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IGNOU MBA MS-03 Solved Assignment 2013

Course Code Course Title Assignment Code Coverage : : : : MS-03 Economic and Social Environment MS-03/TMA/SEM-I/2013 All Blocks

Note : Attempt all the questions and submit this assignment on or before 30th April, 2013 to the coordinator of your study center.

1. Management at all levels of specialized functions, is influenced by the critical elements of the business environment. Explain with suitable examples. Solution: Business environment influences business management. The critical elements of
business environment often interact with the critical elements of business management. The critical elements of business management are planning, direction, organization, control or coordination, staffing and supervision and evaluation. Management at all the levels, top, middle as well as supervisory, is concerned with these critical elements to a certain degree. Similarly, these very critical elements are the concerns of the management that specializes in different functions such as production, finance, marketing, purchase, inventory control, personnel, public relations, research and development etc. Management, at all the levels of specialized functions, is influenced by the critical elements of economic environment. For example, when an industry faces business recession, the management may decide to cut down the rate of production or to pile up inventory accumulation. When the market is being invaded by an increasing number of closely substitutable products, the management may decide to go in for aggressive advertisement or cut-throat competition. When the financial institutions start interfering too much with the dayto-day business operations of a firm, the firm's management may decide to depend exclusively on its own internal funds rather than borrowed capital. When the government enforces minimum wage legislations and other social security measures for all permanent workers, the management may decide to recruit only casual laborers through a labor contractor. Business environment may act either as a stimulant or as a constraint for business management. If the prevailing environment is favorable to business growth and prosperity, then the management feels happy and responds positively. Small business owners are often encouraged to produce more when the government pays them subsidy. On the other hand, when the prevailing environment is unfavorable, it acts as a disincentive.

FOR EXAMPLE : when the government tries to impose a high tax rate on corporate profits,
many business concerns try to evade tax by under-reporting their profits. It is interesting to note that the same environment may act both as stimulant and as a constraint stimulating for some and constraining for others. A high tax rate increases the propensity to evade taxes, it induces the corporate tax-payer to restrict his output, sales or profits. At the same time, this very situation provides an opportunity to the tax consultant for thriving business. A good amount of managerial

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skill and dexterity is required in adjusting to the environment. The managers must have a thorough knowledge, understanding and comprehension of their immediate business environment. With experience and maturity, the alert managers acquire the skill to deal with the environment. When an environment repeats itself, the experienced managers effectively display their "capability" to take of it. When the changing dimensions of the environment establish a sudden departure from the past trends and tendencies, the managers are called upon to demonstrate their "capability" to deal with the situation or risk and uncertainty. The environment thus poses, challenge for the management. The managerial efficiency and/or effectiveness is a measure of adaptability to the existing business environment. ====================================================================

2. What is the exact position of China in so far as its economic system/structure and the role of the Government are concerned? How would you describe its economic system? Solution: China stood as the second-largest economy in the world after the US, having
surpassed Japan. The dollar values of China's agricultural and industrial output each exceed those of the US; China is second to the US in the value of services it produces. Still, per capita income is below the world average. The Chinese government faces numerous economic challenges, including: (a) reducing its high domestic savings rate and correspondingly low domestic demand; (b) sustaining adequate job growth for tens of millions of migrants and new entrants to the work force; (c) reducing corruption and other economic crimes; and (d) containing environmental damage and social strife related to the economy's rapid transformation. Economic development has progressed further in coastal provinces than in the interior, and by 2011 more than 250 million migrant workers and their dependents had relocated to urban areas to find work. One consequence of population control policy is that China is now one of the most rapidly aging countries in the world. Deterioration in the environment - notably air pollution, soil erosion, and the steady fall of the water table, especially in the North - is another long-term problem. China continues to lose arable land because of erosion and economic development. The Chinese government is seeking to add energy production capacity from sources other than coal and oil, focusing on nuclear and alternative energy development. In 2010-11, China faced high inflation resulting largely from its credit-fueled stimulus program. Some tightening measures appear to have controlled inflation, but GDP growth consequently slowed to near 9% for 2011. An economic slowdown in Europe is expected to further drag Chinese growth in 2012. Debt overhang from the stimulus program, particularly among local governments, and a property price bubble challenge policy makers currently. The government's 12th Five-Year Plan, adopted in March 2011, emphasizes continued economic reforms and the need to increase domestic consumption in order to make the economy less dependent on exports in the future. However, China has made only marginal progress toward these rebalancing goals.

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Present Economy System of China: The World Bank's chief economist Justin Lin in
2011 stated that China, which became the world's second largest economy in 2010, may become the world's largest economy in 2030, overtaking the United States, if current trends continue. Challenges include income inequality and pollution. The Standard Chartered Bank in a 2011 report suggested that China may become the world's largest economy in 2020. A 2007 OECD rapport by Angus Maddison estimated that if using purchasing power parity conversions, then China will overtake the United States in 2015. James Wolfensohn, former World Bank president, estimated in 2010 that by 2030 two-thirds of the world's middle class will live in China.[The Director of the China Center for Economic Reform at Peking University Yao Yang in 2011 stated that "Assuming that the Chinese and U.S. economies grow, respectively, by 8% and 3% in real terms, that China's inflation rate is 3.6% and America's is 2% (the averages of the last decade), and that the renminbi appreciates against the dollar by 3% per year (the average of the last six years), China would become the world's largest economy by 2021. By that time, both countries' GDP will be about $24 trillion." In 2011, the IMF warned that government controlled banks could be building up imbalances that could hamper growth and leave the system "severely impacted" In 2011, the IMF predicted that China's GDP (purchasing power parity adjusted) would overtake that of the United States in 2016. The state favours state-owned enterprises despite lower productivity; this crowds out competition, in a phenomenon known as Guo jin min tui. From 2011 onward, however, China has been experiencing a slowing of its growth that throws all of the above calculations into doubt. Ray Dalio, founder of the worldest largest hedge fund, told the Council of Foreign Relations that he foresaw Chinese GDP falling to 4-5% due to failure to switch successfully from the export-driven model to more consumption. In 2012, Amnesty International reported that forced evictions that resulted from a construction boom caused by excessive stimulus spending were a serious threat to China's social and political stability. Due to the corruption and political uncertainties of the one-party state and the limited economic freedom in an economy dominated by large state owned enterprises, many skilled professionals are either leaving the country or preparing safety nets for themselves abroad. Corruption continued to grow worse in the PRC as it dropped from 75th to 80th place in Transparency International's index of state corruption. As a result of the labor shortage, increased wages and tighter scrutiny of business practices, manufacturing began to migrate back to the United States from China ====================================================================

3.

Name and briefly describe a sick unit with which you are familiar or identify one such unit and briefly attempt the following: a) Factors which caused sickness, including management failures and the present position.

Solution: Causes for Sick Industrial Company

"`Sick Industrial Company' means an industrial company which has i) The Accumulated losses in any financial year equal to 50 per cent or more of its average net worth during four years immediately preceding such financial year; or

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ii) Failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company." The above definition tell us that, one may say that moratorium period has after all not been done away with if anything, it has been retained at the same level of five years. It is clear that the moratorium period has been completely done away with. For, had the four-year moratorium period been intended that would have been made a common factor for both clauses. In the event, every industrial company would inevitably and invariably have to press the panic button needlessly in vast majority of cases and a trifle prematurely in others. This would happen because no industrial company can start making profit from year one. Gestation period ranges from a couple of years to a decade.

Example
A power manufacturer has a capital of Rs 100 crore and in the first year it incurs a loss of Rs 50 crore, bulk of it thanks to huge start-up expenses that it is unable to capitalise in his books of account. It would be unfair to brand it sick especially if there is nothing inherently wrong in its business plan and it is sure of turning the corner in a couple of years. One may still contend that on the touchstone of accumulated losses, the moratorium period of five years has been retained. They may buttress their argument by pointing to absence of provisions similar to those contained in Section 43C of the Income-Tax Act which albeit in a totally different context says that if a company has been in existence for lesser number of years, the average figure would be found out by aggregating the total income for the years the company was in existence and dividing the same by those many number of years. Industrial sickness specially in small-scale Industry has been always a demerit for the Indian economy, because more and more industries like cotton, Jute, Sugar, Textiles small steel and engineering industries are being affected by this sickness problem. As per an estimate 300 units in the medium and large scale sector were either closed or were on the stage of closing in the year 1976. About 10% of 4 lakhs unit were also reported to be ailing. And this position also remain same in the next decades. At the end of year 1986, the member of sick units in the portfolio of scheduled commercial banks stood at 1.47,740 involving an out standing bank credit of Rs. 4874 crores. Where the total number of large Industries which are sick were 637 units at the end of year 1985 increased to 714 units in the end of next year 1986. Likewise on the other hand the number of sick small scale units were also increased 1.18 lacks at the end of 1985 to 1.46 lakhs at the end of 1986. The bank amount which was outstanding in case of large industries for the same period also increased from Rs.2,900 crores to Rs. 3287 crores at the end of year 1986 Dues of Small Scale sector also increased from Rs.1071 crores to Rs.1306 at the end of the year 1986. Of the 147, 740 sick industrial units which contains large medium as well as small scale involving the total bank loan (credit) of Rs. 4874 at the end of the year 1986. ====================================================================

4.a)Define the following: Balance of trade; balance of invisible transfers; current account balance; capital account balance and balance of payments.

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Solution: The Balance Of Trade is the difference between the monetary value of exports and
imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports. A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance. The Balance Of Invisible Transfers Balance on services is that part of the balance of trade that refers to services and other products that do not result in the transfer of physical objects. Examples include consulting services, shipping services, tourism, and patent license revenues. This figure is usually generated by tertiary industry. The term 'invisible balance' is especially common in the United Kingdom.For countries that rely on service exports or on tourism, the invisible balance is particularly important. For instance the United Kingdom and Saudi Arabia receive significant international income from financial services, while Japan and Germany rely more on exports of manufactured goods. The Current Account Balance is one of two major measures of the nature of a country's foreign trade (the other being the net capital outflow). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period. The balance of trade is the difference between a nation's exports of goods and services and its imports of goods and services, if all financial transfers, investments and other components are ignored. A Nation is said to have a trade deficit if it is importing more than it exports. The Capital Account: is one of two primary components of the balance of payments, the other being the current account. Whereas the current account reflects a nation's net income, the capital account reflects net change in national ownership of assets. A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current account, the inbound flows will effectively be borrowings or sales of assets rather than earnings. A deficit in the capital account means money is flowing out the country, but it also suggests the nation is increasing its claims on foreign assets. The term "capital account" is used with a narrower meaning by the International Monetary Fund (IMF) and affiliated sources. The IMF splits what the rest of the world calls the capital account into two top level divisions: financial account and capital account, with by far the bulk of the transactions being recorded in its financial account. Balance of payments (BoP) accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing

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more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries. ====================================================================

b) Prepare a write up on the merits and demerits of currency convertibility for a developing country. Solution: Currency
convertibility or capital account convertibility is a very simple concept. All it means is that if you take your rupee to a bank or foreign exchange dealer and want to exchange it into another currency, such as the US dollar or the euro, it they should be done exchange the money with no questions asked whatsoever. There should also be no limit on the amount that can be exchanged into another currency as there is now. Currently there is some amount of rupee convertibility is allowed to some extent in India but not full capital account convertibility. There have been several committees to discuss when and how India can go become fully convertible on the capital account, the latest being the `Committee on Fuller Capital Account Convertibility' under the former RBI Deputy Governor, Mr S. S. Tarapore.

The Merits Are:

It paves the way for companies to access funds from outside without hindrance. It makes it far easier for foreign companies to invest in India. It sends a signal to international investors as well as the financial world that India is confident of itselfherself in the economic and financial arena and has the capability to withstand anything that is thrown at ither. Since it exposes makes India more exposed to the vagaries of the international financial sector, it forces the government to become more disciplined on the fiscal side of things. It forces the financial sector to be become more efficient, more disciplined, and much stronger.

The Demerits Are:

It exposes the country India to the volatility of the world financial system. The rupee can possibly become more volatile. That said, there are infinitely more merits than demerits to going becoming convertible on the capital account. The As far as the demerits are concerned, they are only demerits so only as long

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as the financial system and government accounts are shoddy. If they it become world class financial system, the it can easily manage volatility can be managed without any problem. ==================================================================== 5. Collect data on foreign technical and financial collaborations for the last ten years and write a detailed note on the annual trends of these collaborations.

Solution: Coming soon ====================================================================

6. a) Distinguish between basic restructuring and financial restructuring. Solution: The basic restructuring is a zero sum game. Strategic restructuring reduces
financial losses, simultaneously reducing tensions between debt and equity holders to facilitate a prompt resolution of a distressed situation. Corporate debt restructuring is the reorganization of companies outstanding liabilities. It is generally a mechanism used by companies which are facing difficulties in repaying their debts. In the process of restructuring, the credit obligations are spread out over longer duration with smaller payments. This allows companys ability to meet debt obligations. Also, as part of process, some creditors may agree to exchange debt for some portion of equity. It is based on the principle that restructuring facilities available to companies in a timely and transparent matter goes a long way in ensuring their viability which is sometimes threatened by internal and external factors. This process tries to resolve the difficulties faced by the corporate sector and enables them to become viable again. Financial restructuring is the reorganizing of a business' assets and liabilities. The process is often associated with corporate restructuring where an organization's overall structure and its processes are revamped. Although companies can restructure for any reason, in most cases it is done when there are serious problems with the business, and to avoid bankruptcy liquidation. Every functioning company controls assets, or economic resources that can be owned and are otherwise considered valuable. Most businesses also hold liabilities, which are debts or other obligations that arise as a result of past transactions. These economic factors will often have the most significant impact on the success or failure of that business, so financial restructuring is likely to focus on effectively managing assets and reducing liabilities. ====================================================================

b)

Discuss the privatization.

various

organizational

measures

which

promote

Solution: (i) Ownership measures: By the extent of ownership transferred the degree of
privatisation is judged form the public enterprises to the private sector. Ownership almost transferred to a separate, co-operative or corporate sector. This can have three forms:

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(a) Entire Denationalisation implies 100% transfer of ownership of a public enterprise to private sector. (b) Joint venture implies partial transfer of a public enterprise to the private sector. It can have various variants 25% transfer to private sector in a joint venture implies that majority ownership and control remains with the public sector. 51% transfer of ownership to the private sector shifts the balance in optimum to the private sector, through the public sector retains a substantial stake in the undertaking. 74% transfer of Ownership to the private sector implies a dominant share being transferred to private sector. In such a situation, the private sector is in a better position to change the character of the enterprise. (c) Liquidation implies sale of assets to a person who may use them for the same purpose or some other purpose. This solely depends on the preference of the buyer. (d) Workers co-operative is a special form of denationalisation. In this form, ownership of the enterprises is transferred to workers who may form a co-operative to run the enterprise. In such a situation, relevant provision of bank loans is build to enable workers to buy the shares of the enterprise. The burden of running the enterprises rests on the workers in workers co-operative. The workers become entitled to ownership dividend besides achieving wages for their services. Organisational measures involve a variety of measures to limited state control. They added: (a) In their day-to-day commands a structure of holding company almost designed in that the government limits its control to top-level big decisions and leaves a sufficient degree of autonomy for the operating companies. A big company like the Somnath enterprises of India limited (SEIL) or Raghvan Heavy Electrical Limited (RHEL) may acquire a holding company status, thereby transferring a number of functions to its smaller units. In this way, a decentralised pattern of management emerges. (b) Leasing: In this arrangement, the government agrees to transfer the use of assets of a public enterprise to a private bidder for a specified period, say of 5 years. While entering into a lease, the bidder is required to give an assurance of the quantum of profits that would be built available to the state. This is a kind of tenure ownership. The government reserves the right to review the lease to the same person or to grant the lease to another bidder depending upon the circumstances of the cases. ==================================================================== ====================================================================

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