air Act set out various other offences, such as:
 Failure to provide information to the Pollution Control Boards.
 Failure to notify an accident.
 Knowingly or wilfully making a false statement.
 Wilfully tampering with monitoring equipment.
They are all punishable with imprisonment for a term up to three months, or a fine up to INR
10,000, or both.
Residuary penalty. A person who breaches the Water Act or the Air Act, or fails to comply
with any order or direction with no specific penalty, is punishable with imprisonment up to
three months, or a fine up to INR10,000, or both. If the failure continues, an additional fine
can be imposed up to INR5,000 per day.
EP Act and the NGT Act. Unlike the Water Act and the Air Act, the EP Act, which is the
umbrella act for the numerous rules adopted under it, such as the HW Rules,provides only
one type of punishment. Any breach of the rules under the EP Act is punishable with
imprisonment up to five years, or a fine up to INR100,000, or both.
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However, amounts imposed by courts are now significantly higher already. Under the NGT
Act, NGTs have the power to order:
 Relief and compensation to the victims of pollution.
 Restitution of damaged property.
 Restitution of the environment.
These amounts are in addition to amounts payable under the Public Liability Insurance Act
1991. Moreover, NGTs can divide the compensation payable under the following separate
heads as specified in Schedule II of the NGT Act:
 Death.
 Permanent/temporary disability or other injury or sickness.
 Medical expenses incurred for treatment of injuries or sickness.
 Damages to private property.
 Loss and destruction of any property other than private property.
 Expenses incurred by the government or a local authority in providing relief, air and
rehabilitation to the affected persons, or compensation for environmental degradation
and restoration of the quality of the environment.
 Claims including cost of restoration on account of any harm or damage to the
environment, including pollution of soil, air, water, land and ecosystems.
 Claims on account of any harm, damage or destruction to fauna and aquatic fauna and
flora, crops, vegetables, trees and orchards.
 Loss of business or employment, or both.
 Any other claim arising out of or connected with any activity of handling hazardous
substances.
Most significantly, the NGT Act provides that anyone who fails to comply with any order or
award of the NGT Act is punishable with imprisonment for a term up to three years, or a fine
up to INR100 million, or both. If the failure or breach continues, an additional fine can be
imposed up to INR25,000 per day.
The penalty under the NGT Act is even stricter for companies. If a company fails to comply
with an order or award of the NGT, it is liable to a fine up to INR250 million, and an
additional fine up to INR100,000 for each day the breach continues.
Further, the CPCB has recently devised a formula for calculating the environmental
compensation to be levied on the defaulting industry.

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The Central Ground Water Authority. under the Ministry of Jal Shakti Department of Water
Resources, River Development and Ganga Rejuvenation, is the body responsible for the
supervision of water abstraction.
The regulation of ground water development in notified areas is conducted by district
administrative heads assisted by Advisory Committees under the provisions of section 4 of
the EP Act. All issued pertaining to the granting of "No Objection Certificates" (NOCs) for
ground water abstraction will have to be submitted to the Central Ground Water Authority.
Water abstraction is limited in the sense that the grant of a NOC for ground water extraction
for drinking and domestic purposes for infrastructure projects/industries/the mining sector
will be considered only on the production of a completion certificate from the competent
authority. Moreover, a NOC for ground water withdrawal will be considered only in cases
where the water supply department concerned is unable to supply an adequate amount of
water in the area.
A NOC will not be granted to industries for the extraction of ground water for construction
activities in the project in critical/over-exploited areas. Similarly, water intensive industries
(like packaged drinking water, tanneries, distilleries, breweries, paper and pulp industries,
fertiliser companies, water parks and amusement centres) will not be allowed to abstract
water from overexploited areas.
For example, owing to the high levels of fluoride present in the groundwater of the 12
districts in Maharashtra, the National Green Tribunal has now passed an order that prohibits
the unauthorised extraction of the resource for commercial use by dealers and businesses
dealing in packaged water. Earlier the Tribunal had issued notices to the collector of these
districts over the rampant and illegal digging of borewells in these already water-scarce areas.
Compensation
If the licensee of a NOC is not in compliance with a NOC for ground water, then this can lead
to the cancellation or non-renewal of that NOC.
Penalties
Penalties can be imposed under the EP Act in the case of non-compliance in notified areas. A
Show Cause Notice (SCN) or stop work order can be served on the licensee by the SPCB.
Subsequently, a closure notice can be issued, if no response is given to the SCN. If there is
failure to comply with the directions issued, then this can be punishable by a term of
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imprisonment and/or the penalties specified under the EP Act, which can result in either a
prison term of up to five years, or a fine of up to INR100,000, or both.
12.5 AIR POLLUTION

Companies must apply to the relevant SPCB for either a consent to operate under the Air Act
or Water Act, or a common consent order, or an integrated environmental permit under the
Air Act and Water Act.
The Air Act is similar to the Water Act, in terms of consent application management, air
pollution standards set by the CPCB, and the type of infringements and penalties. State
governments in consultation with SPCBs identify air pollution control areas, which determine
how they approach consent applications.
Clean-up/compensation
SPCBs can order companies to clean-up air pollution and issue directions to companies for
closure or stoppage of electricity or water supply, until the cause is adequately addressed.
Courts and the NGTs can order compensation to be paid by companies for harm caused to the
environment or people
Penalties
The structure and penalties under the Air Act are similar to those under the Water Act.
12.6 OTHER IMPORTANT ASPECT
12.6.1 Environmental Impact Assessments

Scope
Many activities require a prior environmental clearance, and some also require a detailed EIA
study (many also involve a public consultation component), including:
 Mining of minerals.
 Offshore and onshore oil and gas exploration, development and production.
 Oil and gas transportation pipelines.
 Thermal power plants.
 Nuclear power projects and processing of nuclear fuel.
 Metallurgical industries (ferrous and non-ferrous).
 Asbestos milling and asbestos-based products.
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 Chlor-alkali industry.
 Chemical fertilisers.
 Pulp and paper industry.
 Sugar industry.
 Building and construction projects.
 Townships and area development projects (exempted from the public consultation
phase).
The Environment Impact Assessment Notification 2006 identifies various activities where
prior environmental clearance must be obtained by the project proponent. The activities are
classified into two categories, A and B, based on the spatial extent of potential impacts and
potential impacts on human health and natural and man-made resources.
New projects and the expansion and modernisation of existing projects falling under the
relevant activities require prior environmental clearance:
 Category A activities require clearance from the Central Ministry of Environment,
Forests and Climate Change (which bases its decision on the recommendation of the
Expert Appraisal Committee).
 Category B activities require clearance from a state-level EIA Authority which bases
its final decision on the recommendation of the state-level Expert Appraisal
Committee). Category B is further sub-divided into Category B1 projects, which
require an EIA, and Category B2 projects which do not require an EIA study/report
(neither require public consultation).
There are four stages to obtain an environmental clearance:
 Stage 1 screening (only for Category B projects and activities).
 Stage 2 scoping.
 Stage 3 public consultation.
 Stage 4 appraisal.
Public hearings are not required for some projects, such as:
 Modernisation of irrigation projects.
 Projects in industrial estates or parks.
 Expansion of roads and highways not needing further land acquisition.
 Building, construction, area development and townships.
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An Expert Appraisal Committee (EAC) or State Level Expert Appraisal Committee (SEAC)
must complete its assessment and make a recommendation within 60 days from receipt of all
required documents and completion of the public hearing. The regulatory authority will
consider the recommendations of the EAC or SEAC and notify its decision to the applicant
within 45 days of receipt of the recommendations of the EAC or SEAC (that is, within 105
days of receipt of the final environment impact assessment report).
For projects which do not require an environment impact assessment (B-2 projects, identified
by the SEAC in stage 2 scoping stage), the final decision must be notified within 105 days of
receipt of the complete application with the required documents.
The prior environmental clearance granted for a project or activity is valid for:
 Ten years for river valley projects.
 The project life estimated by the EAC or SEAC, subject to a maximum of 30 years for
mining projects.
 Five years for all other projects and activities.
It is mandatory for the project management to submit half-yearly compliance reports on the
terms and conditions in the environmental clearance.
A prior environmental clearance granted for a specific project or activity to an applicant can
be transferred during its validity to another legal person entitled to undertake the project or
activity. Transfer is made on application by the transferor, or by the transferee with a written
no objection by the transferor, to the relevant regulatory authority, on the same terms and
conditions and for the same validity period. No reference to the EAC or state-level EAC is
necessary in such cases.
Penalties
Because the EIA Notification 2006 was issued under the EP Act, the penalties in the EPA Act
apply in the case of an infringement of the EIA Notification 2006 (see Question 6).
The Supreme Court of India, has in some cases levied 10% of the project cost as
environmental compensation in cases where the construction was initiated without having a
valid EC for the project and in some instances demolition orders have also been passed by the
courts categorising the construction as illegal.
12.6.2 Waste and The Circular Economy
Specific permits, consents or authorisations must be obtained by various parties generating or
handling waste, under the following key waste-management laws:
 Solid Waste Management Rules, 2016.
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 Plastic Waste Management Rules, 2016.
 E-Waste (Management) Rules, 2016.
 Bio-Medical Waste Management Rules, 2016.
 Construction and Demolition Waste Management Rules, 2016.
 Hazardous and Other Waste (Management and Transboundary Movement) Rules,
2016.
 Batteries (Management and Handling) Rules, 2001.
The waste rules make it mandatory to obtain a prior consent or authorisation from the SPCB
(in most cases) or CPCB (for example for the producer under the E-Waste Rules).
Operator criteria
Most environmental laws, including the HW Rules, refer to the term occupier, defined as the
person who in relation to any factory or premises has control over the affairs of the factory or
the premises, and includes in relation to a hazardous substance the person in possession of the
substance or waste.
Special rules for certain waste

Hazardous and Other Waste (Management and Transboundary Movement) Rules, 2016. This
is in many ways the most comprehensive of the waste management rules, as it covers the
generation, handling, storage, transport, recycling, disposal, and import/export of hazardous
waste.
The HW Rules impose detailed obligations on the occupier for the management, storage,
packaging, labelling and transport of such waste. All parties involved must sign a movement
document (or manifest system), and copies of it must be submitted to the SPCB.
Every occupier/owner/manager of any site dealing with or generating hazardous waste is
required to have a hazardous waste authorisation or permit from the relevant SPCB to handle,
generate, dispose of, recycle, reuse or carry out any other activity involving hazardous waste.
The HW Rules contain a separate chapter on the import and export of hazardous waste, for
which prior approval must be obtained from the MoEFCC. The MoEFCC in its review of
applications is assisted by a technical review committee, which meets at regular intervals and
reviews each import/export application.
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The definition of hazardous waste is detailed, with a strong focus on whether the material
exhibits or triggers certain hazardous characteristics.
Plastic Waste Management Rules 2016. The Plastic Waste Management Rules 2016,
replacing the 2011 Rules, is wider in scope, and:
 More clearly imposes obligations on "brand owners", "producers" and "importers".
 Introduces the notion of extended producer responsibility, in the context of plastic
waste management.
 Covers for the first time "waste generators", which includes every person generating
waste.
 Explicitly refer to "waste pickers", an important element since the waste management
sector or the segregation of it is largely not formally regulated. The failure of earlier
waste management rules to acknowledge this segment has often undermined effective
implementation of waste rules. This is also true for the management of e-waste.
E-Waste (Management) Rules 2016 (E-Waste Rules). The E-Waste Rules entered into
force on 1 October 2016.
The new E-Waste Rules apply to every:
 Manufacturer, producer, bulk consumer, other consumer, collection centre,
refurbished, dismantler and recycler.
 Dealer and e-retailer involved in the manufacture, sale, transfer, purchase, collection,
storage and processing of e-waste or electrical and electronic equipment (EEE), as
detailed in Schedule I to the E-Waste Rules.
An important improvement is that a producer can now obtain one centralised extended
producer responsibility authorisation from the CPCB, instead of one from each SPCB where
it has a market presence.
Another key change is that the operator can fulfil its extended producer responsibility
obligation by becoming a member of the newly created Producer Responsibility
Organisation, or of an e-waste exchange, or both. These were introduced to facilitate
implementation of the E-Waste Rules, given the failure by industry to create effective
mechanisms to implement the earlier Rules (adopted in 2011).
Penalties
The Environmental Protection Act, 1986 (EP Act) the umbrella Act for numerous rules
adopted under it such as the waste rules, provides for only one type of punishment. Any
breach of these rules is punishable with imprisonment for a term up to five years, or a fine up
to INR 100,000, or both
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Importantly, the NGTs can impose significantly higher penalty amounts on companies for
non-compliance with their directions. If a company fails to comply with any order or award
of the NGT, the company is liable to a fine up to INR25 million, and an additional fine up to
INR 100,000 for each day the breach continues. It is expected that the EP Act and all other
environmental laws will at some point incorporate the penalty amounts identified under the
NGT Act.
National strategy
The Plastic Waste Management Rules and the E-Waste Rules explicitly refer to the extended
producer responsibility, and both Rules have been adopted at central level and apply
throughout India. Some states have moved even further beyond these provisions and banned
single-use plastic altogether.
Targets
The E-Waste Rules, unlike the Plastic Waste Management Rules, does contain specific e-
waste collection targets which must be achieved by the producers as part of their obligations
as members of the Producer Responsibility Organisation, starting with 10% of the quantity of
waste generated and going up to 70% by the year 2023.
[Source: https://uk.practicallaw.thomsonreuters.com/]
12.7 SUMMARY
The legislature enacted the Environment (Protection) Act, 1986 under Article 253 of the
Constitution of India after the Bhopal gas tragedy. This was done to implement the decisions
that were taken in the United Nations (UN) Conference on the Human Environment, 1972
regarding protection and betterment of the environment and to suggest ways to prevent
hazards to all living organisms.
The environmental aspect of CSR is the duty of the corporate to cover the environmental
effects of the company\’s products operations and facilities; remove waste and emissions;
increase the productivity and efficiency of its resources, and decrease practices that may
adversely affect the enjoyment of resources by future generations.
The main environmental laws, including under which various key environmental permits (or
consents) are being issued in India, include the:
 Water (Prevention and Control of Pollution) Act 1974 (Water Act), which also
initially identified the powers, functions and hierarchy of the environmental agencies,
the CPCB and the SPCBs.
 Air (Prevention and Control of Pollution) Act 1981 (Air Act).
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 Environment (Protection) Act 1986 (EP Act). This umbrella law enables the central
government to take measures it deems necessary to protect and improve the
environment, and to prevent, control and abate environmental pollution. A wide range
of rules and notifications have been adopted under it, such as the:
 E-Waste (Management) Rules 2016, as amended in 2018 (E-Waste Rules);
 Bio-Medical Waste Management Rules 2016;
 Plastic Waste Management Rules 2016;
 Solid Waste Management Rules, 2016;
 Construction and Demolition Waste Management Rules 2016;
 Hazardous and Other Waste (Management and Transboundary Movement)
Rules 2016, as amended in 2019 (HW Rules);
 Manufacture, Storage and Import of Hazardous Chemicals Rules 1989
(MSIHC Rules);
 Coastal Regulation Zone Notification 2019; and
 Environment Impact Assessment Notification 2006.
 Wild Life (Protection) Act 1972.
 Forest (Conservation) Act 1980.
 Public Liability Insurance Act 1991.
 Biological Diversity Act 2002.
 National Green Tribunal Act 2010.
12.8 KEYWORDS
 ISO- International Organization for Standardization

 EMS (Environment Management System)- is the “the organizational structure,
responsibilities, practices, procedures, processes, and resources for determining and
implementing environmental policy.
 (CEPI) - The concept of Comprehensive Environmental Pollution Index (CEPI)
was evolved by Central Pollution Control Board (CPCB) during 2009-10 as a tool
for comprehensive environmental assessment of prominent industrial clusters and
formulation of remedial Action Plans for the identified critically polluted areas.
 Regulatory agency - independent governmental body established by legislative act in
order to set standards in a specific field of activity, or operations, in the private sector
of the economy and then to enforce those standards.
 Suo motu - ("on its own motion") describes an act of authority taken without formal
prompting from another party.
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1. What is the importance of Bio-Medical Waste (Management and Handling) Rules, 1998
for business?
___________________________________________________________________________
___________________________________________________________________________
2. Discuss the role of ISO: 14001
___________________________________________________________________________
___________________________________________________________________________
Short Questions
1. What is the purpose of Environment Protection Act?
2. Highlight the importance of CSR with reference to Environment Protection Initiatives.
3. Describe the Self-Regulation Measures.
4. Write a note on EMS
5. Explain Comprehensive Environmental Pollution Index (CEPI).
Long Questions
1. Explain the concept of Environmental Clearance.
2. Discuss Environmental permits and penalties.
3. Outline the implications of Water Pollution Act for business.
4. Why it is important for business to consider Air Pollution Regulations?
5. What is Waste and Circular Economy? State its important element with explanation.

1. The provisions for environmental protection in the constitution were made in:
a. 1976
b. 1950
c. 1982
d. 1960
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2. The power to declare an area as a sanctuary or national park of central Government is
Wildlife (Protection) Act is under:
a. Section 39
b. Section 38
c. Section 18
d. Section 27
3. This act prohibits entry of any poisonous, noxious or polluting matter into any stream,
well, sewer or on land for disposal determined in accordance with such standards as laid
down by the State Board.
a. The Air (Prevention and Control of Pollution) Act, 1981
b. Hazardous Wastes (Management, Handling and Trans-Boundary Movement) Rules, 2008
c. The Water (Prevention and Control of Pollution) Act, 1974
d. Bio-Medical Waste (Management and Handling) Rules, 1998
4. Which ISO standard providesguidelines for maintenance, improvement, and

implementation of EMS?
a. ISO: 31000
b. ISO: 50001
c. ISO: 9001
d. ISO: 14004:2004
5. What is the PI score for orange category?

a. 60 and above
b. 41 to 59
c. 21 to 40
d. upto 20
Answers
1 - a; 2 - b; 3 –c; 4 – d; 5 – b.
Text Books:
308
Publishing House],
Hall.
Reference Books:

Open Text Source:
p. 2049. ISBN 9788180385926.
Limited. pp. 48–.ISBN 978-81-7534-840-0.
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UNIT 13: BUSINESS NEW TRENDS
Structure
13.1 Introduction
13.2 Ecology
13.2.1 Concept
13.2.2 Types:
13.2.3 Importance of Ecology
13.3 Green Marketing
13.3.1 Definitions:
13.3.2 Golden Laws
13.3.3 Importance
13.4 4P’s of Green Marketing
13.4.1 Trends in India
13.4.2 Attributes of Green Consume
13. 5 Summary
13.6 Keywords
13. 7 Learning Activity
13. 8 Unit End Questions
13. 9 Suggested Readings
 Explain the relationship of ecology and business

 Describe the concept of Green Marketing
 Analyze 4P’s of the Green Marketing
13.1 INTRODUCTION
Now a days, the environmental problems seem to concern all active citizens, enterprise, and
institutions all over the world much more than it did 30 years ago. International researches
show that consumers worry about the environment and change their behaviour gradually.
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Thus, a new market for viable or sustainable product emerges, which is further strengthened
by active consumers since it is a way to contribute to the protection of the environment.
The enterprises gradually recognize the various competitive advantages and the enterprising
opportunities that arise from this ecological consuming approach, entering the word “green”
in many of their activities. Thus, in parallel with the concept of corporate social responsibility
of “green marketing” has also been cultivated with sufficiently effective practices.
The term green marketing refers to the planning, development and promotion of products or
services that satisfy the needs of consumers for quality, output, prices and services without a
negative effect on the environment with regard to the use of raw material, the consumption of
energy, etc.
There is growing interest among people around the world regarding protection of natural
environment. People are getting more concerned for environment and changing their
behaviour for the protection of environment. As a result of this, the term “Green Marketing”
has emerged. Hence, marketers are feeling their responsibility towards environment and
giving importance to green marketing.
13.2 ECOLOGY
13.2.1 Concept:
Ecology is a branch of biology concerned with understanding how organisms relate with
each other and their environment. This branch of biology mainly deals with the relationships
between the organisms, their relationships among each other, their relationships towards the
shared resources, their relationships with the space they share, and even their relationships
with the non-living aspects in the environment
In understanding the given relationship, ecology encompasses aspects such as population
growth, competition, symbiotic ecologic relationships (mutualism), trophic relations (energy
transfer from one section of the food chain to the next), bio-diversity, migration and
physical environment interactions. Because ecology includes all the living organisms on earth
and their physical as well as chemical surroundings and it is divided into sub-classes as
follows:
13.2.2 Types:
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Microbial
ecology
Organism
Global
Ecology /Behaviour
Ecology
Types of
Ecology
Ecosystem Population
Ecology Ecology
Community
Ecology:
Fig 13.1: Types of Ecology

Microbial ecology
Microbial ecology looks at the smallest fundamental levels of life, that is, the cellular level. It
involves mainly the first two life kingdoms which are; Kingdom Monera and Kingdom
Protista. Here, the connections are made between microbes and their relationships with each
other and their environments. Microbial ecology is particularly important in the analysis of
evolutionary connections and events leading to existence (known as phylogeny). These
connections help us understand the relationships shared among organisms. It is particularly
interested in DNA and RNA structures as they carry most of the information passed along
from organisms to their progeny, providing the data ecologists need.
Organism/Behaviour
This is the study of the organism at its fundamental levels and can encompass microbial
ecology. In this type of ecology, the main goal is to understand the organism’s behaviours,
adaptations for such behaviours, reason for those behaviours as explained through the lens of
evolution, and the way all these aspects mesh together.
In this case, the main concern is the individual organism and all its different nuances,
especially in trying to understand how it all ties together to enhance the survival of the
organism or any beneficial adaptations.
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Population Ecology:
Population ecology is the next rank on the ecological ladder. Population ecology focuses on
the population, defined as a group of organisms of the same species living in the same area at
the same time. Here, attention is given to things such as population size, its density, the
structure of the population, migration patterns, and the interaction between organisms of the
same population. It tries to explain the different changes in each of the dynamics of the
population such as why numbers would increase and whether this affects any other aspects of
the population such as its density.
Community Ecology:
Community ecology takes a look at the community, defined as all the populations that live in
a given area. This includes all the different species populations. The focus here is usually on
the interactions between the different species and how their numbers and sizes all mesh
together and how change in one population change the dynamic of the whole community.
The animal populations here are exposed to more complex interactions given their increased
species numbers which give rise to dynamics such as trophic relationships (who eats who),
space dynamics, migration patterns and the most important ecological driving force when it
comes to inter/intra species interaction
Ecosystem Ecology:
Ecosystem ecology makes a unique contribution to understanding ecology by adding abiotic
(non-living) factors to the items analysed, alongside the biotic (living) factors involved. This
interaction therefore involves all aspects of the environment and how they interact.
It includes understanding how things like climate and soil composition affect the behaviours
and interactions of populations from different species. It also includes a wide range of factors
to better understand the whole aspect of interaction between the living things and their
environments/habitats.
Global Ecology:
The global ecology is principally important in understanding all the ecosystems affecting the
entire globe. This includes all the different biomes, with considerations of aspects such as
climate and other environmental geography.
It means, global ecology takes into account the whole world’s biosphere while considering all
living organisms from the microscopic to higher lifeforms, the environments they leave in,
the interactions that they have with each other, the influences that their environments have on
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these interactions and vice versa, and finally, how they are all interconnected under the
common ground that they all share a single planet – the Earth.
13.2.3 Importance of Ecology

Helps in Environment Conservation:
Ecology allows us to understand the effects our actions have on our environment. With this
information, it helps guide conservation efforts by first showing the primary means by which
the problems we experience within our environment begin and by following this
identification process, it shows us where our efforts would have the biggest effect.
Ecology also shows individuals the extent of the damage we cause to the environment and
provides predictive models on how bad the damage can get. These indicators instil a sense of
urgency among the population, pushing people to actively take part in conservation efforts
and ensure the longevity of the planet
Ensure proper resource allocation:

Ecology equally allows us to see the purpose of each organism in the web of connectivity that
makes up the ecosystem. With this knowledge, we are able to ascertain which resources are
essential for the survival of the different organisms. This is very fundamental when it comes
to assessing the needs of human beings who have the biggest effect on the ecosystem.
An example is human dependency on fossil fuels that has led to the increase of carbon
footprints in the ecosystem. It is ecology that allows humans to see these problems which
then calls for the need to make informed decisions on how to adjust our resource demands to
ensure that we do not burden the environment with demands that are unsustainable
An example is human dependency on fossil fuels that has led to the increase of carbon
footprints in the ecosystem. It is ecology that allows humans to see these problems which
then calls for the need to make informed decisions on how to adjust our resource demands to
ensure that we do not burden the environment with demands that are unsustainable
Enhance Energy Conservation:

Energy Conservation and ecology is connected in that, it aids in understanding the demands
different energy sources have on the environment. Consequently, it is good for decision
making in terms of deciding resources for use as well as how to efficiently convert them into
energy
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Without proper understanding of energy facts through ecology, humans can be wasteful in
their use of allotted resources such as indiscriminate burning of fuels or the excessive cutting
down of trees. Staying informed about the ecological costs allows people to be more frugal
with their energy demands and adopt practices that promote conservation such as switching
of lights during the day and investing in renewable energy.
Promotes Eco-friendliness
With all the information and research obtained from ecology, it ultimately promotes eco-
friendliness. It makes people aware of their environment and encourages the adoption of a
lifestyle that protects the ecology of life owing to the understanding they have about it.
This means that in the long-term, people tend to live less selfishly and make strides towards
protecting the interest of all living things with the realization that survival and quality life
depends on environment sustainability. Hence, it fosters a harmonious lifestyle and assures
longevity for all organisms.
Aids in diseases and pest control:

A great number of diseases are spread by vectors. The study of ecology offers the world
novel ways of understanding how pests and vectors behave thereby equipping humans with
knowledge and techniques on how to manage pests and diseases.
For example, malaria which is one of the leading killer diseases is spread by the female
Anopheles mosquito. In a bid to control malaria, humans must first understand how the insect
interacts with its environment in terms of competition, sex, and breeding preferences. The
same applies to other diseases and pests. By understanding the life cycles and preferred
methods of propagation of different organisms in the ecosystem, it has created impressive
ways to device controls measures.
Ecology and Economic Growth!

The ecological and economic growth debate started in late 1960’s raising the deep questions
as to whether the industrialization of the planet could proceed much further without
imperilling the survival prospects of the human species and the habitability of the planet. To
the question of how much growth may have to be given up to protect the natural environment
and maintain a habitable planet, both ecologists and economists offer a wide range of
answers.
The pessimists argue that it is essential to begin now to plan a world economy based on an
acceptance of ecological limits. On the other hand, the optimists argue that issues of global
pollution and resources shortage make it desirable to proceed as ever but with caution. As
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pointed out by Ross and Passell, “The most important lesson of ecology is caution: each step
towards more sophisticated technology risks transgress against nature.”
The ecological pessimists are alarmed by the interplay between growth dynamics and the
finite space and usable resources available to mankind. These pessimists foresee a steady
deterioration of the quality of life as a consequence of future crowding and depletion. This
deterioration could diminish the life prospects of future generations and may even precipitate
an ecological collapse of catastrophic proposition.
According to H. Daly, there is a limit to how long the earth’s natural resources can be
consumed at the present rate and that this limit is not far off. He feels that ways should be
found to reduce human consumption levels as measured by the rate of economic growth but
without reducing the quality of life.
Carl Kaysen has expressed optimistic views in this context. According to him, there are no
credible reasons for believing that the world as a whole cannot maintain a fairly high rate of
economic growth (though not necessarily the present one) over a long period of time into
future. Further, if it becomes necessary, for whatever reason, to slow down the growth rate, a
relatively smooth transition from higher to lower rates will be perfectly possible, and not
achievable only through catastrophe.
G. Harlem Brundtland questioned the ability of the market mechanism to cope with the two
vital issues of resource scarcity and environmental degradation. According to her, economic
growth during the last 30 years has brought security, welfare and prosperity to the people of
the industrialised countries.
Large groups have gained freedom from heavy work, poverty and unhealthy living
conditions. Moreover, energy has been a key factor in this development. We now face the
possibility of a limited supply of energy and it is natural to see this as a threat to all we have
gained.
In seeking a solution, we find new constraints, the most important being set by the biosphere
and the delicate ecological system of the planet. No doubt also the social costs of growth—
structural changes, migration and environmental impacts, will become increasingly
burdensome as prosperity increases.
Further, environmental and ecological concerns are responsible for the questioning of the
need for further economic growth. In the production of more and more goods, natural
resources are being used up at an alarming rate and sources of energy are being strained by
the production of non-essential goods and services demanded by the affluent societies. The
planet is being despoiled by pollution of the air and water as man bums up his energy
supplies in the quest for more and more goods.
W. Beckerman in his defence of economic growth, argues that in the matter of resources
allocation one should not confuse between inter-temporal choice (growth) and resources use
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at any point of time. The growth rate cannot be hold responsible for the failures to correct the
externalities (pollution) which are caused by resource misallocation at any moment of time.
Robert Costanza considers the debate as technological optimism versus technological
pessimism and comments. “There have been thousands of studies over the last 15 years on
various aspects of our energy and resource future and different points of views have waxed
and waned. But the bottom line is that there is still an enormous amount of uncertainty about
the impacts of energy and resource constraints.”
According to W.W. Heller, “Of many economists there are those who accept the spaceship
earth concept of finite limits to the assimilative capacity of the environment and who believe
that growth will test those limits within relevant time horizons and must therefore be
retarded. Pro-growth observers tend to discount present ecological strains such as the energy
crisis, as provisional, short-term problems which will disappear in a decade or so when new
energy sources are developed”.
Thus, ecological challenge has grave implications for a world order system organised around
a principle of virtually unrestricted and uncontrolled growth. Wasteful consumption patterns
and environmentally destructive behaviour should be reduced as quickly as possible and
conservation policies must be adopted and implemented even-handedly.
We may conclude with E.J. Mishan, “The current aim of the environmentalist is not a no-
growing economy per se much less a recession in a growing economy. It is that of persuading
the public at large to accept a steady state economy as a desirable norm of social policy.”
13.3 GREEN MARKETING
According to the American Marketing Association, green marketing is the marketing of

products that are presumed to be environmentally safe. Thus,Green marketing incorporates a
broad range of activities, including-
1. Product modification,
2. Changes to the production process,
3. Packaging changes, as well as
4. Modifying advertising.
The term green marketing came into prominence in the late 1980s and early 1990s. The
American Marketing Association (AMA) held the first workshop on “Ecological Marketing”
in 1975.
Thus, green marketing incorporates a broad range of activities, including product
modification, changes to the production process, packaging changes, as well as modifying
advertising.
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In simple terms green marketing refers to the process of selling products and/or services
based on their environmental benefits. Such a product or service may be environmentally
friendly in itself or produced and/or packaged in an environmentally friendly way.
13.3.1 Definitions:
According to American Marketing Association – “Green marketing is the marketing of
products that are presumed to be environmentally safe.”
According to Polonsky, 1994 – “Green or Environmental Marketing consists of all activities

designed to generate and facilitate any exchanges intended to satisfy human needs or wants,
such that the satisfaction of these needs and wants occurs, with minimal detrimental impact
on the natural environment.
Green marketing refers to the process of selling products and/or services based on their
environmental benefits. Such a product or service may be environmentally friendly in itself or
produced and/or packaged in an environmentally friendly way. The assumption of green
marketing is that potential consumers will view a product or service’s “greenness” as a
benefit and base their buying decision accordingly. The consumers may be willing to pay
more for green products than they would for a less-green product.
Green Marketing incorporates broad range of activities including product modification,

changes to the production process, packaging changes, and modifying advertising. The focus
of Green Marketing is on satisfaction of customers’ needs and wants with no or minimum
harm to the natural environment.
Marketing products and services based on environmental factors or awareness. Companies

involved in green marketing make decisions relating to the entire process of the company’s
products, such as – methods of processing, packaging and distribution. Investopedia explains
‘Green Marketing’ as the companies seek to go above and beyond traditional marketing by
promoting environmental core values in the hope that consumers will associate these values
with their company or brand.
Engaging in these sustainable activities can lead to creating a new product line that caters to a
new target market, also known as sustainable marketing, environmental marketing or
ecological marketing.
According to the American Marketing Association, green or Environmental Marketing

consists of all activities designed to generate and facilitate any exchanges intended to satisfy
human needs or wants, such that the satisfaction of these needs and wants occurs, with
minimal detrimental input on the national environment.
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Green Marketing has progressed over a period of time. There are three phases in the
evolution process of Green Marketing. First phase was ecological green marketing where
environmental problems and remedies for environmental problems were mainly focused.
Environmental green marketing was the second phase; the major focus was on clean
technology and designing of innovative new products, which can control pollution and waste
issues. Third phase was “sustainable green marketing”. This phase gained popularity in the
late 1990s and early 2000.
A variety of jargons are used in this area, like Green Marketing, Ecological Marketing and
Environmental Marketing. The term Green Marketing came into regulation in the late 1980s
and early 1990s.
13.3.2 Golden Laws:

The important golden laws of Green Marketing are as follows:
1. Customers should be Aware:
ADVERTISEMENTS:
If a company needs to sell the products, it should make sure that the customers are better
aware of the benefits of “green” products and their growing necessity. The customer should
know the main reason behind the issue of the products that are eco-friendly.
2. Reassure the Buyers:

Marketer should understand that they need to convince the customers by promoting the true
quality and ethically show the performance of the product, because it would be very difficult
to sell the products to customers only on the lines that they are eco-friendly.
3. Transparency:
Marketers should be ethical in claiming their products as eco-friendly. They should be
genuine and transparent about their claims. The business policies should also go with it.
4. Consider Pricing:
It is possible that marketers charge a greater price for their “green” products because of their
high cost of production and use of higher-quality ingredients. Many customers might not
afford these high prices, so company needs to consider a reasonable price and target the
appropriate audience effectively.
5. Customer Participation:
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The marketer should involve the customers in the initiative of green marketing. Once the
customer is a part of this cause, he or she will understand the concept better and the issues of
pricing etc. can be resolved.
13.3.3 Importance of Green Marketing:

It is well known that increasing production and business activities are polluting the natural
environment. The damages to people, crops, and wildlife are reported in different parts of the
world. As resources are limited and human wants are unlimited, it is necessary for marketers
to use resources efficiently, so that organisational objectives are achieved without waste of
resources. So green marketing is inevitable.
Importance # 1. Environmental Advantages:

Going green is an environmentally responsible choice. It is estimated that 40 percent of all
greenhouse gases in the United States comes from energy production that businesses use to
heat, cool and light workplaces. Reducing these energy needs reduces carbon dioxide output,
helping to control global warming. As businesses use more natural resources than individual
consumers, recycling business materials and conserving water contribute to conservation on a
larger scale.
Importance # 2. Economic Advantages:

The reduction in waste equals lower operating costs and more savings. Eco-friendly business
equipment and practices such as – low-wattage or LED lights, use of natural lighting, water
conservation policies, mandatory recycling and hybrid company vehicles save money on
utilities, fuel and office supplies. This generates instant cash flow. Further going green puts a
business in a positive light in the eyes of customers, potential investors, distributors, activists,
watchdog groups, communities and prospective employees.
Importance # 3. Sustainability:
Going green is about sustainability; this sustainability translates to sustainable profits in green
sectors with secure futures. The future-safe markets include biomaterials, green buildings,
personal transportation, smart grids, mobile applications and water filtration.
Importance # 4. Efficient Use of Resources:

Today, human demands and needs are unlimited but resources are short enough that cannot
fulfill the human needs. Markets need to facilitate the consumers by utilizing resources
efficiently.
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Importance # 5. Planned Techniques:
It needs to develop well planned techniques and innovative policies to achieve the
organizational goals effectively without any wastage of time and other resources. Green
marketing examples of different products and services develops a growing interest among
customers throughout the world.
Importance # 6. Consumer Attraction:

Green marketing examples of different products attracts the consumers regarding
environment protection. People are so much conscious about their environment and variations
in behaviour. Green marketing is considered as growing marketing that helps to design
socially and sustainable products.
Importance # 7. Innovation:
Green marketing helps to design such kinds of products that are economically affordable and
satisfy the human needs efficiently. It produces innovative green products that consume less
resource.
Importance # 8. Competitive Advantage:

Companies enjoy competitive advantage over other companies in the market through green
marketing examples. Today, companies which adopt green marketing techniques gain more
competitive advantage over other companies which are not conscious about such techniques
and environment. Companies which develop innovative products and services with
innovative qualities at affordable rates are successful in the market.
Green marketing is a group of activities that are designed to meet the consumer’s demands
and needs at affordable price range.
13.4 4P’S OF GREEN MARKETING
Marketers need to define and design the 4 Ps of marketing mix from the viewpoint of
environmental preservation. The green marketing mix elements address the key
environmental issues appropriately and effectively.
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Green Green
Products Price
Green Green
Promotion Place
Fig 13.2: 4 P’s of Green Marketing
Element # 1. Green Products:

Consider products that consume more energy, use toxic chemicals, cannot be recycled, and
use extensive packaging. Such products are a threat to the environment as they lead to
environmental degradation and pollution. On the other hand, products that help in saving
energy, use natural ingredients, are recycled, or use reduced packaging make contributions to
the environment. Therefore, those products that are produced in harmony with the
environment are known as ‘green products’.
Production of green products is based on green technology. Green products help in saving
natural resources and subscribe towards sustainable future.
Organizations should produce environment-friendly products as they help in saving energy
resources and do not affect the environment adversely. The various stages involved in the
production of environment-friendly products are efficient in terms of environment protection
and conservation.
Environment-friendly products use natural and organic ingredients that are sourced from
local suppliers and its manufacturing and circulation is done in a manner that has least or no
impact on environment. Different governing organizations and certification systems certify
the product as green after assessing it against environmental performance criterion.
Element # 2. Green Price:

Production of green products requires modification in the production processes and this
necessitates expenditure. Cost increase results in increased price point of green products that
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makes acceptability of the product in the market difficult. The high price may act as a
deterrent as consumers may be either unwilling or unable to pay this green premium.
The gap between the price of a green product and a non-green product is known as ‘pricing
gap’. Price impediments can be tackled either by lowering the price point of green products to
make it contiguous with the prevailing products in the market or by enhancing the perceived
value of the green products in the eyes of the customer (by adding to the benefits derived
such as improved packaging, improved attributes, and making the product specific to
customers’ needs).
Element # 3. Green Place:

Green place relates to the distribution of green products without doing any harm to the
environment. This is achieved through efficient utilization of fuel and energy and arranging
for logistics with the least emissions.
Transportation costs constitute a major part of business costs and resources spend in
distribution can be saved through local production. This decreases transportation costs and
also reduces carbon footprint. Selling over the Internet as compared to a shop also saves
business resources.
Element # 4. Green Promotion:

Consumers need to be made aware about green products and motivated to purchase them.
Therefore, huge amount of money and resources are spent by companies nowadays on
advertising and promotion of green products. Green promotion entails increasing the
sensitivity of consumers towards green products as well as promoting the products in an
environment-friendly manner like using social networking sites to post profiles related to
green marketing.
Recently, Nike with its ‘Better World’ campaign launched its first 100 per cent recycled
television advertisement, which was recycled by reusing and remixing film of its earlier
campaigns.
13.4.1 Trends in India
1. Organizations perceive environmental marketing to be an opportunity that can be used to
achieve its objectives.
2. Organizations believe they have a moral obligation to be more socially responsible.
3. Governmental bodies are forcing firms to become more responsible.
4. Competitors’ environmental activities pressure firms to change their environmental
marketing activities.
5. Cost factors associated with waste disposal or reductions in material usage forces firms to
modify their behaviour.
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Green Warming – Proposed Solution:
The solution to this problem lies in “Going Green” in our thoughts, behaviour and actions.
The consumers and corporations need to focus on clean and environment friendly products
and services.
To elaborate on the “Green” Terminology:
1. “Green Product” is non-toxic and is made from recycled material. There is no absolute
green product. However the products, which consume less energy, cause less pollution and
are biodegradable, belong to this category. Thus “Green” is a relative term.
2. “Green Service” fulfils the philosophy of sustainable development, improving and
maintaining the quality of life for people without compromising the environment.
3. “Green Washing” is the process of making products and services “Green” in all respects.
To make products and services green the businesses need to focus on bringing the green
in various aspects such as:
i. Supply Chain
ii. Packaging
iii. Raw Material
iv. Product Innovations
Role of Information Technology:
IT departments are under increasing scrutiny and pressure to deliver environmentally sound
solutions. Large data centre are one of the most significant energy consumers in an
organization’s IT infrastructure, so any measures that the organization can take to reduce this
consumption (and therefore also carbon dioxide emissions) will have a positive impact on the
organization’s environmental footprint.
A green data centre is defined as one in which the mechanical, lighting, electrical and
computer systems are designed for maximum energy efficiency and minimum environmental
impact. The construction and operation of a green data centre are involved in advanced
technologies and strategies.
Some examples include:
i. Reducing the power consumption of the data centre.
ii. Using low-emission building materials, carpets and paints.
iv. The consumption of energy is considered the dominant and often the only factor in
defining whether or not a facility is green.
Examples:
Corporate are going green from the grassroots level to sustain and win the customers’
expectations. The environment is becoming increasingly an important part of the corporate
reputations and they are actively participating in greening the corporate strategy. Companies
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have converted almost all the products to make them eco-friendly products. Following are the
recent environment friendly initiatives taken by the companies.
Example # 1. Maruti Suzuki:

The company has been promoting 3 R since its inception. As a result the company has not
only been able to recycle 100% of treated waste water but also reduced fresh water
consumption. The company has implemented rain water harvesting to recharge the aquifers.
Also, recyclable packing for bought out components is being actively promoted.
The country’s largest car manufacturer had managed to slash energy consumption per car at
its Gurgaon factory by 26 per cent over the past six years, while its carbon dioxide (CO2)
emissions during car manufacturing processes has come down 39 per cent in the past five
years. The model with gas as fuel was adopted by Maruti Suzuki India Limited as their Green
Marketing practices.
Example # 2. Bharat Petroleum:
Bharat Petroleum launched a programme to cut production of greenhouse gases by 10%
across its units worldwide and achieved it much ahead of schedule. Cleaner fuels such as
Greener Diesel (ultra-low sulphur content) and BP Autogas were developed. Almost all of its
plants are ISO 14001 certified. Currently it is running a programme to contain its net
emissions at current levels for ten years.
Example # 3. Hindustan Petroleum:
Hindustan Petroleum owns a massive e-waste recycling plant, where enormous shredders and
granulators reduce four million pounds of computer detritus each month to bite-sized chunks
the first step in reclaiming not just steel and plastic but also toxic chemicals like mercury and
even some precious metals. HP will take back any brand of equipment; its own machines are
100 percent recyclable. It has promised to cut energy consumption by 20 percent by 2010.
Example # 4. Proctor & Gamble:

Laundry detergents are also touting energy savings. Proctor & Gamble’s (P&G) newest
market entry, Tide Coldwater, is designed to clean clothes effectively in cold water. About 80
to 85 percent of the energy used to wash clothes from heating water.
Example # 5. ITC:
ITC has been ‘Carbon Positive’ for three years in a row sequestering/ storing twice the
amount of CO2 than the Company emits. It has been ‘Water Positive’ six years in a row
creating three times more Rainwater Harvesting potential than ITC’s net consumption. It has
obtained close to 100% solid waste recycling. All Environment, Health and Safety
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Management Systems in ITC conform to the best international standards. ITC’s businesses
generate livelihoods for over 5 million people.
ITC’s globally recognized e-Choupal initiative is the world’s largest rural digital
infrastructure benefiting over 4 million farming families. ITC’s Watershed Development
Initiative brings precious water to nearly 35,000 hectares of dry lands and moisture-stressed
areas. ITC’s Sustainable Community Development initiatives include women empowerment,
supplementary education, integrated animal husbandry programmes.
13.4.2 Attributes Of Green Marketing:

To take the advantage of the emerging green market, it is important to understand who green
customers are and the factors influencing their purchasing decisions and behaviour.
The proposed framework presents Environmentally Consciousness Consumer Behaviour

(ECCB) as a process involving consumer environment, constructs, mediators and outcomes.
The underlying influencers of ECCB are complex and different approaches to consumer
motivation account for them in various ways.
Apart from this Natural Marketing Institute (NMI) divides the market into following
categories:
1. Lohas – Very progressive on environment and society, looking for ways to do more; not
too concerned about price.
2. Naturalites – Primarily concerned about personal health and wellness, and use many
natural products; would like to do more to protect the environment.
3. Conventional – Practical, like to see the results of what they do; interested in green
products that make sense in the long run.
4. Drifters – Not too concerned about the environment, figuring we’ve got time to fix the
environmental problems; don’t necessarily buy a lot of green products.
5. Unconcerned – Have other priorities, not really sure what green products are available and
probably wouldn’t be interested anyway; they buy products strictly on price, value, quality
and convenience.
Towards a Green Marketing Partnership – ICT and Cost Management is the Key.
Worldwide evidence indicates people are concerned about the environment and are changing
their behaviour accordingly. As a result there is a growing market for sustainable and socially
responsible products and services.
The types of businesses that exist, the products that they produce and their approaches to
marketing are changing. Successful green marketers will reap the rewards of healthy profits
and improved shareholder value and help in making the world a better place for future
generations.
Identify and close the Green Gap.
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Right now, gaps exist on both sides of the market, between where customers are today and
the preferences that will help sustain a future market. There is also a gap between today’s
products and green designs of tomorrow.
Green marketing has been widely adopted by the firms worldwide and the following are
the possible reasons cited for this wide adoption:
1. Opportunities:
As demands change, many firms see these changes as an opportunity to be exploited and have
a competitive advantage over firms marketing non-environmentally responsible alternatives.
Some examples of firms who have strived to become more environmentally responsible, in an
attempt to better satisfy their consumer needs are:
I. McDonald replaced its clam shell packaging with waxed paper because of increased
consumer concern relating to polystyrene production and ozone depletion.
II. Tuna manufacturers modified their fishing techniques because of the increased concern
over driftnet fishing, and the resulting death of dolphins.
III. Xerox introduced a “high quality” recycled photocopier paper in an attempt to satisfy the
demands of firms for less environmentally harmful products.
2. Governmental Pressure:
As with all marketing related activities, governments want to “protect” consumers and
society; this protection has significant green marketing implications.
Governmental regulations relating to environmental marketing are designed to protect
consumers in several way:
I. Reduce production of harmful goods or by-products.
II. Modify consumer and industry’s use and/or consumption of harmful goods.
III. Ensure that all types of consumers have the ability to evaluate the environmental
composition of goods.
Governments establish regulations designed to control the amount of hazardous wastes
produced by firms.
3. Competitive Pressure:
Another major force in the environmental marketing area has been firms’ desire to maintain
their competitive position. In many cases firms observe competitors promoting their
environmental behaviours and attempt to emulate this behaviour. In some instances this
competitive pressure has caused an entire industry to modify and thus reduce its detrimental
environmental behaviour.
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For example- it could be argued that Xerox’s “Revive 100% Recycled paper” was introduced
a few years ago in an attempt to address the introduction of recycled photocopier paper by
other manufacturers. In another example when one tuna manufacturer stopped using driftnets
the others followed suit.
4. Social Responsibility:
Many firms are beginning to realize that they are members of the wider community and
therefore must behave in an environmentally responsible fashion. This translates into firms
that believe they must achieve environmental objectives as well as profit related objectives.
This results in environmental issues being integrated into the firm’s corporate culture.
There are examples of firms adopting both strategies. Organizations like the Body Shop
heavily promote the fact that they are environmentally responsible. While this behaviour is a
competitive advantage, the firm was established specifically to offer consumers
environmentally responsible alternatives to conventional cosmetic products.
5. Cost or Profit Issues:

Firms may also use green marketing in an attempt to address cost or profit related issues.
Disposing of environmentally harmful by-products, such as polychlorinated biphenyl (PCB)
contaminated oil are becoming increasingly costly and in some cases difficult.
Therefore firms that can reduce harmful wastes may incur substantial cost savings. When
attempting to minimize waste, firms are often forced to re-examine their production
processes. In these cases they often develop more effective production processes that not only
reduce waste, but reduce the need for some raw materials. This serves as a double cost
savings, since both waste and raw material are reduced.
Advantages:
Today’s consumers are becoming more and more conscious about the environment and are
also becoming socially responsible. Therefore, more companies are responsible to
consumers’ aspirations for environmentally less damaging or neutral products. Many
companies want to have an early mover advantage as they have to eventually move towards
becoming green.
Some of the advantages of green marketing are:

i. It ensures sustained long term growth along with profitability.
ii. It saves money in the long run, though initially the cost is more.
iii. It helps the companies market their products and services keeping the environment aspects
in mind. It helps in accessing the new markets and enjoying the competitive advantage.
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iv. Most of the employees also feel proud and responsible to be working for an
environmentally responsible company.
Challenges:
Challenge # 1. Need for Standardization:
It is found that only 5% of the marketing messages from “Green” campaigns are entirely true
and there is a lack of standardization to authenticate these claims. There is no standardization
currently in place to certify a product as organic. Unless some regulatory bodies are involved
in providing the certifications there will not be any verifiable means. A standard quality
control board needs to be in place for such labelling and licensing.
Challenge # 2. New Concept:
Indian literate and urban consumer is getting more aware about the merits of green products.
But it is still a new concept for the masses. The consumer needs to be educated and made
aware of the environmental threats. The new green movements need to reach the masses and
that will take a lot of time and effort.
By India’s ayurvedic heritage, Indian consumers do appreciate the importance of using
natural and herbal beauty products. Indian consumer is exposed to healthy living lifestyles
such as yoga and natural food consumption. In these aspects the consumer is already aware
and will be inclined to accept the green products.
Challenge # 3. Patience and Perseverance:
The investors and corporate need to view the environment as a major long-term investment
opportunity, the marketers need to look at the long- term benefits from this new green
movement. It will require a lot of patience and no immediate results. Since it is a new concept
and idea, it will have its own acceptance period.
Challenge # 4. Avoiding Green Myopia:
The first rule of green marketing is focusing on customer benefits i.e. the primary reason why
consumers buy certain products in the first place. Do this right motivate consumers to switch
brands or even pay a premium for the greener alternative. It is not going to help if a product is
developed which is absolutely green in various aspects but does not pass the customer
satisfaction criteria. This will lead to green myopia. Also if the green products are priced very
high then again it will lose its market acceptability.
13.5 SUMMARY
 Ecology is a branch of biology concerned with understanding how organisms relate

with each other and their environment.
 Microbial ecology: Microbial ecology looks at the smallest fundamental levels of
life, that is, the cellular level.
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 Organism/Behaviour: In this type of ecology, the main goal is to understand the
organism’s behaviours, adaptations for such behaviours, reason for those behaviours
as explained through the lens of evolution, and the way all these aspects mesh
together.
 Population Ecology: Population ecology focuses on the population, defined as a
group of organisms of the same species living in the same area at the same time.
 Community Ecology: Community ecology takes a look at the community, defined as
all the populations that live in a given area.
 Ecosystem Ecology: Ecosystem ecology makes a unique contribution to
understanding ecology by adding abiotic (non-living) factors to the items analysed,
alongside the biotic (living) factors involved.
 Global Ecology: The global ecology is principally important in understanding all the
ecosystems affecting the entire globe.
Green marketing incorporates a broad range of activities, including-
1. Product modification,
2. Changes to the production process,
3. Packaging changes, as well as
4. Modifying advertising.
Not only marketers but consumers are also concerned about the environment, and consumers
are also changing their behaviour pattern. Now, individual as well as industrial consumers are
becoming more concerned about environment-friendly products.
Moving towards Green Marketing:
The era of green marketing has begun. It has already been granted wide acceptance by all
stakeholders. However, there is a need to lay down the standards and practices, in order to
bring in objectivity in the judgment of various national and international agencies. This will
not only encourage the activities of green marketing but shall also provide the much needed
level playing fields to all.
13.6 KEYWORDS
 “Green Product” is non-toxic and is made from recycled material. There is no

absolute green product. However the products, which consume less energy, cause less
pollution and are biodegradable, belong to this category. Thus “Green” is a relative
term.
 “Green Service” fulfils the philosophy of sustainable development, improving and
maintaining the quality of life for people without compromising the environment.
 “Green Washing” is the process of making products and services “Green” in all
respects.
 Drifters – Not too concerned about the environment, figuring we’ve got time to fix the
environmental problems; don’t necessarily buy a lot of green products.
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 Unconcerned – Have other priorities, not really sure what green products are available
and probably wouldn’t be interested anyway; they buy products strictly on price,
value, quality and convenience.
1. What should be the focus of businesses to make the products and services green?
___________________________________________________________________________
________________________________________________________________________
2. Discuss the importance of ecology from business perspective
___________________________________________________________________________
___________________________________________________________________________
Short Questions
1. Explain the types of Ecology.
2. What do you understand by the word Greenness in the Green Marketing?
3. What are the golden laws of the Green Marketing?
4. What is Green Price?
5. State the importance of the technology in Green Marketing.
Long Questions
1. Explain the importance of Ecology.
2. How the Green Marketing helps business to gain the competitive Edge?
3. How Green Promotion strategy can be aligned with the profit objectives of an
organization?
4. What are the attributes of the Green consumers? How it should be integrated in HR Policy
or CSR or Organizational Policy?
5. Green marketing has been widely adopted by the firms worldwide and the following are
the possible reasons cited for this wide adoption.
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1. ______________is particularly important in the analysis of evolutionary connections and
events leading to existence (known as phylogeny).
a. Ecosystem ecology
b. Population ecology
c. Microbial ecology
d. Global ecology
2. Green marketing is a part of

a. Relationship marketing
b. Social Marketing
c. Service marketing
d. Rural Marketing
3. Green marketing refers to

a. the purchasing of products from producers whose farming practices are Fair Trade
certified.
b. the marketing efforts taken by new and smaller companies that lack both the experience
and resources of their major competitors.
c. the marketing efforts to produce, promote, and reclaim environmentally sensitive products.
d. the marketing of products that have in no way been altered or reprocessed by artificial
means.
4. Identify the category – that is very progressive on environment and society, looking for
ways to do more; not too concerned about price
a. Conventional
b. Lohas
c. Naturalites
d. Drifters
5. ________________relates to the distribution of green products without doing any harm to

the environment.
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a. Green Promotion
b. Green Product
c. Green Place
d. Green Price
Answers
1 - c; 2 - a; 3 –c; 4 – b; 5 – c.
Text Books:
Publishing House],
Hall.
Reference Books:

Open Text Source:
p. 2049. ISBN 9788180385926.
Limited. pp. 48–.ISBN 978-81-7534-840-0.
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UNIT 14: TECHNICAL ENVIRONMENT
Structure
14.0 learning Objective
14.1 Introduction
14.2 Environmental Technologies
14.2.1 The Impact of Technology on the Environment
14.2.2 Environmental Technology
14.3 Ecological implications of technology
14.3.1 The Negative Ecological Impacts:

14.3.2 The Positive Ecological Impacts:
14.4 Sustainable Development:
14.4.1 Definition and Principle

14.4.2 Parameters
14.4.3 Challenges
14.5 Pillars of Sustainable Development
14.6 Summary
14.7 Keywords
After studying thisUnit, you will be able to
 Explain the concept and impact of Environmental Technologies

 Describe the Ecological implications of technology
 Analyze the importance of sustainable development
 Highlight the Pillars of Sustainable Development
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14.1 INTRODUCTION
Current estimates suggest that there are 7 billion people sharing the planet with the natural
world, competing for space and resources. Attempts to curb the negative impacts that
humanity has on the natural world and the global environment puts serious issues like climate
change high on the political agenda for many governments around the world. Alongside
policy and governance, a new breed of technologies is helping humanity fine tune the delicate
balance between the developed and natural world.
Environmental technology, also known as ‘green’ or ‘clean’ technology, refers to the
application of environmental sciences in the development of new technologies which aim to
conserve, monitor or reduce the harm humans regularly cause the environment while
consuming its resources.
Sustainable development sits at the core of environmental technology - adopted practices that
fuel economic development by avoiding the depletion of natural resources and further
polluting.
Put simply, environmental technologies aim to protect the environment. They offer ways of
consuming which are less polluting or do so in a sustainable manner, and often provide new
ways to avoid depletion of natural resources altogether. Prominent examples include solar
and wind energy, water desalination (the removal of salt or other minerals from saline water),
electric vehicles, and pyrolysis (thermochemical decomposition of organic material).
14.2 ENVIRONMENTAL TECHNOLOGIES
The term ‘technology’ refers to the application of scientific knowledge for practical purposes
and the machinery and devices developed as a result. We are currently living in a period of
rapid change, where technological developments are revolutionising the way we live, at the
same time as leading us further into the depths of catastrophe in the form of climate change
and resource scarcity.
We will understand firstly, the negative impact of technology on Environment and how the
new and clean energy is going to help solve the different environmental issues and improve
the efficiency of the organization, society and human beings on broader aspect.
14.2.1 The Impact of Technology on The Environment

The industrial revolution has brought about new technologies with immense power. This was
the transition to new manufacturing processes in Europe and the United States, in the period
from about 1760 to 1840. This has been succeeded by continued industrialisation and further
technological advancements in developed countries around the world, and the impact of this
technology on the environment has included the misuse and damage of our natural earth.
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These technologies have damaged our world in two main ways; pollution and the depletion of
natural resources.
1. Air and water pollution

Air pollution occurs when harmful or excessive quantities of gases such as carbon dioxide,
carbon monoxide, sulphur dioxide, nitric oxide and methane are introduced into the earth’s
atmosphere. The main sources all relate to technologies which emerged following the
industrial revolution such as the burning of fossil fuels, factories, power stations, mass
agriculture and vehicles. The consequences of air pollution include negative health impacts
for humans and animals and global warming, whereby the increased amount of greenhouse
gases in the air trap thermal energy in the Earth’s atmosphere and cause the global
temperature to rise.
Water pollution on the other hand is the contamination of water bodies such as lakes, rivers,
oceans, and groundwater, usually due to human activities. Some of the most common water
pollutants are domestic waste, industrial effluents and insecticides and pesticides. A specific
example is the release of inadequately treated wastewater into natural water bodies, which
can lead to degradation of aquatic ecosystems. Other detrimental effects include diseases
such as typhoid and cholera, eutrophication and the destruction of ecosystems which
negatively affects the food chain.
2. Depletion of natural resources

Resource depletion is another negative impact of technology on the environment. It refers to
the consumption of a resource faster than it can be replenished. Natural resources consist of
those that are in existence without humans having created them and they can be either
renewable or non-renewable. There are several types of resource depletion, with the most
severe being aquifer depletion, deforestation, mining for fossil fuels and minerals,
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contamination of resources, soil erosion and overconsumption of resources. These mainly
occur as a result of agriculture, mining, water usage and consumption of fossil fuels, all of
which have been enabled by advancements in technology.
Due to the increasing global population, levels of natural resource degradation are also
increasing. This has resulted in the estimation of the world’s eco-footprint to be one and a
half times the ability of the earth to sustainably provide each individual with enough
resources that meet their consumption levels. Since the industrial revolution, large-scale
mineral and oil exploration has been increasing, causing more and more natural oil and
mineral depletion. Combined with advancements in technology, development and research,
the exploitation of minerals has become easier and humans are therefore digging deeper to
access more which has led to many resources entering into a production decline.
Moreover, the consequence of deforestation has never been more severe, with the World
Bank reporting that the net loss of global forest between 1990 and 2015 was 1.3 million km2.
This is primarily for agricultural reasons but also logging for fuel and making space for
residential areas, encouraged by increasing population pressure. Not only does this result in a
loss of trees which are important as they remove carbon dioxide from the atmosphere, but
thousands of plants and animals lose their natural habitats and have become extinct.
14.2.2 Environmental Technology
Despite the negative impact of technology on environment, a recent rise in global concern for
climate change has led to the development of new environmental technology aiming to help
solve some of the biggest environmental concerns that we face as a society through a shift
towards a more sustainable, low-carbon economy. Environmental technology is also known
as ‘green’ or ‘clean’ technology and refers to the development of new technologies which
aim to conserve, monitor or reduce the negative impact of technology on the environment and
the consumption of resources.
The Paris agreement, signed in 2016, has obliged almost every country in the world to
undertake ambitious efforts to combat climate change by keeping the rise in the global
average temperature at less than 2°C above pre-industrial levels.
This section will focus on the positive impact of technology on the environment as a result of
the development of environmental technology such as renewable energy, ‘smart technology’,
electric vehicles and carbon dioxide removal.
Renewable energy
Renewable energy, also known as ‘clean energy’, is energy that is collected from renewable
resources which are naturally replenished such as sunlight, wind, rain, tides, waves, and
geothermal heat. Modern environmental technology has enabled us to capture this naturally
occurring energy and convert it into electricity or useful heat through devices such as solar
panels, wind and water turbines, which reflects a highly positive impact of technology on the
environment.
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Having overtaken coal in 2015 to become our second largest generator of electricity,
renewable sources currently produce more than 20% of the UK’s electricity, and EU targets
means that this is likely to increase to 30% by 2020. While many renewable energy projects
are large-scale, renewable technologies are also suited to remote areas and developing
countries, where energy is often crucial in human development.
The cost of renewable energy technologies such as solar panels and wind turbines are falling
and government investment is on the rise. This has contributed towards the amount of rooftop
solar installations in Australia growing from approximately 4,600 households to over 1.6
million between 2007 and 2017.
Smart technology
Smart home technology uses devices such as linking sensors and other appliances connected
to the Internet of Things (IoT) that can be remotely monitored and programmed in order to be
as energy efficient as possible and to respond to the needs of the users.
The Internet of Things (IoT) is a network of internet-connected objects able to collect and
exchange data using embedded sensor technologies. This data allows devices in the network
to autonomously ‘make decisions’ based on real-time information. For example, intelligent
lighting systems only illuminate areas that require it and a smart thermostat keeps homes at
certain temperatures during certain times of day, therefore reducing wastage.
This environmental technology has been enabled by increased connectivity to the internet as
a result of the increase in availability of Wi-Fi, Bluetooth and smart sensors in buildings and
cities. Experts are predicting that cities of the future will be places where every car, phone,
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air conditioner, light and more are interconnected, bringing about the concept of energy
efficient ‘smart cities’.
The technology of the internet further demonstrates a positive impact of technology on the
environment due to the fact that social media can raise awareness of global issue and
worldwide virtual laboratories can be created. Experts from different fields can remotely
share their research, experience and ideas in order to come up with improved solutions. In
addition, travel is reduced as meetings/communication between friends and families can be
done virtually, which reduces pollution from transport emissions.
Electric vehicles
The environmental technology of the electric vehicle is propelled by one or more electric
motors, using energy stored in rechargeable batteries. Since 2008, there has been an increase
in the manufacturing of electric vehicles due to the desire to reduce environmental concerns
such as air pollution and greenhouse gases in the atmosphere.
Electric vehicles demonstrate a positive impact of technology on the environment because
they do not produce carbon emissions, which contribute towards the ‘greenhouse effect’ and
leads to global warming. Furthermore, they do not contribute to air pollution, meaning they
are cleaner and less harmful to human health, animals, plants, and water.
There have recently been several environmental technology government incentives
encouraging plug-in vehicles, tax credits and subsidies to promote the introduction and
adoption of electric vehicles. Electric vehicles could potentially be the way forward for a
greener society because companies such as Bloomberg have predicted that they could become
cheaper than petrol cars by 2024 and according to Nissan, there are now in fact more electric
vehicle charging stations in the UK than fuel stations3.
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‘Direct Air Capture’ (DAC) – Environmental Technology removing Carbon from the
atmosphere
For a slightly more ambitious technology to conclude with, the idea of pulling carbon dioxide
directly out of the atmosphere has been circulating climate change mitigation research for
years, however it has only recently been implemented and is still in the early stages of
development.
The environmental technology is known as ‘Direct Air Capture’ (DAC) and is the process of
capturing carbon dioxide directly from the ambient air and generating a concentrated stream
of CO2 for sequestration or utilisation. The air is then pushed through a filter by many large
fans, where CO2 is removed. It is thought that this technology can be used to manage
emissions from distributed sources, such as exhaust fumes from cars. Full-scale DAC
operations are able to absorb the equivalent amount of carbon to the annual emissions of
250,000 average cars.
Many argue that DAC is essential for climate change mitigation and that it can help reach the
Paris Climate Agreement goals, as carbon dioxide in the air has been the main cause of the
problem after all. However, the high cost of DAC currently means that it is not an option on a
large scale and some believe that reliance on this technology would pose a risk as it may
reduce emission reduction as people may be under the pretense that all of their emissions will
simply be removed.
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Image source: http://www.texasvox.org/direct-air-capture-co2-climate-solution-limitations/
Although we cannot reverse the negative impact of technology on the environment caused by
industrialisation, many believe that new environmental technology, such as renewable energy
combined with smart logistics and electric transport, has the potential to bring about the rapid
decarbonisation of our economy and the mitigation of further detrimental harm.
14. 3 ECOLOGICAL IMPLICATIONS OF TECHNOLOGY
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14.3.1 The Negative Ecological Impacts:
One of the biggest problems the world faces today is the amount of energy that is consumed
globally. With almost all of the world's businesses using computer technology to operate, the
energy consumption of the industrial world is constantly on the increase. Countries such as
the United States where the average employee works more than 40 hours a week, as a result,
the energy consumption of a typical office in the United States is likely to be higher than that
of an office in a country where the average work week does not exceed 40 hours. (Hayden
and Shandra 576) Many offices run their computer systems on a mainframe server. This
server is usually running 24 hours a day and is rarely shut down. To keep these servers from
overheating, fans are installed within the hard drives. With the combined energy of the fans
and the operation of the servers, the amount of energy being consumed is huge and results in
a very high thermal count.
According to the International Energy Agency or, IEA, around 4% of the world's energy
consumption in 2008 was due to the mass use of information communications technologies.
This figure is predicted to rise to an incredible 40% by the time the year 2030 arrives. By this
time, the demands on the world's electricity sources will have also doubled globally and
companies will need to have a viable solution to prevent computer technologies from being a
major drain on the world's energy resources.
As it currently stands, many of the world's organizations have not begun to actively look for
greener more ecologically sound methods for producing the energy they need. Today, many
of these companies are not thinking of ways to improve their carbon footprint, yet it is an
issue that needs to be addressed sooner rather than later.
But it is not just information communications technologies that have affected the ecology of
the planet. A number of the ecological and environmental problems that are occurring are due
to the rapid growth of new industrialized countries such as South Korea and China.
(Jorgenson and Jorgenson 365) With so many countries now outsourcing their manufacturing
to these industrialized nations, more and more factories are being constructed as a result. To
run these factories, a large amount of energy consumption is needed as many of the factories
operate 24 hours a day. The emissions these factories produce are amongst some of the
highest in the world and contribute significantly to the amount noxious gases that pollute the
air. (Hayden and Shandra 582)
Industry aside, there are many other ways technology has had a negative, ecological impact
on the world. In the modern home, there are numerous high technology gadgets designed to
make our lives easier and more pleasant. These gadgets range from the microwave to the
electric kettle to refrigeration. One of the largest contributors to gases in the atmosphere are
the gases produced by the combustion process used to produce energy. (Williams 36)
In the United States alone, 83% of this energy comes from a combustion process. (Williams
36) The combustion process is an effective way to produce energy for a wide range sources.
The negative aspect of the combustion process however, is the amount of harmful gases that
it produces. These gases can have a devastating impact on the ozone layer and contribute to
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what is known as the "Greenhouse Effect". What this effect essentially does is add to the
increase in the warm air that filters around the globe through air currents such as the Gulf
Stream. (Kilian 366) Often referred to as a thermal balance, these warm air currents affect the
climate and seasons. As a result, there can unseasonably warm winters or, cool summer
periods. More devastatingly though, is the harmful effect the increased thermal balance has
on the Poles. (Kilian 365) It is due to the increase in thermal balance that the Polar Icecaps
are melting at an alarming rate, causing a significant rise in the world's oceans. This, as it is
well known, has a ripple effect around the planet. The change in thermal balance can also be
seen as contributing to the increased frequency of natural disasters as certain regions of the
world experience more devastating floods, typhoons and a higher number of violent storms.
Although it can be argues these changes in our weather systems have just as much to do with
Mother Nature as technology. It is hard to ignore the correlation between the rise in
technology use and the increased frequency of environmental disasters.
14.3.2 The Positive Ecological Impacts of Technology

Despite the claims that technology is to blame for many of the world's ecological problems,
technology has also served to improve the shape of our planet. Since the rise of technology in
the workplace, numerous ICT companies have been designing "greener technology" to
combat the detrimental effect that computers and their accompanying technology have on the
environment. One of the best known organizations is the Green Grid. (Courtney 49) The
Green Grid is an organization that consists of IT companies and professionals from around
the world. (Courtney, p. 49) The Green Grid is devising ways to improve the way energy is
consumed by IT oriented businesses and their offices. (Courtney 49) One of the biggest
achievements of the Green Grid is the Power Usage Effectiveness or, PUE, metric system.
This system records data center energy consumption. How it works is by recording the
energy consumption of a data center or mainframe server every 15 minutes. By recording in
these 15 minute increments it helps those monitoring the data to notice if there are any energy
fluctuations and if the data center systems are using an adequate amount of energy. The long
term goal of the Green Grid is to introduce a standard system that allows business managers
and IT operatives to compare the amount of the energy they are consuming and if necessary
resolve ways to reduce it.
Another technology that is having positive impacts on the environment is low carbon
technology. Low carbon technology is a form of technology that has been developed in
China. Largely developed because of China's low carbon footprint in comparison to other
developing countries, the low carbon technology aims to offset the amount of emissions
polluting the air by using renewable fossil fuels.
China is a low carbon economy for two main reasons. First, the number of people that own a
car is far lower than the national average of a country like the United States. Currently the
majority of China's inhabitants use public transport or bicycles to get around. Second is the
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high amount of renewable fossil fuels that the country utilizes in its factory productions. (Xie
1594) Fossil fuels are used because of their high energy efficiency and their extremely low
emissions. Carbon is not emitted when fossil fuels are used and therefore, many of the
Chinese factories run on renewable energy that is created from fossil fuels. (Xie 1594)
For other countries to develop effective low carbon technologies, they will need to have a
different approach to their resources than China. This is because many of the other countries
will have different environments and different natural resources to hand. (Xie 1595) China's
main resource is its extensive supply of coal which it readily burns as a source of renewable
fossil fuel. China has a rich resource of renewable energy and is able to not only exploit its
coal resources for the time being, but also its large amount of renewable hydroelectricity.
(Xie 1595) These renewable resources, if managed properly will go a long way into creating
a low carbon future for China. (Xie 1596)
Other countries can also diversify into new low carbon options, thanks to the advances in
technology. Bio-fuels, solar power and wind power are no longer science fiction but science
fact. They are more than capable of replacing some of the energy resources currently used
that produce harmful gases. (Xie 1596) These new developments towards a low carbon future
are only possible through our advancements in modern technology and are one way that
technology is having a positive and beneficial effect on the environment.
One obvious way that technology is helping the ecology of the planet is by reducing the need
for paper. With the ever increasing use of email and electronic communication, paperless
offices are now a common occurrence in companies. (Jorgenson and Jorgenson 364)
Reducing the need for paper in turn reduces the demand for logging and deforestation,
allowing richer lands to create a smaller footprint. (Kilian 366) The development of green
technologies such as PC power management systems and multi-function devices allows a
business that relies heavily on technology to reduce the amount of energy it consumes.
An office can become more environmentally sound if it employs many of the new energy
reducing technologies that are readily available and incorporates them with or eco-friendly
practices such as turning off excess lights and using less paper. Jorgenson and Jorgenson 365)
According to current statistics, putting energy management systems into practice can save a
company a huge amount in energy consumption. (Courtney 50) For example, a company
consolidates its 100 physical computer servers into less than 20 servers that operated virtual
server software. It not only saves potentially hundreds of thousands of dollars in server
replacements and repairs, it also saves over 600,000 kilowatts of energy.
Another example is the replacement of laser printers with multi-function devices. Multi-
function devices usually incorporate a printer, fax machine and photocopier all in one system.
This not only saves space but saves the amount of electronic hardware that is permanently on
standby in an office. (Courtney 51) Using five multi-function devices in an office instead of
five printers, a photocopier and a fax machine are going to enable the office to be more
productive and save the company even more in energy consumption. (Courtney 51) This is
because instead of a minimum of 7 different machines being on permanent standby, the office
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will have a maximum of 5 on standby. This is enough to make a significant difference in the
office power consumption and also enables more than one person at a time to fax or
photocopy. (Courtney 51) Also the amount of repair costs will be reduced as only one
product would necessarily need replacing or fixing instead of a potential of 3 different
products.
As a result of the increase in the various forms of technology, there are many positive and
negative ecological impacts on the planet. Through the rise in modern technology and
increase in globalization, there is a high increase in energy consumption. This in turn has
devastating effects on the planet's climate and air quality. However, without modern
technology there would not be the capability to improve energy management systems or to
develop environmentally friendly products such as bio-fuels. To make a progressive step
towards reducing the amount of damage technology does to the environment, it is necessary
to find ways to manage new technology responsibly so that it can continue to have positive
ecological impacts.
14.4 SUSTAINABLE DEVELOPMENT.
14.4.1 Definition and Principles:

Definition of Sustainable Development:
The World Commission on Environment and Development (the Brundtland Commission) in
its report to the United Nations in 1987 defined sustainable development as meeting the needs
of the present without compromising the ability of future generation to meet their own needs.
Agenda 21, adopted during the United Nations Conference on Environment and Development
(UNCED) called Earth Summit held in Rio de Janeiro in Brazil in 1992 is a blue print on how
to make development socially, economically and environmentally sustainable.
Principles of Sustainable Development:

The Rio Declaration on Environment and Development fleshes out the definition by listing
18 principles of sustainability:
1. People are entitled to a healthy and productive life in harmony with nature.
2. Development today must not undermine the development and environment needs of
present and future generations.
3. Nations have the sovereign right to exploit their own resources but without causing
environmental damage beyond their borders.
4. Nations shall develop international laws to provide compensation for damage that activities
under their control cause to areas beyond their borders.
5. Nations shall use the precautionary approach to protect the environment. Where there are
threats of serious or irreversible damage, scientific uncertainty shall not be used to postpone
cost-effective measures to prevent environmental degradation.
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6. In order to achieve sustainable development, environmental protection shall constitute an
integral part of the development process and cannot be considered in isolation from it.
7. Eradicating poverty and reducing disparities in living standards in different parts of the
world are essential to achieve sustainable development and to meet the needs of the majority
of people.
8. Nations shall cooperate to conserve, protect and restore the health and integrity of the
Earth’s ecosystem. The developed countries acknowledge the responsibility of sustainable
development.
9. Nations should reduce and eliminate unsustainable patterns of production and consumption
and promote appropriate demographic policies.
10. Environmental issues are best handled with the participation of all concerned citizens.
Nations shall facilitate and encourage public awareness and participation by making
environmental information widely available.
11. Nations shall enact effective environmental laws and develop national law regarding
liability for the victims of pollution and other environmental damages. Where they have
authority, nations shall assess the environmental impact of proposed activities that are likely
to have a significant adverse impact.
12. Nations should cooperate to promote an open international economic system that will lead
to economic growth and sustainable development in all countries. Environmental policies
should not be used as an unjustifiable means of restricting international trade.
13. The polluter should, in principle, bear the cost of pollution.
14. Nations shall warn one another of natural disasters or activities that may have harmful
transboundary impacts.
15. Sustainable development requires better scientific understanding of the problems. Nations
should share knowledge and innovative technologies to achieve the goal of sustainability.
16. The full participation of women is essential to achieve sustainable development. The
creativity, ideals and courage of youth and the knowledge of indigenous people are needed
too. Nations should recognize and support the identity, culture and interests of indigenous
people.
17. Warfare is inherently destructive of sustainable development. Nations shall respect
international laws protecting the environment in times of armed conflict and shall cooperate
in their further establishment.
18. Peace, development and environmental protection are interdependent and indivisible.
14.4.2 Parameters of Sustainable Development:

The goal of sustainable development is an outcome achieved through joint effort among
several inter-related parameters and requiring coordination at both vertical and horizontal
levels. There exists dynamic triangular relationship among three keys viz., Environmental,
Economic and Social parameters.
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The people centred at social parameter forms the broad base of triangle as active public
participation holds an instrumental role. The interrelationship between population,
environment and development is complex. Besides key factors, efficient manpower capacity
building, institutional strengthening, including strong political will and effective
implementation/monitoring mechanism play equally important role for successful outcome of
sustainable development.
Following parameters may be considered:

1. Environmental Sustainability:
Environmental sustainability relates with maintenance of carrying capacity of natural
resource base and life support systems. This emphasizes on area of conservation of
biodiversity hot spots, increase in forest cover, watershed protection and adoption of holistic
approach.
Equally important are reduction of environmental threats, environmental pollution and using
environment friendly clean and green technologies to mitigate local to global level
environmental problems such as biodiversity loss, climate change from an inter-generational
equity perspective.
2. Economic Sustainability:
Economic sustainability provides important energy source like a battery to secure
environmental and social sustainability. This emphasizes on promotion of economic self-
sustenance of development projects through measures like adequate budgeting, budget
transparency and financial incentive.
The focus area includes; alleviation of poverty, increase in per capita income, promotion of
income generating activities including off farm employment and green micro-enterprises,
establishment of mechanism of fair sharing of benefit and natural resource accounting.
3. Social Sustainability:
Social sustainability focuses on upgrading human environmental quality of life with
fulfilment of basic needs and transforming man from most dangerous animal to most
important creative resource. It emphasizes local communities to be well informed on
sustainable ways of resource utilization.
It ensures active public participation at various level of development activity, collaborative
efforts in conservation and development activities, improvement in public health, education
and basic need, reduction of conflict among stakeholders on resource use. This will be
derived through upgrading public environmental awareness, enhanced gender equity and self-
confidence among local community with an emphasis on economically
disadvantaged/marginalized groups.
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4. Institutional Sustainability:
Plans and programmes without action represent futile exercise. Strict implementation and
monitoring of relevant environmental policies, plans, laws, regulations and standards is
indispensable to attain the goal of sustainable development. There should be adequate skilled
and motivated manpower and strong institutional capacity to address environmental and
social sustainability.
Focus area lies to achieve environmental quality of life such as reduced air, water, soil, noise
pollution to accepted level of international standard and public confidence to get involved in
environmental conservation activities. Institutional strengthening of project management
should be efficient to deal with environmental problems having local, national, regional to
global level significance and including legally binding world conventions and treaties.
14.4.3 Challenges of Sustainable Development:

Sustainable development that fulfils people’s needs of the present and future generations
require radical improvements in eco-efficiency and fundamental renewal in technological
systems. Since fundamental renewal system takes several decades to move from concept to
market, it is imperative that we initiate renewing innovations in the shortest possible time to
allow sufficient time to meet this challenge.
Improving eco-efficiency, which will remain an essential element of sustainable
developments, is unlikely to suffice in the long run for two reasons:
The report on sustainable development in our common future identifies three leading
interconnected principles viz. environmental efficiency, inter and intra-generational social
justice and participation in decision making. Although the assumed growth of welfare
includes rebound effects, this cannot be prolonged endlessly. Also eco-efficient growth will,
in the long run, meet the earth limits.
Systems renewal therefore is a concept integrating technological, cultural and structural
elements (Table 1).
Table 14.1: Global Challenge of Sustainable Development
Dimensions of Challenge:
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Three interacting dimensions of challenge can be distinguished for achieving more
sustainable patterns of development:
1. Interwovenness of Culture-Structure-Technology:
Improvements in eco-efficiency should help fulfil people’s needs better. Achieving this goal
will require intensive interacting changes in culture (institutional), structure and technology.
a. Culture refers to justifying nature, conditions and volume of societal needs to be fulfilled
(sufficiency).
b. Structure refers to the ability of the economic and institutional organisations to fulfil
justified needs (effectiveness).
c. Technology provides the technical means to fulfil needs (efficiency).
2. Approaches: Optimisation, Improvement and Redesign-Renewal:

Improvements in eco-efficiency must fit with the time frame for decision making and H 2O
actions that are accepted in firms and governments. This reflects an approach that fosters
transitions along three parallel tracks (Fig. 14.3.1).
Fig 14.1 Different approaches for sustainable development and their effect on eco-
efficiency.
(i) System optimization. It involves changes in operational processes through quality

management, maintenance, auditing, efficiency drives etc. at time scales up to 5 years and
with an expected effect on eco-efficiency ranging up to a factor of 1.5.
(ii) System improvements that leave fundamental structures and technologies unchanged but
produce incremental changes through revision, reorganisation, redesign at time scales from 5
to 20 years and with an expected effect on eco-efficiency from a factor of 1.5 up to 5.
(iii) System renewal through jump-like changes that grow out of long term research and
affect structure, culture and technology fundamentally at time scales of over 20 years (Fig.
14.4.2).
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Fig 14.2: Divergence and Convergence in system renewal for different levels of
exploration
Here IP- Illustration Process
Such drastic renewal of technology demands redefinition of existing technology,

development approaches and designing new ones at a scale that can increase eco-efficiency
by a factor of 5 to 50.
3. Parties Involved:
The challenge of system renewal can only be realised through co-operation between
relevant stake holders such as:
(i) Government bodies,
(ii) Private production parties,
(iii) NGO’s including consumers and local communities,
(iv) Science and technology.
These parties act in their own arena and keep accounts in their own currency (Table 14.4.2).
To ensure broad participation in system renewal, stake holders should be able to recognise
the possibility of profit.
Table 14.2: Arena and Currencies for parties in sustainable development

Relevant aspects with respect to sustainable development of these parties include control,
planning (government), exploration of opportunities (private parties), norm setting (NGO’s),
analysis (science and technology). Interaction among these dimensions of challenge results in
different characterizations of actions and involved actors as shown in Table 14.4.3.
350
Table 14.3: Culture Structure and Technology Dimension
System Renewal:
In industrialised countries like Netherlands, system optimisation and system improvement are
well covered by existing policies and policy instruments. The challenge is to initiate a process
of systems renewal. The future generations concept implies the necessity to achieve systems
renewal within 20 to 50 years. But the development of system renewal takes several decades
to move from concept to market.
Initiating processes of systems renewal will entail several questions and dilemmas such
as:
1. How to handle the uncertainties involved in long term trends and risks?
2. What new roles and forms of co-operation between market, science and technology,
government and NGO’s will be demanded and how will they bring the specific strengths,
weaknesses and responsibilities of these groups into account?
3. How to involve interested actors and stake holders?
4. How to bridge the drive of competition and the necessity of co-operation?
Today, all aspects of sustainability — physical, economic and social are at stake. Integration
of different domains of knowledge (disciplines, sectors, institutions) proves to be essential
challenge to obtain viable results and well supported development processes.
Sustainability is basically the ability to provide for the needs of the current generation using
available resources without causing future generations any problem with providing for their
own needs. The concept doesn’t only apply to the environment, which is considered the most
pressing pillar of sustainability today, but also to other aspects, including the people and
the economy. This is an important part of PEST Analysis and ESG analysis.
(Reference: Corporate Finance Institute.com)
14.5 PILLARS OF SUSTAINABILITY
The Three Pillars of Sustainability

The three pillars of sustainability are planet or environment, social or people, and profit or
economics.
Fig 14.3: pillars of Sustainability
351
People
Planet Profit
Pillars of
Sustainability
1. Planet
Let us first discuss the first pillar, which is the planet, and use agriculture as an example.
Imagine a piece of land that has been farmed for palm oil for decades. Ideally, farmers should
take breaks in between harvests because the land’s quality will be compromised if it is
overused. If overused, it will take several years before the land can be useful again, which
means future generations won’t be able to use it for a while.
2. People
People sustainability, on another note, includes giving priority to the welfare of a given set of
workers of a company. Let’s say, for example, Target gives bi-annual skills training to its
workers that they can use in the future. The skills that they acquire can be useful to the
operations of Target in the future.
Also, it may include providing workers with more flexible working hours and a more
conducive working environment. Doing so makes the workforce happier, which will
eventually lead to a more productive company.
3. Profit
As for the economy, which is referred to as profit, sustainability means using a particular set
of resources in a responsible way that will allow them to be used on a long-term basis.
Furthermore, it means making money and growing the company without negatively
impacting the other two pillars, people and planet or environment.
For example, a diesel power plant operates 24 hours a day in a city using diesel engines that
emit black smoke and produce a very distracting sound. Though it is making profits because
of its non-stop operations, the smoke it emits surely pollutes the air, while the noise can cause
long-term disorders to the residents. Sustainability should mean balancing the profit and its
impact on the surroundings.
352
The great thing about sustainability is that if the people and the planet are taken care of,
profits will also be achieved.
Five Domains of Sustainability
Fig 14.4: Sustainable Communities
The diagram above illustrates how sustainable communities are achieved, and it involves the
overlapping of different domains, including the three pillars of sustainability, namely, planet
(environmental), people (socio-cultural), and profit (economic). If one is missing, then a
sustainable community will not be achieved.
For example, a community already has a contented set of residents because they have almost
everything they need within reach, such as work opportunities, parks, and groceries, but don’t
have stable communication lines for internet connection and landline and cellular phone
access. The technological domain here is missing. Therefore, the community is not
sustainable because, without communication lines, there will be no interaction or opportunity
for growth and collaboration with other communities.
353
In another example, consider the same community with a lot of job opportunities from
booming companies, contented people or residents, and an impressive transportation system.
However, the community lacks a public policy that will protect its residents from one of the
booming companies that does not follow acceptable standards of waste disposal. Eventually,
the community will be destroyed, and its resources will be depleted.
Therefore, no community can be sustainable if one of the domains is missing.
[Reference: www. Biologydiscussion.com]
EXAMPLE OF ENVIRONMENT INITIATIVES BY INDIAN CORPORATES:
Cummins India Ltd.

Project Title: Creating Oxygen Hubs
Due to rapid urbanization, Pune is among one of the polluted cities in India. As per 2013-14
reports City of Pune emits 46 lakh tonnes of carbon in one year. This directly affects level of
oxygen in environment. Cummins decided to fight against this pollution and started spend
CSR funds for “Creating Oxygen Hubs” i.e. (Converted Non-Forest land to Forest).
Cummins partnered with various NGOs, communities, civic authorities, elected members and
the defence department in the city to create oxygen hubs by creating forest.
Century Plyboards India Ltd.

Project Title: Animal welfare
Under the in-animal welfare section, Century plyboards tried to serve helpless, shelter less, ill
as well as handicapped cow in nearby areas. Company also wanted to bring awareness on
cow-based agriculture, health and environment. Company established cow hostel in Kolkata
and nearby area.
Project Implementation by: Calcutta Pinjrapole Society; Gow Seva Sameetee Ghatwa;
Friends of Vrindavan; Central Kolkata Prerna Foundation
Amount spent: INR 0.39Cr
Location: Kolkata and Vrindavan
354
14.6 SUMMARY
As a result of the increase in the various forms of technology, there are many positive and
negative ecological impacts on the planet. Through the rise in modern technology and
increase in globalization, there is a high increase in energy consumption. This in turn has
devastating effects on the planet's climate and air quality. However, without modern
technology there would not be the capability to improve energy management systems or to
develop environmentally friendly products such as bio-fuels. To make a progressive step
towards reducing the amount of damage technology does to the environment, it is necessary
to find ways to manage new technology responsibly so that it can continue to have positive
ecological impacts.
The goal of sustainable development is an outcome achieved through joint effort among
several inter-related parameters and requiring coordination at both vertical and horizontal
levels. There exists dynamic triangular relationship among three keys viz., Environmental,
Economic and Social parameters.
Parameters of Sustainable Development are –
1. Environmental Sustainability:
Environmental sustainability relates with maintenance of carrying capacity of natural
resource base and life support systems.
2. Economic Sustainability:
Economic sustainability provides important energy source like a battery to secure
environmental and social sustainability.
3. Social Sustainability:
Social sustainability focuses on upgrading human environmental quality of life with
fulfilment of basic needs and transforming man from most dangerous animal to most
important creative resource.
4. Institutional Sustainability:
Strict implementation and monitoring of relevant environmental policies, plans, laws,
regulations and standards is indispensable to attain the goal of sustainable development.
Improvements in eco-efficiency will require intensive interacting changes in culture
(institutional), structure and technology. Approaches to improve eco-efficiency are
Optimisation, Improvement and Redesign-Renewal:
Pillars of sustainability – People, Planet and Profit and domains are economic, public policy,
technological, socio-cultural and environmental.
355
14.7 KEYWORDS
 Culture refers to justifying nature, conditions and volume of societal needs to be

fulfilled (sufficiency).
 Structure refers to the ability of the economic and institutional organisations to fulfil
justified needs (effectiveness).
 Technology provides the technical means to fulfil needs (efficiency).
 Interwovenness - close or inseparable connection
 Rebound effects - In conservation and energy economics, the rebound
effect (or take-back effect) is the reduction in expected gains from new technologies
that increase the efficiency of resource use, because of behavioural or other systemic
responses
1. Explain the principle of Sustainable Development.

___________________________________________________________________________
________________________________________________________________________
2. Discuss the role of different stake holders in the System Renewal

___________________________________________________________________________
_______________________________________________________________________
Short Questions
What is Environmental Technology?
Discuss any 2 types of Environmental Technology with example.
State the meaning of Sustainable Development
What are the challenges involved in Sustainable Development?
Why System Renewal is important?
Long Questions
1. Explain the Ecological Implications of Technology.
2. Write a note on Environmental Technology and types. Also, state the reasons for
Organization adopting Environmental Technology.
3. Discuss the parameters of Sustainable Development
356
4. Illustrate the Dimensions of Challenges.
5. How the pillars of Sustainable Development will help to change the dimension of
economy?

1. It involves changes in operational processes through quality management, maintenance,
auditing, efficiency drives etc.
a. System optimization
b. System Renewal
c. System Replacement
d. System Modifications
2. In System improvement, expected effect on eco-efficiency from a factor of __________

a. 5 to 20
b. upto 1.5
c. 5 to 50
d. 1.5 up to 5.
3. Which pillar indicatessustainability means using a particular set of resources in a

responsible way that will allow them to be used on a long-term basis?
a. Place
b. Profit
c. People
d. Planet
4. Identify the domain of sustainability.

a. Planet
b. Product
c. Technological
d. Organizational Policy
5. What will be the system improvement in cultural dimension?
357
a. Discipline
b. Ambitious
c. Carefulness
d. Niche policies
Answers
1 - a; 2 - d; 3 –b; 4 – c; 5 – b.
Text Books:
Publishing House],
Hall.
Reference Books:

358

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MBA

BUSINESS, SOCIETY AND LAW

Prof. (Dr.) R.S.Bawa

Academic and Administrative Management

Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh

SLM SPECIALLY PREPARED FOR

Printed and Published by:

For: CHANDIGARH UNIVERSITY

Institute of Distance and Online Learning

1.0 LEARNING OBJECTIVE

After studying this unit, you will be able to

 Highlight the nature and features of Business Environment

Business is surrounded by environment where it takes birth, progresses or operates and

1.2 BUSINESS ENVIRONMENT

Aggregati Specific Far-

Fig: 1.1 Characteristics of Business Environment

(2) Specific and General Forces:

(4) Dynamic Nature:

(8) Far-reaching impact:

1.3 COMPONENTS OF BUSINESS ENVIRONMENT:

Fig 1.2: Components of Business Environment

Value Management Human Organizational

Vision, Internal Company Other

Fig 1.3:Elements of Internal Business Environment

VISION, MISSION AND OBJECTIVES:

TOP MANAGEMENT STRUCTURE:

INTERNAL POWER RELATIONSHIP:

Fig 1.4:Sub-categories of External Business Environment

1.3.4 Micro Environment:

Micro environment of business enterprise refers to analysis of small area or immediate

1.5: Elements of Micro-Environment

Fig 1.6: Elements of Macro Environment

 The population growth

1.4.2 The Process of Environmental Analysis:

1.Monitoring 1.Forecasting Assessing the

Fig 1.5: Stages of Environmental Analysis

 Business structure refers to the legal structure of an organization that is recognized

1.7 LEARNING ACTIVITY

1. Highlight the relation of Supplier and its impact on Organizational Performance.

1.8 UNIT END QUESTIONS

B. Multiple Choice Questions

1.9 SUGGESTED READINGS

 Morrison J, The International Business Environment, Palgrave

Open Text Source:

2.2 Economic Environment

2.3 Economic System

2.4 Types of Economic System

2.4.1 Capitalist Economy

2.4.2 Socialist Economy

2.4.3 Mixed Economy

2.0 LEARNING OBJECTIVES

After studying this Unit, you will be able to

 Explain the significance of Economy and Economic System

2.2 ECONOMIC ENVIRONMENT

2.3 ECONOMIC SYSTEM