Saturday, January 18, 2014


Course Code: ECO - 13
Course Title: Business Environment
Assignment Code: ECO – 13/TMA/2014-15
Coverage: All Blocks
Maximum Marks: 100
Attempt all the questions.
1. What is meant by mixed economy? Why did India adopt mixed economy after achieving independence? (5+15)
Ans: Mixed Economy: There was no reference to the mixed economic system in Economic literature in the past. Economists were mainly familiar and advocated the Laissez faire or free enterprise system, as several countries could develop fast following the free enterprise system, in which there was no or little government intervention. The entire economic system operated with the price mechanism at its center point. The producers produced what the consumers wanted and this provided very little scope for the government to intervene in the system. The Classical economists and their ardent supporters believed that the invisible hand will direct the economy and with private initiative and enterprise, every country should be able to record a faster growth as proved in the case of UK, USA, Europe, Australia, and other countries.
In a mixed economy, one will find the existence of both the private and public sectors. In such a system, the government will undertake the responsibility to build and develop certain sector activities and leave the other activities for the private initiative. In India, the government announced the adoption of the mixed economy system through its 1948 Industrial Policy Resolution. The government clearly earmarked the industries to be completely under the state control, the industries which are too owned and controlled by the state as well as the private sector and industries which are completely left for the private sector. In this way the Resolution provided for the simultaneous existence of both private and public sectors.
Mixed economy facilitates the flow of investment into channels which confers the society with several benefits. For example, the Indian government has invested huge amount in several projects to develop the infrastructural facilities. This forms the basis for the development of other sectors. The investment in these infrastructural areas will not come forth from the private sector as the return is nil. Hence, the government in a mixed economic set up provides the thrust by developing the necessary background and strength which will encourage the private sector to invest in profitable opportunities. In this way the government plays a key role in a mixed economic system.
Mixed Economy in India after Independence
The recommendation of mixed economic model for India by very first planning commission was a fair result of trade-off between efficiency and equality. In his book, N.G. Mankiw explains this trade-off as a sure phenomenon in economics, faced by every individual.
Just after independence, the newly formed government neither had sufficient resources nor the estimate of potential resources. So, the efficiency i.e. property of getting more from scarce resources, had to be improved since the beginning. Capitalism being profit centered depicts a greater efficiency.  But on the other hand, there lied a major chunk of population that was oppressed, down trodden and underprivileged. It was quite apparent that the equality i.e. uniform distribution of economic prosperity was much needed for sustained growth of country as a whole. Socialist economy advocates equality as its numero-uno principle.
In a period when much of the wars by countries were waged to establish supremacy of their economic system, it would have been hard for India not to resort to only one of the ideologies. But our leaders did a good thing then, they looked at the feasibility of both (communism and capitalism) based on our country’s condition.
Capitalism would mean more profit in lesser hands followed by more power. This simply means those few would have the power to influence market as well as bystander (the common man). Even a thin possibility of some of those few going against the interest of government or masses would have added to the territorial tension our country was already facing. Such an economy would also mean eventually doing away with public subsidies.
A decision to opt for communist economy would have highly discouraged the class of traders and merchants who were operating ever since the ages of monarchy. The government gravely needed their expertise, capital and active participation to explore the means and prospects of economic growth. Moreover people were just out of the authoritative and rough rule of British government. A strict practice of communism might have been perceived as same causing a large scale resistance.
Above two insights made it very clear that mixed economy was an optimal choice aimed both at increasing productivity as well as reducing inequality. Different five year plans showed government’s varied emphasis on communism and capitalism. In the first five year plan, essence of communism can be seen in abolition of landlord-ism i.e. zamindari system, ryotwari system, talukdari system etc. The constitution was amended to give legislature the ultimate authority. On contrary, second and third plans were aimed at rapid industrialization, sufficiency of food grains, and utilisation of man power augmented with increased budget plan for private sectors

2. Giving examples, distinguish between direct and indirect roles of the government in business. Explain the objectives of the Industries (Development and Regulation) Act, 1951. (10+10)
Ans: Role of Government in Business:
We can all agree on the important role governments play in our societies. Fundamental to the way we all interact, they provide order via laws, they facilitate economic activity by building infrastructure, and they are the administrators of force via policing departments and military, which protect us and ensure safety. Still, there is a widely-adopted social mythology that the role of government has nothing to do with business, because mixing for-profit motives with not-for-profit interests is like mixing oil with water. Should this “black or white” idea be brought in to question? Considering the facts, the reality is that policy regimes create the conditions under which businesses either thrive or perish. So, policy plays a critical role in business. For example, a government’s policy regime creates or diminishes efficiency in capital markets. Also, sometimes lingering legislation from times past can have enormous consequences today, though circumstances change.
Direct role of Government:
Governments control the business activities is many ways both direct and indirect. However, government can control business activities in a more direct way. These are as follows:
1.       Prescribes the rules of the game for business
2.       Is a major purchaser of business' products and services
3.       Uses its contracting power to get business to do things it wants
4.       Is a major promoter and subsidizer of business
5.       Is the owner of vast quantities of productive equipment and wealth
6.       Is the architect of economic growth
7.       Is a financer of business
8.       Is the protector of various interests in society against business exploitation
9.       Directly manages large areas of private business
10.   Is the repository of the social conscience and redistributes resources to meet social objectives.
With the growth and expansion of towns and cities the local government and state governments have generated a proliferation of new rules, laws, and regulations of their own. All of this must be taken into consideration when choosing a plant or business location.
Indirect role of Government in Business:
1.       Government can affect business activities in various indirect ways. These are as follows:
2.       Providing a safe, reliable, stable, environment for the pursuit of economic activities. 
3.       Government ministers can play a critical role in fostering enterprise and innovation. Their role is to direct the government departments and agencies to focus on the problem and develop effective policies.
4.       Encourage growth across all industry sectors including low, mid and high-tech firms.

The Industries Development and Regulation Act of India (1951)
The Industries (Development and Regulation) Act, (IDRA), came into force from 8th May 1952 under a notification of the Central Government published in the Gazette of India. The Act extends to whole of India including the state of Jammu & Kashmir with a view to being under Central and regulation of a number of important industries, the activities of which affect the country as a whole and the development of which must be governed by economic factors of all India importance.
Objectives of the Act: The Important objectives are,
(i) To Implement the Industrial Policy: The Act provides the necessary means to the Central Government in order to implement its industrial policy.
(ii) Regulation and Development of Important Industries: The Act brings under the control of the Central Government the development and regulation of a number of important industries listed m the first schedule attached to the Act as the activities of such industries will affect the country as a w ะพ e and, therefore, the development of such important industries must be governed by the economic factors of all India importance.
(iii) Planning and Future Development of New Undertakings: A system of licensing is introduced under the Act to regulate planning and future development of new undertaking on sound and balance lines and may be deemed expedient in the opinion of the Central Government.
The Act confers on the Central Government power to make rules for the registration of existing undertakings for regulating the production and development of the industries specified in the schedule attached to the Act

3. What do you mean by industrial sickness? Describe its indicators. (5+15)
Ans: Industrial Sickness: Industrial sickness is a universal phenomenon. It is a major problem of all industries in the world whether it is developed or developing countries. It is a serious matter of the countries. Definition of a sick unit is given by Sick Industrial companies act, 1985. According to the act “ The sick industrial company is a company which has at the end of any financial year accumulated losses equal to or excluding its entire net worth and has also suffered cash losses in that financial year and in the financial year immediately preceding it.”
According to state bank of India,” A sick unit is that unit which falls to generate internal surplus on a continuing basis and depends for its survival on subsequent infusion of external funds”.
Industrial sickness especially in small-scale Industry has been always a demerit for the Indian economy, because more and more industries like – cotton, Jute, Sugar, and Textile small steel and engineering industries are being affected by this sickness problem. Industrial Sickness contributes to high cost economy. This in turn, will affect the competitiveness of the economy at home and abroad. Dead investment is a burden on both banks and budgets and ultimately consumers should pay the high cost. Money locked up in sick units gives no returns and effects the availability of resources to the other viable units 
Indicators of Industrial sickness 
Industrial units may become sick at different stages and due to different reasons. Indeed, “some industries are born sick, some achieve Sickness and some have sickness thrust upon them”. 
a) Born Sick: Industries born sick are those which are destined, (or disaster right from their conception due to various causes. A study conducted by the Institute of Economics Hyderabad, found that 50 per cent of the dead units closed within three years of opening. This proves that these industries never had any reasonable survival prospect right from birth. 
Any one or more of the following factors may indicate the birth of sick units: 
1. Lack of experience of the promoters, wrong Selection of the project, faulty Project etc., may give birth to sick units. The mushroom growth of the so-call consonance firms has been regarded as a factor contributing to these sorts of problems because the primary interest of such Consultancy fans is to make money by selling some ideas or project reports to the aspirants who may thus be misguided or made overenthusiastic We must also think that the rosy hopes generate by the high promises and schemes including the self-employment schemes of the financial institutions and other promotion agencies of the Governments also contribute to this Unfortunate Situation. 
2. Paucity of fun and faulty financial management may also cause the birth of sick units. Many new units have been found to be under utilised and the strains of undercapitalization become evident when the unit becomes operational. In case of some companies, the heavy investment in non-productive capital assets likes laugh housing projects even before they commence production distorts the liquidity and causes a lot of problems. Problems also crop up due to inadequate provide for contingencies, faulty fund flow and cash flow estimate, etc. 
3. Time and cost over-runs sometimes prove to be very disastrous. Particularly in case of large projects, delays in project commissioning due to delay in supply of equipment, both indigenous and imported, slippage in the schedule of civil works, creation of equipment, etc., are not uncommon. Such delays cause cost escalations leading to capital shortage, liquidity problems, hike in the production costs and break-even point etc. 
4. Sickness may arise from lavational problems also. It has been observed that “high technology based units are established in areas without skilled labour or supporting infrastructure; industries based on imported raw materials are founded in regions without adequate transport and communicate ion system”. 
5. Technological factors like selection of obsolete or improper technology or the technology becoming outdated due to innovations while the project is being executed, sub-standard machinery, wrong collaboration, etc., also cause sickness.  According to the Tiwari Committee, 14 per cent of the large sick units suffered from technical factors and faulty initial planning. 
6. Wrong assessment of the market potential or faulty demand forecasting, change in the market conditions, including the change in the consumer tastes and preferences and competitive situation, etc. can also cause birth of sick units. 
b) Achieved Sickness: Industries which achieve sickness are those which fail after becoming operational due to internal causes. Such internal indicators which are common are the following: 
1. Bad management, which “covers a wide range from inexperience, inefficiency, lack of professional expertise, neglect and internal squabbles to delinquency and dishonesty” is an important cause of industrial sickness. According to the Tiwari Committee Report, 1984, “the factor most often responsible for industrial sickness can be identified as ‘management’. This may take the form of poor production management, poor labour management, poor resources management, lack of professionalism, dissensions within the management, or even dishonest management”. The Committee found that 65 per cent of the large sick units were affected by this problem. 
2. Unwarranted expansion and diversion of resources may also result in sickness. Some concerns tend to expand beyond the resources including managerial capability. Diversions of resources to start new units or to acquire interest in other concerns without due regard to the capability of the unit to provide such funds sometimes lands the unit in trouble. Extravagances and acquisition of unproductive fixed like company guest houses or corporate luxuries like air cars, etc., also may contribute to sickness. 
3. Poor inventory management in respect of finished goods as well as inputs may land a unit in trouble. 
4. Failure to modernize, the productive apparatus, changes the product mix and other elements of the marketing mix to suit the changing environment are a very important cause of industrial sickness. 
5. Poor labour-management relationship and the associated poor worker morale and low productivity, strikes, lockouts, etc., also may ruin the health of a unit to survive), 
c) External Causes: Sickness may be caused also due to factors beyond the control of an industrial unit. Some of these common external indicators are the following: 
1. Energy crisis arising out of power cuts or shortage of coal, and oil have almost become a constant problem for many industrial units in India. 
2. In a number of cases the units are not able to achieve optimum capacity due to shortage of raw materials due to production set-backs in the supply industries, poor agricultural output clue to natural reasons, changes in the import conditions etc. 
3. Infrastructural problems like transport bottlenecks also sometimes cause serious problems. 
4. It is a general complaint of the industrial circles that the credit squeeze very adversely affects the industrial sector. According to the Tiwari Committee, 24 per cent of the large sick units were affected by shortage of working capital/liquidity constraints. 
5. Artificial economic constraints also make their contribution to the growing industrial sickness. Government controls on the product mix and prices are said to be causing serious problems for certain industries. Sometimes, it is not possible to automate or rationalize due to unfavorable government policy about attitude. 

4. Distinguish between the following:
(a) Heavy industries and small scale industries
Ans:  Difference between heavy industries and small scale industries:
1. Registration:
The entire large scale entrepreneur included in schedule of the Industrial Development and Regulation Act are subject to licensing and registration with Government within a prescribed time limit.
Small entrepreneur is required to be registered as SSI units with the Director of Industries or State and Union territories for purpose of allocation of scarce raw-materials, power supply and taxation and also for statistical purposes.
2. Government intervention:
Government can intervene in heavy industries if there had been unjustifiable fall in the volume of production in the industry or there had been unjustifiable deterioration in quality or increase in prices without justification or cause serious injury or damage to customers.
Government intervention is somewhat less as compared to heavy industries. The main task of the Small Industries Development Organization (SIDO) is the development of small-scale industries in India.
3. Capital investment:
There is a capital investment of Rs. 5 corers and above in heavy industrial undertaking.
The investment limit in plant and machinery does not exceed Rs. 1 corer.
4. Ownership:
The heavy industries are generally found in company forms.
Ownership of small scale industries is sole proprietary or partnership.
5. Technology:
Heavy industries have higher input of technology and capital these units are relatively more capital intensive.
Generally, SSI units are less capital intensive and more labor-intensive.
6. Location:
Heavy industries are generally located more around Metropolitan and urban areas, where all the basis infrastructural facilities are available.
SSI units are more amenable to dispersal and decentralized growth. As such, they are located in cities as well as in rural and semi-urban areas with the minimum availability of infrastructural facilities.
7. Management:
Heavy industrial units have a greater exposure to professional management.
SSI units use the age-old techniques and equipment. There is no scope of professionalization in small scale units.
8. Marketing:
Large industries are basically market-oriented. They produce goods for the masses.
SSI units basically cater to the needs of the local people.
9. Specialization:
Different jobs are handled by a chain of specialized and skilled people.
All the work from brining raw materials to marketing is done by individual entrepreneur.
10. Training:
Training is imparted in specialized institution and modern modes of management are implemented to derive varied benefits.
Training is generally imparted from father to son. It is a tradition rather than a work process. Skills are perfected over the years of work.

(b) Foreign direct investment and foreign portfolio investment (10+10)
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:
a) 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.
Many mathematical models have been built by economists to determine the bargaining power of the parties. Of these Chamberlain’s explanation is more acceptable. He has tried to determine the bargaining power of the two parties of the two parties in terms of cost of agreement relative to the cost of disagreement to each party in collective bargaining process. Greater the cost for the employers of disagreeing (facing a strike) as opposed to the cost of agreeing (granting unions demand) greater will be bargaining power of union and vice versa.

b) Balance of payments (10+10)
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.
Transaction relating to goods, services and income constitute the current account, while those relating to claims and liabilities of a financial nature, which go to finance the deficit on current account or to absorb its surplus, form the capital account. The sum of these current and capital account transactions together constitute the basic Balance of Payments.
Balance of Current Account = [Export of goods + export of services + unrequited receipts] – [Imports of goods + Imports of services + unrequited payments] – unrequited receipts include gifts and indemnities etc. from foreigners while unrequited payments are gifts and indemnities to foreigners. Only in the year 1976-77 to 1979-80, India had a small current account surplus of 0.6% of GDP otherwise there is generally a deficit.
Balance of Capital Account = Capital Receipts – Capital Payments. Capital receipts include borrowings from, capital repayments by or sale of assets to foreigners. Capital payment includes lending to, capital repayments to or purchase of assets from foreigners.
Balance of Payment (BOP) = Balance of Current Account + Balance of Capital Account.
The Balance of Payment is sometimes also presented in three divisions as follows:
I. Current Account:
(a) Visible trade relating to imports and exports.
(b) Invisible items, viz, receipts and payments for such services as shipping.
(c) Unilateral transfers such as donations.
II. Capital Account:
(a) Short term movement of capital made by instruments of less than one year’s maturity, both private and government.
(b) Long term movement of capital, both private and governmental.
III. Official Reserve Assets Accounts:
(a) Gold stock.
(b) Holding of its convertible foreign currencies.
(c) Special Drawing Rights.
The official Reserve Assets Accounts consists of gold stock, holdings of its convertible foreign currencies, and Special Drawing Rights (SDRs). This account is the balancing item with respect to current and capital account transactions.