BUSINESS ENVOIRNMENT

1. Industrial Policy:
IP is rules regulations principles
policies and procedures laid down by
government for regulating developing
and controlling industrial undertaking
in the country.
Also indicates large medium and
small scale sectors.

2. OBJECTIVES:
• Achieving socialistic pattern of society.
• Control on concentration of economic power.
• Achieving industrial development.
• Reducing disparity in regional development.
• Providing opportunities for employment.

3. OBJECTIVES:
• Achieving self-sustained economy.
• Alleviating poverty.
• Building up large cooperative sector.
• Updating technology and modernization of industries.
• Liberalization and Globalization of economy.

4. INDUSTRIAL POLICY:
• Industrial Policy Resolution of 1948.
• Industrial Policy Resolution of 1956
• Industrial Policy Resolution of 1973
• Industrial Policy Resolution of 1977
• Industrial Policy Resolution of 1980
• Industrial Policy Resolution of 1991

5. Case on Birla corporation:
• This company manufactures cement jute
products automobile components etc. By
2003-04 their sales short up by 10.6% to
Rs. 1243.18 crore from the previous year .
Profit after tax was rs.41.56 crore against
Rs. 4.19 crore in 2002-03. This was
achieved improved performance of
cement division and by a well planned
cost management.

6. Case on Birla corporation:
• The cement division division alone contributed for 88.75% of the
company’s sales in 2002-03 and in 2003-04 they achieved higher
capacity utilization. Total export increased to 48.19 corers in 2002-03.
• In 2003-04 jute export increased and the company had good
performance rate. the automobile sector had to face a decline. Their
calcium –carbide industry struggled much due to competition from low
priced markets from China and Romania and duty free imports from
Bhutan . Increase in power tariff also contributed much to their
struggle.
• Taking into advantage , Birla Corporation has decided to expand
capacity at its Durgapur Cement Plant by 1 million ton.
• They are also working hard to make the production capacity of
Chanderia Cement 3 lakh tons per annum.
• Project are underway to set up a power plant of 27 MW as new
industrial undertaking at M.P. and Rajasthan.
• Discuss the business activities of Birla Corporation on recent
developments.

7. Industrial Policy 1948:
• Government recognised the need for mixed economy .
• Reserved the national monopolies for Atomic Energy and Rail
and Road industry.
• Government had the right to initiate projects in 6 industries and
they are:
• Coal iron and steel aircraft manufacturing ship building
telephone and minerals.
• The government could regulate and license 18 other industries
of national importance.

8. Industrial Policy Resolution 1956:
• Parliament accepted ‘the socialistic pattern of
society’ as the basic aim of social and economic
policy.
• These important developments necessitated a fresh
statement of industrial policy of 1956.
• The resolution laid down 3 categories of industries.
• Schedule A:
• The state government was responsible for them.
• Schedule B:
• State owned companies.
• Private enterprises only supplement the efforts.

9. Schedule C:
All the remaining industries and their future development
would in general be left to the initiative and enterprise of the
private sector.
Other features of the resolution are:
Fair and non-discriminatory treatment for private sector.
Encouragement to village and small enterprises.
Removing regional disparity.
Development of ancillary industries in areas where large
industries were to be set up.

10. Industrial policy Statement 1977:
Due to some disparities there were certain problems like:
Unemployment was increasing rural urban disparity widened and
real investment stagnated.
The growth rate of industrial segment was not more than 3-4% per
annum.
The incidence of industrial sickness also became widespread.
The concept of District Industrial Centers was introduced for the
first time. Each district would have such a district centre which
would extent all support and services required by small
entrepreneurs.

11. Within the SSI sector , a new concept of the tiny sector was
introduced.
TINY SECTOR: Industrial unit with investment in machinery
and equipment of up to rs. One lakh and situated in a town
with population less than 50,000.
this concept was given by Karve Committee in 1967 with 47
products .

12. Industrial policy 1980:
Focused on the need for promoting competition in the domestic
market, technological upgradation and modernization.
Laid the foundation for increasingly competitive export base and
for encouraging foreign-investment in high- tech areas. The policy
suggested following measures:
Effective operational management of public sector.
Integrating industrial development in the private sector.
Regularization of unauthorized excess capacity installed in the
private sector.
Encouragement of Merger and Acquisition of sick units.
Drawback: it underplayed the employment objective as was
technology centric.

13. Industrial Policy 1991(july):
Announced at the time of Mr. P.V. Narsimha Rao .
The reforms in 1991 did make significant changes in industrial , trade
and public sector policies.
Significant changes are:
Abolished licensing for all projects except in 18 industries.
MRTP act amended to eliminate prior approval to large companies for
capacity expansion.
The requirement of Phased Manufacturing Programs discontinued for
all new projects.
Schedule A of industries reserved exclusively for state enterprises cut
down from 17 to 8 .
Schedule B of industries , where state enterprises were to acquire a
dominant positions, abolished.
Small scale enterprise allowed to offer up to 24% of share holdings of
large enterprises.

14. Major issues covered by Industrial policy 1991 are:
Foreign Direct Investment:
Limit on foreign equity holdings raised from 40% to 51% in a wide
range of industry.
Foreign equity proposals need not be accompanied by foreign
technology transfer agreement.
Technology imports liberalized by increasing royalty limits.
Public Sector Policy:
Disinvestment in selected public sector enterprises to raise finances
for development , bring in greater accountability and help create a new
culture in their working for improved efficiency.
Government equity ranging from 5% to 20% in 31 PSEs with ‘good
track record’ disinvested to public sector mutual funds and financial
institutions.

15. Trade policy:
Administered licensing of imports replaced by import entitlements
linked to export earnings. These entitlements called exim scrips made
freely tradable.
permission to import capital goods without ‘indigenous clearance’
provided import covered by foreign equity .
Scope of canalization narrowed.
A process which exists for some categories - which means these can
be imported only by designated agencies.
Current update:
A number of items like urea are canalized. This means they can be
imported only by designated agencies like MMTC and STC, the
government's trading arms. An item like gold, in bulk, can be imported
only by specified banks like SBI and some foreign banks or designated
agencies.

16. Environmental issues:
Government came up with environmental policy . The policies
are implemented through various acts such as Wildlife
protection act 1972.
water (Prevention and Control of Pollution) Act 1974 .

17. Industrial Licensing:
• Licensing is a written permission issued by
the central government to an industrial
undertaking stating details like location,
article to be manufactured , production
capacity , and other relevant particulars
including the validity period.

18. OBJECTIVES OF LICENSING
• To limit the capacity within the targets set by plans.
• To direct investments in industries according to plan
priorities.
To regulate the location of industrial units so as to secure a
balanced regional development.
• To prevent monopoly.

19. To protect small scale industries against undue competition
from large scale industries.
To foster technology and economic improvements in
industries by ensuring units of economic size and adopting.
To encourage new entrepreneurs to start industrial units.

20. Industrial Licensing Policy:
Industries (Development and Regulation) Act 1951:
provisions of the Act were:
No new industrial units could be established or substantial
extension to existing plants be made without a license from
central government.
Government could take under its own management undertaking
which failed to carry out its instructions in management and
policies.
This act also empowered the government to prescribe prices,
methods and volume of production and channels of distribution.
The act empowered the government to set up Development
council for groups of industries.

21. New Industrial Policy and Procedure, 1970:
In February 1970
government announced its new industrial licensing policy which consisted of
list of core industries in the economy (instructed by Industrial Licensing Policy
Inquiry Committee). The industries were.
Agriculture input Non-ferrous metal
petroleum Iron and Steel
coal
heavy industrial machinery
ship building
news print and electronics.

22. DISINVESTMENT in PUBLIC
SECTOR:
• Needs of public sector:
• To increase the growth of core-sectors in the
economy by creating a solid foundation in
industrial growth.
• To serve the financial and technological needs of important sectors
like Railways, telecommunication.
• To ensure easy availability of articles of mass-consumption
and to check production of unimportant luxury articles.

23. Failing of PSU:
In spite of monopoly in certain areas PSUs are never profitable.
Facts and figures:
1997-98: Public Manufacturing Enterprises showed
profitability of minus (-) 3.9%.
Reasons for failure of PSUs are
Low rate of return on investment, poor capacity utilization,
declining contribution to national savings , red tapism.

24. Disinvestment:
• The main objective of DISINVESTMENT is to put national resources
and assets to optimal use and in particular to unleash the
productive potential inherent in our PSEs.
• The policy of disinvestment aims at modernization of PSEs,
creation of new assets , generation of employment and retiring of
public debt.
• Privatization and Disinvestment:
Privatization leads to change in management with change in
ownership whereas change in ownership is not a necessary
condition in Disinvestment. It refers to dilution of the stakes of the
government to a level where there is no change in control .

25. Disinvestment Procedure:
1. Proposal for disinvestment in any PSU are placed for
consideration of Cabinet Committee on Disinvestment
(CCD).
2. An Advisor is appointed to invite Expression of
Interest (EOI) from parties.
3. The prospective bidders undertake due diligence of
the PSU.
4. Concurrently the task of valuation of the PSU is
undertaken.

26. 5.Calculation of reserve price of PSU is done using any of the 3
methods.
Discounted cash flow method. Asset valuation method,
Balance sheet method.
6.Share purchase agreement is sent to prospective bidders
for inviting the final binding bids.
7.The bids received are placed before the CCD for final
approval. CCD then approves the final buyer.
After the transaction is complete the papers are forwarded to
the Controller and Auditor General of India (CAG) for
undertaking the evaluation of disinvestment, He place it in
the parliament and release it for public.

27. Merits of Disinvestment:
• To obtain release of large amount of public
resources locked up in non-strategic Public
sector units for re-employment in areas of
higher social priority.
• Facilitates transferring the commercial risk
to which the tax payer’s locked up in public
sector is exposed to the private sector
wherever they are willing to step in.
• More and more man-power is utilized which
was dumped in PSU.

28. Disinvestment would expose privatized companies to market
disciplines and help them to become self reliant.
Wider distribution of wealth by offering shares of privatized
companies to small investors and employees.
Beneficial for capital market. Increase in floating stock
would give market more liquidity, give investors early exit
options which will help raising of funds by privatized
companies for their projects .

29. Demerits of Disinvestment:
• The amount raised through disinvestment in the year 1991-2001
was only Rs.2051 cr which is very less amount.
• Only when the government ensures that the market system
regulates privatized firms take care of public’s interest
otherwise not.
• In most of the cases shares of disinvested PSU ‘s are by and
large in the hands of institutions of with little floating stock.
• No monopoly is good only fair and full competition can bring
relief to consumers.

30. Let us know…
• BALCO: Bharat Aluminium
Company Ltd (BALCO)
• It is a fully integrated aluminium producing company
set up in 1965 . The government of India had 100%
stake in BALCO prior to disinvestment. In 1998, the
disinvestment commission recommended 51%
disinvestment in favour of strategic buyer along with
transfer of management .Sterlite company acquired
stakes in march 2001 for Rs. 551.50 crs.

31. VSNL: Videsh Sanchar
Nigam Limited:
Govt. sold 25% of equity share holdings out of its total
holdings of 52.97% in VSNL in 2002 . The total paid-up
capital was rs. 285 crore ,the govt. holding being Rs.
151crs. Rs. 71.25 crs was sold to M/s Panatone (TATA
group) at a price of Rs. 1439 crs. The govt. received
approx Rs. 3689crs. Thus govt. sold its shares at a price
of Rs. 202 per share .

32. Some other privatized PSUs:
• Modern Food Industries Limited ( MFIL) : Hindustan Lever.
• Computer Maintenance Corporation (CMC) : Tatas.
• 9 Hotels of Indian Tourism Development Corporation (ITDC)
• Indian Petrochemical Complex Limited (IPCL) : Reliance.
• Maruti Udyog Limited (MUL) : Suzuki.
• Hindustan Zinc Limited (PPC) : Ruia.
• Paradeep and Phosphates Limited (PPC)
• Hotel Corporation of India Limited (HCL)

33. Disinvestment and FDI
• In India the success of disinvestment has depended on
domestic investment and foreign investors have kept away. On
the contrary privatization has failed to attract FDI in India.
• The main reasons for failure are:
• It took almost a decade to finalize disinvestment policy and
there is lack of transparency.
• Till 1991 the policy was harped on controlling power and
protecting workers.
• The disinvestment of 25% equity holdings of VSNL was
decided in 2001 but actual disinvestment took a year. Global
investors wont wait for long.
• Globally M and A have been a major source of FDI inflows. In
India regulatory laws make M and A’s low profile.

34. Modes of Disinvestment :
• Involving a change in ownership.
• Involving no change in ownership.
• No change:
• 1. disinvestment deferred.
• 2. no disinvestment.
• Closure of Assets.

35. In the budget 2000-01 , the main elements of the
disinvestment policy were enunciated , which are as follows:
Restructure and Revive potentially viable PSEs.
Closedown PSE’s which cannot be reviewed.
Bring down government equity in all non-strategic PSE’s to 26% or lower
if necessary.
Fully protect the interest of workers.
Use the entire receipt from disinvestment and privatization for meeting
expenditure in social sector .
Setting up Ministry of Disinvestment (Department of Disinvestment was
set up in December 1999 and is made a full fledged Ministry under
Government of India)

36. International Trade Theories

37. Adam Smith said - each nation should
specialize in producing things it has an
"absolute advantage" . The theory of
"Absolute Advantage" seems to make
sense in situations where the
circumstances of the geographic and
economic environment are relatively
simple and straight forward - example: -
Switzerland and watches, Canada
and cereal grain.

38. An Example:
• India needs 30 man-hours to produce one quintal of rice whereas
Bangladesh needs 50-man hour. The cost of production of rice is much
more in Bangladesh as compared to India. India thus has an absolute
advantage in production of rice. In case of jute India needs 60 man
hours while Bangladesh needs 20- man hour to produce one quintal of
jute. Thus Bangladesh has an absolute advantage in jute production.
• Country Rice Jute
• India 30 60
• Bangladesh 50 20

40. In 1817, David Ricardo looked at Adam Smith's theory and
suggested that
"there may still be global efficiency gains from trade if a
country specializes in those products that it can produce
more efficiently than other products - regardless of
whether other countries can produce those same
products even more efficiently"

41. Example:
Country Rice Jute
India 30 60
Bangladesh 50 80

43. The Theory of Factor Endowments suggested you should
trade in the products which you can make from the
production factors and resources you naturally possess. So
for Canada this means we should trade in lumber and
minerals and grain since we naturally possess these
resources in large quantities. Following this theory it would
then make sense for Canada to import citrus fruits since our
climate does not naturally give us weather to allow this food
to grow without expensive greenhouses. This theory was
espoused by Heckscher and Ohlin.