Friday, January 10, 2014


Course Code: ECO - 13
Course Title: Business Environment
Assignment Code: ECO – 13/TMA/2015-16
Coverage: All Blocks
Maximum Marks: 100

Attempt all the questions.
1. What is meant by business environment? Describe briefly various components of non-economic business environment.                                    (5+15)
Ans: Business is any activity undertaken for the purpose of producing or selling a particular commodity or service and earns a profit. The business has several dimensions such as purchasing the inputs, converting the inputs into the output, selling that output at a profitable price. Every dimension of a business depends upon several factors. Hence a business is influenced by several factors, all them put together are described as Business Environment. A business can grow and prosper in a particular environment just as a plant can grow in a particular soil, climate, water supply etc.  Hence the entrepreneur has to pay attention to the environment in which he has to conduct his business activities. If he is able to adapt his business to the environment effectively and efficiently the business can make higher profits. This makes the study of business environment important.
According to Keith Davis, ”Business environment is the aggregate of all conditions, events and influences that surrounds and affect the business.”
According to wheeler, ”Business environment is the total of all things external to business firms and industries which affect their organisation and operations.

The various elements of non-economic environment are as follow:
(a) Social Environment: The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc.

(b) Political Environment: This includes the political system, the government policies and attitude towards the business community and the unionism. All these aspects have a bearing on the strategies adopted by the business firms. The stability of the government also influences business and related activities to a great extent. It sends a signal of strength, confidence to various interest groups and investors.

(c) Legal Environment:  This refers to set of laws, regulations, which influence the business organisations and their operations. Every business organisation has to obey, and work within the framework of the law. The important legislations that concern the business enterprises include:
(i) Companies Act, 1956
(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 19112
(v) Payment of Gratuity Act, 19112
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Essential Commodities Act, 2002
(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986
(xiv) Environment Protection Act
(xv) Competition Act, 2002
Besides, the above legislations, the following are also form part of the legal environment of business.

(i) Provisions of the Constitution: The provisions of the Articles of the Indian Constitution, particularly directive principles, rights and duties of citizens, legislative powers of the central and state government also influence the operation of business enterprises.
(ii) Judicial Decisions: The judiciary has to ensure that the legislature and the government function in the interest of the public and act within the boundaries of the constitution. The various judgments given by the court in different matters relating to trade and industry also influence the business activities.

(d) Technological Environment:  Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. The varying technological environments of different countries affect the designing of products. In the modern competitive age, the pace of technological changes is very fast. Hence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time.

(e) Demographic Environment:  This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services.

(f) Natural Environment:  The natural environment includes geographical and ecological factors that influence the business operations. These factors include the availability of natural resources, weather and climatic condition, location aspect, topographical factors, etc. Business is greatly influenced by the nature of natural environment. For example, sugar factories are set up only at those places where sugarcane can be grown. It is always considered better to establish manufacturing unit near the sources of input.

2. Explain the concept of monetary policy. Describe its objectives.                               (5+15)
Ans: Monetary Policy: Monetary policy refers to policy formulated and implemented for achieving the following objectives:
1.       Regulating the supply of money including credit money and adjusting it to the needs of the economy
2.       To control the cost of money by regulating the rates of interest.
3.       Directing the supply of money to the required channels in accordance with the plan of priorities prepared by the planning authority.
According to A.G. Hart "A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy." From the above discussion, it is clear that a monetary policy is related to the availability and cost of money supply in the economy in order to attain certain broad objectives.
Objectives of Monetary Policy: The objectives of a monetary policy in India are similar to the objectives of its five year plans. In a nutshell planning in India aims at growth, stability and social justice. After the Keynesian revolution in economics, many people accepted significance of monetary policy in attaining following objectives.
a)      Rapid Economic Growth
b)      Price Stability
c)       Exchange Rate Stability
d)      Balance of Payments (BOP) Equilibrium
e)      Full Employment
f)       Neutrality of Money
g)      Equal Income Distribution

a)      Rapid Economic Growth: It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth.
b)      Price Stability: All the economics suffer from inflation and deflation. It can also be called as Price Instability. Both inflation and deflation are harmful to the economy. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable. It helps in reducing the income and wealth inequalities.
c)       Exchange Rate Stability: Exchange rate is the price of a home currency expressed in terms of any foreign currency. If this exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate.
d)      Balance of Payments (BOP) Equilibrium: Many developing countries like India suffer from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the domestic economy, while the later stands for stringency of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.
e)      Full Employment: Full Employment refers to absence of involuntary unemployment. In simple words 'Full Employment' stands for a situation in which everybody who wants jobs get jobs. However it does not mean that there is Zero unemployment. In that senses the full employment is never full. Monetary policy can be used for achieving full employment.
f)       Equal Income Distribution: Many economists used to justify the role of the fiscal policy are maintaining economic equality. However in recent years economists have given the opinion that the monetary policy can help and play a supplementary role in attaining an economic equality.

3. Define collective bargaining. Explain its different types. How is it done? What are its pre-requisites?             (5+5+5+5)
Ans: Collective Bargaining is a process involving discussions and negotiations between two groups representing Labour and Management regarding terms of employment.  Collective Bargaining, a collective and continuous process, involves formation of bargaining agreements and the implementations of such an agreement. It is a flexible approach that attempts in achieving peace and discipline in the Industry. The principle of ‘give and take’ has been infused in the principle of Collective Bargaining. As workers mainly in the formal sector are organized, collective bargaining is more commonly in vogue in the formal sector.
Collective bargaining is a technique that has been adopted by the unions and the managements to reconcile their conflicting interests. It is called ‘collective’ because the employees as a group, select representatives to meet and discuss differences with the employer.
Donovan Commission “ A right which is and should be the prerogative of every worker in democratic society”.
Byar & Rue (1991) “ CB is a process that involves the negotiation, drafting, administration and interpretation of a written agreement between an employer and a union for a specific period of time”.
 J.T. Dunlop & J.T. Healey “ CB as a mixture of a poker game combining deception, bluff, luck and ability”.
1. Conjunctive/Distributive Bargaining: Here, the parties try to maximize their respective gains. In this method, the parties try to settle economic issues through a zero-sum game. Zero-sum game is where ‘my gain is your loss and your gain is my loss’. Neither party is willing to yield an inch. 
2. Co-operative Bargaining: Both parties are more open to coming down from their high horses and co-operating. They are willing to negotiate the terms of employment in a flexible way. This willingness is because of recession and the need to be able to survive in such difficult times. This would not be possible without each other’s support and hence co-operative bargaining. 
3. Composite Bargaining: Workers tend to argue that productivity bargaining increases their workload. Rationalization, introduction of high technology, tight productivity norms hit the unions and workers below the belt. As a result, workers tend to favour composite bargaining. In this method, labour bargains for wages as usual.
In addition, they also bargain for such issues that, if permitted, may result in lower employment in some other plant, diluting the bargaining powers of unions. 

The collective bargaining process comprises of five core steps:
1)      Prepare: This phase involves composition of a negotiation team. The negotiation team should consist of representatives of both the parties with adequate knowledge and skills for negotiation. In this phase both the employer’s representatives and the union examine their own situation in order to develop the issues that they believe will be most important. The first thing to be done is to determine whether there is actually any reason to negotiate at all. A correct understanding of the main issues to be covered and intimate knowledge of operations, working conditions, production norms and other relevant conditions is required.
2)      Discuss: Here, the parties decide the ground rules that will guide the negotiations. A process well begun is half done and this is no less true in case of collective bargaining. An environment of mutual trust and understanding is also created so that the collective bargaining agreement would be reached.
3)      Propose: This phase involves the initial opening statements and the possible options that exist to resolve them. In a word, this phase could be described as ‘brainstorming’. The exchange of messages takes place and opinion of both the parties is sought.
4)      Bargain: Negotiations are easy if a problem solving attitude is adopted. This stage comprises the time when ‘what ifs’ and ‘supposals’ are set forth and the drafting of agreements take place.
5)      Settlement: Once the parties are through with the bargaining process, a consensual agreement is reached upon wherein both the parties agree to a common decision regarding the problem or the issue. This stage is described as consisting of effective joint implementation of the agreement through shared visions, strategic planning and negotiated change.
a)      Trade Union Recognition: The existence of the freedom of association does not necessarily mean that there would automatically be recognition of unions for bargaining purposes. Especially in systems where there is a multiplicity of trade unions, there should be some pre-determined objective criteria operative within the industrial relations system to decide when and how a union should be recognised for collective bargaining purposes. The accepted principle is to recognise the most representative union, but what criteria is used to decide it and by whom may differ from system to system. In some systems the issue would be determined by requiring the union to have not less than a stipulated percentage of the workers in the enterprise or category in its membership. The representativeness may be decided by a referendum in the workplace or by an outside certifying authority (such as a labour department or an indepenedent statutory body). There could be a condition that once certified as the bargaining agent, there cannot be a change of agent for a prescribed period (e.g. one or two years) in order to ensure the stability of the process.
b)      Observance of Agreements: Especially in developing countries where there is a multiplicity of unions, unions are sometimes unable to secure observance of agreements by their members. Where a labour law system provides for sanctions for breaches of agreements, the labour administration authorities may be reluctant to impose sanctions on workers. Where there is frequent non-observance of agreements or understandings reached through the collective bargaining process, the party not in default would lose faith in the process.
c)       Support of Labour Administration Authorities: Support by the labour administration authorities is necessary for successful collective bargaining. This implies that they will Provide the necessary climate for it. For instance, they should provide effective conciliation services in the event of a breakdown in the process, and even provide the necessary legal framework for it to operate in where necessary, e.g. provision for the registration of agreements, will not support a party in breach of agreements concluded consequent to collective bargaining.
d)      Good Faith: Collective bargaining is workable only if the parties bargain in good faith. If not, there will be only the process of bargaining without a result viz. an agreement. Good faith is more likely where certain attitudes are shared among employers, workers and their organizations e.g. a belief and faith in the value of compromise through dialogue, in the process of collective bargaining, and in the productive nature of the relationship collective bargaining requires and develops. Strong organizations of workers and employers contribute to bargaining in good faith, because there would be some parity in the bargaining strength of the two parties.
e)      Proper Internal Communication: Both the management and union should keep their managers and members respectively well informed, as a lack of proper communication and information can lead to misunderstandings and even to strikes. Sometimes managers and supervisors who are ill-informed may inadvertently mislead workers who work under them about the current state of negotiations, the management's objectives and so on. In fact, it is necessary to involve managers in deciding on objectives and solutions, and such participation is likely to ensure greater acceptance - and therefore better implementation - by them.

4. Distinguish between the following:                                   (10+10)
a) Cash Reserve Ratio and Liquidity Reserve Ratio
Ans: The cash reserves that banks keep with the central bank is called the Cash Reserve Ratio (CRR). A CRR requires only a cash reserve so a portion of the cash deposits that banks receive are kept with the central bank as a reserve. A decrease in the CRR would mean a higher amount of money that banks can lend generating more income for them. It controls the liquidity in the economy.
The Statutory Liquidity Ratio (SLR), on the other hand, is cash, precious metals, or certificates that a bank keeps with them as a reserve. It limits the influence that banks have on putting more money into the economy. An SLR guarantees the stability of banks and is used to limit the increase in bank credit.
Differences between SLR and CRR is given below
1.“CRR” stands for “Cash Reserve Ratio” while “SLR” stands for “Statutory Liquidity Ratio.”
2. A commercial bank’s CRR is maintained with the central bank while its SLR is maintained at the bank.
3. The SLR can be in the form of cash, precious metals like gold, or securities while a CRR can only be in the form of cash.
4. The CRR controls the liquidity in the economy and staves off inflation while the SLR controls the credit growth in the economy and limits the influence banks have in putting more money into the economy.
5. An SLR is intended to make banks invest in government securities while a CRR is intended to maintain the purchasing power of money in order to curb inflation.

b) Foreign direct investment and foreign portfolio investment                                
Ans: FDI- Foreign Direct Investment refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment.
FDI is calculated to include all kinds of capital contributions, such as the purchases of stocks, as well as the reinvestment of earnings by a wholly owned company incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or branch. The reinvestment of earnings and transfer of assets between a parent company and its subsidiary often constitutes a significant part of FDI calculations. FDI is more difficult to pull out or sell off. Consequently, direct investors may be more committed to managing their international investments, and less likely to pull out at the first sign of trouble.
On the other hand, FPI (Foreign Portfolio Investment) represents passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities' issuer by the investor.
Unlike FDI, it is very easy to sell off the securities and pull out the foreign portfolio investment. Hence, FPI can be much more volatile than FDI. For a country on the rise, FPI can bring about rapid development, helping an emerging economy move quickly to take advantage of economic opportunity, creating many new jobs and significant wealth. However, when a country's economic situation takes a downturn, sometimes just by failing to meet the expectations of international investors, the large flow of money into a country can turn into a stampede away from it.
Difference between FDI and FPI
Involvement - direct or indirect
Involved in management and ownership control; long-term interest.
No active involvement in management. Investment instruments that are more easily traded less permanent and do not represent a controlling stake in an enterprise.
Sell off
It is more difficult to sell off or pull out.
It is fairly easy to sell securities and pull out because they are liquid.
Comes from
Tends to be undertaken by Multinational organisations
Comes from more diverse sources e.g. a small company's pension fund or through mutual funds held by individuals; investment via equity instruments (stocks) or debt (bonds) of a foreign enterprise.
What is invested
Involves the transfer of non-financial assets e.g. technology and intellectual capital, in addition to financial assets.
Only investment of financial assets.
Stands for
Foreign Direct Investment
Foreign Portfolio Investment
Having smaller in net inflows
Having larger net inflows
Projects are efficiently managed
Projects are less efficiently managed

5. Write short notes on the following:                                   (4×5)
a) Central Bank
Ans: A central bank is the most important institutions responsible for safeguarding the financial stability of the country.  It is the one bank acting as the leader of the money market. In the words of R.P Kent, “Central Bank is an institution charged with the responsibility of managing the entire monetary and banking affairs of the country in the national interest”.
A central bank is responsible for regulating the supply of money and credit in the economy for which it is given special powers by the state. Unlike the commercial banks, it is guided by the motive of economic welfare of the people and not by the profit motive. It holds the ultimate reserves of the action, acts as a banker’s bank and a banker to the state.
Inspite of controversies regarding the functions of a central bank, the functions which are invariably performed by almost all central banks of the world are: -
1. Monopoly of note issue
2. Banker to the state
3. Banker’s Bank: The central bank is the parent bank of all other banks. In this capacity the central bank performs three important functions.
i) Custodian of the cash reserves
ii) Lender of the last resort
iii) Clearing and Settlement:
4. Credit Control
5. Regulation of Foreign exchange
b) Public Sector
Public Sector means the various economic, industrial and commercial activities taken up by the State i.e., Central Government, state government, union territories or local self-governments. The public sector in India has taken up projects involving highly sophisticated technology and difficult construc­tion. It has played a very important role in the economic development of country. They are the medium through which rapid industrial development has resulted. They have helped in producing enough infrastructural facilities (production of electricity, coal, steel, petroleum etc.) so that private sector may grow. Even in the agricultural field the Green Revolution could be possible through public sector by providing power and fertilizers. They have by and large developed substantial capacities for production of coal, iron-ore, steel, petroleum products, fertilizers, heavy machines, basic drugs, electricity, power equipments and ships. They have contributed to India’s export earrings as- well-as successful efforts towards import substitution. In addition, they are a source of employment to a large number of people.
c) Collective Bargaining
Ans: It was Adam Smith in the 18th Century who made the first reference to collective bargaining in the labour market. The Bargaining Theory Proponents have argued that short-run wages have always been determined by the process of bargaining. Collective bargaining is possible because there exist today the bilateral monopoly situation in the labour market. That is to say that labour market is neither perfectly competitive nor is it marked by monopoly conditions only. Both the employers and employees have now equal strength to negotiate on problems of wage settlement. This situation is called bilateral monopoly situation. Collective bargaining is conducted under bilateral monopoly.
Under bilateral monopoly conditions wages rate and volume of employment will depend on the relative bargaining strength of the Employer’s associations and Worker’s unions. If the Employer’s Association is stronger than Trade Union, it will push the wage below the competitive equilibrium level or very near to the subsistence level. On the contrary if the Trade Union is stronger than the Employers Association the wage rate will be pushed up above competitive equilibrium rate or to marginal productivity or at least to the level of the capacity to pay of the employers. Thus, there is no definiteness about the levels of wage under collective bargaining. In other words wages under bilateral monopoly situation are indeterminate. We can only indicate the broad limits within which the wages rate and the volume of employment would come to be settled according to relative bargaining power of the parties.
d) Balance of Payments
Ans: The Balance of Payments (BOP) of a country is a systematic record of all economic transactions between the residents of a country and the rest of the world. It is composed of all receipts on account of goods exported, services rendered and capital received by residents and payments made by them on account of goods imported, services received and capital transferred to non-residents or foreigners.
The Balance of Payment or BOP is shown in the form of an Account or Balance sheet which enumerates how much has been received from foreigners and how much has been paid to them during a particular accounting period. Usually the accounts are prepared on an annual basis. The Balance of Payments Account of a country shows, on its credit side, the different items for which it has received payment and the amount of such payments. These are called the credit items. On the debit side the Account shows the items for which the country had paid to foreigners and the amount of such payments.
They are the Debit Items. If the total of the debit items and the total of the credit items are equal in value, the country’s international payments are balanced. In other words, if the entries are done in a proper way debits and credits will always be in balance, so that in an accounting sense the BOP will always be in balance. Each debit has a corresponding credit entry. If the credit items are larger, so that there is a net balance due to it, the country is said to have a Favourable Balance. If the debit items are larger, so that there is a net balance due to foreigners, the country is said to have an Unfavourable Balance. The terms ‘favourable’ and ‘unfavourable’ are misleading but have the sanction of long usage.
The Balance of Payment (BOP) statement is divided into two major accounts.
(i) Current Account and
(ii) Capital Account.