BUSINESS ENVIRONMENT

Self Instructional Material

Jaipur National University

Directorate of Distance Education
_________________________________________________________________________________
Established by Government of Rajasthan
Approved by UGC under Sec 2(f) of UGC ACT 1956
(Recognised by Joint Committee of UGC-AICTE-DEC, Govt. of India)
 BUSINESS ENVIRONMENT

Business Environment- Nature, components and significance. Factors effecting environment of

Business. Economic factors its components. Cultural, Political, Social, Sovereignty,
Technological factors and their impact on business. Legal environment and external factors
influencing Business environment. International Business Environment, challenges.

Indian Economic Systems - Assessing current state of business environment in India, Economic
planning with reference to public, private and cooperative sectors. Various Industrial Policies of
India with special emphasis on new industrial policy with various amendments. Foreign Trade
Policy, Fiscal Policy and Tax System in India, Monetary policies.

Economic Reforms: Liberalisation, Privatisation and globalization and their Impact.

Competition Act and its impact on Indian business. Foreign Direct Investment in India, Impact of
WTO in India, Public Sector s: Rationale and Role played by them since independence.
Disinvestment- Meaning and various loopholes in and challenges to disinvestment programme,
Multi National Enterprises and their role in India.

Small Scale Enterprises: Meaning, Importance to the Indian economy, problems and various
incentives given to these.

International Trade: Various Trade Reforms announced in India in recent times. Balance of
Payments, Foreign Direct Investment- Importance, policy and current position of India. EXIM
Policy. World Trade Organisation and its impact on Indian Business.
 Unit-1 Business Environment

CONTENTS
Objectives
Introduction
1.1 Meaning of Business Environment
1.2 Factors Affecting Environment of Business
1.3 Economic Factors
1.4 Economic Components and its Impact on Business
1.5 The Legal Environment
1.6 External Factors Influencing Business Environment
1.7 International Business Environment
1.8 Summary
1.9 Keywords
1.10 Self Assessment Questions
1.11 Review Questions

Objectives
After studying this chapter, you will be able to:
Understand the meaning of business environment
Define factors affecting environment of business
Explain economic factors
Understand economic components and its impact on business
Define legal environment
Explain external factors influencing business environment
Understand international business environment
Introduction
Business Environment encompasses all those factors that affect a company‟s operations, and includes
customers, competitors, stakeholders, suppliers, industry trends, regulations, other government activities,
social and economic factors and technological developments.
Understanding the environment within which the business has to operate is very important for running a
business unit successfully at any place. Because, the environmental factors influence almost every aspect
of business, be it its nature, its location, the prices of products, the distribution system, or the personnel
policies. Hence it is important to learn about the various components of the business environment, which
consists of the economic aspect, the socio cultural aspects, the political framework, the legal aspects and
the technological aspects etc. In this chapter, we shall learn about the concept of business environment, its
nature and significance and the various components of the environment. In addition, we shall also
acquaint ourselves with the concept of social responsibility of business and business ethics.

The formula for business success requires two elements the individual and the environment. Remove
either value and success becomes impossible. Business environment consist of all those factors that have
a bearing on the business. The term business environment implies those external forces, factors
and institutions that are beyond the control of individual business organizations and their management
and affect the business enterprise. It implies all external forces within which a business enterprise
operates. Business environment influence the functioning of the business system. Thus, business
environment may be defined as all those conditions and forces which are external to the business and are
beyond the individual business unit, but it operates with in it. These forces are customer, creditors,
competitors, government, socio-cultural organizations, political parties national and international
organizations etc. some of those forces affect the business directly which some others have indirect effect
on the business

1.1 Meaning of Business Environment

Business depends on adapting itself to the environment within which it functions. For example, when
there is a change in the government polices, the business has to make the necessary changes to adapt it to
the new policies. Similarly, a change in the technology may render the existing products obsolete, as we
have seen that the introduction of computer has replaced the typewriters; the colour television has made
the black and white television out of fashion. Again a change in the fashion or customers‟ taste may shift
the demand in the market for a particular product, e.g., the demand for jeans reduced the sale of other
traditional wear. All these aspects are external factors that are beyond the control of the business. So the
business units must have to adapt themselves to these changes in order to survive and succeed in business.
Hence, it is very necessary to have a clear understanding of the concept of business environment and the
nature of its various components.

The term „business environment‟ connotes external forces, factors and institutions that are beyond the
control of the business and they affect the functioning of a business enterprise. These include customers,
competitors, suppliers, government, and the social, political, legal and technological factors etc. While
some of these factors or forces may have direct influence over the business firm, others may operate
indirectly. Thus, business environment may be defined as the total surroundings, which have a direct or
indirect bearing on the functioning of business. It may also be defined as the set of external factors, such
as economic factors, social factors, political and legal factors, demographic factors, and technical factors
etc., which are uncontrollable in nature and affects the business decisions of a firm. Totality of external
forces: Business environment is the sum total of all things external to business firms and, as such, is
aggregative in nature.
Specific and general forces: Business environment includes both specific and general forces. Specific
forces affect individual enterprises directly and immediately in their day-to-day working. General forces
have impact on all business enterprises and thus may affect an individual firm only indirectly

1.1.1 Nature of Business Environment Nature/Features of Business Environment

On the basis of the above discussion the features of business environment can be summarized as follows:
1. Business environment is the sum total of all factors external to the business firm and that greatly
influences their functioning.
2. It covers factors and forces like customers, competitors, suppliers, government, and the social,
cultural, political, technological and legal conditions.
3. The business environment is dynamic in nature that means, it keeps on changing.
4. The changes in business environment are unpredictable. It is very difficult to predict the exact
nature of future happenings and the changes in economic and social environment.

Did You Know?

Business environment differs from place to place, region to region and country to country. Political
conditions in India differ from those in Pakistan. Taste and values cherished by people in India and China
vary considerably.

1.1.2 Components of Business Environment

Generally Business refers to those activities that are related to the buying and selling of goods. Business
Environment consists of all those factors that have a bearing on the business.
The survival and success of a business firm depend on its strength, resources at its command, including
physical resources, financial resources, human resources, skill and organization and its adaptability to the
environment and the extent to which environment is favourable to the development of the organization.
The survival and success of a fir, thus, depend on two sets of factors, viz., and the internal factors the
internal environment and external factors the external environment.

Some of the external factors have a direct intimate impact on the firm (like the suppliers and distributors)
of the firm. These factors are classified as microenvironment also known as task environment and
operating environment. These are other external factors which effect an industry very generally (such as
industrial policy, demography factors etc.). They constitute what is called macro-environment, general
environment or remote environment.
Business environment consists of two environments:
o Internal (micro) environment
o External environment
 Market environment
 Macro environment

or Micro Environment

Market Environment

Figure: 1.1 Components of Business Environment

1.1.3 Significance of Business Environment Significance/Importance of Business Environment
The interaction between the business and its environment helps in identifying the opportunities for and
threats to the business. It opens up new frontiers of growth for the business firms. Environmental analysis
makes the task of managers easier in dealing with business challenges. There is a close and continuous
interaction between the business and its environment. This interaction helps in strengthening the business
firm and using its resources more effectively. The business environment is multifaceted, complex, and
dynamic in nature and has a far-reaching impact on the survival and growth of the business. To be more
specific, proper understanding of the social, political, legal and economic environment helps the business
in the following ways:

Determining Opportunities and Threats

The interaction between the business and its environment would identify opportunities for and threats to
the business. It helps the business enterprises for meeting the challenges successfully.
Giving Direction for Growth
The interaction with the environment leads to opening up new frontiers of growth for the business firms.
It enables the business to identify the areas for growth and expansion of their activities.
Continuous Learning
Environmental analysis makes the task of managers easier in dealing with business challenges. The
managers are motivated to continuously update their knowledge, understanding and skills to meet the
predicted changes in realm of business.
Image Building
Environmental understanding helps the business organizations in improving their image by showing their
sensitivity to the environment within which they are working. For example, in view of the shortage of
power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own
requirement of power.
Meeting Competition
It helps the firms to analyze the competitors‟ strategies and formulate their own strategies accordingly.
Identifying Firm’s Strength and Weakness
Business environment helps to identify the individual strengths and weaknesses in view of the
technological and global developments.

Task
Prepare a flow chart for components of business environment of any organization.

1.2 Factors Affecting Environment of Business

Business, now-a-days is vitally affected by the economic, social, legal, technological and political factors.
These factors collectively form business environment. Business environment, as such, is the total of all
external forces, which affect the organization and operations of business. The environment of an
organization has got internal, operational and general lives managers must be aware of these three
environmental levels and their relationship and importance.

The term 'business environment implies those external forces, factors and institutions that are beyond the
control of individual business organizations and their management and affect the business enterprise. It
implies all external forces within which a business enterprise operates. Business environment influence
the functioning of the business system. Thus, business environment may be defined as all those conditions
and forces which are external to the business and are beyond the individual business unit, but it operates
within it. These forces are customer, creditors, competitors, government, socio-cultural organizations,
political parties national and international organizations etc. some of those forces affect the business
directly which some others have indirect effect on the business.
Business environment as such are classified into the following three major categories, they are:
Internal environment
Operational environment
General/external environment
Both internal and operational environment are the creation of the enterprise itself. The factors of external
or general environment are broad in scope and least controlled and influenced by the management of the
enterprises.
The following list is however a comprehensive and integrated list of all possible economic factors that
affect the working of business organizations.
Econmic Factors affecting the Business organization
1.2.1 Demand and Supply
The demand and supply are two principal factors that affect the working of any business model. The
demand is the will and ability of consumers to purchase a particular commodity and the supply is the
ability of the business to provide for the demand of consumers. It must be noted that all the factors that
are included in this list are inter-connected.

1.2.2 Marginal and Total Utility

Utility is the amount of satisfaction that is derived by consumers from consumption of goods. It so
happens that after continuous and successive consumption of units of the same goods, the satisfaction that
is experienced by consumer starts decreasing. This often results into short term or long term fall of sales.
Some organizations prepare for the launch of another brand before the fall in utility and sales are
experienced. The launch of new brand ensures that the revenue trend of the business does not fall.
Diminishing utility is among the external factors affecting business.

1.2.3 Money and Banking

Banking facilitates monetary and fiscal policies that affect business and also the customers of the
business. Money in circulation dictates the paying power or rather the demand of the consumers and the
banking facility dictates the borrowing capacity of individuals as well as the business.

1.2.4 Economic Growth and Development

Economic growth dictates the amount of finances that the society at large is earning and development
indicates the volume of money that is being invested into channels of long term up-gradation. Among all
the economic factors affecting business environment, development is the most important one, as the
business has to cater to the demand of an economically dynamic society.

1.2.5 Income and Employment

Another very important aspect of the economy that affects the working of the business is the level of
employment and rate of income. The per capita income and density of employment dictates the rate of
demand, density of demand and also the purchasing power of the people.

1.2.6 General Price Level

Another very important aspect of the economy that affects the business is the general price levels of the
commodities that also affect the sales of the business. Costs of raw materials, paying power of people,
cost of production and finally, cost of transport are some of the important components that determine the
general price level and also, the sales of the firm.
1.2.7 Trade Cycles
Trade cycles are the fluctuating costs of goods and commodities in an economy. Rise, stability, continuity
and fall are some of the important cycles that affect the prices off all goods such as raw material, credit,
final goods, etc. Trade cycles also many a times affect the general price level.

1.3 Economic Factors

A nation's economy can be highly volatile and is often a function of a variety of factors. In a strong
economy, unemployment is low and consumers enjoy increased spending power. In a struggling
economy, more people are out of work and consumer confidence dwindles. As confidence decreases, less
money goes back into the economy, causing businesses to become less profitable and jobs to disappear.

1.3.1 Supply and Demand

Supply and demand impacts a nation's gross domestic product (GDP), which is the combined dollar value
of all goods and services produced by a country in a given year. The high demand for personal computers
in India led to an increase in the supply of computers, which contributed to an increase in GDP during
that time. The higher the demand for goods and services, the greater the need for workers to produce
them, leading to economic growth.

1.3.2 Interest Rates

Fluctuation in interest rates can have an impact on consumer purchasing. Then interest rates are high,
consumers may be less inclined to borrow money to buy a new home or car. People who have adjustable-
rate home mortgages can face financial hardship or even lose their homes when interest rates spike.
Retirees who live largely off investment income may need to lower their standard of living when interest
rates decline.

1.3.3 Inflation
Higher inflation is typically accompanied by higher prices, so consumers may be less willing to buy non-
essential or luxury items. If wages do not rise at the same rate of inflation, people actually lose money.
When inflation rises, the value of the dollar decreases, so consumer buying power drops accordingly. The
changing of national monetary policy, such as adjusting the prime interest rate or putting more money
into circulation can influence inflation, but such changes can take one to three years to have a major
impact.

1.3.4 Unemployment
The rate of unemployment can have a major effect on the economy. The more people who are out of work
the less money that is circulated into the economy through the purchase of goods and services. Even the
threat of unemployment has an impact, as workers who fear losing their jobs are less inclined to spend or
invest their money. Unemployment increases near the end of an economic downturn, since companies
typically try to avoid lying off workers off until it becomes necessary.

1.3.5 Foreign Exchange Rate

A nation's foreign exchange rate is the value of its currency in the international market. When the value of
the dollar is high in relation to other countries' currencies, the more goods and services we are able to
import. In contrast, a higher value of the dollar means that other nations may be less inclined to import
products. Factors such as a rising trade surplus can increase the demands for a country's currency by
foreigners, thus strengthening the currency.
1.4 Economic Components and its Impact on Business
Economics studies the methods by which society allocates its resources, limited by nature, to achieve
societal outcomes. It does this by using a variety of theoretical approaches and studying the actions of the
various components that comprise an economy. Some economists depict an economy as comprised of
consumers, firms, markets and government.
The following components of economics:

1.4.1 Cultural Environment

Culture is also part of the internal environment of business. As we have said, although business cannot be
isolated from the wider culture it does to some extent constitute a discrete sphere of activity with
distinctive roles, attitudes and behaviours. It follows from this that the culture of a business organization
can be an important factor influencing its success or failure, and that happing this culture is a key
managerial task. Organization culture may even be seen as a managerial tool (though arguably not a
precision instrument). The workplace may be seen as an arena in which competition between rival value
systems is played out. For example, an „us and them‟ culture characterized by a confrontational
relationship between management and employees in some cases, by attitudes on both sides), may be
contrasted with a culture emphasizing shared interests, partnership and teamwork.

1.4.2 Political Environment

The political environment of a country is influenced by the political organizations such as philosophy of
political parties, ideology of government or party in power, nature and extent of bureaucracy influence of
primary groups etc. political stability in the country, foreign policy, Defence and military policy, image of
the country and its leaders in and outside the country. The political environment of the country influences
the business to a great extent. For example, the Government of India, bottling and sale of Coca-cola was
discontinued in India in the late seventies following policy of restricting the growth of multinationals in
Indian markets. But, its entry was allowed under the New Industrial policy of 1991. Under this new
policy, government allowed liberalized licensing, imports and exports, inflow of foreign capital and
technology on more liberal terms. The trend towards globalization and signing of GATT in 1993 has
posed new challenges before Indian business.

1.4.3 Social Dimensions or Environment

The social dimension or environment of a nation determines the value system of the society which, in turn
affects the functioning of the business. Sociological factors such as costs structure, customs and
conventions, cultural heritage, view toward wealth and income and scientific methods, respect for
seniority, mobility of labour etc. have far-reaching impact on the business. These factors determine the
work culture and mobility of labour, work groups etc. For instance, the nature of goods and services to be
produced depends upon the demand of the people which in turn is affected by their attitudes, customs, so
as cultural values fashion etc. The social groups such as trade unions or consumer forum will intervene if
the business follows the unethical practices. For instance, if the firm is not paying fair wages to its
business in indulging in black marketing or adulteration, consumer‟s forums and various government
agencies will take action against the business.

1.4.4 Sovereignty Dimensions or Environment

The sovereign state has many features that recommend it as the best agent to serve as environmental
regulator. States have a moral claim to legal and physical authority within their borders. They are capable
of creating and enforcing binding laws and of holding both individuals and companies responsible for
their actions in a non-arbitrary way. States are continuous, accessible institutions that can be contacted by
other states and international organization, and taken to task for their mistakes. Perhaps most importantly,
the concept that each state is sovereign is necessary for the drafting of international agreements between
equals and the expectation that those agreements will be carried out. A clear contracting party exists
when, for example, Canada ratifies an international environmental protocol. Far from precluding the
possibility of international cooperation, in most cases national sovereignty is an essential prerequisite for
it.

To begin to assess the role of the state in environmental decision-making, it is worthwhile to consider the
question with regards to domestic environmental policies. Particularly in democratic states, there has been
a correlation between economic development and the demand for more rigorous environmental controls.
One need only consider the toxicity of the Thames River today with that which it had during the initial
stages of industrialization to understand that development can lead to improved environmental standards
and conditions. The example is important internationally, and from a perspective of justice, because one
must consider the fact that today‟s industrialized nations have had the chance to pass through a highly
polluting phase in order to reach a level of comparative cleanliness today. Luckily, today‟s developing
countries do not have to endure the same errors as were committed by others during their
industrialization. Also, they have access to numerous cleaner technological options as the result of science
done largely in the developed world. Still, in the interests of fairness, it is important that developing
countries be allowed to make the same kind of choices that the developed world had the ability to make
previously. While superior scientific knowledge about the environmental impact of particular choices
should certainly be considered in formulating the environmental policies of developing nations, it should
not necessarily be the case that standards identical to those in the rich world are the most moral choice. If
a relatively brief and dirty period of industrialization can lead to a significant improvement in the lives of
current and future generations, such a one-off „investment‟ might be justifiable. By being able to gauge
the particular needs of their citizens, especially in the case of democratic states, the governments of
nations are best placed to tailor policies to their condition. In so doing, they have the opportunity to
maximize the likelihood of their citizens living good lives. That freedom is one that should not lightly be
cast aside.

1.4.5 Technical Environment

The business in a country is greatly influenced by the technological development. The technology
adopted by the industries determines the type and quality of goods and services to be produced and the
type and quality of plant and equipment to be used. Technological environment influences the business in
terms of investment in technology, consistent application of technology and the effects of technology on
markets. In India, advancements in automation and information technology have posed the challenging
situation for the organization in future.

Caution:
Superior scientific knowledge about the environmental impact of particular choices should certainly be
considered in formulating the environmental policies of developing nations.

1.5 The Legal Environment

The international legal framework is somewhat confused. Most controls or regulations revolve around
export and import controls, transfer pricing, taxes, regulation of corrupt practices, embargoed nations,
antitrust, expropriation and distribution of equity, patents and trademarks. The following touches on a
number of these issues and in particular the import/export regulations (terms of access):
1.5.1 International Law
To many, the supreme body is the International Court of Justice, situated in The Hague, Holland. Here a
number of international disputes may be taken for ultimate adjudication. However, a series of other
bodies and legislation exists.
a) FCN (Friendship, Commerce and Navigation) and Tax Treaties primarily concerned with giving
protection of trading rights and avoiding double taxation.
b) IMF and GATT concerned with member nation‟s international trade restrictions and dumping.
c) UNCITRAL (UN) international trade law commission set up with the intent to provide a uniform
commercial code for the whole world, particularly international sales and payments, commercial
arbitration and shipping legislation. Works with international chambers of commerce and Governments.
d) ISO (International Standards Organisation) often works with ILO, WHO etc. and contains technical
committees working on uniform standards.
e) Patents and trademarks there is no such thing as international patent. The most important patent
agreement is the International Convention for the Protection of Industrial Property, first signed in 1983
and now honoured by 45 countries. The treaty provides that if a filee files in a signatory country within
one year of the first filing, the filee will be afforded the date of the first filing for priority purposes.
A patent cooperation treaty (PCT) and a European Patent Convention are also in effect. The PCT has 39
countries including the USA, Japan and Brazil. The EU convention covers 15 countries and gives patent
protection in all 15 if signified in one.
f) Air transport is covered mainly by IATA (International Air Transport Authority), ICAA (International
Civil Aviation Authority) and ITU (International Telecommunication Company).
g) Codes of conduct, like those in the OECP, are not technical law but important. Member countries
produce guidelines for multinational enterprises covering aspects of general policy, disclosure of
information, competition, financing, taxation, employment and industrial relations.
h) Recourse arbitration is an attempt to reduce disputes by consultation. Some of the most widely used are
the International Chamber of Commerce, the American Arbitration Association, the London Court of
Arbitration and the Liverpool Cotton Exchange.

1.5.2 Marketing Implications

The implications of international law on marketing operations are legion. The principle ones are as
follows:
Product decisions physical, chemical, safety, performance, packaging, labelling, warranty
Pricing decisions - price controls, resale price maintenance, price freezes, value added systems and
taxation
Distribution contracts for agents and distribution, physical distribution, insurance
Promotion - advertising codes of practice, product restriction, sales promotion and,
Market research collection, storage and transmission of data.
Other areas affected are obviously in currency and payments.

Task
Explain the five international laws of business environment.

1.5.3 Different Legal Systems

The legal systems of most of the non-socialist countries can be grouped into common law and code law.
Common law is generally based on precedents or past practices while a code, which is a comprehensive
set of volumes having statutory force and covering virtually the whole spectrum of the country's law, is
established by arbitrary methods e.g. a speed limit of 80 kph or a three-day period for cancelling a
contract.
Contracts
Central to all commercial activities is the contract. The purpose of a contract is to specify the respective
rights and obligations of the parties to an agreement and outline specific procedures or actions that must
take place. In this way, the possibility of disputes arising between the parties is reduced. In the context of
international business, with its inherent risks and complexities, contracts assume a vital role. The
principal legal arrangement underlying an export transaction is the export sales contract. However, when
a company obtains materials from a local supplier, engages the services of a freight forwarder or insurer,
or concludes agreements with carriers, e.g. shipping lines, airlines and domestic road hauliers, it is also
entering contracts.

In many cases, a contract is entered into once agreement has been reached. It is important to agree at the
beginning of the negotiations that all agreements are reduced to writing before contracts are formalised.
When an international commercial dispute occurs, the problem must be settled in one of the countries
involved according to the laws and regulations of that country unless the contract states otherwise. If the
dispute cannot be settled amongst the parties involved, resolution can possibly be obtained through
arbitration (i.e. through negotiations facilitated by an independent third party). Where the process of
arbitration fails, for one reason or another, the option of litigation, i.e. going to court, might be
considered. Disputes that go to court usually involve large monetary transactions or the ownership of
patents, copyright or physical property. Court actions can take from a few months to several years and can
involve large expenditure in legal fees and lost revenues.
Whose system of law is applicable at a particular stage of an international business transaction depends,
inter alia, on the nature and terms of the agreement.

International Law
Buyers and sellers are at times also subject to international law, which may be defined as that body of
rules which regulates relationships between countries or other international legal persons.
The principal sources of international law are treaties and conventions. These are created when several
countries reach agreement on a certain matter and bind themselves to it by authorising their
representatives to sign a document embodying that agreement. Essentially, they have entered into a
contract that obliges them to do something or to refrain from doing something. Failure to comply is the
equivalent of breach of contract.

Before a country is liable to comply with the provisions of a treaty or a convention, it must have signed
the original protocol (i.e. the original treaty document or minutes of the convention). Once a country has
signed the protocol, the method of enforcement depends on the terms of the treaty or convention. A
common way of bringing a defaulting country to heel is by imposing sanctions against it. Sanctions may
take many different forms and can be applied with varying degrees of severity. Obviously, the more
parties there are to the protocol, the easier it is to enforce by virtue of the weight of opinion and the
efficacy of any measures that can be taken against an offender.

There has been no treaty or convention whereby countries have bound them to the use and meaning of
Incoterms. The Incoterms have been published merely as an aid to international trade. Some countries
have incorporated the Incoterms in their domestic laws by legislation but, in most cases, they are merely a
guide. However, their usage has, largely, become a norm in international trade.
Exporters need to be able to recognise the legal significance of their actions in the general course of
marketing and export-related activities. Potentially costly errors will be avoided and should develop
greater confidence in conducting negotiations at both a domestic and international level.
Did You Know?
International law plays an important role is in controlling the use of the sea and the environment outside
the territorial waters of countries.

1.6 External Factors Influencing Business Environment

A business does not operate in a vacuum. It has to act and react to what happens outside the factory and
office walls. These factors that happen outside the business are known as external factors or influences.
These will affect the main internal functions of the business and possibly the objectives of the business
and its strategies.
It refers to the environment that has an indirect influence on the business. The factors are uncontrollable
by the business. There are different types of external environment:

1.6.1 Micro Environment

The micro environment is also known as the task environment and operating environment because the
micro environmental forces have a direct bearing on the operations of the firm.
The micro environment consist of the actors in the company‟s immediate environment that affect the
performance of the company. These include the suppliers, marketing intermediaries, competitors,
customers and the public. The micro environmental factors are more intimately linked with the company
than the macro factors. The micro forces need not necessarily affect all the firms in a particular industry
in the same way. Some of the micro factors may be particular to a firm. When the competing firms in
an industry have the same micro elements, the relative success of the firms depends on their relative
effectiveness in dealing with these elements.

1.6.2 Suppliers
An important force in the micro environment of a company is the suppliers, i.e., those who supply the
inputs like raw materials and components to the company. The importance of reliable source/sources of
supply to the smooth functioning of the businesses obvious.

1.6.3 Customer
The major task of a business is to create and sustain customers. A business exists only because of its
customers. The choice of customer segments should be made by considering a number of factors
including the relative profitability, dependability, stability of demand, growth prospects and the extent of
competition. Competition not only include the other firms that produce same product but also those firms
which compete for the income of the consumers the competition here among these products may be said
as desire competition as the primary task here is to fulfil the desire of the customers. The competition that
satisfies a particular category desire then it is called generic competition

1.6.4 Marketing Intermediaries

The marketing intermediaries include middlemen such as agents and merchants that help the company
find customers or close sales with them. The marketing intermediaries are vital links between the
company and the final consumers.

1.6.5 Financiers
The financiers are also important factors of internal environment. Along with financing capabilities of the
company their policies and strategies, attitudes towards risk, ability to provide non-financial assistance
etc. are very important.
1.6.6 Public
Public can be said as any group that has an actual or potential interest in or on an organization‟s ability to
achieve its interest. Public include media and citizens. Growth of consumer public is an
important development affecting business.

1.7 International Business Environment

International Business Environment is about the economics and politics of the nation in a global
economy. We will study the political and economic forces that shape production, trade flows, capital
flows, interest rates, exchange rates, and other variables that create the global economic landscape. The
course is also about firm-level decisions in the face of these global forces.

One of the most striking features of business growth in the latter half of the twentieth century has
been an increase in growth across national borders. At its simplest the need to buy and sell across borders
is motivated by the fact that no country is entirely self-sufficient. Increased business activity and growth
has stimulated increased demand for goods, services and factors of production. In the event that such
commodities cannot be satisfied from within national borders, foreign suppliers are sought to meet the
demand. Various favourable factors came together in the years following the Second World War which
served to greatly intensify the internationalization of business. Today, the millions of international trading
relationships across the world mean that international business affects, in one way or another, almost
every individual and organisation. This may be either directly through such things as imports or exports,
or indirectly through the use of foreign currency or foreign goods and services.

1.7.1 Factors that have Stimulated Increased Internationalization

How then can we explain the growth in business across national borders? Like many phenomena in
business, it has several contributory factors. Some of the most important are discussed below:

The Communication “Revaluation”

The twentieth century has been distinguished by a number of outstanding innovations in communications
technology. Since the industrial revolution in the late eighteenth century, the pace of change has
accelerated as new technologies have been developed. Whereas previously the fastest method of reliable
communication was the galloping horse, information travelling at the speed of light can now circulate the
earth several times in less than 1 second. Furthermore, in addition to the enormous speeding up of
communications, an unprecedented number of people all over the world now have access to channels of
advanced means of communication. Communications can thus reach many more people than ever before
at almost instantaneous speed. The changes in communications technology have been so marked that the
term the „communications revolution‟ has been coined to describe it.

Over recent years, communications technology has grown in line with developments in computer
technology and satellite transmission capabilities. The „digitisation‟ of all First World telephone systems
in the late 1980s and early 1990s enabled telephony to be combined with computers and the
communication revolution continued apace into the twenty-first century with „3G‟ (third generation)
mobiles combining the easy access and flexibility of mobile telephony with the power of the Internet.
New generations of telecommunications‟ users are fast developing applications for the sophisticated
communication technology. For example, witness the growth and establishment of e-mail and mobile
telephony as the natural way of life, as evidenced by the dramatic rise in text messaging and music
downloads.
The absence of a fixed-line infrastructure is a particular advantage in boosting the growth of modern
telecommunications in Third World countries with major implications for trade and economic
development. The mass media, particularly the medium of television has also enjoyed expansion coupled
with reductions in the real price (i.e. after inflation) of technology. This has offered business the
opportunity to advertise and communicate with billions of people worldwide in a way that was not
possible earlier.

Improved transport and related infrastructure

In a similar vein to advances in electronic communication, physical transport of goods has become faster
and more reliable through innovations in both vehicular transport and in the infrastructure it uses. The
growth and improvements in motorcar technology has signalled a huge growth in independent transport
whilst the construction of fast motorway systems has made transport by road faster and safer. However,
increasing volumes of traffic with consequent time-consuming congestion have stimulated a trend in the
transferral of freight haulage from the roads to the rail network. The rapid loading and unloading of ships
together with electronic inventory management in shipping services have increased the usefulness of
shipping as a means of goods passage between countries. Airline activity has continued to grow at a fast
rate, with the revenue of £20.5 billion generated by UK airlines in 2010. This demonstrated a rise of 6.3%
over the previous year and indicated a positive upward trend following the global reduction in long-haul
air travel between 2008 and 2011, in the aftermath of 11th September 2008. Also, during that period, the
long-haul, business travel oriented airlines experienced significant reductions in business as a result of
effects of the outbreak of foot-and-mouth disease in the UK and the SARS in Asia.

Did You Know?

The growth of „global‟ brands, such as Coca Cola and the Big Mac is due in part to the promotions made
possible by mass communications.

1.7.2 Challenges of International Business Environment

The globalisation of business and commerce has become an increasingly significant reality worldwide: in
2010, the global trade in goods and services reached 25% of world GDP, while in terms of manufactured
goods, international trade has multiplied by more than 100 times since 1955. The rise of globalisation
posits a number of important challenges to a business seeking international presence. Numerous strategic
aspects must be taken into account prior to commitment at an international level, and afterwards. Constant
flexibility is required to adapt to changing patterns at local, regional and international levels.

Globalisation in the International Business Environment

Definitions of globalisation refer to it as “growing economic interdependence among countries as
reflected in increasing cross-border flows of three types of commodities: goods and services, capital, and
knowhow” or as “the closer integration of the countries and peoples of the world ...brought about by the
enormous reduction of costs of transportation and communication, and the breaking down of artificial
barriers to the flows of goods, services, capital, knowledge, and people across borders"
Globalisation has significantly impacted on the business environment, prompting the development of the
multi-national enterprise (MNE). The governance of the MNE is recognised as being different than that of
a national company.

Strategic Choices for International Business

Beginning with the pioneering work of Perlmutter, numerous scholars have emphasised the importance of
adopting a global strategic approach to business. However, the optimal strategy for tackling global
markets has been a matter of dispute. Often scholars propose an evolutionary view of strategy, which goes
from a simple international strategy to sophisticated transnational solutions. Under the international
strategy framework, international business is not a core interest of the firm. The company simply decides
to “go international” and often sets up an international division that deals with the non-domestic business
of the company. As the international business develops, the company may decide to source some
components from overseas, and to standardise some of its products. As a company‟s international
presence increases, often a multi-domestic or localisation strategy develops. Under this strategy, the
company sets up subsidiaries in several countries, which tend to operate independently from each other
and often relatively independently from the headquarters .This type of strategy emphasises local
responsiveness, but this is often achieved at the expense of costs and possibly quality.

When MNEs grow in size, they could reach a level where „global standardisation strategy‟ may be a
strategic choice. The global strategy was promoted by Levitt, who considered that globalisation naturally
results in uniformity of consumer taste. In this framework, a company could achieve significant
economies of scale by producing the same standard product at a global level. In addition to the global
strategy solution, many large MNEs with significant international presence may choose the transnational
strategy approach. In addition to overall strategic choices, a company seeking international business must
consider the method of accessing international markets. At a very simple level, a company may choose to
invest in foreign firms. A company could restrict itself to exportation of goods or to franchising, which is
type of quality or brand export. In more involved strategies, a MNE may choose to establish an equity
joint venture with a local or global company, or to create a whole-owned subsidiary.

Culture and the Costs of Doing Business

Culture is an elusive term that has received hundreds of definitions. Hofstede‟s influential definition is
that culture is “the collective programming of the mind which distinguishes the members of one human
group from another” Hofstede identified the main dimensions of culture that affect work practices in
different countries: Power distance, uncertainty avoidance, individualism vs. collectivism, masculinity vs.
femininity, long vs. short-term orientation.

Uncertainty avoiding countries tend to have solid legal frameworks and strict rules of doing business. In
such countries, thorough auditing tends to be carried out to ascertain compliance with rules. These
countries tend to have uniform accounting procedures and low disclosure levels. Coming from a different
cultural perspective, an international business may find it costly to adapt to the national standards and
rules of the country it wishes to do business in. Paradoxically, uncertainty avoidance can also translate
into unethical practices as persons seek to secure a more certain result through corruption. In terms of
entry modes into the country, businesses may find that uncertainty avoidant countries favour solid
frameworks such as established subsidiaries or local ownership, which are more costly and risky.
Masculinity vs. femininity also tends to influence business costs. For instance, high masculine cultures
have been associated with unethical practices. Feminine cultures could result in higher secrecy and
conservatism in accounting and finance.

Apart from Hofstede‟s aspects, religion has an important impact on doing business. For instance, Hill
noted that Islamic culture encourages private enterprise and the right to private property. This implies that
doing business in Islamic culture may have reduced political risks, whose prevention can become costly.

The Impact of Political Risk

The challenges faced by investors that result from some sort of government action, and sometimes
inaction. Political risk implies negative business consequences due to the behaviour of governments and
public sector organisations.
The most important political risk has been the threat of nationalisation. The extreme threat of
nationalisation sometimes takes milder forms as when, in times of crisis, some governments resort to
exchange rate controls. Other sources of political risk are wars or civil strife. However, Jones observes
that dramatic events such as wars, assassinations and sequestrations are rare in the international business
arena.

Another important political risk is represented by corruption practices. For instance, a company may lose
a contract because of a government‟s unethical dealings. To mitigate this risk, Transparency International
has created a corruption index that can be available to all interested.

Political risk can also translate in the change in tariff barriers, which make a company more or less
competitive globally. Other political risks are more mundane and include, as Jones points out,
government procurement policies, health and safety, environmental regulations, new standards, consumer
protection policies or technology transfer. Intellectual property rights as a political risk, since the legal
framework varies from country to country.
Customarily, the management of political risks has been divided into integrative and protective
techniques. Integrative techniques seek to integrate the company within the host society. Such measures
include local sourcing and employment, ownership sharing with government or local firms; training of
managers to ensure cultural sensitivity; cultivation of close ties to the government. The downside of
integrative techniques is the risk of a MNE embedding itself too much into local culture and losing its
worldwide optimisation.

Protective techniques attempt to discourage government interference or to minimise the losses in case
interference happens. A typical protective measure is political risk insurance .Too many protective
techniques can adversely affect companies as the government may identify it as a hostile entity.
Generally, to minimise political risk, companies can respond through political behaviour such as lobbying
the central government. Another solution is to negotiate a better deal with the government; for instance,
an investor can seek a reduction of tax levels in exchange for accommodating the government.

International Trade Theory

International Trade Theory dates back to Adam Smith‟s famous Wealth of Nations and David Ricardo‟s
comparative advantage model. In the early 20th century, trade theory has achieved its classical form
through the Heckscher-Ohlin (H-O) theory. According to the H-O model, relative factor endowments
determine a country‟s comparative advantage. Leontief found that empirically the H-O theory did not
work in the case of the US, which imported capital-intensive products, even though it was a capital-rich
country. This generated a long line of controversy as further researchers found arguments for and against
the Leontief paradox.

Empirical trade analysis has concluded that the traditional trade models must be adjusted to fit the trade
data. Such modifications should include technology differentials, home biases in consumption, trade costs
and distance and intermediate outputs. Trefler created a modified H-O model that accounted for a
difference in technologies and home bias. Rivera-Batiz and Oliva maintain that, once such model
modifications are introduced, the H-O model appears to hold fairly well. Davis and Weinstein and Trefler
and Zhu have achieved up to 74% correlation between predictions and measurements under the modified
H-O model. Despite this, the H-O model continues to fail to account for intra-industry trade and
increasing returns to scale in major industries.
The Product Cycle model introduced by Vernon creates a theory of product development, exports and
imports. Poh considered the model valid, although some refinement was needed. Later on, showed
empirically that, as Vernon predicted, more advanced countries do tend to grow faster and display higher
levels of economic activity than the less advanced ones.

Another assumption of international trade, the gravity theory, fares quite well in terms of empirical
testing. According to gravity model, the volume of trade between two countries is related to the size of
each country and the distance between the trading partners. Evidence confirms that the larger and richer
countries trade more with each other than with smaller countries.
Generally, it must be noted that the empirical analysis of international trade is currently experiencing a
revival. The adjusted H-O and the gravity theory are now fitting the real world trade much better than
earlier models.

National and International Accounting

Business accounting has historically developed on a national basis. As Walton et al point out, the
national differences are a reflection of the culture of the country where businesses operated. Moreover,
the national accounting principles seek to capture the respective economic circumstances of the country.
The „contingent‟ model of accounting evolution considers that accounting principles or laws are built in
response to a major national crisis, or pressure

In addition to culture, another variable of national accounting principles is represented by influences from
one‟s neighbours, major trading partners or culturally tied countries. Recently, the cross-border ties have
been a driver of accounting harmonisation, as countries become regionally integrated.
Similarly, accounting practices differ in accordance with the relationship between the business and its
shareholders. There are three established sources of capital: individual investors, banks and government.
For instance, the tradition of family-owned companies in Germany has created an environment of
professional secrecy which does not require high transparency.
Inflation accounting also differs amongst different countries. As the world is becoming more and more
globalised, there have been increasing efforts toward harmonisation of accounting. Currently, the idea of
convergence rather than standardisation of accounting have become the most popular. The drive toward
harmonisation is given by the need for efficient cross-border transactions, as well as reduction of burden
for multinational companies.

Harmonisation has been led by two main organisations: the International Accounting Standards Board
(IASB) and the European Union. The European Union‟s accounting principles are being developed
regionally and are enforced through Directives. By comparison, the IASB attempts to set global
accounting principles through voluntary compliance. The IASB has issued the IAS (international
accounting standards), which are now embraced by many multi-nationals. IAS has encountered several
difficulties, including the disagreements between the different participants, and particularly because of the
opposition of the US GAAP. However, the IAS is now emerging as a de-facto international standard.

Did You Know?

Individualism vs. collectivism is an important aspect that influences the costs of business. It has found an
important correlation between software piracy and individualism criterion. Collectivism has been
associated with unethical behaviour and corruption.

Case study: Business Process Modelling- Business Process Modelling (BPM) is a modern term and
methodology which has evolved through different stages and names, beginning during the 'division of
labour' of the late 1700s, when manufacturing first moved into factories from cottage industry. More
explanation is in the historical development of Business Process Modelling below.
Broadly the term 'business' in Business Process Model/Modelling/modelling is interchangeable with
'organisation'. Business Process Modelling is not only carried out in conventional businesses; the
methodology is increasingly applicable to all sorts of other organisations, for example government
agencies and departments, charities, mutual‟s and cooperatives, etc.
Confusingly, the acronym BPM can mean different things, some closely related to Business Process
Modelling; others less so. 'Business Process Management' is an example of a different and related
meaning.
Business Process Modelling is a method for improving organizational efficiency and quality. Its
beginnings were in capital/profit-led business, but the methodology is applicable to any organised
activity.

The increasing transparency and accountability of all organizations , including public service and
government, together with the modern complexity, penetration and importance of ITC (information and
communications technology), for even very small organisations nowadays, has tended to heighten
demand for process improvement everywhere. This means that Business Process Modelling is arguably
more widely relevant than say Time and Motion Study or Total Quality Management (to name two earlier
'efficiency methodologies') were in times gone by.
Put simply Business Process modelling aims to improve business performance by optimising the
efficiency of connecting activities in the provision of a product or service.
Business Process Modelling techniques are concerned with 'mapping' and 'workflow' to enable
understanding, analysis and positive change. Diagrams essentially 'flow diagrams' are a central feature of
the methodology.

The diagrammatical representation of Business Process Modelling is commonly called 'notation'. Many
and various proprietary software (off-the-shelf computer programs) exist to enable this, but the basic
principles of Business Process Modelling can also be applied using a pen and a table-napkin or a flip-
chart or a bunch of sticky notes, and in some cases these are still effective aids for creating and
communicating fundamental ideas. Computers sometimes get in the way, over-complicate simple things,
and exclude groups. So choose your devices wisely. Business Process Modelling generally needs support
from people to work in practice.
While Business Process Modelling relates to many aspects of management (business, organisation, profit,
change, projects, etc) its detailed technical nature and process-emphasis link it closely with quality
management and the analytical approaches and responsibilities arising in the improvement of quality.
Business Process Modelling is a quality management tool, like for example Six Sigma, and is useful
especially in change management.
SWOT Analysis, Balanced Scorecard and Project Management methods provide further examples of
change management tools, and Business Process Modelling can be regarded as working alongside these
methods.

The term Business Process Model (also abbreviated to BPM) is the noun form of Business Process
Modelling, and refers to a structural representation, description or diagram.

Questions
1. Explain the business process qualities and techniques.
2. What are the historical developments of Business Process Modelling?
1.8 Summary
The term „business environment‟ connotes external forces, factors and institutions that are beyond the
control of the business and they affect the functioning of a business enterprise.
The interaction between the business and its environment helps in identifying the opportunities for
and threats to the business.
Environmental analysis makes the task of managers easier in dealing with business challenges.
Supply and demand impacts a nation's Gross Domestic Product (GDP), which is the combined dollar
value of all goods and services produced by a country in a given year.
A nation's foreign exchange rate is the value of its currency in the international market.
The political environment of a country is influenced by the political organizations such as philosophy
of political.
The sovereign state has many features that recommend it as the best agent to serve as environmental
regulator.
The financiers are also important factors of internal environment.
The globalisation of business and commerce has become an increasingly significant reality
worldwide.

1.9 Keywords
Business environment: The environment within which the business has to operate is very important for
running a business unit successfully at any place.
Demand and Supply: The demand is the will and ability of consumers to purchase a particular
commodity and the supply is the ability of the business to provide for the demand of consumers.
Environment: An "environment" is the whole of surrounding things. Surroundings are defined by a
central entity. In ecology, environment refers to the surroundings of humankind.
Inflation: Inflation is typically accompanied by higher prices, so consumers may be less willing to buy
non-essential or luxury items.
Marketing Implications: The implications of international law on marketing operations are legion.
Micro Environment: The micro environment is also known as the task environment and operating
environment because the micro environmental forces have a direct bearing on the operations of the firm.
Sovereignty Dimensions: The sovereign state has many features that recommend it as the best agent to
serve as environmental regulator.
Trade Cycles: Trade cycles are the fluctuating costs of goods and commodities in an economy.

Lab Exercise
1. Give the example of Foreign Exchange Rate. And discuss the process of exchanging.
2. How international laws manage the legal international business. Explain with the example.

1.10 Self Assessment Questions

1. Demand and are two principal factors that affect the working of any business model.
(a) Supply (b) Elasticity (c) Consumer (d) None of these

2. Generally ..........refers to those activities that are related to the buying and selling of goods.
(a) Business (b) Organization (c) Company (d) None of these

3. Environmental analysis makes the task of managers easier in dealing with...............

(a) International work (b) Economic problem (c) Business challenges (d) None of these
4. A nation's foreign exchange rate is the value of its currency in the international market.
(a) True (b) False

5. ............... is also part of the internal environment of business.

(a) Culture (b) Economics (c) Science (d) Art

6. Buyers and sellers are at times also subject to international law, which may be defined as that body of
rules which regulates relationships between countries or other international legal persons.
(a) True (b) False

7. The micro environment is also known as the

(a) Task environment (b) Operating environment (c) Both (a) and (b) (d) None of these

8. International Business Environment is about the economics and politics of the nation in a ....
(a) Global economy (b) national economy (c) none of these (d) both (a) and (b)

9. The formula for business success requires elements ...................

(a) individual (b) environment (c) Both (a) and (b) (d) None of these

10. Business environment is the sum total of all factors external to the business firm and that greatly
influences their functioning.
(a) True (b) False
1.11 Review Questions
1. What you understand to business environment.
2. Give factors that effecting environment of business.
3. Explain the five economic factors of international economic.
4. Explain the components of economic and impact on business.
5. What you understand to legal environment. Give any example.
6. Differentiate between external factors and internal factors.
7. Give the discussion international business environment.
8. Explain the following.
(a) Components of economic
(b) Nature of business environment
9. Give the brief explanation of Interest Rates.
10. How Sovereignty Dimensions or Environment is used in economics.

Answers for Self Assessment Questions

1 (b) 2 (a) 3 (c) 4 (a) 5 (a)
6 (a) 7 (c) 8 (a) 9 (c) 10 (a)
 Unit-2 Indian Economic System

CONTENTS
Objective
Introduction
2.1 Current State of Business Environment in India
2.2 Essential Objectives of Economic Planning In India
2.3 Industrial Policies of India
2.4 New Industrial Policy
2.5 Foreign Trade Policy
2.6 Fiscal Policy
2.8 Monetary Policies
2.9 Summary
2.10 Keywords
2.11 Self Assessment Questions
2.12 Review Questions

Objective
After studying this chapter, you will able to:
Understand the current state of business environment in India
Discuss the objectives of economic planning in India
Explain about Industrial Policies of India
Discuss about new industrial policy
Explain about Foreign Trade Policy
Discuss Fiscal Policy
Understand various tax system in India
Explain about Monetary Policies
Introduction
The India Economic System was based on social democratic-based policies. The policies feature
protectionism, extensive regulation and public ownership which led to slow growth and corruption. But
the economy has moved to a market-based system with economic liberalization starting in 1991. The
growth rate of the economy increased in 2000's with healthier economic reforms and policies. India
became the second-fastest growing major economy in the world by 2008.
Around 54% of the GDP comprises the service industry while 29% is the industrial sector and 17% is the
agricultural sector. The main occupation in India is agriculture which employs 60% of the population.
Around 28% of the population is employed in the service sector and the rest 12% are in the industrial
sector. The work force amounts to half a billion workers.

2.1 Current State of Business Environment in India

The current position of business environment in India and how to overcome to these conditions are
discussed below:

To ensure basic education to all

Education is still a major challenge and India should expand their budget towards the education and to
make sure to provide at least basic education (high school) to all. VMW believes, expansion of education
budget is extremely important for India to sustain at a level of higher economic growth and to supply
quality human resource for the next generation.
Heavy investments in Social Infrastructure
Since Indian government has already committed to invest up to $1 trillion in infrastructure, however the
pace of development is very slow in proportion to the economic growth. Asia‟s third largest economy is
attracting billions of dollars in terms of portfolio investments and foreign direct investments and
transforming itself as a best investment and market destination for the investors but to keep up the
momentum, infrastructure development needs to step up moderately.
Invest in Entrepreneurism
Make India as a source of new innovation to lead the next generation. Indian government should start
focus on the entrepreneurism to give people a platform to exhibit their bright ideas which enables to
transform their ideas into the potential corporation.

Good times are, seemingly, ahead with the sustainable growth amid persisting higher inflation,
appreciation of currency against the US Dollar, trade gap and ameliorating tax policy. On the above key
stats, overspending or fiscal deficit for the fiscal year 2010–11 at 2.91% of the total GDP till Jun, 2010
and VMW estimated total fiscal deficit at 3.9 %. It is indeed lower than the budgeted estimates largely
supported by the auction of 3rd generation mobile technology spectrum, which yields the Indian
Government about $22 billion. Apparently, fiscal deficit (was a preliminary problem) is not a cause of
concern since the government is sitting on an ample amount of cash and could expand their spending on a
much-needed social infrastructure such as Unique Identification or UID system for the Indian citizens to
get them eligible for the several government schemes (prevailingly benefited for the lower-income group
people). Most importantly, however, on the other side, India‟s geo-political relations would be nagger,
which the VMW is seriously cogitating and seeing it as one of the major challenge for India going
forward. India as a “state” is a competitive economy and a representative political system. The recent
most sensitive judgment on Ayodhya‟s Disputed Land lawsuit filed by the several parties for the title of
land ownership has proved India‟s efficiency towards the system of justice, socio-economic, sustainable
security, stability in politics via quality leadership and signalling further strong civilization in the country,
which is extremely important for an economy which is attracting investments round the world.
Did You Know?
The Indian economy is the world's 12th largest according to market exchange rates. It is also the fourth
largest economy by purchasing power parity (PPP) basis from 1947 to 1991.

2.1.1 Debate Over Quantitative Easing 2 (QE2)

Economic challenges for the United States might be prodigious; however the recent policies should not be
a solution for the US to re-emerge from the painful unemployment situation in the country. The
overstated tone of the US President in the past few months have sparked a thought of “Protectionism”.
US, who is always known for its dynamic economy, biggest corporations and avant-garde entrepreneurs is
now becomes a propagandist towards the protectionism. Indeed, the United States is a pillar of the global
economy but there is an urgent need of consistent government policies to promote trade, tax holiday to the
smaller companies to improve employment opportunity and pacified business financing for smoother
function of business. For that purpose, central bank‟s involvement in every government policy is
desperately needed. In India, central bank, Reserve Bank of India have revised interest rates to curb rising
inflation but the inflation is not a concern for the industrialized economies and there is an urgent need of
expansion of money supply since there is no room for further rate cut as the central banks running on the
Zero Interest Rate Policy (ZIRP). The recent controversial move by the US Central Bank, Federal
Reserve to expand the country‟s money supply by purchasing treasury bonds worth $600 billion have
sparked the debate and facing dissent from the emerging nations like China, Brazil and the advanced
nations like France and Germany, however the Fed‟s move is absolutely best in the US‟ interest and it
should be keep in mind that the stability in the US economy is absolutely necessary for the global
economic growth. Although, it might be a problem for the emerging nations since they‟re worrying about
their economy being flooded with the fresh hot money, however this could be a solution for a continuous
stable recovery. Japan, the world‟s third largest economy, which is fighting against the sharp rise in Yen
(ISO 4217 Code: JPY) and Deflation, its central bank, Bank of Japan too has cut rates to around zero.
Bank of Japan also committed to buy $60 billion worth of Japanese securities, which is clearly giving the
signal of infusion of fresh money into the system, which is a bolster for the Japan‟s ailing economy.

Task
Explain the different zero interest rate policies of banks in India and in foreign countries?

2.1.2 India Economy 2011 Prospect with Global Economy in Contrast

India has never faced as worst situation as the western economies have faced. It was just an experience of
slower export, bad liquidity condition which hampered the developing economy to keep on the
spectacular growth. Now, Indian economy is prospering with its own sturdy domestic demand amid high
level of poverty. Corruption is still a matter of concern and mismanagement at the organization is also a
crucial part which is impacting the sustained economic growth. India‟s accounts reporting system is
letting tens of thousands of companies evading tax. India‟s tax department is losing almost $11 billion in
terms of tax revenue every year and unorganized sector is the major contributor to the tax evasion.
Despite of recent developments in the last 15 years, when the Indian taxation system has undergone
tremendous reforms, but lack of transparency in the tax policy is still leading to the higher loss of tax
revenue, which should be meliorate with the moderate tax policies. The recent debate over the
implementation of Direct Tax Code (DTC) from FY2012-13 would improve the tax laws and simplifies it
further. India still has a long way to bring taxation reforms in order to prop-up tax revenue to cut the
fiscal deficit because, year 2010 cannot be repeated again and again, where the government was able to
raise hunky amount of cash through the sale of 3rd generation mobile technology to the mobile operators
and most importantly, India was able to cut its overspending (fiscal deficit).
2.1.3 Liquidity Update: Stock of Money, Inflation and Overnight Lending Rates. India needs long
term foreign investment inflows.
Inflation in India is one of the principal subjects for the policy makers. Even inflation at 8% – RBI is at
sixes and sevens to fix the price crisis amid disquietude for the stable and target of double-digit growth
rate for the economy. While the food price inflation is over 16% and the wholesale price inflation is over
8%, it makes a fuss since both benchmarks are passé and needs to be reconstructed or revamped with
newer commodities. Government officials say, food prices will come down in the next few months, but is
there any hope for the same? Food prices are rising, thanks to the watchword of fastest growing economy,
since the domestic demand is rising without pause (and would continue to rise) and at the same time,
supply would not be able to conform to the rising demand. The rise in food prices are realistic and could
not seem to be pacify in the next few months, however the good monsoon this year might be a solution
for the rising food prices, though the RBI‟s monetary policy has different facet. RBI is fixing the inflation
problem by tightening the money supply and demand side problem (food price inflation index) cannot be
fixed straightaway. Consequently, going forward, inflation would continue to be problematic for the
central bank as it is not expected that the inflation would come down to below 5% in the next couple of
months due to volatility in commodity prices and strong local demand. RBI‟s policy stance would be
inflation hawk but it is not certainly pointing towards the consistent rise in interest rates. There are other
several measures, which are available with the central bank and it is expected that the RBI would target
the foreign inflows to certain extent to contain the swift appreciation in Indian Rupee (ISO 4217 Code:
INR) or sell enormous amount of Indian currency to impede further wild appreciation against the US
Dollar (ISO 4217 Code: USD). On the monetary situation, RBI, since Oct-2009, revising interest rates to
ensure that the excess liquidity in the market would not be use in risky assets since the economic recovery
is too fragile. The RBI has revised its policy rates by more than 300 bps and room for further tightening is
still available with the RBI. It is now clearly visible that the commercial banks have started borrowing
from the RBI‟s repo window and many of them have revised their lending rates and deposit rates to keep
up their capital adequacy ratio and sufficient liquidity for a proper credit growth for the sustainable
economic growth. Indian Economy so far has vastly exceeded expectations. Perhaps, the shining growth
would continue. Apparently, VMW has revised the GDP growth estimates at 10 % for the fiscal year
2012 and maintaining this growth rate. India could see the double-digit growth rate (refer to the above
figure of GDP over the past 60 years) backed by the immense foreign inflows, unbolting rising domestic
demand, boosting agricultural output, government‟s bolster for the infrastructure development will spur
the economic growth and employment opportunities further for the next five years and it is certain that
India would grow at double-digit growth rate. For this fiscal year 2010–11, according to the government
authorities, Indian economy is expected to grow at 8.5 % and 9 % for the next fiscal. On the other side,
Current Account of the Balance of Payment (BoP) is expected to be at -2.7 % of the total GDP for this
fiscal and to expand further by 0.2 % to -2.9 % for fiscal 2011–12. India‟s merchandise trade deficit
would hard hit due to local currency appreciation, anticipation of higher crude imports and non-crude oil
imports and VMW expects, Rupee will appreciate to INR 42 for a US Dollar. In this situation, RBI would
intervene into the foreign exchange market (since INR is a managed float type of currency) to curb
appreciation and maintain uniformity.

Since the Agriculture and Allied sector is one of the most significant parts of the Indian Economy,
dependency on monsoon is also higher. This year had a better than anticipated rainfall in the prominent
parts of the country and kharif crop will see a strong output this year along with the signification
availability of resources for the rabi crops, which will improve the farm sector growth by at least 4 % and
it will improve the overall economic outlook for the next fiscal too. On the country‟s industrial growth,
service export, which accounts for 5.8 % of the India‟s GDP, will continue to be sluggish since the major
export customers of the Indian IT Services are the United States and Western Europe, which are still
fighting for the “sustainable foundation” of economy. Mining sector on the other side has a robust growth
in the past few quarters and still progressing with higher growth prospect due to oil & gas activity, while
growth registered by the manufacturing sector largely driven by the domestic demand.

Capital Inflows, Financial Market and Overall Economic Outlook:

2010 2011 2012
Real GDP
9.70% 8.40% 10%
Growth
Consumer
8.60% 5.70% 5.50%
Prices
Current
-3.1% -3.1% -2.3%
Account

So far, year 2010 has attracted over $21 billion in terms of Portfolio Investments in the Indian equity
markets and over $15 billion has been raised through the initial public offerings. Since the foreign
investors pouring billions of dollars in emerging markets to earn good amount returns over their
investments. Right now, equity is one of the most favourable investment option, since it is giving the
handsome returns in a short span of time. Furthermore, the corporate earnings, more or less, are better
than expectations and supporting the anticipated rally in the equity markets. India will see the further
inbound foreign direct investments would able to attract over $90 billion of capital inflows, which will be
used to finance to abate the current account deficit to certain extent, thus India has no, but at least slight,
problem as far as the macro economy is concerned. The major tussle is inflationary pressure on the Indian
economy, which is a rowdy challenge and currently reading at two times of the comfort levels (set by
RBI). The VMW expects that the inflation would continue to put RBI on its toe and further tightening of
liquidity is expected over the next couple of quarters. More importantly, going forward, RBI would
consider curbing foreign inflows into the country to prevent heating-up of the economy, since India is the
best investment option from the global investments perspective.

Per the observation, global economy would continue to recover, though it would be flimsy, however the
world economies are set to see a major change in business cycle from the year 2012 and global economies
would expand at a rapid pace with strong fundamentals framed by the government authorities and
revamped strong financial system.

2.2 Essential Objectives of Economic Planning In India

There are generally two sets of objectives for planning, namely the short-term objectives and the long-
term objectives. The short-term objectives vary from plan to plan, depending on the immediate problems
faced by the economy. The process of planning is inspired by certain long term objectives. In case of our
Five Year plans, the long-term objectives are:
(i) A high rate of growth with a view to improvement in standard of living.
(ii) Economic self-reliance;
(iii) Social justice
(iv) Modernization of the economy, and
(v) Economic stability

(i) High Rate of Growth

All the Indian Five Year Plans have given primary importance to higher growth of real national income.
During the British rule, Indian economy was stagnant and the people were living in a state of abject
poverty. The Britishers exploited the economy both through foreign trade and colonial administration.
While the European industries flourished, the Indian economy was caught in a vicious circle of poverty.
The pervasive poverty and misery were the most important problem that has to be tackled through Five
Year Plan.

During the first three decades of planning, the rate of economic growth was not so encouraging in our
economy Till 1980, the average annual growth rate of Gross Domestic Product was 3.73 % against the
average annual growth rate of population at 2.5 %. Hence the per-capita income grew only around 1 %.
But from the 6th plan onwards, there has been considerable change in the Indian economy. In the Sixth,
Seventh and Eight plans the growth rate was 5.4 %, 5.8 % and 6.8 % respectively. The Ninth Plan, started
in 1997 targeted a growth rate of 6.5 % per annum and the actual growth rate was 6.8 % in 1998–99 and
6.4 % in 1999–2000. This high rate of growth is considered a significant achievement of the Indian
planning against the concept of a Hindu rate of growth.

Did You Know?

Planning without an objective is like driving without any destination.

(ii) Economic Self Reliance

Self reliance means to stand on one‟s own legs. In the Indian context, it implies that dependence on
foreign aid should be as minimum as possible. At the beginning of planning, we had to import food grains
from USA to meet our domestic demand. Similarly, for accelerating the process of industrialization, we
had to import, capital goods in the form of heavy machinery and technical know-how. For improving
infrastructure facilities like roads, railways, power, we had to depend on foreign aid to raise the rate of
our investment.

As excessive dependence on foreign sector may lead to economic colonialism, the planners rightly
mentioned the objective of self-reliance from the third Plan onwards. In the Fourth Plan much emphasis
was given to self-reliance, more especially in the production of food grains. In the Fifth Plan, our
objective was to earn sufficient foreign exchange through export promotion and important substitution.
By the end of the fifth plan, Indian became self-sufficient in food-grain production. In 1999–2000, our
food grain production reached a record of 205.91 million tons. Further, in the field of industrialization,
now we have strong capital industries based on infrastructure. In case of science and technology, our
achievements are no less remarkable. The proportion of foreign aid in our plan outlays have declined
from 28.1 % in the Second Plan to 5.5 % in the Eighth Plan. However, in spite of all these achievements,
we have to remember that hike in price of petroleum products in the international market has made self-
reliance a distant possibility in the near future.

(iii) Social Justice

Social justice means to equitably distribute the wealth and income of the country among different sections
of the society. In India, we find that a large number of people are poor; while few lead a luxurious life.
Therefore, another objective of development is to ensure social justice and to take care of the poor and
weaker sections of the society. The Five-Year Plans have highlighted four aspects of social justice. They
are:
(i) Application of democratic principles in the political structure of the country;
(ii) Establishment of social and economic equity and removal of regional disparity;
(iii) Putting an end to the process of centralization of economic power; and
(iv) Efforts to raise the condition of backward and depressed classes.
Thus the Five Year Plans have targeted to uplift the economic condition of socio-economically weaker
sections like scheduled caste and tribes through a number of target oriented programmes. In order to
reduce the inequality in the distribution of landed assets, land reforms have been adopted. Further, to
reduce regional inequality specific programmes have been adopted for the backward areas of the country.
In spite of various efforts undertaken by the authorities, the problem of inequality remains as great as
ever. According to World Development Report in India the top 20 % of household enjoy 39.3 % of the
national income while the lowest 20 % enjoy only 9.2 % of it. Similarly, another study points out that the
lowest 40 % of rural household own only 1.58 % of total landed asset while the top 5.44 % own around
40 % of land. Thus the progress in the field of attaining social justice has been slow and not satisfactory.

(iv) Modernization of the Economy

Before independence, our economy was backward and feudal in character. After attainment of
independence, the planners and policy makers tried to modernize the economy by changing the structural
and institutional set up of the country. Modernization aims at improving the standard of living of the
people by adopting a better scientific technique of production, by replacing the traditional backward ideas
by logical reasoning's and bringing about changes in the rural structure and institutions.

These changes aim at increasing the share of industrial output in the national income, upgrading
the quality of products and diversifying the Indian industries. Further, it also includes expansion of
banking and non-banking financial institutions to agriculture and industry. It envisages modernization of
agriculture including land reforms.

(v) Economic Stability

Economic stability means to control inflation and unemployment. After the Second Plan, the price level
started increasing for a long period of time. Therefore, the planners have tried to stabilize the economy by
properly controlling the rising trend of the price level. However, the progress in this direction has been far
from satisfactory.
Of the three types of state interventions in the economy a good deal of work has been done to
examine the functioning and efficacy of different regulatory mechanisms. The state regulatory
mechanisms in India have come under frequent reviews for various reasons. The ones who are deprived
can only be expected to react and plead for abolition of these systems. By their very character criticism of
regulatory mechanisms should be a predictable phenomenon. The shortcomings of the system would be
highlighted by those who fail to enjoy the preferences they expected from the regulatory policies and
mechanisms. The Hazari Report, Industrial Licensing Policy Inquiry Committee (ILPIC) Report,
Memoranda submitted to Government by the Federation of Indian Chambers of Commerce and Industry
(FICCI) and a number of other individual studies on the functioning of industrial licensing system in
India are an indicator of the scrutiny that the industrial regulatory mechanisms have received over the past
three decades

Similarly, the third type of state activity, that is, direct state intervention in economic activities,
attracts considerable public attention and scrutiny that goes with public accountability. There are a
multiple of institutions which continue to monitor and evaluate the functioning of activities undertaken
directly by the state. The Bureau of Public Enterprises (BPE), Parliamentary Committee on Public
Undertakings (COPU), and the Comptroller and Auditor General of India (C&AG), are engaged in annual
reviews on the working of Public Enterprises. There is, however, one category of policies and
programmes which gets very little attention; the category is that of 'promotional' activities.

While we have drawn a distinction between regulatory, promotional and direct intervention it is
true that the distinctions are not always easily discernable in many concrete situations. For instance, the
difference between direct participation and promotional policies can be a thin one. To illustrate, one
would find it difficult to say if the fact of having a substantial share in the risk capital in a private sector
company should be equated with direct participation with regulatory motive or undertaken as a
promotional measure. It is well known that public sector financial institutions hold a substantial share in
the risk capital of the Indian corporate sector in general and the large private corporations, in particular.
The present situation has emerged out of three types of independent developments. One, due to
nationalization of insurance and large private commercial banks the public sector institutions have
emerged as important share holders. Two, the public sector financial institutions had to take up the 'left
overs' due to the underwriting activity of the public issues floated by the private sector companies. Also,
the financial institutions had to acquire shares in the open market not only for earning higher returns but
also to bail out some of the private enterprises and to ensure the stability of the stock market. Three, in a
few cases loans provided to private sector companies were converted into equity as per the initial
understanding. And four, public sector institutions acquired significant shares to provide security to new
investments. The last category is a follow-up of the policies to promote joint enterprises where in public
sector and a private entrepreneur set up a new enterprise and the risk capital is so shared as to have almost
equal stake of both.

One does not need to dwell on the fact that geographic spread of industries in India is not a
balanced or a logical one. There are States with rich resource endowment to support high level of
manufacturing and other commercial activities; but due to historical and other reasons these States have
not witnessed the emergence of new entrepreneurial class. The consequence is the absence of the process
of industrialization. In some cases public interest demands new investments but there are no private
takers. There are also situations when it appears more logical to have public ownership but leave the
actual operation of activities to some private managements. Such situations provide a rationale for 'joint
sector', in addition to the cooperative, private and public sectors.
The Committee favoured conversion of loans given to large projects into equity. The joint sector form
was also expected to "ensure that the management of industry is conducted according to the overall
policies laid down by government and that public interest and not merely private profit would guide the
operations of large industrial undertakings in the private sector". The Committee saw a way of curbing the
concentration of economic power with the help of this approach. In their view joint sector, as formulated
along the lines suggested, would be "an important instrument for the attainment of this objective and it is
likely to be more effective than licensing

2.2.1 Imported Technology and Joint Sector Enterprises (JSEs):

It appears that joint sector was not specifically used to promote indigenous technology alone. One finds a
large number of cases where foreign technology was employed. Out of the 162 JSEs as 58 many as were
based on imported technology. One even finds foreign companies to have been directly involved as
private promoters. There are a few cases where the SIDCs have directly entered into joint venture
agreement with the foreign collaborators. Some of the important cases, besides are Noble Explochem Ltd.
and Dyn India Ltd. Noble Explochem is a joint venture between State Industrial Corporation of
Maharashtra Ltd (SICOM) (28 % participation in equity) and AB Bofors, Sweden, Dyno Industries A/s.
Norway, and Swedish Fund for Industrial Corporation with Developing Countries (together holding 23.89
% of equity capital).

We had mentioned earlier that Punjab Anand Lamp Industries Ltd is a joint venture between Punjab State
Industrial Development Corporation Ltd, (26 %) and N.V. Philips, Netherlands (25 %). In addition to the
cases which involved financial collaboration between the SIDCs and foreign companies, there are other
cases where joint sector enterprises have entered into technical collaboration with foreign companies. An
illustrative list of joint sector companies (out of the 162) which have entered into collaboration
agreements with foreign companies is given in Annexure - II.

Did You Know?

The broad objective of Indian plans has been a non-inflationary self-reliant growth with social justice.

2.2.2 Joint Sector and Regional Development

Balanced growth of different regions of the country was visualized in India's Five Year Plans as an
instrument of improving living standards of the people and reducing regional disparities. Further, the
Industrial Policy Resolution of 1956 also emphasized that:
In order to that industrialization may benefit the economy of the country as a whole, it is important that
disparities in levels of development between regions should be progressively reduced. The lack of
industries in different parts of the country is very often determined by factors such as the availability of
the necessary raw materials and other natural resources.

One of the objectives of the joint sector scheme is to attract entrepreneurs to the relatively backward areas
in order to achieve industrial dispersal. Many of the backward areas possess rich natural resources, but
risk capital is not easily forthcoming to these areas. Many incentives are provided to facilitate industrial
development of these areas.

State participation in the risk capital would be an additional incentive for private entrepreneurs to invest
in the backward areas. At the state level, the SIDCs are acting as catalysts of industrial growth. The state
governments through the State Industrial Development/Investment Corporations (SIDCs and SIICs) or
other state government undertakings are playing an active role in seeking licences for establishing
projects under joint and assisted sector schemes. The competition among the states has attained different
dimensions with greater emphasis on joint sector form of organisation and various incentives being
offered by the state governments. State promotion agencies have been obtaining significant proportion of
industrial approvals. The SIDCs had approximately 10 % share in the total letters of intent issued during
1983, 1984, 1985 and 1986 claiming 468 of the 4706 letters of intent issued.

The SIDCs obtain ILS/LIS from central government and invite private sector promoters to implement the
licences under joint or assisted sector projects. The joint sector scheme thus assumes special significance
in the development of backward areas due to two main considerations. One, since the initiative comes
from the state through SIDCs, it is guided more by the developmental needs of the State rather than
quick return on investment and two, the private promoter will not hesitate to locating the unit in
backward areas since he does not have to invest large amounts on his own.

An examination of the locational pattern of the JSEs will help in understanding the extent to which the
joint sector form was used in realising this objective. One way to examine this is with the help of
percentage of JSEs being directed to the backward areas within a state.

As regards this, the progress does not seem to be uniform, distribution of the 162 Joint sector projects
according to location of the projects. Out of the 162 projects, 103 are located in backward areas (a little
more than 63 %). If we look at the state-wise figures, in case of states like Gujarat, Rajasthan and Orissa,
the percentage of Joint Sector projects located in backward areas is more than average level.
There are few states like Madhya Pradesh, Maharashtra, Uttar Pradesh and West Bengal which have
relatively lesser number of projects located in backward districts.
2.2.3 Sharing of Risk and Contribution to Investment in JSEs:
It is generally stipulated that the private promoter should take an equity stake of 25 % and the financial
institutions are expected to hold a slightly higher share of 26 %. However, when it comes to the share in
total investment of the project and its distribution among different parties there are no specific guide-lines
with regard to joint sector projects. Minimum levels of promoters' contribution are prescribed from time
to time and these again vary according to the location of the project and the type of entrepreneur.
The Industrial Development Bank of India (IDBI) stipulates the levels of promoters contribution in the
total project cost. The minimum promoters contribution for projects in category 'A' districts was reduced
from 17.5 % to 15 % of the project cost in 1983.
Simultaneously the required minimum share of small and medium entrepreneurs was reduced from 17.5
% to 10 %. In case of projects in category 'B' and 'C' districts, the promoter‟s contribution was placed at
15 % and 17.5 % respectively.
The share of private promoters and foreign collaborators taken together in the total project cost of the
joint sector companies. The share of these two categories is obtained by adding private and foreign equity
and unsecured loans extended by the private promoters towards financing the project. To not only take
care of the relative changes in prices but also to bring out the changes over time the shares of private
promoters were calculated for different time periods. It can be note that the share of private promoters in
total project cost of 162 industrial projects was 13.75 for the period until 1975. It was significantly lower
at less than 10 % during the subsequent period.
It is also of often said that a significant part of the private promoters share is mobilised from the general
public through private placement. In the case of 162 joint sector projects 32.20 % of the cost of the
projects was financed through share capital.

2.3 Industrial Policies of India

Industrial policy of a nation is the true determinant of foreign investment as well as domestic investment.
Objective of the Industrial policy should be for bringing higher growth and prosperity for a country.

2.3.1 Objectives of the Industrial Policy

The main objectives of Industrial policies are given below:
Maintaining a sustained growth in productivity;
Enhancing gainful employment;
Achieving optimal utilisation of human resources;
Attaining international competitiveness and
Transforming the country into a major partner and player in the globa arena.

Policy Focus
Deregulating Indian industry;
Allowing the industry freedom and flexibility in responding to market forces and
Providing a policy regime that facilitates and fosters growth of Indian industry.

2.3.2 Policy Measures

Following are some important policy measures announced by the Ministry of Finance, Department of
Industrial policy to pursue the above objectives.
Liberalisation of Industrial Licensing Policy At present, only six industries are under compulsory
licensing mainly on account of environmental, safety and strategic considerations. Similarly, there are
only three industries reserved for the public sector.
Introduction of Industrial Entrepreneurs' Memorandum (IEM) Industries not requiring compulsory
licensing is to file an Industrial Entrepreneurs' Memorandum (IEM) to the Secretariat for Industrial
Assistance (SIA). No industrial approval is required for such exempted industries.
Liberalisation of the Location Policy A significantly amended location policy in tune with the liberalised
licensing policy is in place. No industrial approval is required from the Government for locations not
falling within 25 km of the periphery of cities having a population of more than one million except for
those industries where industrial licensing is compulsory. Non-polluting industries such as electronics,
computer software and printing can be located within 25 km of the periphery of cities with more than one
million populations. Permission to other industries is granted in such locations only if they are located in
an industrial area. Zoning and land use regulations as well as environmental legislations have to be
followed.
Policy for Small Scale A differential investment limit has been adopted since 9th October 2001 for 41
reserved items where the investment limit up to rupees five crore is prescribed for qualifying as a small
scale unit. The investment limit for tiny units is Rs. 25 lakhs.
The 749 items are reserved for manufacture in the small scale sector. All undertakings other than the
small scale industrial undertakings engaged in the manufacture of items reserved for manufacture in the
small scale sector are required to obtain an industrial licence and undertake an export obligation of 50%
of the annual production. This condition of licensing is, however, not applicable to those undertakings
operating under 100% Export Oriented Undertakings Scheme, the Export Processing Zone (EPZ) or the
Special Economic Zone Schemes (SEZs).
Non-Resident Indians Scheme The general policy and facilities for Foreign Direct Investment as
available to foreign investors/company are fully applicable to NRIs as well. In addition, Government has
extended some concessions especially for NRIs and overseas corporate bodies having more than 60%
stake by the NRIs. These inter-alia includes (i) NRI/OCB investment in the real estate and housing sectors
up to 100% and (ii) NRI/OCB investment in domestic airlines sector up to 100%.
The NRI/OCBs are also allowed to invest up to 100% equity on non-repatriation basis in all activities
except for a small negative list. Apart from this, NRI/OCBs are also allowed to invest on repatriation/non-
repatriation under the portfolio investment scheme.Electronic Hardware Technology Park
(EHTP)/Software Technology Park (STP) scheme for building up strong electronics industry and with a
view to enhancing export, two schemes viz. Electronic Hardware Technology Park (EHTP) and Software
Technology Park (STP) are in operation. Under EHTP/STP scheme, the inputs are allowed to be procured
free of duties.

The Directors of STPs have powers to approved fresh STP/EHTP proposals and also grand post-approval
amendment in respect of EHTP/STP projects as have been given to the Development Commissioners of
Export Processing Zones in the case of Export Oriented Units. All other application for setting up projects
under these schemes, are considered by the Inter-Ministerial Standing Committee (IMSC) Chaired by
Secretary (Information Technology). The IMSC is serviced by the SIA.

Policy for Foreign Direct Investment (FDI) The Department has put in place a liberal and transparent
foreign investment regime where most activities are opened to foreign investment on automatic route
without any limit on the extent of foreign ownership. Some of the recent initiatives taken to further
liberalise the FDI regime, inter alia, include opening up of sectors such as Insurance (up to 26%);
development of integrated townships (upto 100%); defence industry (up to 26%); tea plantation (up 100%
subject to divestment of 26% within five years to FDI); Encenhancement of FDI limits in private sector
banking, allowing FDI up to 100% under the automatic route for most manufacturing activities in SEZs;
opening up B2B e-commerce; Internet Service Providers (ISPs) without Gateways; electronic mail and
voice mail to 100% foreign investment subject to 26% divestment condition; etc.
The Department has also strengthened investment facilitation measures through Foreign Investment
Implementation Authority (FIIA).

2.4 New Industrial Policy

New Industrial Incentive policy is being issued separately, and some of its factors are discussed below:
2.4.1 Infrastructure Development
It is well known that no amount of subsidies or incentives can compensate for lack of infrastructure
development in a particular area. The experience world over has amply proved that infrastructure
development holds the key in promoting industrial development of an area. Government will give specific
emphasis on infrastructure development, particularly in backward areas. The State has already set up
Gujarat Infrastructure Development Board under the chairmanship of Hon. Chief Minister to allow single
point expeditious clearance of infrastructure development projects with private sector participation. The
Board would also lay down guidelines and norms for identification of such projects and their clearances.
Investment in specified infrastructure will be provided due weight age in determining the quantum of
incentive under the new Incentive Policy.

2.4.2 Land Laws

Easy availability of the right type of land is a crucial factor in the location of an industrial unit. The
present laws governing grant of land for industry are rather cumbersome. The State Government will
introduce suitable amendments in the present land laws to make land available for setting up industry
without protracted paper work and delay.

Procedure for the grant of permissions under various land reform laws would be simplified and time-
bound clearances assured. At present, non-agriculturists cannot purchase agricultural land without the
prior approval of the Government. This provision causes undue delay in acquiring land for industrial use.
Amendments will be carried out in the Bombay Tenancy and Agricultural Lands Act so that bona fide
entrepreneurs could purchase land for setting up industrial projects without any delay. Conversion of
agricultural land for Non-Agricultural (NA) use for industrial purposes would also be simplified by the
introduction of the concept of Deemed NA. Government would stipulate precautionary conditions so that
there is no misuse of these facilities and that lands acquired under these provisions are utilised for
industrial use within a specified time period. To reduce delay in grant of permission for acquiring land for
industrial use, Government will consider further delegation of powers to the Collectors.

Government has identified Agro and Food Processing Industries as one of the Thrust Industries so that the
farmers in the State could get better returns for their products in addition to generation of employment in
rural areas. In order to ensure that Agro based projects can be set up with necessary linkages to ensure
easy availability of raw material and increase productivity of agriculture in local areas. Government has
decided to make necessary arrangements including contractual marketing agreement with farmers.

2.4.3 Land Use Planning and Zoning

With rapid industrialization and urbanization of Gujarat, in order to ensure easy availability of land,
government intends to introduce the concept of land use planning to ensure optimum utilisation of land.
Government will try to ensure that rich agricultural land is not diverted for the purpose of industry. To
ensure this, it will identify specific sites in backward regions of the State which could be developed for
the setting up of industrial estates/zones with necessary infrastructural facilities. One of the main
objectives of zoning on the basis of land use planning would be the location of industries in clusters so
that the environmental protection measures can be adopted through setting up of common effluent
treatment plants, disposal of treated effluents etc. Government will try to prevent haphazard growth of
industries which may make pollution control measures as well as optimum utilisation of land difficult.

2.4.4 Industrial Townships and Urban Development

Urbanisation is the concomitant to industrialisation process. Experience in the State, which is one of the
most urbanised States in the country, shows that this is creating a severe burden on the existing urban
infrastructure and services which in any case have been already stretched far beyond their designed
capacity. In designing industrial growth centres and clusters, therefore, instead of adopting an estate
development approach, therefore, instead of adopting an estate development approach, industrial
township approach has become necessary. Creating industrial parks with all urban facilities added on, and
also promoting new township to act as focal point in urbanisation are some of the aspects which the State
would like to promote as a part of the new industrial policy. Development of such township would
decelerate, to some extent, the haphazard growth being experienced by the cities and towns in the State.
The state would like to promote private sector initiatives in setting up industrial parks and the new
townships which can attract investments from not only within the country but also from abroad.
Establishing new ventures is not merely confined to setting up of factories and production facilities. When
the State wants to reap the full advantage of flow of investment, it is necessary that facilities like Trade
and Finance Centres, Corporate Headquarters, Exhibition Centres, Convention Centres and other facilities
of international standard are created for smooth and rapid execution of trade and business dealings. The
State is experiencing serious inadequacy in this regard. It is therefore, intended to take up projects for
creating such complexes in and around metropolitan centres. The State would be seeking the cooperation
and help from well-known designers, planners and developers in undertaking such ventures.

2.4.5 Power
Gujarat has been fortunate enough to be in a reasonably comfortable position as far as availability of
power is concerned. Demand for power has been growing at a rate of 8% to 10% per annum. Apart from
requirement of power in the industrial sector, consumption of energy has been growing at a rapid rate in
domestic, commercial and agricultural sectors. The State Government has taken the initiatives of
promoting new generating capacities with projects totalling 3000 MW in various stages of
implementation. However, looking to the rapid rate of industrialisation and urbanisation in the State, it
will be necessary to increase the power generating capacity from the present 6165 MW to over 15000
MW by 2000 AD. This will require massive investment for which the State Government has welcomed
private sector participation.

Major investments by the private sector in generation and distribution of power will require
comprehensive review of the existing statutory provisions, policies and procedures relating to the power
sector. The role of Gujarat Electricity Board vis-a-vis the private sector entrants into power sector will
also have to be set out in clear terms. Government will address these issues in its Power Policy which is
on the anvil.
The State Government will encourage modernisation in industrial units to adopt energy conservation and
use of non-conventional sources of energy as well.

2.4.6 Port Development

Gujarat has over 1600 km. of coastline and 40 minor and intermediate ports which could be the base for
tremendous development. This potential can offer excellent locations for promoting hinterland
industrialisation and globalisation. To encourage port based industrialisation, linkages will be provided by
setting up infrastructural facilities like tank terminals, warehouses, customs houses and social
infrastructure. More potential sites would be identified and prioritised for development by Gujarat
Maritime Board, Gujarat Industrial Investment Corporation for joint sector or for privatisation. These
ports will be run on commercial basis and would generate own resources for maintenance and future
growth. What is critical in this regard is to ensure optimum utilization of this inelastic resource.
Systematic development of the coast has the potential of making Gujarat the window to the World, as
well as the major entry point for investments flowing into the country. In this context, the State will
declare new Port Policy.

2.4.7 Road Development

This importance of road development for improving transportation and communication network cannot be
over-emphasised. Economic viability of several major projects depends upon the existence of road
linkages of the right king. Road privatization is getting more and more importance in developing
countries. Gujarat has already initiated this process by making amendments in the Motor Vehicles Act. A
list of roads with privatization potential has already been prepared. With the Gujarat Infrastructure
Development Board laying down the guidelines governing private sector participation, the development
of this important infrastructure will take off rapidly.

2.4.8 Human Resources Development

The rapid industrialisation of Gujarat has highlighted the need for human resources development which
holds the key in all round improvement in technology, innovation and productivity. Human resource
development will have to cover the entire gamut from basic education, vocational and technical education
to professional qualification. Providing skill-specific vocational educational facilities to meet the
requirement of industry in a specific area is the best way of generating employment opportunities in local
areas. For this purpose, industry will be involved to project the area-specific requirement of various skills,
and also in finalising the curriculum in ITIs and Polytechnics so that the local youth could acquire the
necessary skills to get absorbed in the industries coming up in the area. At the end of the spectrum of
human resource development is the generation of manpower with professional qualifications. With the
rapid industrial development and consequential faster growth in the service sectors, a large number of
professionals would be required in Gujarat. The State has been fortunate enough to have national level
institutes of excellence such as Indian Institute of Management (IIM), National Institute of Design (NID)
and Institute of Rural Management (IRMA). However, students from the State have not been able to take
full advantage of the location of these institutes in the state. The State Government will initiate efforts to
enable the students from Gujarat to successfully complete for admission into these institutes so that they
are available to sustain the rapid growth of economy in the State. In addition, the State Government will
promote, with the active participation of the private sector, setting up of various management,
professional and engineering institutes in different parts of the State. The State Government will also
pursue with Government of India the setting up of an Indian Institute of Technology (IIT) in Gujarat in
order to provide suitable opportunities to the students in the State and the Region with regard to facilities
of higher technical education to meet the requirement of the industries. The State Government will also
consider setting up of separate University for technical education. Satellite education will also be
encouraged.

2.4.9 Pollution Control and Environmental Protection

The requirement of sustainable development entails the need to tighten the pollution control measures and
environmental safety in the State. The chemical and petrochemical industry along with dyes, dye
intermediates and pharmaceuticals triggered the industrial transformation of the State in the 70s and the
80s. Since most of the laws relating to pollution control and environment safety came into force in the
80s, there has been some laxity in adhering to the stipulated parameters by the industrial units which had
been set up prior to that. In order to comply with the legal provisions as also the standards prescribed by
Gujarat Pollution Control Board, the State has contemplated a number of measures like supporting the
setting up of common effluent treatment plants in industrial clusters, facilities for collection and disposal
of effluents and hazardous wastes in such clusters, tightening the implementation of the laws,
strengthening the machinery of Gujarat Pollution Control Board and also supporting the industries in
some ways. Industrial development cannot be at the cost of the environment. Along with strictly
implementing the pollution and environment protection measures, the State would be striving to set right
the irregularities in this regard, which has taken place in some industrial clusters. The State would also
like to confine the development of highly polluting industries to the zones and designated estates
specifically set up for industries so that the pollution control measures can be managed economically and
the standards in this regard can be met adequately.

2.4.10 Mineral-based Industries

Gujarat has several valuable minerals which if properly explored and exploited can go a long way not
only in accelerating development of the industry, but also in correcting regional imbalances in the
industrial development as many of these minerals are occurring in relatively backward areas of the State.
A fine example of this is Lignite. Exploration carried out in the past one decade or so has resulted in
identification of good deposits in Kutch and Saurashtra. Lignite based power projects are being set up in
these areas. Large limestone deposits are helping in setting up of several cement plants in the State. Other
minerals like Bauxite, Bentonite, Marble, Graphite, Granite, Flourspar, etc. are attracting industrial
ventures all over the State. The State intends to systematise the exploration and exploitation of the
mineral resources and in doing so, value addition would be one of the basic considerations. Even
application of latest satellite remote sensing technology will be encouraged for exploration of minerals. In
order to organise the mineral based activities on scientific basis and also to simplify and streamline the
present policies, it is intended to bring out a State Mineral Policy during the current year. In addition,
setting up of mineral based industries will be encouraged.

2.4.11 Agro-based Industries

The State Government intends to put emphasis on the development of Agro and Food Processing
Industries with the specific objective of ensuring better returns to the farmers for their products as well as
creating employment opportunities in the rural areas. The strategy would be to promote industries based
on specific farm products in particular areas with priority given to, items having export potential.
Infrastructural facilities for this purpose in the form of chain of cold storage, post-harvest storage
facilities, cargo complex and facility of air freighting of fresh fruits and vegetables and cut flowers at
Ahmadabad airport, etc. will be developed. Government will disseminate latest technologies in all land-
based activities covering agriculture, horticulture, animal husbandry and aquaculture, so that the farmers
in specific areas are able to provide the inputs to sustain agro-industry complexes. Private sector will be
encouraged to set up such complexes with specific extension measures to compliment the Governments
efforts at increasing agricultural yields.

2.4.12 Thrust Areas

Rapid industrialisation by itself does not really generate significant growth in employment opportunities
in the organised sector. In the liberalised environment when Indian industry is striving to be globally
competitive, it cannot be burdened with surplus manpower. Employment quotient per unit of capital is
comparatively higher in specific industrial sectors and service sector. The State Government intends to
promote and encourage certain thrust areas in order to create adequate employment opportunities to
absorb the youth entering the job market every year. These areas are as follows:
1. Electronics
2. Ancillary Development
3. Garments
4. Gems and Jewelleries
5. Food and Agro Processing Industry
6. Handlooms and Handicrafts.
7. Leather goods
8. Other labour-intensive industries

2.4.13 Exports
Gujarat contributes as much as 16% of the total export from the country. However, looking to its present
rapid rate of industrial development, there is scope for a quantum jump in exports from the State and
higher value addition of its exportable products. Government, therefore, intends to adopt a specific policy
of promoting export from the State with higher value addition. Some of the measures will form part of the
other schemes such as promotion of agro and food processing industries, development of aquaculture, etc.
The main thrust would be in providing infrastructural facilities such as development of ports with bulk
handling facilities, setting up of container depots near major industrial growth centres, facilities for
product testing and development, particularly for small scale units, encouragement of quality up gradation
by adoption of total quality management and ISO series certification, etc.

2.4.14 Foreign Investment

The State Government will welcome foreign investment particularly in high-tech and high priority
industries. The State Government will promote foreign investment and foreign technology tie-ups. In
addition, foreign direct investments will be encouraged for infrastructure projects and especially for
power generation, port development, construction of roads and bridges as well as social infrastructure
such as education facilities, health care facilities and tourism projects. It will actively promote flow of
foreign technologies for the technological up gradation and modernisation of different industrial sectors
including infrastructure projects in the State.

2.4.15 Non-Resident Indians

A large number of expatriate Gujarat is having settled in various countries abroad. These NRIs have,
through their enterprise and hard work, established themselves in trade and industry in their adopted
countries. They not only have investible resources but also high level of skills and managerial
capabilities, which can be utilised in setting up world class enterprises in this country. Non-resident
Indians, as a matter of fact, have become the second highest source of foreign investment in terms of
actual inflow into the country in the post-liberalisation period. The Government of Gujarat intends to use
its unique advantage to create and atmosphere for attracting significant NRI investment to the State.
The State had pioneered the concept of promoting NRI investment through the Industrial Extension
Bureau. The flow so far has not been very significant considering the potential. The Government,
therefore, intends to not only promote NRI investments by offering special incentives, but also by
removing irritants to NRIs who are used to certain facilities abroad. The State Government intends to
strengthen dissemination of information for selection of projects. Besides, it also plans to consider giving
priority/reservation in allotment of plots/sheds in industrial estates or reservation of plots in industrial
townships, scheme of construction of luxurious houses for NRIs near major towns and cities.

2.4.16 Research and Development and Modernisation of Existing Units

Technological up gradation and modernisation of existing units are crucial to the survival of Indian
industry in the liberalised era. This will mainly be encouraged by providing necessary incentives under
the incentive policy. However, this can be done on a regular and sustained basis only by adequate
investments in R&D facilities, which has been a neglected area of Indian industry and which is crucial for
Indian industries for acquiring a competitive edge. Government, therefore, intends to encourage and
facilitate adequate investment in R & D facilities. Small and medium scale units may not be able to invest
in R & D beyond certain minimum testing facilities. In specific industrial sectors, therefore, Government
will have to take the initiative in setting up common R & D facilities servicing a large number of units in
a specific sector, with financial participation of different industries associations. The management of such
establishments will be left to the industries associations or subsidiary companies/societies set up by them
so that these are run on professional and commercially viable lines.
In addition to facilitating setting up of common R & D establishments, Government will adopt specific
measures to encourage dedicated research sponsored by industries in the Universities and technical
educational institutions in the State. This will benefit both the industry as well as the educational
institutions. As part of the efforts in this direction, Government will promote the setting up of Science
Parks attached to Universities/R & D establishments so that the benefits of technology flow to small and
medium enterprises.

The existing industrial establishments will have to upgrade its technological levels on a priority basis in
order to survive in the increasingly competitive market place. Investment in R & D facilities can be a long
term solution to meet the technological requirements of the industries in the State. Small scale industries
in particular will have to source the required technologies from established national R & D establishments
in the country as well as from sources abroad. While the medium and large industrial units have the
capability of sourcing such technologies, the small scale units will definitely require assistance in locating
such sources, adapting the available technology to their requirements and for getting such technologies on
reasonable terms. Government will asset the small scale sector in this area. For this purpose, Government
intends to strengthen the Industrial Extension Bureau to play a catalytic role in this case.

2.4.17 Small Scale Sector

The Government is committed to promote the healthy growth of small scale sector. Government will
provide positive support to SSI units in such areas as sourcing of technology for technological up
gradation and modernisation, improvement in quality of the products of such units through adoption of
ISI or ISO 9000 certification. Small scale industries also need assistance towards supply of raw materials
and marketing. For this purpose, the existing organisations of the Government such as Gujarat State
Financial Corporation, Gujarat Small Industries Corporation and District Industries Centres would be
strengthened and reoriented. Assistance will be provided in identifying different products through market
research.

2.4.18 Entrepreneurship Development

Government is concerned that with the restructuring of the financial sector, as a part of liberalisation,
there has been a lessening of emphasis on priority sector lending by the nationalised banks. This has
adversely affected the changes of first generation entrepreneurs and those from disadvantaged groups in
obtaining finance from banks and financial institutions to set up industrial units. Government of Gujarat
has always aimed at widening the entrepreneurial base in the State. This is a process which will continue
to require positive intervention by the State Government with adequate support. The State Government
had pioneered the concept of training for entrepreneurship development by setting up the Centre for
Entrepreneurship Development. It would now put greater emphasis on training of first generation
entrepreneurs, particularly those belonging to the category of women, Scheduled Castes/Scheduled Tribes
and other backward classes and technically qualified unemployed youth. In order to make this training
effective and result oriented, it will ensure close and regular coordination with banks and financial
institutions so that the persons trained get financial assistance for setting up of industrial units without
delay.
2.4.19 Simplification of Rules and Procedures
Most of the statutory provisions, rules, regulations and procedures relating to the industrial as well as
other sectors in the whole country as well as in Gujarat have their genesis in the Licence Permit Raj.
Some of the statutes currently in force pre-date the independence of the country and were relevant to the
war time requirements of the British India. There is an imperative need for comprehensive review of all
the statues, rules and regulations so that they are brought in tune with the reforms and the requirements of
the liberalised era. The State Government will set up Task Forces to undertake such reviews with the
specific objective of doing away with redundant and irrelevant restrictions and requirements and to
simplify the rules and procedures in the remaining areas to facilitate grant of various clearances in an
objective and transparent manner.

In undertaking this review, the State Government will not compromise on the basic requirement of safety
in the work place and labour welfare measures. On the contrary, it would aim at making these provisions
more effective in their administration. Government will not try to enforce all these statutes on the basis of
mistrust and suspicion but expect industries to understand their responsibilities for compliance.

2.4.20 Single Window Clearance System

The State Government is committed to provide the facility of single window clearance to ensure that
entrepreneurs do not have to visit different government offices to obtain the required clearances for
setting up industrial units in the state. For this purpose, the State Government intends to introduce single
window clearance system at the district and the state levels based on a common application backed by
computerised processing and clearance through Committees where all the Government departments and
agencies are represented.

2.4.21 Industrial Data Bank

A weak point of the present Industries Administration is the lack of reliable data relating to industrial
investments, production, sickness, etc. As a matter of fact, under the earlier regime, Director General of
Technical Development (DGTD) in the Ministry of Industry, Government of India, used to collect and
maintain production data of different industrial sectors. Most of the industries are no longer under
compulsory licensing and this has affected the availability of reliable data on industrial production. The
State Industries Administration had no system for collecting production data on a regular basis. Similarly,
in the small scale sector, data relating to investment, employment, etc. are simply not available. Data
relating to sickness and closure are entirely historical based on survey carried out at a particular time. This
has limited the ability of the State Industries Administration to fix targets for production in different
sectors, project and plan for infrastructural facilities, raw material supplies, service back-up, etc. In view
of this, the State Government has decided to set up an Industrial Data Bank in the Industrial Extension
Bureau, which will be run on a commercial basis.

2.4.22 Administration
Even the best policy will have limited impact unless it is implemented effectively. Government will
therefore aim at strengthening the Industries Administration through computerisation of District
Industries Centres and the Industries Commissioners Office and by introducing office automation and
modernisation. The State Government will compliment the scheme of Government of India for the
computerisation of district Industries Centres so that all the District Industries Centres are computerised
and linked to the State headquarters. This would enable not only the flow of data for the proposed
Industrial Data Bank, but also allow for effective monitoring of the implementation of all industrial
approvals in the State as well as for the operation of the single window clearance system at the district
and the state levels.
2.4.23 Public Undertakings
The State Government undertakings and organisations operating in the industrial sector were set up
during the Licence Permit Raj. Their functioning has been influenced by operating in a protected
environment. They will be reorganised and reoriented for meaningfully contributing to the efforts of the
State Government towards balanced industrial development of the State. The functioning of these
undertakings will be on a professional basis with full accountability to the Government for complying
with the objectives of the States industrial policy. For this purpose, Government intends to introduce the
system of Memorandum of Understanding between the undertakings and the State Government.

2.4.24 Disinvestment in Public Sector Enterprises

Government has under its consideration various recommendations of the Gujarat State Finance
Commission which submitted its report in April 1994 regarding disinvestment in and privatization of
State Undertakings. Government intends to take an overall view of these recommendations to decide on
the loss-making Public Sector Undertakings (PSUs) which should be wound up. Public Sector
Undertakings where part of the Government holding can be disinvested in favour of the general public
and those units which can be totally privatised in favour of the general public to be run by a professional
management. Government will continue to have dominant stake in only those Public Sector Undertakings
which play a critical role in the States development.

2.4.25 Industrial Rehabilitation

While the Government of India has set up Board For Industrial and Financial Reconstruction under Sick
Industrial Companies Act, 1985 (SICA) to decide the revival or the winding up of sick industrial units
falling under the purview of the Act, there is no such statutory mechanism at the state level to deal with
sick units which do not fall within the purview of Sick Industrial Companies Act, 1985. The State
Government had introduced a scheme of revival of non-BIFR and small scale sector units, which provides
specific reliefs and incentives as part of package of revival to be decided by a state level committee
headed by the Industries Commissioner. The scheme has not had much impact in dealing with sickness in
the small scale sector. The Government intends to comprehensively review the scheme and to modify its
main provisions so that it plays an effective role in combating sickness in the small scale sector. Revival
of sick units will not be possible without the active and full cooperation of financial institutions and
banks. In view of this, Government would ensure that the scheme is implemented with the full
involvement and participation of the banks and financial institutions. It would also take up this matter
with the Government of India and the Reserve Bank of India to ensure that the fullest cooperation is
received from Financial Institutions and Banks for this purpose.

2.4.26 Industrial Licensing

All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for:
(i) industries reserved for the Public Sector (Annex I),
(ii) industries retained under compulsory licensing (Annex II),
(iii) items of manufacture reserved for the small scale sector and
(iv) if the proposal attracts locational restriction. (For procedure to obtain Industrial Licence refer to para
7.2).

Task
Explain the effects of new industrial policy of India.
2.5 Foreign Trade Policy
To become a major player in world trade, a comprehensive approach needs to be taken through the
Foreign Trade Policy of India. Increment of exports is of utmost importance, India will have to facilitate
imports which are required for the growth Indian economy. Rationality and consistency among trade and
other economic policies is important for maximizing the contribution of such policies to development.
Thus, while incorporating the new Foreign Trade Policy of India, the past policies should also be
integrated to allow developmental scope of India‟s foreign trade. This is the main mantra of the Foreign
Trade Policy of India.

2.5.1 Objectives of the Foreign Trade Policy of India

Trade propels economic growth and national development. The primary purpose is not the mere earning
of foreign exchange, but the stimulation of greater economic activity. The Foreign Trade Policy of India
is based on two major objectives, they are:
To double the percentage share of global merchandise trade within the next five years.
To act as an effective instrument of economic growth by giving a thrust to employment
generation.

2.5.2 Strategy of Foreign Trade Policy of India

Removing government controls and creating an atmosphere of trust and transparency to promote
entrepreneurship, industrialization and trades.
Simplification of commercial and legal procedures and bringing down transaction costs.
Simplification of levies and duties on inputs used in export products.
Facilitating development of India as a global hub for manufacturing, trading and services.
Generating additional employment opportunities, particularly in semi-urban and rural areas, and
developing a series of „Initiatives‟ for each of these sectors.
Facilitating technological and infrastructural upgradation of all the sectors of the Indian economy,
especially through imports and thereby increasing value addition and productivity, while attaining
global standards of quality.
Neutralizing inverted duty structures and ensuring that India's domestic sectors are not
disadvantaged in the
Free Trade Agreements / Regional Trade Agreements / Preferential Trade Agreements that India
enters into in order to enhance exports.
Upgradation of infrastructural network, both physical and virtual, related to the entire Foreign
Trade chain, to global standards.
Revitalizing the Board of Trade by redefining its role, giving it due recognition and inducting
foreign trade experts while drafting Trade Policy.
Involving Indian Embassies as an important member of export strategy and linking all
commercial houses at international locations through an electronic platform for real time trade
intelligence, inquiry and information dissemination.

2.5.3 Partnership
Foreign Trade Policy of India foresees merchant exporters and manufacturer exporters, business and
industry as partners of Government in the achievement of its stated objectives and goals.

2.5.4 Road Ahead of Indian Foreign Trade Policy

This Foreign Trade Policy of India is a stepping stone for the development of India‟s foreign trade. It
contains the basic principles and points the direction in which it propose to go. A trade policy cannot be
fully comprehensive in all its details it would naturally require modification from time to time with
changing dynamics of international trade.

2.6 Fiscal Policy

Fiscal policy may be defined as Government policy concerned with raising revenue and pattern of
expenditure in order to achieve the objectives of the economic policy. The revenue can be raised
through taxation and other measures. In a developing economy, the objective of the fiscal policy is to
accelerate the rate of economic growth, social justice and price stability.

2.6.1 Objective of Fiscal Policy

In our Indian mixed economy, fiscal policy has got the following purposes:
Economic development: It is used as an economic development. Undeveloped economies suffer from low
per capita income, lesser development and low capital formation. Rich persons use their surplus funds in
unproductive activities. Progressive taxation, one of the measures of fiscal policy will force people to
save. It will also check wasteful expenditure.
Distributive justice: Social unrest and class-struggle are the result of economic development. It is due to
the inequality of income between rich and poor. Industrialists, traders, speculators, smugglers and
profiteers, grow richer and the general masses grow poorer. In order to reduce the inequality of income,
wealth tax, income tax, gift tax, estate duty etc. are levied. The revenue received from taxation is
transferred to poor in the form of free medical, health, education and other welfare activities.
Price stability: Inflation grows in developing economy. The purchasing power of the people increases at
faster rate than the increase in the supply of goods. The result is the increase in the price. Inflation badly
affects the fixed income group and weaker sections of the economy. The state must intervene to regulate
prices.
The fiscal policy or budgetary policy of Government consists of taxation, public expenditure and
management of public debt.

2.7 Taxation
Both the central and the state Governments may exercise their powers of taxation, subject to the
provisions of the constitution. The guiding principles of taxation policies are economic development,
price stability and checking inequality of income.
The Government earns revenue through both tax and non-tax sources.
Taxes may further be classified according to the incidence (burden) of taxation:
Direct taxes: Income tax, corporation tax, wealth tax, estate duty and gift tax, etc.
Indirect taxes: Customs, excise, sales tax and entertainment tax.

2.7.1 Direct Taxes

The burden of these taxes cannot be shifted to some other person. It has to be borne by the tax payer
himself. For example, the income tax-payer bears the burden of tax himself. Important direct taxes are as
under:
Income tax: Taxes are levied on income from salaries, business, profession, property and other sources.
Corporation tax: It is levied on the income of companies and business corporations.
Profession tax: It is charged on the income of professionals i.e., doctors, chartered accountants, artists
and actors etc.
Agricultural income tax: Certain states have taxed agricultural income.
Wealth tax: It is levied on the wealth accumulated by individuals.
Gift tax: There are certain very, rich people, who gift a part of income to their relatives in order to escape
income tax. The Government levies tax on such gifts.
Estate, duty: It is levied on the inherited wealth, if it exceeds beyond certain limit.
State Government: Charge land revenue, stamps and registration fee.

2.7.2 Indirect Taxes

The burden of this tax is not borne by the tax payer. It is shifted to certain other persons. Important
examples of these taxes are as under:
Sales tax: This tax is levied by the State Governments. The tax is aid by the trader on sales made by him
to the Government. The trader barges the amount of tax from the customers.
Excise: Central excise is imposed on the production of sugar, cotton, cloth, tobacco, match boxes, cement
and spirit etc.
State excise is imposed on liquor, opium and other drugs and narcotics.
Excise is the most important source of Government revenue. It accounts for almost 37% of our national
revenue.
Custom: It is levied on the imported goods. It is the source of revenue and also protects our industries.
The purpose of taxation policy is to reduce inequality of income, providing sufficient revenue to the
Government and speed up economic development.
Non-tax revenue
Revenue is also obtained through non-tax sources:
The contribution of non-tax sources is very limited. It is revenue, charged by the Government for
services rendered:
(i) Interest and Receipts. Interest is received on the funds, advanced to states, union territories,
Railways, Post and Telegraph, other institutions and undertakings.
(ii) Dividend and Profit. The Government earns profit through public sector undertaking. Dividends are
also received from investment in other companies.
(iii) Monetary Receipts. Currency notes are issued by the Reserve Bank of India as the agent of the
Government. One rupee notes are issued by the Secretary, Ministry of Finance.
(iv) Cash grants. Amount received from foreign countries as loans and grants are known as cash grant. It
can also be received from World Bank and other international institutions.
(v) Other services. Nominal receipts are obtained from:
(a) General services, stationery, printing, public works etc.
(b) Social and community services. Services like education, family welfare, public health, housing,
employment and labour; nominal services charges.
(c) Economic services. Agriculture, industry, water and development and minerals also fetch nominal
receipts.

2.7.3 Budgetary Gap and Its Financing

Budget is an estimate of future revenue and expenditure of the Government for a year. The difference
between estimated expenditure and expected revenue is known as `Budgetary gap'. The excess of revenue
over the expenditure is, known as surplus budget. If expenditure and revenue are the same, it is known as
Balanced Budget. In case the estimated expenditure exceeds the expected revenue the difference is known
as Deficit Budget. In case of Govt. Deficit budget is supposed to be good. It shows that the Government
plans to spend more than what it expects to receive as revenue.
The problem faced with the developing economy is how to finance the deficit. It is technically called as
deficit financing. Generally, the following methods are adopted to meet deficit financing:
(i) Borrowing from with the country,
(ii) External borrowings, and
(iii) Borrowing from Reserve Bank of India.
2.7.4 Public Debt
In order to meet deficit financing the Government may also resort to Public Debt i.e., borrowing from the
public. In order to borrow from public, Government issues bonds and loans. A fixed rate of interest is
provided on these loans. The Government also issues National Saving Certificates. Revenue can also be
obtained through various attractive schemes introduced the Life Insurance Corporation, Unit Trust of
India and other public undertakings.

Did You Know?

In India, Reserve Bank of India is responsible for monetary control and credit money.

2.8 Monetary Policies

Money is the basic component of every monetary policy. Money consists of both currency (money is
circulation) and bank money, also known as credit money (Cheques, Bank Drafts etc). Monetary policy
of the Government includes:
(i) Money supply, its composition, direction and cost of borrowing.
(ii) Credit policy, regulating bank reserves, note issue, creating sound banking structure.
Monetary policy may be defined as the economic policy of the Government relating to currency and
credit money. According to Radcliffe committee "economic policy of the Government in the monetary
field" is its monetary policy.

2.8.1 Role of Monetary Policy in an Economy

In a developing economy, the role of the monetary policy is both regulatory and promotional. In a
developing economy, the Government has to raise investment through credit expansion and deficit
financing. The Government has to incur developmental expenditure. It causes inflation, which results in
continuous rise in prices. In this way, it becomes the duty of Government to regulate the monetary
supply in such a way that the inflation may be kept within limit.
The Central Government will have to promote financial institutions, which will improve the capital
market and speed up the rate of industrialization. The regulation and promotion of monetary, supply has
got more significance in developing economy because of:
(i) Absence of organized money market,
(ii) Lesser use of credit money,
(iii) Presence of non-moneterized sector, and
(iv) Low level of per capita income and investment.

2.8.2 Monetary Control

Financial institutions are promoted by the Government to advance loans and credit to business, trade,
commerce and industry. The loans may be short term, medium term and long term. Funds are also need
consumption purposes such as marriage ceremonies; buying other capital goods. The state controls the
amount and direction through Central Bank of the country. In India, Reserve Bank of India is responsible
for monetary control.
Reserve Bank of India controls the supply of money in circulation and credit money in the following
measures:
1. Issue of currency notes. It issues the notes to the extent required by the Government. Our Government
is committed to rapid planned development of the economy. It requires a lot of expenditure, generally
more than the revenue. The deficit in this way is financed by issuing bond, loans and saving certificates.
The uncovered amount is financed through issue of currency notes. It will increase the money supply in
the economy. In order to regulate the supply of money, the Government in consultation with the Reserve
Bank of India decides the quantity of notes to be issued intelligently, so that it may not cause damage to
the economy.
2. Open market operations. Open market operation means public selling and borrowing of Government
promissory notes. Reserve Bank of India increases the supply of money in the economy through buying
Government papers. In case of buying by the Reserve Bank of India, the payment for these purchases
will increase money supply. In the same way in order to decrease the money supply in the economy the
Bank sells Government bonds, certificates and papers. This is purchased by the individuals of the
economy. Payment by these individuals reduces money supply in the economy.
3. Bank rate policy. The Reserve Bank of India is banker's bank. It meets the financial requirements of
banks by lending them. The rate at which the Reserve Bank of India lends money to its scheduled bank is
termed as "Bank rate". Scheduled banks lends money to the public at the rate more than the bank rate. For
increasing money supply in the economy, the Reserve Bank of India will fix up lesser bank rate, causing
the scheduled bank to supply money to public at cheaper rates. People will be induced to borrow, because
the loan is available at cheaper rates. In order to reduce the money in the economy the Reserve Bank of
India increases bank rate, which enables Banks also to advance loan at high - rates. It discourages
borrowing. It induces the public to make deposits more in the bank and results in the reduction of money
supply.
4. Regulation of Cash Reserve. Cash reserve is the amount retained by bank out of the total deposits made
in the bank. We know that the bank not retain all the cash deposited with it. Generally, it keeps 10% as
cash reserve and remaining 90% is lent to the individuals, trade, and commerce. Cash Reserve ratio is
fixed by the Reserve Bank of India. If bank fixes cob reserve at 15%, so only 85% of deposits will be
available with the bank ft lending and money supply will be reduced. In y, lowering minimum cash
Reserve will increase money supply the
5. Selective Credit Control. Reserve Bank of India may direct funds in certain direction and-withdraw
from other sources. It directs the bank to lend money at cheaper rates to certain sectors for certain
purposes or to lend money at cheaper rates to certain other sectors. Making credit cheaper or dearer
controls money supply in different sectors and for different purposes. of India adopts the above measures
to control and regulate the supply of money, so that rapid economic development with social justice may
take place.

Caution
The quantity of notes should be regulated by Reserve Bank of India to avoid damage of the economic
system of India.

Case study: Economic History of India

Indus valley civilization, which flourished between 2800 BC and 1800 BC, had an advanced and
flourishing economic system. The Indus valley people practiced agriculture, domesticated animals, made
tools and weapons from copper, bronze and tin and even traded with some Middle East countries.
Agriculture was the main economic activity of the people in the Vedic age but with the second
urbanization a number of urban centers grew in North India. This gave a major fillip to trade and
commerce. The ancient Indians had trade contacts with far off lands like the Middle East, the Roman
Empire and the South East Asia. Many Indian trading colonies were settled in other countries. Most of the
Indian population resided in villages and the economy of the villages was self-sustaining. Agriculture was
the predominant occupation of the populace and satisfied a village's food necessities. It also provided raw
materials for industries like textile, food processing and crafts. Besides farmers, other classes of people
were barbers, carpenters, doctors, goldsmiths, weavers, etc. In towns and urban centers trade took place
through coins but in villages barter was the main system of economic activities. The system of castes and
sub-castes ensured division of labor and functioned much like guilds, providing training to apprentices.
The caste system restricted people from changing ones occupation and aspiring for an upper caste's
lifestyle. Traditionally, there was joint family system and the members of a family pooled their resources
to invest in business ventures.
Products like the muslin of Dhaka, calicos of Bengal, shawls of Kashmir, textiles and handicrafts,
agricultural products like pepper, cinnamon, opium and indigo were exported to Europe, Middle East and
South East Asia in return for gold and silver.
With the coming of Europeans in the 16th century trade and commerce was completely transformed. The
Europeans concentrated mainly on spices, handicrafts, cotton clothes, indigo etc. Of all the European
powers the British proved most strong and drove their competitors out of India. Slowly and gradually the
British acquired political supremacy and hold over India and subverted the Indian economy according to
their own needs. With the establishment of British rule in India the drain of wealth from India began.
There was poor industrial infrastructure when the British left India.
After independence, India opted for planned economic development. The key concern was to develop
thrust and heavy industries. With this there began rapid industrialization. Here, it is important to note that
our economic policies were socially oriented and controlled by the state. India began to follow a mixed
economy pattern. But in the late eighties and in the beginning of the 1990s, the Indian policy makers
realized that state controlled economy was not able to produce desired results in almost 45 years. It was
decided to pursue economic policy based on liberalization, privatization and globalization. In this era of
liberalization, privatization and globalization, India has witnessed rapid growth in some sectors of
economy, even though better results were expected when India began to follow the new economic policy.

Questions
1. What is the key concern of Indian economy?
2. What was the main economic activity of the people in the Vedic age?

2.9 Summary
The main occupation in India is agriculture which employs 60% of the population.
Around 28% of the population is employed in the service sector and the rest 12% are in the industrial
sector.
The excess of revenue over the expenditure is, known as surplus budget.
If expenditure and revenue are the same, it is known as Balanced Budget.
In case the estimated expenditure exceeds the expected revenue the difference is known as Deficit
Budget.
Money is the basic component of every monetary policy.
Money consists of both currency (money is circulation) and bank money, also known as credit money
(Cheques, Bank Drafts etc).

2.10 Keywords
Balance of Payments (BOP): The BOP accounts are an accounting record of all monetary transactions
between a country and the rest of the world. These transactions include payments for the country's exports
and imports of goods, services, financial capital, and financial transfers
Electronic Hardware Technology Park (EHTP): The EHTP Scheme is a 100% Export Oriented Scheme
for undertaking manufacturing of electronic hardware equipment/components and other items.
Monetary Policies: Monetary policy is the process by which the monetary authority of a country controls
the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and
stability
Taxation: A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or
a functional equivalent of a state
Zero Interest Rate Policy (ZIRP): The ZIRP is a macroeconomic concept describing conditions with a
very low interest rate, such as contemporary Japan and, since December 16, 2008, the United States. It
can be associated with slow economic growth

Lab Exercise
1. Make a list of direct taxes and indirect taxes.
2. Explain the role and responsibilities of Reserve bank of India.

2.11 Self Assessment Questions

1 Asia‟s ................................largest economy is attracting billions of dollars in terms of portfolio
investments
(a) First (b) Second (c) Third (d) Fourth

2 The....................started in 1997 targeted a growth rate of 6.5 % per annum and the actual growth rate
was 6.8 % in 1998–99 and 6.4 % in 1999–2000.
(a) Ninth Plan (b) Sixth Plan (c) Seventh Plan (d) Eight plans

3 In the much emphasis was given to self-reliance, more especially in the production of food grains.
(a) Ninth Plan (b) Sixth Plan (c) Seventh Plan (d) Fourth Plan

4 ………………..mean to equitably distribute the wealth and income of the country among different
sections of the society.
(a) Economic Self Reliance (b) Social justice
(c) High Rate of Growth (d) Modernization of the Economy

5 A significantly amended location policy in tune with the ...............................is in place.

(a) Liberalisation of industrial licensing policy (b) Introduction of industrial entrepreneurs
(c) Liberalisation of the location policy (d) Policy for small scale

6 The State Government will introduce suitable amendments in the present ............................to make land
available for setting up industry without protracted paper work and delay.
(a) Planning and zoning (b) Infrastructure development
(c) Land laws (d) Urban development

7 Sick Industrial Companies Act under 1995.

(a) True (b) False

8 The requirement of sustainable development entails the need to tighten the pollution control measures
and environmental safety in the state.
(a) True (b) False

9. RBI is fixing the inflation problem by tightening the money supply and demand side problem can be
fixed straightaway.
(a) True (b) False

10. Current Account of the Balance of Payment (BoP) is expected to be at ......... of the total GDP
(a) 0 % (b) 5 % (c) -2.7 % (d) 2.7 %

2.12 Review Questions

1. Explain the current position of business environment in India
2. What are the objectives of economic planning in India?
3. Explain various industrial policies of India.
4. What is new industrial policy in India?
5. Discuss the small scale sector.
6. Discuss the strategy of Foreign Trade Policy of India.
7. What is the objective of Fiscal Policy?
8. Explain the tax system in India.
9. What are direct and indirect taxes?
10. Define Monetary Policies?

Answers for Self Assessment Questions

1 (c) 2 (a) 3 (d) 4 (b) 5 (c)
6 (c) 7 (b) 8 (a) 9 (b) 10 (c)
 Unit-3 Economic Reforms

CONTENTS
Objectives
Introduction
3.1 Liberalization
3.2 Privatization
3.3 Globalization
3.4 Competition Act
3.5 Foreign Direct Investment in India
3.6 World Trade Organization (WTO) in India
3.7 Public Sectors
3.8 Summary
3.9 Keywords
3.10 Self Assessment Questions
3.11 Review Questions

Objectives
After studying this chapter, you will be able to:
Discuss about liberalization, privatization, and globalization and their impacts
Explain about Competition Act and its factors on Indian business
Explain foreign direct investment in India
Describe the impact of WTO in India
Explain about rationale and role played by public sectors
Introduction
Economic reforms in India should be viewed in terms of a number of distinct eras. Under normal
conditions, economic reform in India describes the post-1991 consequences of various economic
practices. According to the Finance Minister, achieving 9–10% growth is very much within reach in the
medium term. The government has already identified 61 state-owned companies for disinvestment and the
process is likely to be completed by the end of FY 2009–10 for four PSUs National Thermal Power
Corporation (NTPC), Rural Electrification Corporation (REC), Sutlej Jal Vidyut Nigam and National
Mineral Development Corporation (NMDC). FDI inflows topped $1.74 billion in November 2009, up 60%
from November 2008 when FDI inflows stood at 50 billion. However, the cumulative FDI during April-
November 2009 declined to 99 billion from 99 billion in the corresponding period in the last fiscal year.
Amendments to the Copyright Act would bring it in conformity with the World Intellectual Property
Organization (WIPO) Internet Treaties––WIPO Copyright Treaty (WCT) and WIPO Performances and
Phonograms Treaty (WPPT), which have set the international standards in these spheres.

The constant efforts of the Government of India in making the country an investor friendly destination are
reaping dividends. Alongside the United Nations Conference on Trade and Development (UNCTAD)
ranking India at second place in global foreign direct investments (FDI) in 2010, in its report titled,
'World Investment Prospects Survey 2009–12' has added to the initiative to a great extent. The report
further forecasts, India to be among the top five attractive destinations for international investors during
2010–12.

FDI inflow rose by more than 100% to US$ 4.66 billion in May 2011, which is the highest monthly
inflow in 39 months, while the cumulative amount of FDI equity inflows from April 2000 to May 2011
stood at US$ 205.96 billion, according to the latest data released by the Department of Industrial Policy
and Promotion (DIPP).

3.1 Liberalization
The economic boom that is being experienced in India is largely attributed to the globalization and
liberalization of the Indian economy. The Indian markets were predominantly closed in nature. The
government of India, however, ruled and regulated Indian markets but with the globalization and
liberalization of the Indian economy, the whole market scenario changed in no time. The reforms
progressed furthest in the areas of opening up to foreign investment, reforming capital markets,
deregulating domestic business, and reforming the trade regime. Liberalization has done away with the
License Raj (investment, industrial and import licensing) and ended many public monopolies, allowing
automatic approval of foreign direct investment in many sectors. Government's goals were reducing the
fiscal deficit, privatizing the public sector, and increasing investment in infrastructure.

Task
Explain the features of License Raj.

3.1.1 Criticism
Critics of trade liberalization have blamed it for a host of ills such as rising unemployment and wage
inequality in the advanced countries, increased exploitation of workers in developing countries and a
“race to the bottom” with respect to employment conditions and labour standards, the de-industrialization
and marginalization of low-income countries, increasing poverty, global inequality, and degradation of
the environment. These views have spread in spite of the fact that the benefits of free trade, in terms of
improved allocation of resources and consequent gains in productive efficiency and economic growth, are
a basic tenet of mainstream economic analysis.

Did You Know?

Trade reforms and changes in the regulation of foreign direct investment were introduced to open India to
foreign trade while stabilizing external loans.

3.1.2 Pre-and Post-liberalization Impact on Employment

Present scenario of employment
Economic reforms may have given a boost to industrial productivity and brought in foreign investment in
capital intensive areas. This has not created jobs and was not unexpected. The combined sales of the
world's top 200 MNCs are now greater than the combined gross domestic product (GDP) of all the
world's nine largest national economies. Yet, the total direct employment generated by these
multinationals is a mere 18.8 millions -one-hundredth of 1% of the global workforce (Table 3.1). India's
labour force is growing at a rate of 2.5% annually, but employment is growing at only 2.3%. Thus, the
country is faced with the challenge of not only absorbing new entrants to the job market (estimated at
seven million people every year), but also clearing the backlog.

Table 3.1 Per cent of the global workforce

S/No. Sectors Annual growth rate

1983–94 1994–2004
1. Agriculture 1.51 –0.34
2. Mining and quarrying 4.16 –2.85
3. Manufacturing 2.14 2.05
4. Electricity, GAS and WS 4.50 –0.88
5. Construction 5.32 7.09
6. Trade 3.57 5.04
7. Transport/storage/communication 3.24 6.04
8. Financial services 7.18 6.20
9. Community and social services 2.90 0.55
10. Average employment 2.04 0.98

Sixty per cent of India's workforce is self-employed, many of whom remain very poor. Nearly 30% are
casual workers (that is they work only when they are able to get jobs and remain unpaid for the rest of the
days they have no job). Only about 10% are regular employees, of which two-fifths are employed by the
public sector.

More than 90% of the labour force is employed in the "unorganized sector", that is sectors which do not
provide social security and other benefits of employment as in the "organized sector”. In the rural areas,
agricultural workers form the bulk of the unorganized sector. In urban India, contract and sub-contract as
well as migratory agricultural labourers make up most of the unorganized labour force.
The ninth plan projects a decline in the population growth rate to 1.59% per annum by the end of the
ninth plan, from over 2% in the last three decades. However, it expects the growth rate of the labour force
to reach a peak level of 2.54% per annum over this period; the highest it has ever been and is ever likely
to attain. This is because of the change in age structure, with the highest growth occurring in the 15–19
years age group in the ninth plan period.
The addition to the labour force during the plan period is estimated to be 53 millions on the "usual status"
concept. The acceleration in the economy's growth rate to 7% per annum, with special emphasis on the
agriculture sector, is expected to help in creating 54 million work opportunities over the period. In other
words, if the economy maintains an annual growth of 7%, it would be just sufficient to absorb the new
additions to the labour force. If the economy could grow at around 8% per annum during the plan period,
the incidence of open unemployment could be brought down by two million persons, thus attaining near
full employment by the end of the plan period, according to the plan.
However, there appears to be some confusion about the figure of open unemployment. Perhaps the
Planning Commission referred to the current figure while the Labour Ministry‟s figure referred to the
accumulated unemployment backlog.

Recession: Affecting employment growth

A recession is characterized by rising unemployment, increase in government borrowing, decrease of
share and stock prices, and falling investment. All of these characteristics have effects on people as they
have a general understanding of the recessions' negative effects. But how an ordinary consumer gets
affected by an employment recession, in particular is not really clear. The Centre for Economic and
Policy Research states that the looming recession will raise unemployment by about two to 3% depending
on the severity of the recession. On the other hand, unemployment data does not represent the educated
workforce. For them, the truth is there are more available jobs than there are candidates and the
unemployment rise affects mainly the low-skilled workers. At most, this is the unemployment impact of
the perceived recession for that year. Companies differ to a certain degree on their outlook regarding the
hiring of additional workers or streamlining their workforce. There are companies who think their
concern is on the difficulty of looking for skilled workers who would help boost their efficiency. Others
implement a freeze on hiring. There are even companies who have laid off some of their workers. These
realities are also seen even during normal times but presently, these moves are made with extra caution
and rigid analysis. The findings are part of a first of its kind survey conducted by the Labour Bureau of
ministry of Labour and Employment as part of a study on the effect of economic slowdown on
employment in India. A sample size of 2,581 units covering 20 centres across 11 states was used for the
survey. Eight major sectors like textile and garment industry, metals and metal products, Information
Technology (IT) and business process outsourcing (BPO), automobiles, gems and jewellery,
transportation, construction and mining industries were also included in the survey.
The total employment in all these sectors had come down from 16.2 million in September 2008 to 15.7
million by December 2008.
Exporting units had observed a higher decline in employment with gems and jewellery sector shedding
8.43% of its work force. This is followed by metals and textile sector which lay off 2.6 and 1.29% of their
work force, respectively.
Among the domestic sector units, gems and jewellery sector again witnessed the maximum decline in
employment with 11.9% of their work force losing their jobs. This was followed by automobiles and
transport sectors that shed 4.79 and 4.03% of their work force. The study also found out that the overall
decline in contract workers was observed to be 3.88% during the period in comparison to only 0.63%
decline for direct employees.
Contradicting popular belief that the IT and BPO sector during the same period had embarked on
retrenchment, the sector had infact increased its employment marginally by 0.33%.

3.1.3 Impact on Indian Economy

Indian economic policy after independence was influenced by the colonial experience (which was seen by
Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended
towards protectionism, with a strong emphasis on import substitution, industrialization under state
monitoring, and state intervention at the micro level in all businesses especially in labour and financial
markets, a large public sector, business regulation, and central planning. Five-Year Plans of India
resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications,
insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s.
Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj,
were required to set up business in India between 1947 and 1990.
In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly reduced
License Raj and also promoted the growth of the telecommunications and software industries.
The following impact of Indian Economic
The low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from
1950s to 1980s, while per capita income averaged 1.3%. At the same time, Pakistan grew by 5%,
Indonesia by 9%, Thailand by 9%, South Korea by 10% and in Taiwan by 12%.
Only four or five licenses would be given for steel, electrical power and communications. License
owners built up huge powerful empires.
A huge public sector emerged. State-owned enterprises made large losses.
Infrastructure investment was poor because of the public sector monopoly.
License Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout
much of the country" and corruption flourished under this system.

Did You Know?

According to the latest government study, five lakhs people were rendered jobless between October and
December 2008 due to the recession.

3.2 Privatization
Privatization is very necessary for India‟s welfare because main points are here that India public sector
i.e., Govt. Corporations has lot of problems like bureaucracy, red tapism, corruptions, not good
implementation of plans, lot of ignorance about work. These are some of basic problems of public sectors
and in privates we experienced good quality services, product, customer satisfaction and good for social
welfare and it is also good for globalization and shinning of India.
Public sectors cannot participate in country's shining. Government can only make some policies for better
work but again the same problem of implementation of policies. On the other hand private sector makes
full effort to implement the policies.
So privatization is only way by which a country can succeed. You can take the examples of America and
Japan these are the countries where private market prevails and these are the most developed countries of
the world also when Soviet Union tried that public sectors. Criteria they did not succeed in that process so
they also have to make the changes in the market and made it private sectors.
Market that they are progressing at good pace. So, privatization is the best way for success.
Moreover these firms cannot totally be self-cantered. They do need employees to work for them; this in
turn would increase employment opportunities. Privatization would also mean end of government‟s
monopoly, which ensures market competition wherein the consumers benefit the most.
We have in front of us the privatization of telecom industry and the decline in tariff due to competition.
As far as interests of farmers are concerned the government can intervene and ensure that they get their
dues.
Privatization every option has its pros and cons why not we attempt for a midway we take good points of
privatization and try to remove off the bad point of PSU just imagine how much synergistic effect this
will have when the Immense power of government machinery and the financial and knowledge input of
private sector with an aim to surge ahead will have on the growth of people and country.
It is necessary to remove poverty, illiteracy from country and not the poor and illiterate from country.
The Growth rate of 9% is just a computed value by a human being and not real face of status of
population in our country, so just going by saying we have 9% growth is just trying to make one happy
and run from reality.

Caution
Due to some issues which are generally not be taken care by private firms like environmental protection,
farmer's interests, poor men's interests and many more, where complete privatization is not desirable. So,
it is very essential to keep a balance between the public sector and private industries.

3.2.1 Impact of Privatization

The process of selling state-owned enterprises (SOEs) to private owners often elicits high emotions.
Those who support privatization tend to consider it one of the most important economic events of the
millennium, while those who oppose it are equally convinced that the process threatens the foundations of
the modern welfare state, if not of democracy itself. If we put aside the emotions and take a cold, hard
look at privatization to date, what could we say about privatization‟s impact on the world economy? Has
it transformed the productive capacity of the economies where it has been implemented or merely
transferred ownership of the choicest pieces from the public to the private sector? The objective of this
chapter is not to argue for or against privatization; instead, it is to survey the empirical record of the past
twenty years and attempt to codify the “lessons of privatization.” As we will see, although most of the
privatization programs implemented thus far have been economically successful, the technology, or
methodology, of divesting state ownership has not been fully proven.
Britain‟s former Conservative government under Margaret Thatcher, who took office in 1979, is widely
credited with pioneering and legitimizing privatization as an official state policy. To say that the world
has followed Mrs. Thatcher‟s lead over the past two decades would be a significant understatement. To
understand just how important privatization programs have been as agents of economic change, consider
the following key points:
Less than ten years after the collapse of communism in Eastern Europe and the former Soviet
Union, state ownership in formerly communist countries has been dramatically reduced. The state
sector today represents less than half of the economies of Eastern Europe, and less than 30% of
Russia‟s economy. Although the methods that have brought about this transformation have often
been controversial, it is generally believed that privatization is now irreversible.
Since 1988 over 70 countries have used direct asset sales as a method of divesting state-owned
firms. These sales have risen over $175 billion through more than 800 individual transactions.
The direct sale of SOEs to private, frequently foreign-owned investors or corporations brings the
divesting government much-needed cash, and may often involve an injection of foreign
technology and expertise.
Since 1979 over 60 national governments have raised almost $500 billion through about 600
separate public sales of stock in SOEs. These share-issue privatizations (SIPs) have almost
always been the largest share issues in a nation‟s history, and have often both radically increased
the number of individual shareholders and increased the liquidity and total capitalization of the
nation‟s stock market.

Why privatize?
The chief reason that governments increasingly choose to privatize SOEs is clear. Governments have
been selling SOEs to private investors in order to improve these firms‟ performance through the discipline
of private ownership, as well as to raise revenue without raising taxes. The specific objectives articulated
for privatization programs are often very ambitious, and most tend to mirror the goals voiced by
Thatcher‟s government during the early 1980s.
These objectives are to: (1) raise new revenue for the state; (2) promote economic efficiency; (3) reduce
government interference in the economy; (4) promote wider share-ownership; (5) provide the opportunity
to introduce competition; and (6) develop the nation‟s capital markets.
Although these objectives may initially seem unrealistic, four recent studies, together examining over 200
companies privatized by over 40 countries, clearly document significant improvements in the operating
performance and financial strength of newly privatized firms.

Output, profitability, and efficiency increase significantly in the years after firms are privatized.
In both industrial and developing countries total earnings of newly privatized companies increase, on
average by more than 25% in the three years following divestiture.
Profitability more than doubles in developing country privatizations, and increases by 45% in industrial
country privatizations, while efficiency increases by 16% and 11%, respectively, in developing and
industrial country privatizations.
Capital investment spending surges after a firm is privatized.
Capital expenditures as a fraction of total sales increase by 44% in industrial country privatizations and by
over 70% in developing country privatizations. At least three factors seem to cause this investment spree.
First, privatized companies are no longer required to borrow from the public sector; instead, they have the
freedom to both select and finance necessary capital investments. Second, once privatized, the rapid
growth that typically follows privatization is subsequently followed by capital investment in new plants
and equipment. Third, privatization transfers the authority for decision making from public officials to the
firm‟s shareholders, who are the only stakeholders with the incentive to increase the long-term value of
the firm.
Total employment will usually not decline after a firm is privatized.
Of course, when an SOE is obviously over-staffed, privatization will bring layoffs. However, all four
studies referred to above, which were based on data from OECD economies (about 66% to 75% of the
cases) and transitional and developing economies (the remainder of the cases) document that employment
in newly privatized companies, on average, either remains the same or increases after divestiture. These
findings suggest that the great fear of those opposing privatization that it will lead to large scale job losses
will not generally be founded, unless the state-owned enterprise is clearly over-staffed before being
privatized.
The studies cited above provide compelling evidence that share-issue privatizations (SIPs) “work” in the
sense that efficiency, profitability, and total sales increase after divestiture, without necessarily sacrificing
employment. Nevertheless, the studies‟ focus on SIPs means they cover only a minuscule fraction of the
total number of companies that have been privatized since 1979. The World Bank reports that over 12,000
companies were privatized during the period from 1980 to 1993 (almost half between 1991 and 1993);
less than 5% of these divestitures involved public share offerings.

Task
What are the advantages of share-issue privatizations (SIPs)? Discuss

3.2.2 Alternative Methods

After the collapse of European communism in 1989 the new governments of the region faced an
excruciatingly difficult challenge: how to privatize SOEs in a politically acceptable way. The most
straightforward method simply auctioning off the SOEs to the highest bidder would surely have resulted
in the wholesale transfer of the nation‟s most prized assets to foreign ownership, since only international
corporations and investors had the necessary financial wealth and managerial expertise.
While this was politically an unattractive option, waiting to determine the optimal method of privatization
was also an unattractive option during the early 1990s because many SOEs were either rapidly losing
value in the managerial vacuum that followed communism‟s collapse or were being systematically looted
of their choicest assets through the process of “spontaneous privatization”.

3.2.3 Voucher Programs

In much of Eastern Europe, the only politically feasible alternative to auctioning off SOEs was to
effectively give the SOEs directly to the nation‟s citizens by giving them the exclusive right (and the
means) to purchase shares. These voucher programs had the virtues of speed and perceived fairness:
literally thousands of firms were privatized in five years or less, and the non-discriminatory nature of
these voucher distribution programs ensured their popularity. This popularity had the added bonus of
making privatization politically irreversible because large percentages of the population in each country
had effectively become capitalists. In spite of the fact that voucher programs were probably the only
feasible method of privatizing Eastern European economies in the early 1990s, these programs have
several serious weaknesses, and are unlikely to remain as important in future SOE divestitures. The
principal drawbacks are threefold:
Voucher programs do not raise cash for the SOE or the government.
Voucher privatizations do not result in an infusion of new technology or managerial expertise.
Vouchers do nothing to establish an effective monitoring mechanism for newly privatized firms,
and the ownership structure that results from their exercise is usually highly flawed.

3.2.4 Direct Selling of Assets

In countries that were never communist, the direct sale of SOE assets to private investors has emerged as
an alternative to voucher privatizations. In a direct sale, all or part of an SOE is auctioned, either to an
existing company (foreign or domestic) or to a group of investors. Where politically feasible, direct sales
are superior to voucher programs in that they solve all three of the problems detailed above. In addition,
they bring in significant revenue for the government; they frequently inject new technology and expertise
into the SOE‟s operations; and they solve the monitoring problems that an atomistic ownership structure
creates.
Asset sales also compare favourably with SIPs in terms of the speed with which direct sales can be
arranged, the ability of governments to sell SOEs piecemeal, and the fact that the direct sale format means
that buyers are obliged to commit to certain operating standards of their acquired firms.
Furthermore, a recent study has shown that asset sales are preferred to SIPs in countries with relatively
undeveloped capital markets. It is perhaps not surprising that direct sales have been much more common
than SIPs during the past two decades. In the period 1980–97, there were 831 privatizations through direct
sales, totalling $176 billion; the comparable figures for SIPs were 660 privatizations with a combined
value of $440 billion.

3.2.5 Share-issue Privatizations

Despite the great popularity of asset sales, share-issue privatizations (SIPs) have clearly become the
divestment method of choice for most privatizing governments. In addition to a maturation of the
privatization technology and increasing comfort with capital market tools, there are at least four other
reasons why governments have come to see SIPs as their preferred divestment vehicle:
From both an operational and a financial perspective SIPs are the only practical method of selling off
the largest SOEs. For example, to whom could the Japanese government have sold a 35% stake in
Nippon Telegraph and Telephone (NTT) in the late-1980s, if not to the public? Since the three NTT
tranches in 1987 and 1988 raised almost $80 billion, no other company could have raised the capital
to buy NTT outright or marshalled the managerial resources to run the newly acquired company with
300,000 employees.
 A SIP is by far the most transparent method of selling corporate assets. This feature is often
extremely important to a government trying to convince sceptical voters that the nation‟s economic
“crown jewels” are being sold fairly and honestly.
Governments have realized that they can modify the share allocation, pricing, and other terms of a
public share offering to achieve political as well as economic objectives. For example, governments
can provide favoured domestic investors with an immediate capital gain on the shares they purchase
by deliberately setting the initial offering price low, and then allocating more shares to these investors
than to foreign or institutional investors.
SIPs marketed to domestic investors have vastly increased the total capitalization and trading volume
of almost every major non-US stock market. Developing a national capital market is usually a major
objective of privatization programs, and SIPs have the capacity to transform these markets. As
mentioned previously, almost without exception, SIPs have been the largest stock offers in any
nation‟s history.

Governments have also promoted the development of their domestic capital markets through SIPs in order
to develop capital markets large enough to support a privately financed, fully funded pension system and
to promote the formation of capable and sophisticated institutional investors. This is especially important
for those countries with rapidly aging populations (such as Japan and the countries of Western Europe)
which have come to understand the dangers posed by reliance on a pay-as-you-go, government-run
system of pension financing. Finally, many governments have expressed the hope that SIPs will help
promote an equity culture among their nation‟s investors, and there is evidence that this has often
occurred.
For example, privatizations under Thatcher increased the fraction of the British population holding shares
from 7% in 1979 to 24% in 1990. Meanwhile, more than 3 million Frenchmen and 2 million Germans
purchased shares in, respectively, the initial offerings of Banque Paribas (January 1987) and Deutsche
Telekom (November 1996) dramatically increasing the number of citizen shareholders in each case.
Similar increases have occurred in Chile, Italy, Spain, Denmark, and numerous other countries.

Designing share-issue privatizations

Based on the widespread usage of SIPs for privatizing enterprises, it is possible to identify some
guidelines for designing successful initiatives: Demand for appropriately priced shares of attractive
companies is essentially limitless. During a seven-week period in October and November 1996 over $28
billion was raised by nine governments, each of which sold shares in one of its firms. While this was an
unusually busy period, the ability of international capital markets to absorb large amounts of privatized
equity has consistently surprised observers.
Most SIPs are enthusiastically received by investors, at least partly because governments deliberately
under price the shares issued. Ever since the issue of British Telecom shares in 1984, governments have
generally been able to anticipate a favourable market response to their SIPs. The one exception to this rule
has been where governments have tried to extract the maximum attainable price for the shares being
offered. In these cases exemplified by the French and Italian privatizations of the early 1990s, many of
the international offers by Chinese SOEs, and almost all of the Japanese SIPs selling governments have
often met with embarrassment. In the far more typical case, governments are willing to accept under
pricing in order to generate excess demand for the shares and to pave the way for subsequent issues of
shares. The structure of privatization share offerings varies tremendously over time and from country to
country, depending on the political and economic circumstances of individual countries. For example,
governments are usually willing to under price their SIPs because the allocation of shares in these
offerings almost always heavily favours domestic investors over foreign and institutional buyers. In
addition, domestic investors are often given the opportunity to purchase shares at a discount.
Governments in many cases also find it convenient to guarantee that a newly divested firm will not be the
target of a hostile takeover or, even worse, a takeover by a foreign company by retaining a “golden share”
in the firm, giving the state veto power over changes in control.
As SIPs have become larger and more common, the competition for international underwriting and
advising mandates has become more intense. Although a handful of British and American investment
banks still dominate SIP underwriting, the competition from other European, Asian, and even developing
country banks has caused a rapid decline in underwriting fees and a shift in the balance of power from
underwriter to issuer. Large SIPs during the 1980s frequently offered lead underwriters‟ fees as high as
4% or more of the offer‟s value. Recently, banks have had to accept underwriting fees of less than 1.5%
on a handful of large deals, and in one recent Brazilian privatization the underwriting fee was a mere
0.07%.
On the other hand, since SIPs tend to be massively underpriced, bankers handling these issues of shares
bear little underwriting risk and even 1.5% of a multi-billion-dollar share issue is a sufficiently attractive
sum to attract competition.

3.2.6 Future of Privatization

Most of the privatization programs implemented thus far have proven to be economically successful, but
this does not mean that the process of privatization has become foolproof. There are important reasons to
conclude that the most challenging privatizations have not yet been attempted. For one thing, most
governments have wisely chosen to privatize the “easy” companies (the healthiest, both economically and
operationally) first, and have not yet attempted controversial privatizations of companies that are
obviously over-staffed and excessively indebted. Given that these SOEs will require painful financial
restructuring and massive layoffs before they can attract private buyers, it seems clear that the most
politically difficult privatizations lie in the future.
In spite of these difficulties, the future of privatization is bright. In country after country these programs
have yielded greater and more immediate economic payoffs, with less economic and political pain than
expected: investors around the world have demonstrated there is an amazing demand for privatized
equity. Furthermore, the secondary impacts of privatization which often include greater respect for private
property rights and individual entrepreneurship have helped many nations develop the infrastructure of a
dynamic market economy in a historically compressed time frame.
Perhaps the most important reason to be optimistic about privatization‟s future is that the three largest
developing countries appear on the verge of launching large-scale divestiture programs, and are doing so
from positions of considerable strength. China, India and Russia, which collectively represent over one-
third of the world‟s population and are already the third, sixth, and ninth largest economies, respectively,
on a purchasing power basis, have all experimented with privatization, but in all three cases large sections
of the economy remain state-owned. The privatization programs in these three countries will be truly
revolutionary in scale and scope. If these programs are successful, they will provide a valuable example
for many other countries to follow.

3.3 Globalization
Globalization is the new buzzword that has come to dominate the world since the nineties of the last
century with the end of the cold war and the break-up of the former Soviet Union and the global trend
towards the rolling ball. The frontiers of the state with increased reliance on the market economy and
renewed faith in the private capital and resources, a process of structural adjustment spurred by the
studies and influences of the World Bank and other International organizations have started in many of
the developing countries. Also Globalization has brought in new opportunities to developing countries.
Greater access to developed country markets and technology transfer hold out promise improved
productivity and higher living standard. But globalization has also thrown up new challenges like growing
inequality across and within nations, volatility in financial market and environmental deteriorations.
Another negative aspect of globalization is that a great majority of developing countries remain removed
from the process. Till the nineties the process of globalization of the Indian economy was constrained by
the barriers to trade and investment liberalization of trade, investment and financial flows initiated in the
nineties has progressively lowered the barriers to competition and hastened the pace of globalization.

3.3.1 Impact on India

India opened up the economy in the early nineties following a major crisis that led by a foreign exchange
crunch that dragged the economy close to defaulting on loans. The response was a slew of Domestic and
external sector policy measures partly prompted by the immediate needs and partly by the demand of the
multilateral organizations. The new policy regime radically pushed forward in favour of a more open and
market oriented economy.
Major measures initiated as a part of the liberalization and globalization strategy in the early nineties
included scrapping of the industrial licensing regime, reduction in the number of areas reserved for the
public sector, amendment of the monopolies and the restrictive trade practices act, start of the
privatization programme, reduction in tariff rates and change over to market determined exchange rates.
Over the years there has been a steady liberalization of the current account transactions, more and more
sectors opened up for foreign direct investments and portfolio investments facilitating entry of foreign
investors in telecom, roads, ports, airports, insurance and other major sectors.
The Indian tariff rates reduced sharply over the decade from a weighted average of 72.5% in 1991–92 to
24.6 in 1996–97.Though tariff rates went up slowly in the late nineties it touched 35.1% in 2001–02.
India is committed to reduced tariff rates. Peak tariff rates are to be reduced to be reduced to the minimum
with a peak rate of 20%, in another 2 years most non-tariff barriers have been dismantled by March 2002,
including almost all quantitative restrictions.

3.3.2 India with the Global

The liberalization of the domestic economy and the increasing integration of India with the global
economy have helped step up GDP growth rates, which picked up from 5.6% in 1990–91 to a peak level
of 77.8% in 1996–97. Growth rates have slowed down since the country has still been able to achieve 5–
6% growth rate in three of the last six years. Though growth rates has slumped to the lowest level 4.3% in
2002–03 mainly because of the worst droughts in two decades the growth rates are expected to go up
close to 70% in 2003–04. A Global comparison shows that India is now the fastest growing just after
China.
This is major improvement given that India is growth rate in the 1970's was very low at 3% and GDP
growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of India. Though
India's average annual growth rate almost doubled in the eighties to 5.9% it was still lower than the
growth rate in China, Korea and Indonesia. The pickup in GDP growth has helped improve India's global
position. Consequently India's position in the global economy has improved from the 8th position in 1991
to 4th place in 2001. When GDP is calculated on a purchasing power parity basis.

3.3.3 Globalization and Poverty

Globalization in the form of increased integration though trade and investment is an important reason why
much progress has been made in reducing poverty and global inequality over recent decades. But it is not
the only reason for this often unrecognized progress, good national polices, sound institutions and
domestic political stability also matter.

Despite this progress, poverty remains one of the most serious international challenges we face up to 1.2
billion of the developing world 4.8 billion people still live in extreme poverty.
But the proportion of the world population living in poverty has been steadily declining and since 1980
the absolute number of poor people has stopped rising and appears to have fallen in recent years despite
strong population growth in poor countries. If the proportion living in poverty had not fallen since 1987
alone a further 215million people would be living in extreme poverty today. India has to concentrate on
five important areas or things to follow to achieve this goal. The areas like technological
entrepreneurship, new business openings for small and medium enterprises, importance of quality
management, new prospects in rural areas and privatization of financial institutions. The manufacturing of
technology and management of technology are two different significant areas in the country.

There will be new prospects in rural India. The growth of Indian economy very much depends upon rural
participation in the global race. After implementing the new economic policy the role of villages got its
own significance because of its unique outlook and branding methods. For example food processing and
packaging are the one of the area where new entrepreneurs can enter into a big way. It may be organized
in a collective way with the help of co-operatives to meet the global demand.
Understanding the current status of globalization is necessary for setting course for future. For all nations
to reap the full benefits of globalization it is essential to create a level playing field. President Bush's
recent proposal to eliminate all tariffs on all manufactured goods by 2015 will do it. In fact it may
exacerbate the prevalent inequalities. According to this proposal, tariffs of 5% or less on all manufactured
goods will be eliminated by 2005 and higher than 5% will be lowered to 8%. Starting 2010 the 8% tariffs
will be lowered each year until they are eliminated by 2015.

3.3.4 GDP Growth Rate

The Indian economy is passing through a difficult phase caused by several unfavourable domestic and
external developments; Domestic output and Demand conditions were adversely affected by poor
performance in agriculture in the past two years. The global economy experienced an overall deceleration
and recorded an output growth of 2.4% during the past year growth in real GDP in 2001–02 was 5.4% as
per the Economic Survey in 2000–01. The performance in the first quarter of the financial year is5.8%
and second quarter is 6.1%.

3.3.5 Export and Import

India's Export and Import in the year 2001–02 was to the extent of 32,572 and 38,362 million
respectively. Many Indian companies have started becoming respectable players in the International
scene. Agriculture exports account for about 13 to 18% of total annual of annual export of the country. In
2000–01 Agricultural products valued at more than US $ 6million were exported from the country 23% of
which was contributed by the marine products alone. Marine products in recent years have emerged as the
single largest contributor to the total agricultural export from the country accounting for over one fifth of
the total agricultural exports. Cereals (mostly basmati rice and non-basmati rice), oil seeds, tea and coffee
are the other prominent products each of which accounts for nearly 5 to 10% of the country‟s total
agricultural exports.

Where does Indian stand in terms of Global Integration?

India clearly lags in globalization. Number of countries has a clear lead among them China, large part of
east and far east Asia and Eastern Europe. Let‟s look at a few indicators how much we lag.
Over the past decade FDI flows into India have averaged around 0.5% of GDP against 5% for China
5.5% for Brazil. Whereas FDI inflows into China now exceeds US $ 50 billion annually. It is only US
$ 4billion in the case of India
Consider global trade––India's share of world merchandize exports increased from 05% to 07% over
the past 20 years. Over the same period China's share has tripled to almost 4%.
 India's share of global trade is similar to that of the Philippines and economy 6 times smaller
according to IMF estimates. India under trades by 70–80% given its size, proximity to markets and
labour cost advantages.
It is interesting to note the remark made last year by Mr. Bimal Jalan, Governor of RBI. Despite all
the talk, we are now where ever close being globalized in terms of any commonly used indicator of
globalization. In fact we are one of the least globalized among the major countries––however we look
at it.
As Amartya Sen and many other have pointed out that India, as a geographical, politico-cultural
entity has been interacting with the outside world throughout history and still continues to do so. It
has to adapt, assimilate and contribute. This goes without saying even as we move into what is called
a globalized world which is distinguished from previous eras from by faster travel and
communication, greater trade linkages, denting of political and economic sovereignty and greater
acceptance of democracy as a way of life.

The implications of globalization for a national economy are many. Globalization has intensified
interdependence and competition between economies in the world market. This is reflected in
Interdependence in regard to trading in goods and services and in movement of capital. As a result
domestic economic developments are not determined entirely by domestic policies and market conditions.
Rather, they are influenced by both domestic and international policies and economic conditions. It is thus
clear that a globalizing economy, while formulating and evaluating its domestic policy cannot afford to
ignore the possible actions and reactions of policies and developments in the rest of the world. This
constrained the policy option available to the government which implies loss of policy autonomy to some
extent, in decision-making at the national level.

3.4 Competition Act

The Competition Act was enacted in 2003 in line with the international competition regime. It aims at
promoting and sustaining competition and ensuring freedom of trade rather than curbing monopolies. The
Competition Act has specific provisions dealing with abuse of dominance, cartels, and predatory pricing.

3.4.1 Competition Act in India

The past few years have been challenging for the economy and for businesses world over, making the task
of policy makers even more daunting. India, in the pursuit of globalization responded by opening up its
economy by removing controls and resorting to liberalization. In the light of this, the obvious need of the
hour was that the Indian market be geared to face competition from within the country and outside. The
financial crisis which gripped world strengthened the need and highlighted the importance of a strong and
effective competition policy, a policy which would encourage markets to work well for the benefit of
business and consumers, thereby increasing the country‟s economic fitness: markets characterized by
effective competition makes firms innovate more, keep prices down for consumers and improved total
factor productivity drives economic growth. These factors are all the more relevant given the financial
challenges faced by the country. It is clear that ultimately, the way out of this crisis – for the financial
sector and the wider economy – lies with competitive markets, backed up by a robust competition policy.
Competition policy is defined as those government measures that affect the behaviour of enterprises and
structure of the industry with a view to promoting efficiency and maximizing consumer/social welfare.
There are two components of a comprehensive competition policy. The first involves putting in place a
set of policies that enhance competition or competitive outcomes in the markets, such as relaxed industrial
policy, liberalized trade policy, convenient entry and exit conditions, reduced controls and greater reliance
on market forces. The other component of competition policy is a law and its effective implementation to
prohibit anti competitive behaviour by businesses, to prohibit abusive conduct by dominant enterprise, to
regulate potentially anti competitive mergers and to minimize unwarranted government/regulatory
controls.
In the wake of economic liberalization and wide spread economic reforms introduced by India since 1991
and in conformity with the commitments made at the WTO, in October 1999, the Government of India
appointed a High Level Committee (Raghavan Committee) on Competition Policy and Competition Law
to advise a modern competition law for the country in line with international developments and to suggest
a legislative framework, which may entail a new law or appropriate amendments to the MRTP Act. The
Committee submitted its report to the Central government. The Central Government consulted all
concerned including the trade and industry associations and the general public. The Central Government
after considering the suggestions of the trade and industry and the general public decided to enact a law
on Competition to replace the then existing competition law namely, the Monopolies and Restrictive
Practices Act (1969) (the MRTP Act) which was primarily designed to restrict growth of monopolies in
the market with a modern competition law in sync with the established competition law principles. As the
first step towards this transformation, a new Competition Act, 2002 was enacted which received
Presidential assent on January 13, 2003.
The Competition Act, 2002 („the Act‟) in its preamble, seeks to achieve the following objectives:
Prevent practices having adverse effect on competition.
Promote and sustain competition in the markets.
Protect the interests of consumers.
Ensure freedom of trade carried on by other participants in markets, in India.

The Act regulates the following broad areas of competition law in India
Anti-competitive agreements: these could be both horizontal and vertical agreements
Abuse of dominant position: The Act prohibits abuse of such dominant position by an enterprise or a
group. The Competition Commission of India (the Commission) is empowered into such matters.
Combinations: It needs to be noted that the provisions relating to regulation of “combinations”
(mergers, acquisitions and amalgamations) are still to be notified. The same are likely to be notified
any time after the Commission finalizes the regulations for the same.
Competition advocacy: this is defined as the ability of the competition office to provide advice,
influence and participate in government economic and regulatory policies in order to promote more
competitive industry structure, firm behaviour and market performance.(World Bank)

The Competition (Amendment) Act, 2007

The Competition (Amendment) Act, 2007 was approved by the Parliament in September 2007 and
received Presidential assent on 24thSeptember 2007. The amendment brought significant changes in the
then existing regulatory infrastructure established under the Competition Act. A few of the major changes
are set out below:
The Commission to be an expert body which will function as a market regulator for preventing anti
competitive practices in the country and would also has advisory role and advocacy functions.
The Commission to function as collegiums and its decisions would be based on simple majority.
Omits power of the Commission to award compensation to parties against proven anti competitive
practices indulged in by enterprises.
Allows continuation of the MRTP Commission till two years after the constitution of the Commission
for trying pending cases under the MRTP Act and to dissolve the same thereafter.
Notification of all “combinations” i.e. Mergers, Acquisitions and Amalgamations to the Commission
made compulsory.
 Establishment of a Competition Appellate Tribunal with a three member Quasi judicial body to be
headed by a retired or serving judge of the Supreme Court or Chief Justice of High Court to hear and
dispose appeals against any direction issued or decision made or order passed by the Commission.

Present Position: Competition Act 2002, as amended

The Competition Act 2002, as amended through Competition (Amendment) Act 2007 is currently in
force. All its provisions with the exception of sections 5 and 6 (relating to Combinations) and provisions
before Competition Commission of India (CCI) benches relating to implementation of these provisions
have been notified. The regulations for the provisions that have been notified have also been issued by the
Commission. The Competition Commission of India and the Competition Appellate Tribunal have been
fully constituted with the appointment of respective Chairpersons and Members.

3.4.2 Competition Act Impact on Indian Business

With the advent of globalization, the Indian economy was opened up removing controls and a policy of
liberalization is being followed in every aspects of Indian economy. As a result the Indian market was
forced to competition from inside and outside. It was felt that the Monopolies and Restrictive Trade
Practices Act 1969, was outdated to match with the international economic developments and the
necessity was felt to enact a new Law to promote competition and to curb monopolies.
The Act provides for the establishment of a Competition Commission to prevent practices, having adverse
effect on competition to promote and sustain competition in markets, to protect the interests of consumers
and to ensure freedom of trade carried on by other participants in markets, in India, and for matters
connected therewith or incidental thereto. As per the Act no enterprise shall abuse its dominant position in
the economy and also it prohibits combinations by enterprises which are likely to cause an adverse effect
on competitions with in the relevant market in India.
The Competition Commission shall consist of a chairperson and not less than two and not more than ten
members to be appointed by the Central Government. The Commission can enquire into contraventions of
the provisions of the Act, on the basis of complaints received by it or on a reference made to it by the
central or state government or a statutory authority.
The Jurisdiction, powers and authority of the Commission may be exercised by Benches which shall be
constituted by the Chairperson. The Bench shall consists of not less than two members.
On receipt of a complaint or a reference from the Central Government, or a Statutory authority or on its
own knowledge or information, the Commission is of the opinion that there exists a prima facia case,
shall direct the Director General to cause an investigation to be made into the matter.
The Commission can levy penalty for contravention of its orders, failure to comply with its directions,
making of false statements or omission to furnish material information, etc. Further the Commission can
levy upon an enterprise a penalty of not more than 10% of its average turnover for the last three financial
years. It can also order division of dominant enterprises. It will also have power to order demerger in the
case of mergers and amalgamations that adversely affect competition.
The act provides for a fund called the Competition fund. The grants given by the Central Government,
fees received under the Act and costs realized by the Commission and application fees charged will be
credited into this fund.

3.5 Foreign Direct Investment in India

Foreign direct investment (FDI) in India has played an important role in the development of the Indian
economy. The FDI in India has in a lot of ways enabled India to achieve a certain degree
of financial stability, growth and development. This money has allowed India to focus on the areas that
needed a boost and economic attention, and address the various problems that continue to challenge the
country.
India has continually sought to attract FDI from the world‟s major investors. In 1998 and 1999, the Indian
national government announced a number of reforms designed to encourage and promote a favourable
business environment for investors.
The FDIs are permitted through financial collaborations, through private equity or preferential allotments,
by way of capital markets through euro issues, and in joint ventures. FDI is not permitted in the arms,
nuclear, railway, coal or mining industries.
A number of projects have been implemented in areas such as electricity generation, distribution and
transmission, as well as the development of roads and highways, with opportunities for foreign investors.
The Indian national government also granted permission for FDIs to provide up to 100% of the financing
required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 cores,
approximately $352.5 million.
Currently, FDI is allowed in financial services, including the growing credit card business. These also
include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in
private banks, although there is condition that these banks must be multilateral financial organizations. Up
to 45% of the shares of companies in the global mobile personal communication by satellite services
(GMPCSS) sector can also be purchased.
In 2007, India received $34 billion in FDI, a huge growth compared to the previous years, but
significantly less than the $134 billion that flowed into China. Although the Chinese approval process is
complex, China continues to outshine India as a choice destination for foreign investors. Why does India,
a country with resources and a skilled workforce, lag so far behind China in FDI amounts?
While many of the issues that plague India in the aspects of telecommunications, highways and ports have
been identified and remedied, the slow development and improvement of railways, water and sanitation
continue to deter major investors.
Federal legislation is another perverse impediment for India. Local authorities in India are not part of the
approval process and the large bureaucratic structure of the central government is often perceived as a
breeding ground for corruption. Foreign investment is seen as a slow and inefficient way of doing
business, especially in a paperwork system that is shrouded in red tape.
In India, Foreign Direct Investment Policy allows for investment only in case of the following form of
investments:
Through financial alliance
Through joint schemes and technical alliance
Through capital markets, via Euro issues
Through private placements or preferential allotments
Foreign Direct Investment in India is not allowed under the following industrial sectors:
Arms and ammunition
Atomic Energy
Coal and lignite
Rail Transport
Mining of metals like iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc

Did You Know?

Physical infrastructure is the biggest hurdle that India currently faces, to the extent that regional
differences in infrastructure concentrates FDI to only a few specific regions.

3.5.1 FDI in India across Different Sectors

Hotel and Tourism
Hotels include restaurants, beach resorts and business ventures providing accommodation and food
facilities to tourist. Tourism would include travel agencies, tour operators, transport facilities, leisure,
entertainment, amusement, sports and health units. 100% FDI is permitted for this sector through the
automatic route.
Trading
For trading companies 100% FDI is allowed for
Exports
Bulk Imports
Cash and Carry wholesale trading.

Power
For business activities in power sector like electricity generation, transmission and distribution other than
atomic plants the FDI allowed is up to 100%.
Drugs and Pharmaceuticals
For the production of drugs and pharmaceutical a FDI of 100% is allowed, subject to the fact that the
venture does not attract compulsory licensing, does not involve use of recombinant DNA technology.
Private Banking
FDI of 49% is allowed in the Banking sector through the automatic route provided the investment adheres
to guidelines issued by RBI.
Insurance Sector
For the Insurance sector FDI allowed is 26% through the automatic route on condition of getting license
from Insurance Regulatory and Development Authority (IRDA).
Telecommunication
For basic, cellular, value added services and mobile personal communications by satellite, FDI is
49%.
For ISPs with gateways, radio-paging and end to end bandwidth, FDI is allowed up to 74%. But any
FDI above 49% would require government approval.

Business Processing Outsourcing

FDI of 100% is permitted provided such investments satisfy certain prerequisites.
NRI's and OCB's
They can have direct investment in industry, trade and infrastructure Up to 100% equity is allowed in the
following sectors:
34 High Priority Industry Groups
Export Trading Companies
Hotels and Tourism-related Projects
Hospitals, Diagnostic Centres
Shipping
Deep Sea Fishing
Oil Exploration
Power
Housing and Real Estate Development
Highways, Bridges and Ports
Sick Industrial Units
Industries Requiring Compulsory Licensing
Industries Reserved for Small Scale Sector

3.5.2 Role of the Foreign Direct Investment

There are a number of areas in which Governments could encourage support from foreign investors and
source country Governments in the current climate, where the traditional role of the corporation is
changing from pure profit-oriented organization to one of taking a role in other attributes of economic
development. The Monterrey Consensus, adopted in March 2002, clearly recognizes that while
Governments provide the framework for the operations of foreign investors, businesses, on their part, are
required to engage as reliable and consistent partners in the development process. They should take into
account not only the economic and financial but also the developmental, social, gender and
environmental implications of their undertakings –what is commonly referred to as corporate social
responsibility (CSR). TNCs and other firms should be encouraged to accept and implement the principle
of good corporate citizenship and should, inter alia, subscribe to the United Nations Global Compact, an
initiative encouraging the private sector to embrace, support and enact a set of core values in the areas of
human rights, labour standards and environmental practices.

Source countries too are expected to facilitate and encourage investment flows to developing countries. In
this regard, they supported the Monterrey Consensus proposal to increase their support to private foreign
investment in infrastructure development and other priority areas, including projects to overcome the
digital divide in developing countries. This could be achieved through a range of instruments including
export credits, venture capital, leveraging aid resources and risk guarantees.

3.6 World Trade Organization (WTO) in India

The World Trade Organization is an international organization which was created for the liberalization of
international trade. The World Trade Organization came into existence on January 1st, 1995 and it is the
successor to General Agreement on Trade and Tariffs (GATT). The World trade organization deals with
the rules of trade between nations at a global level. WTO is responsible for implementing new trade
agreements. All the member countries of WTO have to follow the trade agreement as decided by the
WTO.

3.6.1 Structure of the WTO

Following is the structure of WTO:
Highest Level: Ministerial Conference
The Ministerial Conference is the top most body of the WTO, which meets in every two years. It brings
together all the members of WTO.
Second Level: General Council
The General Counsel of the WTO is the highest level decision making body in Geneva, which meets
regularly to carry out the functions of WTO.
Third Level: Councils for Trade
The Workings of GATT, which covers international trade in goods, are the responsibility of the Council
of Trade.
Fourth Level: Subsidiary Bodies
There are subsidiary bodies under the various councils dealing with specific subjects such as agriculture,
subsidies, market access etc.

3.6.2 Benefits of WTO

It helps promote peace and prosperity across the globe.
Disputes are settled amicably.
Rules bring about greater discipline in trade negotiations, thereby reducing inequalities to a large
extent.
Free trade reduces the cost of living and increases household income.
Companies have greater access to markets and consumers have wider range of products to choose
from.
 Good governance accelerates economic growth

3.6.3 India and WTO

India is one of the founding members of WTO along with 134 other countries. India's participation in an
increasingly rule based system in governance of International trade, would ultimately lead to better
prosperity for the nation. Various trade disputes of India with other nations have been settled through
WTO. India has also played an important part in the effective formulation of major trade policies. By
being a member of WTO several countries are now trading with India, thus giving a boost to production,
employment, standard of living and an opportunity to maximize the use of the world resources.

3.6.4 Impact of WTO in India

The negative repercussion of the world trade organization (WTO) agreement on India farming community
is well published and has become a major concern of wide spectrum of people and organizations in India.
The drastic erosion of the price of farm produce and the dumping of cheap agriculture commodities by
other countries are allegedly undermining the welfare of Indian farmers who form over 70% of the
nation‟s population.

Various theoretical solutions based on political leanings and financial considerations are offered by a
wide spectra of Indian media, public and national intelligence. However, a solution based on a sound and
practical scientific approach has yet to be emerge.
Underlying all the problems is the inability of the country to compete with the other nations in pricing and
quality of Indian farm produce and agriculture commodities. Most other nations can produce at lower cost
than India, agriculture items traded in the international market.
An attempt is made here to evolve a scientific dimension for solving the WTO related negative impacts
on Indian agriculture in general and the economics of the farming community in particular.
India has one of the lowest agriculture productivity or crop productions per acre in the world. This is
responsible for most of the maladies associated with WTO considerations.
Adoption of modern agriculture production practices and putting tools of state-of the-art production
technologies in the hands of Indian farmers would make them competitive with the farmers of the other
countries. This will open the way for Indian farmers to significantly reduce unit cost of agriculture
produce, which is fundamental to successful competition in the world market.
The first step towards attaining this goal would be to evolve a systematic approach in understanding the
pros and cons of WTO agreement as it applies to the interest of India as a whole and the economics its
states and their cropping systems in particular.
In order to achieve this, the formation of a higher-level adhoc commission consisting of agricultural
professional experts with practical experience in the science of international production agriculture
involving economics of cropping system and farming communities and professional consultants including
international personnel capable of analyzing and providing remedial measures, is necessary.
This commission will conduct a time-bound in depth investigation of the problems of Indian agriculture
through discussions with a wide spectrum of farmers, farm leader, agriculture scientists and economists to
come up with a comprehensive report containing recommendations that will meet the challenges and
provide solutions to problems posed by the WTO agreements and their repercussions on Indian
agriculture.
The recommendations of the adhoc committee will be studied by an appropriate policy making team of
the government of India. A goal oriented time bound action plan will be developed in collaboration with
the adhoc committee. The implementations of the plan will we carried out under the guidance of the
adhoc committee by nominated technocrats well versed in cutting edge technologies in crop production,
agriculture economics and international marketing.
Since the success of the plan depends on achieving the goal of each phase of the plan on a timely basis,
Provisions for close and periodic reviews will be built into the implementation schedule of the plan.

3.6.5 Role of WTO

The World Trade Organization (WTO) is one of the three international organizations (the other two are
the International Monetary Fund and the World Bank Group) which by and large formulate and co-
ordinate world economic policy.
It can be argued that the WTO plays a particularly significant role in the promotion of free international
trade. The organization acts as an umbrella institution, that is an organization covering the agreements
concluded at the Uruguay Round. The Uruguay Round was the preparatory stage for the launch of the
WTO. The Round was based on the General Agreement on Tariffs and Trade (GATT).
The crucial role of the WTO is to provide a common institutional framework for the implementation of
those agreements. The organization is the result of the Uruguay Round of negotiations (1986–94) and was
formally created in 1995.

For Transparency in government procurement and Trade Facilitation India got membership of World
Trade Organization. India found the right track to make her prosperity through more trade, innovation and
renovation of new and pararelled trades and foreign trade in increasing rate. India got involved in WTO
taking effective entry first in GAT in order to enhancement and increasing rule based system in the
governance of international trade is to ensure more stability and predictability. Recently Nuclear
Agreement has successfully added to its campaign for growth of potential market and strong economy.
Foreign collaboration and allowance of their investment in various sectors directly along with technology
and skilled techniques now have been being cultivated the endeavour of attachment in WTO.

3.7 Public Sectors

The public sector is the one whose working is in the hands of the government. The government holds a
majority stake in public sector industries. Their activities are mostly influenced by the government. But
due to privatization of public sector industries, their number has reduced to a significant extent. Indian
railways, nuclear power industry, electricity board, etc. Are still in clouded in the public sector. It may be
defined as "an enterprise where there is no private ownership but its activities are not mainly confined to
the maximization of profits and private interests of the enterprise but it is influenced by social interest.

3.7.1 The Role of the Public Sector

The key issue about the role of the Government is not whether it should intervene but the kind of
intervention, including direct participation if there is insufficient capacity in the local private sector. Some
macroeconomic policies and investment-friendly policies are necessary, although not sufficient in today‟s
world of increasing competitiveness in attracting investment. The crucial role for the host Government is
to create conditions as well as be proactive in developing these new drivers to attract international
production and services in the light of the fact that contract manufacturing has grown rapidly to take
advantage of differences in costs and logistics. This implies giving equal emphasis to promoting domestic
private investment to benefit from the FDI. Simply opening up an economy is only the first step, and no
longer enough to attract sustained flows of FDI and upgrade the quality. At the minimum, foreign
investors are expecting assurances of the rule of law, a commitment to be treated no less favourably than
competing domestic investors and provisions for the free transfer of capital, profits and dividends,
guarantees against expropriation of their assets and binding arbitration of disputes. The report of the panel
on high-level financing for development to the Secretary-General advised host Governments not to
exempt foreign investors from domestic laws governing corporate and individual behaviour or to use
costly and discretionary investment incentives or those that eroded labour and environmental standards in
a “race to the bottom”. The report also said that developing countries needed to continue improving their
attractiveness to FDI through positive actions (i.e., by improving standards of accounting and auditing,
transparency, corporate governance and public administration) rather than through tax concessions, which
should be regulated and discouraged. An OECD study indicates that incentives-based competition for FDI
can be intense in selected industries (e.g., automobiles) or for particular investment projects. Most
incentives-based competition is effectively intraregional, i.e., within a region. While data on direct
financial/fiscal cost per job are not readily available, OECD estimates that in the automobile industry the
cost in OECD as well as developing countries can exceed US$ 100,000 per job. Hence the distortion
effects of incentives on a de facto basis work against local firms and against firms in sectors or types of
activities that are not targeted. Undiscerning use of investment incentives and other discretionary policies
by Governments to attract FDI can have a negative effect on FDI flows, partly because incentives could
be viewed as unsustainable.

The competition for FDI raises the delicate question of how to ensure accountability of government
officials, particularly those involved in the negotiation of discretionary incentive packages. A strong
rules-based approach to attracting FDI, including safeguards for labour standards and the environment,
can provide the policy transparency necessary to limit rent-seeking behaviour. Policies on FDI are also
needed to counter two sets of market failures. The first arises from information or coordination failures in
the investment process that can lead a country to attract insufficient FDI and more importantly the wrong
quality of FDI. The second results when private interests of TNCs diverge from the interests of the host
countries. This can lead to negative effects of FDI or a failure to harness fully the potential of the FDI.
The challenge for the Government is achieving the right balance in terms of promoting synergy between
FDI and domestic private investment in terms of a win-win situation for the citizens. At the heart of these
endeavours is improving the competitiveness of a country‟s economy to improve its economic
fundamentals and enhance living standards. As the performance of economies, industries and firms is
continuously compared and benchmarked across nations, it means that individual firms and countries
must also benchmark all activities against the best of competitors in a changing world economy marked
by knowledge and technology-based advantages. In other words, apart from the series of measures to
liberalize the economy and promote FDI that many countries are in the midst of implementing to varying
degrees, there is a need for proactive policies aimed at shaping new industrial and service locations
through a cooperative approach between the public and private sectors.

What determinants of competitiveness should the public sector focus on? The standard determinants of
competitiveness are not only the economic, technological and measurable attributes such as strong
economic fundamentals, political stability, technological effort, human resources development, physical
infrastructure and financial and labour market flexibility. There are also non-economic factors, some of
them controversial, such as the promotion of democratic institutions, human rights, corporate governance,
anti-corruption and a host of other subjective criteria. Effective governance is therefore essential to
encourage both sound FDI and domestic private investment. The role of the Government spans virtually
all aspects of economic development, and here, the focus of the discussion is narrowed down– only
aspects that have a direct bearing on promoting FDI and domestic private sector linkages will be
considered.
Following are the important roles of Public Sector in Indian Economy:
Capital Formation
Development of Infrastructure
Development of Defence Industries
Development of Basic and Key industries: Iron and steel, cement, etc
Development of Power projects
 Development of Banking and Insurance
Balanced Regional development
Balanced Economic Growth
Strong Industrial Base
Economies of Scale
Removal of Regional Disparities
Import Substitution
Export Promotion
Expansion of Employment Opportunities
Source of Revenue to the Government
Saving in Foreign Exchange
Better Allocation and Utilization of Resources
Diversity of Projects

Case Study: Research and Development

The market failures associated with research and development is positive externalities. If private benefits
are frequently less than the social benefits the market will under invest in research. This could occur if a
firm is unable to appropriate all of the benefits of the research for themselves, for example, because a
competitor is able to copy the findings of the research following the release of a new product. There is an
externality argument for intervention. How should the public sector intervene?
Patents are one policy response to problems associated with research and development. Patents grant the
firm rights to the use of the research for a period of time, allowing them to appropriate the benefits of the
research.
Other ways that the public sector may intervene are to:
Co-ordinate collaborative research and development (R&D) by firms and universities who share the
costs and internalize the benefits with wider use of the results in the short term. This disadvantage of
collaboration on R&D among firms is the dampening of competitive innovation between the firms
Produce or finance the research, which does not place restrictions on its use but is a heavy cost to the
public sector. The public sector tends to directly support academic scientific research, which has the
widest application and spillover and is less likely to be undertaken by the private sector.
Subsidize research by the private sector to encourage extra investment. Subsidies such as tax credits
also have pros and cons. On the plus side, tax credits are self-selecting – they put businesses in
control of the research to be undertaken and do not rely on the public sector being able to guess what
type of research will benefit the private sector most. On the down side, they are likely to encourage
research with the least positive spillovers for other businesses rather than the greatest collective
benefit. Therefore, tax credits may have a heavy deadweight cost – they support the research which
was most likely to be undertaken anyway. Tax credits may also have an income effect, such that not
much extra research is undertaken but the subsidy leaks out to support other activities.
This example shows the complexities faced the public sector in considering whether intervention is
merited and what type of intervention will be most cost-effective, and illustrates the importance of
considering how the private sector will respond to an intervention. It also demonstrates that in terms of
the public sector, central government controls most of the policy instruments available to alleviate market
failure including patents, tax subsidies and financing academic research.
At a regional level, the main instrument described above is co-ordination between businesses and research
organizations and to encourage greater involvement and use of research and development by business.
With coordination, as with other direct interventions, it is important to remember that there is no rationale
for the public sector „picking winners‟ by selectively providing support to research which is considers
will have the greatest commercial value. The public sector has no better information than the private
sector about what will succeed and what will fail; arguably it has worse information.

Questions:
1. Explain the factors that affect market failures.
2. Distinguish between private and public sector.

3.8 Summary
Economic reforms may have given a boost to industrial productivity and brought in foreign
investment in capital intensive areas.
Indian economic policy after independence was influenced by the colonial experience and by those
leaders' exposure to Fabian socialism.
Privatization will help in the economical development of the country
The Indian economy is passing through a difficult phase caused by several unfavourable domestic and
external developments
FDI is not permitted in the arms, nuclear, railway, coal or mining industries.
A goal oriented time bound action plan will be developed in collaboration with the adhoc committee.

3.9 Keywords
Foreign Direct Investment: It is a type of investment that involves the injection of foreign funds into an
enterprise that operates in a different country of origin from the investor.
Globalization: The worldwide movement toward economic, financial, trade, and communications
integration.
Liberalization: Liberalization is the process of liberating the economy from various regulatory and
control mechanisms of the state and of giving greater freedom to private enterprise.
Privatization: It is the transfer of ownership from the public sector (government) to the private sector
(business). . The term is also sometimes used to refer to government subcontracting a service or function
to a private firm.
Recession: A period of temporary economic decline during which trade and industrial activity are
reduced, generally identified by a fall in GDP in two successive quarters.
The Competition Act: It has specific provisions dealing with abuse of dominance, cartels, and predatory
pricing.

Lab Exercise
1. According to you, how privatization affects in India?
2. Explain the advantages and disadvantages of globalization?

3.10 Self Assessment Questions

1. IPS stands for ……………….
(a) Institute of Policy Studies (b) Indian Police Service
(c) Intrusion Prevention Systems (d) Institute of Private Studies

2. An internal government paper prepared in ………. put the unemployment figure at the beginning of the
eighth plan.
(a) 1999 (b) 2002 (c) 1997 (d) 2005

3. The process of selling state-owned enterprises (SOEs) to private owners often elicits ……….
(a) Low intelligence (b) High emotions (c) High intelligence (d) Low emotions

4. Demand for appropriately priced shares of attractive companies is essentially………...

(a) Limitless (b) Broken

5. Greater access to developed country markets and technology transfer hold out promise improved
productivity and higher living standard.
(a) True (b) False

6. India's share of global trade is similar to that of the………….

(a) South Africa (b) Pakistan (c) Philippines (d) None of the above

7. The Competition Act was enacted in ………..

(a) 1998 (b) 1879 (c) 2001 (d) None of these

8. The FDIs are not permitted through financial collaborations, through private equity or preferential
allotments.
(a) True (b) False

9. WTO has ……….structure levels.

(a) 5 (b) 4 (c) 6 (d) 3
10. Combined gross domestic product (GDP) of all the world's nine largest ............economies.
(a) National (b) organization (c) Private firm (d) None of these

3.11 Review Questions

1. What do you understand by the term economic reforms?
2. What are the features of liberalization?
3. How pre- and post-liberalization affects employment?
4. Explain GDP.
5. What are the effects of recession?
6. Explain the term globalization.
7. Describe briefly Competition Act.
8. What is the purpose of competition commission?
9. What are the functions of Foreign direct investment (FDI) in different sectors?
10. Explain the structure and benefits of World Trade Organization (WTO).
11. What is the role of the public sector?

Answers for Self Assessment Questions

1 (a) 2 (c) 3 (b) 4 (a) 5 (a)
6 (c) 7 (d) 8 (b) 9 (b) 10 (a)
 Unit-4 Disinvestment

CONTENTS
Objectives
Introduction
4.1 Meaning of Disinvestment
4.2 Disinvestment-A Global Phenomenon
4.3 Loop Holes and Challenges of Disinvestment
4.4 Disinvestment: Indian PSUs
4.5 Problems Associated with Disinvestment
4.6 National Common Minimum Program
4.7 The Multinational Enterprise
4.8 Role of MNEs in India
4.9 Summary
4.10 Keywords
4.11 Self Assessment Questions
4.12 Review Questions

Objectives
After Studying this chapter, you will be able to:
Understand the meaning of disinvestment
Discuss disinvestment as a global phenomenon
Explain the loopholes and challenges in disinvestment programme
Understand disinvestment in India
Explain the process associated with disinvestment
Discuss the national common minimum program
Explain multinational enterprises (MNEs) and their role in India
Introduction
Disinvestment is a term that has been used to describe a process of economic and physical deterioration
that has plagued inner-ring neighbourhoods in other large cities. In such situations, middle income
families have abandoned the inner neighbourhoods for the perceived benefits of modern schools and other
public facilities in the newest and most outlying suburbs. As the middle class and their disposable
incomes move out, businesses follow them, leaving a void of services in their place. When the area
becomes less desirable and functional, it becomes attractive mostly to lower income families and non-
families, often as transient renters rather than as owners. Without the financial commitment and resources
that home ownership entails, the new residents and absentee landlords allow their buildings to fall into
disrepair. The limited economic capability of the area causes the remaining shopping centres to become
tenanted with businesses such as pawn shops, tattoo parlours and strip-bars that further stigmatize the area
and spur further deterioration. A downward spiral develops in which neighbourhoods become
increasingly unattractive and dangerous, and the momentum moves outward affecting the next ring of
neighbourhoods and then the next until a vast central portion of the city is abandoned and useless.

Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott,
with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a
change in policy, or in the case of governments, even regime change. The term was first used in the
1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed
to pressure the government of South Africa into abolishing its policy of apartheid.

4.1 Meaning of Disinvestment

1. The action of an organization or government selling or liquidating an asset or subsidiary, which also
known as "divestiture".
2. A reduction in capital expenditure, or the decision of a company not to replenish depleted capital
goods.
3. A company or government organization will divest an asset or subsidiary as a strategic move for the
company, planning to put the proceeds from the divestiture to better use that garners a higher return on
investment.
4. A company will likely not replace capital goods or continue to invest in certain assets unless it feels it
is receiving a return that justifies the investment. If there is a better place to invest, they may deplete
certain capital goods and invest in other more profitable assets.
Objectives and Progress of Disinvestment
The primary objectives of disinvestment of the PSUs as indicated in the manual of policy and procedure
issued by DOD in April 2010 were the following:
releasing large amount of public resources locked up in non-strategic
PSUs, for redeployment in areas that were much higher on social priority, such as, basic
health, family welfare, primary education, social and essential infrastructure;
stemming further outflow of scarce public resources for sustaining the unviable non-strategic
PSUs;
reducing the public debt that was threatening to assume unmanageable proportions;
transferring the commercial risk, to which the taxpayers‟ money locked up in the public
sector was exposed, to the private sector wherever the private sector was willing and able to
step in; and
releasing other tangible and intangible resources, such as, large manpower currently locked
up in managing the PSUs, and their time and energy, for redeployment in high priority social
sectors that were short of such resources.
The common perception about the effectiveness of divestment lies in the belief that institutional selling of
a certain stock lowers its market value. Therefore, the company's net worth becomes devalued and the
owners of the company may lose substantial paper assets. In addition, institutional divestment may
encourage other investors to sell their stocks for fear of lower prices, which in turn lowers prices even
further. Finally, lower stock prices limit a corporation's ability to sell a portion of their stocks in order to
raise funds to expand the business.

The role of the State vs. Market has been one of the major issues in development economics and policy.
In a mixed economy such as India, historically the public sector had been assigned an important role.
However, national economic policy underwent a radical transformation. The new policy of liberalization,
privatization and globalization de-emphasized the role of the public sector in the nation‟s economy. To
date several arguments have been proffered by the apologists of market-oriented economic structures:
The government must not enter into those areas where the private sector can perform better.
Market-driven economies are more efficient than the state-planned economies
The role of the state should be as a regulator and not as the producer, and
Government resources locked in commercial activities should be released for their deployment in
social activities.
It is also contended that the functioning of many public sector units (PSUs) has been characterized by low
productivity, unsatisfactory quality of goods, excessive manpower utilization, inadequate human resource
development and low rate of return on capital. For instance, between 2002 and 2010, the average rate of
return on capital employed by PSUs was about 3.4% as against the average cost of borrowing, which was
8.66%. Disinvestment (or divestment) of the PSUs has therefore been offered as one of the solutions in
this context.

Disinvestment involves the sale of equity and bond capital invested by the government in PSUs. It also
implies the sale of government‟s loan capital in PSUs through securitization. However, it is the
government and not the PSUs who receive money from disinvestment.
The fixation of share/bond price is an important aspect of disinvestment. Now, the Disinvestment
Commission determines the share/bond price. Disinvested shares are listed, quoted and traded on the
stock market. Indian and foreign financial institutions, banks, mutual funds, companies as well as
individuals can buy disinvested shares / bonds.
An important fact that needs to be remembered in the context of divestment is that the equity in PSUs
essentially belongs to the people. Thus, several independent commentators have maintained that in the
absence of wider national consensus, a mere government decision to disinvest is not enough to carry out
the sale of people‟s assets. Inadequate information about PSUs has impeded free, competitive and
efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit
monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has
in turn prevented the disinvestment process from being completely open and transparent.

4.1.1 Evolution of Disinvestment Policy

It has been decided that Government would disinvest up to 20 % of its equity in selected public sector
undertakings, in favour of mutual funds and financial or investment institutions in the public sector. The
disinvestment, which would broad base the equity, improve management and enhance the availability of
resources for these enterprises, is also expected to yield Rs. 8,500 crores to the exchequer in 2010-2011
The modalities and details of implementing this decision, which are being worked out, would be
announced separately. The policy, as enunciated by the Government, under the Prime Minister Shri
Chandrashekhar was to divest up to 20% of the Government equity in selected PSEs in favour of public
sector institutional investors. The objective of the policy was stated to be to broad-base equity, improve
management, and enhance availability of resources for these PSEs and yield resources for the exchequer.

4.1.2 Motives
Firms may have several motives for divestitures.
First, a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what
it does best. For example, Eastman Kodak, Ford Motor Company, and many other firms have sold various
businesses that were not closely related to their core businesses.

A second motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is
selling one of its businesses in exchange for cash. For example, CSX Corporation made divestitures to
focus on its core railroad business and also to obtain funds so that it could pay off some of its existing
debt.

A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the
value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values
exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be
worth more when liquidated than when retained.
A fourth motive to divest a part of a firm may be to create stability. Philips, for example, divested its chip
division called NXP because the chip market was so volatile and unpredictable that NXP was responsible
for the majority of Philips's stock fluctuations while it represented only a very small part of Philips NV.
A fifth motive for firms to divest a part of the company is that a division is under-performing or even
failing.
A sixth reason to divest could be forced on to the firm by the regulatory authorities, for example in order
to create competition.

4.1.3 Divestment for Financial Goals

Often the term is used as a means to grow financially in which a company sells off a business unit in
order to focus their resources on a market it judges to be more profitable, or promising. Sometimes, such
an action can be a spin-off. Divestment of certain parts of a company can occur when required by the
Federal Trade Commission before a merger with another firm is approved. A company can divest assets
to wholly owned subsidiaries.

4.1.4 Method of Divestment

Some firms are using technology to facilitate the process of divesting some divisions. They post the
information about any division that they wish to sell on their website so that it is available to any firm that
may be interested in buying the division. For example, Alcoa has established an online showroom of the
divisions that are for sale. By communicating the information online, Alcoa has reduced its hotel, travel,
and meeting expenses.

With Economic liberalization of the Indian economy, Ministry of Finance of India had set up a separate
Department of Disinvestments.

Did You Know?

The largest and likely most famous, corporate divestiture in history was the 1984 U.S. Department of
Justice-mandated breakup of the Bell System into AT&T and the seven Baby Bells.
4.2 Disinvestment-A Global Phenomenon
South Africa
The most frequently-encountered method of "disinvesting" was to persuade state, county and municipal
governments to sell their stock in companies which had a presence in South Africa, such shares having
been previously placed in the portfolio of the state's, county's or city's pension fund. Several states and
localities did pass legislation ordering the sale of such securities, most notably the city of San Francisco.
An array of celebrities, including singer Paul Simon, actively supported the cause.
Many conservatives opposed the disinvestment campaign, accusing its advocates of hypocrisy for not also
proposing that the same sanctions be levelled. Ronald Reagan, who was the President of the United States
during the time the disinvestment movement was at its peak, also opposed it, instead favoring a policy of
"constructive engagement" with the Pretoria regime. Some offered as an alternative to disinvestment the
so-called "Sullivan Principles", named after Reverend Leon Sullivan, an African-American clergyman
who served on the Board of Directors of General Motors. These principles called for corporations doing
business in South Africa to adhere to strict standards of non-discrimination in hiring and promotions, so
as to set a positive example.

Northern Ireland
There was also a less well-publicized movement to apply the strategy of disinvestment to Northern
Ireland, as some prominent Irish-American politicians sought to have state and local governments sell
their stock in companies doing business in that part of the United Kingdom. This movement featured its
own counterpart to the Sullivan Principles; known as the "MacBride Principles" (named for Nobel Peace
Prize winner Sean MacBride), which called for American and other foreign companies to take the
initiative in alleviating alleged discrimination against Roman Catholics by adopting policies resembling
affirmative action. The effort to disinvest in Northern Ireland met with little success, but the United States
Congress did pass (and then-President Bill Clinton signed) a law requiring American companies with
interests there to implement most of the MacBride Principles in 1998.

Cuba
Though in place long before the term "disinvestment" was coined, the United States embargo against
Cuba meets many of the criteria for designation as such and a provision more closely paralleling the
disinvestment strategy aimed at South Africa was added in 1996, when the United States Congress passed
the Helms-Burton Act, which penalized owners of foreign businesses which invested in former American
firms that had been nationalized by Fidel Castro's government after the Cuban revolution of 1959. The
passage of this law was widely seen as a reprisal for an incident in which Cuban military aircraft shot
down two private planes flown by Cuban exiles living in Florida, who were searching for Cubans
attempting to escape to Miami.

Sudan
During the late 1990s and early 2000s several Christian groups in North America campaigned for
disinvestment from Sudan because of the Muslim-dominated government's long conflict with the
breakaway, mostly Christian region of Southern Sudan. One particular target of this campaign was the
Canadian oil company, Talisman Energy which eventually left the country, and was supplanted by
Chinese investors.
There is currently a growing movement to divest from companies that do business with the Sudanese
government responsible for genocide in Darfur. Prompted by the State of Illinois - the first government in
the U.S.A. to divest - scores of public and private-sector entities are now following suit. In New York
City, Councilman Eric Gioia recently introduced a resolution to divest City pension funds from
companies doing business with Sudan.
The recent divestment of assets implicated in funding the government of Sudan, in acknowledgment of
acts of terrorism and genocide perpetrated in the Darfur conflict. In the United States, this divestment has
taken place at the state level (including Illinois, which led the way, followed by New Jersey, Oregon, and
Maine). It has also taken place at many North American Universities, notably Cornell University, Harvard
University, Case Western Reserve University, Queen's University, Stanford University, Dartmouth
College, Amherst College, Yale University, Brown University, the University of California, the
University of Pennsylvania, Brandeis University, the University of Colorado, American University,
University of Delaware, Emory University, and the University of Vermont. The Sudan Divestment Task
Force has organized a nationwide group which advocates a targeted divestment policy, to minimize any
negative effects on Sudanese civilians while still placing financial pressure on the government. The so-
called 'targeted divestment approach' generally permits investment in Sudan, and is thus radically
different from the comprehensive divestment that ended apartheid in South Africa. Because targeted
divestment permits investment in hundreds of multinational corporate and private-equity firms that
support, lend legitimacy to, and pay taxes and graft to the government of Sudan, policy experts suggest
that this "feel good" approach will have little impact on the Sudanese government's sponsorship of
terrorism and genocide. Because of the massive deficiencies in the so-called 'targeted divestment
approach,' human rights advocates recommend the more comprehensive approach to divestment that has
been taken by the State of Illinois. Under this approach, sponsored by State Senator Jacqueline Collins,
public pensions are prohibited from investing in any corporation or private equity firm that conducts
business in Sudan, unless authorized to do so by the U.S. Government.
Others
Myanmar (formerly Burma) has also been the target of disinvestment campaigns (most notably one
initiated by the state of Massachusetts.) Divestment campaigns have also been directed against Saudi
Arabia due to allegations of "gender-apartheid." The University of California, Riverside's Hillel chapter
has a Saudi Divestment petition circulating as of 2007.
Since 2007, several major international and Canadian oil companies had threatened to withdraw
investment from the province of Alberta because of a proposed increase in royalty rates.

4.3 Loop Holes and Challenges of Disinvestment

There have been several arguments that have been raised against disinvestment, both specific as well as
general in nature. Some of them are listed below, with their counter-arguments (in bold italics):
The Government will forego dividends on the equity holdings by selling off its stakes. According to the
Public Enterprises Survey 2010–11, the Central PSUs taken together contributed Rs. 40,423 crore to the
central exchequer in 2010–11 as dividends, witnessing an increase of over Rs. 8,000 crore from 2009–
2010. Considerable disinvestment of government‟s stakes in CPSEs would squeeze this important source
of revenue for the Government.
Apart from generating a one-time sale amount, a lot of these stake sales have also resulted in higher
annual revenues for the government, thus nullifying the effect of loss of dividends. More so, while they
were dividend yielding, there were annual outgoes associated with them, thus again nullifying the effect
of dividends. Moreover, the loss of dividends, if any, is well compensated by gains in capital
appreciation.

A nationwide survey conducted by the NCAER in 2010–11 revealed that only 0.5% of Indian household
invests in equities. A recent article in The Economist (21st May 2009) estimates this section to be 0.7% of
Indian households. Thus, in case the public offer route is followed, it would imply transferring the
common ownership of the PSUs by all Indians into the private ownership of 0.5–0.7% of Indians. Thus,
essentially implying that the real beneficiaries would not be the ordinary retail investor but institutional
investors.
While the current equity penetration remains low, it is precisely these PSU IPOs themselves that present
the best opportunity of widening the retail base. To also ensure that institutional investors do not run
away with the bulk of this sale, curbs and measures can be put in place that ensure only retail participation
in these issues.
Using funds made available from disinvestment to bridge the fiscal deficit is an unhealthy and a short
term practice. It is said that it is equivalent of selling „family silver‟ to meet short term monetary
requirements. Borrowing which is the currently used practice for bridging fiscal deficit, should continue
to be used since while borrowing, the government has to make interest payments in the future against a
one-time borrowing from the market, in the case of disinvestment, future streams of income from
dividends are forgone against a one-time receipt from the sale of stakes.

Letting go of these assets is best in the long term interest of the tax payers as the current yield on these
investments in abysmally low. Even if the funds from the sale are not utilised for bridging fiscal deficit, a
much better utilisation of these funds would be investments into critical sectors such as healthcare,
education and infrastructure or for retiring government debt rather than letting the low yielding capital
remain locked in these assets.

Effective tax rate for the CPSEs taken together in 2009–10 was 40.78%, while the average effective tax
rate for private sector companies in the same year was 19.5% only. Criticism stems from the fact that
while not only a major tax revenue source will be lost, the private sector which ideally should be paying
an equivalent tax rate is exempted due to tax concessions.

As mentioned above, while there will be a loss in terms of dividend and tax income, this shortfall would
be more than adequately compensated by revenues and capital gains. More so, the returns on capital
employed for the entire PSU sector is very low and the government can find alternate avenues for
deploying this capital which would yield far better returns, both monetarily and otherwise. All the same,
revisions need to be made in tax laws to ensure that all such loopholes currently being exploited by the
corporate sector are closed.
Profit making PSUs should not be disinvested as they are performing well in any which way
Employees of PSUs would lose jobs
Complete Privatisation may result in public monopolies becoming private monopolies, which
would then exploit their position to increase costs of various services and earn higher profits
It needs to be ensured that Privatisation leads to greater competition in all cases
Complete Privatisation results in a situation where political compulsions may make companies
being sold cheap to preferred parties
The process followed for Privatisation needs to be very fair and transparent to ensure a situation
such as this does not arise
A majority stake sale done to another CPSE results in no real change in ownership, and is thus
just hogwash.

This is fair to some extent, though it must be realized that some of the CPSEs are very well run,
competitive and profit making. Thus, a sale of a loss making CPSE to a well performing CPSE can be a
proposition well worth considering.
Public Offer being the chosen approach for Disinvestments does not yield the best realisation on the
assets and is a far too time consuming process. Auctioning to financial institutions (QIBs) should be the
preferred modus operandi since it gives the best realisation on the assets, and has minimal transaction cost
While the realisation on assets might be higher in case of an auctioning process, it must be remembered
that the Government is not a private enterprise and hence should not be looking at short-term gains. It
should look at the greater good and sell these stakes by public offers to increase retail participation in the
capital markets as well as to increase the depth and width of the capital markets. In any case, the loss is
minimal as very small stakes are being sold. The real gains for the government lie in the appreciation
post-listing. Let us look at the PSU IPOs since 2010 with a trading period of over 1 year. The value of the
government holding, courtesy the market, has gone up nearly 3 times from Rs. 236980 crore on the issue
date to Rs.406813.58 crore (as on 23 September 2011).

4.4 Disinvestment: Indian PSUs

An important fact that needs to be remembered in the context of divestment is that the equity in PSUs
essentially belongs to the people. Thus, several independent commentators have maintained that in the
absence of wider national consensus, a mere government decision to disinvest is not enough to carry out
the sale of people‟s assets. Inadequate information about PSUs has impeded free, competitive and
efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit
monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has
in turn prevented the disinvestment process from being completely open and transparent.
It is not clear if the rationale for divestment process is well-founded. The assumption of higher efficiency,
better/ethical management practices and better monitoring by the private shareholders in the case of the
private sector all of which supposedly underlie the disinvestment rationale is not always borne out by
business trends and facts.
Total disinvestment of PSUs would naturally concentrate economic and political power in the hands of
the private corporate sector. The US economist Kenneth Galbraith had visualized a role of countervailing
power for the PSUs. While the creation of PSUs originally had economic, social welfare and political
objectives, their current restructuring through disinvestment is being undertaken primarily out of need of
government finances and economic efficiency.
Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no
decline in national wealth. But the sale of such equity to foreign companies has far more serious
implications relating to national wealth, control and power, particularly if the equity is sold below the
correct price!
If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically,
issues such as - the correct valuation of shares, the crowding out possibility, the appropriate use of
disinvestment proceeds and the institutional and other prerequisites.
Disinvestment is generally expected to achieve a greater inflow of private capital and the use of private
management practices in PSUs, as well as enable more effective monitoring of management discipline by
the private shareholders. Such changes would lead to an increase in the operational efficiency and the
market value of the PSUs. This in turn would enable the much needed revenue generation by the
government and help reduce deficit financing.
To date several arguments have been proffered by the apologists of market-oriented economic structures:
the government must not enter into those areas where the private sector can perform better market-driven
economies are more efficient than the state-planned economies role of the state should be as a regulator
and not as the producer government resources locked in commercial activities should be released for their
deployment in social activities.
It is also contended that the functioning of many public sector units (PSUs) has been characterized by low
productivity, unsatisfactory quality of goods, excessive manpower utilization, inadequate human resource
development and low rate of return on capital. For instance, between 2010 and 2011, the average rate of
return on capital employed by PSUs was about 3.4% as against the average cost of borrowing, which was
8.66%. Disinvestment (or divestment) of the PSUs has therefore been offered as one of the solutions in
this context.

Disinvestment involves the sale of equity and bond capital invested by the government in PSUs. It also
implies the sale of government‟s loan capital in PSUs through securitization. However, it is the
government and not the PSUs who receive money from disinvestment.
The fixation of share/bond price is an important aspect of disinvestment. Now, the Disinvestment
Commission determines the share/bond price. Disinvested shares are listed, quoted and traded on the
stock market. Indian and foreign financial institutions, banks, mutual funds, companies as well as
individuals can buy disinvested shares/bond Disinvestment is generally expected to achieve a greater
inflow of private capital and the use of private management practices in PSUs, as well as enable more
effective monitoring of management discipline by the private shareholders. Such changes would lead to
an increase in the operational efficiency and the market value of the PSUs. This in turn would enable the
much needed revenue generation by the government and help reduce deficit financing.
However, to date the market experience has been otherwise. The large national budgetary deficit on
revenue account has been increasing. The government has not used the disinvestment proceeds to finance
expenditure on capital account; i.e. the disinvestment policy has resulted in capital consumption rather
than generation. Administrative costs of the disinvestment process have also been unduly high.

4.5 Problems Associated with Disinvestment

A number of problems and issues have bedevilled the disinvestment process. The number of bidders for
equity has been small not only in the case of financially weak PSUs, but also in that of better-performing
PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to
purchase the equity which was being unloaded through disinvestment. These organizations have not been
very enthusiastic in listing and trading of shares purchased by them as it would reduce their control over
PSUs. Instances of insider trading of shares by them have also come to light. All this has led to low
valuation or under pricing of equity.
Further, in many cases, disinvestment has not really changed the ownership of PSUs, as the government
has retained a majority stake in them. There has been some apprehension that disinvestment of PSUs
might result in the crowding out of private corporate (through lowered subscription to their shares) from
the primary capital market
After a great deal of initial excitement and reservations, disinvestment of public sector enterprises has
become an ongoing process in the country. But the debate continues, with some enthusiastically
endorsing it and others expressing apprehensions and opposition. By and large, this debate has been at the
ideological level. Ideology cannot be kept out of the debate, but disinvestment has other dimensions too.
The modalities of disinvestment are important. So are its consequences.
A second procedure adopted was partial disinvestment whereby the government still retained effective
control by holding 51 % or more of equity. This has been the procedure adopted in the majority of cases.
This is not a simple procedure, though. A decision has to be made as to who would be eligible to acquire
the shares - other enterprises, employees or the public at large - and the manner in which the shares are to
be off-loaded.

4.6 National Common Minimum Program

The policy of the Government as stated in the National Common Minimum Program, “The Government
is committed to a strong and effective Public Sector whose social objectives are met by its commercial
functioning. But for this, there is need for selectivity and a strategic focus. It is pledged to devolve full
managerial and commercial autonomy to successful, profit-making Companies operating in a competitive
environment. Generally, profit-making Companies will not be privatized.
All privatisations will be considered on a transparent and consultative case-by-case basis. The existing
“Navaratna” companies will be retained in the public sector while these companies raise resources from
the capital market. While every effort will be made to modernize and restructure sick public sector
companies and revive sick industry, chronically loss-making companies will either be sold-off, or closed,
after all workers have got their legitimate dues and compensation. The Government will induct private
industry to turn around companies that have potential for revival.
The Government believes that privatisation should increase competition, not decrease it. It will not
support the emergence of any monopoly that only restricts competition. It also believes that there must be
a direct link between privatisation and social needs – like, for example, the use of privatisation revenues
for designated social sector schemes. Public sector companies and nationalized banks will be encouraged
to enter the capital market to raise resources and offer new investment avenues to retail investors.”

4.7 The Multinational Enterprise

MNE (Multinational Enterprise) is any business which has productive activities in two or more countries
and manufactures and markets products and services in different countries. MNE is an efficient agent for
transferring capital, managerial skills, culture, technology, industrial know how, product design, line and
brand name, and goods and services across countries. MNE also transfers information such as its superior
information gathering ability, headquarters discoveries, and exploit opportunities beyond the domestic
market. MNE can bear the risks of ventures great size and financial strengths better than the domestic
company can do. In the 1980's, there was a rise of non U.S. MNEs and the growth of the mini
multinationals in the 1990's. United States. MNEs account for 2/3 of all direct investment, but in 2010, of
the 260 largest MNE, only 48.5% were U.S. owned multinationals; Great Britain had 18.8%; Japan had
3.5%, and Latin America had 5%. Other countries with MNEs are: France, Germany, Canada, Sweden,
Netherlands, Switzerland, Hong Kong, Singapore. Countries with mini multinationals in 2010 are Israel,
Germany, United States, Australia, Italy, Brazil and Mexico with medium to small size companies such as
Lubricating Systems of Kent, Ohio, Swan Optical and Cardiac Science.
Multinationals do extensive overseas operations including manufacturing in different countries. The
UNCTAD (United Nations Conference on Trade and Development) reported that about 40,000 MNE
have about 378,000 affiliates with more than $318 trillion in investment.
Service Companies: such as banks, investment financial companies, brokerage houses, legal, airlines,
hotels, health, entertainment, travel agencies, tourism, and accounting are the growing multinationals of
the 21th Century.
A multinational corporation (MNC) or enterprise (MNE) is a corporation or an enterprise that manages
production or delivers services in more than one country. It can also be referred to as an international
corporation. The International Labour Organization (ILO) has defined an MNC as a corporation that has
its management headquarters in one country, known as the home country, and operates in several other
countries, known as host countries.
Some multinational corporations are very big, with budgets that exceed some nations GDPs.
Multinational corporations can have a powerful influence in local economies, and even the world
economy, and play an important role in international relations and globalization.
Multinational corporations because of their enormous size, enjoy massive economic and political power
which enables them to dictate terms to the under-developed countries. They are able to manipulate prices
and profits and restrict the entry of potential competitors through their dominant influences over new
technology, special skills, ability to spend enormous fund on advertising etc.
MNCs organize this operation in different countries through any of the following five alternatives:
1) Branches: The simplest form of extending business operations is to set up branches in the developing
countries. Such branches bring with them the technology of the parent company and are linked up with it.
2) Subsidiaries: Multination also operates by setting up national affiliates as subsidiary companies. A
subsidiary in a particular country is established under the laws of the country. Such subsidiary companies
take advantage of the financial, managerial and technical skills of the holding company and also benefit
by the international reputation that latter enjoys.
3) Joint Venture Company: A joint venture is the establishment of a firm that is jointly owned by two or
more otherwise independent firms. Most joint ventures are 50:50 partnerships. At times, multinationals
enter into a joint venture with an indigenous firm or agency. Under this arrangement of MNC makes
available machinery, capital goods and technological expertise to the indigenous firm. This form of
organization is adopted in those countries where the law requires control by nationals.
Joint ventures are attractive because: They allow the firm to benefit from a local partner‟s knowledge of
the host country‟s competitive conditions, culture, language, political systems, and business systems. The
costs and risks of opening a foreign market are shared with the partner.
The firm risks giving control of Joint ventures are unattractive because: The firm may not have the tight
control over its technology to its partner. Share subsidiaries need to realize experience curve or location
economies. Ownership can lead to conflicts and battles for control if goals and objectives differ or change
over time.
4) Franchise Holders: This is a special kind of arrangement by which an affiliate firm produces or markets
the product of a multinational firm after obtaining a license from that firm. A formal contract is entered
into between the affiliate firm and the multinational firm which specifically mentions the rights that are
transferred to the affiliate firm and lays down the compensation (usually in the form of royalties) that it
has to pay to the parent firm.
Firms avoid many costs and risks of opening up a foreign market. Franchising is attractive because: Firms
can quickly build a global presence.
Franchising is unattractive because:
It may inhibit the firm‟s ability to take profits out of one country another. The geographic distance of the
firm support competitive attacks in another form. Its foreign franchisees can make poor quality difficult
for the franchisor to detect.
5) Turn key Projects: under this organizational form, the multinational undertakes to complete the project
form scratch to the operational stage. When the project is ready it is handled over to the host country. In a
turnkey project, the contractor agrees to handle every detail of the project for foreign client, including the
training of operating personnel. At completion of the contract, the foreign client is handed a key to the
plant that is ready for full operation.
They are a way of earning: Turn key projects are attractive because: economic returns from the know-
how required to assemble and run a FDI.

Caution:
Ownership can lead to conflicts and battles for control if goals and objectives differ or change over time.
Turn key projects are unattractive because: The firm that enters into a turnkey deal will have no long-term
interest in the competitor. The firm that enters into a turnkey project may create a foreign country.
Through these various methods of operations, MNCs carry their technology to the developing countries.
If MNCs set up a branch or a subsidiary company, it is claimed that there is a direct injection of foreign
experience and expertise in the developing country. The branch or the subsidiary company can provide a
channel for the transmission of the latest improvements from the developed to the underdeveloped
countries. There is a no question that the branch factory is a highly effective way of improvement
technology. It usually provides, along with the technical expertise, the capital that is not easily mobilized
in underdeveloped countries for new industrial countries for new industrial ventures and the managerial
experience that can so rarely be supplied by them.
The modus operandi of the multinationals in spreading there is very interesting. Like the East India
Company which came to India as a trading company and then spread its net throughout the country to
become politically dominant, these multinationals first start their activities in extractive industries or
control raw materials in the host countries and then slowly enter the manufacturing and service sectors.

Did You Know?

The Dutch East India Company was the first multinational corporation in the world and the first company
to issue stock. It was also arguably the world's first mega corporation, possessing quasi-governmental
powers, including the ability to wage war, negotiate treaties, coin money, and establish colonies.
Four Main Criteria to Identifying a MNE
1. Structure of Corporation
2. Behaviour
3. Performance
4. Coordination
1. Structure refers to the number of countries in which the MNE operates. Also refers to the nature of
corporate ownership. Examples: Suzuki owned by GM, Gillette is U.S. owned, an Mitsubishi is owned by
Japan, even though GM owns a large percentage. For the majority of MNEs, the ownership of the
corporation is maintained in the parent country, even though they might list shares of stock and have
ownership in different countries. For example: Kereitsus in Japan, Chaebols in South Korea such as
Samsung, Lucky Star and Daewoo, and mergers in the U.S.
2. Performance is the percentage of total revenues, profits, assets and employees coming from abroad.
The greater the reliance of the corporation on foreign materials, production, personnel and product plants,
the more global the corporation is. If they derive 40% or more from outside the home country, the MNE
is considered Stateless Corporation. At Nestle, 98% of business is done abroad-Switzerland is home
country. Hoffman La Roche, 96%-Switzerland, Michelin, 78%-France, Sony, 66%-Japan, Gillette, 65%-
U.S.
3. Behaviour is the attitude of top management toward the role of international operations within the total
corporate strategy. In most of the European corporations, the majority of CEOs are from foreign
countries. The U.S. is an exception.
4. Coordination is how the firm looks at its worldwide operations, multi-domestic or global. Multi-
domestic is where each country is considered a different market (Japan uses the term multi-cultural
corporation). The corporation is really a collection of subsidiaries. Global is where the firm views the
entire world as one market and standardizes its products.

4.7.1 Philosophical Positions Influencing the Training Process of a MNE

1. Ethnocentric MNE: put home office people in charge of key international management positions. The
multinational headquarters group and the affiliated world company managers all have the same basic
experiences, attitudes, and beliefs about how to manage operations, run corporations, and market, (e.g.,
Japanese Keiretsu such as Mazda and Mitsubishi, traditional suppliers, and Chaebols in Korean firms). It
will do all training at headquarters.
2. Polycentric MNE: is an MNE that places local nationals in key positions and allows these managers to
appoint and develop their own people as long as the operations are sufficiently profitable. For example,
East Asia, Australia and in general, markets where the expatriates tend to be not expensive for the
corporations. It will do the training of employees relying on local management to assure responsibility of
seeing that the training function is carried out.
3. Regiocentric MNE: relies on local managers from particular geographic areas to handle operations in
and around the area, (e.g., in common markets or trade zones). It often relies on regional group operation
and cooperation of local managers, (e.g., Gillette corporation).
4. Geocentric MNE: seeks to integrate diverse regions of the world through a global approach to
decision making. For example, IBM and John Deere

4.7.2 Illustration of Types of Activity That Favour MNES

Natural resource seeking Capital, technology, access to markets; complementary assets; size and
negotiating strengths Possession of natural resources and related transport and communications
infrastructure; tax and other incentives To ensure stability of supplies at right price; control markets To
gain privileged access to resources vis-à-vis competitors
(a) Oil, copper, bauxite, bananas, pineapples, cocoa, hotels
(b) Export processing, labour-intensive products or processes

Market seeking Capital, technology, information, management and organizational skills; surplus R&D
and other capacity; economies of scale; ability to generate brand loyalty Material and labour costs; market
size and characteristics; government policy (e.g. with respect to regulations and to import controls,
investment incentives, etc.) Wish to reduce transaction or information costs, buyer ignorance or
uncertainty, etc., to protect property rights, to protect existing markets, counteract behaviour or
competitors; to preclude rivals or potential rivals from gaining new markets Computers, pharmaceuticals,
motor vehicles, cigarettes, processed foods, airline services

Efficiency seeking
(a) of product (b) of processes As above, but also access to markets; economies of scope, geographical
diversification and international sourcing of inputs (a) Economies of product specialization and
concentration (b) Low labour costs: incentives to local production by host governments (a) As for second
category plus gains from economies of common governance (b) The economies of vertical integration and
horizontal diversification As part of regional or global product rationalization and/or to gain advantages
of process specialization (a) Motor vehicles electrical appliances, business services, some R&D (b)
Consumer electronics, textiles and clothing, cameras, pharmaceuticals Strategic asset seeking Any of first
three that offer opportunities for synergy with existing assets Any of first three that offer technology,
markets and other assets in which firm is deficient Economies of common governance; improved
competitive or strategic advantage; to reduce or spread risks To strengthen global innovatory or
production competitiveness; to gain new product lines or markets Industries that record a high ratio of
fixed to overhead costs and which offer substantial economies of scale or synergy.
Trade and distribution (import and export merchanting) Market access; products to distribute Source of
inputs and local markets; need to be near customers; after-sales servicing, etc. Need to protect quality of
inputs; need to ensure sales outlets and to avoid underperformance or misrepresentation by foreign agents
Either as entry to new markets or as part of regional or global marketing strategy A variety of goods,
particularly those requiring contact with subcontractors and final consumers
As part of regional or global product or geographical diversification (a) Accounting advertising, banking,
producer goods
(b) Where spatial linkages are essential (e.g. airlines and shipping).

4.8 Role of MNEs in India

Multinational enterprises (MNEs) play an important role in the economic activity of most developing
countries, including India. The inter-industry pattern of their participation in a country is, however,
expected to be uneven depending upon the ownership of intangible assets and internalisation incentives.
Furthermore, because of their ownership advantages, centralised decision-making, and global outlook,
MNE affiliates adopt different competitive strategies from their host country firms which may have a
bearing on their performance. Within this broad framework this book analyses the industrial distribution,
distinguishing characteristics, and relative performance of MNEs in Indian manufacturing. The book
begins with a succinct account of the evolution of the Indian government's policy towards foreign
collaborations and a discussion of the governmental role in shaping the pattern of foreign direct
investments (FDIs) in the country. This is followed by a rigorous examination of the extent to which the
postulates of contemporary theory and policy factors explain the inter-industry variation in foreign shares,
computed for the first time for India using unpublished sources, as well as the significance of licensing
agreements. Then the book systematically analyses the distinctive characteristics of MNE affiliates and
local firms in terms of 15 different aspects of firm conduct and performance using uni- and multivariate
techniques. It contends that MNE affiliates and local firms constitute different 'strategic groups' in Indian
industries and finds empirical support for the hypothesis that the superior profitability of MNEs is due in
part to the protection enjoyed by them from intergroup mobility barriers. It also assesses the role of MNEs
in promoting India's manufactured exports, comments on new policies, makes a case for a more focused
approach to attracting export-oriented FDIs and outlines elements of such a strategy.

4.8.1 MNES in Local Economic Development (Led)

The foregoing tells us that MNE‟s should be actively involved in the local economic development of
India. But what exactly is there to gain for the Indian country?
With the right regulatory and policy climate, foreign investment is vital for bringing access to what is
needed - capital, technology and managerial and environmental best practices - to spur development.
(Multilateral Investment Guarantee Agency) The Multilateral Investment Guarantee Agency states that
FDI in a developing region brings access to finance, new technologies, modern business practices and
market links for smaller companies.

Other benefits that Indian people may reap from the participation of MNE‟s in the process of LED, are
the creation of new jobs, the arrival of new products and the availability of financial resources. These all
constitute needs of the Indian people. Another important advantage is the impulse that the arrival of an
MNE may give to local entrepreneurship. The MNE brings new knowledge to India, and it may even take
an active role in helping the local population set up and run their own companies. This role is stressed by
the Multilateral Investment Guarantee Agency when they say that direct investment can play an important
role in small and medium enterprises development, either through joint ventures with local partners or
through the establishment of wholly foreign-owned enterprises. Foreign Direct Investment can help the
private sector to fulfil its role as the main engine of growth.

It is clear that participation of MNE‟s in LED programs can turn out to be fruitful for India. The Indian
government should be aware of the positive contribution that MNE‟s can make to the economic
development of the country, and they should actively attract foreign MNE‟s to the country. This is done
by the pursuit of macro-economic stability, improvements of the functioning of market-regulating
institutions and the strengthening of procedures for contract enforcement and dispute settlement.
Additionally, attractive and coherent trade, tax, competition and investment policies should be
implemented. These are supposed to affect the volume of investment and its development impact.

Benefits for the MNE

What could be reasons for MNE‟s to invest in India by participating in LED programs? It is clear that
LED is not a profitable undertaking per se; and as Birkholzer states; LED is not about making money. So
what does a profit-seeking MNE look for in LED programs? Which benefits are to be gained?
Research conducted by the Multilateral Investment Guarantee Agency shows that market access is the
main objective in establishing foreign operations. The next two objectives that are most common are the
reduction of costs and the consolidation of operations. Clearly, differences exist between firms from
different sectors. Whereas manufacturing firms primarily aim at the reduction of costs; service companies
highlight innovation in their FDI process.

The extraction of raw materials and the use of local labour are other common reasons for MNE‟s to be
active in countries like India, as these inputs are generally cheaper and/or more available than in the
firm‟s country of origin. MNE‟s might also reap the benefits of legal systems for labour rights, trade
practices, environmental effects, etc.

Conflicting expectations?
The foregoing shows that differences may exist with regard to the individual goals that MNE‟s and the
national government of India want to achieve in a LED program. The challenge for MNE‟s and the
national government is to find a way in which the objectives of both actors are accomplished.
Reality shows us that often, agreement is reached on LED programs in which both the benefits of the
local government and the participating MNE are achieved. Whereas an MNE might find access to new
customers by locating itself in a region, the arrival of the MNE in that region may be beneficial for that
region as it creates hundreds of new jobs. An MNE might offer to educate local people in exchange for
them to work for the company for several years. In this way, the level of education within a region is
enhanced, while the MNE benefits from the availability of cheap, well-educated workers.
Benefits might also be found in other areas of the LED process; MNE‟s might fund local universities,
which on the one hand improves the level of higher education in the region, and on the other hand fosters
the future prospect for the MNE of the availability of high-educated personnel. Agreements between
MNE‟s and national governments about the reduction of income taxes in exchange for the supply of
managerial knowledge are also common. These are all examples that could convince foreign MNE‟s and
the Indian government that it is possible to achieve the goals of both parties in Indian LED programs

Case Study: Centaur, Juhu Beach

Disinvestment of the hotel/flight kitchens of the Hotel Corporation of India, a subsidiary of Air India, was
initiated by Air India under the supervision of the Ministry of Civil Aviation. A Sub-Committee of the
Board of Air India was constituted by the said Board to oversee the disinvestment process. On the basis of
the Sub-Committee's recommendation, Air India appointed M/s Jardine Fleming Securities India Ltd.
(currently known as M/s JP Morgan India Pvt. Ltd) as Global Advisors on June 6, 2000. An
advertisement inviting Expressions of Interest from the prospective bidders was issued by Air India on
October 11–12, 2000 for all the businesses of the Hotel Corporation of India including Centaur Hotel,
Juhu Beach, and Mumbai. The Sub-Committee, with the assistance of the Global Advisors, accomplished:
Finalisation of the transaction structure of selling the individual businesses on slump sale basis;
Finalisation of the Confidential Information Memorandum;
Shortlisting of bidders;
Appointment of Legal Advisors and Asset Valuers;
Conducting data room study and due diligence by the bidders; and Finalisation of transaction documents.
On 27th September 2001, based on a Government decision, the Department of Disinvestment took over
the process of disinvestment in Hotel Corporation of India. After taking over the process, Department of
Disinvestment constituted an Inter-Ministerial Group and adopted the transaction structure and
transaction documents as finalized by Air India.
For the five businesses of Hotel Corporation of India that were offered for sale, the Qualified
Interested Parties had already been identified. In respect of Centaur Hotel Juhu Beach, Mumbai,
Expressions of Interest were received initially from 20 parties of whom three were found to be ineligible.
Of the remaining 17 Qualified Interested Parties, 16 did not furnish the prescribed Expression of Intent
Letters along with the Earnest Money Deposit of Rs. 5 lakhs, thereby withdrawing them from further
participation from the disinvestment process. Therefore, there was only one Qualified Interested Party. On
24th October 2001, the Global Advisors addressed the Qualified Interested Party, viz., namely, M/s Tulip
Hospitality Services Ltd asking it to submit its price bid on 6th November 2001. M/s Tulip Hospitality
Services Ltd submitted its price bid on 6th November 2001.

An Evaluation Committee comprising the concerned Joint Secretaries of the Ministry of Civil
Aviation and the Ministry of Disinvestment and the Managing Directors of Air India and Hotel
Corporation of India under the chairmanship of the Joint Secretary & Financial Advisor, Ministry of Civil
Aviation met on 8th November 2001. After detailed consideration of the asset valuation report prepared
by the Asset Valuer (M/s Kanti Kararnsey & Co., Mumbai), the valuation report prepared by the Global
Advisor and the merits and demerits of the various methods of valuation adopted by them and the then
prevailing market conditions, the Evaluation Committee determined the reserve price for Centaur Hotel
Juhu beach Mumbai at Rs. 101.60 crores. The price bid, which was in a sealed cover, was thereafter
opened by the Evaluation Committee on 8th November 2001. The bid was for Rs.153.00 crores.

The Evaluation Committee recommended for acceptance the financial bid submitted by M/s Tulip
Hospitality Services Ltd of Rs.153.00 crores for Centaur Hotel Juhu Beach, Mumbai, since it was above
its determined reserve price. The Inter-Ministerial Group, in its meeting held on 9th November 2001,
accepted the recommendation of the Evaluation Committee. The recommendations of the Evaluation
Committee/Inter-Ministerial Group were accepted by the Core Group of Secretaries on Disinvestment on
9th November 2001 and by the Cabinet Committee on Disinvestment on 10th November 2001. Initially,
Air India proposed to execute the Agreement to sell by 21st December 2001 and notified M/s Tulip
Hospitality Services Ltd. However, M/s Tulip Hospitality Services Ltd made a series of representations
from time to time, seeking extensions for conclusion of the transaction. Three extensions were given to
M/s Tulip Hospitality Services Ltd, the last being on 23rd February 2002. These extensions were given
apparently with the view to complete the sale of Centaur Hotel, Juhu Beach, Mumbai at a price of Rs.153
crores, which was above the reserve price of Rs.101.60 crores. Since some concerns had arisen with
respect to M/s Tulip Hospitality Services Limited's ability to meet the financial obligations under the
transaction, a decision had been taken on 21st February 2002 to invoke the Bank Guarantee of M/s Tulip
Hospitality Services Limited and to terminate the deal. However, the Chairman, M/s Tulip Hospitality
Services Limited met the then Minister of Disinvestment on 22nd February, 2002, and sought an
opportunity to demonstrate M/s Tulip Hospitality Services Limited's intent to complete the transaction by
producing his consortium of bankers before the Minister.
On 23rd February 2002, M/s Tulip Hospitality Services Limited and the consortium of bankers,
which consisted of both public sector banks and private banks, met the then Minister of Disinvestment
and committed to finance the sale transaction by 9th March, 2002. On this commitment, a further
extension was granted on 23rd February, 2002, until 9th March, 2002. Since, 9th March, 2002 was a
Saturday, high value clearing did not take place and, consequently, the transaction was completed on 11th
March 2002. The business was transferred to M/s Tulip Hospitality Services Limited on 31st May 2002
on completion of transaction formalities.

As per the transaction Agreement, M/s Tulip Hospitality Services Limited was bound to offer a Voluntary
Retirement Scheme to the employees of the hotel by 30th May, 2003. Anticipating that the management
might not offer the Scheme in time, the Officers' Association filed a writ in the Bombay High Court on
9th May, 2003 itself. On the directions of the High Court, M/s Tulip Hospitality Services Limited
introduced a Voluntary Retirement Scheme on 1st October, 2003. Since this was not fully acceptable to
the Association, it approached the High Court again. However, the High Court did not give any further
relief. Thereafter, on 1st July, 2004, the Association moved the matter before a Division Bench of the
Bombay High Court. While the matter is before the Division Bench, the Officers' Association and the
management have come to an agreement on all critical issues on 6th August, 2004. On the basis of this
agreement, M/s Tulip Hospitality Services Limited filed an affidavit before the Bombay High Court on
12th August, 2004. The case now stands adjourned to 10th January 2005.
It looks odd that it was a single bidder transaction. It further looks odd that the Discounted Cash Flow
method of evaluation was adopted in this case. We do not think that this method is the only method, or
the most appropriate method of evaluation in all cases. It further looks odd that so much indulgence was
granted to the bidder by way of not invoking the bank guarantee, which was ordered twice, and by way of
granting him repeated extensions. We personally think that as a result of its disinvestment zeal, the then
Government overlooked some discomforting aspects of this transaction.

The agreement does not permit the resale. The matter is now sub judice before the High Court of
Bombay regarding the Voluntary Retirement Scheme. But, if there is a violation of agreement, certainly
the Ministry of Civil Aviation will be advised to take necessary action.

Questions
1. Give brief description on the above case study.
2. How disinvestments affect the other services?

4.9 Summary
The term disinvestment was first used in the 1980s, most commonly in the United States, to refer to
the use of a concerted economic boycott designed to pressure the government of South Africa into
abolishing its policy of apartheid.
A company or government organization will divest an asset or subsidiary as a strategic move for the
company, planning to put the proceeds from the divestiture to better use that garners a higher return
on investment.
Disinvested shares are listed, quoted and traded on the stock market. Indian and foreign financial
institutions, banks, mutual funds, companies as well as individuals can buy disinvested shares /
bonds.
Public Offer being the chosen approach for Disinvestments does not yield the best realisation on the
assets and is a far too time consuming process. Auctioning to financial institutions (QIBs) should be
the preferred modus operandi since it gives the best realisation on the assets, and has minimal
transaction cost.
Disinvestment is generally expected to achieve a greater inflow of private capital and the use of
private management practices in PSUs, as well as enable more effective monitoring of management
discipline by the private shareholders.
A multinational corporation (MNC) or enterprise (MNE), is a corporation or an enterprise that
manages production or delivers services in more than one country. It can also be referred to as an
international corporation.

4.10 Keywords
Disinvestment: The action of an organization or government selling or liquidating an asset or subsidiary,
which also has known as "divestiture" or disinvestment.
International Labour Organization (ILO): It has defined an MNC as a corporation that has its
management headquarters in one country, known as the home country, and operates in several other
countries, known as host countries.
MNE (Multinational enterprise): This may be any business which has productive activities in two or
more countries and manufactures and markets products and services in different countries.

Lab Exercise
1. Discuss the role of disinvestment in banking sectors.
2. List few MNCs and discuss the role of MNCs in India.

4.11 Self Assessment Questions

1 In which year the term disinvestment was firstly used
(a) 1970 (b) 1980 (c) 1982 (d) 1985

2 According to survey conducted by the NCAER in 2010–11, how many Indian household invests in
equities
(a) 0.9% (b) 0.7% (c) 0.5% (d) None

3 ………………..play an important role in the economic activity of most developing countries, including
India.
(a) Local firms (b) National Firms (c) Multinational enterprises (d) None

4 MNE‟s should be actively involved in the local economic development of India

(a) True (b) False

5 LED programs are totally harmful

(a) True (b) False

6. Disinvestment is a term that has been used to describe a .................. of economic and physical
deterioration
(a) Product (b) Project (c) Process (d) Company

7. The government must not enter into those areas where the ............. .......can perform better
(a) Government (b) Private sector (c) Multinational company (d) None of these

8. Behaviour is the attitude of top management toward the role of international operations within the total
corporate strategy.
(a) True (b) False

9. The firm that enters into a turn key deal will have no ............................in the competitor.
(a) Long-term interest (b) Short term interest (c) Interest (d) None of these

10. A multinational corporation (MNC) or enterprise (MNE) is a corporation or an enterprise that

manages production or ................ in more than one country.
(a) Managers (b) Production services (c) Employees (d) Delivers services

4.12 Review Questions

1. What is the meaning of disinvestment?
 2. Describe the motives of disinvestment.
3. Explain how disinvestment is a global phenomenon?
4. What are the loopholes and challenges in disinvestment?
5. What are the roles of disinvestment in Indian PSUs?
6. What are the problems associated with disinvestment?
7. What is National Common Minimum Program?
8. Define Multinational enterprises (MNEs). Write the main criteria to identifying a MNE.
9. Illustrate the types of activity that favour MNEs?
10. What are the roles and benefits of MNEs?

Answers for Self Assessment Questions

1 (b) 2 (c) 3 (c) 4 (a) 5 (b)
6 (c) 7 (b) 8 (a) 9 (a) 10 (d)
 Unit-5 Small Scale Industries in India

CONTENTS
Objectives
Introduction
5.1 Role of Small Scale Industries in Indian Economy
5.2 Disabilities of Small Enterprises
5.3 Several Difficulties of Small Scale Enterprises
5.4 Measures
5.5 Micro, Small and Medium Enterprises Development Organization
5.6 Importance of SSE in Indian Economy
5.7 Summary
5.8 Keywords
5.9 Self Assessment Questions
5.10 Review Questions

Objectives
After studying this chapter, you will be able to:
Role of Small Scale Industries in Indian Economy
Explain disabilities of small enterprises
Discuss several difficulties of small scale enterprises.
Explain measures
Understand micro, small and medium enterprises development organization
Importance of SSE in Indian economy
Introduction
The role played by the small scale industry in the economic activity of advanced industrialised countries
like Japan, Germany, Great Britain and the United States of America is significant. Many Nations, both
developed and developing exteriorized that the small industry sector is a useful vehicle for growth, in the
later for the creation of new employment opportunities on a wide scale in the shortest possible time. Small
and Medium enterprises account for approximately 80% of the private sector industrial workers and hence
occupy an important position in the industrial structure of Japan. The employment creating capacity of the
small and medium enterprises in Japan has been seen to be larger than that in Germany or United States.

The concept for small -scale industrial undertakings has changed over time. Initia lly they
were classified into two categories- those using power with less than 50 employees and those not using
power with the employee strength being more than 50 but less than 100. However, t h e c a p i t a l
resources invested on plant and machinery buildings have been the primary
criteria to differentiate the small-scale industries from the large and medium scale industries. An
industrial unit can be categorized as a small-scale unit if it fulfils the capital investment limit fixed by the
Government of India for the small-scale sector.

Definition
A n y industrial unit to be regarded as “Small Scale Industrial unit the following condition is to be
satisfied: Investment in fixed assets like plants and equipments either held on ownership terms on lease or
on hire purchase should not be more than Rs 10 million. However, the unit in no way can be
owned or controlled or ancillary of any other industrial unit”.
SSI means Small Scale Industries, which is an industrial undertaking with the investment not exceeding
Rs. 100 lakhs in plant and machinery. In cases of auxiliary industries the investment ceiling on plant and
machinery is also Rs. 100 lakhs.

Classification of Small Scale Industries (SSIs)

A common classification is between traditional small industries and modern small industries. Traditional
small industries include khadi and handloom, village industries, handicrafts, sericulture, coir, etc. Modern
SSIs produce wide range of goods from comparatively simple items sophisticated products such as
television sets, electronics, control system, various engineering products, particularly as ancillaries to the
large industries. The traditional small industries are highly labour-intensive while the modern small-scale
units make the use of highly sophisticated machinery and equipment. For instance, during 1979–80,
traditional small-scale industries accounted for only 135 of the total output but their share in total
employment was 56%. As against this, the share of modern industries in the total output of this sector was
74% in 2010–11 but their share in employment was only 33%. Obviously, these industrial units would
behave higher labour productivity. One special characteristic of traditional small-scale industries is that
they cannot provide full time employment to workers, but instead can provide only subsidiary or part time
employment to agricultural labourers and artisans. Among traditional village industries, handicrafts
possess the highest labour productivity, besides handicrafts make a significant contribution to earning
foreign exchange for the country. N o w a d a y s I n d i a n small-scale industries (SSIs) are mostly modern
small-scale industries. Modernization has widened the list of products offered by this industry. The items
manufactured in modern Small-scale service and Business enterprises in India now include rubber
products, plastic products, chemical products, glass and ceramics, mechanical engineering items,
hardware, electrical items, transport equipment, electronic components and equipments, automobile parts,
bicycle parts, instruments, sports goods, stationery items and clocks and watches.
5.1 Role of Small Scale Industries in Indian Economy
The small-scale industrial sector plays a pivotal role in the Indian economy in terms of employment and
growth has recorded a high rate of growth since Independence in spite of stiff competition from large-
scale industries. There are several important reasons why these industries are contributing a lot to the
progress of the Indian economy:

5.1.1 Production
The small-scale industries sector plays a vital role in the growth of the country. It contributes almost 40%
of the gross industrial value added in the Indian economy.
It has been estimated that investment in fixed assets in the small scale sector produces 4.62 million worth
of goods or services with an approximate value addition of ten percentage points.
When the performance of this sector is viewed against the growth in the manufacturing and the industry
sector as a whole, it in stills confidence in the resilience of the small-scale sector

5.1.2 Employment
SSI Sector in India creates largest employment opportunities for the Indian populace, next only to
Agriculture. It has been estimated that 100,000 rupees of investment in fixed assets in the small-scale
sector generates employment for four persons.

Did You Know?

The small-scale sector has grown rapidly over the years. The growth rates during the various plan periods
have been very impressive. The number of small-scale units has increased from an estimated 0.87 million
units in the year 1980–81 to over 3 million in the year 2011.

5.1.3 Export
SSI Sector plays a major role in India's present export performance. SSI Sector contributes 45%–50% of
the Indian Exports. Direct exports from the SSI Sector account for nearly 35% of total exports. Besides
direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly.
This takes place through merchant exporters, trading houses and export houses. They may also be in the
form of export orders from large units or the production of parts and components for use for finished
exportable goods. It would surprise many to know that non-traditional products account for more than
95% of the SSI exports
The exports from SSI sector have been clocking excellent growth rates in this decade. It has been mostly
fuelled by the performance of garments, leather and gems and jewellery units from this sector. The
product groups where the SSI sector dominates in exports are sports goods, readymade garments, woollen
garments and knitwear, plastic products, processed food and leather products. The SSI sector is
reorienting its export strategy towards the new trade regime being ushered in by the WTO.
Task: With the help of flow chart give percentage share, use of emplacement of Small Scale Industries in
Indian economy

Opportunity
The opportunities in the small-scale sector are enormous due to the following factors:
Less Capital Intensive
Extensive Promotion and Support by Government
Reservation for Exclusive Manufacture by small scale sector
Project Profiles
Funding - Finance and Subsidies
Machinery Procurement
 Raw Material Procurement
Manpower Training
Technical and Managerial skills
Tooling and Testing support
Reservation for Exclusive Purchase by Government
Export Promotion
Small industry sector has performed exceedingly well and enabled our country to achieve a wide measure
of industrial growth and diversification.

I. Fashion Technology
Opportunities
Glamour and Limelight
Creative
High Value Addition
Coverage (Extensive)
Clothes
Dresses
Garments
Textile
Footwear
Various Leather Products
Jewellery
Travel Goods
Fashion Accessories (purses, bags, carryon, watches etc.)
Personal Embellishment (Face, Hair, Hands, Feet, Cosmetics, Perfumes etc.

II. Information Technology

Opportunities
Media and Entertainment
Contents,
Animation,
Games

III. Design Technology

Opportunities
Interiors (Furniture and Furnishing – homes, work places, community, hospitals, schools, shopping
places, recreation, sports)
Exteriors - (Architectural)
Industrial products
Textiles
Electrical appliances
White goods
Leather products
Engineering products
Machinery
Dies and tools
 Watches
Jewellery
Hospital equipments
Medical instruments
Electronics and Communication Products and Equipments

5.1.4 Welfare
These industries are also very important for welfare reasons. People of small means can organize these
industries. This in turn increases their income levels and quality of life. As such these can help in
reducing poverty in the country. Further, these industries tend to promote equitable distribution of
income. The reasons are obvious.

One, a large proportion of income generated in these enterprises is distributed among the workers.
Two, income are distributed among a vast number of persons throughout the country. All these benefits
flow from the fact that these industries are highly labour-intensive, and that these can be set up anywhere
in the country. Distributive aspect of small-scale industries further unravels their two-fold beneficial
character. On the one hand, these industries enable a vast number of people to earn income, and on the
other hand, the very people among whom these are distributed generate this income.

5.2 Disabilities of Small Enterprises

Small enterprises are presently seriously handicapped in comparison with larger units by an inequitable
allocation system for scarce raw materials and imported components, lack of provision of credit and
finance; low technical skill and managerial ability; and marketing contracts. It is, therefore, essential to
develop an overall approach to remove these disabilities.

5.2.1 Output vs. Employment

One argument is that the emphasis on employment is irrelevant, as the basic thing is the output that the
economy needs for its growth. From this angle, it is contended that, since the productivity of these
industries is low compared to that of large industries, the small industries simply waste the capital which
is very scarce, and which, if diverted to large industries, can produce more. From this view point, small
industries are more capital-intensive. It is also argued that the labour-productivity in the small industries
is also small compared to large industries.

5.2.2 Adverse Effect on Capital Formation

It is also contended by some that small industries have unfavourable consequences on saving and capital
formation. They argue that the establishment of these industries will, over a period of time, reduce the
availability of capital for large-scale industries with higher productivity of capital.
First, it will happen because capital, used inefficiently in the small industries, will not be available
for large-scale industries.

Second, these industries being labour-intensive, use a major proportion of the sale proceeds of output to
pay workers whose marginal propensity to save is low. As a result, a large part of their incomes will be
used for consumption resulting in a lower rate of saving and capital formation for the economy.

5.2.3 Inefficient Production

Another charge against these industries is that the cost of production is higher than in the large industries,
because these industries suffer from several inefficiencies.
5.2.4 Large Sickness
There are two main issues in respect of sick SSIs: (i) existence of a large number of sick units which are
non-viable; and (ii) rehabilitation of potentially viable units. As far as former is concerned, there were 1,
67,980 sick SSI units as on March 31, 2010. These units are those that had obtained loans from banks. An
amount of Rs. 5,706 crore was blocked in these units. Of these, as many as 1, 62,791 units with
outstanding bank credit of Rs. 4,569 crore were identified by banks as being non-viable. As far as the
latter issue is concerned, of the 1,67,980 sick SSI units as on March 31, 2010, only 3,626 units with
outstanding bank credit of Rs.625 crore were found to be potentially viable by the banks.

Task: Give main sicknesses of SSI in the form of flow chart.

5.3 Several Difficulties of Small Scale Enterprises

It is thus obvious that these industries, despite their importance in the economy, are not contributing to
their full towards the development of the country along the desirable lines. It is because these are beset
with a number of problems concerning their operations. These may be described as under:

5.3.1 Inadequacy of Finance

A serious problem of these industries is in respect of credit both for long-term and short-term purposes.
This is evident from the fact that the supply of credit has not been commensurate with their needs
associated with fixed and working capital.

5.3.2 Difficulties of Marketing

These industries are also up against the crucial problem of marketing their products. The problem arises
from such factors as small scale of production, lack of standardization, inadequate market intelligence,
competition from technically more efficient units, etc. Apart from the inadequacy of marketing facilities,
the cost of promoting and selling their products too is high.

5.3.3 Shortage of Raw Materials

Then there is the problem of raw materials which continues to plague these industries. Raw materials are
available neither in sufficient quantity, nor of requisite quality, nor at reasonable price. Being small
purchasers, the producers are notable to undertake bulk buying as the large industries can do. The result is
taking whatever is available, of whatever quality and at high prices.

5.3.4 Low-level Technology

The methods of production, which the small and tiny enterprises use, are old and inefficient. The result is
low productivity and high costs. There is little of research and development in this field in the country.
There is almost no agency to provide venture capital to cover risks associated with the introduction of
new technologies.

5.3.5 Competition from Large-Scale Industries

Another serious problem, which these industries face, is that of competition from large-scale industries.
Large-scale industries, organized as they are on modern lines, using latest production technology and
having access to man facilities, can easily outsell the small producers.

Caution: To avoid difficulties in Small Scale Enterprises use of latest technologies and tools is
mandatory in organization.
5.4 Measures
To help the SSIs in meeting the challenges of globalization, the Government has taken several initiatives
and measures in recent years. Primarily among them is the enactment of the „Micro, Small and Medium
Enterprises Development Act, 2006‟, which aims to facilitate the promotion and development and
enhance the competitiveness of MSMEs. The Act came into force from 2nd October 2006. The main
features of the act are:

Other major initiatives taken by the government are setting up of National Manufacturing
Competitiveness Council (NMCC) and the National Commission of Enterprises in the Unorganized
Sector (NCEUS). Further, in recognition of the fact that delivery of credit continues to be a serious
problem for MSEs, a „Policy Package for Stepping up Credit to Small and Medium Enterprises (SME)‟
was announced by the government with the objective to double the credit flow within the period of five
years. The government has also announced a comprehensive package for promotion of micro and small
enterprises, which comprises the proposals/schemes having direct impact on the promotion and
development of the micro and small enterprises, particularly in view of the fast changing economic
environment, wherein to be competitive is the key of success. The Ministry of Micro, Small and Medium
Enterprises (MSME) performs its tasks of formulation of policies and implementation of programmes
mainly through two Central organizations.

5.5 Micro, Small and Medium Enterprises Development Organization

The Micro, Small and Medium Enterprises Development Organization (earlier known as Small Industries
Development Organization) set up in 1954, functions as an apex body for sustained and organized growth
of micro, small land medium enterprises. As an apex organ, it provides a comprehensive range of
facilities and services to the MSMEs through its network of 30 Small Industries Service Institutes (SISIs),
28 branch SISIs, 4 Regional Testing Centres (RTCs), 7 Field Testing Centres (FTSs), 6 Process-cum-
Product Development Centres (PPDCs).

Small and Medium enterprises play in extraordinarily important role as muscles for regional economic
development. In the development of sparsely populated areas such as Hokkaido Island in the North they
have been a valuable tool for development. In the first half of the sixties the small and medium enterprises
accounted for more than 50 % of Japanese exports. Such business was mostly laboured intensive and not
dependent on imports of raw materials and hence, its net contribution to foreign exchange was very high.
Indian economy is an under developed economy. Its vast resources are either unutilized or underutilized.
A major section of man power is lying idle. The per capita income is low. Capital is shy and scarce and
investment is lean. Production is traditional and the technique is outdated. The output is insufficient and
the basic needs of the people remain unfulfilled. Industrialization is the only answer to this present state
of disrupted economy. The problem is of the approach which should be direct, utilitarian and pragmatic.
Such industries do not require huge capital and hence suitable for a country like India. The Small Scale
Industries have a talent of dispersal. They can be accessible to the remote rural areas of the country and
do not lead to regional imbalances and concentration of industries at one place, which is responsible for
many economic resources such as entrepreneurship and capital. The planners and the economists in India
took recourse to small scale industry because most of these industries existed in the traditional form,
which symbolize our heritage and past glory. These still serve as the back bone of our economy, which is
mostly rural. It is with this view that an assessment of growth, development and working of Small Scale
Industries in the specific region is attempted in this research study. However, before entering into an
analytical study of this project, it is necessary to examine the concept of Small scale industry as it has
come to be, today, in India.
The concept of Small Scale Industries, as it has developed in years, is one of the confusion and lacks
clarity. Neither the Government, nor the planners could provide a clear and graphic definition. Obviously
Small Scale Industries were not given such importance during the British rule as is given today. We now
have a pragmatic approach to the concept in view of the prevailing economic conditions, gradual
industrial development and the difficulties that arise in the implementation of planned programes hence;
the concept has undergone changes from time to time. Before Independence, the present small scale
industry was meant to denote the village and the urban cottage industry. This group included a variety of
industries ranging from manufacturing of Iron safes, locks, carpets, marble jigs, baskets, hand-loom cloth
and the like. In fact, at that time the term” cottage and Small Scale Industries ‟was used in juxtaposition
to large scale industries, which were established under the British patronage. Small Scale Industries were
indigenous with a historical background of ages. They received encouragement and support during the
freedom movement. The nationalists considered it to be their patriotic duty to develop them.

Prof. K.T. Sash was the first Indian economist, who realizing the importance of Small Scale Industries in
India, tried to give a workable definition of these industries. He defined “A small scale or cottage industry
may be defined as an enterprise or series of operations carried on by a workman skilled in the craft on his
responsibility, the finished product of which, he markets himself”. He works in his home with his own
tools and materials and provides his own labour or at most the labour of such members of his family, as
are able to assist. These workers work mostly by hand labour and personal skill, with little or no aid from
modern power driven machinery, and in accordance with traditional technique. Such supplementary
energy as is provided by animal power may add to the economy and efficiency of the industry. He works,
finally, for a market in the immediate neighbourhood that is to say in response to known demand with
reference to quality as well as quantity. In contrast Jawaharlal Nehru seemed to be clearer in his mind
when he maintained separate entities of cottage and Small Scale Industries. He was of the view that a
small industry was the middle sector and it would overlap both the cottage and the large industries. The
basic policy support of SSI sector had its roots in the Industrial Policy Resolution 1977, laid emphasis on
reservation of items. The reservation economically viable and technologically feasible products to be
exclusively manufactured by small scale industry began with a list of 47 items which was gradually
extended to too many products. At Present 812 items are in the reserved list.7
The other policy support which could be listed are excise exemption, credit under priority sector lending
from banks and financial institutions, marketing support through reservation of items for products from
small scale industry sector for government purchases, providing infrastructure facilities like sheds, plots
in industrial estates, technological support, new management techniques, training and entrepreneurship
development programmes. The achievement of SSI sector in 2010 – 2011 were 32.25 lakhs SSI units
providing production of Rs. 578299 crores, exports of Rs. 53995 crores and providing employment to
177.30 lakhs persons. Though this sector has shown substantial progress, its major problems like
inadequate credit flow from banks and financial institutions, inadequate infrastructure facilities, low
quality standards of products, use of technology, plant and machinery and equipments and inefficient
management techniques, are still inhibiting the sector. In addition to these, this sector has to face
challenges of competition from the opening up of economy to globalization, need for increasing exports
and to meet World Trade Organization commitments. The policy support provided so far has acted a
catalyst in promoting this sector. However, the planning commission felt an urgent need to review the
policy measures so as to make this sector more growth oriented and enable it to withstand the pressure
from global competition.

India’s vision of emerging as an economic power in the 21st century can be realized through the
promotion and development of the small and medium enterprises.
Liberalization and globalization are the order of the day. The market forces will determine the systems
and manner of production. The allocation of resources within the sector must be governed by the criteria
of efficiency, productivity and competitiveness. The Small Scale Industries will have to move from a
regime of protective environment to a competitive environment. Small scale industrial units feel
apprehensive about globalization and the impact of the agreements with World Trade Organization
(WTO). The growth experience of the Asian Tigers has to some extent, promoted India to go for export
orientation. But more important influence is on the perception of the small enterprises and their
employment role as an instruction for an easier management of the social system. A high powered
committee headed by Meera Seth, former member of Planning Commission describes how the hand
looms faired during 10 years after implementation of the textile policy but the committee failed to provide
a credible account or analysis for impact of policy.

Did You Know?

There were about 20 crores small scale industry units in 2010–11 providing goods. Worth Rs. 1,55, 340
crores exports order of Rs. 9,661 crores and providing employment to about 125 lakhs persons.

Task
Name the first Indian economist realizing the importance of Small Scale Industries in India.

5.5.1 National Small Industries Corporation Ltd (NSIC)

NSIC, since its inception in 1955 has being working with its mission of promoting, aiding and fostering
the growth of micro and small enterprises. The Corporation has been introducing several new schemes
from time to time for meeting the change aspirations of micro and small enterprises. The main objective
of all these schemes is to promote the interest of the micro and small enterprises and to put them in
competitive and advantageous position. The information pertaining to the schemes planned to be
continued/implemented in the XI plan period by NSIC with Government support is given hereunder:
Performance and Credit Rating Scheme
NSIC, in consultation with Rating Agencies and Indian Banks Association, has formulated Performance
and Credit Rating Scheme for Small Industries. The scheme is aimed to create awareness among small
enterprises about the strengths and weaknesses of their existing operations and to provide them an
opportunity to enhance their organizational strengths and credit worthiness. The rating under the scheme
serves as a trusted third party opinion on the capabilities and credit worthiness of the small enterprises.
An independent rating by an accredited rating agency has a good acceptance from the Banks/Financial
Institutions. Under this scheme, rating fee to be paid by the SSIs is subsidized for the first year only and
that is subject to maximum of 75% of the fee or Rs. 40,000/-, whichever is less.
This is an ongoing old scheme. Marketing, a strategic tool for business development, is critical for the
growth and survival of SSIs in today‟s intensely competitive market. One of the major challenges before
the SSIs is to market their products/services.
NSIC acts as a facilitator to promote marketing efforts and enhance the competency of the small
enterprises for capturing the new marketing opportunities by way of organizing and participating in
various domestic and international exhibitions/trade-fairs, buyers-sellers meet intensive campaigns,
seminars and consortia formation at the subsidized rates. In addition, the Ministry has three National
Level Entrepreneurship Development Institutes namely, Indian Institute for Entrepreneurship (IIE),
Guwahati, National Institute for Entrepreneurship and Small Business Development (NIESBUD), Noida
and National Institute for Micro, Small and Medium Enterprises (NIMSME), Hyderabad.
Infrastructure Development
For setting up of industrial estates and to develop infrastructural facilities for MSMEs, the Integrated
Infrastructure Development Scheme (IID) was launched in 1994. The scheme covers districts which are
not covered under the Growth Centres‟ scheme. The scheme covers rural as well as urban areas with a
provision of 50% reservation for rural areas and 50% industrial plots are to be reserved for tiny units. For
the promotion and development of MSEs in the country, cluster is one of the thrust areas of the Ministry
in the 11th plan.
Technology Upgradation in MSE Sector
The opening up of economy has exposed MSE sector to global and domestic competition. With a view to
enhancing the competitiveness of this sector, the Government has taken several steps such as:
i. Assistance to industry association for setting up of testing centres and to State Governments and to their
autonomous bodies for modernization/expansion of their Quality Marking Centres.
ii. Regional Testing Centres and Field Testing Centres to provide testing
services and services for quality up gradation.
iii. Implementation of Micro and Small Enterprise Cluster Development Programme (MSECDP), under
which 91 clusters have been taken up, including national programme for the development of toy, stone,
machine tools and hand- tool industry in collaboration with UNIDO.
iv. A scheme of promoting ISO 9000/14001 Certification under which S S I units are given financial
support by way of reimbursing 75% of their expenditure to obtain certification subject to maximum of
Rs.75,000 per unit.
v. Setting up of Biotechnology Cell in SIDO.

5.5.2 Measures for Export Promotion

Export promotion from the MSE sector has been accorded a high priority. Following schemes have been
formulated to help MSEs in exporting their products.
i. Products of MSE exporters are displayed in international exhibitions and the government reimburses the
expenditure incurred.
ii. To acquaint MSE exporters with latest packaging standards, techniques, etc., training programme on
packaging for exporters are organized in various parts of the country in association with the Indian
Institute of Packaging.
iii. Under the MSE Marketing Development assistance (MDA) scheme, assistance is provided to
individuals for participation in overseas fairs/exhibition, overseas tours, or tours of individuals as member
of a trade delegation going abroad.

5.5.3 Entrepreneurship and Skill Development

The Ministry conducts Entrepreneurship Development Progamme (EDPs) to cultivate the skill in
unemployed youths for setting up micro and small enterprises. Further, under the management
Development Programmes (MDPs), existing MSE entrepreneurs are provided training on various areas to
develop skills in management, to improve their decision-making capabilities resulting in higher
productivity and profitability. To encourage more entrepreneurs from SC/ST, women and physically
challenged groups, the Ministry of MSME provides them a stipend of Rs. 5000 per capita per month for
the duration of the training. From the above description of the government approach and measures, it is
clear that these are by and large on the right lines. If, however, the SSIs still suffer from various
handicaps, it is obviously, because these measures are not implemented effectively. It is that the efforts
are more in direction of “protection” of this sector, and there is very little by way of raising its efficiency
and competitive strength. Unless this becomes the centre-theme of the policy, the SSIs will not become a
dynamic sector.

5.6 Importance of SSE in Indian Economy

The following importance of SSE Indian Economy:
Performance
 Performance Table
Economic Indicators
Production
Employment
Export
Opportunity

5.6.1 Generation of Employment––Industry Group-wise

Food products industry has ranked first in generating employment, providing employment to 0.48 million
persons (13.1%). The next two industry groups were Non-metallic mineral products with employment of
0.45 million persons (12.2%) and Metal products with 0.37 million persons (10.2%).
In Chemicals and chemical products, Machinery parts except Electrical parts, Wood products, Basic
Metal Industries, Paper products and printing, Hosiery and garments, Repair services and Rubber and
plastic products, the contribution ranged from 9% to 5%, the total contribution by these eight industry
groups being 49%.
In all other industries the contribution was less than 5%.

5.6.2 Per-unit Employment

Per unit employment was the highest (20) in units engaged in beverages, tobacco and tobacco products
mainly due to the high employment potential of this industry particularly in Maharashtra, Andhra
Pradesh, Rajasthan, Assam and Tamil Nadu.
Next came Cotton textile products (17), Non-metallic mineral products (14.1), Basic metal industries
(13.6) and Electrical machinery and parts (11.2.).
Per unit employment was the highest (10) in metropolitan areas and lowest (5) in rural areas.
However, in Chemicals and chemical products, Non-metallic mineral products and Basic metal industries
per unit employment was higher in rural areas as compared to metropolitan areas/urban areas.
In urban areas highest employment per unit was in Beverages, tobacco products (31 persons) followed by
Cotton textile products (18), Basic metal industries (13) and Non-metallic mineral products (12).

5.6.3 Location-wise Employment Distribution––Rural

Non-metallic products contributed 22.7% to employment generated in rural areas. Food Products
accounted for 21.1%, Wood Products and Chemicals and chemical products shared between them 17.5%.

5.6.4 Urban
As for urban areas, Food Products and Metal Products almost equally shared 22.8% of employment.
Machinery parts except electrical, Non-metallic mineral products, and Chemicals and chemical products
between them accounted for 26.2% of employment.

5.6.5 State-wise Employment Distribution

Tamil Nadu (14.5%) made the maximum contribution to employment.
This was followed by Maharashtra (9.7%), Uttar Pradesh (9.5%) and West Bengal (8.5%) the total share
being 27.7%.
Gujarat (7.6%), Andhra Pradesh (7.5%), Karnataka (6.7%) and Punjab (5.6%) together accounted for
another 27.4%.
Per unit employment was high - 17, 16 and 14 respectively - in Nagaland, Sikkim and Dadra and Nagar
Haveli.
It was 12 in Maharashtra, Tripura and Delhi.
This was followed by Maharashtra (9.7%), Uttar Pradesh (9.5%) and West Bengal (8.5%) the total share
being 27.7%.
Gujarat (7.6%), Andhra Pradesh (7.5%), Karnataka (6.7%) and Punjab (5.6%) together accounted for
another 27.4%.
Per unit employment was high - 17, 16 and 14 respectively - in Nagaland, Sikkim and Dadra and Nagar
Haveli.
It was 12 in Maharashtra, Tripura and Delhi.

Opportunity
The opportunities in the small-scale sector are enormous due to the following factors:
Less Capital Intensive
Extensive Promotion and Support by Government
Reservation for Exclusive Manufacture by small scale sector
Project Profiles
Funding Finance and Subsidies
Machinery Procurement
Raw Material Procurement
Manpower Training
Technical and Managerial skills
Tooling and Testing support
Reservation for Exclusive Purchase by Government
Export Promotion
Growth in demand in the domestic market size due to overall economic growth
Increasing Export Potential for Indian products

Growth in Requirements for ancillary units due to the increase in number of Greenfield units coming up
in the large scale sector. Small industry sector has performed exceedingly well and enabled our country to
achieve a wide measure of industrial growth and diversification.

By its less capital intensive and high labour absorption nature, SSI sector has made significant
contributions to employment generation and also to rural industrialisation. This sector is ideally suited to
build on the strengths of our traditional skills and knowledge, by infusion of technologies, capital and
innovative marketing practices. This is the opportune time to set up projects in the small-scale sector. It
may be said that the outlook is positive, indeed promising, given some safeguards. This expectation is
based on an essential feature of the Indian industry and the demand structures. The diversity in production
systems and demand structures will ensure long term co-existence of many layers of demand for
consumer products / technologies / processes. There will be flourishing and well grounded markets for the
same product/process, differentiated by quality, value added and sophistication. This characteristic of the
Indian economy will allow complementary existence for various diverse types of units. The promotional
and protective policies of the Govt. have ensured the presence of this sector in an astonishing range of
products, particularly in consumer goods. However, the bugbear of the sector has been the inadequacies in
capital, technology and marketing. The process of liberalisation coupled with Government support will
therefore, attract the infusion of just these things in the sector.

Small industry sector has performed exceedingly well and enabled our country to achieve a wide measure
of industrial growth and diversification.
By its less capital intensive and high labour absorption nature, SSI sector has made significant
contributions to employment generation and also to rural industrialisation. This sector is ideally suited to
build on the strengths of our traditional skills and knowledge, by infusion of technologies, capital and
innovative marketing practices. So this is the opportune time to set up projects in the small scale sector. It
may be said that the outlook is positive, indeed promising, given some safeguards. This expectation is
based on an essential feature of the Indian industry and the demand structures. The diversity in production
systems and demand structures will ensure long term co-existence of many layers of demand for
consumer products / technologies / processes. There will be flourishing and well grounded markets for the
same product/process, differentiated by quality, value added and sophistication. This characteristic of the
Indian economy will allow complementary existence for various diverse types of units. The promotional
and protective policies of the Govt. have ensured the presence of this sector in an astonishing range of
products, particularly in consumer goods. However, the bug bear of the sector has been the inadequacies
in capital, technology and marketing. The process of liberalisation will therefore, attract the infusion of
just these things in the sector.

Did You Know?

In metropolitan areas the leading industries were Metal products, Machinery and parts except electrical
and Paper products and printing (their total share being 33.6%).

5.6.6 The Problems or Hurdles of Small Scale Industry

One of the major hurdles faced by small scale industry is fund management. The problems on account of
impact of fund management can be presented as follows:
The Small-scale industries find themselves at a loose end in competition with large scale industries with
their large organization and resources. Of the present difficulties, availability of raw material at
competitive prices appears to be the greatest.

Small units suffer from inadequate work space, power, lighting and ventilation, absence of sanitary and
safety measures etc. These shortcomings tend to endanger the health of workmen and have adversely
affected the rate of production.

Marketing is one of the major stumbling blocks for Small Scale Industries. i.e. lack of standardization,
poor designing, lack of quality control, lack of precision, poor bargaining power, scale of production and
the like affect them. Small Scale Industries in our country have suffered from the lack of entrepreneurial
ability to develop initiative and undertake risks in the unexplored industrial fields. The inefficiency in
management comes first among managerial problems. The shortage of finance affects the ability of the
small units severely. Every kind of problem, whether of raw material, power, transport or marketing faced
by an entrepreneur in its ultimate analysis turns out to be a problem of finance? The small industry gets
elbowed out by the large and medium scale industries in the procurement of bank finance and institutional
credit.

A serious problem which is hampering small scale sector is its sickness. Many small units have fallen sick
due to one problem or the other. Some aggregate economic behaviours of the country such as growth in
Gross National Product, availability of credit, volume of money supply, capital market activity or level of
investment and price level fluctuations, may have important bearing on industrial sickness in the country.
The crux of the problem is very often that of finance. Small Scale Industries are very poor and have little
to offer as security for raising finance. In the background of these developments, a study on the Financial
Performance of Small Scale Industry has become desirable.
Did You Know?
Accordingly, the present study is an attempt to investigate into the Fund Management of Small Scale
Industries in Thiruvananthapuram District of Kerala.

Case Study:
Successful SME Financing-SIDBI
Worldwide, the wind has been changing in the finance sector in general and banking-investment sector in
particular. Such a panorama teaches us that now, are the time of cooperation rather than a competition,
now it‟s a time of convergence rather than cutting each other‟s neck over customers and markets, now it‟s
a time of consolidation rather than antagonism. Curing the fatal disease requires the doses of small pills;
impressive thoughts come out from the small brain, similarly, India requires prominence of small and
medium enterprises for curing its problem of low economic growth vis-à-vis developed nations.

To cure the overall disease of lack of appropriate growth of Indian SMEs – Small and Medium
Enterprises, India needs several small pills such as adequate credit delivery to SMEs, better risk
management, technological up gradation of Banks ESP. Public Sector Banks, attitudinal change in
Bankers and so on. Among them, the major problem of inadequate financing to SMEs needs an urgent
attention. Having said this, it is pertinent to mention that Small Industrial Development Bank of India has
achieved landmark results in the domain of small and medium enterprise financing and fulfilling their
credit requirements time to time in various forms such as long term project finance, working capital
finance, bill discounting etc. However considering the level of appetite for credit facilities of Indian small
and medium enterprises, private and public sector banks in India need to work out an unique and
innovative model of financing to this vital sector (SME) of Indian Economy.

In today‟s changing world, retail trading, SME financing, rural credit and overseas operations are the
major growth drivers for Indian banking industry. The scene has changed since the adoption of financial
sector restructuring program in 1991. The reform in the financial sector in India along with the overall
second generation economic reforms in Indian economy has transformed the landscape of banking
industry and financial institutions. GDP growth in the 10 years after reforms averaged around 6 %.
With the introduction of the reforms especially in financial sector and successful implementation of them
resulted into the marked improvement in the financial health of the commercial banks measured in terms
of capital adequacy, profitability, asset quality and provisioning for the doubtful losses.

Now, the rules of the game have completely changed. Consolidation has become the new mantra for
survival. Due to the growing influence of globalization on the Indian banking industry, the author is of the
opinion that the financial sector would be opened up for greater international competition under WTO.
Opening up of the financial sector from 2005, under WTO, would see a number of global banks taking
large stakes and control over banking entities in the country. They are expected to bring with them
capital, technology, and management skills which would increase the competitive spirit in the system
leading to greater efficiency. Government policies to allow greater FDI in banking industry and the move
to amend Banking regulations Act to remove the existing 10 % cap on voting rights of shareholders are
pointer to these developments.

The pressure on banks to gear up to meet stringent prudential capital adequacy norms under Basel II and
the various Free Trade Agreements (FTAs) that India is entering into with other countries, such as
Singapore, will also impact on globalization of Indian banking.

However, the flow need not be one way. Some of the Indian banks may also emerge as global players. As
globalization opens up opportunities for Indian corporate entities to expand their overseas operations,
banks in India wanting to increase their international presence could naturally be expected to follow these
corporate entities and other trade flows out of India.

Alongside, the growing pressure on capital structure of banks is expected to trigger a phase of
consolidation in the banking industry. In the past mergers were initiated by regulators to protect the
interest of depositors of weak banks. In recent years, there have been a number of market-led mergers
between private banks. This process is expected to gain momentum in the coming years. A merger
between two public sector banks or between a public sector bank and a private bank could be the next
logical development. Consolidation could also take place through strategic alliances or partnerships
covering specific areas of business such as credit cards, insurance, SMEs financing etc.

Secondly, risk management has become the key to success in which adoption of the state-of-the-art
technology and latest rating and management skills turn out to be the significant aid for better risk
management. The ability to gauge the risks and take appropriate position will be the key to successful
financing in the emerging Indian banking scenario. Risk-takers will survive, effective risk managers will
prosper and risk-averse are likely to perish.
In this context, Indian banks have to ensure:
1. Risk management has to trickle down from the corporate office to branches. They should be made
more accountable and responsible towards their duties.
2. As audit and supervision shifts to a risk-based approach rather than transaction oriented, the risk
awareness levels of line functionaries also will have to increase.
3. There is a growing need for banks to deal with issues relating to „reputational risk‟ to maintain a
high degree of public confidence for raising capital and other resources.
In this process, the technological advancement of Indian banks would create a soothing climate to manage
their risk in a better way. In the years to come, technological developments would render flow of
information and data faster, leading to prompt appraisal and decision-making. This would enable banks to
make credit management more effective, besides leading to an appreciable reduction in transaction cost.
In order to reduce investment costs in technology, banks are likely to resort sharing of facilities such as
ATM networks. Banks and financial institutions will join together to share facilities in the areas of
payment and settlement, back-office processing, data warehousing, and so on – majorly for cost
effectiveness and secondary motto would be to provide everything under one head.

The advent of new technologies could see the emergence of new players doing financial intermediation.
For example, we could see utility service providers offering, say, bill payment services or supermarkets or
retailers doing basic lending operations. So for better profit margin, with the help of technological
innovation, consolidation and innovation in corporate lending, the conventional definition of banking
might undergo changes.

Considering such developments in the banking industry of India, it seems that the next decade
will be an era of consolidation and integration. In such a scenario, the expected integration of various
intermediaries in the financial system would require a strong regulatory framework. It would also require
a number of legislative changes to enable the banking system to remain contemporary and competitive.
There would be an increased need for self-regulation among Indian banks since development of best
international standard practices could evolve better through this rather than based on mandatory
regulatory prescriptions. For instance, to enlist the confidence of the global investors and international
market players, the banks will have to initiate adopting the best global practices of financial accounting
and reporting. It is expected that banks should migrate to global accounting standards smoothly rather
than waiting for the regulatory circulars and guidelines, although it would mean greater disclosure and
tighter norms.
Last and the most important development in the Indian banking industry is its change of focus in
corporate lending on account of above mentioned changes and challenges. In the sheltered days of
corporate lending by banks, when customers could be freely charged, banks concerned themselves with
only `revenue' which was equal to cost plus profit. Post-reforms- after 1991, when the cost of services
became nearly equal across banks and cost-control was a key to higher profits, the focus of financial
institutions especially banks shifted to `profit', which was equal to revenue minus cost. This was an
alternative measure of revenue stream which every bank thought of due to effects of external environment
on their workings. And in the future, as domestic and international competition hots up, financial
institutions including banks may have to shift their focus to `cost' which will be determined by revenue
minus profit.
In other words, cost-control in tandem with efficient use of resources and increase in productivity will
determine the winners and laggards in the future. The economic theory of „survival of the fittest‟ works
everywhere it seems through this example.
The ray of hope is Small and Medium Enterprises (SMEs) which is an emerging, inevitable and profitable
target market for the financers‟ i.e. financial institutions and banks. However, that need not mean banks
and financial institutions will back-up the social banking. Rather than being seen as directed and
philanthropic-like financing, such lending should have been now more business driven.
On the contrary, the authors believe that all the sources or market of revenues have not been
vanished yet. The SMEs sector is considered to be an untapped market for financial institutions in India.
We just need to combat certain obstacles. The hurdles which need to be removed are:
1. Minimization of probabilities of skewed returns from SMEs by better risk management
2. Eradicate inconsistency in the knowledge of SMEs business. For example, entrepreneurs may possess
more information about the nature and characteristics of their products and processes than potential
financiers.
3. Absence of managerial and technical expertise of intermediaries whose role is to evaluate and monitor
companies
4. Lack of international infrastructure and expertise in SME financing

Questions.
1. Give the brief description of SME financing-SIDBI.
2. What are the processes of the technological advancement of Indian banks?

5.7 Summary
SSI means Small Scale Industries, which is an industrial undertaking with the investment not
exceeding Rs. 100 lakhs in plant and machinery.
A common classification is between traditional small industries and modern small industries.
Traditional small industries include khadi and handloom, village industries, handicrafts, sericulture,
coir, etc.
The small-scale industrial sector plays a pivotal role in the Indian economy in terms of employment
and growth has recorded a high rate of growth since Independence in spite of stiff competition from
large-scale industries.
SSI Sector plays a major role in India's present export performance. SSI Sector contributes 45%-50%
of the Indian Exports.
Small enterprises are presently seriously handicapped in comparison with larger units by an
inequitable allocation system for scarce raw materials and imported components.
 Primarily among them is the enactment of the „Micro, Small and Medium Enterprises Development
Act, 2006‟, which aims to facilitate the promotion and development and enhance the competitiveness
of MSMEs.
The Micro, Small and Medium Enterprises Development Organization (earlier known as Small
Industries Development Organization) set up in 1954, functions as an apex body for sustained and
organized growth of micro, small land medium enterprises.

5.8 Keywords
Classification of Small Scale Industries (SSI): SSI means Small Scale Industries, which is an industrial
undertaking with the investment not exceeding Rs. 100 lakhs in plant and machinery.
Employment: Employment is a contract between two parties, one being the employer and the other being
the employee.
Export: Export is usually decomposed by product sold and by target country.
Measures: To help the SSIs in meeting the challenges of globalization, the Government has taken several
initiatives and measures in recent years.
Production: The processes and methods employed to transform tangible inputs (raw materials, semi
finished goods, or subassemblies) and intangible inputs (ideas, information, knowledge) into goods
or services.
Welfare: Welfare economics is a subjective study that may assign units of welfare or utility in order to
create models that measure the improvements to individuals based on their personal scales.

Lab Exercise
1. Collect information of some Small Scale Economy Industries in India.
2. Give the process of using Information Technology in Indian Economic field.

5.9 Self Assessment Questions

1. SSI means small scale...........
(a) India (b) Industries (c) Infrastructure (d) None of these

2. SSI .........in India creates largest employment opportunities for the Indian populace.
(a) Sector (b) Economics (c) Rule (d) Method

3. Industries are also very important for ...........reasons.

(a) Work (b) Different (c) Welfare (d) None of these

4 There are main issues in respect of sick SSIs:

(a) Existence of a large number of sick units which are non-viable.
(b) Rehabilitation of potentially viable units.
(c) Both a and b
(d) None of these

5. The serious problem of Small Scale Industries is in respect of credit both for long-term and
...........purposes.
(a) Short-term (b) measure (c) Eonomic (d) None of these

6. To help the SSIs in meeting the challenges of ...................

(a) Enterprises (b) Organization (c) Globalization (d) None of these
7. The Micro, Small and Medium Enterprises Development Organization earlier known as ..........
(a) Small Industries Development Organization (b) Micro
(c) Development organization (d) Both a and b

8. The Micro, Small and Medium Enterprises Development Organization set up in ........
(a) 1950 (b) 1954 (c) 1990 (d) 1880

9. The opportunities in the small-scale sector are enormous due to some factors, these are:
(a) Less Capital Intensive (b) Project Profiles
(c) Machinery Procurement (d) All of these

10. Small Scale Industries are very poor and have little to offer as security for raising finance.
(a) True (b) False

5.10 Review Questions

1. Give the brief definition of Small Scale Industries in India.
2. Explain the Classification of Small Scale Industries (SSIs).
3. What you understand to role of production in the Small Scale Industries in Indian Economy?
4. Discuss the five roles of Small Scale Industries in Indian Economy.
5. Differentiate between fashion technology and information technology in SSI.
6. Give the discussion on Welfare in economic term.
7. Explain the large sickness and inefficient production.
8. What are the difficulties of small scale enterprises?
9. Give the understanding of measures in meeting the challenges of globalization.
10. Explain the small and medium enterprises development organization.
11. What is the Importance of SSE in Indian Economy?

Answers for Self Assessment Questions

1 (b) 2 (a) 3 (c) 4 (c) 5 (a)
6 (c) 7 (a) 8 (b) 9 (d) 10 (a)
 Unit -6 International Trade

CONTENTS
Objectives
Introduction
6.1 International Trade and the World Economy
6.2 Various Trade Reforms
6.3 Balance of Payments
6.4 Foreign Direct Investment (FDI)
6.5 EXIM Policy
6.6 World Trade Organization (WTO)
6.7 Summary
6.8 Keywords
6.9 Self Assessment Questions
6.10 Review Questions

Objectives
After studying this chapter, you will be able to:
Explain international trade and the world economy
Discuss various trade reforms announced in India in recent times
Understand balance of payments
Explain foreign direct investment
Define EXIM policy
Explain world trade organization
Introduction
International trade is the exchange of goods and services between countries. This type of trade gives rise
to a world economy, in which prices, or supply and demand, affect and are affected by global events.
Political change in Asia, for example, could result in an increase in the cost of labour, thereby increasing
the manufacturing costs for an American sneaker company based in Malaysia, which would then result
in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in
the cost of labour, on the other hand, would result in you having to pay less for your new shoes. Trading
globally gives consumers and countries the opportunity to be exposed to goods and services not available
in their own countries. Almost every kind of product can be found on the international market: food,
clothes, spare parts, oil, jewellery, wine, stocks, currencies and water. Services are also traded: tourism,
banking, consulting and transportation. A product that is sold to the global market is an export, and a
product that is bought from the global market is an import. Imports and exports are accounted for in a
country's current account in the balance of payments.

6.1 International Trade and the World Economy

Integration into the world economy has proven a powerful means for countries to promote
economic growth, development, and poverty reduction. Over the past 20 years, the growth of world trade
has averaged 6% per year, twice as fast as world output. But trade has been an engine of growth
for much longer. Since 1947, when the General Agreement on Tariffs and Trade (GATT) was
created, the world trading system has benefited from eight rounds of multilateral trade liberalization, as
well as from unilateral and regional liberalization. Indeed, the last of these eight rounds (the so called
"Uruguay Round" completed in 1994) led to the establishment of the World Trade Organization to help
administer the growing body of multilateral trade agreements.

The resulting integration of the world economy has raised living standards around the world. Most
developing countries have shared in this prosperity; in some, incomes have risen dramatically. As a
group, developing countries have become much more important in world trade they now account for
one-third of world trade, up from about a quarter in the early 1970s. Many developing countries have
substantially increased their exports of manufactures and services relative to traditional commodity
exports: manufactures have risen to 80% of developing country exports. Moreover, trade between
developing countries has grown rapidly, with 40% of their exports now going to other developing
countries.

However, the progress of integration has been uneven in recent decades. Progress has been very
impressive for a number of developing countries in Asia and, to a lesser extent, in Latin America. These
countries have become successful because they chose to participate in global trade, helping them to
attract the bulk of foreign direct investment in developing countries. This is true of China and India since
they embraced trade liberalization and other market-oriented reforms, and also of higher income
countries in Asia like Korea and Singapore that were poor up to the 1970s themselves.

But progress has been less rapid for many other countries, particularly in Africa and the Middle East.
The poorest countries have seen their share of world trade decline substantially, and without lowering
their own barriers to trade, they risk further marginalization. About 75 developing and transition
economies, including virtually all of the least developed countries, fit this description. In contrast to the
successful integrators, they depend disproportionately on production and exports of traditional
commodities. The reasons for their marginalization are complex, including deep-seated structural
problems, weak policy frameworks and institutions, and protection at home and abroad.
6.1.1 The Benefits of Trade Liberalization
Policies that make an economy open to trade and investment with the rest of the world are needed for
sustained economic growth. The evidence on this is clear. No country in recent decades has achieved
economic success, in terms of substantial increases in living standards for its people, without being open
to the rest of the world. In contrast, trade opening (along with opening to foreign direct investment) has
been an important element in the economic success of East Asia, where the average import tariff has
fallen, from 30% to 10% over the past 20 years.

Opening up their economies to the global economy has been essential in enabling many developing
countries to develop competitive advantages in the manufacture of certain products. In these countries,
defined by the World Bank as the "new globalizers," the number of people in absolute poverty declined
by over 120 million (14%) between 1993 and 1998. There is considerable evidence that more outward-
oriented countries tend consistently to grow faster than ones that are inward-looking. Indeed, one finding
is that the benefits of trade liberalization can exceed the costs by more than a factor of 10. Countries that
have opened their economies in recent years, including India, Vietnam, and Uganda, have experienced
faster growth and more poverty reduction. On average, those developing countries that lowered tariffs
sharply in the 1980s grew more quickly in the 1990s than those that did not. Freeing trade frequently
benefits the poor especially. Developing countries can ill-afford the large implicit subsidies, often
channelled to narrow privileged interests that trade protection provides. Moreover, the increased growth
that results from free trade itself tends to increase the incomes of the poor in roughly the same proportion
as those of the population as a whole. New jobs are created for unskilled workers, raising them into the
middle class. Overall, inequality among, countries has been on the decline since 1990, reflecting more
rapid economic growth in developing countries, in part the result of trade liberalization.

The potential gains from eliminating remaining trade barriers are considerable. Estimate of the gains from
eliminating all barriers to merchandise trade range from US$250 billion to US$680 billion per year.
About two-thirds of these gains would accrue to industrial countries. But the amount accruing to
developing countries would still be more than twice the level of aid they currently receive. Moreover,
developing countries would gain more from global trade liberalization as a percentage of their 6DP than
industrial countries, because their economies are more highly protected and because they face higher
barriers.

Although there are benefits from improved access to other countries markets, countries benefit most
from liberalizing their own markets. The main benefits for industrial countries would come from the
liberalization of their agricultural markets. Developing countries would gain about equally from
liberalization of manufacturing and agriculture. The group of low-income countries, however, would
gain most from agricultural liberalization in industrial countries because of the greater relative
importance of agriculture in their economies.

6.1.2 The Need for Further Liberalization of International Trade

These considerations point to the need to liberalize trade further. Although protection has declined
substantially over the past three decades, it remains significant in both industrial and developing countries,
particularly in areas such as agriculture products or labour-intensive manufactures and services (e.g.,
construction), where developing countries have comparative advantage.

Industrial countries maintain high protection in agriculture through an array of very high tariffs,
including tariff peaks (tariffs above 15%), tariff escalation (tariffs that increase with the level of
processing), and restrictive tariff quotas (limits on the amount that can be imported at a lower tariff rate). Average
tariff protection in agriculture is about nine times higher than in manufacturing. In addition,
agricultural subsidies in industrial countries, which are equivalent to 2/3 of Africa's total GDP,
undermine developing countries agricultural sectors and exports by depressing world prices and pre-
empting markets. For example, the European Commission is spending 2.7 billion euro per year making
sugar profitable for European farmers at the ; same time that it is shutting out low-cost imports of tropical sugar. In
industrial' countries, protection of manufacturing is generally low, but it remains high on many
labour-intensive products produced by developing countries.

Did You Know?

United States, which has an average import tariff of only 5%, has tariff peaks on almost 300
individual products. These are largely on textiles and clothing, which account for 90% of the $1
billion annually in U.S. imports from the poorest countries - a figure that is held down by import
quotas as well as tariffs.

Many developing countries themselves have high tariffs. On average, their tariffs on the industrial
products they import are three to four times as high as those of industrial countries, and they exhibit
the same characteristics of tariff peaks and escalation. Tariffs on agriculture are even higher (18%)
than those on industrial products.

Non-traditional measures to impede trade are harder to quantify and assess, but they are becoming
more significant as traditional tariff protection and such barriers as import quotas decline.
Antidumping measures are on the rise in both Industrial and developing countries, but are faced
disproportionately by developing countries. Regulations requiring imports to conform to technical and
sanitary standards comprise another important hurdle. They impose costs on exporters that can exceed
the benefits to consumers. European Union regulations on a flotoxins, for example, are costing Africa
$1.3 billion in exports of cereals, dried fruits, and nuts per European life saved. Is this an appropriate
balance of costs and benefits? For a variety of reasons, preferential access schemes for poorer
countries have not proven very effective at increasing market access for these countries. Such schemes
often exclude, or provide less generous benefits for, the highly protected products of most interest to
exporters in the poorest countries. They are often complex, non-transparent, and subject to various
exemptions and conditions (including non-economic ones) that limit benefits or terminate them once
significant market access is achieved.

Further liberalization by both industrial and developing countries - will be needed to realize trade's
potential as a driving force for economic growth and development. Greater efforts by industrial
countries and the international community more broadly, are called for to remove the trade barriers
facing developing countries, particularly the poorest countries. Although quotas under the so-called
Multi-fibre Agreement are due to be phased out by 2005, speedier liberalization of textiles and
clothing and of agriculture is particularly important. Similarly, the elimination of tariff peaks and
escalation in agriculture and manufacturing also needs, to be pursued. In turn, developing countries
would strengthen their own economies (and their trading partners') if they made a sustained effort to
reduce their own trade barriers further.

Enhanced market access for the poorest developing countries would provide them with the means to
harness trade for development and poverty reduction. Offering the poorest countries duty and quota
free access to world markets would greatly benefit these countries at little cost to the rest of the world.
The recent market opening initiatives of the EU and some other countries are important steps in this
regard. To be completely effective, such access should be made permanent, extended to all goods, and
accompanied by simple, transparent rules of origin. This would give the poorest countries the
confidence to persist with difficult domestic reforms and ensure effective use of debt relief and aid
flows.

Task
Explain the basic need of liberalization in International Trade.

6.1.3 Reaping the Benefits

The failure to start a new round of multilateral trade negotiations at the WTO conference in Seattle in
1999 was a setback for the international trading system. Such broad-based multilateral negotiations are
particularly important because they provide an opportunity for countries to gain visible benefits for
their exporters from market opening by others. This prospect provides an added incentive for countries
to open their own markets, and to overcome opposition from the entrenched interests benefiting from
protection. In this way, the packages of trade liberalization measures that result for these negotiations
are assured of benefiting all of the participating countries.
A new round of negotiations would raise global growth prospects and strengthen the international
trading system. The IMF considers a successful trade round to be an important step toward meeting
the goal of making globalization work for the benefit of all.

6.1.4 Free Trade Zones

The free trade zone has been over taken by events. Now that NAFTA, GAT and duty rate reductions have
removed many barriers to trade, some major changes have taken place in the international trade
landscape. And so it is a good time to review the role of free trade zones and their future under the
new trading system.
For all of their history, free trade zones have been established to evade or reduce duties and tariffs.
Often used to defer duties up to the point of manufacturing or consumption, they have served
chiefly as bonded warehouses in the United States, with items held in storage only to be released
on an "as needed" basis.

Unlike many of their foreign counterparts, manufacture is forbidden within to American free trade
zones. Assembly, known by the trade term manipulation," is a permissible use. (For the record,
manipulation is the legal trade term for taking two finished products and putting them together).
Often manipulation has resulted in significant savings for companies assembling products with
component parts from different countries.

Many of the 214 foreign trade zones located in the United States have not been booming successes.
This is because the foreign trade zone acts more like a surgical tool, targeting specific dutiable items
rather than the sweeping, continental change that NAFTA brought with it. For example, Duluth,
Minn., the largest port on the Great Lakes, which has Northwest Airlines maintaining its air bus
operation in its zone 51, and a Northwest plant under construction and expected to be ready for
occupancy in 1997, has first-hand experience with the specific affects of a trade zone. "

6.2 Various Trade Reforms

Trade policy reform has also made progress, though the pace has been slower than in industrial
liberalization. Before the reforms, trade policy was characterized by high tariffs and pervasive import
restrictions. Imports of manufactured consumer goods were completely banned. For capital goods, raw
materials and intermediates, certain lists of goods were freely importable, but for most items where
domestic substitutes were being produced, imports were only possible with import licenses. The criteria
for issue of licenses were non transparent, delays were endemic and corruption unavoidable. The
economic reforms sought to phase out import licensing and also to reduce import duties.
Import licensing was abolished relatively early for capital goods and intermediates which became freely
importable in 1993, simultaneously with the switch to a flexible exchange rate regime. Import licensing
had been traditionally defended on the grounds that it was necessary to manage the balance of payments,
but the shift to a flexible exchange rate enabled the government to argue that any balance of payments
impact would be effectively dealt with through exchange rate flexibility. Removing quantitative
restrictions on imports of capital goods and intermediates was relatively easy, because the number of
domestic producers was small and Indian industry welcomed the move as making it more competitive. It
was much more difficult in the case of final consumer goods because the number of domestic producers
affected was very large (partly because much of the consumer goods industry had been reserved for small
scale production). Quantitative restrictions on imports of manufactured consumer goods and agricultural
products were finally removed on April 1, 2001, almost exactly ten years after the reforms began, and that
in part because of a ruling by a World Trade Organization dispute panel on a complaint brought by the
United States.

Progress in reducing tariff protection, the second element in the trade strategy, has been even slower and
not always steady. The weighted average import duty rate declined from the very high level of 72.5% in
1991–92 to 24.6% in 1996–97. However, the average tariff rate then increased by more than 10
percentage points in the next four years. In February 2002, the government signaled a return to reducing
tariff protection. The peak duty rate was reduced to 30%, a number of duty rates at the higher end of the
existing structure were lowered, while many low end duties were raised to 5%. The net result is that the
weighted average duty rate is 29% in 2002–03.

Although India‟s tariff levels are significantly lower than in 1991, they remain among the highest in the
developing world because most other developing countries have also reduced tariffs in this period. The
weighted average import duty in China and south-east Asia is currently about half the Indian level. The
government has announced that average tariffs will be reduced to around 15% by 2004, but even if this is
implemented, tariffs in India will be much higher than in China which has committed to reduce weighted
average duties to about 9% by 2005 as a condition for admission to the World Trade Organization.

6.3 Balance of Payments

The balance of payments (BOP) records all of the many financial transactions that are made between
consumers, businesses and the government in the India with people across the rest of the World. The BOP
figures tell us about how much is being spent by Indian consumers and firms on imported goods and
services, and how successful India firms have been in exporting to other countries and markets. It is an
important measure of the relative performance of the India in the global economy. At AS level we focus
only on one part of the balance of payments accounts. This section is known as the current account.

A country‟s international transactions are recorded in the balance-of-payments accounts. A country‟s

balance of payments has three components: the current account, the financial account and the capital
account.
A detailed break-up of the various accounts is given below:
1) Current Account: It measures a country‟s net exports (that is, the difference between exports and
imports) of goods and services and net international income receipts.
a) Trade Balance (or Balance on Goods and Services): It represents the difference between exports
and imports of goods and services.
i. Merchandise Trade Balance (or Balance on Goods): It equals exports minus imports of goods.
 ii. Services Balance: Includes net receipts from items such as transportation, travel expenditure, and
legal assistance.
b) Income balance:
i. Net Investment Income: it is the difference between income receipts on assets of a country owned
abroad and income payments on foreign-owned assets in that country. It includes international
interest and dividend payments and earnings of domestically owned firms operating abroad
ii. Net international compensation to employees.
c) Net Unilateral Transfers: It is the difference between gifts (that is, payments that do not
correspond to purchases of any good, service, or asset) received from the rest of the world by a
country and gifts made by that country to foreign countries.
2) Financial Account: The difference between sales of assets to foreigners and purchases of assets
held abroad.
a) Assets owned by a country consist of:
i. Official reserve assets such as special drawing rights (SDRs), foreign currencies, reserve position
in the IMF
ii. Government assets, other than official reserve assets
iii. Private assets, such as direct investment and foreign securities.
b) Foreign owned assets consist of:
i. Foreign official assets in the country such as government securities of the home country
ii. Other foreign assets such as currency of the home country.
3) Capital Account: It records non-financial transfers in wealth. For example, if a person migrates to
another country, his assets abroad become a part of the net asset position of the country to which he
has migrated, as a plus. If this country forgives debt to another country, it enters as a minus in the
capital account.

The following relations are important:

a) Trade Balance = Merchandise Trade Balance + Services Balance
b) Current Account Balance = Trade Balance + Income Balance + Net Unilateral

Transfers
c) Current Account Balance=–(Financial Account Balance+ Capital Account Balance).

6.3.1 India’s Balance of Payments

India‟s balance of payments on current account worsened by $ 26 billion to $ 69.2 billion in the first six
months (April–September) of 2008 fiscal year. This reflects deterioration in the balance of trade with
imports rising faster than exports.

Measures to improve balance of payments

Reduce domestic Consumption. Domestic consumption in India is proving resilient as rest of world
slips into recession. This is causing imports to rise faster than exports. Reducing consumer spending
would reduce imports, but, it may be deemed inappropriate as economic growth may be more important
than balance of payments.
Encourage depreciation of Rupee. Depreciation in the Rupee would make Indian exports more
competitive and imports more expensive. The problem is that with a global recession many other
countries will want to help their exporters through encouraging a weaker currency.
Structural improvements. Long term supply side policies aimed at increasing the competitiveness of
exports should help improve the balance of payments for India. However, they will take a long time to
work. India‟s balance of payments (BOP) in 2000–01 remained comfortable and the external sector
experienced a distinct improvement. There were, however, some pressures on the BOP during the first
half of the year on account of the significant hardening of international oil prices, the sharp downturn in
international equity prices and successive increases in interest rates in the United States and Europe; but
the situation eased with the mobilization of funds under the India Millennium Deposits, which helped to
revert the declining trend in reserves and enhanced confidence in the strength of India‟s external sector.
As a result, the BOP situation experienced a turnaround in the second half of the year, 2000–01. Overall,
the current account deficit in 2000–01 narrowed further to about 0.5% of GDP from 1.1% of GDP in the
previous year. This improvement in current account deficit was made possible largely because of the
dynamism in export performance, sustained buoyancy in invisible receipts, reflecting sharp increases in
software service exports and private transfers, and partly due to the subdued non–oil import demand.

Exports, on BOP basis, registered strong growth of 19.6% in US dollar terms in 2000–01, on the heels of
a strong recovery of 9.5% in the previous year. Total imports, on payment basis, recorded only a
moderate growth of 7.0% during 2000–01, much lower than the sharp increase of 16.5% in 1999–2000.
The moderate growth in total imports in 2000–01 was, in fact, largely because of a 24.1% increase in the
oil import bill, while non-oil import growth, on BOP basis, remaining subdued at only 2.0%. Non-oil,
non-gold imports, on customs basis, grew at a very high rate of about 20% per annum, on an average,
during 1992–93 to 1995–96. The growth rate decelerated sharply to just about 3.5% per annum during the
next four years ended 1999–00. As expected, the growth of non-oil, non-gold imports tended to be
moderate when the initial impact of trade liberalization got absorbed, and the exchange rate providing
reasonable incentives for cost-effective import substitution. This allays the fears that trade liberalization
would swamp the domestic market with cheaper imports.

Did You Know?

In 2000–01, nonoil, non-gold imports recorded a negative growth of 6.7%, mainly because of the
continuous industrial slowdown in recent years and the resulting lack of demand for imports.

Reflecting the trends in exports and imports, the deficit on the trade account of BOP narrowed to US
$14.37 billion or 3.1% of GDP in 2000–01 from US $17.84 billion (4.0% of GDP) in 1999–2000 (Table
6.2). The net inflow of invisibles, at US $11.79 billion, covered about 82% of the deficit on the trade
account in 2000–01, leaving a financing gap of only US $2.68 billion on the current account. This deficit
on the current account represented 0.5% of GDP, compared with the deficit of 1.1% of GDP (US $4.70
billion) in 1999–2000.

The recovery in capital flows witnessed in 1999–2000, after some set back in 1998–99, which had been a
consequence of the East-Asian crisis and partly due to the economic sanctions on India, was broadly
maintained. Net inflows of capital (excluding IMF) on the capital account of BOP in 2000–01 were about
US $9.02 billion, which were lower than such inflows of US $10.44 billion in the previous year. This
reduction is mainly accounted for some unching of repayments of commercial borrowings and significant
net outflows under banking capital. On the other hand, capital inflows in 2000–01 were bolstered by the
mobilization of funds of US $5.51 billion under India Millennium Deposits (IMD) in October/November
2000. Fresh inflows of funds for portfolio investments in India by FIIs in 2000–01 amounted to about US
$1.85 billion, which was only slightly lower than the US $2.14 billion in 1999–2000. Net accretions to
non-resident deposits during 2000–01 rose by over 50% to US $2.32 billion. Gross disbursement of
external assistance at US $2.94 billion was comparable with the normal trends in recent years. Gross
borrowing on commercial terms, excluding IMD, at US $3.81 billion in 2000–01 was higher than such
normal borrowings of US $3.19 billion in the previous year. The sharp reduction in current account deficit
and the funds raised under IMD making up for the dip in overall net capital inflows through normal
sources during 2000–01, as indicated above, resulted in a large accumulation of official foreign exchange
reserves for the fifth year in succession. On BOP basis, reserves rose by a substantial US $5.83 billion.
This was on top of an increase of US $6.14 billion in 1999–2000 and an increase of US $4.51 billion per
year, on an average, during the previous three years, 1996–97 to 1998–99.

Official BOP statistics, as compiled by the RBI, for the year 2001–02 are available so far only for the first
half of the year. However, a tentative assessment of BOP outlook for the current year indicates that the
current account deficit in 2001–02 might widen somewhat, but it is expected to remain within 1% of
GDP. The widening of current account deficit will be mainly due to the poor export performance. Export
performance faltered in the current year, as is evident from the growth rate of about 0.6 %, in US dollar
terms, recorded by the DGCI&S data for the first nine months of 2001–02. On the other hand, the
resulting pressure on trade account will be eased to a large extent on account of moderation in oil import
bill, following softening of international oil prices after September 2001. The net inflow of invisibles,
despite larger outflows on account of interest and dividend payments, is expected to remain broadly at last
year‟s level, supported by continued buoyancy in software service exports and private transfers. The
widening of the current account deficit will, however, be more than matched by the expected net capital
inflows from normal sources, resulting in large accretions to reserves. During the first ten months of
current financial year (2001–02), the foreign currency assets of the RBI have increased by about US $7.01
billion from US $39.55 billion at end-March 2001 to US $46.56 billion at end-January, 2002.

6.4 Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is now recognized as an important driver of growth in the country.
Government is, therefore, making all efforts to attract and facilitate FDI and investment from Non
Resident (NRIs) including Overseas Corporate Bodies (OCBs) that are predominantly owned by them, to
complement and supplement domestic investment. To make the investment in India attractive, investment
and returns on them are freely repatriable, except where the approval is subject to specific conditions such
as lock in period on original investment, dividend cap, foreign exchange neutrality, etc. as per the notified
sectoral policy. The condition of dividend balancing that was applicable to FDI in 22 specified consumer
goods industries stands withdrawn for dividends declared after 14th July 2000, the date on which Press
Note No. 7 of 2000 series was issued.

Foreign direct investment is freely allowed in all sectors including the services sector, except a few
sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for
virtually all items/activities can be brought in through the Automatic Route under powers delegated to the
Reserve Bank of India (RBI), and for the remaining items/activities through Government approval.
Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board
(FIPB).

6.4.1 Automatic Route

New Ventures
All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route except
those covered under (i) to (iv) of para 2.9.
Whenever any investor chooses to make an application to the FIPB and not to avail of the automatic
route, he or she may do so.
Investment in public sector units as also for EOU/EPZ/EHTP/STP units would also qualify for the
Automatic Route. Investment under the Automatic Route shall continue to be governed by the notified
sectoral policy and equity caps and RBI will ensure compliance of the same. The National Industrial
Classification (NIC) 1987 shall remain applicable for description of activities and classification for all
matters relating to FDI/NRI/OCB investment:
Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so unless
otherwise decided and notified by Government.
Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial
Assistance (SIA) in the Department of Industrial Policy & Promotion.

Existing Companies
Besides new companies, automatic route for FDI/NRI/OCB investment is also available to the existing
companies proposing to induct foreign equity. For existing companies with an expansion programme, the
additional requirements are that (i) the increase in equity level must result from the expansion of the
equity base of the existing company without the acquisition of existing shares by NRI/OCB/foreign
investors, (ii) the money to be remitted should be in foreign currency and (iii) proposed expansion
programme should be in the sector(s) under automatic route. Otherwise, the proposal would need
Government approval through the FIPB. For this the proposal must be supported by a Board Resolution
of the existing Indian company.
1. For existing companies without an expansion programme, the additional requirements for
eligibility for automatic approval are (i) that they are engaged in the industries under automatic
route, (ii) the increase in equity level must be from expansion of the equity base and (iii) the
foreign equity must be in foreign currency.
2. The earlier SEBI requirement, applicable to public limited companies, that shares allotted on
preferential basis shall not be transferable in any manner for a period of 5 years from the date of
their allotment has now been modified to the extent that not more than 20 % of the entire
contribution brought in by promoter cumulatively in public or preferential issue shall be locked-
in.
3. The automatic route for FDI and/or technology collaboration would not be available to those who
have or had any previous joint venture or technology transfer/trade mark agreement in the same
or allied field in India.
4. Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc. in
domestic companies is permitted through automatic route subject to SEBI/RBI regulations and
sector specific cap on FDI.
5. In a major drive to simplify procedures for foreign direct investment under the “automatic route”,
RBI has given permission to Indian Companies to accept investment under this route without
obtaining prior approval from RBI. Investors are required to notify the Regional Office concerned
of the RBI of receipt of inward remittances within 30 days of such receipt and file required
documentation within 30 days of issue of shares to Foreign Investors. This facility is available to
NRI/OCB investment also. [For procedure relating to automatic approval, refer to para 8.1].

6.4.2 Government Approval

For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall be
necessary:
(i) All proposals that require an Industrial Licence which includes (1) the item requiring an Industrial
Licence under the Industries (Development & Regulation) Act, 1951; (2) foreign investment being more
than 24 % in the equity capital of units manufacturing items reserved for small scale industries; and (3) all
items which require an Industrial Licence in terms of the locational policy notified by Government under
the New Industrial Policy of 1991.
(ii) All proposals in which the foreign collaborator has a previous venture/tie up in India.
Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so unless
otherwise decided and notified by Government.
Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial
Assistance (SIA) in the Department of Industrial Policy and Promotion.
1. RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of
proposals approved by the Government. Indian companies getting foreign investment approval through
FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance
and issue of shares to the foreign investors. Such companies are, however, required to notify the Regional
Office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and to file the
required documents with the concerned Regional Offices of the RBI within 30 days after issue of shares
to the foreign investors.
2. For greater transparency in the approval process, Government has announced guidelines for
consideration of FDI proposals by the FIPB.

6.4.3 Issue and Valuation of Shares in Case of Existing Companies

Allotment of shares on preferential basis shall be as per the requirements of the Companies Act, 1956,
which will require special resolution in case of a public limited company.
In case of listed companies, valuation shall be as per the RBI/SEBI guidelines as follows:
a) The average of the weekly high and low of the closing prices of the related shares quoted on the Stock
Exchange during the six months preceding the relevant date or
b) The average of the weekly high and low of the closing prices of the related shares quoted on the Stock
Exchange during the two weeks preceding the relevant date.
The stock exchange referred to is the one at which the highest trading volume in respect of the share of
the company has been recorded during the preceding six months prior to the relevant date.
The relevant date is the date thirty days prior to the date on which the meeting of the General Body of the
shareholder is convened. In all other cases a company may issue shares as per the RBI regulation in
accordance with the guidelines issued by the erstwhile Controller of Capital Issues. Other relevant
guidelines of Securities and Exchange Board of India (SEBI)/(RBI) including the SEBI (Substancial
Acquistion of Shares and Takeover) Regulations, 1997, wherever applicable, would need to be followed.

6.4.4 Foreign Investment in the Small Scale Sector

Under the small scale policy, equity holding by other units including foreign equity in a small scale
undertaking is permissible up to 24 %. However there is no bar on higher equity holding for foreign
investment if the unit is willing to give up its small scale status. In case of foreign investment beyond 24
% in a small scale unit which manufactures small scale reserved item(s), an industrial license carrying a
mandatory export obligation of 50 % would need to be obtained.

6.4.5 Foreign Investment Policy for Trading Activities

Foreign investment for trading can be approved through the automatic route up to 51% foreign equity,
and beyond this by the Government through FIPB. For approval through the automatic route, the
requirement would be that it is primarily export activities and the undertaking concerned is an export
house/trading house/ super trading house/star trading house registered under the provisions of the Export
and Import policy in force.

6.4.6 Other Modes of Foreign Direct Investments

1. Global Depository Receipts (GDR)/American Deposit Receipts (ADR)/Foreign Currency Convertible
Bonds (FCCB): Foreign Investment through GDRs/ADRs, Foreign Currency Convertible Bonds (FCCBs)
are treated as Foreign Direct Investment. Indian companies are allowed to raise equity capital in the
international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on
investment. An applicant company seeking Government‟s approval in this regard should have a consistent
track record for good performance (financial or otherwise) for a minimum period of 3 years. This
condition can be relaxed for infrastructure projects such as power generation, telecommunication,
petroleum exploration and refining, ports, airports and roads.
2. There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group
of companies in a financial year. A company engaged in the manufacture of items covered under
Automatic Route, whose direct foreign investment after a proposed
GDR/ADR/FCCBs issue is likely to exceed the percentage limits under the automatic route, or which is
implementing a project falling under Government approval route, would need to obtain prior Government
clearance through FIPB before seeking final approval from the Ministry of Finance.
There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment
in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial
borrowing end use requirements; in addition, 25 % of the FCCB proceeds can be used for general
corporate restructuring.

6.4.7 Preference Shares

1. Foreign investment through preference shares is treated as foreign direct investment. Proposals are
processed either through the automatic route or FIPB as the case may be. The following guidelines apply
to issue of such shares:-
2. For all sectors, excluding those falling under Government approval, NRIs (which also includes PIOs)
and OCBs (an overseas corporate body means a company or other entity owned directly or indirectly to
the extent of at least 60% by NRIs) are eligible to bring investment through the automatic route of RBI.
All other proposals, which do not fulfil any or, all of the criteria for automatic approval are considered by
the Government through the FIPB.
3. The NRIs and OCBs are allowed to invest in housing and real estate development sector, in which
foreign direct investment is not permitted. They are allowed to hold up to 100 % equity in civil aviation
sector in which otherwise foreign equity only up to 40 % is permitted.

6.4.8 Procedure for Automatic Route

The proposals for approval under the automatic route are to be made to the Reserve Bank of India in the
FC (RBI) form. In a major drive to simplify procedures for foreign direct investment under the “automatic
route”, RBI has given permission to Indian Companies to accept investment under this route without
obtaining prior approval from Reserve Bank of India. However, investors are required to notify the
concerned Regional Offices of RBI of receipt of inward remittances within 30 days of such receipt and
will have to file the required documents with the concerned Regional Office of the RBI within 30 days
after issue of shares to foreign investors. This facility is available to NRI/OCB investment also.

6.4.9 Procedure for Government Approval

Foreign Investment Promotion Board (FIPB)
(a) All other proposals for foreign investment, including NRI/OCB investment and foreign investment in
EOU/EPZ/STP/EHTP units, which do not fulfil any or all of the parameters prescribed for automatic
approval, as given in paragraph 2.8, 3.1, and 3.2 are considered for approval by the Foreign Investment
Promotion Board (FIPB). The FIPB also grants composite approvals involving foreign technical
collaborations and setting up of Export Oriented Units involving foreign investment/foreign technical
collaboration.
(b) For inward remittance and issue of shares to NRI/OCB up to 100 % equity also, prior permission of
RBI is not required. These companies have to file the required documents with the concerned Regional
Offices of RBI within 30 days after the issue of shares to NRIs/OCBs.
6.4.10 Foreign Technology Collaboration
Procedure for Automatic Approval
Applications for automatic approval for such foreign technology agreements should be submitted in Form
FT (RBI) with the concerned Regional Offices of Reserve Bank of India. No fee is payable. Approvals
are available within two weeks.
Procedure for Government Approval
All other proposals for foreign technology agreement, not meeting any or all of the parameters for
automatic approval, and all cases of extension of existing foreign technical collaboration agreement, are
considered for approval, on merits, by the Government. Application in respect of such proposals should
be submitted in Form FC-IL to the Secretariat for Industrial Assistance, Department of Industrial Policy
and Promotion, Ministry of Commerce and Industry, Udyog Bhavan, New Delhi. No fee is payable. The
following information should form part of the proposals submitted to SIA:
On consideration of the proposal by the Project Approval Board/FIPB, decisions are normally conveyed
within 4 to 6 weeks of filing the application.
Procedure for Foreign Direct Investment in Industrial Park
As 100% FDI is permitted under automatic route for setting up of industrial park, the procedure
mentioned in para 8.1 will be applicable for seeking requisite approval.

6.4.11 Foreign Investment Implementation Authority (FIIA)

Foreign Investment Implementation Authority (FIIA) was established on 9.8.1999 to assist the foreign
investors in getting necessary approvals and thereby facilitating quick translation of Foreign Direct
Investment (FDI) approvals into implementation.
Fast Track Committees have been set up in 30 Ministries/Departments for regular review of FDI mega
projects (with proposed investment of Rs. 1 billion and above), and resolution of any difficulties in
consultation with the concerned Ministries/State Governments. Unresolved issues are brought before
FIIA.

Meetings of FIIA
FIIA‟s meetings are held on regional basis as also with investors from specific countries. In the meetings
of FIIA, apart from Government of India Ministries, senior officials from State Governments also
participate. Besides approval holders of unimplemented FDI projects with proposed investment of Rs.
100 crores and above, representatives from apex industrial associations are also invited.
Regional Meetings of FIIA
For conducting meeting of FIIA, the Country is divided into four regions as under:

Meetings with Investors from Specific Countries

In addition to the regional meetings, separate meeting with Investors from major investing countries in
India are also held. In the recent past following meetings with investors from specific investing countries
have been held for special focus on their problems.
Meetings with investors from Netherlands and Italy in January 2002.
Meeting with investors from Switzerland in May 2002.
Meeting with investors from European Union countries in December 2002.
Meeting with investors from Republic of Korea in May 2003.

6.4.12 Issues Resolved by FIIA

Foreign Investment Implementation Authority has emerged as an effective problem-solving platform for
the foreign investors. Nearly 70% of the issues received from investors in FIIA have been
resolved/decided.
6.4.13 Association of Industrial Organizations
FIIA has been seeking co-operation of apex industrial organizations viz., CII, ASSOCHAM, and FICCI,
JAPAN Chamber of Commerce in India and American Chamber of Commerce (AMCHAM), etc.
Information about meetings of FIIA is sent to such organizations to advise their members to participate in
the meeting, in case they are experiencing difficulties in implementation of their projects. Representatives
of these organisations are also invited to these meetings.
CII, FICCI and ASSOCHAM have also been requested to follow up with approval holders of mega
projects to whom letters have been written by FIIA.

6.4.14 Direct Contact with Investors

Besides the meetings with the investors, FIIA has also taken the following initiatives to establish a direct
contact with foreign investors for resolution of their difficulties:
a. FIIA periodically writes to the approval holders of FDI mega projects, which are under
implementation or about which no information is available, to get a direct feed back on any
difficulties being faced by them in the implementation of their projects, which can be followed by
FIIA with respective Ministries/State Governments.
b. All fresh FIPB approvals issued since September 2001 contain information on FIIA and its e-mail
address for investors to approach FIIA in case of any difficulties.
c. Directors/Deputy Secretaries of DIPP have been designated as Nodal Officers to monitor FDI Mega
projects with concerned State Governments
d. Indian Missions abroad, who already receive FDI applications on behalf of FIPB, have been
advised to monitor implementation of FDI approvals emanating from their regions.

6.4.15 Foreign Investment Promotion Council (FIPC)

Apart from making the policy framework investor-friendly and transparent, promotional measures are
also taken to attract Foreign Direct Investment into the country. The Government has constituted a
Foreign Investment Promotion Council (FIPC) in the Ministry of Commerce and Industry. This comprises
professionals from Industry and Commerce. It has been set up to have a more target oriented approach
toward Foreign Direct Investment promotion. The basic function of the Council is to identify specific
sectors/projects within the country that require Foreign Direct Investment and target specific
regions/countries of the world for its mobilisation.

6.4.16 SIA’s Promotional Activities

As an investor friendly agency, it provides information and assistance to Indian and foreign companies in
setting up industry and making investments. It guides prospective entrepreneurs and disseminates
information and data on a regular basis through its two monthly newsletters the “SIA Newsletter” and the
“SIA Statistics” as also through its Website address, i.e. http://dipp.nic.in. It also assists potential
investors in finding joint venture partners and provides complete information on relevant policies and
procedures, including those, which are specific to sectors and the State Governments.

6.4.17 Investment Promotion and Infrastructure Development (IP & ID) Cell
In order to give further impetus to facilitation and monitoring of investment, as well as for better
coordination of infrastructural requirements for industry, a new cell called the “Investment Promotion and
Infrastructure Development Cell” has been created. The functions of the Cell include:
a) Organising Symposiums, Seminars, etc. on investment promotion;
b) Liaison with State Governments regarding investment promotion;
c) Documentation of single window systems followed by various States;
d) Match-making service for investment promotion;
 e) Coordination of progress of infrastructure sectors approved for investment/technology transfer,
power, telecom, ports, roads, etc.;
f) Facilitating Industrial Model Town Projects, and Industrial Parks, etc.;
g) Promotion of Private Investment including Foreign Investment in the infrastructure sector;
h) Compilation of sectoral policies, strategies and guidelines of infrastructure sectors, both in India
and abroad; and
i) Facilitating preparation of a perspective plan on infrastructure requirements for industry.

6.4.18 Entrepreneurial Assistance Unit (EAU) of the SIA

The Entrepreneurial Assistance Unit functioning under the Secretariat for Industrial Assistance,
Department of Industrial Policy and Promotion provides assistance to entrepreneurs on various subjects
concerning investment decisions. The unit receives all papers/applications related to industrial approvals
and immediately issues a computerised acknowledgement, which also has an identity/reference number.
All correspondence with the SIA should quote this number. In case of papers filed by post, the
acknowledgement will be sent by post. The Unit extends this facility to all papers/applications relating to
IEMs, Industrial Licences, Foreign Investment, Foreign Technology Agreements, 100 % EOUs, EHTP,
STP Schemes, etc.

The Unit also attends to enquiries from entrepreneurs relating to a wide range of subjects concerning
investment decisions. It furnishes clarifications and arranges meetings with nodal officers in concerned
Ministries/Organisations. The Unit also provides information regarding the current status of applications
filled for various industrial approvals.

6.4.19 Web site, Online Chat and Bulletin Board Facilities

To facilitate the easy availability of information to the investors and provide information about the
investment climate in the country, state industrial policies, projects on offer, different publications,
notifications and press releases, Department is hosting a web site www.dipp.nic.in. The web site contains
the following:
Ready Reckoner for Investing in India
Manual on Industrial Policy and Procedures
Press Notes, Notifications and Press Releases
Industrial Policy Statements
Latest Annual Report
Information about Intellectual Property Rights
Status of PAB/IEM and LOI
Profile of selected industrial sectors
Important Legislations
Information about Attached and Subordinate Offices

The web site has the facility of on line chat between 4.00 P.M. to 5.00 P.M. (Indian Standard Time,
GMT+5 ½) on all working days. Investors can ask any question relating to FDI Policies and related issues
which is replied immediately. The on line chat facility is being utilized by the investors. Nearly 2000
queries were responded during chat session in 2002. The web site also has provision of bulletin board. If
the investor cannot avail the on line chat facility, he/she can post the question on bulletin board at any
time of the day. All efforts are made to send a reply within 24 hours. On an average about three to four
questions are received everyday on the bulletin board.
6.4.20 International Centre for Alternative Dispute Resolution (ICADR)
International Centre for Alternative Dispute Resolution (ICADR) has been established as an autonomous
organization under the aegis of Ministry of Law, Justice and Company Affairs to promote settlement of
domestic and international disputes by different modes of alternate dispute resolution. ICADR has its
headquarters in New Delhi and has regional office in Lucknow and Hyderabad.

6.4.21 Current Position of India

Various studies have projected India among the top 5 favoured destination for FDI. Cumulative FDI
equity inflows has been Rs.5,54,270 crore (1,27,460 Million US$) for the period 1991–2009. This is
attributed to contribution from service sector, computer software, telecommunication, real estate etc.
India‟s 83% of cumulative FDI is contributed by nine countries while remaining 17 % by rest of the
world. Country-wise, FDI inflows to India are dominated by Mauritius (44 %), followed by the Singapore
(9 %), United States (8 %) and UK (4 %) (see Table 6.2). Countries like Singapore, USA, and UK etc.
invest in India mainly in service, power, telecommunication, fuels, electric equipments, food processing
sector.

Task
Name the places in India where ICADR has its headquarters and regional office.

Table 6.2: Share of top investing countries FDI Equity Inflows

Though India has observed a remarkable rise in the flow of FDI over the last few years, it receives
comparatively much lesser FDI than China. Even smaller economies in Asia such as Hong Kong,
Mauritius and Singapore are much ahead of India in terms of FDI inflows (UNCTAD, WIR, 2007). This
is largely due to India‟s economic policy of protecting domestic enterprise and its dependence on
domestic demand as compared to above mentioned Newly Industrialized Asian Economies. There is a
positive link between FDI and India‟s growth story. India has been observing a consistent growth in net
FDI flow. Ratio of FDI Inflow to Gross Capital Formation has improved from 1.9 % during the period
1990–2000 to 9.6 % in the year 2008. Similarly ratio of FDI Outflow to Gross Capital Formation also
improved from 0.1 % during 1999–200 to 4.1 % by the year 2008. This seems to be impressive when
compared with corresponding data for China, South Asia, Asia and Oceania, Developing Economies and
even whole world. Net FDI flow to China is reported to much more than India in absolute term.

6.5 EXIM Policy

EXIM Policy, also known as the Foreign Trade Policy is announced every 5 years by Ministry of
Commerce and Industry, Government of India. It is updated every year on the 31st of March and all the
amendments and improvements in the scheme are effective from the 1st of April. Exim policy deals in
general provisions pertaining to exports and imports, promotional measures, duty exemption schemes,
export promotion schemes, special economic zone programs and other details for different sectors. The
Government announces a supplement to this policy each year. The Government of India also releases the
Hand Book of Procedures detailing the procedures to be followed for each of the schemes mentioned in
the Exim Policy.

6.5.1 EXIM Policy–A Free Trade Regime

The third five-year EXIM Policy has been formulated with the objective of achieving at least 1% share of
world exports by 2006–2007 from the present level of 0.67%. The projected export growth means
doubling the present exports of US $46 billion to more than US $80 billion over the Tenth Five Year Plan
period, requiring a compound annual growth rate of 11.9%. In this context, the commodity-country matrix
has been expanded from the earlier 15 countries and 15 commodities to 25 countries and 220 export
products under the Medium Term Export Strategy announced by the Ministry of Commerce and Industry.

The Union Budget for the current fiscal has triggered the process of trade liberalization further by
keeping the sensitive component of the domestic sector well protected. The customs duty rates are
retained at the existing levels of 5%, 15%, and 25% with the peak duty rate at 30%, as against the earlier
35%. The uniform CENVAT rate at 16% and Special Additional Duty rate at 4% have been retained. The
time span for bringing down the customs duty to zero by 2003 under the Information Technology
Agreement has been extended to 2005. The Finance Minister has stated that by the year 2004–2005, there
would be two slabs of customs duty rates at 10% and 20%.

On the trade front, export restrictions like registration and packaging requirements are removed
on butter, wheat & wheat products, coarse grains, groundnut oil and cashew exports to Russia under
Rupee Debt Repayment Scheme. Quantitative and packaging restrictions on wheat and its products,
butter, pulses, grain and flour of barley, maize, bajra, ragi and jowar have also been abolished. Export of
all cultivated varieties of seed with the exception of onion and jute is allowed.
Transport assistance would be made available for export of fresh and processed fruits, vegetables,
floriculture, poultry, dairy products and products of wheat & rice. Besides, 3% special DEPB rate has
been provided for primary and processed foods exported in retail packaging of 1 kg or less.
Special emphasis has been laid on promoting exports of cottage and handicraft sectors. An
amount of Rs 5 crore has been earmarked for promoting cottrage sector exports coming under the Khadi
and Village Industry Commission. The units in the handicrafts sector have been given access to the funds
from the Market Access Initiative Scheme for all the permissible activities including development of
website for virtual exhibition. No past average is required under the EPCG Scheme for these units and the
export house status will be provided based on the average export performance of Rs 5 crore. The
handicraft sector units are entitled to duty free imports of specified items as embellishments upto 3% of
FOB value of their exports.
Based on their export performance, the Policy has identified Tirupur for hosiery, Panipat for
woollen blanket and Ludhiana for woollen knitwear as Towns of Export Excellence. In order to enhance
export capabilities of these first three industrial cluster-towns, the common service providers in these
towns are made eligible to the facilities of EPCG Scheme. The recognized associations of the units in
these towns are provided the necessary access to the funds under the Market Access Initiative Scheme for
creating focused technological services. Further, such areas will receive priority for assistance for
identified critical infrastructure gaps from the scheme on Central Assistance to States. The export house
status is granted based on export performance of Rs 5 crore on an average. The units will also take full
advantage of the various facilities provided under the Policy.
While duty free imports of trimmings and embellishments upto 3% of the FOB value hither to
confined to leather garments has been extended to all leather products, duty free import of sample fabrics
are allowed to the textiles within the 3% limit provided for import of trimmings and embellishments. The
other facilities to the textiles include 10% variation in GSM for fabrics under Advance Licence;
additional items such as zip fasteners, inlay cards, eyelets, rivets, eyes, toggles, Velcro tape, cord and cord
stopper included in input output norms; and Duty Entitlement Passbook rates for all kinds of blended
fabrics allowed.
With a view to strengthening the participation of States in the national export effort, the new
Scheme Assistance to States for Infrastructural Development for Exports (ASIDE) would provide funds
based on twin criteria of gross exports and the rate of growth of exports from different States. Eighty per
cent of the total funds would be allotted to the States based on the above criteria and the remaining 20%
will be utilized by the Centre for various infrastructure activities that cut across State boundaries. A sum
of Rs 49.5 crore has already been sanctioned and a further sum of Rs 330 crore has also been approved
for the current financial year.
The Market Access Initiative (MAI) announced last year for undertaking marketing promotion efforts
abroad on country-product focus approach basis has been further strengthened. The small allocation of
Rs 14.50 crore made last has been further increased to Rs 42 crore during the current financial year. The
area of operation of this Scheme is proposed to be further enlarged by including activities considered
necessary for focussed market promotion efforts.

6.5.2 EXIM Policy Facilities

The existing export promotion schemes such as Export Promotion Capital Goods Scheme, Duty
Exemption and Remission Scheme, Scheme for Gems and Jewellery Exports, EHTP and SEZ Schemes
have been further strengthened and simplified. The various relaxations provided under the above
Schemes are given below:

Export Promotion Capital Goods Scheme (EPCG)

1. EPCG licences of Rs 100 crore or more to have 12 years export obligation period with 5 years
moratorium period;
2. Export Obligation fulfilment period extended from 8 to 12 years in respect of units in agri-export
zones and in respect of companies under the revival plan of BIFR;
3. Supplies under Deemed Exports to be eligible for export obligation fulfilment along with deemed
export benefits.
4. Re-fixation of export obligation in respect of past cases of imports of second hand capital goods
under EPCG Scheme

Duty Exemption and Remission Scheme

1. Duty Exemption Entitlement Certificate (DEEC) book is abolished. Redemption based on
shipping bills and bank realization certificates allowed.
2. Annual Advance Licence is withdrawn. The exporters can avail advance licence for any value.
3. Mandatory spares upto 10% of the cif value are allowed in the advance licence.
 4. Technical characteristics with regard to the imported inputs against Duty Free Replenishment
Certificate (DFRC) are dispensed with for audit purpose.
5. DEPB Value cap exemption granted on 429 items will continue.
6. No Present Market Value verification except on specific intelligence.
7. Same DEPB rate for exports whether as CBUs or in CKD/SKD form?
8. Reduction in DEPB rates will be only after due notice.
9. DEPB for export of transport vehicles to Nepal in free foreign exchange.
10. DEPB rates for composite items to have lowest rate applicable for such constituents

Gems and Jewellery Exports

1. Customs duty on import of rough diamonds is reduced to zero. Import of rough diamonds is
already freely allowed. Licensing regime for rough diamond is abolished. This should help the
country emerging as a major international centre for diamonds.
2. Value addition norms for export of plain jewellery reduced from 10% to 7%. Export of all
mechanized unstudied jewellery allowed at a value addition of 3% only. Having already achieved
leadership position in diamonds, now efforts will be made for achieving quantum jump on
jewellery exports as well.
3. Personal carriage of jewellery is allowed through Hyderabad and Jaipur airports as well.

Special Economic Zones

1. Offshore Banking Units shall be permitted in SEZs. Detailed Guidelines will be issued by
RBI.
2. Units in SEZ would be allowed to undertake hedging of commodity price risks, provided
such transactions are undertaken by the units on stand-alone basis. This will impart security to
the returns of the unit.
3. External Commercial Borrowings for tenure of less than three years will be allowed in SEZs.
Detailed guidelines will be issued by RBI.

Electronic Hardware Technology Parks

1. Positive Net foreign exchange as a percentage of exports is to be achieved in five years. No
other export obligation for units in EHTP.
2. Supplies of ITA 1 items having zero duty in the domestic market are made eligible for
counting of export obligation.

6.6 World Trade Organization (WTO)

The World Trade Organization (WTO) came into being in 1995. One of the youngest of the international
organizations, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT)
established in the wake of the Second World War. So while the WTO is still young, the multilateral
trading system that was originally set up under GATT is well over 50 years old.
The past 50 years have seen an exceptional growth in world trade. Merchandise exports grew on average
by 6% annually. Total trade in 2000 was 22-times the level of 1950. GATT and the WTO have helped to
create a strong and prosperous trading system contributing to unprecedented growth.
The system was developed through a series of trade negotiations, or rounds, held under GATT. The first
rounds dealt mainly with tariff reductions but later negotiations included other areas such as anti-dumping
and nontariff measures. The last round - the 1986–94 Uruguay Round - led to the creation of WTO.
The negotiations did not end there. Some continued after the end of the Uruguay Round. In February
1997, agreement was reached on telecommunications services, with 69 governments agreeing to wide-
ranging liberalization measures that went beyond those agreed in the Uruguay Round.
In the same year 40 governments successfully concluded negotiations for tariff free trade in information
technology products, and 70 members concluded a financial services deal covering more than 95% of
trade in banking, insurance, securities and financial information.
In 2000, new talks started on agriculture and services. These have now been incorporated into a broader
agenda launched at the fourth WTO Ministerial Conference in Doha, Qatar, in November 2001.

Did You Know?

The work program, the Doha Development Agenda (DDA), adds negotiations and other work on non-
agricultural tariffs, trade and environment, WTO rules such as anti-dumping and subsidies, investment,
competition policy, trade facilitation, transparency in government procurement, intellectual property, and
a range of issues raised by developing countries as difficulties they face in implementing the present
WTO agreements.

6.6.1 History of World Trade Organization

World Trade Organization Came into existence in 1995 after the desolation of General Agreement on
Tariff and Trade (GATT). Let‟s first understand the historical perspective of GATT to scale the ladder
towards the present WTO.
A Brief History of GATT
The WTO's Predecessor, The GATT, Was Established on a Provisional Basis after the Second World War
in the wake of other new multilateral institutions dedicated to international economic cooperation -
notably the "Britton Woods" institutions now known as the World Bank and the International Monetary
Fund.
The original 23 GATT countries were among over 50 which agreed a draft Charter for an International
Trade Organization (ITO) a new specialized agency of the United Nations. The Charter was intended to
provide not only world trade disciplines but also contained rules relating to employment, commodity
agreements, restrictive business practices, international investment and services.
In an effort to give an early boost to trade liberalization after the Second World War and to begin to
correct the large overhang of protectionist measures which remained in place from the early 1930s-tariff
negotiations were opened among the 23 founding GATT "contracting parties" in 1946. This first round of
negotiations resulted in 45,000 tariff concessions affecting $10 billion or about one-fifth of world trade. It
was also agreed that the value of these concessions should be protected by early and largely "provisional"
acceptance of some of the trade rules in the draft ITO Charter. The tariff concessions and rules together
became known as the General Agreement on Tariffs and Trade and entered into force in January 1948.
Although the ITO Charter was finally agreed at a UN Conference on Trade and Employment in Havana in
March 1948, ratification in national legislatures proved impossible in some cases. When the United
States' government announced, in 1950, that it would not seek Congressional ratification of the Havana
Charter, the ITO was effectively dead. Despite its provisional nature, the GATT remained the only
multilateral instrument governing international trade from 1948 until the establishment of the WTO.
Although, in its 47 years, the basic legal text of the GATT remained much as it was in 1948, there were
additions in the form of "plural-lateral" voluntary membership agreements and continual efforts to reduce
tariffs. Much of this was achieved through a series of "trade rounds".

Trade rounds - the package route to progress

The biggest leaps forward in international trade liberalization have come through multilateral trade
negotiations, or "trade rounds", under the auspices of GATT the Uruguay Round was the latest and most
extensive.
Although often lengthy, trade rounds offer a package approach to trade negotiations; an approach with a
number of advantages over issue-by-issue negotiations. For a start, a trade round allows participants to
seek and secure advantages across a wide range of issues. Second, concessions which are necessary but
would otherwise be difficult to defend in domestic political terms can be made more easily in the context
of a package which also contains politically and economically attractive benefits. Third, developing
countries and other less powerful participants have a greater chance of influencing the multilateral system
in the context of a round than if bilateral relationships between major trading nations are allowed to
dominate. Finally, overall reform in politically sensitive sectors of world trade can be more feasible in the
context of a global package reform of agricultural trade was a good example in the Uruguay Round.
Most of GATT's early trade rounds were devoted to continuing the process of reducing tariffs. The results
of the Kennedy Round in the mid - sixties, however, included a new GATT Anti - Dumping Agreement.
The Tokyo ' Round during the seventies was a more sweeping attempt to extend and improve the system.

The Tokyo Round a first try at reforming the trading system

Conducted between 1973 and 1979 and with 102 participating countries, the Tokyo Round continued
GATT's efforts to progressively reduce tariffs. The results included an average one-third cut in customs
duties in the world's 'nine major industrial markets, bringing the average tariff on manufactured products
down to 4.7 % compared with about 40 % at the time GATT's creation. The tariff reductions phased in
over a period of eight years, involved an element of harmonization, bringing the highest tariffs n
proportionately more than the lowest.
Elsewhere, the Tokyo Round had mixed results. It failed to come to grips the fundamental problems
affecting farm trade and also stopped short providing a new agreement on "safeguards" (emergency
import measures). Nevertheless, a series of agreements on non-tariff barriers did emerge from the
negotiations, in some cases interpreting existing GATT rules, in others breaking entirely new ground. In
most cases, only a relatively small number of mainly industrialized, GATT members ascribed to these
agreements and arrangements which, as a consequence, were often referred to as "codes". They include
the following agreements:
Subsidies and countervailing measures interpreting Articles VI, XVI and XXIII of the General
Agreement
Technical barriers to trade - sometimes called the Standards Code
Import licensing procedures
Government procurement
Customs valuation - interpreting Article VI I
Anti-dumping - interpreting Article VI and replacing the Kennedy Round Anti-Dumping Code
Bovine Meat Arrangement
International Dairy Arrangement
Trade in Civil Aircraft
Several of the above Codes were amended and extended in the Uruguay Round. Those on subsidies and
countervailing measures, technical barriers to trade, import licensing, customs valuation and anti-
dumping, are now multilateral commitments within the WTO Agreement in other words, all WTO
members are committed to them while those on government procurement, bovine meat, dairy ` products
and civil aircraft remain "plural-lateral" agreements.

Did GATT succeed?

Given its provisional nature and limited field of action, the success of GATT in promoting and securing
the liberalization of much of world trade over 47 years is incontestable. Continual reductions in tariffs
alone helped spur very high rates of world trade growth around 8 % a year on average during the 1950s
and 1960s. And the momentum of trade liberalization helped ensure that trade growth consistently out-
paced production growth throughout the GATT era. The rush of new members during the Uruguay Round
demonstrated that the multilateral trading system, as then represented by GATT, was recognized as an
anchor for development and an instrument of economic and trade reform.
The limited achievement of the Tokyo Round, outside the tariff reduction results, was a sign of difficult
times to come. GATT's success in reducing tariffs to such a low level, combined with a series of
economic recessions in the 1970s and early 1980s, drove governments to devise other forms of protection
for sectors facing increased overseas competition. High rates of unemployment and constant factory
closures led governments in Europe and North America to seek bilateral market-sharing arrangements
with competitors and to embark on a subsidies race to maintain their holds on agricultural trade. Both
these changes undermined the credibility and effectiveness of GATT.

Apart from the deterioration in the trade policy environment, it also became apparent by the early 1980s
that the General Agreement was no longer as relevant to the realities of world trade as it had been in the
1940s. For a start, world trade had become far more complex and important than 40 years before: the
globalization of the world economy was underway, international investment was exploding and trade in
services - not covered by the rules of GATT was of major interest to more and more countries and, at the
same time, closely tied to further increases in world merchandise trade. In other respects, the GATT had
been found wanting: for instance, with respect to agriculture where loopholes in the multilateral system
were heavily exploited and efforts at liberalizing agricultural trade met with little success - and in the
textiles and clothing sector where an exception to the normal disciplines of GATT was negotiated in the
form of the Multi-fiber Arrangement. Even the institutional structure of GATT and its dispute settlement
system were giving cause for concern.
Together, these and other factors convinced GATT members that a new effort to reinforce and extend the
multilateral system should be attempted. That effort resulted in the Uruguay Round.

The Uruguay Round creating a new system

The seeds of the Uruguay Round were sown in November 1982, at the Ministerial Meeting of GATT
members in Geneva. Although Ministers intended to launch a major new negotiation, the meeting stalled
on the issue of agriculture and was widely regarded as a failure. In fact, the work program that Ministers
agreed formed the basis for what was to become the Uruguay Round negotiating agenda.
Nevertheless, it took four more years of exploring and clarifying issues and painstaking consensus-
building, before Ministers met again in September 1986, in Punta del Este, Uruguay, to agree to launch
the Uruguay Round. They were able to accept a negotiating agenda which covered virtually every
outstanding trade policy issue including the extension of the trading system into several new areas,
notably trade in services and intellectual property. It was the biggest negotiating mandate on trade ever
agreed and Ministers gave themselves four years to complete it.
By 1988, the negotiations had reached the stage of a "Mid - term Review". This took the form of a
Ministerial Meeting in Montreal, Canada, and led to the elaboration of the negotiating mandate for the
second stage of the Round. Ministers agreed a package of early results which included some concessions
on market access for tropical products aimed to assist developing countries as well as a streamlined
dispute settlement system and the Trade Policy Review Mechanism which provided for the first
comprehensive, systematic and regular reviews of national trade policies and practices of GATT
members.
At the Ministerial meeting in Brussels, in December 1990, disagreement on the nature of commitments to
future agricultural trade reform led to a decision to extend the round. By December 1991, a
comprehensive draft text of the "Final Act", containing legal texts fulfilling every part of the Punta del
Este mandate, with the exception of market access results, was on the table in Geneva. For the following
two years, the negotiations lurched continuously from impending failure to predictions of imminent
success. Several deadlines came and went; farm trade was joined by services, market access, anti-
dumping rules and the proposed creation of a new institution, as the major points of conflict; and
differences between the United States and European Communities became central to hopes for a final,
successful conclusion. It took until 15 December 1993 for every issue to be finally resolved and for
negotiations on market access for goods and services to be concluded. On 15 April 1994, the deal was
signed by Ministers from most of the 125 participating governments at a meeting in Marrakech, Morocco.

How is the WTO different from GATT?

The World Trade Organization is not a simple extension of GATT; on the contrary, it completely replaces
its predecessor and has a very different character. Among the principal differences are the following:
• The GATT was a set of rules, a multilateral agreement, with no institutional foundation, only a small
associated secretariat which had its origins in the attempt to establish an International Trade
Organization in the 1940s. The WTO is a permanent institution with its own secretariat.
• The GATT was applied on a "provisional basis" even if, after more than forty years, governments
chose to treat it as a permanent commitment. The WTO commitments are full and permanent.
• The GATT rules applied to trade in merchandise goods. In addition to goods, the WTO covers trade
in services and trade-related aspects of intellectual property.
• While GATT was a-multilateral instrument, by the 1980s many new agreements had been added of a
plural-lateral, and therefore selective, nature. The agreements which constitute the WTO are almost
all multilateral and, thus, involve commitments for the entire membership.
• The WTO dispute settlement system is faster, more automatic, and thus much less susceptible to
blockages, than the old GATT system. The implementation of WTO dispute findings will also be
more easily assured.

The "GATT 1947" will continue to exist until the end of 1995, thereby allowing all GATT member
countries to accede to the WTO and permitting an overlap of activity in areas like dispute settlement.
Moreover, GATT lives on as "GATT 1994", the amended and up-dated version of GATT 1947, which is
an integral part of the WTO Agreement and which continues to provide the key disciplines affecting
international trade in goods.

6.6.2 Structure of World Trade Organization (WTO)

The WTO's overriding objective is to help trade flow smoothly, freely, fairly and predictably.
It does this by:
• Administering trade agreements
• Acting as a forum for trade negotiations
• Settling trade disputes
• Reviewing national trade policies
• Assisting developing countries in trade policy issues, through technical assistance and training
programs
• Cooperating with other international organizations

Structure
The WTO has nearly 150 members, accounting for over 97% of world trade. Around 30 others are
negotiating membership.
Decisions are made by the entire membership. This is typically by consensus. A majority vote is also
possible but it has never been used in the WTO, and was extremely rare under the WTO's predecessor,
GATT. The WTO's agreements have been ratified in all members' parliaments.
The WTO's top level decision-making body is the Ministerial Conference which meets at least once every
two years.
Below this is the General Council (normally ambassadors and heads of delegation in Geneva, but
sometimes officials sent from members' capitals) which meets several times a year in the Geneva
headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute
Settlement Body.
At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS) Council report
to the General Council.
Numerous specialized committees, working groups and working parties deal with the individual
agreements and other areas such as the environment, development, membership applications and regional
trade agreements.

Secretariat
The WTO Secretariat, based in Geneva, has around 600 staff and is headed by a director-general. Its
annual budget is roughly 160 million Swiss francs. It does not have branch offices outside Geneva. Since
decisions are taken by the members themselves, the Secretariat does not have the decision making role
that other international bureaucracies are given with. The Secretariat's main duties are to supply technical
support for the various councils and committees and the ministerial conferences, to provide technical
assistance for developing countries, to analyze world trade, and to explain WTO affairs to the public and
media.
The Secretariat also provides some forms of legal assistance in the dispute settlement process and advises
governments wishing to become members of the WTO.
The WTO is 'member-driven', with decisions taken by consensus among all member governments.
The WTO is run by its member governments. All major decisions are made by the membership as a
whole, either by ministers (who meet at least once every two years) or by their ambassadors or delegates
(who meet regularly in Geneva). Decisions are normally taken by consensus.
In this respect, the WTO is different from some other international organizations such as the World Bank
and International Monetary Fund. In the WTO, power is not delegated to a board of directors or the
organization's head.
When WTO rules impose disciplines on countries' policies, that is the outcome of negotiations among
WTO members, the rules are enforced by the members themselves under agreed procedures that they
negotiated, including the possibility of trade sanctions. But those sanctions are imposed by member
countries, and authorized by the membership as a whole. This is quite different from other agencies
whose bureaucracies can, for example, influence a country's policy by threatening to withhold credit.
Reaching decisions by consensus among some 150 members can be difficult. Its main advantage is that
decisions made this way are more acceptable to all members. And despite the difficulty, some remarkable
agreements have been reached. Nevertheless, proposals for the creation of a smaller executive body
perhaps like a board of directors each representing different groups of countries are heard periodically.
But for now, the WTO is a member-driven, consensus-based organization.

Highest authority: the Ministerial Conference

So, the WTO belongs to its members. The countries make their decisions through various councils and
committees, whose membership consists of all WTO members. Topmost is the ministerial conference
which has to meet at least once every two years. The Ministerial Conference can take decisions on all
matters under any of the multilateral trade agreements.

6.6.3 WTO Agreements

How can you ensure that trade is as fair as possible, and as free as is practical? By negotiating rules and
abiding by them.
The WTO's rules - the agreements - are the result of negotiations between the members. The current set
were the outcome of the 1986–94 Uruguay Round negotiations which included a major revision of the
original General Agreement on Tariffs and Trade (GATT).
GATT is now the WTO's principal rule-book for trade in goods. The Uruguay Round also created new
rules for dealing with trade in services, relevant aspects of intellectual property, dispute settlement, and
trade policy reviews. The complete set runs to some 30,000 pages consisting of about 30 agreements and
separate commitments (called schedules) made by individual members in specific areas such as lower
customs duty rates and services market-opening.
Through these agreements, WTO members operate a non - discriminatory trading system that spells out
their rights and their obligations. Each country receives guarantees that its exports will be treated-fairly
and consistently in other countries' markets. Each promises to do the same for imports into its own
market. The system also gives developing countries some flexibility in implementing their commitments.
Goods
It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating lower customs
duty rates and other trade barriers; the text of the General Agreement spelt out important rules,
particularly non-discrimination.
Since 1995, the updated GATT has become the WTO's umbrella agreement for trade in goods. It has
annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as
state trading, product standards, subsidies and actions taken against dumping.
Services
Banks, insurance firms, telecommunications companies, tour operators, hotel chains and transport
companies looking to do business abroad can now enjoy the same principles of freer and fairer trade that
originally only applied to trade in goods.
These principles appear in the new General Agreement on Trade in Services (GATS). WTO members
have also made individual commitments under GATS stating which of their services sectors they are
willing to open to foreign competition, and how open those markets are.

Intellectual property
The WTO's intellectual property agreement amounts to rules for trade and investment in ideas and
creativity. The rules state how copyrights, patents, trademarks, geographical names used to identify
products, industrial designs, integrated circuit layout-designs and undisclosed information such as trade
secrets intellectual property" - should be protected when trade is involved.

Dispute settlement
The WTO's procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for
enforcing the rules and therefore for ensuring that trade flows smoothly. Countries bring disputes to the
WTO if they think their rights under the agreements are being infringed. Judgments by specially -
appointed independent experts are based on interpretations of the agreements and individual countries'
commitments. The system encourages countries to settle their differences through consultation. Failing
that, they can follow a carefully mapped out, stage by-stage procedure that includes the possibility of a
ruling by a panel of experts, and the chance to appeal the ruling on legal grounds. Confidence in the
system is borne out by the number of cases brought to the WTO around 300 cases in eight years
compared to the 300 disputes dealt with during the entire life of GATT (1947–94).
Policy review The Trade Policy Review Mechanism's purpose is to improve transparency, to create a
greater understanding of the policies that countries are adopting, and to assess their impact. Many
members also see the reviews as constructive feedback on their policies. All WTO members must
undergo periodic scrutiny, each review containing reports by the country concerned and the WTO
Secretariat.
6.6.4 Developing Countries and WTO
Development and trade
Over three quarters of WTO, members are developing from the least developed countries. All WTO
agreements contain special provision for them, including longer time periods to implement agreements
and commitments, measures to increase their trading opportunities and support to help them build the
infrastructure for WTO work, handle disputes, and implement technical standards.
The 2001 Ministerial Conference in Doha set out tasks, including negotiations, for a wide range of issues
concerning developing countries. Some people call the new negotiations the Doha Development Round.
Before that, in 1997, a high-level meeting on trade initiatives and technical assistance for least-developed
countries resulted in an "integrated framework" involving six intergovernmental agencies, to help least
developed countries increase their ability to trade, and some additional preferential market access
agreements.
A WTO committee on trade and development, assisted by a sub-committee on least-developed countries,
looks at developing countries' special needs. Its responsibility includes implementation of the agreements,
technical cooperation, and the increased participation of developing countries in the global trading
system.

Technical assistance and training

The WTO organizes around 100 technical cooperation missions to developing countries annually. It holds
on average three trade policy courses each year in Geneva for government officials. Regional seminars
are held regularly in all regions of the world with a special emphasis on African countries. Training
courses are also organized in Geneva for officials from countries in transition from central planning to
market economies.
The WTO set up reference centres in over 100 trade ministries and regional organizations in capitals of
developing and least developed countries, providing computers and internet access to enable ministry
officials to keep abreast of events in the WTO in Geneva through online access to the WTO's immense
database of official documents and other material. Efforts are also being made to help countries that do
not have permanent representatives in Geneva.

In a nutshell
The basic structure of the WTO agreements: how the six main areas fit together - the umbrella WTO
Agreement, goods, services, intellectual property, disputes and trade policy reviews.

6.6.5 Benefits of WTO

The system helps to keep the peace
This sounds like an exaggerated claim, and it would be wrong to make too much of it. Nevertheless, the
system does contribute to international peace, and if we understand why, we have a clearer picture of
what the system actually does.
Peace is partly an outcome of two of the most fundamental principles of the trading system: helping trade
to flow smoothly and providing countries with a constructive and fair outlet for dealing with disputes over
trade issues. It is also an outcome of the international confidence and cooperation that the system creates
and reinforces.
History is littered with examples of trade disputes turning into war. One of the most vivid is the trade war
of the 1930s when countries competed to raise trade barriers in order to protect domestic producers and
retaliate against each others' barriers. This worsened the Great Depression and eventually played a part in
the outbreak of World War 2.
Two developments immediately after the Second World War helped to avoid a repeat of the pre-war trade
tensions. In Europe, international cooperation developed in coal, and in iron and steel. Globally, the
General Agreement on Tariffs and Trade (GATT) was created.
Both have proved successful, so much so that they are now considerably expanded - one has become the
European Union, the other the World Trade Organization (WTO).
How does this work?
Crudely put, sales people are usually reluctant to fight their customers. In other words, if trade flows
smoothly and both sides enjoy a healthy commercial relationship, political conflict is less likely.
What's more, smoothly - flowing trade also helps people all over the world become better off. People who
are more prosperous and contented are also less likely to fight.
But that is not all. The GATTMITO system is an important confidence builder. The trade wars in the
1930s are proof of how protectionism can easily plunge countries into a situation where no one wins and
everyone loses.
The short sighted protectionist view is that defending particular sectors against imports is beneficial. But
that view ignores how other countries are going to respond. The longer term reality is that one
protectionist step by one country can easily lead to retaliation from other countries, a loss of confidence in
freer trade, and a slide into serious economic trouble for all - including the sectors that were originally
protected. Everyone loses.
Confidence is the key to avoiding that kind of no-win scenario. When governments are confident that
others will not raise their trade barriers, they will not be tempted to do the same. They will also be in a
much better frame of mind to cooperate with each other.
The WTO trading system plays a vital role in creating and reinforcing that confidence. Particularly
important are negotiations that lead to agreement by consensus and a focus on abiding by the rules.

The system allows disputes to be handled constructively

As trade expands in volume, in the number of products traded, and in the numbers of countries and
companies trading, there is a greater chance that disputes will arise. The WTO system helps resolve these
disputes peacefully and constructively.
There could be a down side to trade liberalization and expansion. More trade means more possibilities for
disputes to arise. Left to themselves, those disputes could lead to serious conflict. But in reality, a lot of
international trade tension is reduced because countries can turn to organizations, in particular the WTO,
to settle their trade disputes.
Before World War 2 that option was not available. After the war, the world's community of trading
nations negotiated trade rules which are now entrusted to the WTO. Those rules include an obligation for
members to bring their disputes to the WTO and not to act unilaterally.
When they bring disputes to the WTO, the WTO's procedure focuses their attention on the rules. Once a
ruling has been made, countries concentrate on trying to comply with the rules, and perhaps later
renegotiating the rules - not on declaring war on each other.
Around 300 disputes have been brought to the WTO since it was set up in 1995. Without a means of
tackling these constructively and harmoniously, some could have led to more serious political conflict.
The fact that the disputes are based on WTO agreements means that there is a clear basis for judging who
is right or wrong. Once the judgment has been made, the agreements provide the focus for any further
actions that need to be taken.
The increasing number of disputes brought to GATT and its successor, the WTO, does not reflect
increasing tension in the world. Rather, it reflects the closer economic ties throughout the world, the
GATT/WTO's expanding membership and the fact that countries have faith in the system to solve their
differences.
A system based on rules rather than power makes life easier for all
The WTO cannot claim to make all countries equal. But it does reduce some inequalities, giving smaller
countries more voice, and at the same time freeing the major powers from the complexity of having to
negotiate trade agreements with each of their numerous trading partners.
Decisions in the WTO are made by consensus. The WTO agreements were negotiated by all members,
were approved by consensus and were ratified in all members' parliaments. The agreements apply to
everyone. This makes life easier for all, in several different ways. Smaller countries can enjoy some
increased bargaining power. Without a multilateral regime such as the WTO's system, the more powerful
countries would be freer to impose their will unilaterally on their smaller trading partners. Smaller
countries would have to deal with each of the major economic powers individually, and would be much
less able to resist unwanted pressure.
In addition, smaller countries can perform more effectively if they make use of the opportunities to form
alliances and to pool resources. Several are already doing this.
There are matching benefits for larger countries. The major economic powers can use the single forum of
the WTO to negotiate with all or most of their trading partners at the same time. This makes life much
simpler for the bigger trading countries. The alternative would be continuous and complicated bilateral
negotiations with dozens of countries simultaneously. And each country could end up with different
conditions for trading with each of its trading partners, making life extremely complicated for its
importers and exporters.
The principle of non-discrimination built into the WTO agreements avoids that complexity. The fact that
there is a single set of rules applying to all members greatly simplifies the entire trade regime.
And these agreed rules give governments a clearer view of which trade policies are acceptable.

Freer trade cuts the cost of living

We are all consumers. The prices we pay for our food and clothing, our necessities and luxuries, and
everything else in between, are affected by trade policies.
Protectionism is expensive: it raises prices. The WTO's global system lowers trade barriers through
negotiation and applies the principle of non-discrimination. The result is reduced costs of production
(because imports used in production are cheaper) and reduced prices of finished goods and services, and
ultimately a lower cost of living.

6.6.6 Impact of WTO in Indian Business

India is a founder member of World Trade Organization, and also treated as the part of developing
countries group for accessing the concessions granted by the organization. As a result, there are several
implications for India for the various agreements that are signed under WTO. Let us understand each
agreement in general, what it means and its implications for India in specific.
1. General Agreement on Tariffs & Trade (GATT): India was a signatory of the GATT and as a part of
the commitment had to change several laws and policies; the major changes that were incorporated were
as follows:
Reduction of peak and average tariffs on manufactured products
Commitments to phase out the quantitative restrictions over a period as these were considered
non-transparent measure in any countries policy structure.
The result of this agreement as mentioned earlier was limited as, GATT was only an agreement and there
was no enforcing agency to strictly implement the clauses and punish the country which breaks the
clauses. Thus the impact was partial. However, with WTO coming into effect, the competition from
imports for the domestic firms has increased. WTO had the deadline till 2005, for the domestic policy was
supposed to phase out the QR's; for those countries which face severe balance of payments problems
special concession period was given. Thus it is very clear that only those firms that have competitive
advantage would be able to survive in the long run, and those firms which are weak would fade into
history in the process.
2. Trade Related Investment Measures (TRIMS): The agreement relates to investments originating from
one country to another. The agreement prohibits the host country to discriminate the investment from
abroad with domestic investment, which implies that it favours national treatment of foreign investment.
Besides this, there are several other clauses of the agreement totalling to 5 in this segment; one agreement
requires investment to be freely allowed within domestic borders without any maximum cap on it.
Another restricts to impose any kind of export obligation or import cap on the investment. Another
requires that there should not be any domestic content requirement on foreign firms operating and
manufacturing in other countries.
These agreements have a direct impact on our Trade, Investment and foreign exchange policy, domestic
annual budgetary proposals and also on the industrial policy.
Implementation process for the above requires proper preparation by the industries and policy makers, as
sudden change may result in loss of revenue and decline of foreign exchange for the government and
economy, and it may result in decline of market share and profitability of businesses, decline in
employment opportunities and overall decline in growth.
3. Trade Related Intellectual Property Rights (TRIPS): An intellectual property right refers to any
creation of human mind which gets legal recognition and protection such that the creator of the intangible
is protected from illegal use of his creation. This agreement includes several categories of property such
as Patents, Copyrights, Trademarks, and Geographical indications, Designs, Industrial circuits and Trade
secrets.
Since the law for these intangibles vastly varied between countries, goods and services traded between
countries which incorporated these intangibles faced severe risk of infringement. Therefore the agreement
stipulated some basic uniformity of law among all trading partners. This required suitable amendment in
the domestic IPR laws of each country. Since this process is not a simple one, a time period of 10 years
was given to the developing countries.
As a result, in India there was a requirement to change the patents act, Trade and merchandise mark act
and the copyright right act. Besides these main laws, other related laws also required changes.
The main impact of this is on industries such as pharma and bio-technology, because now with the law in
place, it is not possible to reverse engineer the existing drugs and formulas, change the process and
produce the same product. Now new investment in fresh research is required. This is quite a burden for
small industries and there is a possibility that they are thrown out of business due to competition.
Besides these, the technology transfer from abroad is expected to become costly and difficult.
Strict implementation of law is very important in India, otherwise there could be disastrous affect on the
revenue of industries which invest millions of rupees in Research and development if their products get
infringed.
4. Agreement on Agriculture (AOA): The Agriculture happens to be one of the most protected sectors in
all the countries without any exceptions, and therefore an agreement on the agricultural issues have
always been evading and debated strongly by all the countries involved in trade in agriculture.
The agreement on agreement deals with market access, Export subsidies and government subsidies.
Broadly, as of now the requirement is to open up the markets in specific products in market access and in
case of subsidies, it is to go for tarrification and phase it out eventually or reduce it to bound limits. The
immediate impact of the agreement would be on the policy makers to scrutinize all the items under
subsidy, QRs and tariffs. However, the calculation of AMS reveals that the subsidy given to Indian
farmers are much below the acceptable levels and therefore need not be changed. Looking from other
perspective, the reduction of tariffs and subsidy in export and import items would open up competition
and give a better access to Indian products abroad. However, the concern is on the competitiveness and
sustainability that the Indian farmer would be able to prove in the long run once the markets open up.
Thus there is a requirement to change policy support to meet the changing needs of Indian agriculture to
gear it up for future.
5. Agreement on Sanitary and Psyto-sanitary measures (SPM): this agreement refers to restricting
exports of a country if they do not comply with the international standards of germs/bacteria etc… if the
country suspects that allowing of such products inside the country would result in spread of disease and
pest, then there is every right given to the authorities to block the imports.
Indian standards in this area are already mentioned and therefore there is no need to change the law, but
the problem is that of strictly implementing the laws. There is an urgent need to educate the exporters
regarding the changing scenario and standards at the international arena, and look at the possible
consequence and losses to be incurred if the stipulations are not followed. Therefore, to meet the
standards certain operational changes are required in the industries such as food processing, marine food
and other packed food that is being currently exported from India.
6. Multi-fibre Agreement (MFA): This agreement is dismantled with effect from 1 January 2005. The
result was removal of QR on the textile imports in several European countries. As a consequence a huge
textile market is opened up for developing countries textile industry as well as for other countries that
have competitive advantage in this area. The immediate impact is on the garment and textile
manufacturers and exporters. However, it still needs to be seen whether the industry is able and ready to
take advantage of the large markets. This requires quite an amount of modernization, standardization, cost
efficiency, and customization and frequent up gradation of designs to meet the changing need of global
customers. The dismantling of QR also mean more competition to Indian textile exporters and therefore,
it becomes imperative to enhance the competitiveness in niche areas.
Besides these major agreements there are several other agreements such as agreement on Market Access,
which propagates free market access to products and reduction of tariff and non-tariff barriers; agreement
to have Safeguard Measures if there is an import surge and it is liable to affect the domestic industries in
the transition economies. These measures can include imposing QR for a certain period and also imposing
tariffs on the concerned products. There are other agreements that call for direct reduction of subsidies on
Exports, which are not permissible, and phasing it out over a period of time. Besides these there are other
Counter-Veiling Duties (CVD) that are permitted to be used in certain conditions. These are supposed to
have an impact positive if they help the industries and negative if they reduce the cost competitiveness.
The trading countries are allowed to impose an Anti-Dumping Duty (ADD) against imported products if
the charge of Dumping is claimed against them. The requirement is to prove that the product is being sold
at a price, which results in material injury to the domestic industries. There are several cases in which the
duty is imposed but it still remains to be proven by the Dispute settlement tribunal in case the other
trading party opposes the duty imposed as "unfair". However, the proposal always should come from the
representatives of the industries affected; this may result in a problem, as small industries voice may
remain unheard in the process.

Caution:
The brand should be protected from various forms of piracy such as outright piracy, reverse engineering,
counterfeiting, and passing off.

Case study: International Branding

Brand is a combination of name, words, symbols, or design that identifies the product and its source and
distinguishes it from competing products. A good brand name is short. It is unique and easy to remember.
It indicates an important quality or image of the product. It can be protected and owned by a company.
Brand value is of immense importance to a firm. Branding is at the heart of any business activity.
Therefore, a company has to exercise full control over its brands. Brand names have their origin in
different sources. Names of the families, persons, places, descriptive names, and even made-up names
have been the sources of brand names in the past. Identifying brand names is a long and laborious
process. The process has become more a science than an art.

When a manufacturer just manufactures the product and leaves the branding decisions to the retailer, then
the brands developed by such retailers are referred as private brands. Private branding is a safe alternative
for a firm operating internationally for the first time.
Pringles, Visa, Marlboro, Sony, McDonald‟s, Nike, IBM, Gillette Sensor, Heineken, Pantene, and Disney
are some of the better known global brands in the world. Global branding offers some significant
advantages such as economies of scale. A company can market a single brand or multiple brands at the
same time. It chooses to market a single brand when the brand needs exclusive attention and multiple
brands when the market is heterogeneous and needs to be segmented.
Creating global brands may not always be possible. Even when it can be done, the expected benefits
might not materialize due to practical difficulties. In such cases, the firm has to adapt other strategies like
global brand leadership.

Global brand leadership involves using organizational structures, processes, and cultures to allocate
brand-building resources globally, to create global synergies, and to develop a global brand strategy that
coordinates and leverages country brand strategies. Attaining global brand leadership needs exchange of
insights and best practices, a global brand planning process, good brand building strategies, assigning
responsibility, and brand consolidation.

Questions:
1 Give a famous brands name, and explain the famous thing of that brand.
2. What you understand to global brand? Discuss.

6.7 Summary
Greater efforts by industrial countries and the international community more broadly, are called
for to remove the trade barriers facing developing countries, particularly the poorest countries.
The IMF considers a successful trade round to be an important step toward meeting the goal of
making globalization work for the benefit of all.
Official BOP statistics, as compiled by the RBI, for the year 2001–02 are available so far only for the
first half of the year.
The literature on FDI and economic growth generally points to a positive relationship between the
two variables, and offers several, standard explanations for it.
The GATT was a set of rules, a multilateral agreement, with no institutional foundation, only a small
associated secretariat which had its origins in the attempt to establish an International Trade
Organization in the 1940s.
The WTO's top level decision-making body is the Ministerial Conference which meets at least once
every two years.

6.8 Keywords
Balance Of Payments (BOP): The BOP figures tell us about how much is being spent by Indian
consumers and firms on imported goods and services.
Crowding: “Crowding in” occurs where FDI companies can stimulate growth in up/down stream
domestic businesses within the national economies.
Economic Growth: Economic growth is usually associated with technological change.
Foreign Direct Investment (FDI): Foreign Direct Investment, or FDI, is a measure of foreign ownership
of domestic productive assets such as factories, land and organizations.
Gross domestic product (GDP): The gross domestic product (GDP) is one the primary indicators used to
gauge the health of a country's economy.
International Trade: It is exchange of capital, goods, and services across international borders or
territories.
World Trade Organization: The WTO is the successor to the General Agreement on Tariffs and Trade
(GATT) established in the wake of the Second World War.

Lab Exercise
1. Draw the graph for structure World Trade Organization.
2. Make a table of WTO Agreements and its services.

6.9 Self Assessment Questions

1. Freeing trade frequently benefits the .........especially.
(a) Poor (b) Rich (c) Max (d) None of these

2. The........ considers a successful trade round to be an important step toward meeting the goal of
making globalization work for the benefit of all.
(a) WTO (b) IMF (c) FDI (d) None of these

3. A country‟s international transactions are recorded in the .............accounts.

(a) Balance-of-payments (b) Balance (c) Income balance (d) None of these

4. FDI inhibits competition and thus hamper.........

(a) loss (b) profit (c)growth (d) None of these

5. EXIM Policy is also known as the .........................

(a) Foreign Trade Policy (b) World Trade Policy
(c) Industrial policy (d) None of these

6. The EXIM policy made for each ….year.

(a) three (b) five (c) ten (d) two

7 The World Trade Organization came into being in .........

(a) 1996 (b) 1999 (c) 1995. (d) 2000

8. The GATT, was Established on a provisional basis after the ......... World War.
(a) first (b) second

9. Exim policy also known as the .............................

(a) Foreign trade policy (b) Indian trade policy (c) National trade policy (d) None of these

10. Industrial countries maintain high protection in agriculture through an array of very high tariffs,
including tariff peaks.
(a) True (b) False
6.10 Review Questions
1. Discuss the International Trade in the term of World Economy.
2. How Trade Liberalization is beneficial for International trade?
3. What are various trade reforms announced in India in recent times.
4. What you understand to balance of payments.
5. Give the relation of balance of payment in the economic.
6. Discuss the measures to improve balance of payments in India.
7. Explain the foreign direct investment with the suitable example.
8. Discuss Infrastructure Development and Technology Transfer in FDI.
9. Give the brief history of WTO. Explain the EXIM policy.
10. What are the important and benefits of WTO.

Answers for Self Assessment Questions

1 (a) 2 (b) 3 (a) 4 (c) 5 (a)
6 (b) 7 (a) 8 (b) 9 (a) 10 (a)