Module – 1

Business Environment
Reference: Economic Environment Misra & Puri Pg no:5-60

Characteristics / Nature of Modern Business

• Large size
• Oligopolistic character
• Diversification
• Global reach
• Technology orientation
• Change
• Government control

Environment of Business
Environment by definition is something external to an individual or an organization.

Business environment refers to all external factors which have direct or indirect bearing
on the activities of business. The business environment is divided into
• Internal environment
• External environment
a. Micro environment
b. Macro environment

Diagrammatic Representation of Business Environment

Micro/ macro
Internal
External
Environment Business
Environment

Internal Environment
• Value system,
• goals and objectives,
• management structures,
• relationship among the various constituents,
• physical assets,
• technological capabilities and human,

1
• financial and marketing resources make the internal environment of business.

External Environment
External environment of business consists of institutions, organizations and forces
operating outside the company. External environment can be classified into
• Micro Environment
• Macro Environment

(1) Micro environment

The micro environment refers to such players whose decisions and actions have a direct
bearing on the company. Since modern business broadly has two aspects, viz., Production
and selling of goods, the micro environment of business can be divided accordingly.

The most prominent performers in the micro environment are:

• Suppliers of inputs
• Workers and their unions
• Customers market intermediaries
• Competitors
• Publics

(2) Macro environment

Macro environment comprises large societal and physical forces which affect the
company and also the players in the company’s micro-environment.

Macro environment of a company refers to all those economic and non- economic factors
which exercise their influence on the business activity in general and thus determine
opportunities that a company may have to promote its business.

Macro environment can be classified into

• Economic environment
• Non-economic environment

Diagrammatic representation
Diagrammatic representation

National Global
Business
l
itica Nat
pol ec
T ural
o l
ci ra hn
So ltu Demographic
ol
og
cu
ic
al

2
Economic Environment
Since business is basically an economic activity, economic environment of business –
both national and global – is of strategic importance.

In the economic environment of the country,

• country’s economic system,
• macroeconomic scenario ,
• phase of business cycle through which the company is passing,
• organization of the financial system and
• economic policies of the government are the most important elements.

1.Economic System
a. Capitalism
b. Socialism
2. Macro-economic Scenario
a. High rates of growth
b. Inflation
c. High rates of savings and investment
d. Fiscal imbalance
e. Balances of payments
f. Deficits

Phases of business cycle

a. Prosperity
b. Recession
c. Depression
d. Stagflation

Financial System
Economic Policies
a. Industrial policy
b. Trade policy
c. Monetary policy
d. Fiscal policy

Non-Economic Environment
The non- economic environment of business can be classified as:
• Political environment
• Legal environment
• Socio-cultural environment
• Demographic environment
• Technological environment
• Natural environment

3
(a) Political Environment

(b) Legal Environment

The governments sets the legal framework within which business operate.

Legislations defining property and business organizations, laws of contracts and

bankruptcy, mutual obligations of labour and management and a multitude of laws and
regulations constraining the way business activities are carried out constitute legal
environment of business.

Economic legislations, as these, are often called, have a direct bearing on the business.
Economic legislations can be classified into two categories:

Legislations which have a facilitatory role.

Ex: The Contract Act provides the rules for systematic exchange transactions.
Legislations which are restrictive in nature.
Ex: MRTP Act and FERA.

(c) Socio-cultural Environment

The Social environment is made up of the attitudes, desires, expectations, degrees, of
intelligence and education, beliefs and customs of people in a group or a society.

Culture is the heart of a particular group or society – what is distinctive about the way
members interact with one another and with outsiders – and how they achieve what they
do.
Socio-cultural environment is made up of attitudes, desires, expectations, beliefs, faiths,
customs of people besides their set of material practices through which people produce
goods and services that they need for satisfying their wants.

Globalization of culture
Multiculturalism
a. Caste
b. Race
c. Ethnic issues

Demographic Environment
Demographic factors like the Size and Growth rate of population, Life Expectancy, Age
and sex composition of population, Work participation rate, Employment status, Rural-
urban distribution, Educational levels, Religion, Caste, Ethnicity and Language are all
relevant to business.
Some of the issues are:
• Size and growth of population

4
 • Age structure of population
• Urban-rural population
• Burden of population on environment

Module – 3
Economics Of Development

Meaning of Economy (or) Economic System

An economy or economic system refers to the manner in which the various economic
activities relating to production, distribution, exchange and consumption of goods and
services are organised in a country, and the way in which the people of a country earn
their living.

It comprises the farms ,factories, mines, shops, offices, banks, schools and colleges,
transport systems, hospitals, defence, etc The economy of a country is divided into three
sectors:
1. Primary Sector – agriculture, mining, forestry, fishing, etc.
2. Secondary Sector – large scale and small scale industries.
3. Tertiary Sector – services like transport, banking, insurance, trade, public
administration, defence, etc.

Classification of Countries (economy)

The World Bank in its World Development Report (2005) has classified various countries
of the world on the basis of their per capita Gross National Income (GNI) or (GNP). They
are
1.Low income countries – with per capita GNP of $765 and below. Ex : Myanmar,
India, Ghana, Sudan, Nepal, Uganda.

2.Middle income countries – with per capita GNP between $766 and $9,385.
Ex : China, Fiji, Brazil, Cuba, Egypt, Iran, Iraq, etc.

3. High income countries – with per capita GNP higher than $9,386.
Ex : Australia, USA, UK, UAE, Canada, Spain, Germany, France, etc.

Types of Economies
An economy or economic systems can be classified into two types on the basis of the
level of economic development attained by them. They are

1. Developed economy (advanced)

2. Under-developed economy (backward)

Developed economy
The United Nations Experts in 1971have classified countries with per capita real national
income of $1000 and $4000 a year as developed countries.

A developed economy is one which is economically advanced and whose economy is

5
characterized by large industrial and service sectors and high levels of income per head.

Under-developed / developing economy

An economy where the per capita real income is less than $1000 a year is considered an
under-developed economy.

A under-developed economy is characterised by

• Low per capita income
• Chronic mass poverty
• Predominance of agriculture
• Obsolete methods of production and social organisation
• Under-utilization of manpower and natural resources

India as a Developing Economy

Reference - B.S.Raman: pg 19-21 HRK: pg 11-14

Meaning of a Developing Economy

Developing economy, no doubt, refers to an under-developed economy. But this
term is mostly used to refer to that under-developed economy which is not stagnant, but
has started developing by making use of its natural and human resources.
The following changes in the Indian Economy over the last five decades clearly
prove that India is a developing economy.

Increase in national income

1950-51 – Rs. 9,142 crores
2001-02 – Rs. 18,64,292 crores
Increase in per capita income
1950-51 – Rs. 255
2001-02 – Rs. 17,978
Increase in investment
1950-51 – Rs. 1,960 crores
2001-02 – Rs.15,25,639 crores
Increase in agricultural production (food grains)
1950-51 – 50.8 mn. tonnes
2001-02 – 212 mn. tonnes
Increase in industrial Production
Increase in social over-heads
Structural changes

Progress in Science and Technology

Progress in Banking and Financial sector
Reduction in inequalities in income and wealth
Improvement in living standards
Desirable changes in society

Determinants of Economic Development ( Reference – Ruddar Dutt and

6
Sundaram: pg12-14 )

Economic development implies the process of securing levels of productivity in all

sectors of economy and this in turn, is a function of the level of technology.

Economic development thus depends upon two sets of factors:

1. Non-Economic Factors
2. Economic Factors

Non-Economic Factors
Non-economic Factors includes social attitudes, political conditions, human endowments
and efficient governance.
• Religious beliefs
• Political Instability
• Family System
• Development of Education
• Nature of People

Economic Factors
• Capital Formation
• Capital-output Ratio
• Growth of Population
• Building Human Capital
• Availability of Natural Resources
• Climatic Conditions
• Level of Technology

Major Issues of Developments (Reference – Ruddar Dutt and Sundaram: pg 10-12)

• Low per capita income and low rate of economic growth
• High proportion of people below the poverty line
• Low level of productive efficiency due to inadequate nutrition and malnutrition
• Imbalance between population size, resources and capital
• Problem of employment
• Instability of output of agriculture and related sectors
• Imbalance between heavy industry and wage goods
• Imbalance in distribution and growing inequalities

Business Cycles
The business cycle is an alternate expansion and contraction in overall business activity,
as evidenced by fluctuations in aggregate economic activity such as GNP, industrial
production, employment and income.

According to J.M.Keynes “ A trade cycle is composed of periods of good trade

characterized by rising prices and low unemployment percentages, alternating with

7
periods of bad trade characterized by fall in prices and high unemployment percentages.”

Phases of a Business Cycle

A business cycle will have 5 different phases or stages. They are
1. Depression
2. Recovery
3. Prosperity or full employment
4. Boom or overfull employment
5. Recession

(1) Depression
During this period business activity in the country will be much below normal level.
It is characterized by a short fall in production, mass unemployment, fall in prices,
low wages, contraction of credit, a high rate of business failures and an atmosphere of all
round pessimism.
The USA experienced 2 longest depressions in the history i.e during 1873-1879 and
1929-1932.

(2) Recovery
During this period business activity increases. The industrial production and volume of
employment steadily increases. The prices and wages increases. The recovery may take
place due to the following reasons:
• New government expenditure
• Exploitation of new sources of energy
• Innovations
• Investment in new areas
• Changes in the techniques of production

(3) Prosperity
This stage is characterized by high capital investment in basic industries, expansion of
bank credit, high prices , high profits, high rate of formation of new business enterprises
and the full employment.
The longest sustained period of prosperity occurred in the USA between 1923 and
1929.

(4) Boom
It is the stage of rapid expansion in business activity resulting in high stocks and
commodity prices, high profits and over-full employment.
A situation develops in which the no. of jobs exceeds the no. of workers in the market.
Such a situation is known as over-full employment.
Profits will further increase. This will lead to more investment and in turn further raise
in price level and inflation.

(5) Recession
In this stage more business enterprises fail, prices collapse and confidence is shaken.
Building construction slows down and unemployment increases. There is fall in income,

8
expenditure, demand, prices, and profits. The recession will have cumulative effect on the
working of the economy.
USA experienced recession in 1957-1958.

Diagrammatic Representation

Characteristics of Business Cycles

Business cycle is a wave like movement.
• The cyclical fluctuations are recurrent in nature.
• The upward or downward swing of the business cycle is self reinforcing.
• Business cycle contains self generating forces.
• They are all pervasive in their effects.
• The peak and the trough of a business cycles are not symmetrical.
• In cyclical fluctuations the prices and the production generally rise or fall together.
• The cyclical upward and downward swings move parallel with production and
monetary demand.
• The cyclical fluctuations are felt more in capital goods industries than in consumer
goods industries.
• They are not periodical in nature.
• Prices of manufactured goods are comparatively rigid while that of agricultural goods
are normally flexible.
• The cyclical fluctuation tend to be not only national but also international in
character.

Importance of Agriculture to Indian Economy

1.Provides largest employment
60 % of working population
2. Greater share in national income
23 % of national income
3. Supply of food to people
212.22 mn tonnes of food grains in 2003-04
4. Industrial development

9
 5. Contribution to foreign trade
Share of agricultural exports in total exports is 10%
6. Source of revenue to government
7. Source of capital formation
8. Market for industrial products
9. Good national defence
10. Price Stability
Agricultural commodities account for 80% of total consumption
expenditure
11. Development of tertiary sector
12. Influence on government budgets
13. Supply of fodder
14. Influences general price level
15. Involves low capital
16. Supplier of raw materials
17. Main role in consumption basket
60% of household consumption and 85% of household commodity
consumption is of agricultural products.
18. Source of revenue and also exports
19. Political and social significance

Importance of Industrialisation in India

1. Employment generation
2. Larger production
3. Increase in national income and per capita income
4. Promotion of agriculture
5. Development of agriculture
6. Increase in productive capacity
7. Use of potential resources
8. Contribution of export trade
9. National defence
10. Balanced development
11. More revenue to government
12. Changes in the outlook of people
13. Expansion of markets
14. Economic stability and self sufficiency
15. Proper balance between industry, agriculture and tertiary sector
16. Urbanisation
17. Stable growth of the economy

The Importance of Transport in the Economic Development of India

• Development of market
• Large scale of production
• Facilitates territorial division of labour
• Price stability
• Mobility of labour and capital

10
 • Growth of towns and cities
• Employment generation
• Facilities agricultural development
• Helps industrial development
• Social benefits
• National defence
• Efficient administration
• Unity
• Meeting emergencies
• Place and time utility
• Breaking the isolation
• Development of trade and commerce
• Solution to population problem
• Revenue to government
• Efficient use of resources
• Facilitates balanced regional development

Importance of Foreign Trade in the Economic Development of India

• helps India to import plant and machinery, raw materials and technical know-how.
• helps to import goods like petroleum, metals, etc.
• helps India to export goods which are in surplus.
• widens the market for our products.
• contributes to expansion of domestic industries.
• contributes to growth of national income.
• contributes to improvement in the civilisation of our people. International Trade is an
index of civilisation.
• contributes to economic co-operation between India and other countries.
• Gives employment to a large number of people.
• Gives encouragement to the exploitation of unexploited resources of the country.

The Role of Communication System in the Economic Development

• Supply of necessary information
• Motivation
• Development of industries, commerce and trade
• Development of transport
• Bringing buyers and sellers together
• Accelerating the growth rate
• Easy contact
• Improving global competitiveness
• Attracting foreign direct investment
Module – 4
National Income Accounting

11
 Reference : Ahuja – Pg 15-35

National Income
 According to J.R Hicks, “National income consists of a collection of goods and
services reduced to a common basis by being measured in terms of money”.
 According to the National Income Committee of India-1951, “A national income
estimate measures the volume of commodities and services turned out during a
given period, counted without duplication”.

Important Points
• National income refers to the income of a country, Ex: India
• Its measurement refers to a specified period of time, say 1year
• National income includes all goods and services which have exchange value,
counting each one of them only one.

Different Concepts of National Income

1. Gross Domestic Product (GDP)
2. Net Domestic Product (NDP)
3. Gross National Product (GNP)
4. Net National Product (NNP)
5. National Income at Factor Cost (NI)
6. Personal Income (PI)
7. Disposable Personal income (DPI)

Gross Domestic Product

• GDP is the aggregate money value of all final goods and services produced by
normal residents as well as non-residents in the domestic territory of a
country during a year.
• It is a geographical or territorial concept.
• GDP = GNP – net factor income from abroad

Net Domestic product

• NDP refers to the market value of all final goods and services produced during a
period of one year after making allowance for depreciation changes.
• NDP = GDP – Depreciation

Gross National Product

• GNP is defined as the total market value of all final goods and services produced
during a year in a country.
• GNP is a monetary measure.
• GNP includes the market value of only final goods and services.
• It is a flow measure of output of goods and services during a year / currently
produced goods.
• GNP refers to the value of goods and services currently produced by normal
residents of a country.

12
 • The depreciation or replacement value of the fixed assets is not deducted

Net National Product

• This refers to the net production of goods and services in a country during a year.
• NNP = GNP – the value of capital depreciated during the year.
• NNP is a highly useful concept in the study of growth economics.

National Income at Factor Cost

• It refers to the total of all income payments earned by the factors of production in
the form of rent, wages, interest, and profit during a given year.
• NI = NNP – Indirect Taxes + subsidy

Personal Income
• It is that income which is actually received by the individuals and households in a
country during a year from all sources.
• PI = NI – Corporate income tax
-- social security contributions
-- undistributed corporate profits
+ transfer payments
This concept is useful in estimating the potential purchasing power of the
individuals in an economy.

Disposable personal Income

• It is that part of personal income which is left behind after the payment of personal
direct taxes is called disposable personal income.
• DPI = PI – Personal direct taxes
• DPI = Consumption + Saving

Uses / Practical Importance of National Income Estimates

• Economic Position
• Contribution of Different Sectors
• Distribution of National Income among the Factors of Production
• Economic Planning
• International Comparison
• International Payments
• Help to Backward Countries
• Role of Public and Private Sectors
• Grant-in Aids to States
• Anti-Inflationary and Deflationary Measures
• Reveals the Cyclical behavior of an economy

Difficulties in the Measurement of National income

• Treatment of Non-monetary Transactions
• Treatment of Government activities in national income accounts
• Treatment of income generated by foreign firms
• Illiteracy

13
• Non- availability of statistical data
• Existence of barter transactions
• Difficulty in calculating depreciation
• Lack of professional competency
• Problem of consideration of goods and services
• Commodities of self-consumption

Difficulties of Measuring National Income in Developing countries

• Prevalence of non-monetized transactions
• Illiteracy
• Incomplete Occupational specialisation
• Agricultural and industrial production is unorganized
• Lack of adequate statistical data

Trends in National Income Growth and Structure

I. Trends in net national product and per capita income
II. Annual growth rates during the plans
III. Trends in distribution of national income by industrial origin
IV. Trends in the share of the public sector
V. Urban and rural income break-up
VI. Share of organised and unorganised sector in NDP

National Income Estimates in India

According to the National Income Committee, “ A national income estimate measures the
volume of commodities and services turned out during a given period, counted without
duplication”.
 Pre-independence period estimates
 Post-independence period estimates
 National income committee and C.S.O estimates

Circular Flow of Income

 Two Sector Model Without Savings
Households and Firms
 Two Sector Model With Savings
S=Y–C
Where Y = income
S = savings
C = consumption
 Case 1 : S > I
 Case 2 : S = I
 Case 3 : S < I

 Three Sector Model (Government)

T = T1 + T2

14
  Four Sector Model
Firm + Household + Government income and Expenditure + Exports and Imports
S+T+M=I+G+X

Module: 5(a)
Capital Structure

Meaning of Capital Structure

Capital Structure refers to the various sources from which the long-term funds are raised.

The Capital Structure refers to the proportion of equity capital, preference capital,
reserves, debentures and other long-term debts to the total Capitalization.

Characteristics of a sound Capital Structure

• Simplicity
• Profitability
• Flexibility
• Intensive use of funds
• Conservation
• Provision for meeting future contingencies
• Control over the company
• Economy in cost of maintaining different securities

Forms/Patterns of Capital Structure

• Equities only
• Equities and preference shares
• Equity shares and debentures
• Equities, preference shares and debentures

Factors determining capital structure

Two types
• Internal factors or controllable factors
• External factors or uncontrollable factors

Internal factors
• Financial leverage
• Growth & stability
• Cost of capital
• Asset structure
• Retaining control
• Purpose of finance

External factors

15
 • Size of the company
• Nature of company
• Cost of floatation
• Interest rates
• Taxation policy
• Fluctuation in stock market
• Availability of funds

Pecking order theory

Internal Debt
Issue of Debt
Equity Shares

Business risk
Uncertainty about – demand, sales, price, costs, etc.

Leverage:- Meaning and Definition

The Dictionary meaning: “An increased means for accomplishing some purpose”.

In financial analysis: Leverage is ability of using fixed costs to enhance the potential
returns to a firm.

There are 2 types of fixed costs:

1) Fixed operating costs(rent, depreciation, etc.)
2) Fixed financial costs(interest, cost of debt, etc.)
Is also called ‘GEARING’ in USA

James Horne has defined

“Leverage as the employment of an asset or funds for which the firm pays
a fixed cost or fixed return”.

Christy and Roder defined

16
“Leverage as the tendency for profits to change at a faster rate than sales”.

Types of leverage
Financial leverage
The use of long term fixed interest and dividend
Bearing securities like debentures and preference shares along with equity is called
financial leverage or trade on equity.
FL = EBIT
EBT

DFL = Percentage change in EPS

Percentage change in EBIT

Operating leverage
The operating leverage occurs when a firm has fixed cost which must be recovered
irrespective of sales volume. The fixed cost remaining the same the percentage change in
operating revenue will be more than the percentage more than the sales

OL = contribution
EBIT

DOL=Percentage change in EBIT

Percentage change SALES

Combined leverage
Combined leverage shows the relationship between the change in sales and
corresponding variation in taxable income.

Combined leverage = operating leverage X financial leverage

Contribution = EBIT X EBIT

EBIT/operating profit EBT

= contribution
earnings before tax

DCL = Percentage change in EPS

Percentage change in SALES

FINANCIAL LEVERAGE

Q 1. A Ltd. Company has equity share capital of Rs. 5,00,000 dividend into share of Rs.
100 each. It wish to raise further Rs. 3,00,000 for expansion cum modernization plans.
The company plans the following financing schemes.

17
 (a) all common stock .
(b) Rs. One lakhs in common stock and Rs. 2 lakh in 10% debentures.
(c) All through debentures at 10 % interest pa.
(d) All debt in common stock and Rs. 2 lakh in preference capital with the rate of
dividend at 8%

The Company’s existing earnings before interest and tax (EBIT) is Rs.1,50,000. The
corporate rate of tax is 50%.

You are required to determine the earnings per share (EPS) in each plan and comment on
Financial Leverage.

SOLUTION PLAN 1 PLAN 2 PLAN 3 PLAN 4

earnings before interest and tax 1,50,000 1,50,000 1,50,000 1,50,000

Less : Interest _ 20,000 30,000 __

1,50,000 1,30,000 1,20,000 1,50,000

Less : tax @ 50% 75,000 65,000 60,000
75,000
_______ _______ _______
______
Earnings after tax 75,000 65,000 60,000 75,000
Less : preference dividend at 8% __ __ __
16,000
_______ _______ _______ ______
Earnings available for common 75,000 65,000 60,000 59,000
stockholders
No. of common shares 8,000 6,000 5,000 6,000

Earnings per share (EPS) Rs. 9.375 Rs. 10.83 Rs. 12 Rs. 9.83

Financial leverage
= EBIT 1 1.15 1.25 1
EBT

COMMENTS
Since EPS as well as degree of financial leverage is highest in financial plan 3 it should
be accepted. The company should raise Rs. 3 lakh only through debt.

Problems on Leverages:
A simplified income statement of Zenith Ltd. is given below. Calculate the Operating
leverage, Financial leverage, & combined leverage.

Sales 10,50,000/-

18
 Variable cost 7,67,000/-
Fixed cost 75,000/-
Interest 1,10,000/-
Tax 30%
Soln :-

Sales 10,50,000
(-)Variable cost 7,67,000

Contribution 2,83,000
(-)Fixed cost 75,000

EBIT 2,08,000
(-)Interest 1,10,000

EBT 98,000
(-)TAX(30%) 29,400

NET Income 68,000

Operating leverage = contribution

EBIT
= 2,83,000
2,08,000
= 1.36

Financial leverage = EBIT

EBT
= 2,08,000
98,000
= 2.12
Combined leverage = Operating Leverage X Financial Leverage
=1.36 X 2.12
=2.88

Module – 5
Structure Of Industries
( References: Dutt & Sundaram Misra & Puri B S Raman HRK)

Structure / Classification of Industries (HRK – 204-209)

Large Scale Industries :

Large Scale Industries are those industries which invest huge amounts of capital,
reaping the benefits of division of labour and producing goods on a large scale involving
fixed capital investment of more than Rs.10 Cr but less than Rs.100 Cr.

19
Medium Scale Industries :
Medium Scale Industries are those industries which are organised on a medium
scale, and produce goods on a medium scale by using machines, hired labour and power
involving fixed capital investment of more than Rs.1 Cr but less than Rs.10 Cr.

Small Scale Industries:

Small-scale industries are those industries which are organised on a small-scale, and
produce goods on a small scale by using machines, hired labour, and power.
Ex: Ready garments, paper, electrical goods, etc.

Agro-industries and Ancillary Industries:

Industries which produce goods by using agricultural raw-materials are called agro-
industries.
Ex: jute, oil, sugar, cotton textiles, etc

Industries which produce spare parts, components, etc required by the large industries are
called ancillary industries.

Cottage Industries:
A cottage industry is one which is carried on mainly in a house with the help of the
members of the family and with the help of simple and hand-operated tools.
Ex: pottery, toy-making, weaving, carpet-making, wood work, agarbhatti, etc.

Manufacturing Industries:
Any industry which is engaged in the conversion of raw materials into finished goods fit
for consumption with the help of men and machines is generally known as manufacturing
industry.
Ex: conversion of iron ore into iron and steel, wood pulp into paper, etc

Industrial Development Under Five Year Plans

( B S Raman – 258-267 Dutt & Sundaram – 636-640)

 India implemented five year plans and industrial development became an integral
part of India’s development planning.
 High priority was given to programmes of Industrialization on account of
following reasons:
o The country was industrially backward and the establishment of new industries of
industries on a big scale and development of the traditional industries was an
imperative necessity.
o Productivity of labour is the highest in manufacturing Industries.
o Development of the industrial sector is a pre-condition for agricultural
development.
o Industrialization induces development of other sectors. Development of transport,
communications and energy is still more dependant on industrial growth.
o Despite the secondary importance given to industry, the annual rate of growth of

20
 industrial output was about 6%.
o The overall production of industrial goods increased by 39%.
o Capital goods industries like iron and steel were expanded.
o A number of public sector industries like HMT, penicillin factory, etc were
established.
o A number of industries like petroleum-refining, cement, penicillin, etc were set
up.
o Infrastructural facilities like power, transport and communication were expanded
considerably.

Second Five-year plan (1956-61)

• This plan was based on the Industrial Policy Resolution of 1956 which
envisaged a big expansion of Public sector.
• It was really an industrial plan.
• Total investment in industries was Rs. 1,180 crores (27% of total plan).
• The annual rate of growth was 7.25%.
• Industrial production increased by 46%.

• Three major public sector steel plants were set up at Rourkela in Orissa, Bhilai
in MP and Durgapur at WB.
• This plan witnessed a major diversification of the industrial spectrum.
• Most of the investments were in Heavy and Basic Industries.
• Tractors, motor cycles, scooters, etc were produced for first time in India.
• Good progress was also recorded in modernization and re-equipment of jute,
cotton textiles and sugar industries.
• Good progress was made in the production of consumer goods like
fans,radio,etc.
• About 60 industrial estates comprising 1000 small factories were set up.

Third Five-year plan (1961-66)

• Rs.1726 crores(20% of total plan) was allotted for the development of industries
and mining.
• The annual rate of growth was 7.9%.
• UTI and IDBI were set up in 1964.
• A no. of industries like aluminium, automobiles, textiles, etc achieved rapid
growth.
• Mining and extractive industries also showed progress.
• Despite the over-all under-achievement of targets this plan reflected the first stage
of intensive development leading to a self –reliant and self-generating economy.
• Mining and extractive industries also showed progress.
• Despite the over-all under-achievement of targets this plan reflected the first stage
of intensive development leading to a self –reliant and self-generating economy.

Fourth Five-year plan (1969-74)

21
• This plan was based on the industrial policy of 1977.
• Rs 5298 crores (23%) was allotted.
• The actual growth rate was 5% as against 8%.
• This plan aimed to enlarge capacities in export promotion and import substitution
industries.
• Public sector enterprises had started earning profits.

Fifth Five-year plan (1974-78)

• This plan was formulated to achieve the twin objectives of self-reliance and
growth with social justice.
• Rs.16,660 cr (26%) was allocated.
• Actual growth rate was 6% as against 8%
• This plan took many bold steps such as
• Removing the restriction on the private sector
• Monopolistic undertakings
• Foreign investments in India

Sixth Five-year plan (1980-85)

• This plan was a very ambitious plan.
• It was based on the industrial policy of1980.
• Rs.22,200 cr (22.8%) was provided.
• Actual growth rate was only 3.7% as against 7%.
• There was a shortfall in the production of many industrial goods like cement, iron and
steel, etc.
• Industrial progress during this period was most disappointing.

Seventh Five-year plan ( 1985-90)

• This plan laid emphasis on the development of infrastructural facilities,
modernisation, upgradation of technology, reduction in cost, accelerated growth in
selected industries.
• This plan was a success as annual growth rate was 8%.
• Total outlay for industries was Rs. 22,460 cr.
• The govt had liberalised industrial licensing policy to provide incentives to industries.
• Encouragement of ‘Sunrise’ industries such as telecom, bio-tech, computers, etc.
• Industries were encouraged to adopt technologies like laser, robotics, fibre-optic, etc
for enhancing productivity.
• About 30% of industries had installed Pollution Control systems.

Eighth Five-year Plan (1992-97)

• This plan was formulated under Economic Liberalisation and was based on the
industrial policy of 1991.
• During this period, the private sector has developed considerable managerial,
technological, financial and marketing strengths.

22
• The outlay was Rs. 40,670 cr (19% of total plan).
• Over all 9.5% growth rate has been achieved.
• The factors for the slow growth fo industrial sector:
• Could not face foreign competition as a reduction of import duties.
• Under utilisation of domestic capacity
• Dumping by foreigners

Ninth five-year plan (1997-2002

• This plan was a failure as the actual growth rate was only 5% as against 8% of target.
• This plan allocated Rs. 69,972 cr for industry.
• The internal and external factors are responsible for slowdown.
• The failure can be attributed to the fall in public sector investment .
• Lack of external demand resulting from slowdown in world economy decelerated the
growth of industrial sector.
Changes in Industrial Structure During the Planning Period
(Misra & Puri – 479-481)
• Increase in the Share of industrial Sector in GDP:
• The share of industry in GDP at factor cost increased from 13.3% in 1950-51 to
24.6% in 2003-04.
• Building up of Heavy and Capital Goods Industries:
• Growth of Infrastructure Industries: Infrastructure industries include:
i. Electricity
ii. Coal
iii. Steel
iv. Crude petroleum
v. Petroleum refinery
vi. Cement
 A Well Diversified Industrial Structure:
o Machinery:
1950-59--- 1.2%
1990-99 --- 12.7%
o Chemicals:
1950-59 --- 5.7%
1990-99 --- 12.4%
o Non metallic Mineral products:
1.6% to 4.6%
o Transport Equipment:
3.4% to 6.5%
o Rapid Growth of Consumer Durables:
o The rate of growth of this industry in 1980-85 was 14.4% and in 2003-04 was
11.6%.
o Emphasis on Chemicals, Petrochemicals and Allied Industries in 1980s:
o Emergence of Public Sector:
1950 – 5 PSUs with Capital of Rs.29 Crore

23
 2003 – 227 PSUs with Capital of Rs. 4,18758 Crore

Change in Industrial Structure in 1990s

• Shifts in favour of consumer goods and intermediate goods
• Structural changes within basic industries and capital goods industries
• Changes within the consumer goods sector
• Changes within the intermediate goods sector
• Declining role of public sector

Public Sector Enterprises

Reference: Dutt and Sundaram – 188-204 B S Raman -- 213-221,HRK

• The Industrial Policy Resolution of 1956 gave the public sector a strategic role
in the Indian economy.
• Public enterprises or public sector refers to that sector which is owned and
managed by the central government or the state government or a body set up
by the government to direct the undertaking in the public interest.
• Forms or Types of Public Enterprises:
i. Departmental undertakings : Railways, Defence, etc
ii. Statutory Corporations : LIC, the Indian Airlines Corporations, etc
iii. Government Companies : Heavy Electricals Ltd, HMT Ltd, etc
iv. Holding Company : Steel Authority of India Ltd.

Objectives of Public Sector

a. To promote rapid economic development through creation and expansion of
infrastructure
b. To generate financial resources for development
c. To create employment opportunities
d. To promote redistribution of wealth and income
e. To promote balanced regional growth
f. To promote exports and import substitution
g. To encourage SSIs

Role of Public Sector in Indian Economy

• Capital Formation
• Development of Infrastructure
• Development of Defence Industries
• Development of Basic and Key industries:
• Iron and steel, cement, etc
• Development of Power projects
• Development of Banking and Insurance
• Balanced Regional development
• Balanced Economic Growth
• Strong Industrial Base

24
 • Economies Of Scale
• Removal of Regional Disparities
• Import Substitution
• Export Promotion
• Expansion of Employment Opportunities
• Source of Revenue to the Government
• Saving in Foreign Exchange
• Better Allocation and Utilisation of Resources
• Diversity of Projects

Problems and Shortcomings of the Public Sector

o Mounting Losses
o Price Policy of Public Enterprises
o Delay in Completion of the Projects
o Increase in Costs of Construction
o Poitical factors influence decision about Location
o Over-Capitalization
o Under-Utilization of Capacity
o Unfavourable Input-output Ratio
o Use of Manpower Resources in excess of actual requirements
o Faulty Planning and Controls
o Inefficient Management
o Bureaucratic Procedures and Red-tapism
o Labour Problem resulting in Strikes and Lockouts
o Higher Capital Intensity -- Low Employment Generation
o Shortage of Raw materials and Power

Remedies / Measures to be taken for the Performance of Public Sector

o Reduction in Unproductive Expenditure
o Utilisation of Installed Capacity
o Better Utilisation of manpower and materials
o Proper Planning and Control
o Improvement of Efficiency of Management
o Suitable Price Policy
o Making them Autonomous
o Improvement of Industrial Relations
o Motivation of Staff and Workers

Joint Sector
Reference: D&S-222-226,B S Raman- 224-225

• Joint Sector Enterprises refer to economic enterprises or industries which are owned
and managed jointly by the Government and the Private sector.
• Ex: Madras Fertilizers, the Cochin Refineries, etc.

25
• Rationale behind Joint Sector Enterprises:
To combine the financial resources of the Government with the managerial skill of
the private entrepreneurs for the successful running of the economic enterprises.

Types of Joint Sector Enterprises

1. Existing Private Enterprises : through the conversion of bonds or debentures into
equity shares.
2. Existing Public Sector : through the sale of equity shares of such enterprises to
private entrepreneurs.
3. New enterprises set up by the Government jointly with the Private entrepreneurs.

Role / Benefits of Joint Sector Enterprises in India

a. Social Control over Industries
b. Better Industrial Growth
c. Broad-basing of Industrial Entrepreneurship
d. Prevent monopolies and concentration of Economic power
e. Mobilisation of Financial Resources
f. Mobilisation of Techno-managerial Resources
g. State-sponsored Industrialisation
h. Extension of Public Control
i. Failure of Public and Private Sectors
j. Acceleration of Economic Growth
k. Run on Efficient lines and earn sufficient Profits
l. Effective instrument for ensuring Balanced Regional Growth

Private Sector
Dutt & Sundaram – 217-221 B S Raman – 222-224

• Private Sector or Private Enterprises refers to that sector which is owned and
managed by private individuals.
• A private enterprise is controlled either by an individual investor or a joint stock
company or a group of individuals or public or private limited companies.
• Private sector is purely profit motive.

Role of Private Sector in India

1. Help third world countries in their economic development
2. Agriculture : this sector which is completely managed by the private enterprises
contributes 25% of GNP an 60% of employment in 2001.
3. Dominates the Trading Sector
4. Dominant in forestry, fishing, railways, construction, etc.
5. Contribution to national income of country
6. Development of large no. of small scale and cottage industries
7. Production of a variety of goods
8. Efficient management

Limitations Of Private Sector

26
 I. Emphasis on Non-priority Industries
II. Emergence of monopoly power and concentration
III. Industrial disputes
IV. Industrial sickness

Small Scale Industries (SSI)

Misra & Puri – 571-585

 Small-scale industries are industries which are organised on a small-scale and

produce goods with the help of small machines, hired labour and power.
 The investment limit for a SSI is Rs 1 crore
 SSIs plays a pivotal role in India in terms of employment and growth has recorded
a high rate of growth.

Significance of SSIs in the Economic Development of India

1. Expansion of SSI sector and its share in Industrial Output :
 No of SSI units rose from 79.6 lakhs in 1994-95 to 114.0 lakhs in 2003-04.
 The rate of growth of output exceeded 10% from 1994 to 1997.
2. Employment Generation:
1994-95 – 191.4 lakh people
2003-04 – 271.4 lakh people
3. Efficiency of Small-Scale Industries:
At the all-India level, the SSI is more efficient than the large scale sector.
4. Equitable distribution of National Income
5. Mobilisation of capital and Entrepreneurial Skills
6. Regional dispersal of Industries
7. Contribution to Exports
8. Sustains Agricultural Development
9. Less Industrial Disputes
10. Decentralisation of Industries
11. Contribution to National Income
12. Foreign Exchange Earnings

Problems of SSIs
Misra & Puri – 582-585

i. Finance and Credit

ii. Inverted tariff structure and raw material availability
iii. Machines and other equipment
iv. Problems of marketing
v. Infrastructural constraints
vi. Delayed payments
vii. Problem of sickness
viii. Poor database
ix. Adverse effects of economic reforms and globalisation
x. Inefficient management

27
 xi. Competition from large scale industries
xii. Burden of local taxes

Measures to Reduce Sickness among SSI

 Credit and Finance
 Marketing Assistance
 Allocation of Raw materials, Imported Component and Equipment
 Technical Assistance
 Industrial Estates

Small-scale Industrial Policy,1991

Misra & Puri-579
The main features of policy were:
1. Investment for Tiny Enterprises was raised from Rs.2 lakh to Rs.5 lakh.
2. Proposed a separate package for the promotion of SSIs.
3. Provided Equity Participation by other industrial units in the SSIs not exceeding
24% of the total shareholdings.
4. Introduction of new Legal form of organisation of business, namely restricted or
limited partnership.
5. Proposed to meet the entire credit demand of SSIs.
6. Scope of National Equity Fund and Single Window Scheme was enlarged.
7. Provided priority to SSIs in the Government Purchase Programme.
8. Accorded in allocation of indigenous raw materials.
9. Envisaged market promotion of SSI products to be undertaken by Cooperatives,
PSUs and other agencies.
10. Proposed a scheme of Integrated Infrastructure Development for SSI to facilitate
location of industries and to promote co-ordination b/w Industry and agriculture.

Multinational Corporations
Ishwar C Dingra – 552-560

 An MNC is one which undertakes FDI, i.e., it owns or controls income generation
assets in more than one country, and in doing so produces goods or services
outside its country of origin ,i.e, engages in international production.

Characteristics of MNCs
The MNCs are multi-process, multi-product and multi-national composite enterprises.
1. Giant size
2. International Operations
3. Oligopolistic Character
4. Spontaneous Evolution
5. Collective Transfer of Resources

Significance Of MNCs
Impact area Potential benefits
1. Capital 1. Provision of scarce capital

28
 resources.
2. Technology 2. Provision of sophisticated
technology not available in host
3. Exports and balance of payments country
4. Diversification 3. Access to superior distribution and
marketing systems
4. MNCs command technology and
skill required for diversification of
industrial base and for the creation
of backward and forward linkages

Actual impact of MNCs

1. Capital 1. Insignificant net flow
Large dividend remittances
2. Technology Large technical payments
2. Costly ‘over-import’
Problems with advanced technology
3. Exports and balance of Problems with technical support
payments 3. Higher import propensity than domestic
4. Diversification companies
Negative BOP effects
4. Increased foreign influence in key
sectors

Module – 7 - Money and Banking

Commercial Banking Structure In India

• Indian commercial banks are called Joint Stock Banks as they are organized in the
form of joint stock companies.
• Under the Reserve bank Of India Act,1934, the commercial banks in India are
classified into:
i. Scheduled Commercial banks
ii. Non-scheduled Commercial Banks

Scheduled Commercial Banks

• Scheduled commercial banks are those banks which are included in the second
schedule of the Reserve Bank of India, having a paid-up capital and reserve together
Rs.5 lakh and above.
• As on March 2004, there were 286 schedule commercial banks in the country

Non-scheduled Commercial Banks

• Non-scheduled banks are those whose total paid-up capital and reserve fund is less
than Rs.5 lakh and whose name is not included in the second schedule of RBI

29
 Act,1934.
• At present, there are only two non-scheduled banks in the country.

Diagrammatic Representation

Diagrammatic Representation
Scheduled Commercial Banks

Public sector banks Private sector banks

Indian private Foreign

Nationalised SBI and sector banks banks
banks its associates

Old private New private

sector banks sector banks

Nationalisation Of banks
• Nationalisation of banks is nothing but the government taking control of those banks
which were owned by private people.
• This was the milestone in the history of Indian Banking.
• There are 20 nationalised banks which carry out 90% of banking business in the
country.

Nationalisation on 19 July 1969

1. Central Bank of India
2. Bank of India
3. Punjab National bank
4. Bank of Baroda
5. United Commercial Bank
6. Canara Bank
7. United Bank of India
8. Dena Bank
9. Syndicate Bank
10. Union Bank Of India
11. Allahabad Bank
12. Indian Bank
13. Bank of Maharashtra
14. Indian Overseas Bank

Nationalisation on 15 April 1980

30
 1) New Bank of India
2) Vijaya Bank
3) Andhra Bank
4) Corporation Bank
5) Punjab and Sidh bank
6) Oriental Bank of Commerce

Causes of Nationalisation
a. Concentration of Economic Power
b. Neglect of Agricultural Sector
c. Misuse of Power by Directors
d. Credit to Anti-social Elements
e. Neglect of Small Units
f. Plan Objectives Ignored
g. Insufficient Mobilisation of Resources
h. Unbalanced Growth

Objectives of Nationalization
 To prevent concentration of wealth and economic power in the hands of few
people.
 To prevent control and administration of banks by few people
 To prevent misuse of funds
 To provide required finance to priority sectors
 To provide banking facilities to unbanked and rural areas
 To provide deposit security to deposit holders
 To mobilise resources of the country
 To make the banks respond to plan objectives
 To bring banks under the control of RBI
 To prevent the flow of bank credit to anti-social elements
 To provide atmosphere for balanced growth of banking in the country.

Arguments Against Nationalisation

a. Results in the political interference in the functioning of banks.
b. Leads to bureaucratic dictatorship.
c. Results in inefficiency
d. Banks suffer losses
e. Results in corruption
f. Leads to flow of funds to unworthy sectors
g. Results in the disclosure of banking secrets

Achievements Of Nationalisation
 Branch Expansion
In 1969 – 8,260 bank branches
In 2002 – 67,284 bank branches
 Deposit Mobilisation

31
 In 1969 – 4,665 crores
In 2002 – 16,22,579 crores
 Developmental Functions
 Finance to Priority Sectors
In 1969 – 505 crores (2% of total bank credit)
In 2002 – 3,41,291 crores (43.7%)
 Increase in Total Transactions
In 1969 – 4,664 crores of Deposits
In 2002 – 12,59,128 crores of Deposits
 Differential Rate of Interest
 Profit Making
During 1999-2000 – Rs.13,064 crores of profits.
 Safety
 Finance to Public Sectors

Functions of the Reserve Bank of India

• Bank of Issue
• Banker to Government
• Bankers’ Bank and lender of the last resort
• Controller of Credit
a. Quantitative Methods
1. Bank rate
2. Variable cash reserve ratio (CRR)
3. Statutory liquidity ratio (SLR)
4. Open market operations (OMO)
b. Qualitative Credit controls/selective credit control
1. Minimum margin for lending
2. Ceiling on amount of credit
3. Discriminatory rate of interest
• Custodian of Foreign Exchange Reserves
• Supervisory Functions
• Promotional Functions

Recommendations of the Narasimhan Committee, 1991

Reference: Dutt and Sundaram Pg:853

• Aimed At :
1. Ensuring a degree of operational feasibility
2. Internal autonomy for the public sector banks in their decision making process
3. Greater degree of professionalism in banking operations

Important Recommendations :
1. Directed Investment
a. Statutory Liquidity Requirements:
The committee recommended that the government should reduce SLR from

32
 38.5% to 25%.
b. Cash Reserve Ratio
CRR should be reduced from 15% to 3-5%.
2. Directed Credit Programmes
3. The Structure Of Interest rates
4. Structural Reorganization of the Banking Structure
5. Nationalisation of banks
6. Setting up of New banks
Foreign Banks
8. Bad and Doubtful Debts
9. Removal of Dual Control
10. Autonomy to Banks
11. Disinvestment
12. Rural Banking Subsidiaries
13. Recruitment of Staff
14. Computerization

Reform Of the Banking Sector

Dutt and Sundaram Pg:855
1. Statutory Liquidity Ratio (SLR)
SLR on incremental net demand and time liabilities (DTL) has been reduced from
38.5% to 25% in 1997.

2. Cash Reserve Ratio (CRR)

RBI reduced CRR from 15% to 5.5% in 2001. the purpose was to release funds locked
up with RBI for lending to the industrial sectors .

3.Deregulation of Interest Rates

Interest rates slabs were gradually reduced from 20 to 2 by 1995.

4. Prudential Norms
The purpose was that commercial banks should reflect their financial positions more
accurately and in accordance with international accounting practices.
5. Capital Adequacy Norms:
were fixed at 8% by RBI in 1992.
6. Access to Capital Market:
SBI was the first to raise through public issue over Rs. 1,400 crores as equity and
Rs. 1,000 crores as bonds.
7. Freedom of Operation
8. New Private Sector Banks
9. Local Area Banks:
LABs help to mobilise rural savings and to channelise them into investment in local
areas.
10. Supervision of Commercial Banks
RBI has set up a Board of Financial Supervision with an Advisory Council under the
chairmanship of the Governor to strengthen the Supervisory and Surveillance system of

33
banks and FIs
11. Recovery of Debts:
The Government of India passed “Recovery of Debts due to banks and FIs Act,
1993”. Six Special Recovery Tribunal have been set up.
12. Phasing out of Directed Credit
13. Competition

Measures of Money Supply

Reference : Ahuja – 301--303
• From April 1977, the Reserve Bank of India has adopted four concepts of money
supply in its analysis of the quantum of and variations in money supply.
• The four concepts of money supply are:
1. Money Supply M1 or Narrow Money
2. Money Supply M2
3. Money Supply M3 or Broad Money
4. Money Supply M4

Money Supply Chart

Money Supply Chart

Money Supply and

its determinants

M1
M2 M3 M4
=
= = =
Currency
M1 M1 M3
+
+ + +
Demand Deposits
Savings deposits Time Deposits with Total Deposits of
+
with the Banks Post Office Savings
Other deposits of
Post-office Savings Organisation
RBI
Banks (excluding NSC)

Money Supply M1 or Narrow Money

• Liquid measure of money supply
• M1 = C + DD + OD
• C = Currency with the public
• DD = Demand deposits with the public in the commercial and Co-operative Banks
• OD = Other deposits held by the public with the Reserve Bank of India
• C (Currency with the Public) consists of the following:
1. Notes in Circulation
2. Circulation of rupee coins asa well as small coins
3. Cash Reserves on hand with all banks

34
Money Supply M2
• M2 = M1 + Savings Deposits with the post office savings bank
• M2 is a broader concept of money supply

Money Supply M3 or Broad Money

• M3 = M1 + Time deposits with the banks
• Time deposits serve as store of value and represent savings of the people
• Time deposits are very liquid.
• M3 has become a popular measure of one supply.
• M3 is used for monetary planning of the economy and setting target of growth of
money supply.
• M3 also called as Aggregate Monetary Resources (AMR).

Money Supply M4
M4 = M3 + Total deposits with Post Office Savings Organization.

Sources of Broad Money (M3) or Factors affecting Money Supply In India

(Dutt & Sundaram-823)

• There are Five Factors / sources which contribute to the Aggregate Monetary
Resources in the country:
1. Net Bank Credit to Government (A+B)
A. RBIs net credit to Government
i. Claims on Government
ii. Govt deposits with RBI
B. Other Bank’s credit to Government
2. Bank Credit to Commercial Sector ( A+B)
A. RBIs credit to commercial sector
B. Other bank’s credit to commercial sector
3. Net Foreign Exchange Assets of Banking Sector (A+B)
A. RBIs net foreign exchange assets
B. Other bank’s net foreign exchange assets
4. Government’s Currency Liabilities to the Public
5. Net Non-monetary Liabilities of the Banking Sector (A+B)
A. Net Non- monetary liabilities of RBI
B. Net Non- monetary liabilities of banks.
Thus, M1 = 1+2+3+4+5

Monetary Policy Of the RBI / Measures of Control Imposed by RBI to Regulate

Monetary Systems in India (Dutt and Sundaram – 902)
• Controlled expansion ( 1951-72)
• RBIs Anti- Inflationary Monetary Policy since 1972.
• Entry of RBI into Foreign Exchange Market

Major weapons of Monetary Policy / Control Measures

35
• Credit Control:
1. General Credit Controls
a. Bank rate
b. Cash reserve ratio
c. Statutory Liquidity Requirements
d. Open market Operations Of RBI
2. Selective and Direct Credit Controls
• Credit Authorization Scheme (CAS)
• Credit Monitoring Arrangement (CMA)

Module 8
CURRENT ECONOMIC ISSUES

TOPICS
• PUBLIC ACCOUNTS COMMITTEE
• COMPTROLLER AND AUDITOR GENERAL

PUBLIC ACCOUNTS COMMITTE

Composition
 The Public Accounts Committee consists of fifteen Members elected by Lok
Sabha every year

36
 Seven members of Rajya Sabha elected by that House in like manner are
associated with the Committee

Appointment of Chairman
The Chairman of the Committee is appointed by the Speaker from amongst the
members of Lok Sabha elected to the Committee.

As a convention, starting from the Public Accounts Committee of 1967-68, a member

of the Committee belonging to the main opposition party/group in the House is
appointed as the Chairman of the Committee

A Minister is not eligible to be elected as a member of the Committee and if a

member, after his election to the Committee, is appointed as a Minister, he ceases to
be a member of the Committee from the date of such appointment

The term of office of the members of the Committee is one year

FUNCTIONS
 The Public Accounts Committee examines the accounts showing the
appropriation of the sums granted by Parliament to meet the expenditure of the
Government of India
 Committee also examines the various Audit Reports of the Comptroller and
Auditor General on, expenditure by various Ministries/ Departments of
Government and accounts of autonomous bodies.
 To ascertain that money granted by Parliament has been spent by Government
"within the scope of the demand".
 The Committee examines various aspects of Government’s tax administration.
 The Committee identifies loopholes in the taxation laws and procedures and make
recommendations in order to check leakage of revenue.

COMPTROLLER AND AUDITOR GENERAL

 The Comptroller and Auditor General of India is the head of the Indian Audit and
Accounts Department
 CAG is an office which directs, monitors and controls all activities concerned
with audit, accounts and functions of the Department
 Offices of the Accountants General (Audit) are responsible for audit of all receipts
and expenditure of the State governments and audit of State Government
companies, corporations and autonomous bodies
 Offices of the Principal Directors of Audit are responsible for audit of the
activities of the Union Government including Defence, Railways ,Postal,
Telecommunications etc..

The present Comptroller and Audit General of India is

Mr. Vijayendra.N.Kaul

FUNCTIONS

37
 1. He can engage consultants and/or obtain professional services in conducting audit
2. He can make rules for maintenance of accounts
3. Make regulations for carrying out the provisions relating to the scope and extent
of audit
4. To supervise and regulate external auditors' work under the Indian Companies Act
5. Appointment of external auditors.
6. Access the computer systems of the auditees and suggest changes if any.
7. CAG assists the Public Accounts Committee in examination of Accounts and
Audit reports.

COMMITTEE ON PUBLIC ACCOUNTS

8. 15 members elected from lok sabha by every year
9. 7 are elected from rajya sabha to associate with the committee

Process of electing
 Appointment of chairman
 Minister not to be Member of Committee

Term of the office

Functions
 Showing the appropriate of sums
 Examines the audit reports
 Usage of money
 Identifies loopholes in taxation laws
 Recommends in order to check leakage of revenue

Functions
• Showing the appropriate of sums
• Examines the audit reports
• Usage of money
• Identifies loopholes in taxation laws
• Recommends in order to check leakage of revenue
• Assistance by comptroller
• Sub-committees
• Evidence of officials
• Ministers are not called before committee
 Reports
 Action taken on reports

Public Disinvestment Board

38
Privatisation v/s disinvestment
• The words privatisation and disinvestment are often used interchangeably.
• Disinvestment leads to privatisation when the Government held equity is reduced to a
level when the company no longer remains a Government company

Privatisation has different nomenclature in different countries

• Disinvestment.
• Peopalisation.
• Popular capitalism .
• Denationalisation.
• Prioritisation.
• Industrial transition.
• Economic democratisation.
• Partners in development.
• Transformation and restructuring.

Objectives of Ministry of Disinvestment

• Releasing the large amount of public resources locked up in the non-strategic
PSEs for re-deployment in areas of high social priority.
• To reduce the public debt.
• Transferring the commercial risk to the private sector wherever it is willing to.
• Releasing other tangible & intangible resources such as man power etc.
Emergence of disinvestment policy
• Industrial policy 1991.
• Rangarajan Committee 1993.
• Disinvestment commission recommendations 1999.
• Budget speech: 1998-99.
• Budget speech: 2000-01.

Strategic and non-strategic classification

• Arms and ammunitions.
• Atomic energy.
• Railway transport.
• All other public sector enterprises to be considered as non-strategic.

The Department of Disinvestment

• The Department of Disinvestment was formed on the10th December 1999.
• With a view to establish a systematic policy approach to disinvestment and
privatisation.
• To give a fresh impetus to the Government’s disinvestment programme.

TARGETED AND ACTUAL DISINVESTMENT

YEAR TARGET ACTUAL
RECEIPTS RECEIPTS

39
1991-92 2500 3038
1993-94 3500 NIL
1994-95 4000 4853
1995-96 7000 362
1996-97 5000 380
1997-98 4800 902
1999-00 10000 1829

2000-01 10000 1870

2002-03 12000 3348

2003-04 14500 15547

Economic Survey (2004-05

Changing profile of PSUs

PSUs Net profit 01-02 Net profit 02-03

ONGC 6198 10529

IOC 2885 6115
SAIL -304 1498
GAIL 1186 1739
SCI 242 275
BSNL 5740 1444

All through the years now

 The Government’s approach to PSUs has a three-fold objective:

• revival of potentially viable enterprises
• closing down of those PSUs that cannot be revived and
• bringing down Government equity in non-strategic PSUs to 26 percent or lower
Government’s promise
Government would continue to ensure that disinvestment does not result in alienation of
national assets, which, through the process of disinvestment, remain where they are. It
will also ensure that disinvestment does not result in private monopolies.

Criticisms
• Privatisation of profit making public enterprises.
Mr. George Fernandes in NDA Govt.
• Basic criticism – that the funds raised by selling family silver were used to pay
the butler.
To set up disinvestment proceeds fund.
• Methodology for disinvestment.

40
Open auction sale during 94-95 to allow NRIs to participate in the offer.
• Creation of private monopoly in place of public monopoly.
Public sector monopoly is accountable for the parliament but private need not be……
• Valuation of PSUs slated for disinvestment.
Eg: PAC quantified the loss to be of the order of Rs.3000 crores in 91-92 out of Rs.4950
crores raised.

Disinvestment policy and the future of PSUs

The recent changes in the culture of the PSUs as mentioned above also reinforces the fact
that by disinvesting highly profitable PSUs, the government is trying to kill the goose
which lays golden eggs.

OPERATING LEVERAGE
• % change in operating revenue will be more than the % change in sales (FC remains
the same)
• Any increase in sales, FC remaining the same, will magnify the operating revenue
formulas……

contribution = sales- VC
operating profit (EBIT) = sale - VC – FC
or OP = contribution – FC

Example
Following is the cost information of a firm:
FC = 50,000
VC = 70% of sales
Sales = 2,00,000 in previous year
2,50,000 in current year
Find out % change in sales and operating profits when:
i) FC are not there (no leverage)

41
ii) FC are there ( with leverage)

Solution:
(i) Previous year Current year % change
(Rs) (Rs) (Rs)
Sales 2,00,000 2,50,000 25 %
Less: VC(70% of sales) 1,40,000 1,75,000 25 %
Profit from operations 60,000 75,000 25 %

(ii) Previous year Current year % change

(Rs) (Rs) (Rs)
Sales 2,00,000 2,50,000 25 %
Less ; VC(70% of Sales) 1,40,000 1,75,000 25 %
Contribution 60,000 75,000 25 %
Less : FC 50,000 50,000
Profit from operations 10,000 25,000 150 %

Comments:
• In case (i) %change in sales & %change in OP is the same i.e. 25%
• In case (ii) % change in profit (150%) is much more than the %change in sales (25%).
• The FC element has helped in increasing profits.

COMPOSITE LEVERAGE
• Operating leverage affects the income which is the result of production
• Financial leverage is the result of financial decisions
• Composite leverage focuses attention on the entire income of the concern
Composite Leverage = operating leverage * financial leverage.

EX:
The following figures relate to two companies
P LTD Q LTD
Sales 500 1000
Variable costs 200 300
Contribution 300 700
Fixed costs 150 400
150 300
Interest 50 100
Profit before tax 100 200
i) Calculate the OL, FL, CL.
ii) Comment on the relative risk position of them.

42
 Calculation of Leverages
P.Ltd Q.Ltd
O.P = contribution 300 700
EBIT 150 300
=2 =2.333

F.L = EBIT 150 300

EBT 100 200
= 1.5 = 1.5

C.L = OL*FL 300 700

100 200
=3 = 3.5

a) OL : As the OL for Q Ltd is higher than that of P Ltd ; Q ltd has a higher degree of
operating risk. The tendency of profit to vary disproportionately with sales is higher for
Q Ltd as compared to P Ltd.

b) F.L : Since FL for the two companies is the same both the companies have the same
degree of financial risk, i.e. the tendency of net disproportionately is the same for P Ltd
and Q Ltd.

C) C.L : As the combined leverage for Q Ltd is higher than P Ltd has overall higher risk
as compared to P Ltd.

43