Unit 1

Concept of Business Environment

Business environment may be considered as asset of factors that influence the functioning and
effectiveness of a business. Interacting and transacting with the environment is the basic need of
every business organization. Thus there is a mutual interdependence between business and the
environment.

According to Keith Davis, “Business environment is the aggregate of all conditions, events and
influence that surrounds and affect it”.

Business environment means all of the internal and external factors that affect how the
company functions including employees, customers, management, supply and demand and
business regulations.

Nature of Business Environment:

1. Environment is Inseparable from business: the most essential element of any business is
the environment. No business can function without its environment- legal, political,
social, cultural and economic environment.
2. Environment is Dynamic: it is difficult for any business environment to remain constant
for a long period of time. Thus, environment considered dynamic in nature. The
environmental factors undergo changes according to the tastes and preferences of the
customer.
3. Business lack control over environment: business environment keeps on changing
continuously. Business can influence the internal environment not the external
environment.
4. Internal and external factors: there are internal and external factors which influence the
business environment. The factors such as business objective, policies, staff members etc.
Combine to form the internal environment. Whereas, the external environment comprise
of micro and macro factors. The micro factors involve consumers, competitors, suppliers,
society, etc.

Importance of business environment

• First mover advantages: Garb the early opportunity in the market which allow the
enterprise to stay ahead from their competitors. Ex- Maruti Udyog(need of the middle
class people-small car)

• Early warning signal: Its all about environmental awareness. early signal for the
enterprise against upcoming threat. (Maruti proved itself against the new entrant by
tripling its production--- esteem to provide quick customer delivery).
 • Customer focus: facilitates the company to cater the changing tastes and preferences of
the customer. (ex- introduction of HUL – small sachet of shampoo)

• Strategy formulation: environmental analysis- provide various relevant information –

for future plan .(ITC – recognise – scope in travel and tourism- opened new hotel)

• Image building: build company’s positive image in the mind of the customer. Big
Bazzar

Business environment and strategic management

Environment is defined as something external to an individual or organization. From this

angle, business environment refers to all external factors which will influence the activities of
business. However, some experts have used the term “environment” in a broader sense. They
defined business environment as external and internal factors that have direct or indirect
influence on business or business activities. Business environment consists of all the factors
that affect a company’s operations, actions and outcomes. It is comprised of macro
environment and micro environment, the former includes legal and political environment,
social environment, economic environment and technological environment, and the later
includes customers, competitors, stakeholders, suppliers, banks and so on.

• Strategy is a action plan designed to achieve a particular goal. It is the direction and
scope of an organization over the long-term: which achieves advantage for the
organization through its configuration of resources within a changing environment, to
meet the need of markets and to fulfill stakeholder expectation(Johnson G. and Scholes
K.,1999)
• The Characteristics Of Strategy Are:
• (1) It has a long-term direction.
• (2) It defined the scope of an organization’s activities.
• (3) It should match activities with environment.
• (4) It bounded rationality and resources scarcity.
• (5) It has expectation and values.
• (6) It is the basis of company operation, the organization structure and daily operation
policies should all based on the strategy.
• Strategy planning is determined by the external and internal environment, however, it
may be ineffective because the environment can not predict clearly. Therefore, marketers
should obtain new information in the business environment continually and make
strategic planning that can meet the changing conditions(Wall,1995).
• The process of strategy management is: Strategy formulation(at this stage, marketers
should analyze business environment), Strategy implementation, Strategic evaluation.

Classification:
Internal environment:

Environment that has a direct influence on the business is termed as internal environment. The
internal factors which influence the business environment are controllable in nature. Hence, the
factors like physical facilities, and organisation and functional means can be revised and
transformed as per the requirements of the environment.

The internal factors basically include the inner strengths and weaknesses. Internal factors can
affect how a company meets its objectives. Some examples of areas which are typically
considered in internal factors are:

• Financial resources like funding, investment opportunities and sources of income.

• Physical resources like company’s location, equipment, and facilities
• Human resources like employees, target audiences, and volunteers
• Access to natural resources, patents, copyrights, and trademarks
• Current processes like employee programs, software systems, and department
hierarchies

The strategy and decision of internal organization is determined by the following key internal
factors:
Value system: the selection of business, its mission, vision, and objectives, business policies and
practices are all elements of value system in an organisation.

Mission and Vision and objectives: vision is a broader view to define the future prospects of
the business. Vision aids I meeting the objectives of the business organisations.

Management structure and nature: generally, business decisions are persuaded by the
organizational structure. This structure comprises f board of directors, mangers, executives. The
number of members in an organizational structure determines the durations of decision making.

Internal power relationship: the coordination between the levels of organizational structure is
vey important. The three levels,i.e. top, middle, bottom level must have mutual relationship
among them. This helps to organisation t function smoothly.

Human resource: human resource is the key component of any organisation. They define the
strength and weakness of an organisation. The essential requirement of human resource include
skills, quality commitment, sincerity, right attitude.

Company image and brand equity: the internal environment of the enterprise is affected by the
image that it carries in the outside market. The image of the organisation helps in raising capital,
mergers and other alliance etc.

Internal factors affect the business in various ways:

• Organizational and operational
• Operational and administrative procedures.
• This includes disorganized or inaccurate record keeping.
• Interruptions to your supply chain and outdated or faulty IT systems are also factors you
should evaluate.
• If the company does not overcome these, customers might see you as unreliable. You can
also lose all your data.
• Example: on line purchase, or any retail out late, payment through NEFT

Strategic risks
• These affect the firm’s ability to reach the goals in the business plan.
• They could be due to the impacts of changes in technological evolutions or customer
demand.
• These factors could pose as threats as they can alter how customers perceive your
product. Based on these, customers might think a product is overpriced, dull and
outdated.
• Example- Voltas Stabilizer

Innovation
• Business needs innovation in order to keep up with competitors. It is essential to get one
step ahead.
• Innovation could come in the form of marketing. It could also be through promotional
initiatives in the marketing plan, staff training, and welfare.
 • A lack of innovation can pose a serious risk to a growing business.
• Example: Motorola, Nokia, Kodak (failed in communication technology)

Financial
• The financial risks depend on the financial structure of the business.
• It is also dependent on the business transactions and the financial systems. For example,
changes in interest rates or being overly reliant on one customer could affect
business.
• Example: car loan, house loan, study loan etc.

Employee risks
• Employees are vital to business success.
• But, there are risks associated with them.
• For an industry, strike action could lead to a lot of problems.

External environment:

Those factors which are beyond the control of business enterprise are included in external
environment.
• 1. micro environment
• 2. macro environment

Micro factors are closely related to the company.

• Example- the micro environment of a restaurant can be its customers, other restaurants,
suppliers of raw material, human resources etc.

Suppliers: suppliers are those who supply raw materials components and machines to the
business enterprise. The suppliers are an important micro factor in the business environment.
They should be trustworthy and cordial with business enterprise. This will help the enterprise to
attain the customer expectation and companies will become free from the burden of keeping
heavy stocks.

Customer: customers are the most important element of the business enterprise. The main aim of
any business is to attract and retain its customers. This helps the business to attain long term
survival and profitability. Therefore, to increase the level of loyal customers, business enterprise
should carefully observe the needs and wants of the customers and fulfil them effectively. The
business enterprises must also analyses the changing tastes and preference of the customers and
make changes in its product and services accordingly.

Marketing Intermediaries:

Intermediaries are those who act as a mediator between the manufacturer and final consumer.
The number of marketing intermediaries varies according to size and type of distribution
network. Market intermediaries are beneficial to the organisation only when there is a proper
coordination between channel without any hurdle.

Competitors: the organisation which manufacture similar products and try to conquer over the
market share are termed as competitors. To earn more profit and stay competitive, the company
needs to monitor the competitor’s activities and then prepare its future plan.

General public: the general public is also an indispensable part of business environment. The
positive and negative responses of the public directly influences company’s image. This can also
affect the sales and revenue of the company.

Macro Environment:

Macro environment prevails outside the business enterprise. If company has to change on the
basis of macro environment, then it has to change many areas like production, marketing,
management.

Macro environment are

1. Economic environment:

It relates to production and distribution of wealth of the country/ region. It also pay
with the word demand and supply of a business of an organisation. It also said that from
financial perspective of a business firm. These also determine the feasibility of a country
or a region for the conduct of a particular business from a financial perspective. The
economic conditions of a country include the nature of the economy, the stage of
development of the economy, economic resources, the level of income, the distribution of
income and assets.
 The purchasing power of consumers and consumer confidence or insecurities strongly
influences and impact the demand for the products and services of an organisation.it is an
important element of the economic environment. In management decisions of all
businesses, the economic environment comes up for prime consideration.

2. Socio-cultural environment:

Socio- cultural environment is a collection of social factors affecting a business and

includes social traditions, values and beliefs, level of literacy and education the ethical
standards and state of society, the extent of social stratification, conflict and cohesiveness
and so forth.
 3. Demographic environment:

It refers to the population that constitutes population size,

• growth rate of population,

• age,
• composition of the population,
• education level,
• caste,
• religion,
• race, income, assets ownership, home ownership, employment status, location.

It is the customer group for the business process.

• Demographic variables are:

• Age and life-cycle stage
• Gender
• Martial status
• Income
• Social classes
• Family size

For example, premium products such as high-end womens' clothing usually appeal to women
with higher incomes. Conversely, people with comparatively lower incomes are more senitive to
price and, therefore, may prefer purchasing discount products. People with lower incomes have
less disposable income. Value is a major determinant in the products they purchase.
Hence, a company may best reach lower-income people through discount retailers and
wholesalers and attract higher-income buyers in specialty retail shops.

Younger people under 35 are often the first consumers to purchase high-tech products like cell
phones, electronic books and video games. Certain buying groups also have more buying power
than others.

For example, there are about 76 million baby boomers in the United States, according to
"Entrepreneur" online.

This is the single largest population segment. Baby Boomers spent $400 billion more than any
other age group, according to a a June 2009 report by "Entrepreneur." Small business owners
have much to gain by selling products to this population.

4. legal Political environment:

5. Technical environment:

Technology is knowledge of methods to perform certain tasks or solve problems

pertaining to product and services.

The basic elements of technology:

• information on product design

• Production techniques
• Quality assurance measures
• Human resource development

Provide opportunities for businesses to adopt new breakthroughs, innovations, and

inventions to cut costs and develop new products. A business producing confectionery
like Cadbury, Schweppes examines SLEPT factors in designing new products.
Technological change is particularly important today, for example, the development of
 new technologies that have enabled variations on chocolate bars to be produced in
an ice cream format.

6. Natural environment:

Here the term is applies to ecological complex, include plants, animals, micro-organism,
minerals, rock, water bodies. The natural environment is the set of living and non-living
things on earth which occur in a state sustainably not influenced by humans. The term is
most often applied to an ecological complex, which includes all of the plants; animal;
microorganism; abiotic factors such mineral; rocks and magma; water bodies and atmosphere
layers. There are extremely complex interaction between the living organisms and abiotic
elements as well as meteorological influences

Components of natural environment are:

• Land resources: of all natural resources, land is certainly the important. Man and
other living beings use it for their habitation.
• Water resources: water is a prime natural resource. It is required for satisfying one
of the basic needs of humans. Thus, water has become a precious national asset.
• Forest resources: forests occupy an important place among natural resources of a
country.
• Mineral resources: availability of mineral has a unique distinction of influencing the
course of economic development of a country.

Social responsibility of business

The social responsibility of business means various obligations or responsibilities or duties that a
business-organization has towards the society within which it exists and operates from.

Generally, the social responsibility of business comprises of certain duties towards entities,
which are depicted and listed below.
  Shareholders or investors who contribute funds for business.
 Employees and others that make up its personnel.
 Consumers or customers who consumes and/or uses its outputs (products and/or
services).
 Government and local administrative bodies that regulate its commercial activities in
their jurisdictions.
 Members of a local community who are either directly or indirectly influenced by its
activities in their area.
 Surrounding environment of a location from it operates.
 The general public that makes up a big part of society.

The social responsibility of business comprises of the following obligations:

 A business must give a proper dividend to its shareholders or investors.

 It must provide fair wages and salaries with good working conditions.
 It must provide a regular supply of good quality goods and/or services to its
consumers/customers at reasonable prices.
 It must abide by all government rules and regulations, supports its business-related
policies and should pay fair taxes without keeping any delays or dues.
 It must also contribute in betterment of a local community by doing generous activities
like building schools, colleges, hospitals, etc.
 It must take immense care to see that its activities neither directly nor indirectly create a
havoc on the vitality of its surrounding environment.
 It should maintain a stringent policy to curb or control pollution in regard to
contamination of air, water, land, sound and radiation leakages. Here, to do so, it must
hire experienced professional individuals who are experts in their respective fields.
  It should also offer social-welfare services to the general public.

The core objectives of social responsibility of business are as follows:

 It is a concept that implies a business must operate (function) with a firm mindset to
protect and promote the interest and welfare of society.
 Profit (earned through any means) must not be its only highest objective else
contributions made for betterment and progress of a society must also be given a prime
importance.
 It must honestly fulfill its social responsibilities in regard to the welfare of society in
which it operates and whose resources & infrastructures it makes use of to earn huge
profits.
 It should never neglect (avoid) its responsibilities towards society in which it flourishes.

Consumerism

Consumerism is a cultural model that promotes the aquisition of goods, and especially the
purchase of goods, as a vehicle for personal satisfaction and economic
stimulation. Consumerism is often confused with capitalism but the latter is an economic
system, while the former is a pervasive cultural attitude.

Unit 2

Economic roles of government

In modern times, State participation in economic activity can hardly be a matter of disagreement.

The free play of economic forces, even in highly developed capitalist countries, has often meant
large unemployment and instability of the economic system.

In the advanced countries, State intervention has been invoked to ensure economic stability and
full employment of resources. State action is all the more inevitable in under-developed
economies which are struggling hard to get rid of poverty and to attain higher living standards.

Accordingly, Governments are playing a vital role in the development of under-developed

economies.

Their role is all the more remarkable in the following respects:

(i) Comprehensive Planning:
In an under-developed economy, there is a circular constellation of forces tending to act and
react upon one another in such a way as to keep a poor country in a stationary state of under-
development equilibrium. The vicious circle of under-developed equilibrium can be broken only
by a comprehensive government planning of the process of economic development. Planning
Commissions have been set up and institutional framework built up.

(ii) Institution of Controls:

A high rate of investment and growth of output cannot be attained, in an under-developed
country, simply as a result of the functioning of the market forces. The operation of these forces
is hindered by the existence of economic rigidities and structural disequilibria. Economic
development is not a spontaneous or automatic affair.

On the contrary, it is evident that there are automatic forces within the system tending to keep it
moored to a low level. Thus, if an underdeveloped country does not wish to remain caught up in
a vicious circle, the Government must interfere with the market forces to break that circle. That
is why various controls have been instituted, e.g., price control, exchange control, control of
capital issues, industrial licensing.

(iii) Social and Economic Overheads:

In the initial phase, the process of development, in an under-developed country, is held up
primarily by the lack of basic social and economic overheads such as schools, technical
institutions and research institutes, hospitals and railways, roads, ports, harbours and bridges, etc.
To provide them requires very large investments.

Such investments will lead to the creation of external economies, which in their turn will provide
incentives to the development of private enterprise in the field of industry as well as of
agriculture. The Governments, therefore, go all out inbuilding up the infrastructure of the
economy for initiating the process of economic growth.

Private enterprise will not undertake investments in social overheads. The reason is that the
returns from them in the form of an increase in the supply of technical skills and higher standards
of education and health can be realised only over a long period. Besides, these returns will accrue
to the whole society rather than to those entrepreneurs who incur the necessary large expenditure
on the creation of such costly social over-heads.

Therefore, investment in them is not profitable from the standpoint of the private entrepreneurs,
howsoever productive it may be from the broader interest of the society. This indicates the need
for direct participation of the government by way of investment in social overheads, so that the
rate of development is quickened.
Investments in economic overheads require huge outlays of capital which are usually beyond the
capacity of private enterprise. Besides, the returns from such investments are quite uncertain and
take very long to accrue. Private enterprise is generally interested in quick returns and will be
seldom prepared to wait so long.

Nor can private enterprise easily mobilize resources for building up all these overheads. The
State is in a far better position to find the necessary resources through taxation borrowing and
deficit-financing sources not open to private enterprise. Hence, private enterprise lacks the
capacity to undertake large-scale and comprehensive development.

Not only that, it also lacks the necessary approach to development.

Hence, it becomes the duty of the government to build up the necessary infrastructure.

(iv) Institutional and Organisational Reforms:

It is felt that outmoded social institutions and defective organisation stand in the way of
economic progress. The Government, therefore, sets out to introduce institutional and
organisational reforms. We may mention here abolition of zamindari, imposition of ceiling on
land holdings, tenancy reforms, introduction of co-operative farming, nationalisation of
insurance and banks reform of managing agency system and other reforms introduced in India
since planning was started.

(v) Setting up Financial Institutions:

In order to cope with the growing requirements for finance, special institutions are set up for
providing agricultural, industrial and export finance. For instance, Industrial Finance
Corporation, Industrial Development Bank and Agricultural Refinance and Development
Corporation have been set up in India in recent years to provide the necessary financial-
resources.

(vi)Public Undertakings:
In order to fill up important gaps in the industrial structure of the country and to start industries
of strategic importance, Government actively enters business and launches big enterprises, e.g.,
huge steel plants, machine-making plants, heavy electrical work and heavy engineering works
have been set up in India.
(vii) Economic Planning:
The role of government in development is further highlighted by the fact that under-developed
countries suffer from a serious deficiency of all types of resources and skills, while the need for
them is so great. Under such circumstances, what is needed is a wise and efficient allocation of
limited resources. This can only be done by the State. It can be done through central planning
according to a scheme of priorities well suited to the country’s conditions and need.

FISCAL AND MONETARY POLICY

Monetary Policy

• Monetary policy is the process by which monetary authority of a country, generally a

central bank controls the supply of money in the economy by exercising its control over
interest rates in order to maintain price stability and achieve high economic growth. In
other words, Monetary policy is the management of money supply and interest rates by
central banks to control prices and employment. In India, the central monetary authority
is the RBI.

• Objectives of Monetary policy

• Financial stability

• Price stability

• Control inflation

Instruments of Monetary Policy

• To achieve the objectives of monetary policy, the central bank has at its disposal
quantitative and the qualitative measures of monetary policy.

• While the quantitative measures control the total volume of credit and the cost of credit in
the economy, the qualitative measures control the direction and distribution of credit in
the economy.

Quantitative Measures of Monetary Policy

• Open Market Operations: Open market operation refers to the purchase and sale of
Government securities by the Central bank in open market. In order to correct the excess
demand or inflation, the central bank sells securities to the commercial banks and general
public.

• Variable cash reserve ratio: According to the law, each commercial bank has to keep a
part of its deposits with the central bank is a ratio known as the cash reserve ratio (CRR).
 Central bank can increase or decrease this ratio; therefore, it is known as the variable cash
this ratio. It is very powerful instrument of credit control. CRR is set according to the
guidelines of the central bank of a country.

• The Statutory Liquidity Requirement: The word statutory here means that it is a legal
requirement and liquid asset means assets in the form of cash, gold and approved
securities (government securities). The RBI Act instructs that all commercial banks (and
some other specified institutions) in the country have to keep a given proportion of their
demand and time deposits as liquid assets in their own vault. This is called statutory
liquidity ratio.

• Bank Rate Policy: Bank rate is the rate charged by the central bank for lending money to
commercial banks for meeting shortfall for a long period without selling or buying any
security. This rate influence lending rate of commercial banks.

• Repo (Repurchase) Rate and Reverse Repo (Repurchase) Rate:

• It is the rate at which the central bank buys securities from commercial banks. It is
actually a repurchase agreement. Repo rate is the rate at which the central bank lends
money to commercial banks.
• Reverse repo is the exact opposite of repo. In a reverse repo transaction, banks purchase
government securities from RBI and lend money to the banking regulator, thus earning
interest. Reverse repo rate is the rate at which RBI borrows money from banks.

Qualitative or Selective Measures of Monetary Policy

• The qualitative measures do not regulate the total amount of credit created by the
commercial banks. These measures make distinction between good credit and bad credit
and regulate only such credit, which creates economic instability. Therefore, qualitative
measures are known as the selective measures of credit control.
• Prescription of margins requirements: Generally, commercial banks give loan against
‘stocks or ‘securities’. While giving loans against stocks or securities they keep margin.
Margin is the difference between the market value of a security and its maximum loan
value. If central bank feels that prices of some goods are rising due to the speculative
activities of businessmen and traders of such goods, it wants to discourage the flow of
credit to such speculative activities. Therefore, it increases the margin requirement
• Consumer credit regulations:
• Now-a-days, most of the consumer durables like T.V., Refrigerator, Motorcar, etc. are
available on installment basis financed through bank credit. Such credit made available
by commercial banks for the purchase of consumer durables is known as consumer credit.
• If there is excess demand for certain consumer durables leading to their high prices,
central bank can reduce consumer credit. On the other hand, if there is deficient demand
 for certain specific commodities causing deflationary situation, central bank can increase
consumer credit
• Moral Suasion : Moral suasion means persuasion and request. To arrest inflationary
situation central bank persuades and request the commercial banks to refrain from giving
loans for speculative and non-essential purposes. On the other hand, to counteract
deflation central bank persuades the commercial banks to extend credit for different
purposes. This is a combination of persuasion and pressures which a central bank asserts
to bring the erring banks in line so that they function in accordance with the central
bank’s directives.
• Direct Action:

• This method is adopted when a commercial bank does not co-operate the
central bank in achieving its desirable objectives. Direct action may take
any of the following forms:

• Central banks may charge a penal rate of interest over and above the bank
rate upon the defaulting banks;

• Central bank may refuse to rediscount the bills of those banks which are
not following its directives;

• Central bank may refuse to grant further accommodation to those banks

whose borrowings are in excess of their capital and reserves.

FISCAL POLICY

• Fiscal policy refers to the government’s policy regarding government expenditure,

taxation and public borrowing with the view to achieving certain well-defined
macroeconomic objectives.

• It is the sister strategy to monetary policy through which a central bank influences a
nation's money supply.

Instruments of Fiscal Policy

• To implement fiscal policy, the government has at its behest several instruments.

• Taxation: Taxation is a powerful instrument of fiscal policy in the hands of public

authorities which greatly effect the changes in disposable income, consumption and
investment. An anti- depression tax policy increases disposable income of the individual,
promotes consumption and investment. Obviously, there will be more funds with the
people for consumption and investment purposes at the time of tax reduction.

• This will ultimately result in the increase in spending activities i.e. it will tend to increase
effective demand and reduce the deflationary gap. In this regard, sometimes, it is
 suggested to reduce the rates of commodity taxes like excise duties, sales tax and import
duty. As a result of these tax concessions, consumption is promoted. An anti-inflationary
tax policy, on the contrary, must be directed to plug the inflationary gap.

• Government Expenditure: It was realized that government expenditure is imperative for

an economy in the form of investments in capital goods industries, building the
infrastructure and payments of wages and salaries.

• During the period of inflation, the basic reason of inflationary pressures is the excessive
aggregate spending. Both private consumption and investment spending are abnormally
high. In these circumstances, public spending policy must aim at reducing the
government spending. In other words, some schemes should be abandoned and others be
postponed.

• In depression, public spending emerges with greater significance. In this period,

deficiency of demand is the result of sluggish private consumption and investment
expenditure. Therefore, it can be met through the additional doses of public expenditure.
The multiplier and acceleration effect of public spending will neutralize the depressing
effect of lower private spending’s and stimulate the path of recovery.

• Public Borrowing: Public borrowing is a sound fiscal weapon to fight against inflation
and deflation. It brings about economic stability and full employment in an economy.
When the government borrows from non-bank public through sale of bonds, money may
flow either out of consumption or saving or private investment or hoarding. If the bond
selling schemes of the government are attractive, the people induce to curtail their
consumption, the borrowings are likely to be non-inflationary. If the government bonds
are purchased by non-bank individuals and institutions by drawing upon their hoarded
money, there will be net addition to the circular flow of spending.

INDUSTRIAL POLICY

Introduction

The Indian Economy Was Facing a Problem of Illiteracy, poverty, low per capita income,
unemployment and industrial backwardness etc at the time of independence. After
attaining independence in 1947 an effort was made to begin the era of planned industrial
development. It causes rules, regulations and policies adopted by the government for
industries. The industrial policy has injected a substantial measure of competitive
environment and market thrust to industry. Many areas earlier reserved for the public
sector are now open to private sector participation. The restrictions on the expansion of
large industrial houses have been removed. Licensing requirements for industries have
been abolished except for a strategic and defence industries. Before going into the details
of regulation of Indian Industries, let us have a look at the successive industrial policies
adopted by the government.

INDUSTRIAL POLICY 1948

The first industrial policy was announced by late Shyama Prasad Mukherjee on 6th
April, 1948. The aim was to accelerate the industrial development. This policy divides
the Indian industries into following four categories:
INDUSTRIAL POLICY 1956

A second industrial policy resolution was adopted in India on April 20, 1956 which
replaced policy resolution of 1948. This policy has following features:
INDUSTRIAL POLICY 1973

The Industrial policy statement of 1973 identified high priority industries where
investment from large industrial houses and foreign companies would be permitted.
FEATURES OF THE POLICY ARE AS FOLLOWS:

1. The industrial policy resolution of 1956 still remained valid, but certain structural
distortions had crept in the system.

2. The new policy was hence directed towards removing these distortions.

3. It provided for a closer interaction between the agricultural and industrial sectors.

4. Highest priority was given to generation and transmission of power.

5. An exhaustive analysis of industrial products was made to identify products which are
capable of being produced in the small sector

6. The list of industries reserved for small scale sector was expanded.

7. Special legislations to protect cottage and household industries was introduced.

8. Compulsory export obligations, merely for ensuring the foreign exchange balance of
the project, would no longer be insisted upon while improving new industrial capacity.

INDUSTRIAL POLICY 1977

In 1977 a new industrial policy was announced by George Fernandez the then union
industry minister in the parliament. The features of this policy are as follows:

1. Target on development of small scale industries:

Main focus of this policy was development of small and tiny industries. The small
scale industries were divided into three parts:
(1) Household and cottage industries for self employment.
(2) Tiny sector investment upto 1 Lakh.
(3) Small scale industries for investment upto 1 to 15 lacs.
2. Large scale sector: The 1977 industrial policy fixes the areas of large scale sector.
The basic role of large scale industries was to fulfil the requirement of public and to
promote agriculture sector. The following areas covered in industrial policy 1977.
(a) Basic industries: infrastructure and development of small scale and village
industries.
(b) Capital goods industries: meeting machinery requirements of cottage industry.
(c) High technology industry: development of agriculture and small scale industries
such as pesticides, fertilizers, petrochemicals.
(d) Other industries: Remaining industries.
3. Big Business Houses: The objective of this policy was to restrict the control of big
business houses. This was to save the general public from monopoly of big business
houses because if they will have the control and monopoly they can exploit the
consumer or general public.
4. Role of public sector: The new policy 1977 has increased the role of public sector
for
(1) Promotion of essential goods for consumer.
(2) Development of ancillary industries
(3) To make available expertise in technology and management in small and cottage
industries.
5. Sick industrial units: The objective of industrial policy 1977 was to revival and
rehabilitation of sick units and for this purpose it also issued certain guidelines.
INDUTRIAL POLICY 1980
The congress government announced the new industrial policy on 23rd of July, 1980.
Features of industrial policy are as follows:
1. Promotion of balanced growth.
2. Extension and simplification of automatic expansion.
3. Taking over industrial sick units.
4. Regulation and control of unauthorised excess production capabilities installed for
industrial houses.
5. Redefining the role of small scale units.
6. Improving the performance of public sector.
7. Promotion of balanced growth.
8. Extension and simplification of automatic expansion.
9. Taking over industrial sick units.
10. Regulation and control of unauthorised excess production capabilities installed
for industrial houses.
11. Redefining the role of small scale units.
12. Improving the performance of public sector.

INDUSTRIAL POLICY 1991

Congress Government then, the Prime Minister of India P.V Narsimhan Rao
announced new industrial policy in July, 1991 and this policy has changed the
economy to large extent. OBJECTIVES OF NEW INDUSTRIAL POLICY:
1. Unshackle the Indian economy from cobweb of bureaucratic control
2. Liberalising the policy regarding FDI.
3. To abolish restriction on FDI.
4. Redefining the role of public sector.
5. Bringing of welfare scheme of Indian industries.
6. Remove restriction imposed by FERA on international trade.
7. To ensure quality standards.
8. Emphasis on research and development capabilities.
9. Abolishing of MRTP act.
10. Improve the productivity of Indian industry.
11. To prepare Indian industry for globally competitive.
12. Integration of Indian industry with the world.
MAJOR INITIATIVES OF NEW INDUSTRIAL POLICY:-
(I) Abolishing Industrial Licensing:- For liberalize the economy , need was felt to
abolishing of industrial licence except 18 industries that require Compulsory
Licensing. There 18 industries were:
1. Coal and Lignite
2. Petroleum
3. Sugar
4. Animals fats and oil
5. Cigars and Cigarettes of tobacco and manufactured tobacco substitutes
6. Motor cars
7. Paper & Newsprint
8. Defence equipment
9. Hazardous chemicals
10. Drugs & Pharmaceuticals
11. Entertainment Electronics (VCR,DVD, Tape recorders)
12. White goods (Domestic Refrigerator ,Dishwashing Machines Etc)
13. Tanned or Dressed Fur skins
14. Asbestos and its based products
15. Distillation and brewing of Alcoholic drinks
16. Raw hides & skin , Leather
17. Industrial explosives
18. Plywood and others wood based products

With the passage of time this has been reduced to 14, then to 9 and later to 8 and now
5 industries require Compulsory licensing are as follows:-
1. Distillation and brewing of alcoholic drinks
2. Cigars and Cigarettes of tobacco and manufactured tobacco substitutes
3. Hazardous chemicals ,Drugs and Pharmaceuticals
4. Electronics aerospace and Defence equipment
5.Industrial explosives – including detonating fuses, safety fuses, gunpowder,
nitrocellulose and matches.
(2) Role of public sector: Inspite of huge investment public sector was not
performing good so, need was felt to redefine the role of public sector. The number
of industries reserved for public sector reduced from 17 to 8 and then further to 6.
 These six industries are as follows:-
a) Defence products
b) Mineral oil
c) Atomic Energy
d) Railway transport
e) Coal and lignite
f) Mineral
(3) Foreign Investment: Earlier it was necessary for every industry to take the prior
approval of government which led to unnecessary delay and sometime due to
frustration foreign investors do not invest to promote export of Indian goods in the
world market unconditional approval was given under new industrial policy 1981 for
FDI upto 51 % in high priority industries.
(4) MRTP Act: New industrial policy 1991 removed the threshold limit of assets in
respect of MRTP companies this eliminates the company for prior approval of central
government for expansion, establishment of new industries undertaking ,merger etc.
(5) Foreign technology: (i) Automatic permission for foreign technology agreement
in high priorities industries up to 1 crore 5% royalty for domestic sales 8% for export
(ii) No permission for hiring of foreign technicians.
(6) Convertibility of Rupee: The new industrial Policy of the year 1991 has given the
privileges to the industrial regarding import of raw material and technology. The new
policy has introduced the rupee convertibility on current account as well as on capital
account. The government made the current account fully convertible, while under the
capital account the repayment of loan and deprecation of assets has been made
convertible. Further, under the previous provisions the financial institution extending
loans to industrial houses had an option to convert their 20% loans into equity it was
a major threat to the industrialist in posting threat to their positions. Under the new
industrial policy such as compulsory clause of conversion of loans in to equity has
also been abolished.
(7) Reservation for Small Scale Industries: In the year 2006, small scale units were
defined as a unit having investment of 5 cr. In Plant and machinery .In oct 2008, 21
items were reserved for manufacturing in small scale industries.
(8) Encouragement to Industries in Backward Areas: Government has taken various
measures to encourage the industries in backward areas. Various incentives will be
offered by govt to industries in the backward region for reducing regional disparities.
(9) Freedom from Administrative Control: Expansion programmes launched by
government are exempted from administrative controls and already existing units
will be free to produce any commodity on the basis of the licensed already issued.

Privatization
 • Privatisation refers to giving greater role to private sector and reducing the role of public
sector. To execute policy of privatisation government took the following steps:
(a) Disinvestment of public sector. i.e., transfer of public sector enterprise to private sector.
(b) Setting up of Board of Industrial and Financial Reconstruction (BIFR). This
board was set up to revive sick units in public sector enterprises suffering loss.
(c) Dilution of Stake of the Government. If in the process of disinvestments private
sector acquires more than 51% shares then it results in transfer of ownership and
management to the private sector.
• (d) Minimisation of Public Sector: Number of industries reserved for public sector
was reduces from 17 to 3.
• Transport and railway
• Mining of atomic minerals
• Atomic energy

Industrial Sickness

Industrial sickness is defined all over the world as "an industrial company (being a company
registered for not less than five years) which has, at the end of any financial year, accumulated
losses equal to, or exceeding, its entire net worth and has also suffered cash losses in such
financial year and the financial year immediately preceding such financial year".

Industrial Sickness In India

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
lakhs 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 crores 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.
Causes of sickness in small scale industry
Internal causes for sickness
We can say pertaining to the factors which are within the control of management. This sickness
arises due to internal disorder in the areas justified as following:
a) Lack of Finance: This including weak equity base, poor utilization of assets,
inefficient working capital management, absence of costing & pricing, absence of planning and
budgeting and inappropriate utilization or diversion of funds.
b) Bad Production Policies : Another very important reason for sickness is wrong selection of
site which is related to production, inappropriate plant & machinery, bad maintenance of Plant &
Machinery, lack of quality control, lack of standard research & development and so on.
c) Marketing and Sickness : This is another part which always affects the health of any sector as
well as SSI. This including wrong demand forecasting, selection of inappropriate product mix,
absence of product planning, wrong market research methods, and bad sales promotions.
d) Inappropriate Personnel Management: Another internal reason for the sickness of SSIs is
inappropriate personnel management policies which includes bad wages and salary
administration, bad labour relations, lack of behavioural approach causes dissatisfaction among
the employees and workers.
e) Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective or
bad corporate management which includes improper corporate planning, lack of integrity in top
management, lack of coordination and control etc.
External causes for sickness
a) Personnel Constraint: The first for most important reason for the sickness of small scale
industries are non availability of skilled labour or manpower wages disparity in similar industry
and general labour invested in the area.
b) Marketing Constraints: The second cause for the sickness is related to marketing. The sickness
arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in
global marketing scenario, excessive tax policies by govt. and market recession.
c) Production Constraints: This is another reason for the sickness which comes under external
cause of sickness. This arises due to shortage of raw material, shortage of power, fuel and high
prices, import-export restrictions.
d) Finance Constraints: Another external cause for the sickness of SSIs is lack of finance. This
arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable
investments, fear of nationalization.
e) credit squeeze initiated by the government policies.
Unit 3
MRTP Act
Liberalization:

• Liberalization refers to end of licence, quota and many more restrictions and controls
which were put on industries before 1991.

• Indian companies got liberalization in the following way:

• (a) Abolition of licence except in few.

• (b) No restriction on expansion or contraction of business activities.

• (c) Freedom in fixing prices.

• (d) Liberalization in import and export.

• (e) Easy and simplifying the procedure to attract foreign capital in India.

• (f) Freedom in movement of goods and services

• Industries licensing is necessary for following industries:

• (i) Liquor
 • (ii) Cigarette

• (iii) Defence equipment

• (iv) Industrial explosives

• (v) Drugs

• (vi) Hazardous chemicals.

Globalization:

• It refers to integration of various economies of world. Till 1991 Indian government was
following strict policy in regard to import and foreign investment in regard to licensing of
imports, tariff, restrictions, etc. but after new policy government adopted policy of
globalisation by taking following measures:

(i) Liberal Import Policy. Government removed many restrictions from import of capital
goods.

(ii) Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange
Management Act (FEMA)

(iii) (iii) Rationalization of Tariff structure

(iv) (iv) Abolition of Export duty.

(v) (v) Reduction of Import duty.

As a result of globalization physical boundaries and political boundaries remained no

barriers for business enterprise. The Whole world becomes a global village.

Globalisation involves greater interaction and interdependence among the various nations
of global economy.

• Effects of Liberalisation and Globalisation:

• The factors and forces of business environment have lot of influence over the business.
The common influence and impact of such changes in business and industry are
explained below:

• 1. Increasing Competition.

• After the new policy, Indian companies had to face all round competition which means
competition from the internal market and the competition from the MNCs. The
companies which could adopt latest technology and which were having large number of
 resources could only survive and face the competition. Many companies could not face
the competition and had to leave the market.

• 2. More Demanding Customers:

• Prior to new economic policy there were very few industries or production units. As a
result there was shortage of product in every sector. Because of this shortage the market
was producer-oriented, i.e., producers became key persons in the market.

• But after new economic policy many more businessmen joined the production line and
various foreign companies also established their production units in India.

• 3. Rapidly Changing Technological Environment:

• Before or prior to new economic policy there was a small internal competition only. But
after the new economic policy the world class competition started and to stand this global
competition the companies need to adopt the world class technology.

• To adopt and implement the world class technology the investment in R & D department
has to increase. Many pharmaceutical companies increased their investment in R and D
department from 2% to 12% and companies started spending a large amount for training
the employees.

• 4. Necessity for Change:

• Prior to 1991 business enterprises could follow stable policies for a long period of time
but after 1991 the business enterprises have to modify their policies and operations from
time to time.

• 5. Need for Developing Human Resources:

• Before 1991 Indian enterprises were managed by inadequately trained personnel’s. New
market conditions require people with higher competence skill and training. Hence Indian
companies felt the need to develop their human skills.

• 6. Market Orientation:

• Earlier firms were following selling concept, i.e., produce first and then go to market but
now companies follow marketing concept, i.e., planning production on the basis of
market research, need and want of customer.

• 7. Loss of Budgetary Support to Public Sector:

• Prior to 1991 all the losses of Public sector were used to be made good by government by
sanctioning special funds from budgets. But today the public sectors have to survive and
 grow by utilizing their resources efficiently otherwise these enterprises have to face
disinvestment.

• On the whole the policies of Liberalisation, Globalisation and Privatisation have brought
positive impacts on Indian business and industry. They have become more customer
focus and have started giving importance to customer satisfaction.

• 8. Export a Matter of Survival:

• The Indian businessman was facing global competition and the new trade policy made
the external trade very liberal. As a result to earn more foreign exchange many Indian
companies joined the export business and got lot of success in that. Many companies
increased their turnover more than double by starting export division.

• Example, the Reliance Group(RIL), Videocon Group, MRF Tyres, Ceat Tyres, etc. got a
great hold in the export market.