Business Environment

Mgmt study material created/ compiled by - Commander RK Singh rajeshsingh_r_k@rediffmail.
com
Lecture Date: 06 Aug 05

Subject: Business Environment
Professor: Dr VP Raja
Recommended Books
1. Business Environment By Suresh Bedi

Excel Books
2. Business Environment By Raj Agrawal (Second Edition)

Excel Books
3. Business Environment By Francis Cherunilam (15th Edition 2004)

Himalaya Publishing House
Availability – Banarasidas & Sons, Near Mahalaxmi Temple, Warden Road,

Sterling Book Depot, Near VT, Strand Book Depot, Fort
It was suggested by the professor that it is important to read all the three
books as the subject matter covered in each book is entirely different despite
the title being same.
In addition to above books, a list of 15 books was given. Each student is

required to choose one book out of 15 and submit an essay or a book review,
(approximately 12-15 typed pages long in A-4 size paper), based on an in-
depth study of the book, on or before 22 Oct 05.
Study of this subject is basically sensitisation to the external environment

affecting the business. In SWOT analysis (Strength, Weaknesses,
Opportunities and Threats) Strength and Weaknesses are internal to the
business, while Opportunities and Threats belong to the external environment
of the business (Business Environment).
The business in the yester years was much simpler. As the world is shrinking
in distances, the complexities are growing in exponential fashion. Events in a
distant region of the world affect the business in our domain. Gulf war
affected the Indian Economy despite no direct link with it. Bird Flue virus
Page 1 of 48 - Business Environment

Jamnalal Bajaj Institute of Mgmt Studies
Mgmt study material created/ compiled by - Commander RK Singh rajeshsingh_r_k@rediffmail.com
attack in China and other countries affected the poultry business in India both
ways. First chicken demand/prices plummeted due to local population’s fear
about chicken and then it sent the overseas demand for Indian chicken soaring
when it was considered a safe source.
Thus, knowledge of global events and assessment of their impact on our

business can alert us to be able to take advantage of the opportunities or take
corrective action about impending threats.
Or
g
The above diagram indicates as to how an organization is nestled in a sector, which

in turn is affected by the domestic economy which is influenced by the global economy.
Global Economy is itself dictated to a large extent by the Global Geopolitical Environment.
Take for instance following scenario.
America’s meddling in the Iraq has caused the crude oil prices to reach $ 62 per
barrel from the three year old level of $ 22 a barrel. The oil prices are threatening to touch
$ 100 a barrel. India imports almost two thirds of its oil requirement. Oil import bill in
2003-04 at @ $29 a barrel was Rs 93,000 crores, which means that now the bill would
touch Rs 2 lakh crores. Govt can not pass the entire burden to the consumers and would
have to subsidise part of the increased costs which would increase its fiscal deficit. Increase
in fiscal deficit would lead to higher inflation and interest rates. Higher the interest rates
lesser the investment into new projects due to less number of projects passing the IRR test.
Less investment means less job opportunities and increase in joblessness among the youth.
This would result in increase in crime as people would adopt any means to earn a living.

Thus, in medium term, Mr Bush’s dislike of Saddam’s face can lead to increase in crimes
in our country.
Thus, for success in business, it is important for today’s managers and

entrepreneurs to keep abreast with day to day developments in business environment not
only in the immediate neighbourhood but in the whole globe.
Various elements of the business environment are as follows: -
(a) Internal Environment

(b) Domestic macroeconomic environment
(i) Economic System
(aa) Market Economy
(ab) Command Economy
(ac) Mixed Economy
(ad) Socialist Market Economy
(ii) Growth and Distribution Environment
(iii) Macroeconomic stability
(iv)Economic policy
(aa) Monetary Policy
(ab) Fiscal Policy
(ac) Industrial Policy
(ad) Trade Policy
(v) Competitive Environment
(vi)Non Economic Environment
(c) Sectoral Environment
(d) External Public Relations Environment
(i) Suppliers
(ii) Customers
(iii) Distribution Channel Members
(iv)Rivals
(v) Other Entities
(e) International Environment
(f) International Geo Political Environment

Economic Environment
Let us examine the economic environment prevailing in the country since independence,
i.e. since 1947.
In 1947, Indian society was a predominantly agrarian society. 90% of population lived in
villages. Bombay, Calcutta and Ahmedabad were the only industrialized cities with
Calcutta being the most industrialized city. Calcutta had ship building and jute industry
while Bombay and Admedabad had cotton textile mills.
Indians were a heavily exploited lot in those days. There were various sources of
exploitation. The main were:
(a) Zamindari System

(b) Money Lenders
(a) Zamindari System was order of the day in those days. “Zamindari” was a
system whereby the king used to hand over the lordship of an area (a few
villages) to an influential person on a fixed yearly rent. There after, how that
person collected the money (Lagaan) from the villagers under his command was
no concern of the king. This became a big source of exploitation of the poor
indian villagers. The British too had adopted this system from the erstwhile
kings and it continued for some time even after independence.
(b) Money lenders were other exploiters. There were professional money lenders
like Pathans and village traders who use to lend money against gold, silver,
property etc at exorbitant rate of interest and usurp those assets in due course.
Then there were land lords who also use to lend money to the peasants and
convert them into bonded labours. The interest rates were often as high as 345%
per annum.
India, in those times, had very few industries. Indian Business Class was in deed a trading
class. Most of the industrialists were first a trader and then an industrialist. The cotton
textile mill owners use to earn more money by trading in cotton than converting cotton into
fabric. They use to finance the farmers for cotton crop and buy back entire crop in lieu at
dirt cheap rates. There after, they use to hoard the cotton and sell it at a premium later in
the year to the handloom owners.
Bengal Presidency was the area of today’s West Bengal, Bangladesh, Bihar, Jharkhand and
Orrisa. In the post independence era, land reforms were instituted. CPM Government in
West Bengal carried out the reforms admirably well and as a result Bengal is the most
egalitarian society today. This land reform has also been the source of support for the party
till date. In addition, brutal force used by Mr Siddartha Shankar Ray’s congress govt in

order to suppress the Naxalite Movement in Bengal’s colleges, caused severe alienation of
people from the party.
In contrast to successful land reforms of Bengal, land reforms in Bihar and Orrisa were not
executed with same zeal and sincerity and therefore did not succeed. As a result, populace
in both the states are even today of highly feudal mindset. The feudal powers in Bihar kept
changing hands from one caste group to other. It was Bramhins during independence,
Thakurs some time later, and now it is Yadavs. However, common man’s exploitation
never stopped irrespective of who the feudal lord was.
In Maharashtra, land reforms were well executed in the Konkan (Western Maharashtra)
region due to efficient performance of Peasants and Workers Party. However, it was poorly
done in Central and Eastern Maharashtra. It is now reflected in economic disparity in the
two regions.
Central Govt abolished the bonded labour system after the Independence. However, it was
also not well implemented and it continues in some pockets of the country even today.
Indian Economy was poor since there was lot of Disguised Unemployment. Disguised
Unemployment means employing 25 people to do a job which can be as efficiently done by
10 people. The marginal productivity of these 15 extra people is NIL. However, on face of
it, they are employed doing some job. This is precisely what was happening in Indian Farm
Sector. A land which could be cultivated as efficiently by one brother, had 2 or 3 brothers
and more employed. Prime cause of this disguised unemployment was non availability of
avenues for employment. Family sizes were multiplying, mechanised farm equipment were
reducing manpower requirements but land holdings of families were static or shrinking.
There were not many avenues of employment available in villages.
An economy grows when the productivity of its people grows.
Prime Minister Nehru was quick to realize this Disguised Unemployment and felt that
“Industrialization” was the key to eradicate it and improve productivity. While most of his
contemporary leaders agreed with him, Mahatma Gandhi was of a slightly contrarian view.
He believed in self sufficiency of Indian Villages not through mechanised methods but
through “Charkha”.
Pt. Nehru’s economic outlook was influenced by two historical events during his lifetime:
1. Bolshevik or Russian Revolution of 1917 which was headed by Mr

Lenin. In the years preceding 1917, working conditions in the industry in
Russia were far worse than on the agriculture field. From 1917 to 1923, it
was total anarchy and chaos there. However, order was restored by Mr
Stalin (St Petersburg, capital of Russia, was renamed as Stalingrad in his
honour, but was reverted back to original name recently). He introduced the
“5 Year Plan” concept in Russia for its development. He built up a huge

Military Industrial Complex. However, he also took up production of

consumer goods for manufacture by the Public Sector Plants.
2. Pt Nehru had studied first in Harrods and then in Oxford university. This
is where he came under the influence of “Fabian Thinkers” Like George
Bernard Shaw. These people were later called the socialists. Robert Owen
had started writing about Sweat Shop (Industries) causing a upheaval in the
British society.
Pt Nehru married the politics of England with the economics of Russia and created the
Mixed Economy. While the state took up huge on Basic & Heavy industries and
infrastructure, consumer goods industries were left to the private sector. He sought help of
prominent industrialists like JRD Tata to help establish light and consumer goods
industries.
Also, in line with Russian model, he set up a Planning Commission in 1952 for drawing
Five Year Plans. First Five year Plan period is considered to be from 1947 to 1952 which
basically consisted of completing the ongoing projects started in the pre-independence era.
2nd Five Year Plan – 1952 – 57, was truly a well conceived Five Year Plan. Even though
the people who planned as well as those who executed it did not have much formal training
either in planning or management, it is the best planned as well as executed Plan of the 10
Five Year Plans till date. Their lack of knowledge and skills were compensated more than
adequately by the hard work, commitment and sincerity. 10th Five Year Plan is currently in
progress from 2002 -07.
While deciding on the economic model to be adopted for the country, Pt Nehru sought help
of Professor PC Mahalonobis, who was Director, Industrial Statistical Institute, Calcutta.
He is credited with converting Nehru’s idea into a proper economic model (by converting
Harrods- Dammar model).
His economic model, later called as Nehru – Mahalonobis model, was based on following
premises:
(a) Investment in Capital Goods Industry is primary requirement as those goods

would then be used by small entrepreneurs for starting business. Private
enterprises would be averse to invest in such industries.
(b) But such industries would require some basic raw material, like iron, copper,
aluminium, etc which are even more capital intensive to expect private sector to
invest.
(c) Allow private entrepreneurs to produce consumer goods.
Above model became the basis for the Industrial Policy Resolution of 1956.
During the implementation of the model, various hurdles were faced by the Govt.

(a) Required technology for Heavy and Basic industries was not available. –
Thus, Govt sought foreign help for transfer of technology.
(b) Technical manpower not available. - While technology was not there, there
was equal dearth of technical man power also - Managers, supervisors,
skilled labour, which were hard to import. So, a three tier technical training
set up was planned.
(i) Tier I – Engineering Colleges (for Techno Managers) including 05 IITs

starting with IIT Kharagpur in 1957.
(ii) Tier II – Polytechnics (for Supervisors)
(iii) Tier III – Industrial Training Institutes (ITIs) for training skilled
machinery operators.
Now we will see how country went through the learning experience and had to constantly
alter its investment and development priorities.
Years 1962 to 1972 were calamitous for our country. We fought 3 wars, in 1962 against
China, and in 1965 and 1972 against Pakistan. Chinese War was a total surprise to India as
the country enjoyed very warm relations with China and Chinese Premier Mr Chou En Lie
had visited India just a few years back. Hindi Chini Bhai Bhai slogans used to fill the air.
China had by then annexed Tibet and was laying claim for Arunachal Pradesh. There were
also problem of delineation of McMohan Line. But despite above simmering problems with
China, country had not given adequate priority to defence of the country in its quest for
quick economic development. The soldiers did not have even proper footwear for mountain
and high altitude (snow clad region) warfare and were sent to those heights in Nov/Dec
months in summer uniforms. Secondly, all the Indian forces were concentrated on Western
Front along Pakistan border. India did not have enough air crafts to be able to quickly
transport soldiers and armament to Eastern Sector. America then helped India with C-140
transport aircrafts and pilots for transportation of troops. But this help came as a result of
their paranoid fears of expansionist communism expanding its cover than any love for
India.
But we lost the war badly. Chinese had come up to Tejpur but declared unilateral ceasefire
on 20 Dec 1962 and withdrew.
War in 1962 taught us that Economic Development without National Security is

meaningless since decades of economic development can be lost in a single war. India had
perforce to divert those scarce economic resources from Industrial Development to
National Security. There were tremendous psychological and emotional cost too. Nehru did
not survive his monumental diplomatic blunder and passed away on 27 May 1964.
India won both the wars in 1965 and 1972 convincingly.

But wars, whether won or lost, always carry gargantuan economic and human costs and
therefore plunge the economy in throws of recession in the post war period. There is, if at
all, only a marginal difference in cost incurred between the winner and the loser.
Nation’s tryst with calamities did not end here.
Loss of 1962 war was followed by 3 successive years of draught and there was fear of
famine looming large on the horizon. Once again Americans came to the rescue of India
with supply of American wheat called PL 480. India learnt once again that International
Aid does not come without the riders. While no riders were imposed in the beginning,
American Consulate General began to seek regular appointments with Prime Minister to
convey his governments missives for American expectations of India’s voting in various
International Forums like United Nations, or else food aid would be frozen. India then was
leader and founder member of the Non Aligned Movement along with Mr Nasser of Egypt
and Marshall Tito of Yugoslavia. For the leaders, who were bred on staple diet of opposing
Imperialism, it was hard to accept American dictates but had to swallow their pride and
accept them since allowing millions of countrymen to starve to death for ideological
leanings of its leaders would have been a horrendous crime against humanity.
This episode taught the leaders another lesson that food security is paramount for a nation.
So, while more money was allocated to Defence from 3rd Five Year Plan, Agriculture
began to get enhanced share from 4th Five Year Plan.
India’s agriculture in those days was primarily rain fed. There used to be a single crop per
field in most the country in absence of irrigation facilities in post monsoon period. India
wanted to transcend to 2 and 3 crop a year agriculture model. But it meant construction of
dams and canals for storage and taking water to the fields. Further, ground water was to be
used for which electrical power was required in the rural India. Per capita cost of electrical
distribution network in rural area is prohibitively high as density of consumers is very thin.
India’s power generation capacity was barely 3,400 MW in 1947. (Today it is
approximately 1,20,000 MW) So, massive investments were required in the sectors of
power generation and distribution. Poor farmers did not have wherewithal to buy the pump
sets and pay the electricity charges. So, to help the farmers, Govt initially provided highly
subsidized pump sets and free power.
When God closes one door, he leaves at least a window open. India had the fortune of
having the troika of Mr C Subramanyam, Union Agriculture Minister, Mr MR Sivaraman,
Secretary Agriculture, and Mr Swaminathan, Director Agriculture Research. In their quest
to increase the production of food grains, they hit upon a Mexican variety of wheat which
had yield as high as 3-4 times the Indian variety yield. This variety was recommended by
Mr Norman Borlough who later won Nobel Prize.
However, this new high yield variety was highly prone to pest attack and needed water and
fertilizers. This led to upping the investment in pesticides and fertilizers industry.

Alongside above, two agriculture universities, one each at Ludhiana and Pant Nagar were
set up on Land Grant Basis for further research and development in the field of agriculture.
(Land Grant Basis is a method where in a trust is allotted large tract of land to regenerate
revenue from it and finance it operations).
Green Revolution was a great success. But, together with successes a thitherto unthought-
of effect came to be noticed. The Green Revolution had made the rich richer while poor
remained where they were.
Technology is scale neutral (It can be applied on 1 acre land or 1 million acres of land with
same effect) but it is not resource neutral (Proportional resources are required for size of
land). Money was required to buy new seeds, fertilizers and other requirements which was
not available with poor and marginal farmers. Thus, while rich farmers benefited by using
new technology and reinvested extra profits to earn even more profits, poor could not
afford the cost of new technology and continued to remain where they were. Thus, it
caused huge income differentials in the villages. The inequity caused also led to social
tensions. (Those were the days when approx 40% population lived below poverty line.)
Such inequitable distribution of gains of new technology prompted the Govt to concentrate
on poverty alleviation program.
Mr VS Page, a contemporary of Mr VB Chawan, CM of Maharashtra, launched Page

Yojna to help the poor and marginal farmers in Western Maharashtra and it was a great
success. These small initiatives became Central Theme of 5th Five Year Plan.
Mrs Gandhi led a peaceful coup within Indian National Congress in 1969 to overthrow the
old guard of Mr Morarji Desai, BD Jatti, etc and became the Prime Minister. In order to
consolidate her position, she took some populist measures like: -
(a) Banks nationalisation

(b) Abolition of Privi Purses
(c) Launching Poverty Alleviation Programmes.
Dr Man Mohan Singh was the architect of “Direct Attack on Poverty” programme. It led to
micro credits by Nationalised banks to the marginal section of the society to facilitate small
businesses to improve their income. In order to broad base the programme, reach of the
banks had to be increased and therefore new branches were opened in small towns and
rural areas. Many of these branches subsequently became unviable as they provided
Directed Lending at sub optimal rates.
India was following a modified Russian model of industrial development. In the Russian
Model, complete industrial sector was in public sector whereas in Indian Model, consumer
goods production was handed over to the private entrepreneurs. But realising the handicaps
of shortage of capital and trained man power, Govt had followed the Nascent Industry
Argument (providing protection to the new industry through competition restrictive
policies of regulating production licences and creating tariff walls to protect against cheap

imports). Due to historical reasons, Indian leadership was suffering from deep suspicion of
the West. Self Reliance was the mantra every politician worth his salt, right from Mahatma
Gandhi downwards, was chanting. India, therefore, followed the policy of Export
pessimism and Import substitution. While import of equipment/goods and CKD kits
(Completely Knocked Down Kits) had to be allowed in many sectors initially, strict norms
of gradually increasing indigenous content in those products were laid down in order to
stimulate local vendor development.
But with such kind of strict control on every aspect of economy, its negative aspects started
surfacing. Centralised control of day to day financial matters of the nation led to growth of
bureaucracy and corruption. Industrialists were often busy liaisoning powers that be to
ensure that no competition is allowed in their monopoly. Further, factories were
deliberately under-producing to ensure scarcity of products so that prices can be artificially
jacked up. Education system was growing quantitatively but at the cost of quality. The
result was that the skill level of people was not matching their responsibilities. Performance
index of people was plummeting.
Rise of Mrs Gandhi as Prime Minister had another adverse impact on the polity of India.
While Pt Nehru encouraged dissent and debate, Mr Gandhi, probably because of her
insecurity, promoted sycophancy. She placed ill qualified sycophants as the head of various
institutions. Place in central ministry was again reserved for the sycophants. Such crass
devaluation of merit and rewarding of sycophancy destroyed institutions and perpetrated
sycophancy down the line. Indian psyche, which is culturally feudal, only helped the matter
further.
Surfeit of rules and govt controls on basic necessities of life, promoted what was popularly
called License Permit Raj. Licence Permit Raj, prevalence of sycophancy and incapable
people reaching undeserving heights, made a heady brew for corruption. In fact, License
Permit Raj became the prime engine for growth of corruption in the Indian society. While
on one hand corruption caused fiscal indiscipline, on the other hand it caused revenue
leakages.
From 1947 to 1982, India always had revenue surplus. Revenue surplus means Govt
revenue collection through taxes (direct and indirect) and non tax earnings like entry fees to
monuments, dividends from PSUs, etc, exceeded the expenditure on running of govt, ie,
salary to staff, office expenditures, maintenance of foreign consulates, etc. Due to fiscal
indiscipline and revenue leakages, started from 1969, India had its first revenue deficit
budget in 1982 and has not recovered till date. Govt has though passed a Fiscal
Responsibility and Budget Management Act which promises to gradually bring down the
budget deficit to ‘0’ level by 01 Apr 2008.
Revenue deficit has a spiralling effect. During the last year, Govt borrowed Rs 1,40,000
crores. Out of this money, only Rs 42,000 crores was for capital investment purpose, while
Rs 98,000 crores were for meeting budget deficit. Servicing of this loan and interest in
successive years will cause further deficiency of revenue and lead to further borrowing to
fund those shortages unless a way is found out of this morass.

Such borrowings are called Intergenerational Equity which means we are borrowing
against the liability of our future generations. We, instead of leaving a legacy of healthy
economy for our children, will be leaving a debt liability to be serviced by them.
While corruption, nepotism and fiscal indiscipline were some of the causes of revenue
deficit, time and cost over of projects and over staffing of Govt Deptts and PSUs were
equally responsible.
Severe time and cost overrun of projects in the range of 300 to 400 % had become the rule
rather than exception by then. It happened due to variety of reasons, like
(a) Projects were approved more on political expediency than its financial
viability. In order to get the approval, project costs were often understated.
Subsequent processes in securing additional finances were long drawn and
caused delays in project completion.
(b) Corruption was another reason for cost overrun. In the economic parlance,
corruption is called “Rent Seeking”.
(c) New projects approved beyond the financial capability of the govt purely
on political expediency by diverting the funds earmarked for the ongoing
projects. New govt, new ministers and another round of shelving and
revival cycle. This had spiralling effect as the projects got stalled mid way
through due to paucity of funds. Delays in completion of projects also led to
delay in generation of the revenue stream expected out of the project.
Foreign Exchange Situation
British had left a very healthy sterling balance for India when they left in 1947. Because of
export pessimism and requirement to import capital goods for setting up industries, the
foreign exchange reserves kept gradually depleting. A time came when India had to resort
to commercial and bilateral borrowings to fund its import requirements.
In the Balance of Payments Account, first head on receipt side is export earnings. Second
head is Invisibles which are incomes like remittances and deposits made by NRIs,
expenditure by visiting tourists etc. Similarly, one the Expenditure side, there is a head
Invisibles, which includes FE outgo by way of educational expenses of students in foreign
universities, medical expenses of people in foreign hospitals, etc.
India’s foreign exchange situation became critical in 1990. India’s FE holdings were
reduced to just $ 1 bn which was enough to fund only 14 days worth of imports. This
situation was result of a host of domestic and international events: -
(a) Collapse of Soviet Union. India had special import arrangements

with erstwhile Soviet Union whereby India could import Russian goods,

mainly military hardware at highly concessional rates. Even those highly

subsidised payments were to be made in Indian Rupees. Those Indian Rupee
payments were held by the Russian Consulate and Indian consumer products
were purchased with that money in consultation with Ministry of Trade and
commerce so that domestic market does not get unduly disturbed due to
such purchase. It was in essence a barter arrangement and therefore highly
beneficial to India in every respect. Post collapse of Soviet Union, not only
the subsidy disappeared jacking up the cost of those materials many times
over, there was also demand to make payments in dollars thus increasing FE
requirement.
(b) Collapse of Trading arrangement with 2nd World Countries.

Along with collapse of Soviet Union, India’s trading arrangement with other
countries of Communist Block also collapsed.
(c) Gulf War. First Gulf War started because of which large number
of Indians Expatriates working in those countries were repatriated. The
remittances made by them as invisibles in BOP dried up substantially. In
addition, there was hike in price of crude oil causing hike in Oil import bill.
(d) Flight of Capital. Those were the days when Indian polity was in
great turmoil first due to VP Singh’s politics of Mandal Commission and
then BJP’s politics of Mandir Masjid. There have been many who did not
believed that India can sustain itself as a nation. Such events lent credence
to their theory. Scared by the near civil war situation unfolding in the
country, many super rich NRIs who were maintaining substantial accounts
in India, quickly transferred their accounts to safety of Swiss and other
banks. So, there was a flight of foreign capital from the country.
(e) Crash of Credit Ratings. Mr Devilal, Deputy Prime Minister, in

an effort to consolidate his constituency of farmers, addressed a massive
Farmers Rally in Boat Club in Delhi where in he announced a complete loan
waiver for farmers. Within 24 hours of this calamitous fiscal indiscretion by
Mr Devilal, two leading Credit Assessment Agencies of the world, viz M/s
Standard and Poor and M/s Moody lowered the country’s investment ratings
to “Below Investment Limit”.
All foreign funding agencies immediately shut the lending tap. Visits by some of the
articulate ministers to various world capitals did not yield any fruits. India was in the
throws of declaring a Financial Emergency. Dr Manmohan Singh’s advice was sought who
also expressed helplessness in the prevailing situation. Some time was needed to restore the
order and 14 days was far too short. India then bought some time by pawning away 60
tonnes of gold to England which was physically airlifted and deposited in the vaults of
Bank of England. Elections were announced in the meanwhile and Mr ManMohan Singh
became the new Finance Minister in the new government headed by Mr PV Narsimha Rao.

Dr Man Mohan Singh adopted a two step approach. First being to stabilise the economy
and then attempt the structural adjustment. Stabilising the economy involved stabilising the
micro economic indicators like inflation. All investments were stopped.
His prescription for Structural Adjustment was: -
(a) Eradicate the monopolies whether in private sector like in Car

Manufacturing or in public sector like telecom.
(b) Nascent Industry Argument had long outlived its utility and it was stunting
the growth of economy by promoting inefficiency and curtailment of
production. Many of the industries were deliberately under producing to
keep the prices artificially high and earn profits. Economy needed to be
opened up not only to internal competition but to external competition as
well to bring in new technologies, new work culture and FE.
(c) Multiplicity of players in the same segment needed Regulators to ensure that
practices like predatory pricing are kept under check.
(d) Trade Policy
(i) Exim Policy

(ii) Small negative list of import items
(iii) Custom duty cut down from 350% to 30%.
(iv)Export Promotion

Economic Environment contd……

Western Dominance of India actually began with arrival of Vasco De Gama in 1498.
Those were the days of Princely States with no concept of Nation. Control of territories
kept changing hand frequently and people and army changed their loyalty to whoever
became the new king. Napoleon was the one who developed the concept of Nation State
and National Army in Europe. India had seen some amount of such thoughts first by
Ashoka and then by Akbar. But no sooner did the strong central power withered, it was
again a bunch of small princely states, each one to his own.
Imperialism actually originated from trade. Traders from European Nations were
adventurous and travelled far and wide in search of cheap goods and new markets for their
own goods. They were often supported in their quest by their governments. Subsequent to
setting up their trade in new territories, they began to take political control of the territories
to maximise their trade profits. By the policy of divide and rule, supporting one king today
and another one tomorrow, they weakened the kings and eventually took control of the
territories.
England, France, Spain and Portugal were the major imperial powers from 18th to 20th
century. During those days, Most of South America was Spanish colony. America had
declared independence from British Rule in 1776. Northern Africa was mostly French
colony. Infrastructure development in colonies, whether roads or rails or anything else, was
aimed at supporting trade. The train track in Mumbai was laid to bring the raw material
from various parts of the country for export to England by ships.
The Freedom Movement in India started with demand for limited self governance.
However, some incidences, most notable among them being Jallianwala Bag in 1919, led to
hardening of the attitude of people. Poorna Swaraj or complete independence was first
sought in 1930 during Annual Congregation of Indian National Congress.
Luxury of having a clean board to write on is impossible for a leader. Decision making is
never in a vacuum. Historical events cast their shadow on decisions of the day. India and
the world was exploited and abused by the European countries for centuries. Those leaders
had experienced them first hand and this experience was going to affect their judgement for
rest of their life. All the leaders of that era harboured deep distrust of imperialist European
countries and white man. The white man invariably went as a trader in every country to
become the king eventually. The story repeated in every country that was colony of the
white men. Therefore, anti colonial mindset and deep distrust of the white trading
community was only natural. Self Reliance was an automatic choice against this invasion
though trading route. Even subsequent arm twisting by Americans for support in
International Forums in lieu of food aid only hardened those self reliance convictions. And
therefore, Indian leadership of that era put an overbearing emphasis on self reliance.

During the World War II, Japan, Italy and Germany, the extreme right wing countries, were
on one side and the rest of the world including Russia, America and England were on other
side (called Allies). Despite being allies in WW –II, there was great ideological divide
between the communist block counties and the Western countries. West was almost
paranoid about communism. They feared the communism so much that market economy
states turned partially welfare states.
The reasons for this fear of communism were complex. Communism is expansionist in its
outlook. It seeks to take into its fold as many people as possible. Theories of Karl Marx had
tremendous persuasive power. Karl Marx was no alien to Europe. He was German by birth
who had spent most of his life in England. Therefore, his influence reaching the shores of
England and America was not difficult.
He was a very articulate and convincing writer. He writings could secure ideological
conversions with ease. Russian revolution of 1917 had shaken the powers in Western
countries. The conditions in America and the Europe were no better than those leading to
the revolution in Russia. America had a huge population of slaves who were forcibly
brought from African countries and were treated like and at par with domestic animals.
They were chained and lived in stable. They suffered whipping, caning and other physical
abuse. Rubber, Indigo and tea plantations in British colonies was done by the indentured
labour. Even the poor among the citizens in Europe were being exploited by the rich in the
sweat factories.
So, under the prevailing socioeconomic conditions, there was a real fear of communists
starting a revolution in America and Europe leading to upsetting of the political, social and
economic order.
French philosopher Jean J Rousseau had written the book – The Social Contract. The
books contributed immensely to French Revolution. Marx was also influenced by “Hegal”
of Germany who is credited with the word – Dialectics. Dialectics are procesess which
cause conflicts that cannot be resolved.
Max had written a theory through which history could be predicted. As per this theory, he
had predicted doom of capitalism. He also gave a road map as to how this eventual doom
can be expedited. This road map was what we called Communism.
In order to overcome the spell cast by the Marxian thought, two books by Karl Popper:
(a) Open society and its enemies

(b) Poverty of Historicism - (This book attacks on Marxist thinking)
(Historicism is a theory that all sociological phenomena are historically determined: a

strong or excessive concern with and respect for the institutions of the past)

Power corrupts and absolute power corrupts absolutely. Democracy recognises this fact but
communism does not. However, history has proved it right. Whosoever has assumed
absolute power, what ever was the method of attaining power or kind of power, political,
financial, social or religious, with some noted exceptions, has always abused it. But
because of refusal of communist to accept this fact, absolute power rests with just chosen
few in a communist setup. In Russia, while the ordinary man suffered, each of the senior
member of the communist party had Dachas (Russian equivalent of Indian Farm Houses).
And therefore, Trotsky propagated Perpetual Revolution.
However, Democracy recognises the corrupting influence of Power and therefore it first
divides the power and then it provides for a system of checks and balances.
The power is first divided horizontally between Executive (means Prime Minister and
Council of Ministers), Parliament (The elected representatives including opposition) and
the Judiciary. Then the power is divided vertically between Centre, States and the local
bodies. Despite occasional aberrations, this division of power has been working reasonably
well in keeping the people in high places under check.
Indian model of economic development (Nascent Industry Argument) was emulated by

most of the countries of the world who got independence in 1950s after Indian
Independence. However, they started changing track from late 60s when socialism was
deepening its roots in India under the regime of Mrs Gandhi. They changed from export
pessimism to export led growth. South East Asian countries had momentous shift in their
economic growth in just 10-12 years.
In the post 1969 era of socialistic leanings, Banks’ SLR rate was 38% and CRR rate was
12%. Which means 50% of the inventible funds of banks were Directed Credit at sub
optimal rates with poor rate of recovery. Financial Institutions were doomed.
As discussed earlier, debt trap began in external sector in 1990. It triggered the need for
economic reforms in the country.
The collapse of the economic order of the country was not sudden. It gripped the country
gradually over almost 2 decades. But the common public was mostly not aware and a few
those were aware did not care. We, as countrymen, do not participate in the government.
We generally accept government actions without questions. This also has a historical
reason. We may have democracy in the country for over half a century, but we are still
feudal in our mindset. We accept authority. Royals of the yesteryears, royal families of
Jaipur, Gwalior, Mysore and many others still enjoy unqualified respect of the masses in
their old kingdom. So, we have a democratic system superimposed on our feudal outlook.
In England, family values are same as social values. But in India, the two are radically
different. We are highly feudal in our family matters, Father or grand father’s word is final
in all family matters. Mother-in-law will rule the house. Political parties’s premiership is
more of hereditary than merit based. Party leader’s word is rarely questioned. Rebels rarely
get much support. There have been very few instances of splinter groups from political

parties surviving. So, we had a Pilot, Mr Rajeev Gandhi, as Prime Minister after
assassination of Mrs Gandhi and a house wife, Mr Rabri Devi, as Chief Minister of Bihar
when Mr Lalu Prasad Yadav had to vacate his seat due to legal troubles. In both the cases
the party members were more than eager to accept them as their leaders. The story repeats
in every state of the country. Mr OP Chautala in Haryana, Mr Navin Patnaik in Orrisa,
Abdullas in Kashmir and so on.
So, questionable fiscal decisions of the govt went unchallenged.
Original economic road map, formulated by Nehru, went through changes and
modifications in every successive Five Year Plan based on learning experience of the
leaders. But they had been in the form of incremental adjustments. Priority to Defence
spending post 1962 or investments in Green Revolution post arm twisting by Americans
during drought years in 1963 – 65, or poverty alleviation programmes, were all add-ons to
original policy roadmap. But the Economic Reforms of 1991 were paradigm shift. It was a
total break from the past model and some policies were rather antithesis of original
policies. The corner stone of original policy i.e. protection against competition to the local
industry had become anathema in the new economic policy. The entire prescription for
remedy of economy rested on introducing the competition rather than protecting them from
it.
Structural adjustments introduced by Mr Man Mohan Singh included multiplicity of

players in every field so that only the most efficient few survive. But to ensure against any
malpractices, regulators were planned for each of the sectors being opened up for
competition.
Telecom sector was the first one to be opened up. Results are there for every one to see. It
has been an unbridled story of success. Easy availability, rock bottom tariffs, improved
quality, value added services, etc are result of opening up the sector for competition.
Airlines are next success story. Despite extremely slow opening up of this sector, it has
shown great success. Those regular strikes by pilots, cabin crew, engineers, baggage
handlers and so on are rare occurrences now. There are more routes covered, fares are
falling, punctuality improved and services have also improved.
The first baby steps towards liberalisation were taken by Mr Rajeev Gandhi government
when he introduced Broadbanding of Licenses which allowed a firm to manufacture any
item in a particular sector rather than extremely narrow definitions of product
manufacturing licences. A jeep licence which did not allow manufacturing of a car in the
earlier definition became a licence for manufacture of any vehicle on 4 wheels under
broadbanding of licences.
3rd success story has been electronic media. Proliferation of TV channels and FM radio has
been at unprecedented pace.

However, Power sector has been a big failure so far. Power sector can be broadly divided
into three segments:
Production
Transmission
Distribution
Power sector reforms were started with opening of production to private sector. Enron was
one of the first private equity into power sector. However, Enron story got into a muddle
from which nation and Maharashtra are still grappling to get out from.
India was quick to realise that actual problem lies in distribution sector which need reforms
on urgent basis. And the first step in that direction is to trifurcate the three segments clearly
in every state electricity board. Due to vested interests, there has been lot of opposition at
all levels for this proposal. However, some states have succeeded in separating out the
segments. Delhi has handed over the distribution part to Reliance.
BSE reforms were heading in no direction despite all the pleas by FM. So, NSE was
created. Post creation of NSE, BSE reformed itself within 2 years. But by then it had
already lost its Prima Donna status to NSE.
Similarly, there were severe opposition to Banking sector reforms from within and outside
due to vested interests. However, carrot and stick approach worked. Once Private and
Foreign banks started functioning, old banks started to reform. VRS was introduced to get
rid of excess staff as also to create new vacancies for infusion of new blood conversant
with computerised functioning rather than old ledgers.
Capital Market reforms got stalled. Controller of Capital Issues office was closed and SEBI
was introduced instead. However, even before SEBI could settle down in its job, infamous
Harshad Mehta securities scam took place shaking the very roots of small investors’
confidence in the stock market. Small investors are necessary for the health of the stock
market. Current stock market boom is on support of FIIs which can wreck havoc in the
market at any time.
While there is a broad consensus on economic reforms among cross section of the political
parties (any opposition is only for opposition sake – like Left opposing the central govt
policies while following the same policies in Bengal and Kerala), there are real and serious
differences regarding speed and sequencing of reforms. Many leaders are of the opinion
that the market should first be opened to domestic competition and then gradually to
foreign investors. There are also differences regarding which sectors to be opened up for
reforms first and which ones later.
India has opened to international competition in most of the sectors. Custom duty has been
reduced from 350% peak rate to about 30% now. There is further commitment by the govt
to reduce it further to 7% level, same as South East Asian countries. Leaving aside a small
negative list, almost any item can be imported by any one any time.

Off late, there is a debate, like the one after green revolution, as to who have been the real
beneficiaries of these economic reforms of 15 years. Have the masses in Rural India reaped
any benefits? Apparently, very little has reached the villages and most of the gains of
reforms, Telecom, Roads, Media/Communications, etc, are concentrated in Urban India. In
some cases there has been adverse impact on poor, like the locksmiths of Aligarh have
been rendered jobless due to import of locks from China at much lower rates. Therefore,
there is a need to carryout reforms with a human face so that there is equity of growth and
prosperity among all sections of the society.


Besides power sector, another sector where reforms have not taken place is Labour Sector.
Labour sector reforms are a big drag on the economy. Economic growth is dependent on
the investors. Two factors governing the investors’ confidence for investing his money in
business are Entry and Exit conditions. While reforms since 1990 have made the entry into
business very easy, exit routes have still not been opened.
Govt permission is required to close down any industry which employs 100 labours and
more. Govt permission is riddled with vote bank politics which does not favour the investor
as there are 100 votes of workers pitted against the few votes of the investors’ family.
Thus, an investment becomes like a Hindu marriage where divorce is very difficult. Once
married, you have no choice but to live with your spouse. Even if divorced, you have to
provide for her maintenance for life time. Investment conditions are very similar. Once a
factory is setup, there is no exit route even if the business fails and the entrepreneur suffers
heavy losses. He has to continue to pay the salary of the workers. Therefore, there has been
serious reluctance among the entrepreneurs to invest. Those who invest, keep the
manpower at the lowest and prefer machines instead of men. Even if men are necessary,
they outsource or merchandise their product to the unorganised sector. Like a garment
export house prefers to outsource the stitching of clothes to various small group of tailors
distributed across city rather than hiring them himself and locating them in a single
workshop. Similarly, many reputed firms are getting their products manufactured by small
and medium enterprises in unorganised sector and only market those products under their
brand name. Draconian labour laws have forced investor to find such escape routes which
have harmed the workers’ interest. But for presence of such laws, investment climate in
the country would have been more favourable leading to creation of more jobs. Hire and
fire policy if effect is pro-labour in the long run. There is impetus for the workers to
produce more to keep their job leading to improved productivity and lower costs. Lower
costs induce higher affordability and consumption leading to further demand and
investment. Lower costs also give competitive edge for exports creating more jobs in the
country.
Tough labour laws are strongly in favour of the workers who have already got jobs in the
organised sector. However, organised sectors accounts for less than 5% of the labour in the
country. Remaining 95% labour suffer because of these laws.
The fear of rampant exploitation of workers if Hire and Fire is allowed have been proved to
be unfounded in the sectors where hire and fire is permitted. Take for instance BPO
industry. The industry is suffering from the problem of retaining the labour rather than
labour getting exploited in the hands of the employer.
Reforms are still taking place but through deception and camouflage. But pace of reforms
is slow.

LEGAL ENVIRONMENT
Indian Constitution was adopted by the Parliament in 1949 and was brought into force on
26 Jan 1950.
Indian constitution was formulated on the premise that
Power corrupts and absolute power corrupts absolutely.
This hypothesis has been proved umpteen numbers of times in the history. Right from
Magna Carta Revolution in 1300 AD to Chinese revolution against Chiang Kai Shek in
1949, and in between revolutions like American war of independence in 1776, French
revolution in 1789, German revolution in 1848, Bolshevik revolution in 1917, have all
proved only this theory.
Therefore, Indian constitution was drafted on following principles

(a) Power should not become permanent in any hand,
(b) Divide the power so that its concentration in one or few hands is avoided,
(c) Institute a system of internal checks and balances within and by the power
sharers.
The constitution provides for re-election of every elected body every 5 years to ensure that
power does not become permanent in hands of any person or group. We have seen peaceful
change of power at Centre and States so very often. The constitution divided the power
horizontally and vertically. In the horizontal division, three power centres were created
namely, Parliament, Executive and Judiciary. Executive, i.e. the Prime Minister and his
ministers who run the affairs of the govt on day to day basis are answerable to the
Parliament for every act and decision of theirs. Also every decision is subject to judicial
review. Any act of the govt that does not find favour with the Parliament or is not in
accordance with the constitutional provisions, would have to be withdrawn. Similarly, any
act of Parliament that is not in consonance with the constitution of country can be declared
null and void by the Judiciary. Judges, if found not worthy of the high chair they occupy,
can be impeached by the parliament with 2/3 majority voting for it. Impeachment
proceedings had once been initiated against Justice Ramaswamy of Supreme Court.
However, same were dropped a day before voting when the judge resigned on his own.
Each the three pillars of the democracy act as the watchdog for the other two pillars. And
then we have the fourth pillar, the media, which acts as watch dog for all the three pillars.
Even the judicial verdicts, if not considered to be in public interest can be remedied by
passing new laws by the parliament. Supreme Court had once declared the Bombay Rent
Control Act as Ultra Virus. However, Legislature passed new law making is lawful once
again. Judiciary, in the normal course of things, is not expected to go into virtues of the
case but give judgement based on the law passed by the parliament. Take the case of Gutka
which was banned by Govt of Maharashtra. The ban was declared null and void because

despite desirability of the ban on gutka, considering its adverse impact on health of the
people, govt of Maharashtra has no jurisdiction to ban the item since it comes under the
centre’s list of jurisdiction.
In the vertical division, power is divided among central govt, state govt and the local
bodies. Again among these bodies , power is divided horizontally between state legislature,
Executive (Chief Minister and his council of ministers) and the judiciary (except of the
local bodies).
In a democracy, ultimate power resides with the people. Therefore, it is called

SOVEREIGNITY.
During the French Revolution, the Monarch was beheaded and the power was transferred
to the third estate. Monarchy was completely abolished.
First House – Monarch

Second House – House of Lords in England (Rajya Sabha in our country).
Third House – House of Commons (Lok Sabha). It is house of people’s representative.
Lok Sabha or House of commons is more powerful. Purpose of Rajya Sabha is to act as a
brake on Lok Sabha. Rajya Sabha can not reject a bill passed by the Lok Sabha. It can only
send it back for reconsideration. However, in case it is passed a second time by the Lok
Sabha, it would have to pass it mandatorily.
In order to facilitate easy and smooth functioning of the govt, some powers and rights of
the people are handed over to the govt. Govt can take over certain rights and privileges
enjoyed by the citizens as and when required depending upon the socio-political and
economic conditions. However, there are certain rights and powers which can not be taken
over by the govt. These rights are called Bill of Rights. These rights are listed in Part III of
the constitution under Fundamental Rights. Art 12-34 of Constitution of India. Almost
same list of rights are also included in UN charter as Human Rights.
Legislative relationship between Parliament and Legislative councils: -
Seventh schedule of the constitution has 3 lists of subjects: -
Union List – Subjects which are entirely under the jurisdiction of Central Govt and
therefore only Parliament can make laws on the subjects.
State List – Subjects which are exclusively purview of the state govts and only
state legislature can make laws on them.
Concurrent List – Areas which are being governed by both, centre as well as
state. So both can make laws. However, central laws overwrite the state laws in case
of any contradiction between the two, to the extent of contradiction.

Criminal Procedure Code is on the concurrent list. Similarly, Education is also on

the concurrent list. It was earlier on the state list but was brought on concurrent list by a
constitutional amendment during the Emergency in 1977
Financial Relationship
There are different kinds of taxes that the citizens pay and collected and utilised by
different authorities.
Taxes which are wholly kept by the centre. Like custom duty
Taxes which are compulsorily shared between centre and state. Like Income Tax.
Taxes which may be shared by cenre with states. Like excise duty
Taxes which are collected and retained by the states. Like Sales Tax (now rechristened as
VAT), Motor Vehicle Tax, Toll Tax, etc
Administrative Relationship
Centre has powers to instruct states on various matters which it deems to be not being
conducted properly/
Watch Dogs
Comptroller and Auditor General of India
UPSC
Election Commission
Salient Features of the Constitution
Art 13(2) states that no law can be made which interferes with or abridges fundamental
rights (Part III of constitution). If any such law is enacted, courts can declare it ultra virus.
There are two types of laws
1. Procedural Laws (Only three)

(i) Indian Evidence Act
(ii) Civil Procedure Code
(iii) Criminal Procedure Code
2. Substantive Laws – Laws on a particular subject. Like Indian Penal Code is a

collection of laws on crime and therefore substantive law. Similarly, Army Act
and Navy Act are also substantive laws.
Indian Evidence Act lays down what is admissible as evidence and what is not. Like in
civil cases, previous conduct is relevant. But it does not carry any relevance in criminal
cases.
(Indian Evidence Act is recommended for reading for developing analytical ability.)

Supreme court normally looks into matter of law and not into matters of fact. And
therefore, it normally deals with appeal cases. However, in cases where fundamental right
is violated, any citizen can directly approach the Supreme Court under Art 32.
Similarly, under Art 226, High Court can be approached on certain matters.
Courts can issue writs issued against any one.
There are 5 kinds of writs
(a) Habeas Corpus means produce the body
(b) Mandamus means directions to any functionary of Govt to do a job that

he is expected to do
(c) Prohibition means stopping some one from proceeding any further on
the matter. Like declaration of result of counting of votes in case of
complaints of malpractices during voting.
(d) Certio-rari. Decision given by any lower body is set aside.
(e) Quo Warranto. This writ petition is issued against a usurper of the
public office. Like a person not meeting eligibility criteria appointed to a
post. He can be asked to produce the evidence of meeting the eligibility
criteria.
Habeas Corpus is normally issued against law enforcement agencies like police and
Army. In a case in Kerala, a person Mr Rajan was arrested by police and then disappeared.
His father then wrote a post card to the Chief Justice of Supreme Court who took the post
card as an appeal and issued a Habeas corpus to Kerala Govt. An inquiry set to investigate
the case when govt failed to produce the person led to conviction of DIG and other officers
and punishment dismissal from service and 10 years of rigorous jail term.
Mandamus a writ petition filed against Ratlam Municipal Corporation for directions for
clearing the garbage. Court issued a mandamus to Municipal Corporation to clear the
garbage. But corporation pleaded that due to non availability of funds post payment of
salaries to its staff, the job could not be done. Court directed that either the salaries be cut
or the staff be reduced else charge additional taxes but job should be done since it is basic
duty of the Municipal Corporation.
These acts have relevance in business as they relate to equality of opportunity and fair play.
Just treatment of all contenders in the award of public contract is one of the opportunities.

Laws (passed by the parliament or legislature)
Rules (enabling provisions) Subordinate legislation made by the executive. Copies of these
rules are kept in the parliament and its library for members to read and raise objections if
any.
Notifications

POLICY DEVELOPMENT ENVIRONMENT
Knowledge of external environment and its cause/effect relationship with one’s own
business enables scenario building which may not be accurate but still reduces the
uncertainties to a great extent and therefore future shocks. It improves ability to cope with
future changes.
External environment is always in a state of dynamic flux. Therefore, this course only
equips with instruments to gauge the effect of various events in external environment and
estimate their impact on the business in a foreseeable future. It requires continuous study of
a variety of subjects right from history to literature to international political commentary in
order to broaden the knowledge base. There is no alternative to a broad based knowledge.
In order to understand Policy Development Environment, a good sense of history, national

as well as international, is very important. Historical events invariably cast their shadow on
people’s psyche and decisions. Policy makers being well read and informed lot are even
more prone to these events.
United States suffered the great economic depression in 1929. President Roosevelt revived
the economy with the help of Keynesian concept. Keynesian concept propounds increased
in the times of recession to put money in people’s hand to create demand backed by
purchasing power and thereby creating conditions for utilisation of unutilised/under utilised
resources. Increased demand calls for increased utilisation of machinery which generates
jobs. More jobs means even more money in hands of people and further more demand. It
becomes self feeding cycle till recession is overcome.
While the Keynesian concept did wonders for recovery of US post the great economic
depression of 1929 and for Europe in rebuilding their countries and economies post
devastation of World War II, it did not work for developing and under developed countries.
The prime reason for its failure in boosting economies in these countries lay in availability
of capital resources with US & Europe vis a vis Developing and Under Developed
Countries. Govt’s enhanced expenditure in the times of recession helps in putting back idle
capital resources (like machines lying idle due to lack of demand) into productive use. In
developing or underdeveloped countries, there were few capital resources (machines).
Therefore, even if demand is created, economic growth does not take place in absence of
capital resources. It only helps in increasing the import and inflation. This event also
teaches us that all social sciences are dependent on time and space. So, all the theories are
valid only in certain time and space combination. Any further application needs close
scrutiny as to how applicable and useful it would be in the prevailing situation.
Nehru & Mahalonobis were quick to realise this. Therefore, Nehru Mahalonobis model
first concentrated on creation of heavy industries so that capital accumulation can take
place in the country.

Labour was in abundance even in 1947 even though India’s population was only 347
million at that time. Most of this labour was either unemployed or disguisedly unemployed.
Economic activity happens in three different sectors : -
Primary Sector – In covers all agricultural produce including fisheries, dairies,

orchards, etc.
Secondary Sector – It covers manufacturing sector, like various industries Light,
Medium, Heavy and Basic including food processing.
Tertiary Sector – It covers all service industries.
ICOR – Incremental Capital Output ratio, which is a measure of output earned out of every
Rs 100 invested as capital. So, if there are two projects with equal funds requirements, the
one having higher ICOR is preferable.
Dr Manmohan Singh, as Finance Minister, realised the need to convert Outlays to

Outcomes. Outlays are the funds that are invested for a specific purpose. Results achieved
are the outcomes. This is in real sense Efficiency of Investment. Experience has taught us
that Efficiency of Investment improves substantially under pressure of competition.
In India, we have adopted Westminster System of Parliamentary Democracy. This is the

system where President is only Figure Head of the state. Actual power lies in the hands of
Prime Minister. Prime Minister is elected by the elected representatives. In case of
parliamentary majority of the ruling party falling short, the Govt (meaning Prime Minister
and his council of Ministers) have to resign (Like Mr Atal Bihari Bajpai did when Mrs
Jayalalitha had withdrawn her support). In case of Presidential form of Govt, as followed in
United States of America, President is de-facto head of the govt and is directly elected by
the people. In Presidential form of Govt it is possible that the parliamentary majority is
with some party other than the President’s. There the president’s continues for full term
whether or not he enjoys the support of the Parliament.
American constitution is Federal in nature. America is a Federation of States. Individual

states have formed a Union and given up some areas of governance for administration by
the Central Govt (called Federal Govt) while retaining others within their folds. Each
individual state has joined the Federation by choice and therefore they retain much higher
autonomy than states in India. Even today, there are there are huge differences in laws
between state to state. European Union is trying to form another Federation of States with
its parliament in Brussels.
Indian constitution is outwardly Federal in nature with provision for converting it into
Unitary form any time should the circumstances so demand. Provisions like Imposition of
President’s Rule, Declaration of National Emergency, Direction to the states.
Indian Constitution was debated provision by provision by the Constituent Assembly with
active participation by some luminaries before it was passed in 1949. But why did our Law
Makers adopted this Flip-Flop model of constitutional structure?

Indian unity lies in its diversity. India is a country of gigantic diversities. No country in the
world has kind of diversities that are faced by Indian. The diversities range from
geographical, cultural, societal and so on. Indian society is a pluralistic society. Due to this
pluralistic nature there are various fault lines which most of the time lie dormant in sub
surface but become active with little warning causing severe disruptions in society. These
fault line are
(a) Ethnic – Naga demand for separate home land

(b) Linguistic – Anti Hindi demonstrations in Tamilnadu
(c) Caste – Upper caste and lower caste battles (Ranvir Sena Vs Maoist
Communist Party) in Bihar
(d) Religion – Demand for Khalistan by Sikhs
(e) Region – Pan Tamil demand rearing its head in Tamilnadu, Kashmir
(f) Income, etc – Naxal movement in Andhra Pradesh, Bihar, Jharkhand, MP
and Chhattisgarh.
Some of these fault lines give rise to fissiparous (division, separatist) tendencies in people
which threatens the very fabric of nationhood. Some other fault lines threaten the existing
social and political order of the society. Often vote bank considerations or outright
sympathy of ruling class with the ultra sentiments can act as impediment for local govt to
effectively deal with the situation. These are the times when unitary nature of the
constitution allows the central govt to take control of the otherwise state matters and bring
situation under control.
However, these labels (fault lines) are important because they also act as fracture
binds/unifying forces in normal times. That is how we say that India’s unity lies in its
diversity. This humongous diversity of various multitudes that we experience on day to day
basis has made us the most tolerant society in the world.
This Federal/unitary structure of our constitution has served the nation well except for
some aberrations like Emergency in 1977 and imposition of Presidential Rule in States
overthrowing duly elected govts for political considerations. Emergency was imposed after
Mrs Indira Gandhi was pronounced guilty of committing an electoral offence by Allahabad
High Court. During Emergency, though fundamental rights continued to exist, their
enforcement, ie Art 32 of the constitution vide which allows an aggrieved person to
approach Supreme Court for redressal, was suspended. While most of the judges of
Supreme Court, including then Chief Justice of SC capitulated, Justice HR Khanna, did not.
Similarly, Mr Nani Palkhiwala who had agreed to represent Mrs Gandhi’s appeal against
Allahabad High Court order, withdrew when Emergency was declared.
To make the Emergency Provisions even more effective, MISA (Maintenance of Internal
Security Act) was imposed. Under MISA, any one could be arrested on mere suspicion.
However, the arrests were to be confirmed by an advisory group headed by a High Court
Judge within 12 days of the arrest. In many cases, advisory groups showed courage and
refused to blindly ratify the arrests made by the police. Preventive arrests are actually a

violation of fundamental rights and therefore any arrests made under section 151 are to be
produced before a Judicial Magistrate within 24 hours for permission to continue the
detention any further.
Post Emergency, safeguards have been incorporated through constitutional amendments in

provisions which were exploited for and during Emergency.
Govt headed by Mr Manmohan Singh can go ahead with the reforms at much faster pace if
they join hands with BJP. But that is not possible since Secularism is of much higher value
than the economic development of the country.
Economic Relationship
There is a serious mismatch between revenue raising capabilities of states and their
expenditure responsibilities. Whereas centre generates much more revenue than it has been
burdened to expend.
In order to correct this anomaly, constitution provides for devolution of resource. There are
two kinds of devolution
(a) Mandatory Devolution, Like Income tax which is presently shared in the
ration of 77.5: 22.5 between states and centre
(b) Enabling Devolution, (discretionary) like excise duty which the central govt
may or may not share with states.
In order to ensure that resources are shares equitably, constitution provides for Finance
Commission which is constituted every 5 years. Though its recommendations are not
binding on the Govt, traditionally govt has been accepting the recommendations in toto.
Last Finance Commission was the 12 Finance Commission headed by Mr Rangarajan, Ex
RBI Governor. 13th Finance Commission is likely to be constituted by end 2005 so that its
report is ready before commencement of 11th Five Year Plan in 2007.
Finance Commission while deciding the devotion of resources tackles the issue in two
steps. It first decided as to the ratio of taxes which are to be shared with states by the
Centre. In the second step, it lists down as what will be individual states’ share out of funds
being devolved to the states. The share of individual states is based on following factors: -
(a) Population
(b) Area
(c) Revenue raising capability
(d) Population below poverty line
In addition to mandatory devolution of taxes, Art 280/282 of constitution gives central govt
omnibus powers to devolve money to any state or institution. This discretionary power
though was given to meet any unforeseen requirements of states, it has been more abused
to garner political gains than used.

Apart from mandatory devolution, central govt also devolves funds to the states under Plan
Assistance. The difference between the two is that while former is primarily meant for
bridging the revenue gap between expenditure and income, Plan Assistance is to provide
for capital expenditures required for development.
Planning Commission is not a constitutional body. There is no mention of Planning

Commission in the Constitution. There were certain plan holidays due to extraordinary
circumstances prevailing in the country.
The money that is given to states as Plan Assistance was initially given under Gadgil
Formula as the formula was given by the Chairman of Planning Commission Mr Gadgil.
Then there was modified Gadgil formula. Now it is called Mukherjee Formula.
Planning commission has bifurcated the states in two categories
(a) Special Category States – 7 sisters of NE (Assam, Arunachal

Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura) Sikkim and
J&Kashmir. These special category states get 90% of the plan assistance as
grant and remaining 10% as loan.
(b) Other states – All the remaining states fall in this category. They get
the plan assistance in ratio of 30:70 as grant and loan.
Resources devolved as plan assistance are considerably large. However, this also became a
tool for centre to push its own agenda. Programs like Family Planning were given as 100
grant. In some other cases, centre gave a contribution in certain ratio of state’s share, like
50:50; for every Rs 100 invested by state, central govt pooled in with another Rs 100. This
was used as incentive for state govt to invest their resources in development.
Operation Black Board is a central scheme wherein central govt is financing the project
100%. It is providing for one class room, one teacher schools in every village.
Family Planning, Education etc are all state subjects and should be completely controlled
by states. However, these are being controlled by central govt through purse strings of
Planning Commission. Again the devolution was not always equitable and often marred by
political considerations. State Govt leadership which owed its existence to the leadership at
central govt could not contest for its rightful share.
There is huge differential in financial resources of various states. Just to cite a few
examples; Brihan Mumbai Municipal Corporation budget is larger than 12 states’ annual
budget. Similarly, Atomic Energy Commission has budget allocation which dwarfs annual
budgets of 15 states.
During its dealing with state govt, central govt often went by letter of the constitution but
not the spirit. So, while it could not be faulted on the legally, truth was apparent. Thus,

resentment among states could not be avoided and it led to new fault lines. This led to rise
of regional parties in the last two decades.
There was effort to bridge this arbitrariness of central govt through appointment of Sarkaria
Commission to give its recommendation on central and state govt relationship. However,
unless rules are followed in spirit, no amount of law making can help.
Thus we see that a constitution which was essentially federal in character, with provision to
turn it into a Unitary constitution in the times of emergency, was converted into a Unitary
constitution by controlling the Purse Strings of the Planning Commission. State Chief
Ministers who were supposed to draw their support from the elected representatives and be
autonomous in function, be it selection of their cabinet or decision making in policy
matters, became puppet in the hands of “High Command”. This is a culture which has
spread and afflicted even BJP which is the only other pan Indian party in the country. At
present, Kesu Bhai Patel is trying to dislodge Modi Govt in Gujrat not by political
machinations in Gujrat but in Delhi. Such subversion of constitution had its delirious effect
on performance of those govts. Centre State relations have been on a boil continuously.
In 1956, reorganisation of states was done on the basis on language. Constitution had
provided for a window period of 15 yrs for English to be used as link language while
development of Hindi as link language took place. At the end of the window, when Hindi
was to replace as link language, there were violent demonstrations in Tamilnadu in
opposition to Hindi being imposed on them. Old and rich language that it is, Tamils have
always considered Tamil language to be superior to any other language including Sanskrit.
Thus another fault line was created. Dravidian parties utilised this fault line by stoking the
linguistic pride of Tamils. Under the linguistic cover was their political agenda to create
political space for themselves which was till then ruled by Congress. Their success in the
venture ensured that no national party has come to power in Tamilnadu ever since.
Opposition to Hindi in Tamilnadu has its own history. Political and social empowerment of
Dalits and other backward castes that is being witnessed in Hindi heartland of Bihar and
UP now had happened much earlier in Tamilnadu.
Dravidians consider themselves to be the aboriginals of Indian subcontinent. They consider

Aryans, and probably rightly so, to be the invaders from west who defeated and pushed
them to south of Vindhyas. This undercurrent of resentment among the Tamil academicians
always existed. Similarly, Brahmins and Sanskrit were considered to be legacies of Aryan
dominance over them.
Sanskrit revival took place in 9th Century AD. Sanskrit had edged out commoners’
language Pali to be the language of the elite much as English is making inroads into Hindi
and other regional languages’ bastions in the country. Due to hegemony of Sanskrit at that
time, Dravidian languages also got influenced by Sanskrit with induction of lot of Sanskrit
words into those languages. Some Tamil nationalist raised this issue in late 1920s which
culminated in strong anti Brahmin movement in 1930s in South India. Periyar was leader of
this movement. The movement was so strong that there were crazy attempts at creating a

distinct history and culture for Tamils. In the process, Ravana, much reviled demon king
of Hindu epic Ramayan, was begun to be worshipped. Worship of Hindu deities, for that
matter any deities, was opposed. Children begun to be named sans any Sanskrit or any
deities names.
With this fault line pre-existing, imposing of Hindi was only the proverbial last straw on
camel’s back for same forces to raise their head once again. Political parties seized the
initiative for their own political agenda and only stoked the fires further.
Growth of coalition politics is a comparatively recent phenomenon in Indian politics. With

increasing clout of regional parties in state politics, single party rule at centre seems to be a
distant phenomenon now.
Reasons for growth of coalition politics are as follows: -
(a) Congress was the only party with pan Indian presence till late 1980’s. There
was no viable political alternative. Even today, no other party besides BJP
exists which has a presence large enough to form the govt on its own in near
future. Even BJP’s pan Indian presence in only marginal as there are many
states in south as well as east where they still draw a blank.
(b) Growth of Bhartiya Janata Party in north, western and central India at the
cost of Congress Party, thus weakening it.
(c) Shift of traditional vote bank of Congress party, i.e. Dalits and Muslims to
regional parties and upper castes and middle income group to BJP.
(d) Growth of regional parties in erstwhile congress bastions like UP, Bihar,
Maharashtra, Andhra Pradesh, Orrisa and North Eastern states.

Like it has been pointed out in the lecture of 17 Aug 05, one key area where reforms have
not begun in right earnest is the labour reforms. Exit policy in labour sector is absolute
must to entice more entrepreneurs to invest money in industry. Not that reforms have not
taken place at all. Despite govt could not proceed with labour reforms due to spirited
opposition of trade unions, left parties and organised labour force, there has been
substantial improvement in labour related environment in the last 15-20 years. Trade
unions have lost much of their sheen. Labour force is much less militant. Strikes, which
had become bane for the industrialist in 1970s are rare occurrence now a days.
In general, reforms have been lacking in subjects under state list, subject like Agriculture,
irrigation, health and education. While agriculture and irrigation have seen virtually no
reforms till date, health and education have seen small progress.
Education system
Universalization of basic education is govt aim. Education is divided into 3 parts: -
(a) Basic Education – Till the age of 14 years which is till class VIII.
(b) High School Level
(c) University Education
Education fetches two kinds of return
(a) Individual Return – Direct benefits accrued to the student

(b) Societal Return – Benefits accrued to the society due to education of the a
member of the society.
In case of basic education, both returns, Individual as well as Societal, are very high. The
student learns reading, writing, arithmetic, basic hygiene, etc which improve his own and
the society’s productivity in various ways. Thus both are equal gainer in the process.
Higher education gives more of individual return than the societal returns in most of the
cases. Leave the odd case of outstanding scientists and other luminaries like Dr APJ Abdul
Kalam, great economist Mr Mahalonobis or Dr Manmohan Singh who touch lives of
millions by their path breaking work.
In a poor country like ours, basic education should be provided free/cheap to ensure that it
reaches every one. It can be done only by the govt. But higher education needs reforms to
ensure that the colleges compete to attract students rather than students competing to get
the college. When colleges begin to compete to attract the students, they perforce have to
hire best teachers, provide good infrastructure and ensure quality education.

Health System
Reforms in health sector are still to take off. Except in some big cities, private medical care
is still not available. In small towns, health care is still largely provided by Govt Civil
Hospital. In villages occasional dispensary is the only health care available.
Health care is an expensive proposition. In countries like USA, health care is completely
privatised. Health care is supported by Medical insurance else hospitalisation expenses are
beyond the reach of most people even in a rich country like USA.
Britain had become a welfare state after WW-II. Health care in Britain is mostly govt
facility and reforms have not been there either. As a result, there is a long waiting queue
(up to 12 months) for operations like hip joint replacement, bypass surgery, etc. Situation
has become so severe that the cases are being outsourced to hospitals in Hyderabad and
Bangalore. Other than that patients are travelling to India and other country on their
country for medical help which has now been officially named in our country as Medical
Tourism. Health provisioning is a big drain on British exchequer as increase in longevity
of its subject has also compounded health problem the England.
Economics is not value based. There is no right or wrong in economics. These is only cause
and effect on economic well being of people. Take the case of ban on bar dancers in
Mumbai. Desirability or otherwise of ban is a question that is not in the domain of the
economics. It only considers economic effect on lives of bar girls and other peripheral
people whose source of livelihood has got affected. Value judgement/Moral issues
involved in the matter are to be looked into by politics based on public opinion. Parliament
and legislature are bodies of elected people’s representatives. They represent people’s
aspirations and voice. So, their opinion can be considered to be the collective opinion of the
main stream population.
Policy Environment is affected by of economic as well as political environment.
Honda Factory episode in Gurgaon has given the Trade Unions and Left Parties are a fresh
lease of life. They are trying to reorganise themselves once again after getting marginalised
in the last 10 years.
However, events there have affected the investment climate in the city and state. Earlier,
Maharashtra suffered flight of capital from the state in late 1970s when trade unions in
Mumbai turned militant under the leadership of Datta Samant. It killed the blooming textile
industry in the state which eventually shifted base to Gujarat, Tamilnadu and Andhra
Pradesh. Similarly, militancy in Punjab led to flight of industrial investment to Noida and
Gurgaon. West Bengal which was the most industrialised state post independence lost
industries in quick succession due to extremely volatile and militant labour unions
supported by successive State Govts. Today either most of the industries have shifted base
out of the state else are sick.

Orrisa is another state which has lagged behind in industrialisation. While labour in Orrisa
in quite docile, the problem their emanates from the lackadaisical and lazy attitude of
people. The average productivity of people there is very low. So, it is the problems of
work culture.
Atomic Power Plants can not compromise on safety aspects due to immediate as well as
long term catastrophic effects on people in case of any major accident. Chernobyl accident
is a constant reminder to the world. Safety records of our Atomic Power Plants in South
India is pretty good. However, it is dismally poor in plant at Narora in UP. This is despite
AEC conducting a 6 weekly safety training for the employee against 12 weekly schedule in
other plants in the country. The problem lies in the attitude and culture of the people.
Chalta hai attitude and willingness to take risk among people in UP. As against people in
UP, Tamil culture is highly Rule Book oriented. Rational of rules is rarely questioned
which suits the safety requirements of Atomic Power Plants. Given UPs attitude towards
risk, there is little likelihood any more nuclear power plants planned there in future.
With different real life cases of flight of de-industrialisation of various states cited above, it
becomes amply clear that environment assessment is required not only from economic
view points like availability of raw material, labour, proximity to markets, infrastructure,
taxes, etc but also the general climate which covers attitude and culture of people in the
area. These factors are more subjective in nature and therefore hard to quantify.
SOCIOLOGY OF INDIA
There is no country in the world, including communist countries, where society has
achieved complete homogeneity and equality of all men. 100% egalitarian society has
never existed in any era any where in the world. Division and classification in existed in
every country at all times. But this division has mostly been on class basis – Aristocrates,
artisans, business class, farmers and so on.
India is unique in this regard as to have another dimension of inequality among men –
Caste System. No other society apart from Hindus is known to have this caste system.
Caste system is a social institution with long history. There is no unanimity regarding its
origin or commencement. Caste system or “VARNA” finds mention in even in the oldest
text known to mankind i.e. Rig Veda. It is surmised that Caste system was more of a
profession identification tool in its original avatar much like we have names like Mr
Carpenter or Smith in England and Lokhandwalla, Batliwalla, etc in Parsis. Professions
were often passed down the generations and became rigid with time as a social aberration.
Let us examine the social development since 1947.
Like stated earlier, caste system and Hindu religion are interrelated. Manusmriti, an ancient
Hindu social order book, prescribes different punishments for same offence on the basis of
caste of the offender.

Professor MN Srinivas, probably the biggest authority of our times on caste system in
India, describes social movement among the caste in two distinct pattern: -
(a) Westernisation
(b) Sanskritisation
Sociology has a concept called Reference group. It states that no body is happy with what
he is and wants to be like some one else individually or as a group. That group is called
reference group for this person or group. Highest among Hindu castes are Brahmins who
are almost worshipped as Brahman Devta. Lower caste people in villages and small towns
actually touch the feet of Brahmins. They are fed and showered with gifts on special
occasions in the family. But even Brahmins are not happy with being the Brahmins. They
want to be like Westerners. So, their reference group is Westerners.
Similarly, lower castes aspire to be like Brahmins. Brahmins were priests and teachers and
therefore well educated and well versed in Sanskrit. So, this group aspires to be educated
and knowledgeable in Sanskrit like Brahmins. This is called Sanskritisation.
Relevance of Sociology to Business Manager
Each social group, in which ever way it may be classified, caste basis, class basis, religion
basis or region basis, has its own peculiar characteristics and sensitivities. If beaf is a
delicacy for Muslims, it is highest form of sin for a devout hindu. We have already seen the
risk taking/rule book adherence profile of Tamilnadu V/s UP or work ethics of Orrisa vis a
vis other states.
If Bengali’s wont compromise on Durga Puja festival and Vishwakarma Puja,

Maharashtrians are equally fanatic about Ganesh Chaturthi and Gokul Ashtami and a
Gujrati about Garba and Dandia Raas during Deshahra. A business manager who is not
sensitised to these passions of these social groups, may damage labour relations by his
unintentional obstinate behaviour in granting certain concessions to particular groups
during these days.
Traits of people, groups, region, religion, nation are important while making certain
decisions. Like it has been pointed out earlier about safety consciousness of Narora Atomic
Power Plant vis a vis plants in Tamil Nadu or lackadaisical attitude of Orria people towards
work have all impact on business decision making.
As a nation we, the Indians are anti govt while US citizens are highly pro govt in
international matters. We invent a hole in govt story, where proably none exist. US media
rarely flogs its govt in international policy matters. Our praise or condemnation depends
which side of the political divide we stand irrespective of its impact on country’s reputation
or finances. Political parties oppose the international policies of the govt for the sake of
earning political points. Once they assume the power, they follow the same policies with
often re-enforced vigour which they had so vociferously opposed while in opposition. The
media and public also change their opinion overnight. We have seen it happen during
successive changes in Govts since 1991. Even diehard anti Globlisation proponent, CPM,

is following the footsteps of Man Mohan Singh in West Bengal and Kerala while putting
every possible spanners in efforts of Man Mohan Singh, P Chidambaram and Montek
Singh Ahluwalia troika of reformers.
Japanese have been found to carry a large team for every negotiation howsoever small
though only one person speaks and others are merely spectators. No one speaks out of turn.
Some of the members in the delegation may be just a couple of months old in the
organisation. They follow this apparently costly practice for two reasons: -
(a) Train the next generation of business leaders in business negotiation skills.
(b) Sharing the information with every one. After having seen the netotiations,
all the present members have moral obligation to work towards making the
contract a success. So, 100% involvement of every team member.
Japanese are able to adhere to this expensive investment on its young executives because of
another trait of theirs – Loyalty to the company and company’s commitment to its workers’
welfare. Often an employee never sees another company in his life time. Cases of lay off
and retrenchment of workers by the employers in Japan are most rare occurrence. But in
India, neither the workers are so committed to their company nor are the companies
committed to welfare of their workers. An employee trained at company’s expense, is
willing to leave the company and join a rival company for just a few dollars more.
Therefore, there is a cautious approach while investing too much of resources on training
and development of workers in India.
Caste policy of the govt is a affirmative action. Caste system is too deeply entrenched in
psyche of Indian people. A manager needs to be alive to this aspect of Indian psyche.
Quite often caste bias manifests itself in Annual Assessment of subordinates. Unless such
afflictions of people are identified and corrective actions taken to neutralise their harmful
effects, we would have wrong people at the wrong places.
Changes in technology have made us part of the global village. Events in distant part of the
globe, half of which would never even be known to but a few amongst us, affect us in
myriad ways. (As explained in pages 2,3. (Scenario building as to how Bush’s dislike of
Saddam’s face could lead to increase in crimes in our country). Therefore, understanding of
global forces is also necessary for being an effective business manager.
World Stage Since 1945, End of World War –II
Last 60 years, since end of world war II, have seen tumultuous changes in International
Stage. The first development in post WW-II era was spitting of the world into two
Ideological Block, Western Block, headed by United States and Communist Block, headed
by USSR. Interestingly, both the countries were allies during the WW-II. Two blocks,
almost paranoid about each other’s ideology, began a Cold War. This cold war led to
massive arms race to gain superiority over each other. Technology and weapon power
became important means to keep the upper hand. Two new weapons of war, Air Power and

Nuclear Power, began to be piled up to the levels where they could destroy entire world
many times over individually.
India’s independence in 1947 was the clarion call for end of imperial dominance of west
over poor countries. Next 10-15 years most of the colonies of west gaining independence.
This large scale decolonisation of the world was indeed voluntary on part of Colonial
powers. But this voluntary act should not be mistaken for any philanthropic/humanistic
awakening. In the changed international political, social, and technological environment, as
well as rise of communist Russia rising as a super power, colonial occupancy had become
more of a liability than asset that it was thus far.
Along with splitting of world along capitalist and communist block, there was the rise of
Non Aligned Movement under the leadership of Nehru, Sukarno of Indonesia, Nasser of
Egypt and Marshall Tito.
There was also this North - South divide. North was generally rich and South was poor
with some notable exceptions like Australia which was counted along with North.
Therefore, “North South Council was established. Mr Willy Brant, German Counsellor and
a Humanist who was trying to build bridges between Germany and poor East Germany had
also devoted himself to the cause of poor south. He propounded “New Economic Order” to
bridge economic divide. It was called OST politics (Ost in German means “Looking east”)
After the Bolshevik Revolution of Russia in 1917 and rise of Russia thereafter, coupled
with other forces like devastation caused by WW-II, and Keynesian concept, Britain was
forced to turned to become a welfare state. It became highly unionised. In fact Labour Party
was a federation of Labour Unions. From then to the time during Margaret Thatcher, most
of the industrial towns resembled complete disorder.
Most of the developments till then were taking place within a paradigm. Come 1090 and
Mr Gorbachev.
Mr Gorbachev introduced Perestroika and Glasnost. Russia junked communism and

embraced Capitalism. The side effect was collapse of Soviet Union. This was a tectonic
shift in the international order. Instead of one gigantic USSR, there were 15 new states.
Russia’s capacity to act as deterrent to USA was hugely diluted. Crash of its economy
made is dependent on western economic assistance, which further weakened its position to
intervene against USA in international disputes. Geopolitical situation completely changed.
Bipolar world had suddenly changed into a Uni-polar world. American hegemony of the
world was complete.
Before disintegration of Soviet Union, Soviets had invaded Afghanistan. But they pulled
out of Afghanistan due to high human and financial costs. The vacuum created by Russian
pull out was filled by Taliban which was raised, funded and by armed by USA to fight
occupation army of Russia.

Lecture Date: 03 Sep 05
TRADE ENVIRONMENT
Trade Environment has its root much older than any other environment. Trade has affected
the world history more than most other things. International Trade has been practiced in
India and the world over for over a millennium. There are records of trade taking place
through the land route between various countries in middle East, China and India even in
first millennium.
In the later part of the last millennium, trade was used as a tool for imperialistic expansion
of countries in the West. India came in contact with Europe during the regime of Akbar as
traders. A few centuries later, those traders in the form of East India Company, begun to
political role and eventually became the rulers. A little while later, India was taken over
from those traders by Britain and formally annexed as its colony.
Even before India, it was America which was annexed by Britain. America got its
independence in 1776 through American war of Independence.
Australia, Andaman & Nicobar and some other countries were used as prisoner settlements.
India’s struggle for independence though is recorded to have begun by Mangal Pandey in
1857 which led Sepoy Mutiny of 1857, it was demand for limited autonomy. It was as late
as 1930, when congress demanded Poorna Swaraj or full freedom. The irony of this
independence struggle for British was that almost the entire leadership of this struggle was
British educated.
Trade was free in those days. European countries did not intervene in the trade but gave all
possible support. Biggest barriers to free trade during those days were robbers, thugs and
pirates. Imperialistic powers sent their ships to far off locations to ensure that sea routes are
kept clear of pirates.
There was free flow of raw material from India to England and finished products back to
India. Some finished products were also exported from India. But on the whole, raw
materials and finished products from India were purchased at very cheap rates but imports
were at very high rates. Thus, the imperialists who came in the garb of traders, not only
became rulers but also exploited and milked the country to enrich their own country. The
most unusual part of British rule in the country is that British could never naturalise in
India unlike so many foreign invading races to name a few, Sak, Hun, Pashan, Mughals,
etc. South Africa, even after independence, has mixed population of whites and Blacks. But
when British left India, they left lock stock and barrel. Today we see no British in India left
behind from Raj era. And they left by choice. The people in power, disciples of Gandhi,
professing Ahimsa, would have definitely thrown out any British by force even they had
decided to stay put.

Thus, India came under British rule not by direct military defeat, but by manipulation of
traders. It is again a curious fact of History that Robert Clive, who laid the foundation of
British dominance over India, had less than 400 British people with him. Rest were hired
from India only. With this background, it was only natural for the leadership at the time of
independence to eye the foreign trade with suspicion. India wanted itself to be insulated
from eddy currents of imperialism. Self reliance emanated from this philosophy. Export
pessimism and Import substitution were natural extensions of self reliance policy.
Foreign trade can be controlled by either of the two methods: -
(a) Tariffs based controls – Levy of custom duties to increase the landed cost of
goods to make in uncompetitive compared to local goods.
(b) Non Tariff Measures – These are restrictions imposed on imports on

different pretexts, like
(i) Quotas (Quantitative Restrictions)

(ii) Restrictions in the name of Child labour
(iii) Restrictions in the name of good produced in Prison
(iv)Restrictions in the name of Environmental Laws
(v) Restrictions in the name of Human Rights violations
(vi)Restrictions in the name of NPT
(vii) Visa restrictions (Labour movement)
The list is not exhaustive. There are many more excuses that are used to
restrict import of goods from any country.
India, in its attempt to cocoon itself from foreign trade, chose the simplest route of
imposing high customs duties on all imports. In some cases custom duties were as high as
over 500%. In addition, there were long procedures to get approval for import. Quota
system was also used in some cases.
However much India wanted to cocoon itself, it was not possible to completely dissociate
itself from world market. There were a great deal of essential items which had to be
imported because India had not developed the infrastructure to produce them. In some
cases like Oil, India did not have natural resources to produce them.
GATT (General Agreement on Tariffs and Trade)

The Genesis of GATT. In 1946, the newly-created Economic and Social Council of
the United Nations called a conference at the Brettonwoods to consider the creation of the
International Trade Organization (ITO) which was envisaged as the final leg of a triad of
post-War economic agencies (the other two were the International Monetary Fund and the

International Bank for Reconstruction and Development - later the World Bank). A
preparatory committee was established to draft the ITO charter.
During 1946-1947, the committee worked on the draft charter. However, independent of
this official task under the UN mandate, the committee members conducted tariff-cutting
negotiations among themselves in advance of the ITO (ITO never came into existence).
These negotiations resulted in about 45,000 tariff concessions affecting some US$ 10
billion of world trade.
The committee members also agreed to protect the value of the tariff concessions by early
acceptance of some of the trade rules of the draft ITO charter. Thus, tariff concessions and
trade rules together became known as the General Agreement on Tariffs and Trade
(GATT) which was signed on 30 October 1947 by 23 countries and came into force from
01 Jan 1948.
GATT was an agreement which was based on the principle of non-discrimination in trade
relations on a multilateral basis. Through this principle the same rights of market access
were extended to all 23 of the original signing nations, developed and developing alike.
Today, the World Trade Organization, the offspring of the GATT, has 132 members, all of
which have adopted the principle of non-discrimination.
Preamble: - Recognizing that their relations in the field of trade and economic endeavour
should be conducted with a view to raising standards of living, ensuring full employment
and a large and steadily growing volume of real income and effective demand, developing
the full use of the resources of the world and expanding the production and exchange of
goods,
Being desirous of contributing to these objectives by entering into reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other
barriers to trade and to the elimination of discriminatory treatment in international
commerce,
Have through their Representatives agreed as follows……………..
Paradoxically, despite its desire to cocoon itself, India was the founder member of GATT.
Founder members were a mix from developed and developing nations. The list of founding
members was as follows: -
1. Commonwealth of Australia,
2. The Kingdom of Belgium,
3. The United States of Brazil,
4. Burma,
5. Canada,
6. Ceylon,
7. The Republic of Chile,
8. The Republic of China,

9. The Republic of Cuba,

10. The Czechoslovak Republic,
11. The French Republic,
12. India,
13. Lebanon,
14. The Grand-Duchy of Luxemburg,
15. The Kingdom of the Netherlands,
16. New Zealand,
17. The kingdom of Norway,
18. Pakistan,
19. Southern Rhodesia,
20. Syria,
21. The Union of South Africa,
22. The United Kingdom of Great Britain and Northern Ireland, and
23. The United States of America:
GATT was based on 4 building blocks: -
1. MFN. Most Favoured Nation concept, which meant that the tariffs charged to
imports from the most favourable nation among the GATT members should be
charged to all the members. In simple terms it meant NO DISCRIMINATION
in tariffs.
2. Principle of Providing Equal Market Access Opportunity to all Signatories.
3. Principle of Trade Liberalisation through reciprocal concessions being granted.
4. Dispute settlement mechanism in operation.
“Rounds” of GATT trade negotiations

The countries who signed GATT negotiated new trade agreements that all would enter into.
Each such set of agreements was called a “round”. In general, each of these agreements
bound the members to reduce certain tariffs, with many special-case treatments of
individual products, and in many cases with exceptions and modifications for each country.
1. Geneva Round (1948): 23 countries. GATT enters into force.

2. Annecy Round (1949): 13 countries.
3. Torquay Round (1951): 38 countries.
4. Fourth Round (1956): 26 countries. Tariff reductions. Strategy set for future
GATT policy toward developing countries, improving their positions as treaty participants.
5. Dillon Round (1962): 26 countries. Tariff reductions.
6. Kennedy Round (1967): 62 countries. Tariff reductions. This was an across-the-
board reduction rather than a product-by-product specification, for the first time. Anti-
dumping agreement (which, in the United States, was rejected by Congress).

7. Tokyo Round (1979): 102 countries. Reduced non-tariff trade barriers. Also
reduced tariffs on manufactured goods. Improvement and extension of GATT system.
8. Uruguay Round (1993): 123 countries. Created the World Trade Organization to
replace the GATT treaty. Reduced tariffs and export subsidies, reduced other import limits
and quotas over the next 20 years, agreement to enforce patents, trademarks, and
copyrights, and open up foreign investment
India participated in all the 8 rounds and gained admission into WTO as the founder
member by virtue of being member of GATT. China which was the founder member of
GATT but had later withdrawn from it, is yet to get the membership of WTO. It has
currently been accorded an observers status. To become the full member, it requires the
vote of 2/3 members of WTO.
GATT had succeeded to a reasonable extent in removing tariffs but was only partly
successful in removing the non-tariff barriers.
Dunkel Draft. Dunkel Draft had generated lot of heat after the Uruguay round.
Dunkel Draft was named after Arthur Dunkel, then President of GATT. Dunkel Draft
brought in non-trade issues like patents and other intellectual property rights and foreign
investments into the fold. (Originally only trade and tariff was the subject matter of
GATT). These were the issues which were prime concern of Western Countries due to
rampant piracy of drug patents, films and books in the third world countries. Thus, the draft
was heavily tilted in favour of West. By forcing third world countries to Dunkel Draft,
Western Countries stood to gain the most. This was the prime reason for its resentment
outside the West.
IMF – The purpose of IMF is to help the countries with short term “Balance of Payment”
problems.
World Bank – World Bank takes care of long term funding requirements of the countries.
These two institutions are similar to Money Market and Capital Markets who have similar
roles in the economy of a country.
The trio of Mr Willy Brandt, the German Chancellor and Nobel Peace Prize winner, Mr
Robert McNamara, US Secretary of Defense and the World Bank President from 1968 to
1981, and Norwegian President (some lady) proposed New International Economic Order
through North South Commission in 1977. Mr Man Mohan Singh was a member of this
commission. However, this initiative did not work out and died a quiet death over time. But
these were extremely well meaning people who proposed integration of poor South with
rich North.
Post termination of cold war, re-alignation of the world order is in progress. Eastern Europe
which was till then communist in their ideology broke away from the Russian and has been
integrating with Western Europe and America because of their geographical proximity and
religious and cultural similarities. Some of them have already been admitted into NATO

also. However, the Central Asian Republics have not been able to integrate with the West,
again the region is Religious and cultural. Central Asian Republics are essentially Muslim
dominated countries. Also they are located closer to the Middle East Countries. So, they are
religiously and cultural attracted to the Middle East.
India is today completely out of sync with the world trade. Prior to disintegration of Russia,
India had special relationship with Russia and all other communist countries with the
exception of China. India had special trade treaties with them which allowed India to
import their goods (primarily Defence goods/Weapons) on rupee payment. This rupee
account was used by them to purchase consumer goods like tea leaves etc from India. But
after the breakup of USSR, all such arrangements were lost leaving India out in the cold.
Thereafter, India was left out in the cold. It was member of no trading block. There were
NAFTA (North Atlantic Free Trade Association), European Common Market, ASEAN
(Association of South East Asian Nations), OPEC and a few more which encompassed
almost all the major trading nations in the world. India was only member of the SAARC
(South Asian Association for Regional Cooperation), a body which could never discuss any
trade issues due to severe distrust among the member countries. Today, India’s share in
world trade is just 0.82% and share of exports in GDP is barely 6 % against an average of
30-40% of most of the advanced countries.
Although India professed Non-Alignment, it was viewed with scepticism or even down
right smirk by the West because of more than obvious tilt of India towards USSR. India
had even entered into a Friendship Treaty with Russia prior to launching 1971 offensive
against Pakistan. This treaty unambiguously stated that attack one country would be
construed to be attack on other country and therefore …………. This was one of the
deterrents for USA to give full support to Pakistan in Bangladesh as this could have led to
direct confrontation with USSR and could have become cause for WW III.
China is managing a great paradox. There are two systems in operation parallelly. While
the Eastern Coastal China has embraced the Free Market Economy, Central and Western
China are still steeped deep in communist market economy. The difference in per capita
income between poorest and richest province is of the order of 11.
India embraced the free market economy in 1991. In 1993, the exchange rates were
liberalized to be determined by the market rather than Govt fixing it artificially. RBI still
intervenes to maintain the exchange rates at desired rates but it does so by market operation
(selling and buying the dollars from market).
India has huge trade development potential in Pakistan, Afghanistan and beyond. However,
Kashmir disputes has shut the door for trade with Pakistan. Route to Afghanistan passes
through Pakistan. Other route is too circuitous to be cost effective. Similarly, central Asian
Republics markets are difficult to access due to Pakistan factor. Solution to Kashmir
problem will not only huge Pakistani Markets but also other markets.
Economic Integration between different states is achieved through a five step process:

1. Free Trade Zone

2. Customs Union
3. Common Market
4. Economic Union
5. Federation
1. Free Trade Zone – A group of countries decide to remove all the restrictions of
trade and services among them.
2. Customs Union – Free trade among members. But custom rates with non
member countries would be higher.
3. Common Markets – In addition to trade and customs, all barriers for capital
and labour are also removed.
4. Economic Union – The group of countries follow common macro economic
policies. European Union is example of Economic Uni0on. An Economic Union
involves giving up part of the economic sovereignty. Like the fiscal deficit of
any country in the EU can not exceed 3% of the GDP. In case it exceeds 3%,
certain measures would have to be taken by the concerned country immediately
to check the inflation. It also involves harmonizing various laws. EU also has a
separate parliament in Brussels which has been announced to be the capital of
EU.
5. Federation – Like United States of America.
Such economic integration is also called formation of trading blocks between different
states. But these trading blocks promote protectionism rather than free trade. Free trade
between a few states is always at the cost of free trade with rest of the nations.
Trade is a major fault line among nations. Trade leads to money. And MONEY, WOMAN
and LAND are the three major contributors to the reasons for war besides RELIGION. In
the past, quite a few wars have been fought on trade disputes.
Resources are the second fault line among nations. Oil resources led to Iraq annexing
Kuwait and consequential intervention by USA alarmed by its energy security getting
compromised. The second war on Iraq by USA on the pretext of weapons of mass
destruction was also fought to garner 11% of the world proven oil resources.
The third fault line is the civilization or religion. Islam V/s Christianity.

Lecture Date: 04 Sep 05

As stated earlier, India followed a policy of Export Pessimism and Import Substitution till
1990. Imports, as well as exports, were a difficult exercise, with imports being far worse
than exports. Import of an item required a great deal of processing through the bureaucratic
channels apart from high import duties.
But there was a small Open General License List. Items in this list could be imported with
little hassles compared to other items. But Govt permission for import had still to be
obtained which promoted “Rent Seeking” behaviour (Economic jargon for Bribe).
From 1991, we have embarked upon export led growth. While we are trying to make
amends for the follies of the past, there is greater realisation of missed opportunity
presented by the world trade explosion in the late part of the last century. East Asian
countries, viz, Thailand, Singapore, Hong Kong, South Korea, Taiwan, etc, encashed it to
earn the sobriquet of Asian Tigers. These were the countries which had almost similar level
of per capita income and poverty level among the masses. But while we kept chanting the
GARIBI HATAO slogans and begun to embrace the socialism ever more tightly
(Nationalisation of Banks, Airlines and so on), the export led growth that they embraced in
1970s and 80’s has almost completely removed poverty in those countries. We forgot the
basic maxim that charity never makes anyone rich. Don’t give a hungry man a bread,
instead teach him how to earn one. We concentrated on finding ways to make prices
affordable for the poor artificially (through subsidised sale from controlled price shops
(Ration Shops), permits, etc) but never bothered to see as to how even that small money
would reach the hands of poor. India moved in the opposite direction of growth for two
decades. We finally began to walk on the export led growth path only from 1991. But even
this walk is haltingly. While in the decade from 1991-2000 the journey was more or less
secretive, we are still following politics of deception, deceipt and camouflage to promote
reforms. There are enough strong lobbies within each party including Congress and BJP
who are still not convinced about the merits of Free Trade and open economy. Left Parties
in any case have ideological hang ups in addition to fear of survival. In the new market set
up, Marxist philosophy does not have much relevance and thus they would get completely
marginalised. Although there are some welcome signs off late. Even left parties have
begun not to see red each time some one utters MNC. Mr Buddhadeb Bhattacharjee, CM of
West Bengal, is singing the reform tune loudest and others in the party are forced to sing in
chorus. It is ironical that these self styled champions of poor working class have caused
them maximum harm. In any case, Left Parties have always espoused and promoted the
cause of the organised labour who form a very small percentage of the total labour in the
country.
Since 1991, India has gradually removed most of the import restrictions. Now there is a
small negative list called SCOMET List. This is the list of items which have dual use. On
one hand they can be used in various industries for beneficial purposes, on the other hand
they could also be used for creating dangers to public, health and safety. SCOMET stands
for Special Chemicals, Organisms, Materials, Equipment and Technology. Chemicals like
Phosgene gas, Methyl Isocyanides, nerve gas, or materials like radio active sources, or

organisms like small pox can cause havoc if they fall into terrorist hands. Cobalt 60 which
is held by almost 40-50 hospitals in Mumbai alone for dealing with any nuclear fall-out can
be used to make dirty bomb.
EUROPE and WTO
European Union has a “Common Agricultural Policy” which is the biggest stumbling block
in WTO.
Importance of Food-Security was realised by European countries early on due to regular

wars amongst them. As a result, they promoted their agriculture through massive subsidies.
This subsidy is continuing even today and any attempt to reduce the same is met with
violent protests. France followed by Germany are two leaders in subsidy in Europe.
Similarly, in America, there are grain mountains kept as security against any draught which
are dumped into the sea after regular intervals. India itself has Food Security policy which
caters for sustenance for two years in case of continuous draught in whole country. Various
food for work and mid day meals are sustained from this stock.
Effective rate of protection in Europe for agricultural products is almost 250 times
compared to India.
Developing countries have been continuously demanding phasing out of the agricultural
subsidy by rich countries but have not succeeded so far. Agriculture will therefore remain a
difficult item for negotiation in WTO.
During Singapore Ministerial Conference, West is keen on including Profession sector

(Like permission for lawyers from other countries to practice in India) in WTO.
________________
Anti Dumping – Any product by country ‘A’ can not be sold in country ‘B’ at prices less
than domestic prices in country ‘A’. If a case of below par selling is reported and proved,
importing country is at liberty to levy anti dumping duties on such products. Wooden
furniture was being imported from China at almost 1/3 of local rates. Complaint was made
to DGFT. On investigation, it was found that the rates of import are marginally higher than
domestic prices and therefore complaint was dismissed.
GATT has an exclusion clause also. This special clause is to exclude the items that are
critical to the economy of the country. India has refused to allow export of Iron ore with
high iron content.
In case of protectionism, while producers gain due to monopolistic pricing in absence of

adequate competition, consumers lose. Losses to individuals are substantially higher than
gain to the producers and thus country loses too.

WTO is the beginning of end of concept of Nation States. In order to allow WTO to
function smoothly, some economic sovereignty is required to be surrendered by each
member country. As the WTO becomes strong and markets open up, more and more
sovereignty would need to be surrendered making the borders less and less relevant. Thus
the concept of Nation States gets diluted. In case of America and Canada or among the EU
states, there is free flow of man and material. Bus from Srinagar to Muzzafarabad in POK
will weaken the stranglehold of political parties on people on both sides of the border and
promote harmony thus weakening separate state philosophy.
European Union is currently an economic union but it may aspire to become a political
union in future.


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Mgmt study material created/ compiled by - Commander RK Singh rajeshsingh_r_k@rediffmail.

Lecture Date: 06 Aug 05

1. Business Environment By Suresh Bedi

2. Business Environment By Raj Agrawal (Second Edition)

3. Business Environment By Francis Cherunilam (15th Edition 2004)

Availability – Banarasidas & Sons, Near Mahalaxmi Temple, Warden Road,

In addition to above books, a list of 15 books was given. Each student is

Study of this subject is basically sensitisation to the external environment

Page 1 of 48 - Business Environment

Thus, knowledge of global events and assessment of their impact on our

The above diagram indicates as to how an organization is nestled in a sector, which

Page 2 of 48 - Business Environment

Thus, for success in business, it is important for today’s managers and

Various elements of the business environment are as follows: -

(a) Internal Environment

Page 3 of 48 - Business Environment

Lecture Date: 13 Aug 05

(a) Zamindari System

Page 4 of 48 - Business Environment

An economy grows when the productivity of its people grows.

1. Bolshevik or Russian Revolution of 1917 which was headed by Mr

Page 5 of 48 - Business Environment

Military Industrial Complex. However, he also took up production of

(a) Investment in Capital Goods Industry is primary requirement as those goods

Page 6 of 48 - Business Environment

(i) Tier I – Engineering Colleges (for Techno Managers) including 05 IITs

War in 1962 taught us that Economic Development without National Security is

India won both the wars in 1965 and 1972 convincingly.

Page 7 of 48 - Business Environment

Nation’s tryst with calamities did not end here.

Page 8 of 48 - Business Environment

Mr VS Page, a contemporary of Mr VB Chawan, CM of Maharashtra, launched Page

(a) Banks nationalisation

Page 9 of 48 - Business Environment

Page 10 of 48 - Business Environment

Foreign Exchange Situation

(a) Collapse of Soviet Union. India had special import arrangements

Page 11 of 48 - Business Environment

mainly military hardware at highly concessional rates. Even those highly

(b) Collapse of Trading arrangement with 2nd World Countries.

(e) Crash of Credit Ratings. Mr Devilal, Deputy Prime Minister, in

Page 12 of 48 - Business Environment

His prescription for Structural Adjustment was: -

(a) Eradicate the monopolies whether in private sector like in Car

(d) Trade Policy

(i) Exim Policy

Page 13 of 48 - Business Environment

Lecture Date: 14 Aug 05

Economic Environment contd……

Page 14 of 48 - Business Environment

(a) Open society and its enemies

(Historicism is a theory that all sociological phenomena are historically determined: a

Page 15 of 48 - Business Environment

Indian model of economic development (Nascent Industry Argument) was emulated by

Page 16 of 48 - Business Environment

So, questionable fiscal decisions of the govt went unchallenged.

Structural adjustments introduced by Mr Man Mohan Singh included multiplicity of

Page 17 of 48 - Business Environment

Page 18 of 48 - Business Environment

Page 19 of 48 - Business Environment

Lecture Date: 17 Aug 05

Page 20 of 48 - Business Environment

Indian constitution was formulated on the premise that