BUSINESS ENIVIRONMENT QS.1: WRITE A NOTE ON THE FOLLOWING; A. SOCIALISTIC ECONOMY B.

CAPITALISTIC ECONOMY An economy is a system which tries to balance the available resources of a country (land, labor, capital and enterprise) against the wants and needs of consumers. It deals with three key issues: 1. What is produced, 2. How it is produced, and 3. Who gets what is produced. Each country has a different economy. A. Socialistic Economy: An economy which is controlled by the government is called as socialistic economy. Here, the decisions what, when, how and from whom to produce etc. are taken by the centralized authority. Socialism is an economic system based on the central ownership of capital. While individuals work in various capacities, the government regulates how much income an individual can consume/regulates where that income will go. Citizens will also have a say in defining needs. Socialistic economies promote utopian societies, in which all are equal. The government in a socialistic economy is believed to act out of the common good of individuals. Although different types of socialism exist, socialism is thought to be a balance between capitalism and communism. Socialistic societies still have different classes of wealth, but just not to the degree that capitalistic societies have. In socialistic economy, government can utilize land, labor, and capital to fulfill its economic and political agendas. So the private players are reluctant to invest in a socialistic economy. Karl Marx is known in history for being the biggest supporter or most known supporter of socialism. B. Capitalistic Economy: Capitalistic economy is a type of economic system in which the trading and exchange of goods and services and information takes place in a free market, hence it is also called as free market economy. Capitalism gives each individual the ability to be rewarded for their effort to whatever degree they can rise to. The only limits are on the individuals desire and commitment. This utilizes the inherit selfish motive in man to preserve himself and turns it into something that benefits the entire community. I want a well-kept house because the value is greater for me, but my neighbor benefits from my well-kept house as well in his property values. If I provide a productor service for less than a competitor I will have more customers and proper more than I would with a very high price and few customers. The customer benefits from a low price and I benefit from a prosperous business. Capitalism has the ability to become so successful in a given area of commerce that one has no competition to act as a check and balance to how the business conducts itself. This is known as monopoly, capitalist countries pass laws to prevent monopolies from controlling market sectors because competition is a necessary component in making capitalism work for the people. Capitalism is not a system it is what happens in the absence of a system. QS.2: EXPLAIN THE DIFFERENT INSTRUMENTS OF MONETARY POLICIES? Monetary policy refers to the measurement of growth rate and size of money supply; this process is carried out by the central bank. Monetary policy is a way in which the government controls the economy. The different instruments of monetary policies are: 1

1. Bank Rate: A bank rate is the interest rate that is charged by a country's central or federal bank on loans and advances to control money supply in the economy and the banking sector. This is typically done on a quarterly basis to control inflation and stabilize the country's exchange rates. A fluctuation in bank rates triggers a ripple-effect as it impacts every sphere of a country's economy. For e.g., the prices in stock market tend to react to interest rate changes. A change in bank rates affects customers as it influences prime interest rates for personal loans. In India, as per RBI (Reserve Bank of India) norms, the bank rate is retained at 6 percent. 2. Repo Rate: Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from RBI becomes more expensive. Currently, the repo rate in India is 25 basis points from 5.0 percent to 5.25 percent. 3. Reverse Repo Rate: Reverse repo rate is the rate at which RBI borrows money from banks. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest. An increase in reverse repo rate can cause the banks to transfer more funds to RI due to attractive interest rates. Currently the reverse repo rate in India is 25 basis points from 3.5 percent to 3.75 percent. 4. Cash Reserve Ratio: Cash reserve ratio is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. It influences the country's economy, borrowing and interest rate. Currently, the CRR in India is 5.75 percent to 6 percent. QS.3: WHAT ARE THE RISKS INVOLVED IN DOING BUSINESS IN INDIA? The prowess of the Indian economy is based on impetus, resilience and sustainability which is wellacknowledged the world over. This economic sustainability leads to further investments and growth. As John Maxwell said if we are growing, we are always going to be out of our comfort zone. This is very true in the context of Indian economic growth. Outside this comfort zone awaits a plethora of risks that have to be mitigated well in time. 1. Information and cyber insecurity: The risk of information and cyber insecurity has been rated as the highest risk to business establishments by almost all the respondents across sectors and regions. This concern has also been put forward by respondents from outside India. While IT and financial sectors count cyber insecurity as their apex risk, even the government, manufacturing and telecom sectors have rated it as their top three risks, they face. 2. Terrorism: The perils of terrorism have primed to be a part of risks occupying minds at all times. The northern and eastern regions of India indicated terrorism as their prime whereas the western and southern regions placed it at number two and six respectively. It is to be noted that respondents from outside of India rated terrorism at number four, quite different from the popular conviction and foreign media reports that indicate terrorism to be their prime risk. 3. Strikes: An intensifying distress strikes have been graded as the sixth most critical risk to business establishments. Respondents from outside India have rated strikes higher than terrorism. This is predominantly because Indian business units of multinational companies are not able to operate conveniently due to strikes and closures. 2

4. Fire: Fire has been one of the oldest risks around us and much has been done to control it. However, it still continues to be the most destructive threat to life and property. In addition, awareness towards fire safety has not been quite forthcoming. During many incidents, in recent times, establishments such as hospitals, commercial houses and high rise buildings have been found flouting fire safety norms. 5. Natural Hazards: Natural hazards are threats which cannot be averted at will. They have a negative effect on people and the environment. Some natural hazards are interlinked to each other. E.g. the earthquake in Japan on 11th march 2011 led to a giant tsunami causing huge loss to life and property. Its aftermath even resulted in nuclear radiation from the nuclear power plant facility at Fukushima. 6. Political instability: Economic growth and political stability are interconnected. While on the one hand, uncertainty associated with unstable political environment slows down investment and economic development, poor economic growth on the other, also leads to governmental collapse and sociopolitical unrest. Any instability in the political dispensation at the center would have a direct bearing on the governance of the country and would also negatively affect macroeconomic indicators. It also results in the formulation of short-term macroeconomic policies while relegating the need of formulating long-term economic goals to a background. 7. Consumer market risks: The one risk not covered in most multinationals business strategy is Consumer Market Risks. Indian market and customer demands are different from US and other developed country markets. For example, US are a large country with standardized city plans, infrastructure and uniform customer requirements. The American public wears, eats and drinks the same thing across the country. The taste differences vary but not significantly. 8. Employee risks: The second premise for entering Indian market is to use the workforce at a lower cost. India has a huge young population. Multinationals entering India assumes that India has a large workforce. However, most of Indian population resides in rural areas and illiteracy rates are still high in India. Secondly, a high percentage of people even in urban areas are self-employed. Moreover, with increase in urban middle class incomes, the percentage of working women has decreased. Hence, the employable English-speaking workforce is less than quarter of the urban population. 9. Legal risks: Indian law enforcement is weak. Corruption has seeped into police and judiciary departments due to which justice is denied and delayed. The financial cost and time spent of legal cases is high as frequently they continue for 20 years or so. Hence, the public attitude towards legal compliance is lax. The attitude is that all illegal activities are fine until we are caught. QS.4: WHICH ARE THE MAIN FINANCIAL INSTITUTES OF INDIA? WHAT ROLE DO THEY PLAY IN THE ECONOMY? 1. The Reserve Bank of India (RBI): The Reserve Bank of India was established in the year 1935 with a view to organizing the financial frame work and facilitating fiscal stability in India. The preamble of RBI describes the basic functions and the role of RBI as to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. As the preamble of the RBI itself states to operate the currency and credit system of the country to its advantage hence bad money is been removed out of the circulation which will in turn provide good quality notes in the hands of the general public. The policies of the RBI are implemented with the help of board of directors. The RBI acts as the banker, agent and advisor to the government of India. It accepts payments for the account of the union and state governments and also makes payments on behalf of the government. As an apex bank the RBI acts as a banker of the banks and lender of the last resort. Under the RBI act, the bank has been vested with extensive powers of supervision and control over all scheduled commercial and cooperative banks. One of the important functions performed by the RBI is that of external value of the rupee. Apart from adopting appropriate monetary policies for the economic stability in the country and thereby 3

exchange stability in long term, the RBI has to ensure that the normal short-term fluctuations in trade do not affect the exchange rate. The prime duty of the RBI is to regulate the banking system of our country in such a way that the people of the country can trust in banking up to perform its duty. 2. Security and Exchange Board of India (SEBI): The SEBI is the national regulatory body for the securities market. It was in 1980s that India had witnessed a phenomenal growth and development of the securities market. During the phase, India was entering into period of liberalization and decontrol which was to accelerate and gather momentum in the 1990s. The SEBI regulates the business in stock exchange and any other securities market. It registers and regulates the working of intermediaries associated with securities market. It also registers and regulates the working of collective investment schemes including mutual funds. It promotes and regulates self-regulatory organization. It prohibits fraudulent and unfair trade practices in the security market. It also promotes investors education and training of intermediaries in the security market. It prohibits insiders trading in securities. It regulates substantial acquisition of shares and takeover of companies. Calling for information, undertaking inspection, conducting enquiries and audits of the stock exchanges, intermediaries and self-regulatory organization in the securities market are some of their main roles. 3. Central Board of Direct Taxes (CBDT): An act to provide for validation of certain proceedings in relation to direct taxes and for matters connected there with. The objective of the act is to provide for validation of certain proceedings in relation to direct taxes. The CBDT is a part of Department of Revenue in the Ministry of Finance. On one hand, CBDT provides essential inputs for policy and planning of direct taxes in India, at the same time it is also responsible for administration of direct tax laws through the Income Tax Department. The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963. The officials of the board in their ex-officio capacity also function as a division of the ministry dealing with matters relating to levy and collection of direct taxes. The central board of revenue as the department apex body charged with the administration of taxes came into existence as a result of the central board of revenue act, 1924. Initially the board was in charge of both direct and indirect taxes. However, when the administration of taxes became too unwieldy for one board to handle, the board was split up into two, namely the central board of taxes and central board of excise and customs. QS.5: WHAT IS DISINVESTMENT? WHAT IS THE DIFFERENCE BETWEEN PRIVATIZATION AND DISINVESTMENT? WHAT ARE THE OBJECTIVES OF DISINVESTMENT? Disinvestment is the withdrawal of capital from a country or corporation. Disinvestment involves sale of only part of equity holdings held by the government to private investors. Disinvestment process leads only to dilution of ownership and transfer of full ownership. Wordnet dictionary defines disinvestment is a process off transferring property from public ownership. Capital investment shrinkage caused by a firms failure to maintain or replace capital assets being used up or the firms sale of capital goods such as equipment. The term also refers to the reduction of investment in firms, industries or countries for reasons of political or social policy. The objectives of disinvestment are: Redeploying resources locked up in non-strategic PSEs in areas that are much higher on the social welfare priority. Stewing further flow of resources for the non-strategic activities. Ensuring that the tax payers money is not subjected to the volatility of the market. Converting PSEs into strong private commercial enterprises. Reducing public debt and pressure on government resources. Providing vibrant, large and deeper capital market with investment alternatives to investors as well as assuring them easy exit options. 4

Disinvestment would result in wider distribution of wealth through offering of shares of privatized companies to small investors and employees. In many areas e.g. the telecom sector, the end of public sector monopoly would bring relief to consumers by way of more choices, and cheaper and better quality of products and services, has already started happening.

Disinvestment is the reverse of investment, in this context it refers to the decision to sell the governments share in the PSU to the private players. In technical terms the transfer of ownership and management, which involves transfer of 51% of equity to the private players, is termed as privatization. However in the case of disinvestment the transfer of equity is less than 51%, thus the management and the ownership remains in the hand of the government. Though these two terms are loosely used interchangeably, there is vital difference between the two. Disinvestment may or may not result in privatization. When the Government retains 26 per cent of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested all right but would not have privatized, because with 26 per cent it can stall vital decisions for which generally a special resolution (three-fourths majority) is required. With the Government thus breathing down the neck of the strategic buyer, he can hardly take decisions that he wants to which privatization is all about. QS.6: EXPLAIN THE INDIAN ECONOMY WITH REFERENCE TO THE AGRICULTURAL, THE INDUSTRIAL AND THE SERVICE SECTORS. 1. Agricultural sector: Agriculture is the backbone of our Indian economy in at least four ways i.e. product contribution, market contribution, factor contribution and foreign exchange contribution. Agriculture is the main sector of the Indian economy which is amply powered by the following points: a. Share in National Income: The contribution from agriculture has been continuously falling from 55.1% in 1950-51 to 37.6% in 1981-82 & further to 18.5% in 2006-07. But agriculture still continues to be the main sector because it provides livelihood to a majority of the people. b. Largest Employment Providing Sector: in 1951, 69.5% of the working population was engaged in agriculture. This percentage fell to 66.9% in 1991 & to 56.7% in 2001. However, with rapid increase in population the absolute number of people engaged in agriculture has become exceedingly large. c. Provision of Food Surplus to the Expanding Population: Because of the heavy pressure of population in labor-surplus economies like India & its rapid increase the demand for food increases at a fast rate. Therefore, unless agriculture is able to continuously increase its surplus of food-grains, a crisis is likely to emerge. Experts foresee that by the end of 11th five year plan (i.e., 2011-2012), the demand for food-grains is expected to increase to 280.6 million tons. Meeting this demand would require 2% growth per annum. The challenge facing the country is clear as during the last 10 years the food-grains have been growing at a meager 0.48%. d. Contribution to Capital formation: There is a general agreement on the importance of Capital Formation in economic development. Unless the rate of Capital Formation increases to a sufficient high degree, economic development cannot be achieved. Agriculture can play a big role in pushing the Capital Formation in India. Rural sector can transfer labor & capital to the industrial sector which can be effectively used to increase the productivity in the latter. e. Providing Raw Material to industries: Agriculture provides raw materials to various industries of national importance. Sugar industry, Jute industry, Cotton textile industry, Vanaspati industry are examples of some such industries which depend on agriculture for their development. f. Market for Industrial Products: Since more than two-thirds of the population of India lives in rural areas, increased rural purchasing power is a valuable stimulus to industrial development. 5

g. Importance in International Trade: Agriculture constitutes about 75% of the total exports of the country. Such is the importance of agriculture as far as earnings of foreign exchange are concerned. 2. Industrial sector: Industries play an important role in the economic development of any nation .without industries, economic development is impossible. Again, in a backward and developing economy like INDIA, industries are indispensable. Development of industries is not only indispensable for India, but there is also good scope for the development of industries in our country. India has many favorable factors for the development of industries. The various favorable factors present in the country for the development of industries are: a. The country is rich in natural resources, such as minerals, forests, fisheries, etc. required for the development of industries. b. The country is rich in commercial crops, such as sugar-cane, raw cotton, raw jute, tobacco, oil seeds, etc. required for the development of agro-based industries. c. The country is fairly rich in power resources, such as coal, hydro-electricity, atomic energy, etc. required for turning the wheels of industries. d. India is rich in human resources. As such, cheap labor required for the development of industries is also available in the country. e. As the country has vast population, wide market required for the development of industries is also available in the country. 3. Service sector: India is distinctive for the rapid growth of its service sector high-tech information Technology, communications and business services in particular. Whether the service sector provides a route out of poverty for the masses is disputed, however. Some say that the skill and education requirements of modern service sector jobs make them an impractical destination for the rural masses. Others counter that as more skilled and educated workers graduate from manufacturing and traditional services into modern services, they open up economic space for less educated workers capable of upgrading their skills. They argue that the skilled-unskilled mix of the manufacturing and service sectors, each taken as a whole, is not as different as commonly supposed. The critics object that much non-traditional service sector employment is little more than the relabeling of activities previously undertaken in-house by manufacturing firms. Others counter that much of the growth of service sector employment in fact represents new job creation. For our part, we find little evidence that the growth of the service sector is simply disguised manufacturing activity. We also find that the skilled-unskilled mix of labor in the two sectors, taken as a whole, are becoming increasingly similar. The implication is that it is no longer 19 obvious that manufacturing is the exclusive destination for the vast majority of Indian labor moving into the modern sector, or that modern services are a viable destination only for the highly-skilled few. While our analysis has been statistical, there is anecdotal evidence consistent with these Polgreen (2009) describes how modern service sector jobs are now migrating from Indias urban centers to its small towns and rural villages, creating employment for semi-skilled workers. These workers may not have the mathematical training to work as computer programmers or the English fluency needed for employment in call centers, but with some high school education they are sufficiently numerate and have adequate facility in English to do basic data entry, read forms, and even writes simple e-mail messages. The wages of these rural service sector workers are three to four times those in agriculture but only half those of workers in Bangalore, where the competition for labor is more intense and living costs are higher. American trucking companies seeking to process timesheets in India may not have the local knowledge to find rural workers to undertake the task, but companies like Rural Shores have been established to run service sector facilities in rural areas. By one estimate, 20 data entry and 6

call centers have been set up in small towns and villages in recent years. Rural Shores alone has plans to operate 500 such centers by 2017.36 In addition, there is growing anecdotal evidence of parents spending substantial sums on opportunities for children with only high-school education on the acquisition of England-language, computer-utilization and other basic skills that might enable them to take better advantage of openings in the service sector. These observations are consistent with the view that employment in modern service sector activity can be a route out of poverty not just for the few and not just for urban residents. conclusion that employment in modern services can be a useful supplement to employment in manufacturing as a route out of rural poverty. Thus, sustaining economic growth and rising living standards in India will entail shifting labor out of agriculture into modern services as well as manufacturing and not just into the latter. To the extent that the expansion of both sectors continues to be constrained by the availability of skilled labor, this simply underscores the importance for India of continuing to invest in labor skills.