Business Environment

PGDM III A&B

Nature,
Components,
Dynamics &
Importance of
Business Environment.
“Business is an economic activity
because it includes all those
activities whose purpose is to earn
profit by transfer of goods &
services.”
 “Business, Like weather is with us everyday.”
-Wheeler

“Business may be defined as human activity

directed towards producing or acquiring wealth
through buying or selling of goods.
-C.H.Haney

“Environment consists atoms & molecules

agglomeration of things in motion, alive of men
emotions, or force & resistances. There numbers are
infinite & they are always present; they are always
changing.
-Chester Bernard
Nature
1. Interdependence
2. Dynamic
3. Unlimited effect of uncontrollable factors.
4. Media & Social Change
5. Uncertainties & Restrictions.
6. Adverse conditions
7. To keep regular vigil on the changing
environment.
8. Danger of casual change
Business Environment

B u s in e s s E n v ir o n m e n t

In te r n a l E n v ir o n m e n t E x te r n a l E n v ir o n m e n t

S tren g th s W ea k n ess O p p o r tu n itie s T h rea ts

Components
of
Business Environment
“The process by which strategist monitors
the economic, legal, governmental, market,
competitive supplier, technological,
geographic & social setting to determine
opportunities & threats of their firm.”
-William F Gluicck
 Internal Business External
Environment Decisions Environment
 MISSION MANAGEMENT
VALUE
& STRUCTURE &
SYSTEM
OBJECTIVE NATURE

INTERNAL INTERNAL
ATTITUDES BUSINESS POWER
ENVIRONMENT RELATIONSHIP

COMPANY
OTHER HUMAN
IMAGE &
FACTORS RESOURCE
BRAND EQUITY
 Internal Environment

Miscellaneous Factors

 Physical Assets & Facilities

 R&D Technological Capabilities
 Marketing Resources
 Financial Factors
External Environment

E x te r n a l E n v ir o n m e n t

M ic r o M acro
E n v ir o n m e n t E n v ir o n m e n t
Micro Environment

“Micro or task environment is more

specific and immediate environment
in which an organization conducts its
business.”
-Dunham & Pierce
1. Supplier
 Reliability

 Multiple Supplier
2. Customer
 Types of Customers
– Industrial Customers
– Institutional Customer
– Foreign Customer
– Retail Customer
Multiple Customer
Globalization
Customer Segmentation
 3. Market Intermediates

 Types of Market Intermediates

• Middlemen
• Marketing Agencies
• Financial Institution
• Physical Intermediates
4. Public
 Media Publics
 Local Public
MACRO ENVIRONMENT
 Economic
 Political
 Social-Cultural
 Technological
 Natural
 Demographic
 International
• MACRO ENVIRONMENT means general
environment of business. Macro factors are
uncontrollable in comparison to the micro forces
of environment. The growth and survival of
business depend upon its adaptability to macro
environment factor which include
1. ECONOMIC ENVIRONMENT
Economic Conditions
•Boom
•Depression

Economic System
•Capitalist
•Socialist
•Mixed Economy

Economic Policies
•Monetary Policy
•Fiscal Policy
•Foreign Trade Policy
•Foreign Investment
•Industrial Policy
2. POLITICAL ENVIRONMENT

Political Ideology of Govt.

Political stability in the Economy.
Foreign Policy of Govt.
Defense & Military Policy.
Centre state relationship.
Political Environment
P o litc a l E n v ir o n m e n t

P o lit ic a l S y s te m C o n s t it u t io n
E n v ir o n m e n t

L e g is la tu r e P r e a m b le

E x e c u tiv e F u n d a m e n ta l R ig h ts

J u d ic ia r y D ir e c tiv e s
P r in c ip le s o f S ta te P o lic y
3. Socio-Cultural Environment
 Urbanization
 Religion
 Tastes & Preferences
 Customs & Tradition in Society
 Health & Quality of Life
 Language
4. Technological Environment
 Innovation
 Research & Development
 Inflow of foreign Technology etc.
 5. Natural Environment
 Climatic & weather condition.
 Availability of Natural resources.
 Topographical factors: Physical features of
place.
 Pollution Control
6. Demographic Environment
 Age Composition
 Sex Composition
 Education Level
 Family size & structure
 Urban-rural population
 7. International Environment
 Globalization
 Oil Price hike
 International Terrorism
 Cultural Exchange
Dynamics
of
Business Environment
 Factors Effecting
Business Environment

1. Global Scenario
2. Indian Scenario
 1.Global Scenario

 Political & Economic Environment

 Privatization
 Globalization & Internationalism
2. Indian Scenario
 Change in Govt. Policies
 Variation in Growth Performance
 Corrective Policy Actions
 Change in Market Structure & Competition
 Future Expectations & Business Speculation
 Change in Consumer attitudes, taste & Preference
 Infrastructure
Importance
of
Business Environment
 For incorporating dynamic behavior of
environment
 Complete knowledge of internal environment
 To understand international events, pressures&
impact
 Economic policies of the govt.
 To face business problems &challenges
 Vigilant regarding dangers
 Administrative system
 Optimum utilization of resources
 Market conditions
 Scientific & industrial advancement
 Development & success of business
COUNTRY RISK &
POLITICAL RISK
BUSINESS ENVIRONMENT
BUSINESS ENVIRONMENT
RISK
 Risk is a state in which the number of
possible future events or outcomes is
larger than the number of events or
outcomes which will actually take place

 Risk is manifested in the probability of loss

or damage to a business firm
 TYPES OF BUSINESS
ENVIRONMENT RISK

 LEGAL RISK : Changes in Law

 REGULATORY RISK : Regulatory design &
changes
 POLITICAL RISK : Resulting from political
changes
 SOCIAL RISK : From Social Attitudes
 NATURAL RISK : Natural Disasters
 ECONOMIC RISK : Economic Changes
COUNTRY RISK
ANALYSIS

 Country risk analysis is basically

concerned with the performance of an
economy and the behavior of the
Government and the institutions which
determine the Business Environment
 MAJOR SOURCES OF
COUNTRY RISK

 Monetary Policy
 Fiscal Policy
 Import controls
 TRIMs
 Price Control
 Labour Policy
 Exchange controls
POLITICAL RISK
ANALYSIS
 Political environment is set by the
POLITICAL SYSTEM, THE
CONSTITUTIONAL FRAMEWORK,
EXTERNAL POLITICAL RELATIONS,
FUNCTIONING OF THE GOVERNMENT,
ROLE AND BEHAVIOR OF VARIOUS
POLITICAL PRESSURE GROUPS
TYPES OF POLITICAL RISK

1. GENERAL INSTABILITY RISK

Due to change in the political system with
a change in Govt.
Due to social revolution, normal election
process etc
Due to poor Governance, poverty and
exploitation

Cntnd
2. OPERATIONAL RISK
Restriction on the production, marketing,
finance, human resource management or
international business
3. OWNERSHIP RISK
It arises from the probability that the govt. might
take actions that may lead to erosion in
ownership or control in the business firm.

Cntnd
 TYPES OF OWNERSHIP RISK

Confiscation

OWNERSHIP RISK
Expropriation Domestication
4. TRANSFER RISK
This risk applies to MNCs having ventures
in foreign countries or to the domestic firms
having business operations or subsidiaries
Transactions
Transfer of profits, Funds or Assets
 HOW A COMPANY
MANAGES ENVIRONMENT
RISK ?

1. RISK AVOIDING STRATEGIES

Avoiding politically sensitive products
Avoiding sensitive regions
Contractual agreements
Tie-up with other Firms
2. RISK SHIFTING STRATEGIES
Risk can be shifted to other parties through
Insurance
Cntnd
3. RISK REDUCTION STRATEGIES
Establishing a risk-assessment system
Developing the local economy
Local Equity participation
Good Corporate Citizenship
Maintaining Good Political Relations
METHODS FOR ASSESSING
ENVIRONMENT RISK
 CHECKLISTS
 EXPERT-BASED SCORING SYSTEM
 ECONOMIC METHODS
 RATING AND RANKING SYSTEMS
 ASSESSMENT OF COUNTRY’S
CREDITWORTHINESS
 RISK BENCHMARKING
 RISK PREMIUM ON INTEREST
MEANING
Balance of payments refers to the
recording of all economic transactions
of a given country. Such transactions
includes receives payments from and
makes payments to other countries.
Definitions
 According to Benham, ”balance of payments
of a country is a record of the monetary
transactions over a period with the rest of
the world.”
 According to James O Ingram, “the balance
of payments is a summary record of all
economic transactions between residents
of one country and the rest of the world
during a given period of time.”
Balance of payments

Visible Invisible

Capital Transfers
Features
 Fixed Period of Time
 Comprehensiveness
 Systematic Record
 Double Entry System
 All items –Government and Non-
Government
 Structure
 Balance of payments = (Exports of
goods + Capital receipts + Services)
– (Imports of goods + Capital
payments + Services)
Disequilibrium in
balance of payments
 Balanced Balance of Payments
B=R-P=0
 Favourable Balance of Payments
Bf=R-P>0
 Unfavourable Balance of
Payments
BU=R-P<0
Indian Share in World
Import Trade
Trade

Export
1950 1.85 1.71 1.78
1960 1.03 1.69 1.36
1970 0.64 0.65 0.65
1980 0.42 0.72 0.57
1990 0.52 0.66 0.59
1991 0.50 0.56 0.53
1992 0.53 0.61 0.57
1993 0.58 0.60 0.59
1994 0.60 0.63 0.61
1995 0.60 0.60 0.60
1996 0.60 0.60 0.60
1997 0.60 0.60 0.60
Foreign Trade in
India
Year Import Export Trade (def)

1950-51 608 606 2

1960-61 1122 642 480
1970-71 1634 1535 99
1980-81 12549 6711 5838
1990-91 43198 32553 10645
1996-97 138920 118817 20103
1997-98 154176 130101 24075
1998-99 178332 139753 38579
99-2000 215236 159561 55675
2001-02 230873 203571 27302
2003-04 245199 209018 36181
Causes Of
Unfavourable Balance
Of Payments
 Import Of Machinery.
 Import Of War Equipments.
 Price Disequilibrium.
 Embassies.
 Foreign Competition.
 Payments Of Interest On
Foreign Debts.
 Less Growth In Exports.
Measures To
Disequilibrium In
Balance Of Payments
 Promotion Of Exports.
 Increase In Production.
 Encouragement To Foreign
Investments.
 Attraction Of Indian
Currency.
 Restriction On Imports.
 Import Substitution.
FOREIGN DIRECT
INVESTMENT
FDI
 Foreign investment plays important
role to accelerate the growth of any
economy
 International capital flow gives boost
to the various economic sector
TYPES OF FOREIGN
INVESTMENT

 PORTFOLIO INVESTMENT
 FOREIGN DIRECT INVESTMENT
Wholly owned subsidiary
Joint Ventures
Acquisition
1. Wholly owned Subsidiary :
Companies with long term and
substantial interest in the foreign market go
for the wholly owned subsidiary. It provides
the firm with complete control over
production and quality
2. Joint Ventures:
Joint venture is a common strategy of
entering the foreign market. Diverse types
of joint overseas operations are :
 Sharing of ownership and management in
an enterprise
 Licensing/Franchising agreement
through intellectual property rights
Patents
Trade marks
Copyrights
Technical Know-How
Marketing Skills
 FRANCHISING : is a form of licensing in
which a parent company ( The Franchiser)
grants another independent entity( The
Franchise ) the right to do business in a
prescribed manner. The major form of
franchising are as follows:
Manufacturer---retailer system
Manufacturer---wholesaler
Service firm-----retailer system
FACTORS LEADS TO THE
FOREIGN DIRECT
INVESTMENT
 Rate of Interest
 Speculation
 Profitability
 Costs of Production
 Economic Conditions
 Government policies (Remittances, profits,
taxation, Foreign exchange control, tariffs and
monetary policy)
 Political Factors
ADVANTAGES OF FDI

 Increase the level income and employment

 Increase the tax revenue of the Govt.
 It facilitate transfer of technology to the host country
 It provide professionalism
 It enables the country to increase exports and reduces
imports
 Foreign investors encourages the domestic suppliers
 It increase competition and breaks monopoly
 Improves the quality and the cost of inputs incurred
DISADVANTAGES OF FDI

 Flow of investment into high profit area

 Stage of development of the country
 Multinational can evade the economic power
 Unfavorable effect on balance of payments
 Interference in the national politics
 Engage in unfair and unethical trade practices
 Higher cost are involved to encourage FDI
TOP FIVE NATIONS IN INDIA
FDI INFLOWS( IN US dollar)

 MAURITIUS 34.49 %
 USA 17.1 %
 JAPAN 7.33 %
 NETHERLANDS 7.16 %
 UK 6.54 %
FIVE TOP STATES
ATTRACTING MAJOR SHARE
OF FDI
 MAHARASHTRA 14.8 %
 DELHI 12.2 %
 TAMIL NADU 9.05 %
 KARNATKA 7.63 %
 GUJRAT 4.97 %
INDUSTRIAL
POLICY
BUSINESS ENVIRONMENT
INDUSTRIAL POLICY

 The concept of “ Industrial Policy” covers

all those procedures, principles, policies,
rules and regulations which control the
industrial undertaking of a country and
shape the pattern of Industrialization.
 WHY THE NEED ARISES TO
CONSTITUTE THE INDUSTRIAL
POLICY?

 After independence Indian Industrial

production lower down
 Inflation Increases
 Rehabilitation problem faced by Indian due
to partition
 First phase of Industrialization started by
constituting the first Industrial policy
resolution,1948
INDUSTRIAL POLICY
RESOLUTION,1948, MAIN
FEATURES
 The main emphasis of IP,1948 is on the mixed
economy system
 The manufacture of ARMS & AMMUNITION, the
production and control of atomic energy and the
ownership and management of RAILWAY
TRANSPORT were to be the exclusive monopoly of
the central Govt.
 In second category, The COAL, IRON &
STEEL,AIRCRAFT MANUFACTURE, SHIP
BUILDING, MANUFACTURE OF TELEPHONE,
TELEGRAPHS AND WIRELESS APPARATUS
were undertaking by the state.

Cntnd.
 In the third category the industries of such
basic importance that the central govt.
would feel it necessary to plan and
regulate them.
 In the fourth category the industries are
left for the private enterprise, individual
as well as co-operative

Cntnd
 IIIrd PHASE OF
INDUSTRIALISATION

 The third phase of Industrialization begins with the

amendment of IP, 1956, in 1977, when the janta
Govt. came into power
 The main reasons for the change in policy are
Unemployment Increases
Rural-Urban Disparities Widened
Rate of Investment Come Down
Industrial Sickness Increases
Cntnd
MAIN FEATURES OF IP,
1977
 Development of Small Scale Sector
Cottage Industries
Tiny Sectors
Small Scale Industries
 Area of Large-Scale Sector has defined
Basic industries essential for providing
infrastructure as well as development of SSI
like Cement, Steel, Oil refineries

Cntnd
 Capital goods industries for meeting the
machinery requirements of basic industries
 High technology industries which required
large scale production, and which were
related to agricultural and Small Scale
industries development like Fertilizers,
Pesticides, Petrochemicals
NEW INDUSTRIAL POLICY,
1991

 In June 1991, Narsimha Rao Govt. took

over charge and a wave of economic
reforms and Liberalization come in the
economy
 In this new atmosphere, the Govt. declared
broad changes in IP on July 24, 1991
Cntnd
MAIN FEATURES OF IP,
1991
 To maintain the sustained growth in
productivity
 To enhance gainful employment
 To achieve optimum utilization of resources
 To attain international competitiveness
 To transform India into a major partner and
players in the global arena
 POLICY MEASURES TO
ATTAIN OBJECTIVES
 Liberalization of Industrial licensing policy
 Introduction of Industrial Entrepreneur’s Memorandum
 Liberalization of location policy
 Liberalized policy for small scale sectors
 NRI’s are allowed to invest up to 100 %
 Electronic Hardware technology park(EHTP) and
Software technology park(STP) to be build to enhance
exports
 Liberalized FDI policy
INDUSTRIALISAITON
PATTERN
 Industrialization is the hallmark of economic
growth
 It is the process whereby industrial activity comes
to play a dominant role in the economy of the
country
 Industrialization involves replacement of small
scale cottage industry supplying limited local
markets by the large units
 Early years of the British Rule ( 1750-1850)

cntnd
EFFECT OF WORLD WAR I(1914)
ON INDUSTRIALISATION

 Localization of Industries
For Sugarcane North Bihar & Eastern
UP-1904&1936
For Cotton Mumbai followed by
Ahmedabad, Kanpur,
Chennai, Madurai
 Diversification of Industries
Cotton-----Steal--------Coal--------Jute
MAIN FEATURES OF
INDUSTRIALISATION DURING
BRITISH RULE

 Import Substitution
 Increased disparity in the Indian economy
 Lack of Integration
 Minimal speed effect
 Organizational Imperfections
 Lack of Institutional finances
 Beginning of the modern factory system (1850-
1947)
 First Cotton textile mill by a Parsi Businessman
C.N.Davar started in 1884 in Bombay
 Development of Sugar,Paper and Steel Industries
 Development of the railways and other public
works and rise of modern industry after 1850
made India a large number of Iron and Steel in
India
 The first Iron Production started at Barkar Iron
works in 1875
 This was followed by the setting up of the Tata
Iron and Steel Company(TISCO) at
Sakchi(Jamshedpur) in 1907
INDUSTRIALISATION DURING
FIVE YEAR PLANS
1. FIRST FIVE YEAR PLAN(1951-56)
 The first five year plan concentrated on the
development of agriculture. Industrial activity was
mostly directed towards the development of
Infrastructure facilities like power and irrigation
Development of consumer goods industries such as Jute,
plywood, cotton textile, sugar, edible oil,paints etc
Expansion of capital goods industries like iron and steel,
aluminium, fertilizers, chemicals and heavy machine tools
2. Second Five Year Plan(1956-61)
The second five year plan accorded a
very high priority to industrial
development. The major objectives were:
Increased output in the basic and heavy
industries such as Fertilizer,chemicals,iron and
steel, aluminium and heavy engineering
Expansion of the capacity of
cement,chemical,phosphatic fertilizer,bulk drugs
 Modernization of traditional industries like
sugar, cotton textile, jute,etc where the
productivity had declined due to the age structure
of these plants.
Maximum utilization of installed capacity,
especially in the public utilities and infrastructural
services.
During the second plan, investment in the
PSU’s was Rs.870 crores, whereas investment in
the private sector was Rs. 675 crores
3. Third five year plan(1961-66)
The third five year plan was governed by the
overriding need to complete on-going projects in
basic heavy industries. The objectives of this plan
were :
Rapid completion of all projects.
Increased emphasis on raw materials
and producer’s input.
Diversification of capacity in the capital
and producer goods.
The plan envisaged a total outlay of
Rs.3000 crores in the organized industries and
mining of which 1700 cr. For PSU’s and 1300 cr
in private sector.
4. Fourth Five Year Plan(1969-74)
The objectives of the fourth five year plan
were :
Maximum utilization of installed
capacity in industries
To achieve self-reliance through import
substitution and export expansion
To curb monopolistic tendencies
To channelise new investments in strict
accordance with the plan priorities.
Total outlay on the industrial sector was
Rs.5300 crores.
5. Fifth Five Year Plan(1974-79)
The objectives of the fifth plan were:
To achieve substantial increase in
production capacity through technological
expansion and improvement.
Creation of new capacities in
accordance with the plan priorities and initiation
of advance action in cases of long gestation
projects.
To introduce a package of incentives to
desire sectors of economy.
Total outlay was Rs.10200.
6. Sixth Five Year Plan(1980-85)
The Plan had five fold strategy to achieve
rapid industrialization :
To increase manufacturing capacities of
a variety of consumer goods and durables both in
the public and private sectors.
To support industrial growth through
the supply of intermediate and capital goods.
To attain technological excellence for
encouraging exports of engineering goods.
Total outlay was Rs.20407 crores.
7. Seventh five year plan(1985-90)
The objectives of this plan were:
To integrate science and technology into the
main stream of development
To create conditions for and to promote
modernization, efficiency and competition in
industry
To promote diversification of industrial
production
To ensure balanced regional dev.
Total outlay was Rs.22460 crores
8. Eighth five year plan(1992-97)
The broader objective of the plan were:
To ensure efficiency and competitiveness was
of the industrial sector through modernization and
technology upgradation
Expansion and fuller utilization of installed
capacities in power, transport, communication and
water resources.
Greater private participation
9. Ninth five year plan(1997-2002)
The objectives of plan were :
Priority to agriculture and rural development
Ensuring environment sustainability of the
development process through social mobilization
and participation of people at all levels.
Strengthening efforts to build self-reliance.
 GLOBALISATION
 Globalization is the process by which a firms activity
become worldwide in scope
 Doing, or planning to expand , business globally
 Giving distinction between the domestic market &
foreign market
 Locating the production and other physical facilities of
global business dynamics
 Basic product development and production planning on
the global consideration
 Global sourcing of factors of production
 Global orientation of organizational structure and
management culture
FEATURES OF
GLOBALISATION
1. NEW MARKETS
Growing global markets in services
New financial markets
Deregulation of antitrust laws of
mergers
Global Consumer markets with global
brands

Cntnd
2. NEW ACTORS
Multinational corporations
The World Trade Organization
International Criminal Court System
Regional Blocs
More policy Coordination groups-
G-77,G-7, OPEC, OECD
3. NEW RULES AND NORMS
Multilateral agreements in trade new agendas
on environment and social conditions
Cntnd
 New multilateral agreements for services
property rights and communication
Conventions and agreements on the Global
environment
4. NEW TOOLS OF COMMUNICATION
Internet and electronic communication
Cellular phones
Fax machines
Faster and cheaper transport
Computer aided design
FACTORS LEADS TO
GLOBALISATION
 Human Resources
 Wide Base
 Growing Entrepreneurship
 Growing Domestic Market
 Niche markets
 Expanding Markets
 Economic Liberalization
 Competition
OBSTACLES TO GLOBALISATION
 Government Policy and Procedures
 High cost of basic inputs
 Poor Infrastructure
 Obsolescence
 Resistance to change
 Poor Quality Image
 Supply problems
 Small Size
 Lack of Experience
 Limited R&D and marketing research
 Growing Competition
 Trade barriers
 PUBLIC SECTOR
ENTERPRISES REFORMS
 PSE’s includes Government companies in the
Central and State Sectors
 These industries covers a wide spectrum of
activities in basic and strategic industries like:
Steal Heavy Eng. Tourism
Coal Chemicals Financial
Minerals Fertilizers Trading
Petroleum Transp. Marketing
 WHY THE PSE’S ?

 Public enterprises help in rapid economic growth

 It creates the necessary infrastructure for economic
development
 To earn return on investment and generate resources
for development
 To promote redistribution of income and wealth
 To generate employment opportunities
 To promote balanced regional development
 To assist the development of small-scale ind.
 To earn foreign exchange for the economy
 Investment in the PSE,s during plans
Five year InvestmentNo.of PSE,s
Plan (in crores)
Ist plan 29 5
2nd 81 21
3rd 953 48
4rth 3902 85
5th 6237 122
6th 18,225 186
7th 42,811 221
8th 1,18,492 237
9th 2,01,500 238
1999 2,73,700 235
2002 3,24,614 240
2003 3,33,475 240
NEED FOR PUBLIC SECTOR
ENTERPRISES REFORMS
 Lack of Competition
 Over employment
 Long Gestation period
 Over capitalization
 Inefficient Management
 Absence of Appropriate pricing policy
 Social Objectives
 Lack of Efficient and Trained Staff
HIGHLIGHTS OF PUBLIC
ENTERPRISES SURVEY (2002-2003)

 Gross turnover of all 240 PSU’s during 2002-03

has been Rs.544390 crore against Rs.478732 crore
during 2001-02
 Net profit of all 240 PSU’s during 2002-03 has
been Rs. 32141 crore against Rs. 25978 in 2001-
02
 During 2002-03 profit earning PSU’s earned net
profit of Rs. 43085 crore while loss making PSU
gave net loss of Rs. 10944 crore.
cntnd
 PSU earning highest turnover is Indian Oil
Corporation with Rs.123628 crore. Second,
third & fourth places gone to HPCL, BPCL
and ONGC respectively.
 PSU earning highest net profit is ONGC
with Rs. 10529 crore.
 PSU showing highest deficit is FCI with
Rs.1166 crore. Hindustan Fertilizer stand
second with Rs.1058 crore deficit during
2002-03
IDENTIFICATION OF PUBLIC
SECTOR ENTERPRISE AS NINE
GEMS
 SAIL IOCL
 VSNL HPCL
 BPCL ONGC
 BHEL NTPC
 IPCL GAIL
 MTNL
 Two of these namely IPCL and VSNL have since
been privatized and as on July 2003 there are only
9 NAVRATNA PSEs. The profitability of these 9
ratna was Rs.15508 crore during 2001-02
 Besides granting the status of Gems of the
country, the Government also announced on
October 3, 1997 to grant the status of Mini-Gems
to 97 selected public sector profit earning
enterprises.
DISINVESTMENT
PROGRAMMES IN PSE’S
 The disinvestment process, which began in 1991-
92 with the sale of minority stake in some public
sector undertakings
 The new policy in this regard is that the
government is committed to a strong and effective
public sector whose social objectives are met by
its commercial functioning
 The Govt. is committed to devolve full managerial
and commercial autonomy to successful, profit
making companies operating in a competitive
environment
 Generally, profit making companies will not be
privatized
 As per the National Common Minimum Programme
(NCMP) the Government retain existing ‘Navratna’
Companies in the Public Sector
 Loss making companies either sold off or closed, after
all workers get their legitimate dues and compensation
 The Government has approved the constitution of a
National Investment Fund (NIF) comprising of
proceeds from disinvestment of public sector units
 The Govt. has also given in principle approval for
listing of currently unlisted profitable PSEs each with a
net worth in excess of Rs.200 crore, through an initial
public offer (IPO)
OBJECTIVES OF
DISINVESTMENT
 Modernization and up gradation of PSEs
 Creation of new assets
 Generation of Employment
 Retiring of Public Debt
 To ensure that disinvestments does not
result in alienation of national assets, which
through the process of disinvestments,
remain where they are
cntnd
 Setting up a Disinvestment Proceeds Fund
 Formulating the guidelines for the
disinvestments of natural asset companies
 Preparing a paper on the feasibility and
modalities of setting up of Asset
Management company to hold, manage and
dispose the residual holding of the
government in the companies in which
government equity has been disinvested to a
strategic partner
THE WAVE OF ECONOMIC
REFORM
 The wave of economic reforms was born out of
the crisis in the economy. Which climaxed in
1991.
 The main reasons which leads to economic
reforms are :
Increasing Fiscal deficit
Internal debt
Overall agricultural promotion, food grain
product and industrial production showed
negative growth.
cntnd
 Foreign Exchange reserves fell
Inflation rate increases to 14%
Confidence of International financial
institutions was badly shaken
Due to Gulf war, the prices of oil rises
 TYPES OF ECONOMIC REFORMS
TYPES OF ECONOMIC REFORMS

PRIVATISATION

LIBERALISATION GLOBALISATION
LIBERALISATION
 Liberalization of the economy means to free
it from direct or physical controls imposed
by the Government.
 The various types of controls are as follows:
Industrial licensing system
Price control or financial control on goods
Import license
Foreign exchange control
Restrictions on investment by big business houses
MEASURES FOR
LIBERALISATION
 Abolition of Industrial Licensing and Registration
 Concession from monopolies Act
 Freedom for expansion and production to
Industries
 Increase in investment limit of SSI
 Freedom to import capital goods
 Freedom to import technology
 Free determination of Interest rate
ADVANTAGES OF
LIBERALISATION
 Improvements in Industries & service sector
 Free flow of FDI & MNCs
 More availability of imported goods at cheaper
rates
 Quality education and careers to people
 Improvement of technology in the field of SSI &
LSI
 Improvement in means of communication and
Transport.
DISADVANTAGES OF
LIBERALISAION
 Common man fails to enjoy the imported
goods as they lack purchasing power
 Danger in political independence
 Agricultural dominated countries
 Underdeveloped countries fail to increase
their exports in comparison to imports
PRIVATISATION
 Privatization of Industries means opening the
gates of Public Sector to Private sector
 The term privatization is used in two sense
 Transferring the ownership of public sector to
private sector
 Management and controlling of public sector
by private sector without transferring the
ownership
CAUSES OF PRIVATISATION
 Disintegration of Socialist Economies
 Inefficient public sector
 Uneconomic pricing policy
 Burden on the Government
 Inefficient management control
OBJECTIVE OF PRIVATISATION
 To increase the efficiency and competitive power.
 To reduce deficit financing and public deficit
 To strengthen industrial management
 To earn more and more foreign currency
 To make optimum use of economic resources
 To achieve rapid industrial development
MEASURES FOR PRIVATISATION

 Privatization covers three sets of measures

1. OWNERSHIP MEASURES
Total denationalization
Joint Venture
Liquidation
Management buy-out

Cntnd
2. ORGANISATIONAL MEASURES
A holding company structure
Leasing
Restructuring( Financial, Basic )
3. OPERATIONAL MEASURES
Grant of autonomy to PE s in
decision making
Provision of incentives to the
employees
Freedom to acquire certain inputs
from the market
Development of proper investment
criteria
 GLOBALISATION
 Globalization is the process by which a firms activity
become worldwide in scope
 Doing, or planning to expand , business globally
 Giving distinction between the domestic market &
foreign market
 Locating the production and other physical facilities of
global business dynamics
 Basing product development and production planning on
the global consideration
 Global sourcing of factors of production
 Global orientation of organizational structure and
management culture
FEATURES OF
GLOBALISATION
1. NEW MARKETS
Growing global markets in services
New financial markets
Deregulation of antitrust laws of
mergers
Global Consumer markets with global
brands

Cntnd
2. NEW ACTORS
Multinational corporations
The World Trade Organization
International Criminal Court System
Regional Blocs
More policy Coordination groups-
G-77,G-7, OPEC, OECD
3. NEW RULES AND NORMS
Multilateral agreements in trade new agendas
on environment and social conditions
Cntnd
 New multilateral agreements for services
property rights and communication
Conventions and agreements on the Global
environment
4. NEW TOOLS OF COMMUNICATION
Internet and electronic communication
Cellular phones
Fax machines
Faster and cheaper transport
Computer aided design
FACTORS LEADS TO
GLOBALISATION
 Human Resources
 Wide Base
 Growing Entrepreneurship
 Growing Domestic Market
 Niche markets
 Expanding Markets
 Economic Liberalization
 Competition
OBSTACLES TO GLOBALISATION
 Government Policy and Procedures
 High cost of basic inputs
 Poor Infrastructure
 Obsolescence
 Resistance to change
 Poor Quality Image
 Supply problems
 Small Size
 Lack of Experience
 Limited R&D and marketing research
 Growing Competition
 Trade barriers
FINANCIAL
ENVIRONMENT
FINANCIAL ENVIRONMENT

 Financial environment consists of decision taken by the

companies acc.to the Monetary Policy, Fiscal Policy, &
Financial Market Structure.
 Monetary and Fiscal policy are important
determinants of business prospects and investment
decision
 These policies encourage investment and production in
certain priority sectors and discourages them in non-
priority sector.
 The Monetary, fiscal and financial market structure
influence the aggregate supply and demand, level of
employment etc.
 MONETARY POLICY
 Monetary policy refers to the use of instruments within
the control of the RBI to influence the level of
aggregate demand for goods and services
 Monetary policy is based on money supply and money
stock
 Measures of money stock are :
M1 = Currency with the public + Deposits with
banks
M2 = M1+ Post office savings bank deposits
M3 = M2+ Fixed deposits with banks
M4 = M3+ Total post of deposits.
HOW THE RBI CONTRACT &
CREATE THE CREDIT

 Different instruments have been used by the RBI

to contract and create the credit in the market
1. Bank Rate : It is the minimum rate at which
the RBI provides financial accomodation to the
commercial banks
2. Open Market Operations : Purchase and
sale of foreign exchange, Gold and company
shares
 3. Cash Reserve Ratio : The
commercial banks has to keep their cash
with RBI

4. Statutory Liquidity Ratio :

Maintaining a minimum amount of liquid
assets in terms of cash
SELECTIVE CREDIT CONTROL
METHODS OR QUALITATIVE
METHODS
 Change in margin requirement of loans
 Rationing of credit
 Moral persuasion
 Credit Authorization Scheme
 Credit Monetary arrangements
 Loan system for delivery of bank credit
FISCAL POLICY

 Fiscal policy is related to income and

expenditure of Govt. It refers to budgetary
policy of Govt.

 Fiscal policy means the use of Public

finances or expenditure, taxes, borrowings
and its administration to further our national
income
OBJECTIVES OF FISCAL
POLICY
 Mobility of Resources
 Promotion of saving and investment
 Removal of poverty and unemployment
 Growth of Public Sector
 Economic stability
 To achieve favourable BoP
 To support private sectors
TECHNIQUES OF FISCAL
POLICY

1. Taxation policy of Govt of India

Mobilization of Resources
Capital Formation
Equality of Income and Wealth
2. Public Expenditure Policy
Development of Public Enterprises
Infrastructure Development
Social Welfare
3. Public Debt Policy
Internal Debt
External Debt
DRAWBACKS OF FISCAL
POLICY

 Instability
 Defective Tax Structure
 Inequality of Income
 Failure Public Sectors
SUGGESTIONS FOR THE
REFORM OF FISCAL POLICY

 Reduction in Non-Development
Expenditure
 Agricultural Taxation
 Control over Black Money
 More Direct Taxes
 Reduction in Tax Evasion