FACTORS AFFECTING

THE
ECONOMIC
ENVIORNMENT

CAPITAL MARKET
A nation's capital market includes such financial institutions as banks, insurance
companies, and stock exchanges that channel long-term investment funds to commercial
and industrial borrowers. Unlike the money market, on which lending is ordinarily short
term, the capital market typically finances fixed investments like those in buildings and
machinery.

Nature and Constituents

The capital market consists of number of individuals and institutions (including
the government) that canalize the supply and demand for long-term capital and claims on
capital. The stock exchange, commercial banks, co-operative banks, saving banks,
development banks, insurance companies, investment trust or companies, etc, are
important constituents of the capital markets.
The capital market, like the money market, has three important components,
namely the suppliers of loanable funds, the borrowers and the intermediaries who deal
with the leaders on the one hand and the borrowers on the other.
The demand for capital comes mostly from agriculture, industry, trade and the
government. The predominant form of industrial organization developed capital Market
become a necessary infrastructure for fast industrialization. Capital market not concerned
solely with the issue of new claims on capital, but also with dealing in existing claims.

Importance of Capital Market

 The capital market serves a very useful purpose by pooling the capital resources
of the country and making them available to the enterprising investors well-developed
capital markets augment resources by attracting and lending funds on the global scale.
A developed capital market can solve this problem of paucity of funds. For an
organized capital market can mobilize and pool together even the small and scattered
savings and augment the availability of investible funds. While the rapid growth of
capital markets, the growth of joint stock business has in its turn encouraged the
development of capital markets. A developed capital market provides a number of
profitable investment opportunities for a small savers.

Nature of the Indian Capital Market

Like the money market, the Indian capital market also consists of an organized
sector and an unorganised sector. In the organized market the demand for capital comes
mostly from corporate enterprises and government and semi-government institutions and
the supply comes from household savings, institutional investors like banks investment
trusts, insurance companies, finance corporations, government and international
financing agencies. Whereas, the unorganized market consists mostly of the indigenous
bankers and moneylenders on the supply side.

Development of the market

The Indian capital market has undergone remarkable changes in the post-
independence era. Certain steps taken by the government to place the market on a strong
footing and develop it to meet the growing capital requirements of fast industrialization
and development of the economy have significantly contributed to the developments that
took place in the Indian capital market over the last five decades or so.

The important facts that have contributed to the development of the capital
marketing India are the following.

1. Legislative measures: Laws like the companies act, the securities

contracts(Regulations) and the capital issues(Control). Act empowered the government to
regulate the activities of the capital market with a view to assuring healthy trends in the
market, protecting the interests of the investors, efficient utilization of the resources, etc.

2. Establishment of development banks and expansion of the public sectors: Starting

with the establishment of the IFCI, a number of development banks have been established
at national and regional levels to provide financial and other development assistance to
the entrepreneurs and enterprises. These institutions today account for a large chunk of
the industrial finance.

3. Growth of underwriting business: There has been a phenomenal growth in the

underwriting business thanks mainly to the public financial corporations and the
commercial banks. In the last one decade the amount underwritten as percentage of total
private capital issues offered to public varied between 72 per cent and 97 per cent.
4. Public confidence: Impressive performance of certain large companies encouraged
public investment in industrial securities.

5. Increasing awareness of investment opportunities: The improvement in education

and communication has created more public awareness about the investment
opportunities in the business sector. The market for industrial securities has become
broader.

6. Capital Market Reforms: A number of measures have been taken to check abuses and
to promote healthy development of the capital market.

DISINVESTMENT
Twelve years after it was started, the liberalization of the Indian economy remains an
ideological and operational battleground. There is mainstream national consensus on the
need and irreversibility of reforms, but widespread disagreement about its pace and the
sharing of its benefits. A basic aspect of the withdrawal of the state from the economic
sphere has been the divestment to private parties of the shares (and in some cases control)
of public sector enterprises (PSUs) [or state-owned enterprises (SOEs)]. This has affected
thousands of Indians, and triggered fierce political debates

Disinvestment, which has now become a universal trend, means transfer of ownership
and/management of an enterprise from the public enterprise from an industry or sector to
the private sector, partially or fully. Another dimension if disinvestments is opening up of
an industry that has been reserved for the public sectors to the private sector.
Disinvestment is an inevitable historical reaction to the indiscriminate expansion of the
state sector and the associated problems. Today even in communist countries
disinvestments and privatization has become a vital measure of economic rejuvenation.
Disinvestment has its advantages in several ways. It would help reduce the fiscal burden
of the state by relieving it of its losses and reducing the size of bureaucracy,
Enabling the government to mop up funds, better management of the enterprises,
encourage entrepreneurship and help accelerate the pace of economic development as it
attracts more recourses from the private sector for development.
It may increase the number of workers and common man who are shareholders and this
could make enterprises subject to more public vigilance .
Disinvestment also helps the government to concentrate more on the essential state
functions

Government may confront several obstacles to privatization and disinvestment. Trade

unions and political parties may oppose it. In developing countries, the relatively
undeveloped capital markets sometimes makes it difficult for governments to sell shares.
Another problem is that governments usually want to sell the least profitable enterprises,
those that the private sector is not willing to buy at a price acceptable to the government.

Disinvestment will be successful only if certain conditions are satisfied. The policy
should be very clear and there should be proper privatization strategies. Equally
important are the commitment and political boldness on the part of the government.The
following are the ways in which the procedure for disinvestments is generally carried out.

Public offering: This maintained the state ownership on the company but
diversified the shareholding among various entities.
Internal restructuring: One of the most popular methods of restructuring, which
maintained state ownership of assets. This process could involve the breaking up
of the company in to smaller units producing different products or setting up of a
new entity to just take over owner ship of productive assets. Debt equity swap is
also part of the internal restructuring process.
Bankruptcy and reorganization: Restructuring could also involve the bankrupt
firms being dissolved.
Employee shareholding: This has been one of the most popular forms of
restructuring employed in China. Being a communist mindset where collective
holding of assets was always emphasized, this form of restructuring was popular
since the employees were not threatened with retrenchment and hence this was the
most socially acceptable restructuring exercise at that point of time.
Open sale: This form of restructuring has become more popular in recent years.
The firm is openly sold to insiders or outsiders, perhaps through auction. This has
been the most radical form of privatization because it can involve the transfer of
the firm to a single private owner or a management group.
Leases: Under this form of restructuring, the assets of a PSU were leased out. The
assets were leased out to legal entities independent of the government or ex-
employees who formed their own companies. Leasing is often adopted when the
lessee has insufficient financial resources to buy the firm.
Joint ventures: Formation of a joint venture or merger falls under this category
of restructuring. This type of reform companies to obtain long-term access to
capital and technology.

The role of the State vs. Market has been one of the major issues in development
economics and policy. In a mixed economy such as India, historically the public sector
had been assigned an important role. However, in the year 1991 the national economic
policy underwent a radical transformation. The new policy of liberalization, privatization
and globalization de-emphasized the role of the public sector in the nations economy.
The faculty at IIT-Bombay has been studying various aspects of the New Economic
Policy such as financial sector reforms, fiscal implications of reforms, and of
globalization.
To date the apologists of market-oriented economic structures have proffered several
arguments:
 1. The government must not enter into those areas where the private sector can
perform better
2. Market-driven economies are more efficient than the state-planned economies
3. The role of the state should be as a regulator and not as the producer
Government resources locked in commercial activities should be released for their
deployment in social activities.
It is also contended that the functioning of many public sector units
(PSUs) has been characterized by low productivity, unsatisfactory quality
of goods, excessive manpower utilization, and inadequate human resource
development and low rate of return on capital. For instance, between 1980
and 2002, the average rate of return on capital employed by PSUs was
about 3.4% as against the average cost of borrowing, which was 8.66%.
Disinvestment (or divestment) of the PSUs has therefore been offered as
one of the solutions in this context.
Disinvestment involves the sale of equity and bond capital invested by the government in
PSUs. It also implies the sale of governments loan capital in PSUs through
securitization. However, it is the government and not the PSUs who receive money from
disinvestment.
The fixation of share/bond price is an important aspect of disinvestment. Now, the
Disinvestment Commission determines the share/bond price. Disinvested shares are
listed, quoted and traded on the stock market. Indian and foreign financial institutions,
banks, mutual funds, companies as well as individuals can buy disinvested shares / bonds
Disinvestment is generally expected to achieve a greater inflow of private capital and the
use of private management practices in PSUs, as well as enable more effective
monitoring of management discipline by the private shareholders. Such changes would
lead to an increase in the operational efficiency and the market value of the PSUs. This in
turn would enable the much needed revenue generation by the government and help
reduce deficit financing.

Rangarajan Committee On Disinvestment

The committeee on disinvestment in public sector enterprises set up by the government of

India under the chairmanship of c. Rangaragan in 1993 had submitted a report in which it
made a lot of recommendations these important recommendation of the committee have
been considered while carrying out the disinvestment

The best method for disinvestment is offering shares to the general public at fixed price
through a general prospecting. However, since these shares have not been traded so far
on the stock markets, it would be difficult to decide the fixed rate at which they should
be established in the market, this indeed would be the best method. Till then, the auction
method with wide participation may be adopted.
The target level of disinvestment should be decided on the basis of the desirable level of
public ownership in an activity or unit consistent with industrial policy. In all those units,
which are reserved for the public sector, the percentage of equity disinvested should be
49 percent so that the government, by holding majority of the shares, retains control over
the management. In other cases, the percentage of equity to be disinvested should be 74
percent.
Instead of year-wise targets of disinvestment, a clear action plan should be evolved.
Disinvestment shall be in stages and sales shall be staggered so as to get the best possible
price.
A number of steps need to be undertaken for efficiently carrying out privatization. These
may include corporatisation of the public enterprises, restricting of finance with a proper
debt-equity gearing and on independent regulatory commission for the concerned sector,
if necessary.
A scheme of preferential offer of shares to workers and employees may be devised.
Ten percent of the proceeds ;of the privatization may be set apart for lending to the public
enterprises on concessional terms for meeting their expansion and rationalization needs.

Milestones in DISINVESTMENT

The company Pradeep Phosphates Ltd was launched as a joint venture of the
Government. of India and the Republic of Nauru and was incorporated on 24th
December, 1981. Commercial DAP production started from 1st August, 1986. In June
1993 the Company became a Public Sector Undertaking (PSU) wholly owned by the
Govt. of India.
In its PSU avatar, the Company faced problems right from the beginning and continued
in very poor financial health. By early 2000 the position had became untenable with
cumulative losses of Rs. 4,315 million as of 31st March, 2001, estimated losses of over
Rs. 2,000 million in 2001-02 and zero net worth. The Company had also chalked up
massive outstanding liabilities on account of raw materials import, of around Rs. 5,000
million.
On February 28, 2002, in a path-breaking move, aimed at breathing new life into this
hitherto beleaguered and loss making PSU, the Government of India divested 74% of its
stake in favour of selected strategic partner, Zuari Maroc Phosphates Pvt. Ltd.
Today Paradeep Phosphates Limited (PPL) is an enterprise of the K.K. Birla and OCP
(Morocco) Groups and is a complex fertiliser unit engaged in the production of
DAP/NPK. The plant also produces Phosphoric Acid and Sulphuric Acid, which are
critical intermediates in the manufacture of the above mentioned phosphatic fertilisers.
The plant which is located at the Port Town of Paradeep in the district of Jagatsinghpur in
Orissa, has an installed annual capacity of 7,20,000 metric tonnes of DAP (2400 metric
tonnes per day)and other Phosphatic (NPK) fertilizers PPL is the second largest
integrated DAP plant in India and ranks among the largest in Asia. The Unit today is a
51-49 joint venture of Zuari Industries Limited, the flagship fertiliser company of the
K.K. Birla Group and Maroc Phosphore SA, a wholly owned subsidiary of the fertiliser
giant, OCP of Morocco.

An INTRESTING ARTICLE In The TIMES OF INDIA

(ITS GOOD READING)

Paranoia, followed by delusions of grandeur. That describes the soap opera that the
governments disinvestment programme became last week. Originally, the government
hoped to raise Rs 12,000 crore through disinvestment.

To maximise prices and improve efficiency, Disinvestment Minister Arun Shourie

pleaded for strategic sales (selling a controlling stake to businessmen). He argued, with a
wealth of facts and data, that selling minority stakes in PSUs fetched lower prices and did
not improve efficiency.

But politics triumphed. Shouries strategic sales were foiled, and disinvestment stalled.
But then something else happened. The comatose stock market took off. The Sensex
doubled between March and December 2003, spurred mainly by foreign institutional
investors (FIIs).

In this boom, the government realised that it could sell minority stakes in PSUs at decent
prices. Public sector banks like Vijaya Bank and UCO Bank, came out with issues that
were oversubscribed.

Building on this, the government decided to sell a whopping Rs 15,000 crore of minority
stakes in six PSUs, over three weeks in February-March.

Why the rush? Why not spread the sales over several months, as finance experts had
suggested? Because the financial year ends in March and the government wanted to use
the sales to reduce its fiscal deficit to decent levels. India Shining, you see!

Now, this constitutes poor politics and poor economics too. I have been at the very
forefront of those calling for the privatisation of public sector undertakings. But I view
the current round of disinvestment as populist politics rather than economic sense.
Shourie used to be an economist with the World Bank. So he is doubtless aware of the
elementary maxim that increased supply depresses prices, others things constant.

Increasing the supply of shares in the stock market by Rs 15,000 crore will tend to
depress prices, especially in an overheated market that is due for correction anyway.

Yet when the market did indeed fall last week, Shourie suddenly discovered plots hatched
by supposed bear cartels and other dastardly investors engaged in the sinful pursuit of
profit.

These slimes, said Shourie, aimed to hammer down the market and spoil his little
disinvestment party. SEBI, the rather ineffective watchdog of the markets, was asked to
launch an inquiry.

Shourie proposed an Economic Intelligence Unit under the Cabinet to oversee the slimes.
His old lieutenant, Pradeep Baijal, described market operators as sharks attempting to
boost profit margins.

Now, why would anybody be in the stock market save to boost margins and make big
profits? Even in the USA, market operators routinely sell shares before a big public issue,
hoping to buy them back at a lower price.

Shourie accelerated this process in India by setting price bands for disinvestment that
were well below the prevailing market rate.

But his main concern was not falling prices so much as the possibility that the issues
would not be subscribed to. Subscriptions got off to a slow start. This was not unusual:
big investors typically wait till the last day before putting in their bids.

But the slow start led Shourie to press panic buttons, issuing threats to market operators
and issue managers.

Nowhere else in the world does a minister call the Prime Minister because of a 5 per cent
fall in the stock market.

As the week progressed, subscriptions to the issues picked up. Ultimately, they were
oversubscribed. End of drama. Obvious conclusion: Shourie went into an unwarranted,
panicky funk.

But this interpretation does not go down well with Shining India. So instead, Shourie
claimed that his threats exorcised the evil demons of the market, and made them behave.

Really? If indeed economic miracles can be achieved by commands and threats of arrest,
surely we need to return to socialism rather than sell PSU shares.
The law-and-order approach to prices is an old socialist one. I remember when YB
Chavan shifted from the Home ministry to Finance ministry. Laxman had a brilliant
cartoon of Chavan telling the police to go out and arrest inflation. So sad to see Shourie
following suit. Politics, politics!

I preferred the old Shourie who denounced the sale of minority shares in PSUs. What he
is doing today will not improve efficiency. It will not even reduce the fiscal deficit, as he
should know as an economist.

A deficit arises when spending exceeds revenue. This can be funded either by borrowing
more (thus increasing the governments liabilities) or by selling assets like PSU shares.

India persists in the accounting fiction that selling shares reduces the deficit while
additional borrowing increases it. In fact the governments net worth remains the same
whether it sells assets or increases liabilities.

So, the disinvestment has little economic significance. Mainly, it is a political ploy to sell
shares cheaply to a large number of voters, hoping to reap electoral dividends.

ECONOMIC PLANNING
MEANING OF ECONOMIC PLANNING:
Economic planning implies proper utilization of resources to ensure rapid
economic development and social justice. The method of planning was first adopted by
the U.S.S.R (Russia) in 1928.Economic planning is a time bound programme to achieve
certain aims and objectives by allocating the available resources under the control of a
central planning authority.
Economic planning is the making of major economic decisions like what and
how much to produce, when and here it is to be produced and to whom it is to be
allocated.

FEATURES OF ECONOMIC PLANNING:

1. Existence of central planning authority like the planning commission in India.
2. Well defined goals and objectives.
3. Survey of the resources of the economy.
4. Fixing of the targets and priorities.
5. Mobilisation of resources.
6. Choice of techniques: should be according to the need and the available resources in
the country.
7. Time bound programme.
8. Assessment of the plan.

TYPES OF ECONOMIC PLANNING:

1. Centralised planning: In this type of planning all the economic decision
regarding allocation of resources, pattern of investment etc.are taken by the central
authority. The formulation, implementation and execution of the plan rest in the hands of
central authority.
2. Democratic planning: The decision is taken by local and regional bodies
depending upon their needs and other priorities. It is done with the due consent of the
people. The implementation of the plan depends on the approval of the national
parliament. This plan is adopted in a democratic country like India.
3. Totalitarian planning: There is no peoples participation in this planning. It is a
planning by direction.
4. Functional planning: Functional planning is to improve the efficiency and the
function of the different sectors of the economy.
5. Structural planning: In this planning, along with the improvement in
performance and efficiency of the different sectors, there are structural changes like the
modernization of agriculture, implementation of land reforms etc.
6. Perspective planning: It is a long term planning for a period of 15 to 20 years.
7. Short term planning: This is a planning for short period. The objectives and the
targets fixed are to achieved within a specific period.

NEED AND OBJECTIVES OF ECONOMIC PLANNING

1. Optimum utilization of the available resources.
2. Balanced growth of the sectors.
3. Capital formation: Planning is needed to increase the savings and investment
which will lead to capital formation and growth of the economy.
4. Development of the infrastructure: Planning helps in the development of
infrastructure like transport and communication, health, education etc.
5. To raise national income, per capita income and standard of living.
6. Rapid industrialisation: Planned economic development enables us to exploit the
natural resources and accelerate the industrial growth.
7. Modernisation of agriculture: India is basically an agrarian economy. So planning
is needed to modernize the agriculture and increase productivity.
8. Rural development: Industrial sector is backward. Through economic planning
proper rural development programmes can be started.
9. To achieve self reliance and self sufficiency: Agricultural and Industrial
production can be increased through planning and economy can become self-reliant and
self-sufficient.
10. To attain economic stability: Planning is needed to overcome the evils of the
market system like inflation and depression. Economic planning helps to maintain price
stability. Thus economic growth with stability is possible.

PLANNING STRATEGIES IN INDIA:

Plan strategy refers to the methods used in formulating a development plan or
general methods or policies used for achieving specified objectives.
1. The first five year plan was started in the year 1951.Its aim was to solve the food
problem. It was an agrarian plan.
2. The second plan aimed to develop basic and heavy industries and thereby to
promote rapid economic development.
3. The third plan gave more attention to the development of agriculture.
4. The fourth plan strategy was development with stability.
5. The fifth plan was fast rural development.
6. The sixth plan was structural transformation of the economy so as to achieve a
high and sustained rate of growth.
7. The seventh plan strategy was elimination of poverty and creation of employment
opportunities.
8. The eighth five year plan was a transition towards greater market orientation under
the new economic policy of liberalization, privatization and globalization of the Indian
economy.
9. In the ninth plan strategy, importance was given to agriculture and rural
development with a view to generate productive employment and eradicate poverty.

THE EXIM POLICY

Economic environment refers to all those economic factors which have a bearing
on the functioning of business. The importance of economic environment is reinforced by
the fact that more and more economists are finding place in industrial establishments. It is
rightly said, business is one unit of the total economy.
It is difficult to be precise about the factors that constitute the economic
environment of a country but we can try to list a few. We do not restrict ourselves to
microeconomics but we also include macro-economic factors which have a considerable
effect on business. Such factors are:
(a) Growth strategy,
(b) Economic system,
(c) Economic planning,
(d) Industry,
(e) Agriculture,
(f) Infrastructure,
(g) Financial and fiscal sectors,
(h) Removal of regional imbalances,
(i) Price and distribution controls,
(j) Economic reforms,
(k) Population, and
(l) Percapita and national income.
EXIM policy 2002-2007
In exercise of the powers conferred under Section 5 of The Foreign Trade (Development
and Regulation Act), 1992 (No. 22 of 1992), the Central Government hereby notifies the
Export and Import Policy for the period 2002-2007. This Policy shall come into force
with effect from 1st April, 2002 and shall remain in force upto 31st March, 2007 and will
be co-terminus with the Tenth Five Year Plan (2002-2007).

Now lets check in detail the effect on each and every economic factor on the EXIM policy:

(a) Growth strategy: the economic environment as it is now in our country is the
result of the economic growth strategy relentlessly pursued during the past four
decades by the government of India. It creates five year plans for economic
growth, something similar has been seen in the EXIM policy - Murasoli Maran,
Union Minister of Commerce & industry, on Sunday unveiled the first Five-Year
Export & Import (Exim) Policy of the new millennium for the period 2002-2007
containing a comprehensive package intended to give a massive thrust to India's
exports. Announcing the Policy which removes all quantitative restrictions on
exports at a news conference here, Maran said that the new Policy was
comprehensive in scope as it encompassed the agricultural sector, cottage &
handicrafts and the small scale sectors, thus taking care of more than 80% of
Indias population living in the rural areas which would also benefit a wide-range
of the countrys population and give an additional fillip to the countrys exports.
Outlining the broad approach of the new Exim Policy in what he called a Mission
Statement, Maran stressed the need for taking radical steps, away from "a
business as usual approach" and said that the Policy was geared towards doubling
Indias present exports of $46 billion to more than $ 80 billion over the Tenth
Five Year Plan by 2007, envisaging a compound annual growth rate of 11.9% in
exports.

(b) Basic Economic System: there are three distinct economic systems, viz.
capitalism, socialism, communism. Each economy has its own strength and
weakness. Socialism comes somewhere between communism and capitalism and
is hence called mixed economy like ours. It resembles the concept of co-existence
of private enterprises along with public policy. When it comes to EXIM policy
socialism comes as follows - The Export-Import Bank of India (Exim Bank) is a
public sector financial institution created by an Act of Parliament, the Export-
import Bank of India Act, 1981. The business of Exim Bank is to finance Indian
exports that lead to continuity of foreign exchange for India. The Bank's primary
objective is to develop commercially viable relationships with a target set of
externally oriented companies by offering them a comprehensive range of
products and services, aimed at enhancing their internationalisation efforts. Thus
here we see that there is an existence of a give and take relationship between the
public and the private sectors due to EXIM.

(c) Economic Planning: a mixed economy is necessarily a planned economy. The

government should prepare and implement a comprehensive economic plan
 integrating the private sector with the public sector. In exercise of the powers
conferred under Section 5 of The Foreign Trade (Development and Regulation
Act), 1992 (No. 22 of 1992), the Central Government notified the Export and
Import Policy for the period 2002-2007. This Policy came into force with effect
from 1st April 2002 and shall remain in force upto 31st March 2007 and will be
co-terminus with the Tenth Five Year Plan (2002-2007). This plan has the
following objectives
(i) To facilitate sustained growth in exports to attain a share of atleast 1% of
global merchandise trade.

(ii) To stimulate sustained economic growth by providing access to essential

raw materials, intermediates, components, consumables and capital
goods required for augmenting production and providing services.

(iii) To enhance the technological strength and efficiency of Indian

agriculture, industry and services, thereby improving their competitive
strength while generating new employment opportunities, and to
encourage the attainment of internationally accepted standards of quality.

(iv) To provide consumers with good quality goods and services at

internationally competitive prices while at the same time creating a level
playing field for the domestic producers.

(d) Industries: the aspects covered here are industrial policy, industrial licensing,
regulation of trade practices harmful to public interest, regulation of foreign
exchange, regulation of companies, industrial labour, public enterprises, SSI
sector, industrial sickness, privatization, etc. With EXIM one of the principal
objectives is to enhance the technological strength and efficiency of Indian
agriculture, industry and services, thereby improving their competitive strength
while generating new employment opportunities, and to encourage the attainment
of internationally accepted standards of quality. It also says that every exporter or
importer shall comply with the provisions of the Foreign Trade (Development and
Regulation) Act, 1992. Duty free import facility for service sector having a
minimum foreign exchange earning of Rs.10 lakhs. The duty free entitlement shall
be 10% of the average foreign exchange earned in the preceding three licensing
years. However, for hotels, the same shall be 5% of the average foreign exchange
earned in the preceding three licensing years. For revival of sick units, extension of
export obligation period to be allowed to such units based on BIFR rehabilitation
schemes.

(e) Agriculture: about 30% of our GDP comes from agriculture alone. Agriculture is
the backbone of any countrys economic development & is a major source of
livelihood fro the peopled. With EXIM - The Policy gives a major thrust to
agricultural exports from India by removing export restrictions like registration
requirement, minimum export price or the requirement of export through the state
trading regime on whole and infant milk food, butter, wheat & wheat products,
coarse grains, groundnut oil, and on cashew exports to Russia under Rupee Debt
 Repayment Scheme. Export restrictions on non-basmati rice, pulses, grain and
flour of barley, maize, bajra, ragi and jowar have already been removed on 5th
March 2002. Further, transport assistance will be made available for export of
fresh and processed fruits, vegetables, floriculture, poultry, dairy products and
products of wheat & rice. This will also lead to diversification of agriculture
activity. Further, it is also proposed to work out suitable Transport Assistance for
export of accumulated stocks of rice and wheat from FCI (Food Corporation of
India) to facilitate their liquidation, Shri Maran announced. The Minister said that
the government would, in consultation with the state governments, catalyse the
development of necessary infrastructure, flow of credit and other facilities for
promoting agro-products, adding that 20 Agri-Export Zones had already been
sanctioned. Corporate sector with proven credential will be encouraged to sponsor
Agri Export Zone for boosting agro exports. The corporates to provide services
such as provision of pre/post harvest treatment and operations, plant protection,
processing, packaging, storage and related R&D.

(f) Infrastructure: infrastructural facilities are also called the social overheads and
belong to the core sector of the economy. Infrastructure includes energy, transport,
communications, etc. one of the objectives of this policy calls for Upgradation of
infrastructure in existing clusters/industrial locations under the Department of
Industrial Policy & Promotion (DIPP) scheme to increase overall competitiveness
of the export clusters.

(g) Removal of regional imbalances: with EXIM - Foreign bound passengers will now
be allowed to take goods from SEZs to promote trade, tourism and exports. There
are many such other trade practices under EXIM that reduce regional imbalances.

(h) Population: population is the strongest part of an economy, as it constitutes of both

human resources as well as consumers. And in our country there is over population
due to which it becomes a big factor affecting EXIM. Today every consumer wants
quality and timely supply of goods at reasonable prices. With EXIM one of the
main objectives of the policy is to provide consumers with good quality goods and
services at internationally competitive prices while at the same time creating a
level playing field for the domestic producers. Foreign bound passengers will now
be allowed to take goods from SEZs to promote trade, tourism and exports.

Thus we see that all these various factors that constitute the economic environment are
affected the EXIM policy in different ways. All of them have their own unique role in the
plan. Thus we see that is the EXIM policy goes well in hand with the 10th five year plan we
can see a lot of economic growth in our country and at the global level

INDUSTRIAL SICKNESS
 Industrial sickness is a natural concomitant of the market economy. In the U K
over 10000 units fall sick every year. In the U S A the figure is much higher. In our
country, the problem of sickness is serious and likely to grow worse in the years to come.
The usage Industrial sickness came into being during 1970s when large units were
facing closure in West Bengal.

DEFINITION
Definition of a sick unit is given by Sick Industrial companies act, 1985. According to the
act The sick industrial company is a company which has at the end of any financial year
accumulated losses equal to or excluding its entire net worth and has also suffered cash
losses in that financial year and in the financial year immediately preceding it.

EXTENT OF SICKNESS
Industrial sickness is growing at an annual rate of about 28% and 13% respectively in
terms of number of units and out standing number of bank credit. It is reckoned that as of
today there are more than 2 lakhs sick units with an outstanding bank credit of over
Rs7000crore nearly 29000 units are added to sick list every year. Almost every 3 rd or 4th
SSI unit and every 10th unit in the medium and large sectors is sick or dying

CAUSES OF SICKNESS
Causes of industrial sickness can be classified into two categories
a) Internal
b) External

Internal factors mainly relate to the poor quality of top management poor quality of top
management may take one of the several forms:- excessive conservatism, excessive
complacency, growth-mania, poor financial control etc.

External Causes can be further classified into:

1. Industry specific factors
2. Government related factors
3. Financial institutions related factors
4. Others

1. INDUSTRY SPECIFIC FACTORS: These relate to stagnation or recession in the

industry (e.g.: the textile industry), competition faced by the unit (e.g.: small units, rayon
grade, pulp unit )
And excess capacity in the industry (e.g.: the type of industry)

Entry of MNCs and strict quality and hygiene specifications prescribed and enforced
by them has contributed to the sickness of several firms, particularly in the SSI sector.
2. GOVERNMENT RELATED FACTOR: These include tax burden on the unit ,
especially import duties and sales tax ; legal restrictions on the units ;
expansion/diversification ; frequent changes in government policies effecting the unit ;
liberal imports that compete with the units products ; the government or its agencies
going back on its promises made to the unit ; poor law and order situation etc

3. FINANCIAL INSTITUTIONS RELATED FACTORS: These include harshness in

dealing with the unit; delay in providing finance to the unit; inadequate working and / or
long term capital provided by them and their inexpert assessment of the clients finance
proposal

4. OTHERS: Other external factors include customer resistance to the units products;
erratic availability of raw materials / components to the units e.g.; paper and sugar
industries; inadequate transport facilities available to the unit (e.g.: for transporting coal),
etc

SIGNALS OF SICKNESS
The following actions of the unit indicate that the unit is sick or going to be sick:
Continuous irregularity in cash credit accounts ;
Low capacity utilization;
profit fluctuations, downward sales and fall in profits followed by contraction in
the share market;
failure to pay statutory liabilities;
larger and longer outstanding in the bills accounts;
non submission of periodical financial data /stock statement etc. in time;
financing capital expenditure out of funds provided for working capital purposes;
rapid turn over of key personnel;
existence of large no. of law suits against a company;
rapid expansion and too much diversification within a short time;
Any major change in the share holdings.

EFFECT OF SICKNESS
Impact of sickness is very easy to guess. Firstly Industrial Sickness contributes to high
cost economy. This in turn, will affect the competitiveness of the economy at home and
abroad. Secondly dead investment is a burden on both banks and budgets and ultimately
consumers should pay the high cost. Thirdly persistent nature of Industrial Sickness,
especially when policies dont allow flexibility for exit and other forms of adjustment,
not only tends to restrict new employment opportunities but also constrict technological
innovation, thus keeping the employment stagnant. Finally I.S worsens the problem of
stringency of financial resources in the economy. Money locked up in sick units gives no
returns and effects the availability of resources to the other viable units
REMEDIES
Majority of sick units is retrievable in order to tackle the problem of sickness from the
two angles the role of three agencies assumes significance: a) The government b)
Financial institutions and the industry associations

a) THE ROLE OF GOVERNMENT: If the number of units in the country has

increased some 10 times since independence and if we have diversified industrial
structure with wide spread entrepreneurship the credit for this largely belongs to
government.

Penalizing MGMTS that willfully make units sick is the 1st thing that government
should do 2 prevent the Industrial Sickness
Second area where the government can be helpful is Vis--vis industrial licensing.
The very existence of licensing and monopoly regulation legislation implies that there is
a stampede to to get in when ever licensing is liberalized for an industry or an economy
as a whole

b) THE ROLE OF FINANCIAL INSTITUTIONS: The following are the ways by

which sickness can be prevented by financial institutions
a) Continuous monitoring of unit
b) Careful project appraisal
c) Professional institutional response to units problems
d) Required systems at client units
e) Incentives to units to remain healthy

c) THE ROLE OF INDUTRY ASSOCIATIONS : A good practical review by each

industry association of installed and usable capacity in the industry , capacity utilization ,
growth trends , problems etc should be useful 4 the potential new entrants 4 deciding
whether 2 enter the industry or not. The industry can have some sort of 1 st aid cell this
could consist of professionals who could go to the aid of a unit that is beginning to fall
with the offer of managerial and technical help

CURATIVE MEASURES
These measures include how to cure the sickness after it has crept in. There are lots of
agencies which help cure Industrial sickness.

There is Industries (Development and Regulation) Act, 1951, which provides for the
takeover of a sick unit by the Government of India. Before resorting to a takeover, other
alternatives like rehabilitation through the concerned state government and financial
institutions or for the merger of a sick unit with a healthy unit could be explored.

Then there is the Sick Industrial Companies (special provisions) Act, 1985, which was
passed by parliament and received the assent of president in January 1986. It was
amended in December 1991 so as to bring government companies within the preview of
the Act.

Further, there is the Industrial Reconstruction Bank of India (IRBI) which came into
being on March 20th 1985 by converting the erstwhile Industrial Reconstruction
Corporation of India. It provides assistance for reconstructions and rehabilitation of the
sick industrial units by granting those loans and advances, underwriting shares and
debentures etc.

For the sick units in the small scale sector, separate facilities are available. State Finance
Corporations and commercial banks will be asked to devise a scheme for the
rehabilitation of sick units in the small scale sector, and the assistance given by them for
the revival of such units will be eligible for refinancing by the IRBI at the concessional
rate of interest.

INFLATION
Definitions of inflation
1) A rise in the prices of goods and services which occurs when economic demand
exceeds supply. The economy may grow so fast demand for products and services is
greater than the available supply. This situation causes prices to rise. Over time, even
with a relatively low inflation rate, the purchasing power of a dollar is reduced. Things
cost more; your dollar buys less.

2) An increase in the general price level of goods and services; alternatively, a decrease
in purchasing power of the dollar
The increase in the cost of living (prices for goods and services). Inflation is measured as
an annual average by the CPI (Consumer Price Index.)

3) A rise in prices of goods and services, as measured by the Consumer Price Index,
which is based on a "market basket" of about 400 goods and services. Inflation can
decrease the value of money. Therefore, money today is worth less than money
tomorrow.

4)An increase in the cost of goods and services which, in turn, decreases the buying
power of money over time. Inflation is usually measured by the Consumer Price Index
and Product Price Index.
 What Is Inflation?
Simply put, inflation is a situation in the economy where, there is more money chasing
less of goods and services. In other words, it means there is more supply/availability of
money in the economy and there is less of goods and services to buy with that increased
money. Thus goods and services commands a higher price than actual as more people are
willing to pay a higher value to buy the same goods. In this inflationary situation, there is
no real growth in the output of the economy per se. Its simply more money chasing few
goods and services.
Eg: With Rs. 100 you can buy 5kgs of apple when the inflation is say, zero. Now when
the inflation rate is 5%, then you will need Rs. 105 to buy the same quantity of apples.
This is because there is more money chasing the same produce.

What Are The Types Of Inflation?

While there are many types of inflation the prominent ones are:
Modest Inflation (2-3%)
Creeping Inflation (5-!0%)
Running Inflation (Over 10%)

Is Inflation Good For The Economy?

Yes and No. Yes because Inflation helps producers realise better margins. This incites
them to do better and produce more. No because it reduces the buying power of the
consumer in real terms. Inflation always gives rise to inequalities of income because the
poor are hit badly by the price rise. This has further increased. The gap the between the
poor and rich. The value of assets appreciates due to this the rich becomes more rich and
poor becomes poorer.

How Do Governments/Central Banks Control Inflation?

The following are the tactics used to control inflation:
Control the supply of money in the economy; by using monetary policy and fiscal policy,
Encourage measures to increase the productivity in the economy,
Use government borrowing programs to suckout the excess liquidity in the economy,
Use CRR/SLR margin requirements to maintain the required liquidity in the economy
etc.
Changes in the interest rates in the economy to ensure correct liquidity

Issue of money : Central Bank can control the supply of money by controlling the issue
of money.
Bank rate : Bank rate is a ate of interest at which the central bank rediscounts the first
class securities of other banks. Increase in bank rate help in contraction of credit in the
country as it leads to expensive central bank loan to commercial banks.
Open market operation : Bank can control the inflation by controlling the credit by
selling the government securities in open market. When these securities are to be sold in
market, money will come to central bank from circulation. It will also affect the creation
of credit. As the money supply will decline, rise in price can be controlled.
Cash reserve ratio : Cash reserve is that percentage of their deposits which the
commercial banks have to deposit in cash with central bank. Higher the cash reserve
ratio, higher the amount to be kept with central bank and lesser will be the capacity of
commercial banks too create credit. Thus, supply of money will reduce.
Statutory liquidity ratio : Statutory liquidity ratio is the proportion of total assets of
commercial banks to be kept in liquid form with them. Higher the ratio, lesser is the
capacity of commercial banks to create credit and thus supply of money will be reduced.
All these techniques are helpful in reducing the supply of money which will ultimately
help in controlling the inflation.

What Are the Ways of Measuring Inflation?

Consumer Price Index (CPI) This measures the consumer prices of a basket of
commodities in different cities.
Wholesale Price Index (WPI) This measures the different prices of a basket of
commodities in the wholesale markets. The basket is broadly made up of Primary
products, Fuel products, and manufactured products.

Why Do We Need To Know About Inflation?

This is necessary as it tells you what is the real return on your investments and the real
rate of growth in the company/economy.
Eg: If you deposit Rs. 100000 @ 12% p.a., with the annual inflation rate being 5% in the
economy, then the real return on your deposit is 12%(nominal rate) minus 5%(inflation
rate), i.e. 7% p.a.(real rate) This is because after one year when your deposit matures you
will have to pay 5% more for any purchases owing to that being the rate of interest in the
economy for a year.

SMALL SCALE INDUSTRY

DEFIFNTION OF SSI:
In the very expression small scale industry has become outdated and has been discarded
in many countries. In Japan the expression used is small enterprise, in the U.S.A small
business and in the U.K small firm. While it does not matter how a sector is expressed,
it seems more appropriate to call it small enterprise since, in future, it may include all
entrepreneurial activities including services. In India small industry is referred to as
manufacturing activities. But recently the expression has included, to some extent,
servicing activities like repair, maintenance and a few community services.

There are wide variation in the definition of small scale industries in different countries
of the world based on investment, employment and some other criteria. Accordingly,
some countries are defined small scale industries on the basis of investment.

ANCILLARY UNIT
Units having investment in fixed assets in plant and machinery not exceeding Rs. 75
lakhs engaged in the manufacture of parts, components, sub-assemblies, tooling or
intermediates and supplying 30 percent of the production or service to other units.

TINY SECTOR
The industrial policy resolution of 1977 was directed towards removing the distortions of
the past so that the aspirations of the people may be met within a time bound
programmed of economic development .The main thrust was on an effective promotion
of the cottage and small scale industries which are dispersed in rural areas and small
towns. With this end in view a new sector-the tiny sector was created for the first
time .All industries with a capital investment of Rs 2 lakh in plant and machinery and
located in rural areas and small towns are included in the tiny sector so that financial
institutions and other development agencies may give special attention to their rapid
development .It was the objective of the policy to achieve a rapid increase in:

Employment
Productivity
Income of industrial workers

CHARACTERISTICS OF SMALL SCALE INDUSTRIES:-

Although there is no such thing as the typical small industries, they do share many unique
characteristics. Small is a relative term.

1) Capital investment is small.

2) Most have fewer than 10 workers.
3) Generally engaged in the production of light consumer goods, processing etc.

4) Located in rural and semi-urban areas.

5) There is a plethora of one-person firms.
 6) Virtually all of these firms are privately owned and organized as sole
proprietorships.
7) Proprietor and family workers generally form the largest component of small-
industry labour force.
8) Hired worker are unorganized.
9) The average person does not work full-time in one activity over the entire year.
10) Fixed assets form the largest component of small units.
11) Most of the funds come from the entrepreneurs savings.
12) According to the available evidence the small-scale industrial activity has been
growing at a faster rate even than large-scale industries.
13) The incidents of infant mortality are also highest.
14) Very few of small-scale industries have grown up to medium and large
industries.
15) Small-scale industries activity is beehive of entrepreneurship.
16) Most of the small-scale industries, especially chemical units have been
polluting the environment.
17) Exploitation of natural resources is another characteristic of small-scale
industries.
18) Human resources is exploited (child and women in particular) instead of
developing it.
19) Due to various constraints corruption, cheating is a common feature.
20) Small-scale industries are quality conscious.
21) Most of them desire to make huge profit in a short time by hook or crook.
22) Invariably organization and management are very poor and negligible in many
cases.

Scope of small scale industries in selected countries

Country Terminology Scope

Manufacturing ,mining ,servicing,
Japan Small enterprise
trading(wholesale and retail)

India Small scale industries Manufacturing ,repair, and maintains

Manufacturing ,mining, construction

Korea Small enterprise
commerce(limited)
Manufacturing, services ,trading
Canada Small business

Manufacturing commerce,
UK Small firms
construction, mining ,transport

Indonesia Small industry Manufacturing service

CLASSIFICATION OF SMALL-SCALE INDUSTRIES

Small-scale industries are broadly classified into two sectors:

1. Traditional industries: Traditional industries include

a. Khadi and village industries
b. Handlooms
c. Handicrafts
d. Coir
e. Sericulture

2. Modern industries
Modern industries can be further classified into power looms and small scale with power
and without power Small-scale with power and without power includes:-
a. Export oriented
b. Ancillaries
c. Tiny enterprises
d. Small scale service and business enterprises

ADDITIONAL INFORMATION
Small-scale industries occupy a place of strategic importance in Indian economy in view
of its considerable contribution to employment, production and exports. However, since
1991 small-scale industries in India find themselves in an intensely competitive
environment due to globalization, domestic economic liberalization and dilution of sector
specific protective measures. This paper probes the implications of globalization and
domestic economic liberalization for small-scale industries and analyses its growth
performance in terms of units, employment, output and exports. The paper concludes
with policy recommendations to ensure the sustenance and competitive growth of small-
scale industries in India.

In India, the latest definition of a small-scale industry (SSI) is any unit with an upper
limit on investment (in plant and machinery) of from Rs. 0.20 million to Rs. 0.35 million
in the case of SSI and Rs. 0.45 million in the case of ancillary units. What is called the
village and small industries (VSI) sector comprises both traditional and modern small
industries; it is constituted by eight specific groups viz. Handloom, Handicrafts, Coir,
Sericulture, Khadi, Village Industries, Small-Scale Industries and Power looms. The last
two items constitute the modern group of industries, the others being traditional.

Key Problems
The impressive recent growth of village and small industries recorded above suggests a
healthy sector. This is in general true but a number of problems continue to face the
sector. An important one is that the interdependence of the different strata of industry
(large, medium and small) has not been fully realized. Thus, for example, schemes for
making VSI ancillaries of large industries have not spread as widely as had been hoped
for. The second problem is that many VSI are technologically obsolete and this has
restrained their growth. They are also undercapitalized, use outmoded equipment and
exhibit low productivity and high production costs.

Wood products in the Indian SSI sector in 1983.

Industry Group Percentage of

Number of Units Employment Investment

Wood Products 9.0 6.7 5.7

Leather and Leather
9.9 4.1 2.3
Products
Metal Products 9.7 9.0 7.6

Food Products 17.9 18.6 21.7

Some specialization exists in types of lending: the commercial banks provide the bulk of
short-term advances to SSI units and the state finance corporations provide long-term
loans. Both types of finance are made available at relatively low rates of interest for the
SSI sector, the present schedule being as under:

Type of loan (%) Rate of interest

Composite loans up to Rs. 25,000
i) Backward areas 10.0
ii) Other areas 12.0
Short-term advances
i) Up to Rs. 0.2 million 14.0
ii) Over Rs. 0.2 million to Rs. 2.5 million 16.5
iii) Above Rs. 2.5 million 18.0
Term loans
i) Backward areas 12.5
ii) Other areas 13.5
 List of forest-based products reserved for exclusive production by the
SSI sector

Seats for buses and trucks Wooden storage cupboards

Wooden truck bodies Shelves and racks
Wooden crates Wood-wool
Tea chest plywood Hockey stocks
Seasoned wood Wooden flooring tiles
Wooden sewing machine covers Wooden boats
Cable drums Natural oils of cashew shell, sandal
wood, pine, eucalyptus

Tent poles Turpentine

Wooden plugs Wooden furniture and fixtures
Wooden or bamboo handles

Teak blocks

List of forest-based items which can only be purchased by government

from the SSI sector

Wooden items Other

- Crates - Cane baskets
- Tool handles - Bamboo cool handles
- Hand drawn carts - Brooms
- Teak Blocks
- Tent poles
- Shelving
- Wood wool
- Plugs
- Ammunition boxes
- Chairs
- Mallets
- Flush doors
- Wooden Pins
- Veneers

Mats and matting (which includes items made from forest materials) can only be
purchased from the handicraft: sector. Wood products in the Indian SSI sector in 1983.