TUTOR MARKED ASSIGNMENT
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 о 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
Basis
|
FDI
|
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
|
Volatility
|
Having smaller in net inflows
|
Having larger net inflows
|
Management
|
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.