Business Environment 2

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 attack in China
and other countries affected the poultry business in India both ways. First
chicken demand/prices plummeted due to local populations fear about chicken
and then it sent the overseas demand for Indian chicken soaring when it was
considered a safe source.
Page 1 of 55 - Business Environment
Jamnalal Bajaj Institute of Mgmt Studies
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.
Americas 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 Bushs dislike of Saddams
face can lead to increase in crimes in our country.
Thus, for success in business, it is important for todays 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 todays 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 Rays congress govt in order to suppress the
Naxalite Movement in Bengals 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 mans 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. Nehrus 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. 2 nd 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. 10 th 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 Nehrus 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.
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.
Allow private entrepreneurs to produce consumer goods.
(b)
(c)
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.
Nations 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 Indias 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 3 rd Five Year
Plan, Agriculture began to get enhanced share from 4th Five Year Plan.
Indias 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.
Indias 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 5 th 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)
(b)
(c)
Banks nationalisation
Abolition of Privi Purses
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.
Indias foreign exchange situation became critical in 1990. Indias 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, Indias 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 Singhs politics of Mandal
Commission and then BJPs 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 countrys 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 Singhs
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 18 th 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)
(b)
Open society and its enemies

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
fathers word is final in all family matters. Mother-in-law will rule the house.
Political partiess premiership is more of hereditary than merit based. Party
leaders 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 centres 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 peoples
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 ones

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 peoples 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 peoples
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. Govts 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 Indias 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 Presidents. There the presidents 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 Presidents 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)
(b)
(c)
(d)
(e)
(f)
Ethnic Naga demand for separate home land

Linguistic Anti Hindi demonstrations in Tamilnadu
Caste Upper caste and lower caste battles (Ranvir Sena Vs Maoist
Communist Party) in Bihar
Religion Demand for Khalistan by Sikhs
Region Pan Tamil demand rearing its head in Tamilnadu, Kashmir
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 Indias 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
Gandhis 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)
(b)
Mandatory Devolution, Like Income tax which is presently shared in

the ration of 77.5: 22.5 between states and centre
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. 13 th 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)
(b)
(c)
(d)
Population
Area
Revenue raising capability
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 states 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 camels 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
1980s. 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 BJPs 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)
(b)
(c)
Basic Education Till the age of 14 years which is till class VIII.
High School Level
University Education
Education fetches two kinds of return

(a)
(b)
Individual Return Direct benefits accrued to the student

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 societys 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
peoples representatives. They represent peoples aspirations and voice. So, their
opinion can be considered to be the collective opinion of the main stream
population.
Policy Environment is affected
environment.
by of economic as well as political
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 Bengalis 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,
certain decisions.
of Narora Atomic
attitude of Orria
making.
groups, region, religion, nation are important while making

Like it has been pointed out earlier about safety consciousness
Power Plant vis a vis plants in Tamil Nadu or lackadaisical
people towards work have all impact on business decision
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 countrys 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

negotiation skills.
of
business
leaders
in
business
(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 companys
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 companys 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 Bushs dislike of Saddams 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 others 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.
Indias 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. Russias 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.
Indias 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 nondiscrimination.
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.
2.
Commonwealth of Australia,
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,
23.
and
The United States of America:
GATT was based on 4 building blocks: 1.
2.
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.
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.
3.
4.
Annecy Round (1949): 13 countries.

Torquay Round (1951): 38 countries.
Fourth Round (1956): 26 countries. Tariff reductions. Strategy set for
future GATT policy toward developing countries, improving their positions
as treaty participants.
Dillon Round (1962): 26 countries. Tariff reductions.
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).
Tokyo Round (1979): 102 countries. Reduced non-tariff trade barriers.
Also reduced tariffs on manufactured goods. Improvement and extension
of GATT system.
5.
6.
7.
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,
Indias 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.
2.
Free Trade Zone

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 80s
has almost completely removed poverty in those countries. We forgot the basic
maxim that charity never makes anyone rich. Dont 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 fallout 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.

Business Environment 2

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Mgmt study material created/ compiled by - Commander RK Singh

Lecture Date: 06 Aug 05

Business Environment By Suresh Bedi

Business Environment By Raj Agrawal (Second Edition)

Business Environment By Francis Cherunilam (15th Edition 2004)

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

Study of this subject is basically sensitisation to the external environment

Page 1 of 55 - Business Environment

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

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

Page 2 of 55 - Business Environment

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

Domestic macroeconomic environment

External Public Relations Environment

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

International Geo Political Environment

Let us examine the economic environment prevailing in the country since

Money lenders were other exploiters. There were professional money

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

of a slightly contrarian view. He believed in self sufficiency of Indian Villages not

Bolshevik or Russian Revolution of 1917 which was headed by

Pt Nehru had studied first in Harrods and then in Oxford

Page 6 of 55 - Business Environment

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

Institute, Calcutta. He is credited with converting Nehrus idea into a proper

Investment in Capital Goods Industry is primary requirement as those

Required technology for Heavy and Basic industries was not

Technical manpower not available. - While technology was not there,

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

Page 8 of 55 - Business Environment

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

strict norms of gradually increasing indigenous content in those products were

Page 11 of 55 - Business Environment

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

deficiency of revenue and lead to further borrowing to fund those shortages

Projects were approved more on political expediency than its

Corruption was another reason for cost overrun. In the economic

New projects approved beyond the financial capability of the govt

Foreign Exchange Situation

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

expenses of students in foreign universities, medical expenses of people in foreign

Collapse of Soviet Union.

Collapse of Trading arrangement with 2nd World

Flight of Capital. Those were the days when Indian polity

Jamnalal Bajaj Institute of Mgmt Studies

Mgmt study material created/ compiled by - Commander RK Singh

Crash of Credit Ratings.

Eradicate the monopolies whether in private sector like in Car

Multiplicity of players in the same segment needed Regulators to