MMPC 03 IGNOU

BUSINESS ENVIRONMENT

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 MMPC 03 Business Environment

Q1- Define Balance of Payments (BoP) and why it is important , components

of balance of payments ? (v v v v v imp)
Ans – The balance of payments (BOP), also known as the balance of international payments, is a
statement of all transactions made between entities in one country and the rest of the world over a
defined period, such as a quarter or a year. It summarizes all transactions that a country's
individuals, companies, and government bodies complete with individuals, companies, and
government bodies outside the country.

The balance of payments (BOP) transactions consist of imports and exports of goods, services, and
capital, as well as transfer payments, such as foreign aid and remittances. A country's balance of
payments and its net international investment position together constitute its international
accounts.

The balance of payments divides transactions into two accounts: the current account and
the capital account. Sometimes the capital account is called the financial account, with a separate,
usually very small, capital account listed separately. The current account includes transactions in
goods, services, investment income, and current transfers.

The Balance of Payments (BoP) for a country can be defined as a systematic record of all the
transactions between the economic units of one country (such as households, firms and the
government) and the rest of the world in any given period of time. This includes all the transaction
records made among the individuals, corporates and the government and helps in keeping the flow
of funds in track, to develop the economy as a whole. Balance of Payments (BoP) is the sole integral
determinant of the health of an economy as well as its 2 relations globally. It portrays the overall
transactions of an economy with the other global economies during a given time period in a
systematic and prudent manner.

IMPORTANCE OF BALANCE OF PAYMENTS (BoP)

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COMPONENTS OF BALANCE OF PAYMENTS (BoP)

The net exports are also termed as the trade balance, which is the net sum of a country’s exports
and imports in goods as well as in services. Trade in services is often said to be invisible as they
cannot be seen to cross national borders. For instance, when a foreign country pays for the
maintenance of its factory in the domestic home (or domestic) country or for the services by a home
resident who is working in that foreign country, then the home country is said to be exporting a
service. Tourism, is one major service export.

The trade balance reflects a surplus (positive) if the value of exports of a country exceeds its imports
while it is said to reflect a deficit (negative) if the value of imports of a country is higher than its
exports. Transfers to and from abroad may be in the form of gifts or remittances that residents of
one country might send (receive) to (from) another country. If the net transfers from abroad is
positive, it means that transfers from residents in abroad are greater than that sent by domestic
residents to abroad. Similarly, the net transfers from abroad is negative, if transfers from foreign
countries are lesser than the transfers to abroad. Net foreign aid received by a country during a
particular period is also a part of transfers.

If the right-hand side of the equation (i) is positive (negative), then the current account is in surplus
(deficit). It must be noted that large transfers from abroad may put the current account in surplus,
even if the net exports is negative. However, to keep things simple, the term “net transfers” will be
ignored in the subsequent analysis and hence, the current account will comprise of net exports or
trade balance only.

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Capital Account

The capital account records all transactions in assets. An asset may include any one of the type in
which wealth can be held, for instance, stocks, bonds, government debt, etc. Purchase of an asset
records a deduction in the capital account. If an Indian is purchasing a US Car company, then it is
recorded as debit in the capital account of India (as the Indian has to pay in dollars which means that
the foreign exchange is going out of India). The 4 sale of assets, for instance, the sale of share of an
Indian company to a US customer is recorded as a surplus in India’s capital account (as sale of assets
to foreign country will bring foreign exchange into the country).

BoP is in surplus (deficit) if both the current and the capital account (combined) has a surplus
(deficit). Thus, a deficit in current (capital) account doesn’t alone lead to a BoP deficit. It has to be
outweighed by a large surplus in the capital (current) account. Thus, it is very important to keep the
basic rule of BoP accounting in mind.

Q2- How politico-legal environment impact various business ? (v v v v v imp)

Ans-Its comes under legal environments

LEGAL ENVIRONMENT- Legal environment of any country deals with rules, regulations,
policies and the law of the land as whole. These laws are made for the protection of consumers,
investors, environment and national interest. For example, there are several organisations like SEBI,
Consumer Commissions or National Green Tribunal (NGT) in India for the enforcement of such laws.
Further, the legal environment of a country also includes taxation laws and annual budgets. The
changes in government policies such as trade policies, industrial policies, fiscal and monetary policies
can have a great effect on the business. For example, by increasing the limits of permissible FDIs in
the retail sector has led to the emergence of global e-commerce companies. While at the same time,
it has been seen as the threat to local vendors with increasing markets for e-commerce.

POLITICAL ENVIRONMENT- A political system is assumed to be having the qualitative

prerequisites such as being stable, honest, efficient and dynamic. Democracy brings in the political
participation of the citizens thereby providing them personal security which in-turn contributes for
growth of any business in a country. In a political system the role of Government as a political
institution is to formulate social policies aimed to deliver on high social benefits at minimum social

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costs. The government thus facilitates business by making decisions and supporting the economic
activity in form of health, infrastructure, education, law and order etc. implemented on different
levels like local, regional, national or international.

The political environment comprises of many political factors which effect the business activities at
various times and impact, like the bureaucracy levels, corruption, freedom of media and press, tariffs
and related measures of trade control, employment regulation, environmental and pollution control
laws, health and social safety laws, Competition regulation and cartelization, Tax policy (tax rates and
incentives), Trade unionism and related laws, consumerism, ecommerce and related laws about the
quality and quantity of the product, Intellectual property law (Copyright, patents etc.). All this is
done based on the ideology of the political party forming the government which attains it by
formulating and executing them under a set of policies and programmes. This is attained through
legislations and enactments, rules and regulations, systems and procedures, policies and plans,
statements and announcements, directives and guidelines by the Government, which is the essence
of the politico-legal environment.

politico-legal environment -Political and legal environment plays an integral role in the
economy. A favourable politico-legal environment is crucial for growth and survival of business.
These factors govern the entry of foreign firms in the domestic market of the country. Government
and allied agencies act as a regulator of foreign companies where government policies are
considered to be gatekeepers. Political ideologies of the ruling party are also important for creating a
favourable business environment. A pro-business ideology will lead to more opportunities for foreign
investment in the country. Likewise, legal environment draws the perimeter of the permissible trade
and commerce activities within the geographical boundaries of a country.

Business organisations are required to operate within the legal framework. Due to the rapid increase
in globalization and flexible FDI policies, several laws are created to protect the interest of domestic
traders in India. Business organisations are required to have full knowledge about the trade laws,
rules and related policies. Moreover, the increasing complexity of legal environment can cause
difficulties in the business operations. Increased concern about the environmental protection and
sustainability has led to creation of environmental protection laws. Failure of implementing these
laws will not only lead to governmental actions but will also effects the image of the business
adversely. Hence, favourable politico-legal environment is necessary for a stable economic growth
and development. Political instability can create social unrest which in turn can hamper local
businesses in the area. For example, roadways, being blocked as protest-sites can hamper the supply
chains.

Current Scenario of Politico-Legal Environment

Boost to Manufacturing- Government has given a boost to manufacturing activities in the country
through ‘Make in India’ campaign. Under this campaign, government created conducive environment
for doing business. In order to boost manufacturing in India, government has set up panels to fast-
track investment proposals, addressing problems in investment process and creating

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an investor-friendly environment in the country. Efforts are being made to make India a
manufacturing hub and crating more employment opportunities for the locals. In the recent times,
several multinational companies have setup production facilities in India.

Changes in Industrial Policies

Several policy changes have been made in the recent past to ease the entry of foreign investments
in the country. Department of Industrial Policy and Promotions (DIPP) has made efforts to make
policies more flexible and simplified including infusing technology into various processes for
effective and efficient governance. For instance, application for industrial licenses has been made
online which has made it more accessible.

Business Reforms

Several reforms are being undertaken at state as well as centre level to make significant
improvements in way business operates in India. The government has introduced various initiatives
to ease doing business in India. India has been placed at 63rd position on World Bank’s Doing
Business 2020. For instance, Government of India has increased the limits of FDIs in insurance and
defense sectors and thereby attracting more foreign capital in the country. This will lead to creation
of employment and overall economic development (“Doing Business in India”, 2020).

Bank Mergers

In the past few years, government has decided to merge certain public sector banks to reduce the
number of nationalized banks and improve the quality of governance. The number of national banks
has been reduced from 27 banks to 12 public sector banks (Singh, 2019).

Infrastructure Development

The current government has taken several steps for the modernization and development of
infrastructure in the country. The focus is not only on the urban cities but several tier I and tier II
cities have also been developed as the part of a scheme named as ‘Smart Cities’. The government
has announced to develop 100 cities as smart cities under which many industrial corridors are to
build. Several other projects in different sectors like green energy, transportation and real estate
have been planned. These planed projects will create future business opportunities and foreign
collaborations

Skill Development Programmes

Indian government launched ‘Skill India’ movement in 2015 with an aim to provide skill based
education to the youth of the country. The programme focussed at imparting vocational training
with a vision to empower workforce suitable for skill-based jobs. For example, ‘SeekhoaurKamao’
was scheme launched for the youth of union territories of Jammu and Kashmir and Ladakh under
which they were trained according to their qualifications and given employment opportunities in the

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state (NSDC, 2017). Such initiatives were planned to reduce the dependency white collar jobs and
encourage skill-based employment.

Q3- Critically compares the pre and past new industrial policies 1991 in India
? (v v v v v imp)

Ans - The Industrial Policy of 1991 opened up India’s economy to the world, in the backdrop of
severe economic crisis. It was this policy which led to an acceleration of economic growth in our
country -

 The public sector, with the exceptions of railways and atomic energy, was opened up for the
private sector.

 Industrial licensing was abolished barring hazardous chemicals industries, defense,

aerospace, industrial explosives, cigarettes, and tobacco.

 Substantial government stakes were sold off from public sector enterprises.

 Foreign Direct investment as allowed.

 Amendment of the Monopolies and Restrictive Trade Practices (MRTP) Act.

There have been certain drawbacks in the Industrial Policies as well. Some of such criticisms include
– stagnation of the manufacturing sector, labour displacement, selective investment flow, and
general lack of incentives for enhancing efficiency, among others. As the economy of India stands
today, there is a greater need for initiatives like Startup India and Make in India.

Industrial development is aimed to achieve economic prosperity and improving the lives of its
people. India left no stone unturned to brace and strengthen its industrial development for which
the quest started after independence in 1947. The initially conceived policy - The Industrial Policy
Resolution of 1948 outlined and defined the role of the State in industrial development both as an
entrepreneur and authority. For a stringent framework and better implementation of the Industrial
Policy, enactment of Industries (Development & Regulation) Act, 1951 (referred as IDR Act) followed.
This also allowed Union Government to direct investment into preferred areas of industrial activity
through the mechanism of licensing and keeping abreast with national development objectives .

STAGES OF INDUSTRIAL POLICY PRIOR TO 1991-

The model of development and growth and the changes with time demands changes in
economic policies and the need to create institutions for successful implementation of polices
and to achieve growth. This means involvement of State is essential.

Industrial Policy and Strategy

From the time of Second Five Years Plan, Industry-led-growth strategy was a adopted and
this strategy was based on the Industrial Policy Resolution (IPR) of 1956.

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The IPR 1956 was commonly referred as the ‘Economic Constitution’ of India which
established a base for cottage and small-scale industries and aimed to enhance their growth.
A classification was made specifying industries into different groups while stating that both
public and private sector was at the same time anticipated to be a part of the course of
industrialisation in India. The demarcations of the industries were based on the following
three schedules:

Industrial Licensing- Industrial Licensing formed the backbone of State policy. The
government initially insisted upon a written permission to an industrial unit allowing
manufacturing of only those goods which were itemized in the permission letter was an
important instrument which allowed the State to ensure that the manufacturing units follow
the set of rules in place. The licence allotted to a manufacturing unit basically specified the
whereabouts of the unit including site of the plant, merchandise to be manufactured, period
within which the industrial capacity is to be established, etc. The key objective behind
licensing was the idea to work in unison or in agreement with the industrial policy. Any
important alterations and modifications in industrial policy would need corresponding
changes in the framework of Industrial Licensing. The legislative framework for industrial

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It was obligatory to take the permission from the Reserve Bank of India to carry out any trade
activity either commercial or industrial in nature. Even the purchase of shares of any
company required permission and this scrutiny was applied to any acquisition of any
undertaking in India.

Phase of Liberalisation
Four decades after independence, the industrial landscape underwent a drastic change. The
industrial policy’s initial approach was to safeguard and protect the Indian industry during the
initial stages of development and economic fluctuations. But this approach did not allow the
industry to expand and adapt. Therefore, far-reaching expansions to the initial idea were
made:

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NEW INDUSTRIAL POLICY 1991
By now when economic imbalances reached precarious levels, it was understood that the
growth strategy pursued earlier was not sustainable as it led to deficit financing. A rise in
Balance of Payments (BoP) deficit cannot be sustained with domestic resources. All these
fluctuations led to a loss of foreign exchange capital and other funds and resources. This was
a call to adapt and modify while adopting measures to adjust budgetary deficits. The new
amendments and sudden changes led to a slowdown of economy. What added to the problem
were resource constraints in the public sector which could not provide the much needed
support for demand creation. Hope for the revival of growth process was undermined due to
the twin deficits - fiscal and BoP deficit.

This required immediate consideration and the government responded with a suitable set of
macro-economic policies along with a new industrial policy. The new industrial policy was
essentially based on the neo-classical paradigm which was designed to push growth and help
restore macro-economic and financial stability
A new set of policy structure and new objectives gave birth to a revised policy and a new
industrial policy was announced on July 24, 1991. The principal objectives of the new
industrial policy (NIP 1991) was to amalgamate the assets and advances gained during the
four decades of economic planning over 1951-91 and ensure that the weaknesses majorly low
productivity with high production costs are paid close attention. The new policy focussed on
improving and maintaining a sustained growth in industrial productivity with ample
employment opportunities. A major area of attention was to achieve international
competitiveness. It was also emphasised that these objectives will keep a check on
sustainability concerns vis-a-vis protection of environment and efficient use of available
resources.

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Q4- What is business ethics ,discuss the importance of business ethics ,
define CSR , benefits of CSR ? (v v v v v imp)

Ans- Business ethics is the study of appropriate business policies and practices regarding
potentially controversial subjects including corporate governance, insider trading, bribery,
discrimination, corporate social responsibility, and fiduciary responsibilities. The law often
guides business ethics, but at other times business ethics provide a basic guideline that businesses
can choose to follow to gain public approval.

BUSINESS ETHICS- Business ethics are a kind of applied ethics. It is the application of moral or ethical
norms to business. The term ethics has its origin from the Greek word ‘ethos’, which means
character or custom- the distinguishing character, sentiment, moral nature, or guiding beliefs of a
person, group, or institution. Ethics are a set of principles or standards of human conduct that
govern the behaviour of individuals or organisations.

Ethics can be defined as the discipline dealing with moral duties and obligations, and explanation
regarding what is good or not good for others and for us. Ethics is the study of moral decisions that
are made by us in the course of performance of our duties. Ethics is the study of characteristics of
morals and it also deals with moral choices that are made in relationship with others. Business ethics
comprises the principles and standards that guide behaviour in the conduct of business. Businesses
must balance their desire to maximize profits against needs of its stakeholders. Maintaining this
balance often requires trade-offs. To address these unique aspects of businesses, rules, articulated
and implicit, are developed to guide the businesses to earn profits without harming individuals or
society as a whole.

Difference between Ethics and Law- While law is obligatory and violation of law attracts penalties
from the justice system, ethics are more voluntary in nature. However, not acting ethically might
lead to violation of laws, as most laws are in one way or the other a codification of ethics. Business
ethics can be said to begin where the law ends. Business ethics is primarily concerned with those
issues not covered by the law, or where there is no definite consensus on whether something is right

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or wrong. Business ethics is about the grey areas of business, where values are in conflict. In such
scenarios, there might not be a definitive ‘right answer’.

IMPORTANCE OF BUSINESS ETHICS- Now, let us understand why Corporate Ethics matter to
business. Ethics matter because ethical conduct is the right conduct. However, in the absence of a
time-culture, and context-neutral definition of ‘right’, it is very difficult to develop a code of conduct
on this basis alone. It basically says that businesses avoid many risks and gain reputation by acting
in an ethical manner. A good ethics process, operationalised in such a way that all decision making
procedures and structures support it on a day-to-day basis, will give an organisation the best chance
possible for finding out about potential problems early so that they can be dealt with before they
become a disaster. There are also market advantages to be gained from an ethical reputation.

Ways in which Ethics are Important - Major scandals such as WorldCom, Enron, Lehman Brothers
etc., in the US and Satyam in India tell us why ethical business practices are becoming increasingly
important. There are several reasons why ethics are important to business:

The government is interested in ensuring ethical business practices to ensure a basic level of
integrity in the market place. This promotes international competitiveness of the economy and
improves a country’s image concerning ease of doing business. Even domestically, predictable levels
of ethical behaviour ensures that costs of business such as transaction costs, hedging and insurance
etc., are kept to a minimum.

Unethical behaviour imposes costs on the government and taxpayers. Bad behaviour by a few
impacts on all businesses and might also have an adverse impact on the country’s international
competitiveness. Ethics can help improve decision making by providing managers with the
appropriate knowledge and tools that allow them to correctly identify, diagnose, analyse, and
provide solutions to the ethical problems and dilemmas they are confronted with.

Ethics help in analysing the reasons behind this, and the ways in which such problems might be dealt
with by managers, and regulators in improving business ethics. Business ethics can provide us with
the ability to assess the benefits and problems associated with different ways of managing ethics in
organisations. Business ethics also equips us with knowledge that goes beyond the traditional
boundaries of business studies.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

The CSR has become one of the standard business practices of our time. For companies, the overall
aim of CSR is to have a positive impact on society as a whole while it engages in maximizing the
creation of shared value for the owners of the business, its employees, shareholders and

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stakeholders. “Corporate Social Responsibility is a management concept whereby companies
integrate social and environmental concerns in their business operations and interactions with their
stakeholders. CSR is generally understood as being the way through which a company achieves a
balance of economic, environmental and social imperatives (‘Triple-BottomLine-Approach’), while at
the same time addressing the expectations of shareholders and stakeholders” (UNIDO).

The initial definition of CSR was given by Horward R Bowen who defines CSR as “Obligations of
businessmen to pursue those policies, to make those decisions, or to follow those lines of action
which are desirable in terms of the objectives and values of our society”. In the 1960s, one of the
most prominent definitions of CSR was given by Keith Davis who defines social responsibility as
“businessmen’s decisions and actions taken for reasons at least partially beyond the firm’s direct
economic or technical interest”.

The concept of CSR evolved and extended to beyond economic and legal components to encompass
ethical and voluntary aspects as well. Caroll in 1979 gave a definition containing all four
components. “The social responsibility of business encompasses the economic, legal, ethical, and
discretionary expectations that society has of organisations at a given point in time”. Corporate
Social Responsibility (CSR) in its essence fosters the business accountability from the stakeholder,
shareholder and investor perspective which may include factors such as environmental protection,
care for employees, the society and public at large not only in the present context but in future too.
It is a result of continuous interaction between the business and the society.

CSR and Shareholders- Shareholders are one of the important pillars who not only invest in the
company’s business but also remain associated with the financial returns in the form of profits and/
or dividends. This makes companies work for shareholder’s return thus increasing transparency,
giving handsome returns and enabling them in decision making enhances the shareholder’s role in
the company towards wealth maximisation. This is not one time but a continuous effort. Important
to understand here is that shareholders are one of the societal stakeholders too.

CSR and Employees- he employees also are the internal customers of the organisation and the
business’s success is dependent on the employees. With changing times, the employees have
become an important contributory factor towards the attainment of organisational objectives.
Organisations have realized their responsibilities, towards them, thereby ensuring the following:

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BENEFITS OF CSR

Businesses these days can no longer limit their focus to profit maximization and be satisfied just by
creating employment and paying their taxes. They are also required to address the needs of other
stakeholders like creditors, employees, shareholders, consumers, government and public.
Companies these days are more vulnerable to consumer boycotts and campaigns. The companies
need to be socially accountable to the communities among whom they operate. Hence, CSR as a
strategy and in fact as a necessary activity, is becoming increasingly important for businesses due to
the following benefits:

Communities provide the license to operate: The CSR behaviour of corporate is not just driven by
their values but are also influenced by the stakeholders like government, investors, customers and
community. Todays corporate understands that the license to operate in any particular area is not
just given by the government but also by the communities that get impacted by the activities of
these companies. A strong CSR programme provides the companies with the license to operate and
to maintain the trust of the local community.

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Q5- What is the importance of technology in international business
environments, IMPACT OF TECHNOLOGICAL ENVIRONMENT ON INTERNATIONAL BUSINESS ?
(v v v v v imp)

Ans- Let us look at some of the important aspects of technological environment in the international
business.

Business Necessity- In the earlier days, everything in business was performed manually. Introduction
of technology has helped revolutionize the business concepts and models, thereby bringing
tremendous growth in trade and commerce. It has provided a faster, more convenient and more
efficient way of performing business transactions. Some of the technological uses in an international
business environment include accounting systems, management information systems, logistics
tracking systems, customer relationship services, point of sales systems, etc. These have enabled
businesses to expand globally as well.

Communication with Customers- In today’s world, technology has a great importance in building
relationships with customers. In a global business environment, quick and clear interaction with the
clients (globally) is a necessity as websites take hours to respond to customer queries. Alongside,
technological innovations in the transportation services have enabled fast shipment disbursal in a
shorter span of time across national borders. Language translation systems have enabled employees
of a business/organization to interact with customers worldwide, understand their concerns and
resolve their issues. This is how a global business environment benefits from a stronger
communication system globally.

Efficient Business Operations - Technological advancements in a global business environment have

helped them understand their cash flow needs, needs for free flow of shipment, needs for proper
inventory management, need for proper tracking and monitoring of shipment and need for proper
communication with clients in a much more efficient and faster processes, thereby saving time and
physical space. Low-cost internet services and World Wide Web have also enabled businesses to
grow internationally and cater to global needs easily.

Impact on Business Culture and Relations- With the advent of technology, stronger communications
are being facilitated among employees of a business, customers, shipment coordinators and all those
who are associated with a global business environment, directly or indirectly. This has helped to keep
aside all social tensions, distrust and formation of cliques which might have a negative impact on the
business to a large extent. Instead, it has helped develop a strong bond between the employees and
customers of a business.

Business Security- Businesses are often subject to threats. In order to expand globally, businesses
have started expanding online through internet services. This gets them exposed to cyber-crime
threats. With the technological innovations in line, especially in the form of Artificial Intelligence (AI)

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and Machine Learning (ML), businesses can now monitor and secure financial, transaction, client
related data, various confidential reports and other proprietary information. With the help of cloud
computing, employees can now access to all business and client related data along with
communicating with their clients and other employees, while travelling or working remotely, even
without direct active management of data.

Research Capacity - All businesses need to expand – both the line of production capacity and client
base. Technology helps meet the business with newer opportunities by facilitating enough Research
and Development (R&D). This enables a business realise newer dimensions to expand both
domestically and internationally, along with facing competition in the world market. Internet has
enabled businesses to access data on global markets without facing the costs of travelling or risks of
creating separate production plant abroad.

IMPACT OF TECHNOLOGICAL ENVIRONMENT ON INTERNATIONAL BUSINESS-

Every businessman or marketer around the globe is now well aware of how important technology is
for the businesses and what are its effects on a business environment? There are both negative and
positive effects of technology for a business. Initially, the businesses were dependent on a labour
force. But with the rise in technology, businesses do not want to lag behind. They have already
started implementing newer technologies to flourish worldwide. Here are some of the ways in
which the technology affects the global business environment.

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Q6- INTERNATIONAL MONETARY SYSTEM ? (v v v v v imp)

Ans- The nations transact with each other mainly through trade and capital flows. Net transactions
have to be settled at regular intervals. While engaging in such transactions some of the countries
may face situations where the payment obligations are more than their receipts. In that case such
disequilibrium in Balance of Payments (BoP) is either met through foreign exchange reserves or
through borrowed funds. Hence, there is a requirement for countries and institutions to act as
supplier of such reserves. Amount of such reserves that would be demanded depends on the speed
of adjustment of BoP and the institutional framework of the world economy.

Exchange rate system followed by the countries also impacts the amount of reserves that can be
demanded. In a completely market determined exchange rate system the movement in exchange
rate brings the BoP back to equilibrium reducing the requirement for international reserves. In case
of a fixed or pegged exchange rate system in order to maintain a certain level of exchange rate the
requirement for foreign exchange reserves increases. The other function of international reserves is
to facilitate government intervention in foreign exchange rate markets. Higher the volume of such
activities higher is the requirement of international reserves.

The other major factors impacting the demand for international reserves is the speed of automatic
adjustment, policies aimed at restoring BoP equilibrium and international coordination of economic
policies. If the automatic adjustment mechanism takes time, then the demand for international
reserves goes up. For example, a BoP deficit triggers a depreciation of home currency which
enhances exports and reduces imports and automatically moving the country towards equilibrium.
But if rigidities cause the adjustment to be slow then the country has to resort to international

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reserves either owned by them or borrowed from others. Similarly, if the economic policies geared
towards restoring equilibrium takes time to achieve the desired outcomes again the demand for
international reserves go up. The coordination of economic policies across countries has been the
objective of institutions like IMF. Groups like Organisation of Economic Cooperation and
Development (OECD) and monetary unions like European Union (EU) are efforts towards this
direction. More the coordinated are the economic policies across countries lesser would be the
need for international reserves.

The supply of international reserves can be owned or borrowed. They are majorly in the form of
gold, acceptable foreign currencies and Special Drawing Rights (SDRs). Gold has always been a major
form in which international reserves were kept. During the years of the Gold Standard System
(1880-1914), gold served as a means of payment, unit of account and store of value. The national
currencies were denominated in terms of gold and since its supply was not that flexible it disciplined
the Central Banks in the sense that excessive money growth was not possible. Countries stood
committed to exchange gold for their currencies freely. The importance of gold in money supply
however drastically came down before WWI and the importance of paper money and demand
deposits in banks increased manifold. At the end of WWI when inflationary tendencies were high
there was a demand to return back to the gold standard. US was one of the first countries to
announce the return to gold standard. But it turned out to be an uphill task and due to the onset of
Great Depression it was no longer possible to maintain the system and countries one by one
abandoned the gold standard.

After the WWII when IMF came into being the world moved on to what is known as the Gold
Exchange Standard. Gold was considered as a unit of account. US took the responsibility of being the
international banker. Dollar was denominated in terms of gold. All other currencies were
denominated in terms of gold or gold content of dollars. US agreed to freely convert dollar to gold
whenever presented with the currency by the other countries. Dollar thus served as a reserve
currency. This system was perfect till the time US gold reserves were higher than outstanding dollar
liabilities. But as gold reserves fell short of such liabilities fear creeped in to the minds of the
countries holding dollars that the US might devalue the dollar leading to losses for them. On 1st
January 1975 gold was abolished as a unit of account and could be freely traded by countries like
other commodities. Use of gold was discontinued by IMF. Recent data shows that the percentage of
international reserves kept in terms of gold is less than 1%.

Given the expansion of international trade and capital flows, dollars and gold was found to be
inadequate to serve as international reserves. The need was thus felt for an additional international
reserve currency. SDRs were contemplated as a unit to decide the contributions of the members to
IMF. The value of SDRs was determined by the basket of acceptable currencies like dollars, yen,
pound and euro. The proportion is decided on the basis of trade in these currencies in the last five
years. SDRs are not claims on IMF but on the countries, which issue the acceptable currencies on the
basis of which value of the SDRs is determined. Countries holding SDRs can freely convert them into
these currencies.

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The nations can access international reserves from two special windows of IMF. One is the IMF
Drawings. In this the nations in need of international reserves can buy foreign currency by pledging
their home currency and agree to buy them back at some future date. This is normally extended till
50% of the quota for that country is reached. Additional amounts can be accessed through special
permissions. The second option is to access credit through IMF’s General Arrangements to Borrow.
G10 countries agreed to give additional funds to IMF to finance this facility. This is over and above
the amount accessed through IMF Drawings when the latter is found to be inadequate to finance
BoP deficits.

Process of globalization gave rise to the need for an orderly financial system. The IMF and the World
Bank can be seen as institutions which were created for maintaining a stable international financial
system. Specifically, IMF was entrusted with the job of assisting nations in payment problems. In
return for such assistance the countries were supposed to follow prescribed policies. Such policies
while successful in some countries created further problems in others. The World Bank majorly
looked at assisting countries in reducing poverty. Private enterprises in such countries were also
encouraged through assistance from IFC an important arm of the Bank. The current role of IMF is
more flexible than in the past and is seen as more conducive for the developing countries. The
World Bank on the other hand is engaged in poverty reduction and helps build smart infrastructure
in developing countries. Countries thus have means to stabilize their financial system and address
poverty related problems which may be beyond their capacities to tackle.

Q7- Explain the concept and nature of business, process of environment

analysis ? (v v v v v imp)

Ans- BUSINESS AND ENVIRONMENT-

The word ‘business environment’ indicates the aggregate total of all people, organisations and
other forces that are outside the power of industry but that may affect its production. According to
an anonymous writer- “Just like the universe, withhold from it the subset that describes the
system and the rest is environment”. Therefore, the financial, cultural, governmental,
technological and different forces which work outside an enterprise are part of its environment.
The individual customers or facing enterprises as well as the management, customer groups,
opponents, media, courts and other establishments working outside an enterprise comprise its
environment.

The term “environment” refers to the totality of all the factors which are external to and beyond the
control of individual business enterprises and their managements. Environment furnishes the macro-
context, the business firm is the micro-unit. The environmental factors are essentially the “givens”
within which firms and their managements must operate. For example, the value system of society,
the rules and regulations laid down by the Government, the monetary policies of the central bank,

21
the institutional set up of the country, the ideological beliefs of the leaders, the attitude towards
foreign capital and enterprise, etc., all constitute the environment system within which a business
firm operates. These environmental factors are many in numbers and various in form. Some of these
factors are totally static, some are relatively static and some are very dynamic – they are changing
every now and then. Some of these factors can be conceptualized and quantified, while other can be
only referred to in qualitative terms. Thus, the environment of business is an extremely complex
phenomenon. The environmental factors generally vary from country to country. The environment
that is typical of India may not be found another countries like the USA the (former) USSR, the UK,
and Japan. Similarly, the American/Soviet/British/Japanese environments may not be found in India.
There may be some factors in common, but the order and intensity of the environmental factors do
differ between nations. What to say of countries, the magnitude and direction of environmental
factors differ over regions within a country, and over localities within a region. Thus, one may talk of
local, regional, national (domestic) and international (foreign) environment of business. For
example, the local custom of “coolie” labour, the climate of the northern region of Assam, the
policies of the State and Central Governments in India and the size of the world market : all these
factors together will have an important bearing on tea industry. The production, consumption and
marketing of tea will be affected by environmental factors.

NATURE AND SCOPE OF BUSINESS ENVIRONMENT

Every organisation operates in a certain kind of environment. Each organisation has some
opportunities and threats associated with various forces which may be external or internal in nature.

22
23
ENVIRONMENTAL ANALYSIS

We know that all organisations perform within a framework of specific factors of business
environment. These can be internal as well external. A proper environmental analysis of the business
environment is very important. There are different steps involved in the environmental analysis of a
business. These are:

SWOT analysis- SWOT analysis is the business analysis process of examining both the internal and
external environment of an organisation. Here, S, represents Strengths and W, represents
Weaknesses. Both these terms are internal constituents of an organisation. While O, represents

24
available Opportunities in the market and T, represents the possible Threats in the market. Both of
these are the external constituents of the organisation

The SWOT analysis is a tool to evaluate the strengths, weaknesses, opportunities and threats of an
organisation. Every organisation should do SWOT analysis very effectively to explore both internal
and external factors of an organisation and accordingly business strategy should be formulated.

Q8- Different between money market and capital market and write about
some instruments of the money market ? (v v v v v imp)

Ans - Money Market-

25
The money market refers to trading in very short-term debt investments. At the wholesale level, it
involves large-volume trades between institutions and traders. At the retail level, it includes money
market mutual funds bought by individual investors and money market accounts opened by bank
customers.In all of these cases, the money market is characterized by a high degree of safety and
relatively low rates of return.

STRUCTURE OF MONEY MARKET

Financial markets have two main components money market and capital market and they both are
essential for the economic development of the country. In the following section, you will read about
the money market, its importance and various instruments. The money market is a market for short-
term financial assets and assets which are close substitutes of money. Short term implies time
period of less than one year and close substitutes of money refer to those financial assets that can
be converted to money with minimum/no transaction cost and without loss in value. The major
participants in the money market are scheduled commercial banks (excluding regional rural banks or
RRBs), cooperative banks (excluding land development banks) and primary dealers (PDs).

Structure of Money Market in India

The structure of the money market in India is presented in Figure 5.2. The money market is divided
into two parts i) Organised and ii) Unorganised.

26
The organised sector consists of the central bank of India or RBI, commercial banks both nationalised
and private. Further, foreign banks, cooperative banks, the discount and finance house of India and
other financial institutions like IFCI, ICICI, LIC, GCI and mutual funds also operate in the money
market. The unorganised sector consists of non-bank financial intermediaries, indigenous bankers
and money lenders.

CAPITAL MARKET

Capital markets are where savings and investments are channeled between suppliers—people or
institutions with capital to lend or invest—and those in need. Suppliers typically include banks and
investor while those who seek capital are businesses, governments, and individuals.Capital markets
are composed of primary and secondary markets. The most common capital markets are the stock
market and the bond market Capital markets seek to improve transactional efficiencies. These
markets bring suppliers together with those seeking capital and provide a place where they can
exchange securities.

STRUCTURE OF CAPITAL MARKET

The money market which provides short term funds to investors for less than one year. However,
business units and investors need funds for a longer duration also for undertaking business
expansions or technology upgrading and in this regard they approach the capital market. A capital
market is a market for long term securities or financial instruments having a maturity period of more
than one year. Capital markets are important for channelising savings, capital formation and
industrial growth. The structure of the capital market in India can be better understood with the
help of Figure

27
Capital markets comprised of two markets i) Primary Market and ii) Secondary Market. The primary
market is also known as the New Issue Market (NIM) where the issuer of the securities (shares and
bonds) sell the new securities to the investors directly without any intermediaries. Whenever the
securities are offered for sale for the first time by the companies they are called Initial Public
Offering (IPO). IPO is issued to raise capital for funding purpose. Both the companies and
government raise funds by the sale of new stocks in the primary market.

The secondary market is also known as the stock market. It is a place where shares, bonds, options,
etc which were sold earlier are sold and purchased. In India, you must have heard about the Bombay
Stock Exchange (BSE), National Stock Exchange (NSE) they are some of examples of stock exchanges.
The secondary market can be either an auction market or Overthe-Counter. In the auction market,
trading of securities is done through the stock exchange. In Over-the-Counter the trading is
conducted without using the platform of stock exchange, it does not have any physical location and
trading is done electronically.

28
Debentures- Debentures are also a type of debt instrument which is issued by companies for raising
funds but they are not secured by physical assets or collateral. An investor buys debentures based
on the reputations and the creditworthiness of the issuer. The interest rate on debentures is higher
than that of bonds.

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Q9- What are the major facilities offered under the Ayushman Bharat scheme
or Reforms in the Insurance Sector in India? (v v v v v imp)

Ans – its comes under the reforms of insurance sector

Reforms in the Insurance Sector- To provide a universal social security system especially to the
underprivileged and the poor population of the country, the three major schemes were launched in
2015 namely, Pradhan Mantri Suraksha Bima Yojana, Atal Pension Yojana and Pradhan Mantri
Jeevan Jyoti Bima Yojana

III. Atal Pension Yojana (APY)

31
In 2015, the Government introduced Atal Pension Yojana (APY) to provide pension especially to
people engaged in the unorganised sector like gardeners, maids, etc,. APY replaces the previous
Swavalamban Yojana. This scheme provides a defined pension depending upon the contribution and
its period. The subscribers are subject to the minimum pension of Rs 1000, 2000, 3000, 4000 or
5000 per month, from the age of 60 years contingent upon the contribution by the subscribers and
the age at the time of joining the scheme. The spouse of the contributor in the case of death and
nominee in case of death of both the contributor and spouse can claim pension /paid the
accumulated corpus. The central government co-contributes 50% of the total contribution subject
to a maximum of Rs 1000 per annum, to each subscriber’s account, for a period of five years, i.e.
from FY 2015-16 to 2019-20. To avail the benefit of this scheme the subscriber should not be part of
other social security schemes like EPF or be paying income taxes. As of April 2021, a total number of
304.33 lakh people have enrolled, under APY.

32
Q10- What are the eligibility condition and benefits received by PMJDY
beneficiaries ? (v v v v v imp)

Ans - Pradhan Mantri Jan Dhan Yojana Eligibility Criteria

If you are planning to open an account under PMJDY, you must meet the norms outlined by the
concerned bank. The Pradhan Mantri Jan Dhan Yojana Account Eligibility Criteria entails that the
applicant should be from the age group 18-59 years.
Announced on August 15th, 2014, the Pradhan Mantri Jan Dhan Yojana (PMJDY) is a national mission
aimed at ensuring greater financial inclusion in the country through expansion and improving access
to various financial services such as basic savings accounts, need-based credit, micro-insurance,
remittance facilities in addition to better pension facilities for citizens in the unorganised sector to all
sections of society including the excluded segments in the country.
A Pradhan Mantri Jan Dhan Yojana account can be opened under the following conditions

33
 Individuals with Indian nationality status are eligible to successfully open a Jan Dhan Yojana
account.
 An individual with no valid documents as proof for Indian nationality status can also open a Jan
Dhan Yojana account, provided the concerned bank does the required background check on the
individual and categorises him or her as ‘low risk’
 Minors aged above 10 years are also eligible to have a Jan Dhan Yojana account in any bank across
the country. However, minors will require the support of guardians to administer the Jan Dhan
account. Minors can also use RuPay Cards through which they can withdraw money from ATMs
 Individuals who already have a basic savings account in operation with a bank can easily transfer
or link their accounts to Jan Dhan Yojana accounts to avail of various benefits offered by the latter
Individuals who can submit any form of identity proof which is duly authorized by gazette officers can
open a Jan Dhan Yojana

To widen the scope of financial inclusion in the country is the ultimate goal of inclusive growth. To
bring the backward and marginalised citizens of the country under the umbrella of institutional
sources of finance is the goal of the financial inclusion programme. The Government of India launched
one of the biggest initiatives for financial inclusion on 15th August 2014 namely “Pradhan Mantri Jan
Dhan Yojana”. The mission was launched with the objective of making financial products and services
approachable to the common citizens of the country at the least cost possible with the extensive use
of technology to expand the coverage of financial inclusion.
The basic tenets of the scheme are to provide basic banking services to unbanked citizens in the form
of opening a basic bank saving account in any bank branch or business correspondent with zero
balance and zero charges. Providing debit cards with free accident insurance coverage of Rs 2 Lakh.
The six main pillars of this scheme are universal access to banking services, overdraft facility of
Rs.10,000 with every basic saving bank account. Expediting the programme of financial literacy in the
form of spreading information about the usage of ATMs, promotions of savings, use of banking
services for insurance and pension. Creation of credit guarantee fund to save the banks from defaults.
To provide insurance cover with both accident insurance upto Rs 1,00,000 ((enhanced to Rs. 2 lakh to
new PMJDY accounts opened after 28.8.2018) and life insurance of Rs 30,000 and to provide a safety
net to the workers working in the unorganised sector through a pension scheme.

PMJDY account can be used for Direct Benefit Transfers (DBT) for the social security schemes namely
Pradhan Mantri Mudra Yojana (PMMY), Atal Pension Yojana (APY), Pradhan Mantri Jeevan Jyoti Bima
Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY). Post-2018, the focus of PMJDY
has shifted from “ Every Household” to “Every Unbanked Adult”. The overdraft facility has increased
to Rs 10,000 from Rs 5000 and the age limit for the overdraft facility has been increased to 65 years.
As of April 2021, the total number of PMJDY account stood 42.25 Crore and in these accounts, Rs
145408.07 crore was deposited and 30.93 crore Rupay cards were issued. Further, Jan Dhan Darshak
App was also launched to provide necessary information related to banking services like locating
ATMs, Bank Branches etc.

Q11- What difference between FDI and FPI ? (v v v v v imp)

Ans- International Trade has now become an integral factor to determine a country’s economic
growth prospects. However, trading across national borders does involve costs which are to be
incurred by the domestic exporters (or importers) such as costs associated with the shipment of
merchandise, import payments, costs associated with selling goods to authorised third parties of sale,

34
etc. 2 A country with a financial robustness can be able to incur all its expenses related to foreign
trade. However, in due course of time and with strengthening of cross-border relations among trading
partners, various sources of trade financing have come up, which may ensure complete safety to both
the importers and exporters of a country, the most important among them being the strengthening of
global financial market operations
FOREIGN DIRECT INVESTMENT (FDI)
A foreign direct investment (FDI) is a purchase of an interest in a company by a company or
an investor located outside its borders.Generally, the term is used to describe a business
decision to acquire a substantial stake in a foreign business or to buy it outright in order to
expand its operations to a new region. It is not usually used to describe a stock investment
in a foreign company.

Foreign Direct Investment (FDI) can be defined as an investment made by an individual or a firm of
one country into the business interests of another country. In general, FDI occurs when an investor
set up business operations or purchases assets in a foreign company. If an American multinational
company, for example, intends to set up its operations in India or New Zealand, either by partnering
with a local firm or by opening up its own branch, it is considered as an FDI. FDI is actively
operational in open economies that are capable of offering a trained labour force and remarkable
economic growth prospects for an investor to invest. It involves both capital investment as well as

FDI can be done in multiple ways which may include entering into a merger or joint venture with a
foreign enterprise or opening of a subsidiary or an associate firm in a foreign land. The threshold for
a FDI to establish a controlling interest in the business making decisions of the foreign company is
set as per the guidelines of the Organization of Economic Cooperation and Development (OECD)
which is a minimum 10% stake in a foreign based stake.

FOREIGN PORTFOLIO INVESTMENT (FPI)

Foreign portfolio investment (FPI) consists of securities and other financial assets held by
investors in another country. It does not provide the investor with direct ownership of a
company's assets and is relatively liquid depending on the volatility of the market. Along

35
 with foreign direct investment (FDI), FPI is one of the common ways to invest in an
overseas economy. FDI and FPI are both important sources of funding for most economies.

Foreign Portfolio Investment (FPI) refers to investments by residents of one country in a

foreign country’s securities which include shares, bonds (government or corporate),
convertible securities, infrastructure securities, etc. Those investing in these securities are
termed as the Foreign Portfolio Investors. FPI is one of the major components of the capital
account for a country and is reflected in the Balance of Payments (BoP). It consists of passive
ownership, unlike FDI, where investors do not have any control over ventures or direct
ownership of property or stake in a company. FPI is mainly encouraged by the differences in
equity price scenario, bond yield, prospects of growth, rate of interests, dividends and rate of
return on capital in the foreign country’s financial assets.

In case of India, Securities and Exchange Board of India (SEBI) has stipulated the criteria for
FPI to be less than or equal to 10% of capital in a company in the year 2016, while above
10% will be considered as FDI.

Extra long questions second priority for these questions

Q12- What is international trade? why international trade beneficial for

country ?
What type of barrier affect international trade how the can managed( v v
imp)
Ans- INTERNATIONAL TRADE
If you can walk into a supermarket and find Costa Rican bananas, Brazilian coffee, and a
bottle of South African wine, you're experiencing the impacts of international
trade.International trade allows countries to expand their markets and access goods and
services that otherwise may not have been available domestically. As a result of
international trade, the market is more competitive. This ultimately results in more
competitive pricing and brings a cheaper product home to the consumer.

Post the World War I, in the first half of the twentieth century, trading conditions were dead. World
trade disrupted to such an extent from where recovery was almost impossible. It was further
followed by the Great Depression of 1930s, that witnessed mass unemployment levels, giving rise to
the mercantilists’ system of trade, through imposition of protective measures. Most of the 4
countries attempted to improve their Balance of Payments by raising their custom duties,
introducing a wide range of import quotas and imposition of exchange controls (government
restrictions on the transactions related to foreign exchange, where purchases involving foreign
exchange transactions cannot exceed receipts in foreign exchange). The resurgence of this ideology

36
continued till the end of World War II, post which several trade agreements and newer trading
systems emerged to promote free flow of international trade.

NEED FOR INTERNATIONAL TRADE

Countries engage in trading internationally, when there are not sufficient resources or capacity to
satisfy all needs and wants of consumers domestically. By developing and utilising its own domestic
resources, a country can produce goods it is capable of, create surplus and then trade internationally
to buy goods and services from abroad which it is not capable of producing. The concept of
international trade goes back to almost 10,000 years ago, when there were not much defined
modern states and national border concepts. It goes back to the time when ships and pack animals
were the only mode of trading among people.

The countries today, globally, would not be able to survive without trading internationally. With
greater size and increasing population, there is an increase in needs and wants of nations
domestically, which a country may not be able to produce, given its resource base. Hence, import
and export relations worldwide are an integral part of survival for every economy. Now, we know
the reason behind exporting of goods by a country. But why does a country go for importing of some
goods and services? This question can be answered based on the reasons below:

TYPES OF BARRIERS TO INTERNATIONAL TRADE

The most common barriers to international trade are tariffs, quotas and non-tariff barriers. Tariffs
are taxes imposed by governments on the imported goods. Quotas, on the other hand, are trade
restrictions imposed on the quantitative number of goods that can be imported or exported during a
particular period. The effects of both tariffs and quotas are same i.e., both aim at lowering of
imports and protecting the domestic producers from the foreign competition. A tariff raises the price
of the imported good in the tariff imposing country, which in turn, reduces the demand for, and
eventually the supply of the good in the tariff imposing country. Quotas, on the other hand, put
restrictions on the amount of goods to be supplied to the quota imposing country, which in turn,

37
raises the price of the product within the quota imposing country, thereby reducing its demand
among the consumers of that country.

Non-tariff barriers include regulations imposed on product content or quality, product standards,
packaging and shipping regulations, harbour and airport permits, heavy customs procedures, etc.

MEASURES TO REDUCE BARRIERS TO INTERNATIONAL TRADE

Free trade refers to elimination of all barriers to international trade. Several numbers of
organizations and trade agreements are working out to ease the barriers to trade, thereby
promoting more of trade and mutual economic gains from it. Some of the important initiatives taken
to remove those barriers are discussed below

38
Q13- Critically compares the pre and past 2020 agriculture reform in India? ( v
v imp)
Ans - Pre 2020 agriculture reform
EVOLUTION OF FARM POLICIES IN INDIA- Legislative powers are distributed between the centre and
the states through the Seventh Schedule of the Indian Constitution. Agriculture is part of the State List
therefore only individual states have the power to legislate on such matters, but the Central
Government has residual powers.
Domestic Agricultural Policies-

39
40
FARM REFORMS 2020
On 27th September 2020, Ram Nath Kovind, the President of India gave his acceptance to the 3 farm
bills that were earlier passed by the Indian Parliament. These Farm Acts are as follows:

41
Q14- Discuss the rationale behind economic reform introduced in India 1991?
( v v imp)
ANS- New Economic Policy of India was launched in the year 1991 under the leadership of P. V.
Narasimha Rao. This policy opened the door of the India Economy for the global exposure for the first
time. In this New Economic Policy P. V. Narasimha Rao government reduced the import duties,
opened reserved sector for the private players, devalued the Indian currency to increase the export.
This is also known as the LPG Model of growth.
NEW ECONOMIC POLICY 1991
Liberalisation, Privatisation and Globalisation (LPG) form the main component of New Economic
Policy, 1991. In the following section, you shall read about the meaning of liberalisation, privatisation
and globalisation and the various measures undertaken to achieve the objectives of these policy
measures.
Liberalisation- Liberalisation refers to curtailing or lessening of the excessive state/ government
regulations and restrictions as to enhance the participation of private entities/ sectors in the

42
functioning of the economy. Prior to the policy of LPG, the Indian economy was entangled in
Babudom, excessive state control, red-tapism and licence raj. These factors not only inhibited the
efficiency of the public sector but the overall competitiveness of the economy was hampered. Post-
1991, Liberalisation measures include new industrial policy, financial sector reforms, tax reforms,
FOREX reforms and others. In the Industrial policy of 1991, several measures were undertaken to
liberalise the economy.
Firstly, the list of projects requiring industrial licensing was pruned and only 18 industries related to
security concerns, environment, hazardous chemicals, white or luxury goods, etc were kept under the
purview of compulsory licencing. Secondly, Industries reserved for the public sector were reduced to
only two industries i.e. one related to atomic energy and second, railways. Thirdly, the requirement of
licensing for setting up of industries within 25 Kms of the periphery of cities having a population of
more than 10 lakh for a certain class of industries was removed. Fourth, to boost and invite Foreign
Direct Investment (FDI) in high priority industries which requires heavy, lumpsum investment and
advanced technology, it was decided to provide approval for FDI up to 51% foreign equity in 33
industries like electrical equipment, metallurgical industries, etc. Similarly, to inject technological
dynamism in Indian industries, the government provided automatic approval for technology
agreements related to high priority industries with specific parameters. Fifth, the Monopolies and
Restrictive Trade Practices Act (MRTP) 1969 was repealed. Sixth, the sick industries were referred to
Board for Industrial and Financial Reconstruction (BIFR) for the formulation of revival/ rehabilitation
schemes
Privatisation- Privatisation in a broader sense means a change of ownership from the public sector to
the private sector and the induction of private management and control in the public sector. Three
sets of measures namely i) ownership ii) organisation and iii) operational are broad measures of
privatisation.
Under ownership measures, the ownership of public enterprises, fully or partially, is transferred to the
private sector. Ownership measures include total denationalisation, joint venture, liquidation and
worker’s cooperative. Total denationalisation means 100% transfer of ownership of public enterprise
to the private sector. A joint venture implies partial transfer ( 25%, 51% and 74%) of public enterprise
to a private entity. Liquidation is the sale of assets to a person who may use them for the same
purpose or some other purpose. Worker’s cooperative is a special form of decentralisation whereby
the ownership of the enterprise is transferred to workers who may form a cooperative to run the
enterprise. Organisational measures are imposed to limit state control. These measures include the
formation of a holding company structure in which the government provided a sufficient degree of
autonomy in the decision making of the company. Big companies are split into smaller units without
loss of economies of scale. The smaller units become independent in certain product lines or regional
operations. Leasing is another measure whereby government agrees to transfer the use of assets of a
public enterprise to a private bidder for a specified period for example 5 years. The tenderers have to
give an undertaking of the profit that would be passed over to the government. The government
enjoys the right of obtaining profits as per agreement. In case, the bidder fails to meet the
expectations of the government, the latter has the right to replace the bidder with a more promising
bidder. Further, restructuring intends to bring public sector enterprise under market discipline.
Restructuring is of two types namely financial and basic. Accumulated losses are written off and
capital composition is rationalised in respect of debt-equity ratio in financial restructuring. In basic
restructuring, the public sector shed some of its activities which are taken up by ancillaries or small
scale units.
Operational measures aim to improve the overall functioning of the economy, even if fully
denationalisation has not been undertaken. Operational measures include granting autonomy to
public enterprises, provision of incentives to the employees, freedom to buy inputs from the market,

43
development of proper investment criteria, permission to raise resources from capital markets for
expansion or diversification. Various measures in the Industrial policy like dereservation of industries
under the public sector, increasing the limit of the FDI in industries, disinvestment policy, the opening
of private sector banks, restructuring of nationalised banks are some of the steps undertaken towards
privatisation. In the 1991 Budget, the government announced the intention of partial disinvestment in
selected PSUs in order to raise resources, encourage wider public participation and promote greater
accountability. Up to 20 of the Government equity in 31 selected enterprises were offered to Mutual
Funds, Financial Investment Institutions, workers and the general public. From 1991 to 1999 through
the disinvestment method of market sale of shares Rs 18,638 crore were realised.
Globalisation- It refers to the integration of the domestic economy with the rest of the world.
Globalisation connotes the reduction of the trade barriers to permit free trade, free flow of capital,
technology and labour. The important measures undertaken to pursue the objectives of globalisation
are:

44
Q15- Discuss the major advantage and feature of GST? Or fiscal sector reform
( v v imp)
Ans- FISCAL SECTOR REFORMS- In this GST will be discussed as given below.
Goods and Service Tax (GST) - In India, the constitution of India gives the power both to the state and
central government to levy taxes. Central government levies tax like custom duty, central sales tax,
etc. and state government levies taxes like Value Added Tax (VAT). There was a large number of
multiple taxes at various levels of the supply chain levied by both Centre and State government that
lead to a complex structure of the indirect taxes. The cascading of taxes which is due to the ‘tax on
tax’ ultimately inflate the price of the goods and services artificially and the ultimate burden of these
indirect taxes fall on consumers. This set of multiple taxes with different tax bases and tax rates are
also costly to administer and comply with. So it was decided to have one comprehensive indirect tax
or consumption base tax namely Goods and Service Tax (GST). The concept of GST was introduced in
the year 2000. A task force on Fiscal Responsibility and Budget Management was formed in 2003 and
it recommended the introduction of GST in 2004. However, it came into effect by 101st Amendment
to the Constitution of India from 1st July 2017. The motto of GST is ‘One Tax, One Market and One
Nation’. With the implementation of GST large number of indirect taxes were subsumed into it. GST
replaced the taxes levied and collected by the Centre namely service tax, central excise duty, duties of
excise on medicinal and toilet preparations, additional duties of Excise (Goods of special importance
and textiles and textile products), additional duties of customs, special additional duty of customs and
cesses and surcharges related to supply of goods and services. State taxes like state value-added tax
(vat), central states tax, purchase tax, luxury tax, entry tax, taxes on advertisements, entertainment
tax and amusement tax ( except those levied by the local bodies), state cesses and surcharges on
supply of goods and services.
Salient Features of GST
GST is applicable on ‘supply of goods’ or services as against manufacture of goods or on sale of goods
or provision of services. It is a destination-based consumption tax. It is a dual GST namely Central GST
(CGST) and State GST( SGST). CGST is levied by Centre Government and SGST is levied by State
Government. An Integrated GST or IGST is levied on the interstate supply of goods or services. IGST is
levied and collected by Centre Government and is divided among the Union and the States on the
recommendation of the GST Council. At present there are 4 rates of GST namely 5%, 12%, 18% and
28%. Some of the items which are exempted from GST are alcohol for human consumption. Similarly,
petrol, high-speed diesel, supply of petroleum crude, natural gas and aviation turbine fuel and
electricity are kept outside GST
GST Council
GST council act has a provision for the GST council which is an apex committee on GST matters. The
composition of the members includes the chairman of the council (which is the Union Finance
Minister), The Union minister of state in charge of revenue or finance, one member from each state
who is the minister in charge of finance or taxation or any other member. The Vice-chairman is
elected among these members of the state. The secretary of the revenue department is the Ex-
Officio secretary and the chairperson of the Central Board of Excise and Customs is the permanent
invitee in the GST but has no voting right. GST council recommends the Union Government of India
and States on subsuming various taxes, cess and surcharges in GST. Deciding on the threshold limit

45
 below which services and goods will be exempted from GST. Details of services and goods that
will be subjected to GST or will be exempted. Making special provisions to special category states
namely Jammu and Kashmir, Himachal Pradesh, Arunachal Pradesh, Assam, Mizoram, Nagaland,
Manipur, Meghalaya, Sikkim, Tripura, and Uttarakhand. Model IGST laws, principles of levy,
apportionment of IGST and the principles that govern the place of supply. Any special rate of
rates for a specified period to raise additional resources during a disaster or natural calamity
and any other matter relating to GST.
Input Tax Credit
Input tax credit refers to the tax which was already paid by the seller/manufacturer at the time
of purchase of goods or service and which is available as a deduction from the tax payable or the
seller can reduce/deduct the tax which they already paid on inputs at the time of paying tax on
output. For example, seller A bought the goods of amount Rs 18,000 and these goods attract GST
@ 18% so the GST amount is Rs 3240. Now, seller, A sold these goods for Rs 22,000 and this
attracts GST @18% or Rs 3960. In this case, the net GST payable will be (Rs 3960 -Rs 3240 = Rs 720)
and the input tax credit is Rs 3240.

Q16- Discuss the Narasimham Committee, 1991 OR BANKING SECTOR

REFORMS 1991 ( v v imp)
Ans- BANKING SECTOR REFORMS 1991-
In continuation to NEP and to bring structural reforms in the working of the economy, a series of
measures were introduced in the financial sector especially in the banking sector. In the following
section, you will study about these reforms. In 1991, the Government of India set up the Narasimham
Committee to examine all aspects relating to the structure, functioning, organization and procedure of
the financial system to remodel these institutions for raising the overall efficiency
Narasimham Committee, 1991

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 suggested that a peiiod of 4 years should be given to the banks and financial
institutions to conform to those provision requirernents.
c) Banks and financial institutions should achieve a 1nini1nu1n of 4 % capital adequacy
ratio by March 1993 of which Tier-1 capital should not be less than 2%.

VI. An Asset Reconstruction Fund (ARF) to be established for the recove1y of loans.
This fund would take a pot,ion of the bad and doubtful debts of the banks at a
discount.

VII. End to the duality of control and RBI should be the prirna1y agency for the
regulation of the banking system.

VIII. To provide autonomy to the banks the chief executive of the bank should be
appoiuted based on professioualis1n and integrity and not on political
consideration.

IX. Banks can access the capital rnarket and issue of fresh capital to the public t.lu-ough
t.l1e capital rnarket.The Banking Cornpanies (Acquisition and Transfer of
Undertaking) Act was amended so that banks can raise capital t.lrrough public
issues but to the condition that the holding of Cenu-al Govenunent would not fall
below 51 % of paid-up capital.

X. Setting up of new p1ivate sector banks if they conform to the require1nent of

111inim.u1n stru,-up capital and othe1· requi1·e1nents. Fur,her, there should not be any
differential treatment between public and private sector banks.

XI. Opening of foreign banks to open offices in India either as branches or as

subsidiaries.

Narasimham Committee II -1998

This commirte
. e was given the mandate to review the progress of banking sector reforms,
and design a progran11nc to fm,her strengthen t.l1e financial stt-i_1cture, technological up­
gradation, hurnan resource developm.ent, capital adequacy norms and bank mergers. The
1najor recormnendations include:
I. A stronger banking system in the context of Current Account Convertibility (CAC).
Indian banks must be made capl'lble of handling p1·oble1ns pe1·taining to domestic
liquidity and exchange rate management. So strong banks need to be merged which will
have a multiplier effect on the industty.

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Q17- What are the advantage and disadvantage of external commercial
borrowing? ( v v imp)
Ans- EXTERNAL COMMERCIAL BORROWINGS (ECBs)
External Commercial Borrowings (ECBs) can usually be defined as the commercial loans (debtbased
funding arrangement between a business and a financial institution such as bank, to finance major
capital expenditures or operational costs of a company) which can be in the form of bank loans,
securitized instruments such as floating or fixed rate bonds, partially, optionally or non - convertible
preference shares, buyer’s credit or supplier’s credit availed from the non-resident lenders with a
minimum average maturity period of 3 years.

Following are the main advantages of ECBs:

a) ECBs are allowed by the Government of India, as a source of financing existing as well as new
investment projects, at a much cheaper rate.
b) ECBs are mainly encouraged in the infrastructural areas such as telecom, railways, power, urban
infrastructures as well as Small and Medium Enterprises (SMEs).
c) ECBs can be accessed both under Automatic and Approval route. Those accessed under the
Automatic route do not require any approval from the Government of India or the Reserve Bank of
India (RBI). Such ECBs are usually applied for investments in industrial sector, infrastructural sector or
some specified service sector in India. The ECBs which come through approval from the
RBI/Government of India falls under the Approval route.
d) ECBs have other advantages such as diversification of the investor’s base and providing
international recognition to the companies.

ECBs have some disadvantages too. To mention among them,

a) ECBs tend to increase a country’s external debt and as a result increase the borrower’s foreign
exchange rate risk.
b) Such foreign currency fluctuations may lead to a loss which may succeed the savings in interest
costs.
To avoid these, there is a capping set on the ECBs in a financial year and an overall cap on the ECBs in
different sectors, which are subject to change by the RBI/Govt. of India.

50
External commercial borrowing (ECBs) are loans in India made by non-resident lenders in foreign
currency to Indian borrowers. They are used widely in India to facilitate access to foreign money by
Indian corporations and PSUs (public sector undertakings). ECBs include commercial bank loans,
buyers' credit, suppliers' credit, securitised instruments such as floating rate notes and fixed rate
bonds etc., credit from official export credit agencies and commercial borrowings from the private
sector window of multilateral financial Institutions such as International Finance
Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment in stock
market or speculation in real estate. The DEA (Department of Economic Affairs), Ministry of
Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines
and policies.

Q18- What is inflation and different method of measuring inflation? Causes if

inflation, Differentiate between galloping and hyperinflation? ( v v imp)
Ans- INFLATION-
Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of
the rate at which the decline in purchasing power occurs can be reflected in the increase of an
average price level of a basket of selected goods and services in an economy over some period of
time. The rise in the general level of prices, often expressed as a percentage, means that a unit of
currency effectively buys less than it did in prior periods.
One of the most daunting task before economists is to define Inflation as there are multitudes of
problems in penning down one definition. Therefore there is no universal definition for this problem.
Many economists have given different definition like according to Coulborn, Inflation can be
understood as a situation whereby “too much money chases too few goods”. A situation in which the
value of money falls and price rises is inflation according to Crowther. These and other definitions
have one or another deficiency.
Economists are unanimous that inflation refers to a ‘persistent’ and ‘appreciable’ rise in the general
price level. However, the word persistent and appreciable are not clearly defined so there is space for
ambiguity. For example, whether the rate of price rise by 1 %, 5 % or 30 % is considerable or there is
some other rate which is deemed to be considerable
The issue of inflation is of utmost importance because it is both boon as well as bane. A rise in prices is
necessary for producers to induce them to supply more in the market. But higher prices lead to more
burden on the consumer pocket and it may also create many political and social problems. So, what
an economy needs is a moderate rate of inflation. This takes us to another question, what is a
moderate rate of inflation? The answer to this question varies from country to country depending on
the level of development. For instance, in the case of India, a committee set up by the Reserve Bank of
India (RBI) to review the monetary system which is popularly known as Chakravarty Committee (1985)
recommended that 4 percent rate of Inflation is desirable for India’s economic growth.
Different Methods of Measuring Inflation
There are two common methods of measuring inflation.
• Changes in Price Index Number (PIN)
• Gross National Product (GNP) deflator

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Methods of Taming Inflation- Monetary policy is one of the policy option and direct method of
controlling inflation. Reserve Bank of India makes use of monetary policy to regulate the supply of
credit in the market

54
Q19- Highlight the major assumption of the Harrod-Domar model,?or
Discuss any one theory of in THEORIES OF ECONOMIC GROWTH? ( v v imp)
Ans- THEORIES OF ECONOMIC GROWTH
You all must have heard or read at one time or another that some countries of the world like
USA, Germany, etc. are termed as developed countries. On the other hand, countries like
India, China, etc. are classified as developing. Now you might be guessing how countries are
labelled as developed, developing or underdeveloped and why is it so that some are
developed and other underdeveloped. Well, the answer lies in the per capita income (PCY),
Gross Domestic Product (GDP) and Gross National Income (GNI). Countries are classified
into various categories of development and level of income based on a certain level of
income threshold. These thresholds are defined by different world organisations like United
Nations, World Bank, etc from time to time.

Economic growth indicates an increase in the national income and total output of the country.
The growingGDP, Gross National Income (GNI) and production capacity of the country are
some of the indicators of the economic growth of a nation. Economic growth can be viewed
as the material wellbeing of a country. On the other hand, economic development implies an
upward trend in the real income of the country over a long period. According to Schumpeter
economic development is a change in the stationary state of the economy. This change is
erratic, spontaneous and discontinuous. It is a movement from one equilibrium point to
another. It is a steady and gradual change that happens in long run and is a result of a general
increase in the rate of savings and population. It also implies a per capita increase in the
production of a country. Achieving a higher level of economic growth and economic

development are major planning goals of every nation. It is with a higher level of total output
that the standard of living, productive capacity and overall efficiency of the nation increases.
It is because of the increase in GDP that employment increases and more peoplefind jobs.
With an increase in employment level, income level improves and the problems of poverty
and deprivation can be eradicated.

HARROD-DOMAR MODEL OF ECONOMIC GROWTH

This model of economic growth was given by two economists namely Roy Harrod and
EveseyDomar in the early 1950s. This model highlights the role of saving and investment in
economic growth. According to this model,the growth rate in an economy is dependent upon
two factors. One is the saving-income rate (S/Y) and the second, capital-output ratio (the
amount of capital required to produce a unit of output). The model is based on many
assumptions like no government interference in the working of the market (Laissez-faire),
full employment in the economy, closed economy, the law of constant returns to scale,
neutral technical progress, etc

In this model, three growth rates are explained namely actual growth, warranted growth rate
and natural growth rate. The actual growth rate is determined by the actual rate of saving and
investment. It is expressed aschange in income divided by total income ( ). This growth rate

55
is determined by the saving-income ratio and capital-output ratio and its relationship can be
expressed in the following functional form.

Others theories also below

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 Purchasing Power Parity (PPP)

One of the important curiosity among individuals/politicians/economists is to compare their

country with another and then draw many conclusions as per their convenience. However,
there is a well-developed methodology to do and it is called Purchasing Power Parity or PPP.
PPP is used to make comparisons between economic growth and standard of living among
nations. This task of international comparison is lead by World Bank through its statistical
initiative known as International Comparison Program (ICP). ICP provides comparable price
and volume measures of GDP and its expenditure aggregates among countries and publishes
PPP of the world’s economies. PPP measures the purchasing power of the currency. It
measures the total amount of goods and services that a single unit of a currency of one
country can buy in another country. For example, if a pair of shoes cost Rs 1000 in India and
if the same pair of shoes cost $50 in the USA then the exchange rate between the US dollar
and Indian rupee is $1= Rs 20. It means $1 is equal to Rs 20. PPP is used to convert the cost
of a basket of goods and services into common currency and in this process, the price
difference is eliminated across countries. PPP equalises the purchasing power of currencies. It
was important to discuss the PPP as data on various developed indicators is published using
the PPP approach.

Measurement of Economic Development

Economists are interested in measuring economic development because it can help in ranking
the countries and making meaningful comparisons. From time to time attempt has been made
to measure economic development with some socio-economic indicators ranging from Social
Development Index of United Nations Research Institute on Social Development, Physical
Quality of Life Index (PQLI) of Morris D Morris to Human Development Index (HDI). In
Modern times HDI is one most widely accepted index. Let us understand how does it work
and rank countries. HDI is prepared by United Nations Development Program (UNDP) and
was developed by economist Mahbub Ul Haq. It is a composite index made from 3 indicators
measuring key dimensions of human development. These three indicators are life expectancy
(life expectancy index), expected years of schooling and mean years of schooling (education
index) and a decent standard of living measured by GNI per capita (PPP $) (GNI Index). The
top 5 countries in the HDI ranking of 2020 were Norway (1st), Ireland (2nd),
Switzerland(3rd), Hong Kong and Iceland (both 4th) and in the same ranking, India stood at
131 ranks out of 189 countries.

Short note

Q1- SEBI? ( v v imp)

Ans- Securities and Exchange Board of India Act, 1992- Enacted on 4thApril, 1992, the SEBI Act aims
developing the securities market in transparent and disciplined manner for providing investor
protection. It attains for providing fairness in dealings, high governance and institutionalization of

57
standard business practices aimed at fostering efficiencies by an integrated system offering the
services at genuine costs thereby building trust in investors and issuers, both; flexible to continuously
match the emerging requirements.
SEBI is a statutory regulatory body established under this act. The SEBI board comprises of the
chairman, two members of finance and law background nominated by the Central Government, one
member from the RBI, and two more members appointed by the Government of India. They ensure
the investors security in various ways. Cumulatively, the SEBI pursues the following functions:

Q2- National income ? ( v v imp)

Ans- The health and wellbeing of an economy can be judged by the amount of total income that the
citizens of the economy are earning. National Income accounts help us to understand the growth and
trajectory of the economy. The figures of national income accounting (NIA) are used to make
international comparisons. It shows how our country is doing (economically) in relation to other
countries. The planning process of any country is heavily dependent on these numbers. The
interrelationship between different players in the economy can be better understood in the light of
these estimates.
In the NIA, Gross Domestic Product (GDP) is one of the most essential components. The entire series
of national income revolves around this component. Most importantly figures of national income are
derived from the figures of GDP. So to understand national income it is essential to understand this
component. GDP in the simplest sense is the market value of allfinal goods and services which are
produced by the residents of a country within the domestic territory of a country in a given period of
time. Before we move further few points about GDP needs to be understood. First, it is the market
value of final goods and services. Market value is reflected as market prices and market prices indeed
represent the willingness to pay by the consumers. So, the value of goods and services are reflected
by market prices. Second, it includes only the value of the final goods. It means that the intermediate

58
goods are excluded when calculating GDP. It is because to avoid the problem of double counting.
Third, goods and services produced by the residents of the country within the boundaries of the
country are included. Fourth, it measures the value of production which takes place within the specific
time period usually fiscal year or a quarter.GDP indeed measures total income and total expenditure
in an economy. However, they both are the same because for an economy as a whole income must
equal expenditure.
Let us take an example. In every economic transaction, there are two parties namely buyer and seller
so one person’s income is the other’s expenditure. For example, Mehta decorator and painters were
given the order to paint the courtyard of Mr Verma and the deal was signed off with the contract of Rs
10,000 for doing this work. In this example, Mr Verma is a buyer of the service and Mehta decorator
and painters is the seller. The company earns Rs 10,000 and Mr Verma spends Rs 10,000. In this
example, the amount of Mr Verma expenditure is equal to Mehta decorator and painters income. So,
whether you measure GDP from the Income side or expenditure side,it will rise by Rs 1000 in the
above example.

Q3- IMF ? ( v v imp)

ANS- The IMF is an autonomous international organisation of around 190 countries. Members
subscribe to its quota and in turn IMF provides assistance during the crisis of balance of payments
(BoP). Further, technical assistance to help countries better manage their economy and training and
policy advice is also part of IMF’s responsibilities. The IMF came into existence on December 27, 1945
after the articles of agreement was adopted by the members during the Bretton Woods Conference in
1944. The mandate of IMF according to the articles of agreement establishing it are as follows:

59
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Q4- WORLD BANK ? ( v v imp)
ANS- This institution also came into being after the Bretton Woods Conference. The major role
perceived for the institution was to re-build the countries severely impacted by World War II. It
functions like a development financial institution and an investment bank at the same time. After its
operations in the war-ravaged countries their conditions improved. The Bank then shifted focus to the
development needs of the poor countries. The funding source for the Bank’s operation is mainly
capital markets. Issuing bonds and grants received from its members are its other sources of funding.
Direct selling of bonds and notes to its member countries are also sometimes resorted to raise funds.

62
YOU CAN DO IF YOU HAVE EXTRA TIME IN EXAM FOLLOWING

Q5 - FOREIGN AID ? ( v v imp)

Q6 - CRM SOFTWARE ? ( v v imp)

Q7 - CRM SOFTWARE ? ( v v imp)

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Q8 - TECHNOLOGY TRANSFER ? ( v v imp)

Q9- CLOUD COMPUTING ? ( v v imp)

Q10 - ADR GDR ? ( v v imp)

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