Indian Business Environment, Lecture notes of Nationality law

Download Indian Business Environment and more Lecture notes Nationality law in PDF only on Docsity! Business Environment DMGT401 Edited By Dr. Pretty Bhalla ony = [2)ROFESSIONAL {NIVERSITY  www.lpude.in DIRECTORATE OF DISTANCE EDUCATION BUSINESS ENVIRONMENT Edited By Dr. Pretty Bhalla SYLLABUS Business Environment Objectives: The business environment in India has undergone a dynamic change with liberalisation & privatisation in almost all major sectors of the economy. The nature and extent of roles of the state has encountered fundamental changes. With such changes it is necessary for management students to understand how such changes affect business environment. DMGT105 BUSINESS ENVIRONMENT Sr. No. Description 1. Theoretical Framework of Business Environment: Concept, significance and nature of business environment 2. Elements of environment- Internal and External; Changing dimensions of business environment, Techniques of environmental scanning and monitoring. 3. Planning in India: Emergence of Planning, Planning Commission, National Development Council, Five Year plans-Achievement and Failures with special reference to 11th five year plan 4. Economic Environment of Business: Significance and elements of economic environment, Economic Trends: Savings and Investment, Industry, Growth of Infrastructure Balance of Payment. Inadequacies of the program of Industrialization. 5. Problems of Growth: Unemployment, Inflation, Regional imbalances and Social Injustice. 6. Government Policies- Industrial policy, Fiscal and Monetary policies, EXIM policy; SEZ policy, LPG 1991, Direct and Indirect Taxes with special reference to GST and VAT. 7. Political and Legal Environment of Business: Changing dimensions of legal environment in India, Brief introduction to Competition Act, 2005, FEMA, Corporate Governance and Social Responsibility of Business 8. Foreign Investment: FDI, FII, Determinants of Foreign Investment, Multinational Corporations: Favorable and Harmful effect of the operations of MNCs on Indian economy, Liberalization and MNC’s. 9. International Business Environment: World bank, IMF, General agreement on Tariff and trade. 10. WTO: the WTO agreement, TRIPS, TRIMS, Non-tariff barriers and Dispute settlement mechanism, Kyoto Protocol DMGT401 BUSINESS ENVIRONMENT Sr. No. Description 1. Theoretical Framework of Business Environment, Recent developments in political, economical and financial environment. 2. Techniques of environment scanning and monitoring, SWOT analysis of Indian Economy; Planning in India with special focus on 11th 5 year plan. 3. Industrial Policies; Industrial Licensing; Stock Exchanges in India; Liberalisation, Privatisation and Globalisation. 4. Economic Trends; National Income Economic Development; Inflation, Problems of Growth. 5. India’s Monetary and Fiscal Policy; Foreign Trade Policy and BOP; Direct and Indirect Taxes. 6. Poverty in India; Unemployment in India; Human development, Rural Development, Business Ethics, Corporate Governance and Corporate Social Responsibility. 7. MRTP Act, FERA, FEMA, IPR, RTI. 8. Foreign Investment, MNCs; EXIM Policy; SEZ. 9. International Organizations. 10. World Trade Organization. DCOM105 BUSINESS ENVIRONMENT DCOM402 BUSINESS ENVIRONMENT Sr. No. Topics 1. Theoretical Framework of Business Environment: Concept, significance and nature of business environment. 2. Elements of environment- Internal and External; Changing dimensions of business environment, Techniques of environmental scanning and monitoring. 3. Planning in India: Emergence of Planning, Planning Commission, National Development Council, Five Year plans-Achievement and Failures with special reference to 11th five year plan. 4. Economic Environment of Business: Significance and elements of economic environment, Economic Trends: Savings and Investment, Industry, Growth of Infrastructure Balance of Payment. Inadequacies of the program of Industrialization. 5. Problems of Growth: Unemployment, Inflation, Regional imbalances and Social Injustice. 6. Government Policies- Industrial policy, Fiscal and Monetary policies, EXIM policy; SEZ policy, LPG 1991, Direct and Indirect Taxes with special reference to GST and VAT. 7. Political and Legal Environment of Business: Changing dimensions of legal environment in India, Brief introduction to Competition Act, 2005, FEMA, Corporate Governance and Social Responsibility of Business. 8. Foreign Investment: FDI, FII, Determinants of Foreign Investment, Multinational Corporations: Favourable and Harmful effect of the operations of MNCs on Indian economy, Liberalization and MNC’s. 9. International Business Environment: World bank, IMF, General agreement on Tariff and trade. 10. WTO: the WTO agreement, TRIPS, TRIMS, Non-tariff barriers and Dispute settlement mechanism, Kyoto Protocol. Sr. No. Topics 1. Indian Business Environment: Theoretical Framework of Business Environment, Recent developments in political, economical and financial environment. 2. Techniques of environment scanning and monitoring, SWOT analysis of Indian Economy. 3. Industrial Policy and Regulatory Structure: Industrial Policies; Industrial Licensing; Stock Exchanges in India; Liberalisation, Privatisation and Globalisation. 4. Economic Environment of business: Economic Trends; National Income; Industrialisation and Economic Development; Inflation, Problems of Growth. 5. Political Environment: India’s Monetary and Fiscal Policy; Foreign Trade Policy and BoP; Direct and Indirect Taxes. 6. Socio – Cultural Environment: Poverty in India; Unemployment in India; Human development, Rural Development, Business Ethics, Corporate Governance and Corporate Social Responsibility 7. Legal Environment: MRTP Act, FERA, FEMA, IPR, RTI. 8. Foreign Trade: Foreign Investment, MNCs; EXIM Policy; SEZ. 9. International Business Environment: International Organisations: IMF, World Bank, ADB, WTO. 10. Contemporary issues in Business Environment. LOVELY PROFESSIONAL UNIVERSITY 3 Unit 1: Indian Business Environment Notes1.1 Theoretical Framework of Business Environment The framework of business environment can be divided into three broad dimensions: 1. Internal Environment 2. Macro Environment (External Environment) 3. Micro Environment (Relevant Environment, Competitive Environment) 1.1.1 Internal Environment Internal environment is internal to the organization and it is controllable. In brief important internal factors are as follows: 1. Culture and Value System: Organizational culture can be viewed as a system of shared values and beliefs that shape a company' behavioral norms. A value is an enduring preference for a mode of conduct or an end - state. The value system of founders has a great and lasting impact on the value system of organization. Value system not only influences the operations and behavior it also influences the choice of business. 2. Mission and Objectives: The business domain of the company. The mission and objectives of the company guide priorities, direction, of development, business philosophy, and business policy. 3. Management Structure and Nature: Structure is the way in which the tasks and sub tasks are related. Structure is about the hierarchical relationship, span of management relationship between different functional areas. Structure of top management, pattern of share holding etc. 4. Human Resource: It deals with factors like manpower planning, recruitment and selection, and development, compensation, communication, and appraisal. Besides this internal environment includes corporate resources, production/operation of goods and services, finance and accounting system and methods, marketing and distribution. 1.1.2 External Environment External or Macro or General Environment consists of factors external to the industry that may have significant impact on the firm's strategies. Here we will look at six broad dimensions: Demographic, Socio-cultural, Political/Legal, Technological, Economic and Global. All these dimensions of general environment are interrelated. These dimensions not only influence businesses, but also influence each other. After a political change in 1991, when Congress government came to power, major economic change took place in the form of LPG, i.e., Liberalization, Privatization, and Globalization. This led to an enhancement in the technological environment of the country. This technological and economical change has transformed the socio-culture environment of the country. Globalization has also enabled India to become the software superpower of the world. All global organizations now have a new and vast market, as well as cheap manufacturing hub, which has compelled them to change their global marketing and manufacturing strategies. With this, over the last ten years there has been a drastic change in the India's demography as per capita incomes have risen. The number of young achievers and high earners has increased drastically, which changed the entire demand schedule of products: 1. Political Environment: It is the political environment of the country which decides the fortune of the business in a country. 4 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Did u know? After 1917 revolution in USSR suddenly a political change transform the whole equation of business. In India in 1977 Janta government came in power and because of this Coca Cola and IBM have to leave the country. Because of Janta government all liquor company have to close their operations. After the change in the regime in the USSR in late 1980s and early 1990s the whole equation of business changed in Russia. Recently when Dr. Manmohan Singh led UPA government came in power and new economic policy changed the whole definition of business in India on the one hand it gave a bulk of new opportunities for business on the other hand it also brought threat for inefficient organizations. Not only political philosophy but also political stability has a significance importance. More stable will be the political environment of country the more conducive will be the environment for business. The consensus among various political parties on key issues are also relevant in this case. 2. Regulatory and Legal Environment: The political environment governs the legal and regulatory environment of country. The regulatory environment plays a vital role by dictating the do's and don'ts of a business. Every country has a different legal environment. In India we have the Companies Act that governs companies, the MRTP Act which restricts monopoly, various laws regarding shares, the Consumer Protection Act, environmental laws, and the implementation of GATS. GATS has resulted in the implementation of international laws regarding patents. There are also laws for import and export, licensing etc. that have a drastic impact on business and the future of organizations. When an NRI Lord Swaraj Paul, a British citizen, tried to take over Escorts, its owners, the Nandas approached the government to save their company. A law restricting any NRI from purchasing shares of an Indian company came into force, and Escorts was saved. Demographic Socio-Cultural Business Political/ Legal Economic Technological Global 3. Demographic: It is the demographic environment which decides the marketing mix for an organization. It decides the type of product the organization comes out with. In India a lot of research and efforts are undertaken to reduce the cost of products and to launch products at the cheapest possible rates. Example: A one rupee sachet of shampoo or a five rupee ice-cream cone. Figure 1.1: Dimensions in External Environment LOVELY PROFESSIONAL UNIVERSITY 5 Unit 1: Indian Business Environment NotesIt is the demography that decides the pricing, promotion and distribution strategies. 70% of India's population is lives in villages and of this, 70% are youth, which is why every business house is launching new products, specifically for rural market. Example: ITC launched its unique and ambitious programme called e-chaupal, targeted at the rural market. 4. Socio-culture: Socio-culture variables like the beliefs, value system, attitudes of people and their demographic composition have a major impact on their personality and behavior style. The consumers' preferences have undergone a drastic change through the 1990s. This has led to the production of more cars, refrigerators, air conditioners and other articles that were at one time considered ostentatious and luxurious. Not only this, socio-culture paradigms also dictates the preference of consumer in different regions. Example: Companies launch different products in the south and north because of differing preferences. Companies have to change their product portfolio because of cultural preferences as McDonalds and KFC did when they launched their restaurant chain in India. 5. Technological: Technological forces present a wide range of opportunities and threats that have to be accounted for in the process of business strategy formulation. Technological advancement may dramatically affect an "organization's products, services, markets, suppliers, distributors, competitors, customers, manufacturing process, marketing practices, financial composition, and competitive position." Some of the important factors that influence operating in the technological environment are: (a) Sources of technology like company sources, external sources and foreign sources, cost of technology acquisition, collaboration and transfer of technology. (b) Rate of change in technology, rate of obsolesce. (c) Impact of technology on human being, the man machine system, and the environmental effect of technology. (d) Communication and infrastructural technology in management. In fact, technology is today a decisive factor. From FMCG to the microprocessor industry, everybody is investing heavily in technology. The technological knowledge of a consumer also influences the decisions. Organizations have to modify products according to the level of technological knowledge of the target costumer, because in developing nations complex household machines that need programming will not work. So they have to be technologically more and more focused. 6. Global Environment: The international environment consists of all factors that operate at the transnational, cross-cultural level and across the border. The world is a global village today and it is getting closer and closer as far as business is concerned. For the sake of business, countries are burying their grievances and forging economic relationships. Erstwhile adversaries like America and Russia are today good friends and China and India are coming closer. India has signed a bilateral treaty with Sri Lanka, it is developing close economic relationship with South Africa and Brazil, and is planning to develop a road network in South East Asia. India is also a close all of ASEAN, and is also a signatory of WTO which has a multilateral trade agreement among more than 100 nations. 8 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes According to Michael Porter the five forces of competition are: 1. Threat of Competitors: The rivalry among sellers in the industry. 2. Threat of New Entrants: The potential entry of new competitors. 3. Threat of Substitutes: Market attempts of companies in other industries to win customers over to their own substitute products. 4. Bargaining Power of Suppliers: The competitive pressure stemming from the supplier- seller collaboration and resultant bargaining. 5. Bargaining Power of Buyers: The competitive pressure stemming from seller-buyer collaboration and bargaining. Threat of Substitutes Threat of Competitor Bargain Power of Supplier Bargain Power of Buyer Threat of New Entrants To help make this tool more relevant and useful we've used two different examples after each force: An example based on a mythical childcare charity interested in bidding for a local authority contact to provide respite care for parents of disruptive children. Children Charity Co. (CCC): CCC is currently a small provider of 'relief' services for parents of children with behavioural difficulties. They have heard that the local authority in the area where they work will be considering whether to continue using the NSC (National Society for Children) to provide residential childcare for children who are in care/looked after. This contact could be worth £5M and could lead to a national series of contracts for CCC. The CEO and senior team are trying to decide what to do. 1. Threat of Competitors: When rivals compete to win over customers to improve market share or profitability - that is rivalry among competing sellers. The intensity of rivalry among competing sellers is a function of how vigorously they employ tactics such as lower prices, snazzier features, expanded customer service, longer warranties, special promotional offers, and introduction of new product. All these lead to adverse impact on the profits of the firm. Rivalry intensifies as the number of competitors increases and as competitors become equal in size and capability. Rivalry becomes stronger when the demand for a product grows, and industry conditions tempt competitors to cut prices or use other competitive weapons to boost unit volume. Rivalry is also intensified when one or more competitors are dissatisfied with their market position and launch moves to bolster their standing at the expense of rivals, or when exit barriers are very high and it costs more to get out of business than to stay on. Sometimes, Figure 1.2: Michael Porter's Five Forces Model LOVELY PROFESSIONAL UNIVERSITY 9 Unit 1: Indian Business Environment Notesstronger companies outside the industry acquire weak firms in the industry and launch aggressive, well-funded moves to transform their newly acquired competitors into major market contenders. Rivalry is weak when most competitors in the industry are relatively well satisfied with their sales growth and market shares. Such companies rarely make concerted attempts to steal customers away from one another, and have comparatively attractive earning and returns on investment. (a) Is it difficult to compare competitors? In a way it's more difficult if competitors are very different. For example you could agree that trains compete with buses in terms of getting from A to B. But actually they are very different I terms of who uses them and why. Equally for our charity if a competitor came along who said disruptive child behaviour is a medical problem - i.e. that the children should stay at home and be given medicine that would change this from a social care challenge to a medical one. If the competition changes this makes it difficult for the childcare charity to decide what to do. (Back to Ritalin?) (b) Is there very high 'exit barriers'? 'Exit barriers' mean that it is difficult - economically, emotionally and legally - to leave the market. In a commercial example there may be a contract or the redundancy costs may be high. For our childcare charity these concerns may also exist - but many charities also have a high emotional commitment to their work. This may exist long after that work has ceased to be relevant. 2. Threat of New Entrants: A new entrant in an industry represents a competitive threat to established firms, sometimes called the incumbents. The entrant adds new production capacity and brings substantial resources that were not previously required for success in the industry. But there are various barriers to entry that the new player has to face. These barriers are a challenge for the new entrant and a protective shield for the established player and include: (a) Economies of Scale: Existing large firms enjoy lower costs per unit. They have enough room to reduce prices as they may enjoy higher profits. Also, they could be selling products at such a low price that new player may not able to produce the same output. (b) Cost Disadvantage Independent of Scale: Besides economies of scale, existing firms have other many cost advantages such as proprietary product knowledge, patents, favorable access to raw material, favourable location, lower borrowing cost and government subsidies. (c) Learning and Experience Curve: Established companies have the advantage of learning curve. Because of this learning curve established firms are in a better position as they have skilled and trained human resource. (d) Product Differentiation: Differences in physical or perceived characteristics make an incumbent's product unique in the eyes of the consumer. (e) Capital Requirement: It is said the offender must have three times the power than that of the defender. Thus, an offender requires capital not only to establish a new business but also to compete with established firms. Even the, cost of capital is higher for a new firm as lenders hesitate to provide capital to new entrant. (f) Switching Costs: Sometimes, the costs (physical, psychological and financial) incurred in switching from one supplier to another also resists the customer from going for a new vendor. 10 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes (g) Access to Distribution: The middlemen are reluctant to deal with a product that is new to the market. This situation becomes more critical in industrial and international markets as there are few middlemen because they usually prefer established products. Here consider above example of CCC (a) Is it easy to enter the market or are there economic or legal barriers to entry? (b) Does it cost a lot to set up in competition? E.g. it's expensive to start a railroad, and you need a license. For a CCC it's expensive to set up a nationwide network of childcare centres - and they would need licenses/LA approval. (c) Is it difficult to persuade consumers/users to switch from existing providers - because of brand loyalty, cost of switching, or length of contract, E.g. competing against Coca Cola or persuading people to switch from Windows to Macs is a challenge. If the local authority has a 3 year contract with NSC - the existing charity supplier - to provide support for 'difficult' children then CCC getting that contract from that other charity could be very expensive and challenging. (d) Do existing providers have a 'scale-independent' costs advantage? e.g. in a commercial setting this is a unique advantage like a copyright like for Windows, or a broadcast license like ITV which no n eels can have. In the case of CCC if they or their rivals have an accredited training programme for care workers childcare workers, or the ability to use funds from their general fundraising to support local childcare, then these would be similar advantages. 3. Threat of Substitutes: This refers to the market attempts of companies in other industries to win customers over to their own substitute products. Example: A producer of scooters will compete with motorcycle makers, newspapers compete with television operators, tea competes with coffee, CD players compete with DVD players, Aspirin manufacturers compete with the makers of Acetaminophen, Brufen and other pain relievers. Makers of eyeglasses compete with the makers of contact lenses, road transport services compete with the railways. Strong competitive pressure from substitute products depends upon three factors: (a) Whether attractively priced substitutes are available? (b) Whether the buyers view the substitutes as being satisfactory in terms of quality, performance, and other relevant attributes? (c) Whether buyers can switch to substitutes easily? The presence of readily available and attractively priced substitutes creates competitive pressure by placing a ceiling on the prices an industry can charge for its product without giving customers a reason to switch to substitute and thus risk sales erosion. How readily available and cost comparable are substitutes? In the mobile phone industry the big providers are all very similar and the cost of switching very small - except for the contract! For our childcare charity this might be more of a challenge if, for example, the local authority was comparing fostering as an alternative proposition - or even giving out Ritalin to kids in schools 4. Bargaining Power of Suppliers: Suppliers have little or no bargaining power when there are many suppliers and supply exceeds demand. Suppliers compete with each other to grab orders. On the other hand, bargaining power is high when it comes to high technology LOVELY PROFESSIONAL UNIVERSITY 13 Unit 1: Indian Business Environment Notesof user-friendly software. In fact the business of accessories like car and motorcycle accessories, computer accessories, etc., depends upon the key product. In fact, both substitutes and complementary products influence the demand for a product. So while studying the environment one should not forget complementary products because at some point in time, they can be the decisive factor for sales and profits. 1. Marketing Intermediaries: Marketing intermediaries are an important part of the micro environment. These are firms and persons, who help in distribution, promotion, selling, and provide services like consultancy. Almost every business has to take the help of these intermediaries. Sometimes they play a decisive role. Like in the FMCG business, distribution is of critical importance and there is intense competition to acquire the support of a strong distributor. Example: The primary reason Coca-Cola acquired Parle was to gain access to the distribution network of Parle, which was wide and penetrated. Besides this there are brokers, agents, logistics companies, private transporters etc., which play an important role. There are incidences of retailers boycotting the product of particular companies because of low margins. Companies also spend a significant amount on promotion and advertising firms. For instance, companies like HLL spend as much as 800 crores on advertising as part of their marketing strategy. 2. Financial Institutions (FIs): For any business, FIs plays a critical role, especially at the micro level. FIs not only make available the finance but also create an environment for investment. They also give expert opinion and consultancy to the corporate. Every corporate is dependent on FIs – whether it is banks or consultancies or NBFCs – for its financial needs. They also facilitate the mode of payment. For the industrial development of any country a well-established financial institutions is a prerequisite. These FIs mobilize the savings of the public to the corporate world. An organization that has a good rapport with FIs usually gets finance easily and at easy terms, which makes a lot of difference in this competitive environment. 3. Strategic Group: Strategic groups are conceptually defined as clusters of competitors that share similar strategies and therefore compete more directly with one another than with other firms in the same industry. A strategic group is to identify a more defined set of organizations so that each grouping represents those with similar strategic characteristics. They are not a formal group or an association:, in fact they are conceptual clusters in the sense that they are grouped together for the purpose of improving analysis and understanding of competition within their industry. Strategic groupings look for these similarities: (a) Extent of product diversity. (b) Extent of geographic coverage. (c) Number of market segment served. (d) Distribution channel used. (e) Extent of branding. (f) Marketing effort. (g) Extent of vertical integration. (h) Pricing, etc. 14 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Example: Coca Cola and Pepsi will be considered a strategic group because both have similar products and both follow similar strategies. P&G, HLL and NIRMA can also be considered to be the same strategic group. This sort of grouping in order to analyse and understand competition is very useful. It also helps in tracing close competitors and in formatting counter strategies. 4. Critical Success Factors (CSFs): Many industries have small but extremely important set of factors that are essential for successfully gaining and maintaining a competitive advantage. Critical success factors are those areas in which good results will help ensure an organization's success against competition and where poor results usually lead to declining performance. CSFs which are relevant to any company are determined by a variety of environmental and firm-specific considerations. During environmental analysis one should find out what are the critical factors for the firm. Example: For an FMCG, distribution network is a critical success factor, for pharmaceutical companies, R&D is a factor, and for a generic product company like steel or aluminum manufacturing firms, cost is a CSF. For a food chain organization like McDonalds, logistics and supply chain management is a CSF. 5. Driving Force: Behind every change in environment there is some driving force and these driving forces lead to a sequential change in environment. To understand and forecast future trends it essential to understand the driving force behind them. In fact, sometimes changes in segment A can be the result of changes in segment B and on the other hand, to influence B one has to influence A. For instance, if there is a sudden rise in the sale of a certain product of an organization, it may presume this to be a result of the hard work of its sales force, whereas it may actually because its competitor's product is in short supply. 1.2 Recent Developments in Political, Economic and Social Environment Political Environment Decade of 1990 saw the rise of many political parties in India at regional level which not only flourished but also become they force to reckon with. The BJP Govt. was a Coalition Govt. By the year 2000 many regional political parties become so strong in their specific regions that they share power at the centre. We can define this era as a Coalition era. The political Mantra of this era was to associate with strong Regional Parties. So the two National Political Parties that is Congress and BJP associate themselves with regional parties. A look at the results of the last five General Elections reveals that there is a decline in the performance of the National Parties taken together both in terms of total number of seats won as well as their vote share. State Parties and Other Registered Parties gained at the cost of National Parties during this period. This is one of the factors that had contributed to federal coalition governments in the recent past. While the National Parties got a total of 470 seats in the 543 member Lok Sabha in 1989 elections with a share of 79.34 percent of total votes polled, in the next elections, two years later, they got 465 seats although the vote share rose to 80.91 per cent. But their vote share declined to 69.08 percent and 67.98 percent in 1996 and 1998 General Elections respectively. Correspondingly during 1996, they got a total of 403 seats which further declined to 387 in 1998 and 369 in 1999. LOVELY PROFESSIONAL UNIVERSITY 15 Unit 1: Indian Business Environment NotesAll the State Parties, put together, could get only 27 seats in 1989 elections. They improved their tally to 51 in 1991 and 129 in 1996. But there was a decline in seat share to 101 in 1998 and subsequently an increase to 158 in 1999. There was a corresponding increase in their vote share also. In 1989 their vote share was 9.28 percent of the total valid votes polled. In 1991 they improved by a clear 3.7 per cent in their vote share taking it to 12.98 percent. In 1996 elections they got 22.43 percent of votes. In 1998 their vote share declined marginally to 18.79 percent but increased again to 26.93 percent in the 1999 polls. These Regional Parties not only share the Power at Centre but they also work as a Pressure Group. They tries to impose their agenda on the national polices. In 1999 General Election Congress Led Coalition came to power under the leadership of Mrs Sonia Gandhi and Dr. Manmohan Singh became the Prime Minister of India. On the national level CPI supported the Indian National Congress-led United Progressive Alliance government, but without taking part in it. The party is part of a coalition of leftist and communist parties known in the national media as the Left Front. Upon attaining power in May 2004, the United Progressive Alliance formulated a programme of action known as the Common Minimum Programme. The Left bases its support to the UPA on strict adherence to it. Provisions of the CMP mentions to discontinue disinvestment, massive social sector outlays and an Independent Foreign Policy. It is the pressure of CPI that Dr. Manmohan Singh has to apply break on his agenda of Disinvestment and Privatization. On July 08, 2008, Prakash Karat announced that left front is withdrawing its support over the decision by the government to go ahead on the United States-India Peaceful Atomic Energy Cooperation Act. At this moment Mulayam Singh Yadav led Samajwadi Party of Uttar Pradesh came forward and extending its support to Congress. Thus the Central Govt. was on the mercy of regional political parties having their own agenda and regional interest. In 2009 people of India voted for stability. The people of India gave clear majority to the Congress led Alliance that is UPA the other constituents of the UPA are 1. Dravida Munnetra Kazhagam 2. Nationalist Congress Party 3. Jharkhand Mukti Morcha 4. All India Majlis-e-Ittehadul Muslimeen 5. Republican Party of India (Athvale) 6. Sikkim Democratic Front 7. Indian Union Muslim League 8. Trinamool Congress In totality this alliance won 262 Seats out of 543 seats. The Communist Party led Third Front could manage only 80 seats. Most of them are of BJD in Orissa. The 2009 Election clearly indicates that the pressure group politics of regional political parties is over. In current political scenario can be marked by following facts: 1. Strong Presence of Indian National Congress at the National Level 2. Stable Government 3. Unanimity among the Political Parties on Economic Issues 18 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes The budget of 1997-98 and the monetary policy for the first half of 1997-98 are considered landmarks in the process of economic reform in India. In the budget of 1997-98, there are some elements of great relevance to the financial sector, while the monetary policy announcement that followed has been described as a 'big bang' in financial sector reform. 1.3 Techniques of Environmental Scanning and Monitoring The process by which organization monitors their relevant environment to identify opportunities and threats affecting their business is known as environmental scanning. Notes Factors to be Considered for Environmental Scanning The external environment consists of variety of factors we can explain them as follows: 1. Events are important and specific occurrences taking place in different environment sector. 2. Trends are the general tendencies or courses of action along which events takes place. 3. Issues are the current concerns that arise in responses to events and trends. 4. Expectations are the demands made by interested groups in the light of their concern for issues. Source: Aghor Kazmi, TATA McGraw Hill, p. 118 1.3.1 Environmental Analysis Collection of Information Analysis is done by means of a search of verbal and written information, spying, forecasting and formal studies and information system. At first there is the gathering of verbal information, the sources of verbal information are: 1. Media such as radio and television 2. The firm's employees such as peers, subordinates and supervisors. Other sources of verbal information outside the firm are:- Customers of the enterprise, persons in industry channel (such as wholesalers, brokers, distributors, etc.), suppliers doing business with the firm, competitors and their employees, financial executives such as bankers, stockholders, and stock analysts, consultants and the government. Besides verbal sources, information can be gathered by reading. Information about the environment is readily available in newspapers, trade journals, industry newsletters, journals and publications, government reports, reports of various marketing research agencies such as Gallup, ORG, etc. It is said (is it not true?) that behind every business activity there is one government department and one association. This department or association publishes information related to business on regular intervals. The second solution to environmental analysis is to design a Management Information System. A formal MIS gives quick relevant information to the decision-makers, which helps a lot in making timely decisions. Beside this, information regarding competitors can be gathered through Corporate Intelligence and Spying. LOVELY PROFESSIONAL UNIVERSITY 19 Unit 1: Indian Business Environment NotesCorporate Intelligence: Corporate Intelligence (CI) can be described "as a technique of adopting industry/research expertise to analyse the information available on competition from public sources and to draw conclusion based on this data." A typical CI activity involves collection, organization, analysis and utilisation of business-related data of competitors to make informed decisions. Example: Some of the major companies that use CI include: Microsoft, Motorola, P&G, HP, GE, IBM and Xerox. Spying: Corporate espionage can be defined as 'spying' on business competitors to acquire proprietary information such as product design, research projects, marketing plan, trade secret, source code for new software, intellectual property and research information and other business strategies. In 1996 the US government passed the Economic Espionage Act to restrict espionage. Did u know? Once GM alleged that Volkswagen stole its trade secret by luring its head of production. GM won case against Volkswagen and obtained a hefty compensation. Similarly, in 1943, a P&G employee reportedly bribed an employee of Levers Brothers to steal a bar of soap that was under development. Deciding Priorities Various changes take place in the environment and it is difficult, cumbersome and a costly affair to keep a regular eye on every aspect of these changes. So it is essential for a strategist to rate the environmental factors on the basis of criticality and then invest time and resources in environmental analysis. The Nine-cell Matrix is one method of deciding priorities regarding environmental issues. The issues that are critical need maximum attention of the management and quick action or preparation. On the other hand issues of low priority need just monitoring at regular intervals. Issues of high priority need attention standby plans in case and also need regular observation. Critical High Priority Low Priority High Priority High Priority Low Priority To be Watched Low Priority Low Priority Pr ob ab ili ty o f A ct io ns High Medium Low High Medium Low Methods Environmental Analysis Environmental Analysis can be divided into two methods 1. Environmental Evolution: There are three components that are useful to describe changes in the environmental segments: (a) Type of change Figure 1.3: Identifying High Priority Environmental Sector 20 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes (b) Forces driving change (c) Type of future evolution. Changes in the microenvironment may be systematic or discontinuous. Gradual changes, changes in a phased manner, or those that are predictable are systematic changes. As after liberalization, a change in the ratio of youth in population of India, rise in the income of middle class and especially of the youth can be seen as systematic change. Unpredictable or sudden changes are discontinuous, like the twin tower terror attacks in the US and its aftermath. Sometimes changes in one segment may be the result of driving forces in another segment. The driving force behind the acceptance of packaged food in India could be because of the purchasing power of the middle class, or because more women are working, or it could be more awareness among the youth via the mass media. These driving forces constantly interact with each other. Environmental evolution can be completely predictable and sometimes it is dependent upon actions of the firm or other entities in the environment. 2. Process of Environmental Analysis: The process of environmental analysis can be divided into four parts: (a) Scanning the environment to detect warning signals (b) Monitoring specific environmental trends (c) Forecasting the direction of future environmental changes and (d) Assessing current and future environmental changes for their organizational implications. (a) Scanning: Environmental scanning is aimed at alerting the organization to potentially significant external impingement before it has fully formed or crystallised. Successful environmental scanning draws attention to possible changes and events well before occurrence, giving time for suitable action. Scanning frequently detects environmental change that is already in an advanced stage. Scanning is most ill- structured and ambiguous environmental analysis activity. The data sources are many and varied. Moreover a common feature of scanning is that early signals often show up in unexpected places. Fundamental challenge for the analyst in scanning is to make sense of vague, ambiguous and unconnected data and to infuse meaning into it. (b) Monitoring: Monitoring involves following the signals or indicators unearthed during environmental scanning. In monitoring the data search is focused and much more systematic than scanning. By focused, it is meant that the analyst is guided by a priori premonition. Systematic refers to the notion that the analyst has the general sense of the pattern and he is looking for and collects data regarding the evolution of the pattern. As monitoring progresses the data frequently move from the imprecise and unbounded to reasonably specific and focused. The output or monitoring are threefold: (i) A specific description of environmental patterns to be forecast, (ii) Identification of trends for further monitoring, and (iii) Identification of patterns requiring further scanning. LOVELY PROFESSIONAL UNIVERSITY 23 Unit 1: Indian Business Environment Notes Notes PESTLE is an acronym for Political, Economic, Social, Technological, Legal and Environmental factors, which are used to assess the market for a business or organizational unit strategic plan It is important to clearly identify the subject of a PESTLE analysis (that is a clear goal or output requirement), because an analysis of this type is multi faceted in relation to a particular business unit or proposition – if you dilute the focus you will produce an unclear picture – so be clear about the situation and perspective that you use PESTLE to analyze. PESTLE Analysis on an HR Department or other Internal Function While the PEST or PESTLE analysis is primarily aimed at looking at the external environment of an organization, many HR courses ask students to use the PEST or PESTLE analysis model to look at their own function. In this context we need to imagine that the department (HR) is an organization in its own right and look outside. Factors to include in your analysis may include the following: 1. Political (a) What is the culture of the organization? (b) How is the HR function viewed by other functions? (c) Who are the political champions of HR (or its adversaries)? (d) Shareholder views 2. Economic (a) What is the budgetary position of the department? (b) Is more money available? (c) Are our customers likely to spend more or less money on the services we offer? (d) What is happening to the financial status of the organization? (e) Interest rates (f) Inflation (g) Salary trends in the sector 3. Sociological (a) Other departmental attitudes to HR (b) Population shifts (age profile) (c) Education (d) Fads (e) Diversity (f) Immigration/emigration (g) Health (h) Living standards 24 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes (i) Housing trends (j) Fashion & role models (k) Age profile (l) Attitudes to career 4. Technological (a) What changes may be coming our way? (b) What new technology/systems? (c) How do we record attendance, performance? how might this change? (d) Use of and encourage home working? (e) Communications technologies (f) Changes of technology that will increase/reduce the need for recruitment (g) Changes to HR software 5. Legal (a) What is happening in our sector that will impact what we do? (b) Minimum wage, (c) Working time, (d) Food stuffs, (e) Under 18 working, (f) Occupational/ industrial Training etc. (g) What changes will impact the services of the organization? 6. Environmental (a) Staff morale (b) Staff engagement (c) Need to reduce storage needs (d) Management attitudes (inside dept/ function) (e) Organizational culture 1.3.4 Social, Legal, Economic, Political and Technological (SLEPT) Analysis It is important to 'scan' the external environment before creating business plans or when evaluating existing ones. Doing this takes the form of a SLEPT analysis and thus there is a scanning or an investigation of the Social, Legal, Economic, Political, and Technological influences that can be or likely to be on a business. It is important that you should be aware of the actions of your competitors in business. Social factors relate to the pattern of behaviour, tastes, and lifestyles. A major component of this is a change in consumer behaviour resulting from changes in fashions and styles. The age structure of the population also alters over time (currently we have an ageing population). To give your business a better shape it is better to have a good knowledge of the social factors around you. LOVELY PROFESSIONAL UNIVERSITY 25 Unit 1: Indian Business Environment NotesThe legal factors i.e. laws especially the government policy relating to the businesses often undergoes a change with each budget session and the amendments and laws changed from time to time especially in a country like India. There are consumer protection legislation, environmental legislation, health & safety and employment law, etc., which are continually modified in a wide range of areas. Economic factors are affected with every change in the social ones. There are multiple fluctuations associated with general booms and slumps in economy. In a boom nearly all businesses benefit and in a slump most lose out. Other economic changes that affect business include changes in the interest rate, wage rates, and the rate of inflation (i.e. general level of increase in prices). Businesses will be more encouraged to expand and take risks when economic conditions are right, e.g. low interest rates and rising demand. Political changes relate to changes in government influence. In recent years these changes have been particularly significant because as members of the European Union we have to adopt directives and regulations created by the EU which then become part of UK law. Political changes are closely tied up with legal changes. Changes in technology have also become particularly significant in the post-millennium world. This is particularly true in terms of modern communication technologies. The creation of databases and electronic communications have enabled vast quantities of information to be shared and quickly distributed in a modern company enabling vast cost reductions, and often improvements in service. Organisations need to be aware of the latest relevant technologies for their business and to surf the wave of change. Notes SLEPT factors affecting the airline industry in recent years include: 1. Social: Increased popularity of foreign travel leading to a boom in demand for air travel. However, this has been adversely affected by international terrorism. 2. Legal: There are increasingly tight rules about the materials that need to go into aircraft construction in order to make them safer and more resistant to fire hazards. This has had the impact of raising costs. 3. Economic: Lower interest rates have meant that people have more disposable income to spend on luxuries like long distance air travel. 4. Political: The development of freedom of movement and trade in the European Union has led to greater levels of competition on European routes coupled with increased movement of people. 5. Technological: Modern aircraft are safer and more economic to run than in the past making possible cheap air travel. 1.3.5 Methods of Scanning the Business Environment There are three ways of scanning the business environment: 1. Ad-hoc scanning: Short term, infrequent examinations usually initiated by a crisis 2. Regular scanning: Studies done on a regular schedule (say, once a year) 3. Continuous scanning: (also called continuous learning) – continuous structured data collection and processing on a broad range of environmental factors 28 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes 7. Potential Suppliers Labour Supply (a) Quantity of labour available (b) Quality of labour available (c) Stability of labour supply (d) Wage expectations (e) Employee turn-over rate (f) Strikes and labour relations (g) Educational facilities Material Suppliers (a) Quality, quantity, price, and stability of material inputs (b) Delivery delays (c) Proximity of bulky or heavy material inputs (d) Level of competition among suppliers Service Providers (a) Quantity, quality, price, and stability of service facilitators (b) Special requirements Stakeholders (a) Lobbyists (b) Shareholders (c) Employees (d) Partners While scanning these macro environmental variables for threats and opportunities requires that each issue be rated on two dimensions. It must be rated on its potential impact on the company, and rated on its likeliness of occurrence. Multiplying the potential impact parameter by the likeliness of occurrence parameter gives us a good indication of its importance to the organisation. Task What could be the five forces as per Porter's model for the automobile manufacturer, Hyundai? 1.4 SWOT Analysis of Indian Economy SWOT analysis of the Indian economy can be done in following way: Strengths 1. India has huge pool of labour force 2. There are high percentage of cultivable land LOVELY PROFESSIONAL UNIVERSITY 29 Unit 1: Indian Business Environment Notes3. Diversified nature of the economy 4. It has huge English speaking population, availability of skilled manpower 5. Stable economy, does not get affected by external changes 6. Extensive higher education system, third largest reservoir of engineers 7. High growth rate of economy 8. Rapid growth of IT and BPO sector bringing valuable foreign exchange 9. Abundance of natural resources Weaknesses 1. Very high percentage of workforce involved in agriculture which contributes only 23% of GDP 2. Around a quarter of a population below the poverty line 3. High unemployment rate 4. Stark inequality in prevailing socio economic conditions 5. Poor infrastructural facilities 6. Low productivity 7. Huge population leading to scarcity of resources 8. Low level of mechanization 9. Red tapism, bureaucracy 10. Low literacy rates 11. Unequal distribution of wealth 12. Rural-urban divide, leading to inequality in living standards Opportunities 1. Scope for entry of private firms in various sectors for business 2. Inflow of Foreign Direct Investment is likely to increase in many sectors 3. Huge foreign exchange earning prospect in IT and ITES sector 4. Investment in R&D, engineering design 5. Area of biotechnology 6. Huge population of Indian Diaspora in foreign countries (NRIs) 7. Area of Infrastructure 8. Huge domestic market: Opportunity for MNCs for sales 9. Huge natural gas deposits found in India, natural gas as a fuel has tremendous opportunities 10. Vast forest area and diverse wildlife 11. Huge agricultural resources, fishing, plantation crops, livestock 30 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Threats 1. Global economy recession/slowdown 2. High fiscal deficit 3. Threat of government intervention in some states 4. Volatility in crude oil prices across the world 5. Growing import bill 6. Population explosion, rate of growth of population still high 7. Agriculture excessively dependent on monsoons 1.5 Planning in India Planning in India dates back to the 1930s. Even before independence, the colonial government had established a planning board that lasted from 1944 to 1946. Private industrialists and economists published three development plans in 1944. Thus, even before independence, planning was not totally new to the economy. Notes A 'Bombay Plan' was formulated by J.R.D. Tata and some others as a blueprint for rapid industrialisation. Jawaharlal Nehru visualised planning as a means of "avoiding the unnecessary rigours of an industrial transition in so far as it affected the masses resident in India's villages" as well as a "positive instrument for resolving conflict in a large and heterogeneous subcontinent". It was Nehru who persuaded P.C. Mahalanobis to evolve the basic strategy for the Second Five-Year Plan, while Nehru himself was involved in drafting the introduction to its third edition. India's leaders adopted the principle of formal economic planning soon after independence as an effective way to intervene in the economy to foster growth and social justice. The Planning Commission was established in 1950. Responsible only to the Prime Minister, the commission is independent of the cabinet. The Prime Minister is the chairperson of the commission, and the Minister of State with independent charge for planning and program implementation serves as its Deputy Chairperson. A staff drafts national plans under the guidance of the commission; draft plans are presented for approval to the National Development Council, which consists of the Planning Commission and the Chief Ministers of the States. The council can make changes to the draft plan. After the council's approval, the draft is presented to the cabinet and subsequently to Parliament, whose approval makes the plan an operating document for Central and State Governments. 1.5.1 Brief View of Five Year Plans 1. First Five-Year Plan (FY 1951-55) attempted to stimulate balanced economic development while correcting imbalances caused by the World War II and India's partition. Agriculture, including projects that combined irrigation and power generation, received priority. 2. Second Five-Year Plan (FY 1956-60) emphasised industrialisation, particularly of basic, heavy industries in the public sector, and improvement of the economic infrastructure. The plan also stressed social goals, such as more equal distribution of income and extension of the benefits of economic development to the large number of disadvantaged people. LOVELY PROFESSIONAL UNIVERSITY 33 Unit 1: Indian Business Environment NotesAlong with high growth rate aiming for improving livelihood support and increasing employment, the Eleventh Plan strategy calls for new emphasis on education, health and other socially relevant issues. The approach to the plan by the Planning Commission has very appropriately reflected in its title "Towards Faster & More Inclusive Growth". The importance of S&T in the development process envisages innovative solutions. Eleventh Plan is being formulated at a crucial juncture. In a unipolar and truly globalized world where trade barriers are getting dismantled, an organization has to perform and deliver in real time. The global competition is real and severe for every sector including R&D organizations like CSIR. Either we stay relevant by increased and defined focus with well set and articulated delivery protocols or be swamped by competition, primarily from private sector, R&D laboratories both national and international. 1.5.2 Five Year Plans: Target vs. Achievements 1st Plan (1951-56) 1. The first five year plan was presented by Jawaharlal Nehru in 1951. The First Five Year Plan was initiated at the end of the turmoil of partition of the country. It gave importance to agriculture, irrigation and power projects to decrease the countries reliance on food grain imports, resolve the food crisis and ease the raw material problem especially in jute and cotton. Nearly 45% of the resources were designated for agriculture, while industry got a modest 4.9%. The focus was to maximize the output from agriculture, which would then provide the impetus for industrial growth. 2. Though the first plan was formulated hurriedly, it succeeded in fulfilling the targets. Agriculture production increased dramatically, national income went up by 18%, per capita income by 11% and per capita consumption by 9. 2nd Plan (1956-61) 1. The second five year plan was initiated in a climate of economic prosperity, industry gained in prominence. Agriculture programmes were formulated to meet the raw material needs of industry, besides covering the food needs of the increasing population. The Industrial Policy of 1956 was socialistic in nature. The plan aimed at 25% increase in national income. 2. In comparison to First Five Year plan, the Second Five Year Plan was a moderate success. Unfavorable monsoon in 1957-58 and 1959-60 impacted agricultural production and also the Suez crisis blocked International Trading increasing commodity prices. 3rd Plan (1961-66) 1. While formulating the third plan, it was realized that agriculture production was the destabilizing factor in economic growth. Hence agriculture was given due importance. Also allotment for power sector was increased to 14.6% of the total disbursement. 2. Emphasis was on becoming self reliant in agriculture and industry. The objective of import substitution was seen as sacrosanct. In order to prevent monopolies and to promote economic developments in backward areas, unfeasible manufacturing units were augmented with subsidies. The plan aimed to increase national income by 30% and agriculture production by 30%. 34 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes 3. The wars with China in 1962 and Pakistan 1965 and bad monsoon in almost all the years, meant the actual performance was way of the target. 4th Plan (1969-74) 1. At the time of initiating the fourth plan it was realized that GDP growth and rapid growth of capital accumulation alone would not help improve standard of living or to become economically self-reliant. Importance was given to providing benefits to the marginalized section of the society through employment and education. 2. Disbursement to agricultural sector was increased to 23.3% .Family planning programme was given a big stimulus. 3. The achievements of the fourth plan were below targets. Agriculture growth was just at 2.8% and green revolution did not perform as expected. Industry too grew at 3.9%. 5th Plan (1974-79) 1. As a result of inflationary pressure faced during the fourth plan, the fifth plan focused on checking inflation. Several new economic and non-economic variables such as nutritional requirements, health, family planning etc. were incorporated in the planning process. Investment mix was also formulated based on demand estimated for final domestic consumption. 2. Industry got the highest allocation of 24.3% and the plan forecasted a growth rate of 5.5% in national income. 3. The fifth plan was discontinued by the new Janata government in the fourth year itself. 6th Plan (1980-85) 1. The Janata government moved away from GNP approach to development, instead sought to achieve higher production targets with an aim to provide employment opportunities to the marginalized section of the society. But the plan lacked the political will. 2. The Congress government on taking office in 1980 formulated a new plan with a strategy to lay equal focus on infrastructure and agriculture. 3. The plan achieved a growth of 6% p. a. 7th Plan (1985-89) The first three years of the seventh plan saw severe drought conditions, despite which the food grain production rose by 3.2%. Special programmes like Jawahar Rozgar Yojana were introduced. Sectors like welfare, education, health, family planning, employment etc. got a larger disbursement. 8th Plan (1992-97) 1. The eighth plan was initiated just after a severe balance of payment crisis, which was intensified by the Gulf war in 1990. Several structural modification policies were brought in to put the country in a path of high growth rate. They were devaluation of rupees, dismantling of license prerequisite and decrease trade barriers. LOVELY PROFESSIONAL UNIVERSITY 35 Unit 1: Indian Business Environment Notes2. The plan targeted an annual growth rate of 5.6% in GDP and at the same time keeping inflation under control. 9th Plan (1997-2002) It was observed in the eighth plan that, even though the economy performed well, the gains did not percolate to the weaker sections of the society. The ninth plans therefore laid greater impetus on increasing agricultural and rural incomes and alleviate the conditions of the marginal farmer and landless laborers. 10th Plan (2002-2007) 1. The aim of the tenth plan was to make the Indian economy the fastest growing economy in the world, with a growth target of 10%. It wanted to bring in investor friendly market reforms and create a friendly environment for growth. It sought active participation by the private sector and increased FDI's in the financial sector. 2. Emphasis was laid on corporate transparency and improving the infrastructure. 3. It sought to reduce poverty ratio by 5 percentage points by 2007 and increase in literacy rates to 75 per cent by the end of the plan. 4. Increase in forest and tree cover to 25 per cent by 2007 and all villages to have sustained access to potable drinking water. Case Study Doordarshan's Problems After years of falling revenues, in 1999-2000 Doordarshan (DD) had a revenue growth at 50%. In 1999-2000, DD earned revenues of 6.1mn compared to 3.99 mn in 1998-99. DD showed signs of revival with the launch of DD World (a channel for NRIs) and had relative success with some of its regional channels. However, by the end of 2000-01, DD's honeymoon with success seemed to be over. In 2000- 01, DD's revenues were projected to grow at 6-15% while private channels such as Zee TV, Star, Sony had projected 40-50% revenue growth. Analyst's felt that DD's sagging revenues were only tip of the iceberg. DD was plagued by multiple problems, which found their roots in the mismanagement of affairs. By the late 1990's the private producers, advertisers and audience had deserted DD. Not even one car company advertised on DD and even two-wheeler manufacturers kept a low profile. Ads of Pepsi and Coca-Cola were found only during sports telecasts. Only FMCG companies stuck to DD because of its terrestrial network to reach the rural and semi-urban audience. In spite of having over 21,000 employees, DD outsourced 50% of its programmes from the private producers. In late 1990's DD faced number of allegations of large-scale scams and irregularities. Under utilized infrastructure, improper investments and poor financial management plagued the performance of DD. In 1992, when the Government opened airwaves to private players, DD faced the heat of competition from private satellite channels. In the Cable & Satellite (C&S) homes it was found that there were hardly any viewers for the DD programmes. The depleting Television Viewer Ratings (TVRs) of the DD Contd... 38 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Complementary Products: Products that add value to some other product Continuous Scanning: Continuous structured data collection and processing on a broad range of environmental factors Corporate Intelligence: Technique of adopting industry/research expertise to analyse the information available on competition Critical Success Factors: Areas in which good results will help ensure an organization's success against competition Environment Scanning: Process by which organization monitors their relevant environment to identify opportunities and threats ETOP: Environmental Technology Opportunities Portal External Environment: Factors external to the industry having significant impact on the firm's strategies Internal Environment: Internal to the organisation and can be controlled Macro Environment: Environment, which an organization faces in its specific arena Regular Scanning: Studies done on a regular schedule SLEPT Factors: Social, legal, economical, political and technological factors Spying: Corporate espionage Strategic Groups: Clusters of competitors that share similar strategies Substitute Products: Products that can replace another product 1.8 Self Assessment State whether the following statements are true or false: 1. RBI makes changes in the changes in the monetary policy to control the increased demand in the market. 2. The goal of the firm to takeover a significant amount of marker share and take a lead form competitors forms a part of the internal environment. 3. Business environment has the same meaning and same impact on all businesses. 4. Products like motorcycle and scooter are complementary products. 5. An organisation brings out the facts related to its standing in the market vis-à-vis the competition by doing a SWOT analysis. 6. Sales manager and salesmen have to be in regular touch with the market so that they are updated with the currents trends. They do a regular scanning. 7. The field of biology and bio-technology poses a big weakness for Indian economy. 8. National Development Council consists of Planning Commission and governors of the state. Fill in the blanks: 9. The economic environment is a subset of …………………… environment. 10. Kellogg's failed miserably in India in its first attempt because it failed to assess India's …………………… environment. LOVELY PROFESSIONAL UNIVERSITY 39 Unit 1: Indian Business Environment Notes11. India has changed a lot after the LPG policy was introduced in 1991. This shows that business environment is …………………. 12. ………………… helps in study of strategic positioning of the firm and help to assess the business environment also with respect to the competition. 13. Automobile majors like Mercedes Benz, BMW, Volkswagen, Rolls Royce etc. all are a part of ………………….. 14. For a firm like ITC and HUL, widespread distribution is one of it's …………………….. 15. In ………………. the lookout for information is in a more structured and systematic manner. 16. The period of …………… five year plan saw a significant growth in the transportation and communications expenditure. 1.9 Review Questions 1. "The relation between a business and an environment is not a one way affair". Comment. 2. Analyse how Indian automobile market has changed over these years. What are the critical success factors for some of the major players in this industry? 3. India's industrial outlook changed significantly after 1991. Why and how? 4. Discuss the major changes that have taken place in India's political scenario over the years. Has the situation improved or worsened? Give reasons. 5. How do the demographic variables decide the marketing mix of the organisation? Explain with detailed example of any two companies from different industries. 6. "Environment is dynamic and multi-faceted". Discuss. 7. A company should not only monitor its own performance but competition also. Why is it so important to assess the competition? Take any close competitors from any industry and compare & contrast the two. 8. Suppose you are the CEO of a fast food restaurant chain. Your company wants to enter India and position itself in the same category as McDonalds, KFC and Pizza Hut. What factors will you have to keep in mind before entering India? 9. Is there any practical difference between scanning and monitoring? If you were to assess the competition, which one is better for you? 10. "A good strategist always keeps an eye on development in environment." Comment. 11. Do a SWOT analysis of the Indian Tourism industry? 12. Suppose you are going a researcher interested in knowing the actual position of the fashion industry. What will be better for you-SWOT analysis or SLEPT analysis? How will you do analysis? 13. Discuss how volatility in crude oil prices across the world and growing import bill poses a big threat for Indian economy. 14. What is the rationale behind the Five year plans? Do you think five years are enough for a plan to be put up and implemented successfully? Critically analyse the planning process in India till now. 15. Critically evaluate the eleventh five year plans. Do you think they cover all the issues that need to be addressed? What suggestions can you give for improvement in these plans? 40 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Answers: Self Assessment 1. True 2. True 3. False 4. False 5. False 6. False 7. False 8. False 9. Business 10. Socio-cultural 11. Dynamic 12. Porter Five Forces Model 13. Strategic Group 14. Critical Success factors 15. Monitoring 16. 7th 1.10 Further Readings Books Pandey GN, Environment Management, Vikas Publishing, New Delhi Paul Justin, Business Environment: Text and Cases, Tata McGraw Hill, New Delhi Saleem Sheikh, Business Environment, Pearson Education, New Delhi Vivek Mittal, Business Environment, Excel Books, New Delhi Online links planningcommission.gov.in/plans/planrel/fiveyr/welcome.html portal.brint.com/cgi-bin/.../cgsearch.cgi?...SLEPT+Analysis rapidbi.com/created/the-PESTLE-analysis-tool.html www.1000ventures.com/business.../business_environment.html www.acusis.com/AP0410/Company/.../Business.asp www.economywatch.com/indianeconomy/indian-economy-overview www.educationforallinindia.com/fiveyearplans.html www.indiainbusiness.nic.in/indian-economy www.managementparadise.com/.../business-environment www.palgrave.com/business/morrison/.../files/Web% www.quickmba.com/strategy/porter LOVELY PROFESSIONAL UNIVERSITY 43 Unit 2: Industrial Policy and Regulatory Structure Notes2.1 Objectives of Industrial Policy 1. It strives for a balanced regional development, i.e., it tries to ensure that industries are not clustered in specific areas but develop in all parts of the country. 2. It tries to ensure that the scarce resources of the nation are utilised in the interest of the nation and not in the interest of profit. 3. It tries to create employment opportunities. 4. It provides enough power to the government to regulate the industry. 5. It checks the concentration of economic power in a few hands. This happened in South Korea where a major portion of GDP came only from five major companies. 6. It promotes entrepreneurship in the nation. 7. It clearly demarcates the areas where the government will invest and where the private sector will invest, and specifies how the government will regulate the industry. 8. It ensures that there is no flight of capital. 9. It aims at providing the juvenile Indian industry enough protection from multinationals. 10. It provides direction to financial institutions as to which industry they have to lend to liberally, and where they have to restrict the availability of finance. 2.2 Industrial Policies 2.2.1 Industrial Policy 1948 The first industrial policy itself paved the path for mixed economy in the nation. It accepted the existence of both public and private sectors in the economy. It assigned a progressive role for the State, for investment in industrialisation, and in regulating the private sector. It also accepted the importance of small and cottage industries in the development of local resources such as capital, labour, raw material, etc. It recognised the role of foreign capital in industrial development but stated that there should be strict regulation of foreign capital. The 1948 policy divided the industry into four categories: 1. Industries where the State had a Monopoly: Three industries were put under this category: Arms and Ammunition, Atomic Energy, and Rail Transport. 2. New Investment by State: Six industries were specified under this: coal, iron and steel, aircraft manufacturing, ship building, manufacture of telephone, telegraph, and wireless apparatus (excluding radio sets) and mineral oil. However, existing private sectors were allowed to continue for ten years after which the government could review the situation and acquire any undertaking. 3. The Field of Government Control: These industries were to be regulated and directed by the government. Some of these industries were automobiles, heavy chemicals, heavy machinery, machine tools, fertilisers, electrical engineering, sugar, paper, cement, cotton, and woolen textiles. 4. Industries open to Private Sector: The remainder of the industrial field was open to the private sector. 44 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes 2.2.2 Industrial Policy 1956 The draft of the 1956 industrial policy was very comprehensive. This laid emphasis on the establishment of a socialist pattern of society. This policy also emphasised that industrial development of the country should be guided by the Directive Principles of the Constitution. Did u know? The 1956 Policy was regarded as the "economic constitution of India". The 1980 policy statement paid the highest tribute when it stated that, "the industrial policy announcement of 1956 reflects of the value system of our country and has shown conclusively the merit of constructive flexibility." Objectives of the 1956 Industrial Policy 1. To accelerate the rate of growth and speed up industrialisation. 2. To expand public sector. 3. To develop heavy and machine industry. 4. To check the concentration of economic power in a few hands. 5. To reduce the disequilibrium in the distribution of income and wealth. 6. To build a cooperative sector. 7. To expand cottage, village and small-scale industry. 8. To achieve balanced regional development and other socio-economic objective. Features of the Policy The 1956 resolution divided industries into three categories: 1. Monopoly of the State 2. Mixed Sector (Public and Private both allowed) 3. Industries left for private sector Monopoly of State In this list (Schedule A) industries whose future development would be the exclusive responsibility of the state were included. The 17 industries listed in this categories were: arms and ammunition, atomic energy, iron and steel, heavy castings, heavy machinery, heavy electrical industries, coal, mineral oils, iron ore and other important minerals like copper, lead and zinc, aircrafts, air transport, railway transport, shipbuilding, telephone, telegraph and wireless equipment generation and distribution of electric energy. Mixed Sector of Public and Private Enterprise In this section 12 industries (listed in Schedule B) were included. These will be progressively state owned and where the State will generally take the initiative in establishing new undertakings. LOVELY PROFESSIONAL UNIVERSITY 45 Unit 2: Industrial Policy and Regulatory Structure NotesBut in these private enterprises will also be expected to supplement the efforts of the State. Minerals (except minor minerals), road transport, sea transport, machine tools, ferro-alloys and tool steels, basic and intermediate products required by chemical industries such as manufacture of drugs, dyestuffs and plastics, antibiotics and other essential drugs, fertilizers, synthetic rubber, chemical pulp, carbonization of coal, and aluminium and other non-ferrous metals are included here. In these industries, the State would increasingly establish new units and increase its participation but would not deny the private sector opportunities to set up units or expand existing units. Industries Left for the Private Sector All remaining industries and their development were left to the private sector. The division of industries was not very strict. That is, there can be overlapping, for instance, licenses were later given to the private sector to invest in mining and oil. The government also invested in areas that were left for the private sector. The 1956 policy increased the area of operation for the State. Thereafter, the State began taking keen interest in the development of heavy industry and invested a good amount of money and resources. Not only this, it also promoted the private sector to work together as a manufacturer and supplier and also as a user of by-products. The State accepted the role of the private sector and established and encouraged financial institutions to provide assistance to the private sector. The 1956 Policy provided for rapid growth of villages and small industries. To remove regional disparities, this policy emphasised balanced regional growth. For this, it encouraged the establishment of industries in backward areas. This policy intended to improve the working conditions for labourers and expected industry to take care of the working conditions of labour and to ensure industrial peace for its rapid development. Like the 1948, Policy this one also accepted the importance of foreign capital in national development but maintained that the major interest and effective control should always be with Indians. The 1956 industrial policy has been severely criticised on the basis that it laid too much emphasis on the public sector and restricted the development of the private sector. Also, the public sector performance was below par as there was no individual accountability. In the name of alleviating regional disparities, projects were established in locations that were not economically viable and only increased the cost of production. The private sector did not take interest in long-term and big projects as the apprehension was that the public sector would play a dominant role in the economy and private sector would be further be squeezed. This feeling gained momentum as the State declared it could undertake any industry as and when it found suitable to do so. This restricted the growth of private sector. It is also true that in 1956 the private sector was not in a position to invest in an industry with a higher gestation period. With the state investing heavily in this sector, it not only benefited the nation, but also the private sector, in the form of ancillary units, raw materials and machines, and in the overall growth of industry in the country. The private sector was permitted to invest in certain areas reserved for the public sector-coal, oil, fertilisers, chemical engineering, etc. In the case of machine tools, nine licenses were given to HMT, whereas 226 licenses were given to the private sector in fertilisers. The public sector obtained 12 licenses and the private sector was given 42 licenses. This shows that the Industrial Policy Resolution 1956 provided enough support and encouragement to the private sector. 48 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes 8. To encourage R&D and to bring new technology to produce world class products and services. 9. To link Indian economy with the global economy. 10. To encourage big business houses and projects to achieve economies of scale. 11. Increase competitiveness of the industry to benefit the common man and the nation. 12. Rapid development of infrastructure, specially roads and electricity, with active participation of the private sector and FDI. Radical Steps of the New Industrial Policy The New Industrial Policy took radical steps in the following areas: 1. Industrial Licensing 2. Foreign Investment 3. Foreign Technology Agreement 4. Public Sector Policy 5. MRTP Act 1. Industrial Licensing: Industrial licensing is governed by Industries (Development and Regulation) Act, 1951. It is a very effective tool used by the government to regulate the private sector. Over the years it has become a tool for exploitation. The NIP did away with licensing in a big manner. It abolished all industrial licensing, irrespective of the level of investment, except for 18 industries related to security and strategic concern, social reasons, concerns related to safety and overriding environmental issues, manufacture of products of hazardous nature and articles of elitist consumption. Later this list was trimmed, and as of now license is required only for 6 items listed in Annexure II. These are as follows: List of Industries for which Industrial Licensing is Compulsory under Industries (Development & Regulation) Act, 1951: (a) Distillation and brewing of alcoholic drinks. (b) Cigars and cigarettes of tobacco and manufactured tobacco substitutes. (c) Electronic Aerospace and defense equipment. (d) Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose and matches. (e) Hazardous chemicals: (i) Hydrocyanic acid and its derivatives. (ii) Phosgene and its derivatives. (iii) Isocyanates and disocyanates of hydrocarbon, not elsewhere specified (example: Methyl Isocyanate). (f) Drugs and Pharmaceuticals (according to modified Drug Policy issued in September, 1994 and subsequently amended in February, 1999). LOVELY PROFESSIONAL UNIVERSITY 49 Unit 2: Industrial Policy and Regulatory Structure NotesAll areas of industrial activity excluding of areas listed in Annexure I were opened for the private sector. Six items were included in this list: Arms and ammunition and allied items, defence aircraft and warships, Atomic Energy, Coal and Lignite, Mineral Oils, Minerals specified in Schedule to the Atomic Energy (Control of Production and Use) Order, 1953 and Railway Transport. But today only Railway Transport and Atomic Energy and its minerals are reserved for the public sector. In others, private equity and even FDI are allowed though proper procedures. Entrepreneurs are required to submit an Industrial Entrepreneurs Memorandum (IEM) to the Secretariat for Industrial Approvals (SIA) which acknowledges receipt. Phased Manufacturing Programmes (PMP), have been abolished for all new industries and subsequently for all existing projects. Under PMP a concerned enterprise has to progressively replace imported material, parts and components with materials parts and components produced in-house or by other Indian firms. An Investment Promotion and Project Monitoring Cell is set up in the Department of Industrial Policy and Promotion, Ministry of Industrial to provide information to entrepreneurs and to monitor progress of implementation of various projects. Delicensing has been the key feature of Industrial Policy of 1991. This provided a big impetus to investment and employment creation in the coming years. 2. Foreign Investment: This was a revolutionary step taken by the Rao government. In the first 50 years of India's economic planning nobody ever imagined that one day a socialist economy like India would provide free access to foreign equity. Though the 1956 Industrial Policy accepted the role of foreign equity, since independence we have always looked at foreign equity as some sort of economic slavery. But in last 50 years, the enormous underutilisation of resources, unemployment, poor infrastructure and pervasive poverty compelled the government to open the doors for foreign equity. Today, India welcomes foreign equity in almost every sector. In 1991 it allowed: (a) Automatic approval for foreign equity participation upto 51% granted in high priority industries listed in Annexure IV of Industrial Policy, 1991. (b) Foreign trading companies are allowed to invest upto 51% in Indian trading houses engaged in export activity. (c) In hotel and tourism related industry upto 51% foreign equity is allowed. (d) Even in the mining sector foreign investment upto 50% was allowed. ! Caution In fields where foreign investment was not allowed through the automatic route, either because it doesn't cover the foreign exchange requirement for import of capital goods, or if it requires more than 51% equity, or if it is not a high priority area, proposals have to be submitted to the Secretariat of Industrial Approvals (SIA) or Foreign Investment Promotion Board or to Indian Embassies or Consulates abroad. Use of foreign brands names/trade marks for sale of goods in India is permitted. Initially all projects involving foreign equity upto 51% in high priority industries were required to adhere to dividend balancing conditions. Earlier, outflow of foreign exchange on account of dividend payments had to be balanced by export earning for a period of seven years from the date of commencement of production. Now the dividend balancing condition has been withdrawn. 50 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Foreign equity of upto 24% is allowed in the small scale sector too. Manufacture of items reserved for the small scale sector can also be taken up by non-small scale units, if they apply for and obtain an industrial license. In such cases, it is mandatory for the non-small scale unit to undertake minimum export obligation of 50%. This will not apply to non-small scale EOUs that are engaged in the manufacture of items reserved for the SSI sector, as they already have a minimum export obligation of 66% of their production. In addition, if the equity holding from another company (including foreign equity) exceeds 24%, even if the investment in plant and machinery in the unit does not exceed 10 million, the unit loses its small scale status. Foreign equity upto 100% is particularly encouraged in export-oriented units, power sector, electronics and software technology parks. In 1997, the government announced its first ever guidelines for Foreign Direct Investment (FDI) for expeditious approval of foreign investment in areas not covered under automatic approval. Priority areas for foreign direct investment proposals included infrastructure, export potential, large scale employment potential particularly for rural areas, items with linkages with the farm sector, social sector projects like hospitals, health care and medicines, and proposals that lead to induction of technology and infusion of capital. FDI approvals are subject to sectoral cap: 20% (40% for NRIs) in banking sector, 51% in non-banking financial companies, 100% in power, roads, ports, tourism and venture capital funds, 49% in telecommunication, 40% (100% for NRIs) in domestic airline/taxi, 24% in small scale industries, 51% in drugs/pharma industry for bulk drugs, 100% in petroleum, and 50% in mining except for gold, silver, diamonds and precious stones. The list was further expanded and in the same year, equity investment upto 100% by NRIs/OCBs was permitted in high priority industries in metallurgical and infrastructure sectors and 13 other priority industries, hitherto eligible for 74% and 51% equity investment respectively. Foreign equity investment in mining was also allowed upto 100% for NRI/OCBs. During 1999-2000, the government decided to put all items under the automatic route for foreign investment/NRIs and OCB investment, except for a small negative list. Now the automatic route for FDI/NRI/OCB investment is also available to India's existing companies to induct foreign equity. For existing companies with an expansion programme, the additional requirements are that: (a) the increase in equity level must result from the expansion of the equity base of the existing company without acquisition of existing shares by NRI/OCB/foreign investors; (b) the money to be remitted should be in the sector(s) under the automatic route. Otherwise the proposal would need government approval through the FIPB. For this, the proposal must be supported by a Board Resolution of the existing Indian company. For existing companies without an expansion programme, the additional requirements for eligibility for automatic route are: (a) that they are engaged in the industries under automatic route (including additional activities covered under the automatic route regardless of whether the original activities were undertaken with government approval or by accessing the automatic route); (b) the increase in equity level must be from expansion of the equity base; and (c) the foreign equity must be in foreign currency. LOVELY PROFESSIONAL UNIVERSITY 53 Unit 2: Industrial Policy and Regulatory Structure NotesFund (NRF) provided assistance to cover the cost of retraining and redeployment of labour and also provide compensation to labour affected by the closure of unviable public sector units. (c) Disinvestments and Privatisation: The government decided to reduce its stake in PSUs and also decided to privatise a few PSUs. In the coming years, many PSUs were in fact were privatised and disinvested. 5. MRTP Act: Under the MRTP Act, all firms with assets above a certain size ( 100 crores since 1985) were classified as MRTP firms. The principle objective of the MRTP Act was: (a) Prevention of concentration of economic power and control of monopolies (b) Prohibition of monopolistic, restrictive and unfair trade practices. There were many restrictions on MRTP firms as they were permitted to enter into selected industries, that too on a case by case approval basis. Besides licences, these firms require separate permission for any further investment. Example: This restricted the growth of Indian industry and units like TISCO, TELCO, HINDALCO and Ranbaxy, which though having the capacity to become global players, remained confined to India, producing substandard goods. In 1991, the MRTP Act was restructured and pre-entry restrictions removed with respect to new undertakings, expansion, amalgamation, merger, takeover, registration, etc. under Sections 20-26 of Part A of Charter III of the Act. The amended act gave more emphasis to the prevention and restriction of restrictive and unfair trade practices. Appraisal of the Industrial Policy The New Industrial Policy was a new experience for India. On the one hand it provided a conducive environment to the industry, allowing it to spread it wings and on the other hand, it opened the doors for MNCs and sent a clear message to Indian firms to either perform or perish. In this way it opened many avenues for the industry and which, the industry took advantage of. Indian companies began expanding and firms like Ranbaxy, Asian Paints, Aditya Vikram Birla Group and many others became global players. Example: Today Asian Paints is operates in 27 countries and Tata Tea acquired the international tea brand Tetley. In the past 15 years, India has witnessed drastic changes. People who have seen the 70s and 80s would not have imagined that in 1990 they have to wait only for weeks to get a telephone connection and by 1998 they can get a phone right on the spot and carry them in their pockets. By mid-2005, the number of mobile connections had crossed the number of basic telephone users. Today, India has one of the largest grass root refineries of the world in private hands, i.e., Reliance, and the country is now exporting aviation fuel. The Indian economy has shifted from mini-plants to economies of scale, from economies of scarcities to economy of surplus in many goods. This liberalisation has proved to be a big boon for the service sector. Today, the service sector produces more than 50% of the total GDP of India. India is becoming a manufacturing hub as many companies are shifting their manufacturing utilities to India. This includes companies like GE, Nokia and DuPont. 54 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes India is also becoming the back office of the world as more and more countries are shifting their back office work to India. New employment opportunities have been generated in the new economy industries like telecommunication, software, call centres, biotechnology, education, media, etc. Because of increasing competition, the quality of produced goods has improved. Earlier India produced substandard goods, now it is setting the benchmark. Critics says that there is no evidence of positive growth rate after liberalisation as the growth of industrial production fell from 7.8% per annum in the pre reform period (1980s) to 6.6% in 1990s. But the decade of 1990s was a decade of transformation and a process, which takes time. There is a great difference in the quality and level of production of the 1980s and the 1990s. The biggest criticism of the NIP is MNCs may soon take over Indian companies. Example: This is true to a certain extent-Coca Cola acquired Parle, Pepsi acquired Uncle Chipps, HLL acquired Modern Bread, Lakme, TOMCO, Kissan etc. But this is only one side of the picture. On the other side, many Indian firms also acquired MNCs. Videocon recently acquired the picture tube plant of Thomson and the Indian arm of Eletrolux. Asian Paints also acquired Berger International. Although this threat is true to an extent because it is very difficult for Indian firms to compete with MNCs' financial strength. India has moved from too much protection to too little protection. Task Make a note of all items possible that were affected by the New Industrial Policy. Also make a note of the companies that gained and that made losses due to this policy. 2.3 Stock Exchanges The emergence of Capital Markets can be traced back to the second half of the eighteenth century when the transactions were limited to loan stock transactions of the East India Company. By 1830, some corporate stocks had emerged due to the economic boom and establishment of textile mills. A Stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. The Bombay Stock Exchange was formalised in 1875 with the establishment of 'Native Share and Share Brokers Association'. The stock exchanges of Calcutta and Chennai were established in 1908 and the Delhi Stock Exchange in 1947. There are 23 stock exchanges in India and their organization varies. Some are public limited companies (15), while others are limited by guarantees (5) or are voluntary non-profit making organizations. In the period of 1994-1995, the number of stock exchanges went up from 7 to 22. In March 2000, the number of stock exchanges increased to 23 with the formation of Inter Connected Stock Exchanges of India Ltd. (ICSEL), the number of listed companies from 1125 to 9477, the market value of listed companies from 971 crore to 6,39,575 crore. 2.3.1 Definition of Stock Exchange Under the SCR Act, an exchange is defined as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. The SCR says that a stock exchange must be recognised by the government. LOVELY PROFESSIONAL UNIVERSITY 55 Unit 2: Industrial Policy and Regulatory Structure NotesAccording to this Act, securities include: (i) Shares, scrips, stocks, bonds, debentures, stock or other marketable securities of a like nature in or of any incorporated company or body corporate; (ii) Government securities or such other instruments as may be declared by the Central Government to be securities, and (iii) Right of interest in securities. Stock exchange is regarded as "an essential concomitant of the capitalistic system of economy. It is indispensable for the proper functioning of corporate enterprise. It brings together large amounts of capital necessary for the economic progress of a country. It is the citadel of the capital and the pivot of money market". It provides necessary mobility to capital and directs the flow of capital into profitable and successful enterprise. It is the barometer of general economic progress in a country and exerts a powerful and significant influence as a depressant or stimulant of business activity. It may be defined as "the place or market where securities of joint stock companies and of government or semi government bodies are dealt in". 2.3.2 Major Stock Exchanges in India Bombay Stock Exchange The Bombay Stock Exchange is one of the oldest stock exchanges of India and Asia and it is also one of the biggest stock exchanges of the world. It is said to be the nerve of the Indian economy which reveals the health of economy. The Bombay Stock Exchange had a turnover of 6,8,028 crore and a market capitalisation of 9,12,842 crores in 1999-2000. Its business is no more confined to Mumbai alone. In March 2000 it had 275 cities covered by the BOLT network and an increase in the number of Trader Work Stations to 3803. Its daily turnover had increased from 11 crore in 1979-80 to 4587 crore in 2000-01. It was established in 1857 and at that time its membership fee was just Re. 1. It increased to 5 in 1877, 1000 in 1896, 2,500 in 1916, 6,600 in 1929, and 62,000 during post World War II period. It was more than 3 crore in 1992, and was about 2 crore in 1997. The BSE introduced Bombay On-Line Trading (BOLT) System on January 19, 1995. It provides a quote-driven automated trading facility with an order book functioning as an auxiliary jobber. The process of transferring the equity scrips listed on the BSE from trading in the ring to the BOLT system was completed on July 3, 1995. The BSE also began debt trading also on the BOLT system from June 26, 1995 in respect of 60 actively traded debentures. National Stock Exchange The NSE was incorporated in November 1992 with an equity capital of 25 crores. It is sponsored by IDBI and co-sponsored by other term-lending institutions, LIC, GIC, other insurance companies, banks and financial institutions, viz., SBI Capital Market Ltd., Infrastructure Leasing and Financial Services Ltd. (ILFS), Stock Holding Corporations Ltd. (SHCL), and the International Securities Consultancy (ISC) of Hong Kong which have helped in setting up of the NSE. NSE has a fully automated, electronic, screen-based trading system through which it has overcome geographical barrier. The market capitalisation of NSE was 10,20,426 crores on March 1, 2000. Its objectives of NSE are: 1. To provide fair, efficient and transparent nationwide trading facility for equities, debt instrument and hybrids. 58 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes 2.3.6 Stock Exchange Operations 1. Bulls and Bear: A bull is a buyer in the stock market. He is optimistic about the security prices. A bear is a seller of securities. His expectation is that the market would go down. When a bear sells without owning the shares, it is called short trade. 2. Order/Customer Driven and Quote/ Dealer Driven Trading System: Trading in a stock exchange takes place either on the basis of the auction system on a trading floor which is order-driven or customer driven or a broker-dealer market which is quote - driven or dealer - driven. In an-order driven system, customers buy and sell orders and reach at central point where they are matched. In a quote driven system dealers compete to give customers the best price. 3. Market Maker: Market makers make both bid and offer at the same time. The quoted price they would charge from a prospective buyer is offer price or asking price. The quoted price which they would pay to a prospective seller of a security is known as bid price. 4. Margin Trading: When investors buy securities on margin, they buy some shares with cash and borrow from the broker to pay for additional shares, using the paid shares as collateral. The margin customer has to sign a margin agreement, pledging securities as loan collateral. To lend the clients margined securities, the brokers also ask the customers to sign a stock loan consent form. 2.3.7 Badla System/Carry Forward Transactions The Badla System involves trading for clearing with a facility of carrying forward the transaction from one settlement period to another. They don't pay the entire amount at the time of the purchase but against the security of blank transfer deed and share certificates. The Badla rates were fixed on the basis of demand and supply conditions and were on a fortnightly basis. Badla led to high speculative activity which is why this system was banned by SEBI since December 1993 and later was introduced in a modified manner. Badla system involves following: 1. Transfer of Market Position: Carry forward facility means that the buyer/seller can either settle the transactions at the end of a settlement period by actual payment/receipt and acceptance/transfer of the security or carry forward the transactions from one settlement period to another by reversing the transactions. 2. Short Lending/Short Selling: Short sellers are those who sell shares without owning them. Thus they provide scope for higher investment. In a falling market, the short seller has to purchase to cover his sales position. Similarly, in a rising market those who have contracted to purchase, have to sell securities to square their position, thus arresting further rise in share prices. In November 18, 1996, the SEBI decided to make it mandatory for short sellers to report their short sales position at the end of each day. 3. Borrowing/Lending in Money Market: In the Badla system both bulls and bears either need resources to cover their position till the next settlement or have surplus resources. As a result, in most cases, either they have to borrow from the money market or they turn into lenders to the money market. LOVELY PROFESSIONAL UNIVERSITY 59 Unit 2: Industrial Policy and Regulatory Structure Notes2.3.8 Revised Forward Trading System SEBI introduced modified forward trading system on October 6, 1995 effective from October 9, 1995. Capital adequacy norms of 3% had been stipulated for individual brokers and 6% for corporate/institutional brokers. Due to implementation of capital adequacy norms, the limit of 25% of the turnover imposed on carry forward deals by brokers has been removed. Instead of monthly audit, the brokers are now allowed self-certification on their status on settlements. SEBI has reserved the right to re-check the certification. Now transactions can be carried forward for a maximum of 90 days, but squaring off is permitted only up to fifth settlement, i.e. 75 days. Transactions remaining open at the expiry of this time limit have to be compulsorily settled by delivery or payment as the case may be. Stock exchanges are allowed to resume forward trading/carry forward transactions only after permission from SEBI. The permission is granted only if the stock exchange has screen-based trading, effective monitoring, surveillance and reporting system and fulfils other infrastructural requirements. 2.3.9 Derivatives Trading 1. Derivatives: These are financial instruments that are valued according to the expected price movements of an underlying assets, which may be a commodity, currency or a security. Examples of derivatives are futures, options, swaps, etc. 2. Futures: These are agreements to buy or sell a fixed quantity of a particular commodity, currency, or security for delivery at a fixed date in the future at fixed price. Unlike an option, a future contract involves a definite purchase or sale and not an option to buy or sell. 3. Options: These are instruments granting the right to buy or sell a fixed quantity of a commodity, currency, security, etc., at a particular date at a particular price (also called exercised price). Unlike futures, the purchaser of an option is not obliged to buy or sell at the exercise price and will only do so if it is profitable; the purchaser may allow the option to lapse, in which case only the initial purchase price of the option is lost. 4. Swaps: These are means by which intending parties can exchange their cash flows, usually through the intermediary of a bank. A Currency Swap will enable parties to exchange the currency they possess for the currency they need. An Interest Rate Swap (IRS) is an agreement between two parties to exchange interest obligations (or receipts) for a given notional principle for a defined period. 2.3.10 Capital Issues (Contract) Act (CICA), 1947 According to the CICA Act, companies had to obtain prior approval for any new issue, and for pricing or public and rights issue. This act gives powers to Government of India to regulate the timing of new issues by private sector companies, the composition of securities to be issued, interest rates which can be offered on debentures and preference shares, the timing and frequency of bonus issues, the amount of prior allotment to promoters, floatation costs, and the premium charged on securities. Now this Act has been repealed by Capital Issues (Control) Repeal Act, 1992. 60 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes NAME SECTOR Infosys Technologies Information Technology ICICI Bank Limited Finance ITC Ltd FMCG Larsen & Tourbo Capital Goods HDFC Finance HDFC Bank Finance State Bank of India Finance TCS Limited Information Technology ONGC Oil and Gas Bharti Airtel Telecommunications Tata Steel Metal, Metal Products and Mining Tata Motors Automobile BHEL Capital Goods NTPC Limited Power Mahindra & Mahindra Automobile Hindalco Industries Metal, Metal Products and Mining Hindustan Unilever Limited FMCG Sterlite Industries Metal, Metal Products and Mining Jindal Steel Metal, Metal Products and Mining Wipro Limited Information Tech Nology Tata Power Power Bajaj Auto Automobile Maruti Suzuki Automobile Cipla Limited Pharmaceuticals Hero Honda Motors Automobile Reliance Infrastructure Power Jaiprakash Associates Infrastructure DLF Limited Infrastructure Reliance Communications Limited Telecommunications Source: www.bseindia.com Table 2.1: Companies in Sensex LOVELY PROFESSIONAL UNIVERSITY 63 Unit 2: Industrial Policy and Regulatory Structure Notescan direct them to amend their bye-laws and rules including reconstitution of their governing boards/councils; and it is empowered to license security dealers operating outside their jurisdiction. SEBI has been empowered to demand explanation, to summon the attendance and call for documents from all categories of market intermediaries in order to enable it to investigate irregularities, impose penalties, and initiate prosecution. It is also empowered to notify its regulations and file complaints in courts without the prior approval of the Government of India. 2.4.2 Certain Guidelines and Reforms Introduced by SEBI Primary Securities Market 1. The issue of capital no longer requires any consent from any authority for making issue and for pricing it. 2. SEBI raised the standards of disclosure in public issues and enhanced the transparency. 3. The offer document is now made public even at the draft stage. 4. Companies without track record making first issue can price the issue at par only. At the first issue companies are free to price their securities, provided they have shown net profits in the immediately preceding three years, subject to their fulfilling the existing disclosure requirements. 5. Companies with three years' track record or companies without track record, but promoted by companies with five years of track record are free to price the issues. They can list the shares on a stock exchange. 6. Not less than 20% of equity (issued) should be offered to public. 7. For issues above 100 crore, book building requirement has been introduced. 8. The pricing of preferential allotment scheme, a minimum of 50% of the net offer to the public is to be reserved for individual investors applying for securities not exceeding 1000 securities, and the remaining part can be allotted to applications for more than 1,000 securities. 9. Draft prospectus will be vetted by the SEBI to ensure adequacy of disclosure. 10. Bankers to an issue and portfolio managers have to be registered with the SEBI. 11. Existing listed companies are allowed to raise fresh capital by freely pricing their further issues. However price should be determined in consultation with the lead managers to the issues. The high and low prices for the last two years should be indicated in the offer document. The draft proposal will be vetted by SEBI to ensure adequacy of disclosure. Secondary Market and Various Intermediaries 1. The governing body and various committees of Stock Exchanges (SEs) have been recognised, restructured and broad based. 2. Inspection of all 22 SEs has been carried out to determine, inter alia, the extent of compliance with the directives of the SEBI. 3. Corporate membership of SE is now allowed, encouraged, and preferred. The Articles of Association of SEs have been amended so as to increase their membership. 64 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes 4. All the SEs have been asked to established with a clearing house or a clearing corporation. 5. The BSE has been asked to reduce its trading period or settlement cycle from 14 to 7 days for B group shares. 6. All the recommendations of the Dave Committee for improving the working of the OTCEI have been accepted. 7. In accordance with the recommendations of G.S. Patel Committee, the BSE has been allowed to introduce a revised carry forward system (CFS) of trading. Other SEs can introduce forward trading only with the prior permission of the SEBI. 8. Brokers are required to segregate the client and its own account. 9. The capital adequacy norms of 3% for individual brokers and 6% for corporate brokers introduced. 10. Both the brokers and the sub brokers have been brought within the regulatory fold for the first time now; and the concept of the dual registration of stock brokers with the SEBI and the SEs has been introduced. 11. Panel action can now be taken directly by the SEBI against any member of a stock exchange for violation of any provision of the SEBI Act. 12. It has been mandatory for stockbrokers to disclose the transaction price and brokerage separately in the contract notes issued by them to their clients. 13. Compulsory audit of the brokers' books and filling of the audit reports with the SEBI has now been made mandatory. 14. Insider trading has been prohibited and such trading has been made a criminal offence punishable in accordance with the provision of SEBI. 2.4.3 Investment Protection Measures The SEBI has introduced an automated complaints handling system to deal with investor complaints. To create awareness, SEBI issues fortnightly press releases, disclosing names to the companies against whom maximum number of complaints have been received. A representative of SEBI now supervises the allotment of shares process. Besides many other measures, it also issues advertisements frequently to make investors aware of various issues of the securities market and of their rights and remedies. 2.4.4 Insider Training Insider training in securities is prohibited by SEBI under Insider Trading Regulations 1992. Insider training can be defined as the sale or purchase of securities by persons who possess price sensitive information about the company, on account of their fiduciary capacity involving confidence or trust. SEBI Insider Regulations 1992 defines the insider as any person who is or was connected with company and who is reasonably expected to have access by virtue of such connection, to unpublished price sensitive information with respect to the securities of the company, or who has received or has had access to such unpublished price sensitive information. Broadly, insiders can be of two types: (a) Primary Insider e.g. Directors, stock exchanges, merchant bankers, registrars, brokers of the company, top executives, auditors, banks, etc. (b) Secondary insider e.g. dealers, agents, other employees, etc. (c) Others having access to price sensitive information due to their proximity with the company. LOVELY PROFESSIONAL UNIVERSITY 65 Unit 2: Industrial Policy and Regulatory Structure NotesThe SEBI Insider Regulations, 1992 prohibits insider trading and lays down that no insider should: 1. Either on his own behalf or on behalf of any other person, deals in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information; or 2. Communicate any unpublished price sensitive information to any person, with or without his or her request for such information except as required in the ordinary course of business or under any law; or 3. Counsel or procure any other person to deal in securities of any company on the basis of unpublished price sensitive information. 2.4.5 Underwriting Underwriters make a commitment to get the underwritten issue subscribed either by others or by themselves. They agree to take unsubscribed portions of the issue. They render this service for a commission agreed upon between the issuing company and the underwriter subject to the ceiling under the Companies Act. Underwriter services are available from brokers, investment, companies, commercial banks and term-lending institutions. Only such person (an individual, firm or a company) who has obtained certificate of registration from SEBI can act as an underwriter. Example: Merchant bankers and stock brokers already have a valid certificate from SEBI for working as underwriters. Task Find out the underwriters involved in some of the biggest IPOs that have taken place in last five years. 2.5 LPG Policy 2.5.1 Liberalisation The ongoing reforms in India are referred to as economic liberalisation of India. After Independence in 1947, India adhered to socialist policies. The extensive regulation was sarcastically dubbed as the "Licence Raj"; the slow growth rate was named the "Hindu rate of growth". In the 1980s, the Prime Minister Rajiv Gandhi initiated some reforms. His government was blocked by politics. In 1991, after the International Monetary Fund (IMF) had bailed out the bankrupt state, the government of P. V. Narasimha Rao and his Finance Minister Manmohan Singh started breakthrough reforms. The new policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-Controlling measures. The overall direction of liberalization has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labor laws and reducing agricultural subsidies. As of 2009, about 300 million people – equivalent to the entire population of the entire United States – have escaped extreme poverty. The fruits of liberalization reached their peak in 2007, with India recording its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China. An Organisation for Economic 68 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes 4. Dereservations: The 1991 industrial policy reduced the number of industries reserved for the public sector from 17 to 4. The reserved sectors are: (a) Arms and ammunition and allied items of defense equipment, combat aircraft and warships. (b) Atomic Energy. (c) Minerals specified in the schedule to the Atomic Energy Order, 1953. (d) Railway Transport. Example: Presently, only Railways and Atomic Energy are reserved areas. 2.5.3 Globalisation In the recent past, many meanings of the word 'globalisation' have accumulated. Did u know? The word 'globalise' was first attested by the Merriam Webster Dictionary in 1944. To consider the history of globalisation, some authors focus on events since 1492, but most scholars and theorists concentrate on a much more recent past. Long before 1492, people began to link together disparate locations on the globe into extensive systems of communication, migration, and interconnections. This formation of systems of interaction between the global and the local has been a central driving force in world history. In 325 BC Chandragupta Maurya becomes a Buddhist and combines the expansive powers of a world religion, trade, economy, and imperial armies for the first time. Greeks (Selukas) sue for peace with Chandragupta in 325 BC at Gerosia, marking the eastward link among overland routes between the Mediterranean, Persia, India, and Central Asia. By 1350, networks of trade which involved frequent movement of people, animals, goods, money, and micro-organisms ran from England to China, through France and Italy, across the Mediterranean to the Levant and Egypt, and then across Central Asia (the Silk Road) and along sea lanes down the Red Sea, across the Indian Ocean, and through the Straits of Malacca to the China coast. Between 1492 and 1498: Columbus and Vasco da Gama travel west and east to the Indies, inaugurating an age of European sea-borne empires. Example: In South Asia, it should be noted, the Delhi Sultanate and Deccan states provided a system of power that connected the inland trading routes of Central Asia with the coastal towns of Bengal and the peninsula and thus to Indian Ocean trade for the first time. The commodities trade continued well into the seventeenth century, concentrating on local products from each region of the Eurasian system – Chinese silk and porcelain, Sumatra spices, Malabar cinnamon and pepper, etc. – but by the 1600s, long - distance trade was more deeply entrenched in the production process. An expansion of commercial production and commodities trade was supported by the arrival into Asia of precious metals from the New World, which came both from the East and West (the Atlantic and Pacific routes – via Palestine and Iran, and also the Philippines and China). Liberalisation of the 19th century is often called "The First Era of Globalisation". The "First Era of Globalisation" is said to have broken down in stages, beginning with the First World War, and LOVELY PROFESSIONAL UNIVERSITY 69 Unit 2: Industrial Policy and Regulatory Structure Notesthen collapsing with the crisis of gold standard in the late 1920s and early 1930s. Countries that engaged in that era of globalisation, including the European core, some of the European periphery and various European offshoots in the Americas and Oceania, prospered. Inequality between those states fell, as goods, capital and labour flowed remarkably freely between nations. The 20th century was also governed by economic nationalism. Most of the European nations followed this policy. After the Second World War economic nationalism became the key for most nations in Asia and Europe. Even nations like the US and France were not untouched with the phenomenon of economic nationalism. When the US started losing jobs because of globalisation it reacted sharply. Not only this, in the 20th century itself it took various measures to protect its domestic industry like automobiles and motorcycles. It imposed quantitative restrictions on the imports of automobiles from Japan. Similarly, when in 2006 a Britain-based NRI made a bid for Europe's largest steel maker France reacted sharply. Economic nationalism is a term used to describe policies which are guided by the idea of protecting domestic consumption, labour and capital formation, even if this requires the imposition of tariffs and other restrictions on the movement of labour, goods and capital. It opposes globalisation in many cases, or at least it questions the perceived benefits of unrestricted free trade. Economic nationalism may include such doctrines as protectionism and import substitution. Corporations are today changing their strategies and are reorganizing their functions to cope up with the changed scenario. Whether it is their production process or location, Product strategy, Marketing, Finance, HR policies etc. Organizations have incorporated the following changes: Designing in Global Environment If managing product development processes was a challenge before, it is not getting any easier as companies continue to adopt global design strategies. Global designing has cost benefits that are very attractive to today's manufacturer, but it also adds new Product Lifecycle Management (PLM) challenges and intensifies existing problem areas like that of protecting intellectual property. Production Location Selection Jeffrey Immelt of GE Medical Systems (GEMS), pushed for acquisitions to build up scale because for leading global competitors, an R&D-to-sales ratio of at least 8 percent represents a significant source of scale economies. But he also implemented a production strategy that was intended to arbitrage cost differences by concentrating manufacturing operations and, ultimately, other activities – wherever in the world they could be carried out most cost effectively. Rationalised Production Companies produce different components or different portions of their product line in different parts of the world to take advantage of low labour costs, capital, and raw materials. This is rationalised production. In a new, global world, rationalised production is easier. Now organizations can outsource or can establish their own production units in those areas where it is more economical. Example: GE, for instance, used Mexico as a manufacture base for labour-intensive operations. Today, Japanese are selling their cars made in America to the American consumers, while Americans are selling American cars made in Japan. 70 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Contd... Case Study Growing SME's in India SMEs constitute almost about 50% of industrial output & 42% of India's total exports. It is also an important employment generation sector & a means for promoting balance regional development. Table 1 below gives certain important data about SMEs in India. A wide variety of products including consumer items, capital intermediary goods are produced by this sector. Despite all this, they seem to suffer from sub-optimal scales of operations and technological obsolescence. Government of India had a protectionist policy in place from 1951-1991 to protect the SMEs. Certain products were reserved for small scale units, though in recent times, this policy is fast changing. Year % Share in No. of factories % Share in Employment % Share in value of production % Share in gross value added 1989/90 93.00 66.00 52.00 44.00 1996/97 92.31 61.29 43.57 34.19 Source: EPW Research Foundation (2002) Governmental policies towards SMEs always represented certain viable measures which could promote this sector creating more avenues for entrepreneurial development and substitute guarantee of employment in different sectors of the economy, affected by the forces of market fluctuations and variations in the employability conditions. The prospect of SMEs has a viable alternative for the economic development of the country can be listed as below: 1. High contribution to domestic production 2. Significant export earnings 3. Low investment requirements 4. Operational flexibility 5. Location wise mobility 6. Low intensive imports 7. Capacities to develop appropriate indigenous technology 8. Substitution of Imports 9. Contribution towards defense production 10. Technology-oriented industries 11. Competitiveness in domestic and export markets. However, Indian SMEs were very hard hit by the liberalization and faced a number of problems which may be listed as follows: 1. Poor financial situations and low levels of R&D 2. Poor adaptability to changing trade trends 3. Desire to avoid risk Table 1 LOVELY PROFESSIONAL UNIVERSITY 73 Unit 2: Industrial Policy and Regulatory Structure Notesexcise duty with older machinery. The new economic policy reforms of the nineties have changed the situation drastically by reducing the importance of fiscal concessions on the one hand and by raising the market competition on the other. Industry is now facing direct competition from the international players. In order to deal with the situation, Indian component manufacturers including the dominant players have to improve their technology as also quality and have to get into the global supply chains of the vehicle manufacturers or into the dealer network for the replacement market. In particular, small- scale units have to phase out their older and manual machinery and to go in for new and automatic machinery as also to improve their organizational methods so as to supply quality products in time. Questions 1. How has the SME progressed in India? 2. Critically analyse the progress of garments and automotive industry. 3. Do you think Globalisation has any role in development of SMEs? 2.6 Summary Industrial policy is one of the important government documents, which has a lasting impact on a country's industry. It is a policy document prepared by the government which states how the industrial environment of the country will take shape in the future. Before independence, the industrial policy of British India was formulated with the sole purpose of exploiting the resources of the country for Britain's advantage. Soon after independence, in 1948, India's first industrial policy was unveiled, and in 1956 a second and more comprehensive industrial policy was announced. Industrial policy strives for a balanced regional development, i.e., it tries to ensure that industries are not clustered in specific areas but develop in all parts of the country and to ensure that the scarce resources of the nation are utilised in the interest of the nation and not in the interest of profit. The first industrial policy in 1948, itself paved the path for mixed economy in the nation. It accepted the existence of both “public and private sectors in the economy. It assigned a progressive role for the State, for investment in industrialisation, and in regulating the private sector. The draft of the 1956 industrial policy was very comprehensive. This laid emphasis on the establishment of a socialist pattern of society. This policy also emphasized that industrial development of the country should be guided by the Directive Principles of the Constitution. In March 1977 the first non-Congress government was at the centre. The Janata Party assumed power and Morarji Desai, a die-hard Gandhian, became the Prime Minister. The new government declared a new industrial policy. The industrial policy of 1977 stated that funds of the public sector financial institutions and banks should be devoted to the growth of the small scale and medium scale units. The New Industrial Policy (NIP) was a big departure from the erstwhile industrial policy. When all the earlier industrial policies talked about how to regulate the private sector in a so-called national interest, NIP talked about deregulation and delicensing. 74 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Industrial licensing is governed by Industries (Development and Regulation) Act, 1951. It is a very effective tool used by the government to regulate the private sector. Over the years it has become a tool for exploitation. The NIP did away with licensing in a big manner. The New Industrial Policy was a new experience for India. On the one hand it provided a conducive environment to the industry, allowing it to spread it wings and on the other hand, it opened the doors for MNCs and sent a clear message to Indian firms to either perform or perish. The emergence of Capital Markets can be traced back to the second half of the eighteenth century when the transactions were limited to loan stock transactions of the East India Company. Under the SCR Act, an exchange is defined as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. The Bombay Stock Exchange is one of the oldest stock exchanges of India and Asia and it is also one of the biggest stock exchanges of the world. It is said to be the nerve of the Indian economy which reveals the health of economy. The NSE was incorporated in November 1992 with an equity capital of 25 crores. It is sponsored by IDBI and co-sponsored by other term-lending institutions, LIC, GIC, other insurance companies, banks and financial institutions. The OTCEI is primarily meant for small sized companies and small investors. This exchange has the advantages of transparency, fast settlements and potential to reach the nooks and corners of the country. The Securities and Exchange Board Act of 1992 provides for the establishment of a board to protect the interest of investors and to promote the development and regulation of the securities market. Underwriters make a commitment to get the underwritten issue subscribed either by others or by themselves. They agree to take unsubscribed portions of the issue. They render this service for a commission agreed upon between the issuing company and the underwriter subject to the ceiling under the Companies Act. The ongoing reforms in India are referred to as economic liberalisation of India. Privatisation is the process of involving the private sector in the ownership or operation of a state-owned or public sector undertaking. In a broader sense, it connotes private ownership (or even without change of ownership) the induction of private control and management in the PSUs. The formation of systems of interaction between the global and the local has been a central driving force in world history and has led to the phenomenon called globalisation. 2.7 Keywords Bear: A seller of securities BIFR: Board of Industrial and Financial Reconstruction Bull: A buyer in the stock market District Industries Centres: Centres for the development of small scale and cottage industries LOVELY PROFESSIONAL UNIVERSITY 75 Unit 2: Industrial Policy and Regulatory Structure NotesGDP: Gross Domestic Product of an economy; indicator of economic growth IDBI: Industrial Development Bank of India Industrial Licensing: Tool to regulate private sector industries Monopoly: Where single seller dominates the market MRTP Act: Monopolies and Restrictive Trade Practices Act OCTEI: Exchange for small sized companies and small investors Planned Economy: Where proper planning takes place and expenditures are planned Sick Units: Business units which are generating no profits or less revenue Stock Brokers: Members of recognised stock exchanges who deal in securities Stock Exchange: Any body of individuals, whether incorporated or not, constituted for the regulating the capital market Sub Brokers: Acts as an agent of a stock broker; assists him 2.8 Self Assessment State whether the following statements are true or false: 1. One of the purposes of the industrial policy is to increase the number of entrepreneurs India. 2. The Industrial policy of 1948 propagated that foreign capital inflow should be minimised. 3. Under the Industrial Policy of 1956, machine tools and tools steel industry was left only for private sector. 4. New Industrial Policy allowed a 51% FDI in the hospitality sector also. 5. A stock exchange acts a regulator of the capital market. 6. SEBI is an autonomous body that controls the monetary policy of the government. 7. All the companies listed under a stock exchange have to compulsorily offer their securities to public. 8. Privatisation may refer to full or even part purchase of any business by private players. Fill in the blanks: 9. …………………………regulates the Securities Exchange Board of India. 10. The problem of unequal distribution of income and wealth was first dealt in Industry Policy of……………….. 11. Under Industrial Policy of………………, a separate wing of IDBI was established to feed the credit requirements of small scale industries. 12. Stocks of all the blue-chip companies are listed and traded in………………… 13. ………………..was created as a company in 1990 under the Companies Act. 14. When the share market goes up, it is represented by the……………. 15. Indian stock market is called the………………… 16. When government leases its assets to a private company, it transfers it the……………….ownership. 78 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Unit 3: Economic Environment of Business CONTENTS Objectives Introduction 3.1 Economic Trends 3.2 Problems of Growth 3.3 National Income 3.4 Industrialization and Economic Development 3.5 Inflation 3.5.1 Types of Inflation 3.5.2 General Causes of Inflation in India 3.5.3 Measuring Inflation 3.5.4 Impact of Inflation 3.5.5 Measures to Control Inflation 3.6 Summary 3.7 Keywords 3.8 Self Assessment 3.9 Review Questions 3.10 Further Readings Objectives After studying this unit, you will be able to: Discuss the economic trends Identify problems of growth State the role of national income in economy Assess the role of industrialization in economic development Discuss the concept of inflation Introduction Business is an economic activity that has and will continue to influence mankind the most. Almost every citizen of the world obtains his/her bread and butter from some sort of business. Either he is himself engaged in business or is earning because somebody else is engaged in business. A deeper analysis reveals that the basis of international relations is also business. The impact of business is so pervasive that besides judicial and administrative the third important work any government has to perform is to regulate business in the national interest. Harvinder Singh, Lovely Professional University LOVELY PROFESSIONAL UNIVERSITY 79 Unit 3: Economic Environment of Business NotesWhether political interests precede or follow economic interest is a debatable issue. A change in the government or change in the system can change the fate of an organization. Behind every political decision there may be economics and behind every economic decision, politics may be factor. It is difficult to say whether the Iraq war is a political issue or an economic one because of the oil factor. It is also equally difficult to say with certainty that China is coming closer to India because it realizes India's political importance or because of our growing economy. If we look at world politics and economics, we find that they are two sides of the same coin and at any given point it is very difficult to determine which affects the other. If we see a look at the events in the erstwhile USSR, we notice a close-knit relationship between politics and economics. Because of pathetic economic conditions and prevailing starvation among the common people, Russia rose in revolt. Thus, economic conditions resulted in a political revolt and a change in government. The new government believe in an entirely different ideology of communism imposed a communist economic system there. Therefore, because of political changes the entire economy of the USSR underwent a change. So in order to understand economics, one should first understand the political systems of world. 3.1 Economic Trends From the late 1940s, many countries started a new beginning towards growth and development, but almost all of them followed different paths to achieve the goal of welfare of their people. These countries include erstwhile rich countries, Britain, France, West Germany, Japan, Switzerland, Australia, etc., which were ravaged in the Second World War and fell under a debt trap. Their industries were wiped out and a whole generation of human resources was ruined. Along with them, newly independent countries like India, and newly formed countries like North and South Korea also began their journey towards growth and development in this decade. But as stated, they chose different paths. On the one hand, countries like Japan, South Korea, West Germany, Britain and France followed a mixed capital economy, while countries like China, Cuba, East Germany, North Korea, etc., followed a socialist pattern. India while under the guidance of its late Prime Minister Shri Jawaharlal Nehru, choose a Mixed Socialist Economy. During World War II the US supported India's independence by exerting pressure on Britain to free India after the war. But after independence though India tried to forge close economic and political ties with both communist China and Russia, China treacherously attacked us in 1962, and the USSR denied us help when as kedo. We thus see that different countries began their journey towards welfare, growth and development in late 1940s by adopting different routes. The countries that adopted mixed capitalist structure had a remarkable rise. Example: South Korea, could not even manufacture a tyre of car in 1945 is now one of the largest exporters of automobiles in the world. And India, which was manufacturing and exporting automobiles in 1945, was producing same car in 1991. South Korean companies are now teaching Indians to produce world-class cars. India that was still producing world-class steel, that too the cheapest in the world in 1945, was later importing steel from countries like Japan who produce steel after importing iron ore from India. If we go by the parameters of development – per capita income, standard of living, rate of unemployment, availability of basic amenities, etc., we will find that these capitalist mixed economies have outstripped all the socialist economies and even the mixed socialist economies, including India, in every sector. 80 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes In India, people still die of hunger, and commit suicides because of poverty. After fifty years, this is the state of affaire not only in India but almost all the socialist countries like China, Cuba, North Korea, etc. Today, these socialist and mixed economies have to accept the hard realities of the world and have to yield to market forces. These countries have accepted the characteristics of a capitalist economy in the last decade by promoting more and more private sector companies and opening their boundaries to the world. India has a slowly developed a multiple mechanism of dual prices, ceiling prices, floor prices, subsidized prices, statutory prices, retention prices, procurement prices, levy prices, and free market prices. In India, there is a complex system of liberal rules, strict regulations, control mechanism, planning, and a host of price regulations. During the 1980s, the Indian economy took a new direction, towards freedom and deregulation. MRTP and FERA companies were allowed to expand and various export promotion incentives were introduced. Liberalisation measures were supplemented by relaxation in price and distribution controls and amendment in the MRTP Act. During this period, the government took various steps to promote the private sector in various fields. Even the import policy was liberalised. The new economic policy was announced in July 1991, which is of far reaching importance. The Industrial Policy has five important features: 1. Industrial Licensing 2. Foreign Investment 3. MRTP 4. Public Sector 5. Foreign Technology Agreement After liberalisation in 1991, the very face of Indian economy has changed. There is growth in national and per capita income, new opportunities in employment have been generated in telecom, software, call centers, biotechnology, pharmacy, tourism, education, etc. Today, the economy is going through a transition phase, the share of service sector in GDP and employment of India is steadily increasing. Though is slight change in the growth rates of the 1980s and 1990s but there is a drastic sectoral change. Example: In 1952 agriculture had a 56.5% share in GDP and in 1988-99 it fell to 29.2%. Not only this, earlier we produced mostly substandard goods but today we produce goods of international standards from automobile to GSLV (Geo Stationary Satellite Launch Vehicle). There has been rapid growth in the production of petroleum products and infrastructure in the last decade. India has also signed various bilateral and multilateral agreements with nations like China, the ASEAN nations, Brazil, South Africa, Argentina, Venezuela, etc. In the last decade a few Indian companies like IOC and Reliance have gained a place among the Fortune 500 companies. While MNCs have spread their wings in India, Indian companies like Infosys, TCS and Wipro have also spread out across the world as leaders in customised software. Example: Ranbaxy, Cipla and Dr. Reddy's Lab have also acquired firms in the US and Europe and are not only launching their products in these countries but also have manufacturing facilities there. LOVELY PROFESSIONAL UNIVERSITY 83 Unit 3: Economic Environment of Business Noteshave performed well in human development. In the case of India, though the GDP is growing faster, its performance in terms of HDI is far below than that of many countries. Importance of National Income A national income measure serves various purposes regarding economy, production, trade, consumption, policy formulation, etc. The need for estimation of national income, gives the importance of national income: 1. To measure the size of the economy and level of country's economic performance. 2. To trace the trend or speed of the economic growth in relation to previous year(s) as well as to other countries. 3. To know the structure and composition of the national income in terms of various sectors and the periodical variations in them. 4. To make projection about the future development trend of the economy. 5. To help government formulate suitable development plans and policies to increase growth rates. 6. To fix various development targets for different sectors of the economy on the basis of the earlier performance. 7. To help business firms in forecasting future demand for their products. 8. To make international comparison of people's living standards. Task Find out the various methods to calculate national income. Find which country has the highest National income and which has the lowest. 3.4 Industrialization and Economic Development For any economy, whether developed or developing, economic development is very important, which is achieved largely through industrialization. However, even though we know that higher productivity of industries leads to improved economic outcomes, there has been no consensus among researchers about either the desired path of development or the role of state in economic development. The appropriate strategy for any country depends not only on its objective economic situation but also on its government policies and national views regarding the appropriate role of the state. India's economic development strategy immediately after Independence was based primarily on the Mahalanobis model, which gave preference to the investment goods industries sector, with secondary importance accorded to the services and household goods sector. Example: The Mahalanobis model placed strong emphasis on mining and manufacturing (for the production of capital goods) and infrastructural development (including electricity generation and transportation). Any increase in planned investments in India required a higher level of savings but that was not there. Because of the low average incomes in India, the needed higher levels of savings had to be generated mainly by restrictions on the growth of consumption expenditures. 84 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Over time, India created a large number of government institutions to meet the objective of growth with equity. The size of the government grew substantially as it played an increasingly larger role in the economy in such areas as investment, production, retailing, and regulation of the private sector. Notes In the late 1950s and 1960s, the government established public sector enterprises in such areas as production and distribution of electricity, petroleum products, steel, coal, and engineering goods. In the late 1960s, it nationalized the banking and insurance sectors. To alleviate the shortages of food and other agricultural outputs, it provided modern agricultural inputs (for example farm machinery, irrigation, high yielding varieties of seeds, chemical fertilizers) to farmers at highly subsidized prices (World Economic Indicators, 2001). In 1970, to increase foreign exchange earnings, it designated exports as a priority sector for active government help and established, among other things, a duty drawback system, programmes of assistance for market development, and 100 per cent export-oriented entities to help producers export (Government of India, 1984). Finally, from the late 1970s through the mid-1980s, India liberalized imports such that those not subject to licensing as a proportion to total imports grew from five per cent in 1980-1981 to about 30 per cent in 1987-1988. The activities of an economy are commonly divided into five components. The primary sector includes activities directly involving the physical environment; occupations such as agriculture, fishing, forestry, hunting, and mining. The secondary sector involves the processing of raw materials and manufacturing. Most workers in developed countries are in the tertiary sector where they provide services. The service sector includes wholesale and retail sales, transportation, and finance, insurance, real estate. Those whose work involves the exchange or application of information, knowledge, and/or capital are thought to be in the four or quaternary sector. Finally the expansion of the knowledge economy has necessitated the term quinary sector to refer to higher order, complex, and specialist tasks of control, production and management. As a country goes through industrialization or economic development it is possible to see a marked shift in the percentage of the labor force involved in the each of the five sectors. Non industrial states have most of their workers involved in the primary sector. When industrialization begins there is great growth in the secondary sector and the percent of workers involved in primary production decreases. With continued growth in economic activity the labor force shifts toward the third, fourth, and fifth sectors. 3.5 Inflation Although an overall increase in price is often referred to as inflation, in reality it means a continuous rise in prices, accompanied by a decrease in the purchasing power of the currency. Inflation is measured by taking a 'basket' of goods, and comparing the prices at two intervals, and adjusting for changes in the intrinsic basket. Thus, there are different measurements of inflation, depending on the basket of goods selected. The most common measures are of consumer inflation, producer inflation and GDP deflators, or price indices. The last measures inflation in the entire economy. Thus, if the general price was say, 100 in 2000 and 110 in 2001 then there is an inflation rate of 10%. Hence it can be said that in an inflationary situation the purchasing power of money goes down. LOVELY PROFESSIONAL UNIVERSITY 85 Unit 3: Economic Environment of Business Notes3.5.1 Types of Inflation The following are the types of inflation: 1. Hyperinflation: An extremely high rate of inflation is known as hyperinflation. It is a state of galloping inflation. N. Gregory Mankiw has defined Hyperinflation as "inflation that exceeds 50% per month, which is just over 1% over per day. Compounded over many months, the rate of inflation leads to very large increases in the price level". 2. Suppressed Inflation: Suppressed inflation is a situation where deliberate policies are pursued to prevent price rises in the present, but it is only a temporary suppression of inflation. These forces usually accumulate and are bound to burst in future and occasionally result in hyperinflation. 3. Deflation: This means a fall in prices, the opposite of inflation. 4. Disinflation: It refers to the slowing of the rate of inflation, that is, prices are still rising, but at a slower rate than before. It implies the process of bringing down prices moderately from their previous higher level. 5. Reflation: It is a term used to denote inflation after a period of deflation, meaning inflation designed to restore prices to a previous level. 6. Crawling Inflation: Crawling inflation is where inflation is low and which moves up and down slowly. In controlled economies like India, there exist another type of inflation, i.e., Administered Inflation. In a few sectors, India still follows a policy of administered pricing and in some cases, it follows dual pricing in which the manufacturer has to sell a portion of the output at fixed prices while the rest are sold at market driven prices. India also follows the policy of support price for crops. All these administered prices changes from time to time create administered inflation i.e. rise in prices not by market forces but by the government. Though in today's liberalised economy, the government is slowly doing away with administered pricing. Based on its cases or sources, we can identify three kinds of inflation: 1. Administered Pricing: Inflation caused by the revision of prices by the government. 2. Demand Pull Inflation: Demand-pull inflation arises when aggregate demand outpaces aggregate supply in an economy. It involves inflation rising as the real gross domestic product rises and unemployment falls. It is described as "too much money chasing too few goods", since only money that is spent on goods and services can cause inflation. 3. Cost Pull Inflation: This is because of rise in costs. Cost-push inflation or supply-shock inflation is a type of inflation caused by large increases in the cost of important goods or services where no suitable alternative is available. Example: A situation of this kind that has been often cited was the Oil Crises of the 1970s, which some economists see as a major cause of the inflation at that moment. Since petroleum is critically important to economies, a large increase in its price can lead to increase in prices of most products, raising the rate of inflation. Neo Keynesian theory describes three types of inflation: Demand-Pull Inflation, Cost-Pull Inflation, and Built-in Inflation. Built-in Inflation: Built-in inflation is induced by adaptive expectation, often linked to the 'price/wage spiral' because it involves workers trying to match their wages up with prices, and employers passing higher costs on to consumers as higher prices as part of a 'vicious circle'. 88 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes 5. Restrictions on Imports: In a move to protect domestic industry, the government restricted imports in the past. Because of this, diseconomies of scale crept the industrial sector as it was totally a seller's market, resulting in an increase in prices. Consumers were forced to purchase costly products made in India though they could be imported at very cheap rates. This policy also resulted in the inefficient use of resources as scarce resources were invested even in the production of those things which were easily available at very economical prices abroad, and could be easily imported. The various factors that have accelerated demand thus have resulted in the increase in prices are: 1. Growth of Population: India's population keeps rising at more than 2% per annum. Increased population causes increase in the demand of wage goods. It also adds to the government expenditure at all levels to provide basic amenities to the population added and exerts pressure on demand indirectly. 2. Increment in Income and Employment: Post-liberalisation, income and employment have increased significantly. These have resulted in greater demand for wage goods whose supply is relatively inelastic. The result has been a continuous price rise. 3. Urbanisation: The migration of population from villages to city areas adds to the intensity of the demand factor. Monetary and fiscal factors have also contributed to price rise in India as they work as demand accelerators. The following are important reasons in this respect: 1. Rising Level of Government Spending: India has witnessed a sharp rise in public expenditure since independence. This rose from 18.5 % of NNP to around 33 % in 1980-81 and further rose to around 45% in 1998-99. A significant part of government expenditure is on non-developmental activities including defense, interest on public debt, administrative expenditure, and maintenance of law and order in the country. The expenditure on these activities leads to inflationary trends in the economy; the purchasing power of the people increases but the supply of real goods remains more or less the same. 2. Deficit Financing: Deficit financing results in large- scale creation of money and intensifies the price spiral. Net bank credit to the private sector also contributes to inflationary pressures. 3.5.3 Measuring Inflation Inflation is measured by observing the change in the prices of a large number of goods and services in an economy. The prices of goods and services are combined to give a price index measuring an average price level, the average price of a set of products. This price is then adjusted for changes in the underlying basket of goods, a process called hedonic adjustment. Inflation Rate: The inflation rate is the rate of increase of the average price level, i.e., measure of inflation. Alternatively, the inflation rate is the rate of decrease in the purchasing power of money. There is no single true measure of inflation because the value of inflation will depend on the weight assigned to each good in the index as well as the extent of the economic region being examined. Inflation is measured through various price indices. The following price indices used in India to measure inflation: 1. GDP Deflator. LOVELY PROFESSIONAL UNIVERSITY 89 Unit 3: Economic Environment of Business Notes2. Consumer Price Indices. 3. Wholesale Price Index. 1. GDP Deflator: It is the broadest measure of the price level. Gross Domestic Product (GDP) deflator is the index of the average price for the goods and services produced in the economy. It includes the price of all finished goods. In other words, it doesn't include that means, it don't include intermediate goods and raw materials. It ignores the prices of imported goods, which enters the consumption basket and/or to the list of inputs in production. The GDP deflator is based on calculations of the Gross Domestic Product-it is based on the ratio of the total amount of money spent on GDP (nominal GDP) to the inflation-corrected measure of GDP (constant-price or 'real' GDP). 2. Consumer Price Indices (CPI): The Consumer Price Indices (CPI) measure the price of a selection of goods purchased by a 'typical consumer'. A consumer price index refers to the index of the goods and services contained in the consumption basket of the relevant group of consumers. It excludes the prices of capital goods (plant and equipments), raw materials and intermediate goods, and includes the prices of services as well as of imported goods. Because consumption pattern of families varies with their profession, place of living etc., there can be many CPIs. In India we have three such CPIs: (a) CPI for Industrial Workers (CPI-IW). (b) CPI for Urban Non-manual Employees (CPI-UNME). (c) CPI for agriculture labourers (CPI-AL). In many countries, annualised percentage changes in these indices are the most commonly reported inflation figure. These measures are often used in wage and salary negotiations, since employees wish to have nominal pay raises that equal or exceed the rate of increase of the CPI. Sometimes, labour contracts include cost of living escalators, or adjustments that imply nominal pay raises automatically occur due to CPI increases, usually at a slower rate than actual inflation (and after inflation has occurred). 3. Whole Price Index: It measures the change in price of a selection of goods at wholesale (i.e., typically prior to sales taxes). It includes the prices of raw materials and semi-finished goods, as well as of imported tangible goods, besides the prices of tangible goods included in the GDP, if they are transacted at the wholesale level. It excludes the prices of services. 3.5.4 Impact of Inflation Inflation influences and touches the life of every individual and corporate entity. Hence, Inflation influences the decisions affects our lives in the following ways: 1. Indirect Tax: Inflation is considered the cruelest tax. The government can increase this through its right to create money, especially through seigniorage. When the government finances its deficit by issuing money, which the public adds to its holdings of nominal balances, to maintain the real value of money balances constant, we say that the government is financing itself through the inflation tax. The government can thus spend more resources, forcing people to spend lesser, just as if the government had raised taxes to finance extra spending. 2. Shoe Leather Costs: Inflation increases the cost of holding of currency as well as opportunity cost. That is, if people keep the money with themselves, their purchasing power will decrease because of inflation. People will tend to hold less cash, and will try to keep them in banks or will try to invest in other interest yielding instruments during times of inflation. This imposes real costs. 90 LOVELY PROFESSIONAL UNIVERSITY Business Environment Notes Example: The form of more frequent trips to the bank (there is a humorous reference to the cost of replacing shoe leather worn out when walking to the bank). 3. Menu costs: Under inflation, firms must change their prices more frequently, which imposes costs. Example: A restaurants have to reprint their menus as they change them menu time and again. High inflation induces firms to change their posted prices more often. Changing prices is a costly affair as it requires printing and distributing new catalogues. 4. Variability in Relative Prices: The higher the rate of inflation, the greater the variability in relative prices. To adjust to inflation firms usually change their price after specific intervals, usually annually. But prices don't increase annually. They increase daily, weekly or monthly, and this results in variability in prices. Example: Suppose a firm increase its prices to adjust inflation every April. But if inflation is 1% per month, then from the beginning to the end of the year, the firm's relative prices fall by 12%. Sales from this catalogue will tend to be low early in the year (when its prices are relatively high) and high later in the year (when its prices are relatively low). Hence, when inflation induces variability in relative prices, it leads to inefficiencies in the allocation of resources. 5. Negative Impact on Exports: This happens if the inflation in an exporting country is higher than inflation in the importing country. If the nominal exchange rate is not adjusted by the inflation differential then inflation causes appreciation of home currency in relation to the foreign currency. The appreciation in the real exchange rate adversely affects net exports. In another sense, inflation results in higher procurement or manufacturing costs in the home country but if inflation is lower in the importing country, then the selling price will not increase by that magnitude. This reduces profits and increases competition for the export market from other exporting countries that have low inflation. Inflation thus reduces from exports. 6. Change in Yardstick: Money is a yardstick with which we measure economic transactions. But this yardstick changes when inflation occurs. In such an instance it becomes difficult to measure economic variables. The comparision of the economic variable of the country at different periods is an especially difficult task.. Comparing the per capita income of an Indian in 1980 and in 2000 will be of no use as it will not give true picture of his economic capacity. As we compare the size of the economy through the traditional route, that is by Per Capita GDP in Dollars, we find that India ranks through very low. But if we do through with the new route, i.e., Purchasing Power Parity (PPP), then we find that India is among the top five. This shows how difficult it is to compare economic data because of inflation. 7. Tax Anomaly: Inflation distorts the way taxes are levied. Because of inflation, a person can be taxed without having any income. Suppose a person buys some stock today and sells the same a year from now at the same real price. It would seem reasonable for the government not to levy a tax, since there is no income.