Business Environment for MBAs

Presented By:

Sonia Sardana

Nature, Components, Dynamics &

Importance of Business

Environment.

“Business is an economic activity because it includes all those activities whose purpose is to

earn profit by transfer of goods & services.”

“Environment consists atoms & molecules agglomeration of things in motion, alive of men

emotions, or force & resistances. There numbers are infinite & they are always present; they are always

changing.

-Chester Bernard

“Business, Like weather is with us everyday.”

-Wheeler

“Business may be defined as human activity directed towards producing or acquiring wealth

through buying or selling of goods.

-C.H.Haney

Nature1. Interdependence2. Dynamic3. Unlimited effect of uncontrollable

factors.4. Media & Social Change5. Uncertainties & Restrictions.6. Adverse conditions7. To keep regular vigil on the changing

environment.8. Danger of casual change

Business Environment

S tren gth s W eakn ess

In tern a l E n viron m en t

O p p ortu n ities T h reats

E xtern al E n viron m en t

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

Components of

Business Environment

“The process by which strategist monitors the economic, legal, governmental,

market, competitive supplier, technological, geographic & social setting

to determine opportunities & threats of their firm.”

-William F Gluicck

Business Decisions

Internal Environment

External Environment

INTERNAL BUSINESS

ENVIRONMENTATTITUDES

INTERNAL POWER

RELATIONSHIP

MISSION&

OBJECTIVE

VALUE SYSTEM

MANAGEMENT STRUCTURE &

NATURE

HUMAN RESOURCE

COMPANY IMAGE &

BRAND EQUITY

OTHER FACTORS

Internal Environment

Physical Assets & FacilitiesR&D Technological CapabilitiesMarketing ResourcesFinancial Factors

Miscellaneous Factors

External Environment

M ic r oE nvir o nm e nt

M a c r oE nvir o nm e nt

E x te rn a l E n v iro n m e n t

Micro Environment

“Micro or task environment is more specific and immediate

environment in which an organization conducts its

business.”

-Dunham & Pierce

1. Supplier

Reliability

Multiple Supplier

2. CustomerTypes of Customers

– Industrial Customers– Institutional Customer– Foreign Customer– Retail Customer

Multiple Customer

Globalization

Customer Segmentation

3. Market Intermediates

Types of Market Intermediates• Middlemen• Marketing Agencies• Financial Institution• Physical Intermediates

4. Public

• Media Publics

• Local Public

MACRO ENVIRONMENT

EconomicPoliticalSocial-CulturalTechnologicalNaturalDemographicInternational

• MACRO ENVIRONMENT means general environment of business. Macro factors are uncontrollable in comparison to the micro forces of environment. The growth and survival of business depend upon its adaptability to macro environment factor which include

1. ECONOMIC ENVIRONMENTEconomic Conditions

•Boom•Depression

Economic System•Capitalist•Socialist•Mixed Economy

Economic Policies•Monetary Policy•Fiscal Policy•Foreign Trade Policy•Foreign Investment•Industrial Policy

2. POLITICAL ENVIRONMENT

Political Ideology of Govt.

Political stability in the Economy.

Foreign Policy of Govt.

Defense & Military Policy.

Centre state relationship.

Political Environment

L eg is la tu re

E xecutive

Judic iary

P o lit ic a l S y ste m

Pream ble

Fundam enta l R ights

D irec tivesPrinc ip les o f S ta te Policy

C o nst itu t io nE nv ir o nm e nt

P o litca l E n v iro n m en t

3. Socio-Cultural Environment

UrbanizationReligionTastes & PreferencesCustoms & Tradition in SocietyHealth & Quality of LifeLanguage

4. Technological Environment

InnovationResearch & DevelopmentInflow of foreign Technology etc.

5. Natural Environment

Climatic & weather condition.Availability of Natural resources.Topographical factors: Physical features of

place.Pollution Control

6. Demographic Environment

Age CompositionSex CompositionEducation LevelFamily size & structureUrban-rural population

7. International Environment

GlobalizationOil Price hikeInternational TerrorismCultural Exchange

Dynamicsof

Business Environment

Factors Effecting

Business Environment

1. Global Scenario

2. Indian Scenario

1.Global Scenario

Political & Economic EnvironmentPrivatizationGlobalization & Internationalism

2. Indian Scenario

Change in Govt. Policies Variation in Growth Performance Corrective Policy Actions Change in Market Structure & Competition Future Expectations & Business Speculation Change in Consumer attitudes, taste &

Preference Infrastructure

Importance of

Business Environment

For incorporating dynamic behavior of environment

Complete knowledge of internal environment To understand international events,

pressures& impact Economic policies of the govt. To face business problems &challenges Vigilant regarding dangers Administrative system Optimum utilization of resources Market conditions Scientific & industrial advancement Development & success of business

COUNTRY RISK & POLITICAL RISK

BUSINESS ENVIRONMENT

BUSINESS ENVIRONMENT RISK

• Risk is a state in which the number of possible future events or outcomes is larger than the number of events or outcomes which will actually take place

• Risk is manifested in the probability of loss or damage to a business firm

TYPES OF BUSINESS ENVIRONMENT RISK

• LEGAL RISK : Changes in Law• REGULATORY RISK : Regulatory design

& changes• POLITICAL RISK : Resulting from

political changes• SOCIAL RISK : From Social Attitudes• NATURAL RISK : Natural Disasters• ECONOMIC RISK : Economic Changes

COUNTRY RISK ANALYSIS

• Country risk analysis is basically concerned with the performance of an economy and the behavior of the Government and the institutions which determine the Business Environment

MAJOR SOURCES OF COUNTRY RISK

• Monetary Policy• Fiscal Policy• Import controls• TRIMs• Price Control• Labour Policy• Exchange controls

POLITICAL RISK ANALYSIS

• Political environment is set by the POLITICAL SYSTEM, THE CONSTITUTIONAL FRAMEWORK, EXTERNAL POLITICAL RELATIONS, FUNCTIONING OF THE GOVERNMENT, ROLE AND BEHAVIOR OF VARIOUS POLITICAL PRESSURE GROUPS

TYPES OF POLITICAL RISK

1. GENERAL INSTABILITY RISKDue to change in the political

system with a change in Govt.Due to social revolution, normal

election process etcDue to poor Governance, poverty

and exploitation

Cntnd

2. OPERATIONAL RISK

Restriction on the production, marketing, finance, human resource management or international business

3. OWNERSHIP RISK

It arises from the probability that the govt. might take actions that may lead to erosion in ownership or control in the business firm.

Cntnd

TYPES OF OWNERSHIP RISK

OWNERSHIP RISK

Confiscation

Expropriation Domestication

4. TRANSFER RISKThis risk applies to MNCs having

ventures in foreign countries or to the domestic firms having business operations or subsidiaries

TransactionsTransfer of profits,Funds or Assets

HOW A COMPANY MANAGES ENVIRONMENT RISK ?

1. RISK AVOIDING STRATEGIESAvoiding politically sensitive productsAvoiding sensitive regionsContractual agreementsTie-up with other Firms

2. RISK SHIFTING STRATEGIESRisk can be shifted to other parties

through InsuranceCntnd

3. RISK REDUCTION STRATEGIES

Establishing a risk-assessment system

Developing the local economy

Local Equity participation

Good Corporate Citizenship

Maintaining Good Political Relations

METHODS FOR ASSESSING ENVIRONMENT RISK

• CHECKLISTS• EXPERT-BASED SCORING SYSTEM• ECONOMIC METHODS• RATING AND RANKING SYSTEMS• ASSESSMENT OF COUNTRY’S

CREDITWORTHINESS• RISK BENCHMARKING• RISK PREMIUM ON INTEREST

MEANINGBalance of payments refers to the

recording of all economic transactions of a given country. Such transactions includes receives payments from and makes payments to other countries.

Definitions• According to Benham, ”balance of

payments of a country is a record of the monetary transactions over a period with the rest of the world.”

• According to James O Ingram, “the balance of payments is a summary record of all economic transactions between residents of one country and the rest of the world during a given period of time.”

Balance of payments

Visible Invisible

Capital Transfers

Features• Fixed Period of Time• Comprehensiveness• Systematic Record• Double Entry System• All items –Government and Non-

Government

Structure• Balance of payments = (Exports

of goods + Capital receipts + Services) – (Imports of goods + Capital payments + Services)

Disequilibrium in balance of payments

• Balanced Balance of Payments

• Favourable Balance of Payments

• Unfavourable Balance of Payments

B=R-P=0

Bf=R-P>0

BU=R-P<0

Indian Share in World Trade

Export

Import Trade

1950

1960

1970

1980

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

1.85

1.03

0.64

0.42

0.52

0.50

0.53

0.58

0.60

0.60

0.60

0.60

0.60

0.60

1.71

1.69

0.65

0.72

0.66

0.56

0.61

0.60

0.63

0.60

0.60

0.60

0.60

0.80

1.78

1.36

0.65

0.57

0.59

0.53

0.57

0.59

0.61

0.60

0.60

0.60

0.60

0.70

Foreign Trade in IndiaYear Import Export Trade(def)

1950-51

1960-61

1970-71

1980-81

1990-91

1996-97

1997-98

1998-99

99-2000

2001-02

2003-04

608

1122

1634

12549

43198

138920

154176

178332

215236

230873

245199

606

642

1535

6711

32553

118817

130101

139753

159561

203571

209018

2

480

99

5838

10645

20103

24075

38579

55675

27302

36181

Causes Of Unfavourable Balance

Of Payments• Import Of Machinery.• Import Of War Equipments.• Price Disequilibrium.• Embassies.• Foreign Competition.• Payments Of Interest On

Foreign Debts.• Less Growth In Exports.

Measures To Disequilibrium In

Balance Of Payments• Promotion Of Exports.• Increase In Production.• Encouragement To Foreign

Investments.• Attraction Of Indian

Currency.• Restriction On Imports.• Import Substitution.

FOREIGN DIRECT INVESTMENT

FDI

• Foreign investment plays important role to accelerate the growth of any economy

• International capital flow gives boost to the various economic sector

TYPES OF FOREIGN INVESTMENT

• PORTFOLIO INVESTMENT

• FOREIGN DIRECT INVESTMENT

Wholly owned subsidiary

Joint Ventures

Acquisition

1. Wholly owned Subsidiary :Companies with long term and

substantial interest in the foreign market go for the wholly owned subsidiary. It provides the firm with complete control over production and quality

2. Joint Ventures:Joint venture is a common strategy

of entering the foreign market. Diverse types of joint overseas operations are :

• Sharing of ownership and management in an enterprise

• Licensing/Franchising agreementthrough intellectual property rights

PatentsTrade marksCopyrightsTechnical Know-HowMarketing Skills

• FRANCHISING : is a form of licensing in which a parent company ( The Franchiser) grants another independent entity( The Franchise ) the right to do business in a prescribed manner. The major form of franchising are as follows:

Manufacturer---retailer systemManufacturer---wholesalerService firm-----retailer system

FACTORS LEADS TO THE FOREIGN DIRECT

INVESTMENT• Rate of Interest• Speculation• Profitability• Costs of Production• Economic Conditions• Government policies (Remittances, profits,

taxation, Foreign exchange control, tariffs and monetary policy)

• Political Factors

ADVANTAGES OF FDI

• Increase the level income and employment• Increase the tax revenue of the Govt.• It facilitate transfer of technology to the host

country• It provide professionalism• It enables the country to increase exports and

reduces imports• Foreign investors encourages the domestic

suppliers• It increase competition and breaks monopoly• Improves the quality and the cost of inputs

incurred

DISADVANTAGES OF FDI

• Flow of investment into high profit area• Stage of development of the country• Multinational can evade the economic power • Unfavorable effect on balance of payments• Interference in the national politics• Engage in unfair and unethical trade

practices• Higher cost are involved to encourage FDI

TOP FIVE NATIONS IN INDIA FDI INFLOWS( IN US dollar)

• MAURITIUS 34.49 %

• USA 17.1 %

• JAPAN 7.33 %

• NETHERLANDS 7.16 %

• UK 6.54 %

FIVE TOP STATES ATTRACTING MAJOR SHARE

OF FDI

• MAHARASHTRA 14.8 %

• DELHI 12.2 %

• TAMIL NADU 9.05 %

• KARNATKA 7.63 %

• GUJRAT 4.97 %

INDUSTRIAL POLICY

BUSINESS ENVIRONMENT

INDUSTRIAL POLICY

• The concept of “ Industrial Policy” covers all those procedures, principles, policies, rules and regulations which control the industrial undertaking of a country and shape the pattern of Industrialization.

WHY THE NEED ARISES TO CONSTITUTE THE INDUSTRIAL

POLICY?

• After independence Indian Industrial production lower down

• Inflation Increases• Rehabilitation problem faced by Indian

due to partition• First phase of Industrialization started

by constituting the first Industrial policy resolution,1948

INDUSTRIAL POLICY RESOLUTION,1948, MAIN

FEATURES• The main emphasis of IP,1948 is on the mixed

economy system• The manufacture of ARMS & AMMUNITION, the

production and control of atomic energy and the ownership and management of RAILWAY TRANSPORT were to be the exclusive monopoly of the central Govt.

• In second category, The COAL, IRON & STEEL,AIRCRAFT MANUFACTURE, SHIP BUILDING, MANUFACTURE OF TELEPHONE, TELEGRAPHS AND WIRELESS APPARATUS were undertaking by the state.

Cntnd.

• In the third category the industries of such basic importance that the central govt. would feel it necessary to plan and regulate them.

• In the fourth category the industries are left for the private enterprise, individual as well as co-operative

Cntnd

IIIrd PHASE OF INDUSTRIALISATION

• The third phase of Industrialization begins with the amendment of IP, 1956, in 1977, when the janta Govt. came into power

• The main reasons for the change in policy are

Unemployment Increases

Rural-Urban Disparities Widened

Rate of Investment Come Down

Industrial Sickness IncreasesCntnd

MAIN FEATURES OF IP, 1977

• Development of Small Scale SectorCottage IndustriesTiny SectorsSmall Scale Industries

• Area of Large-Scale Sector has definedBasic industries essential for providing infrastructure as well as development of SSI like Cement, Steel, Oil refineries

Cntnd

• Capital goods industries for meeting the machinery requirements of basic industries

• High technology industries which required large scale production, and which were related to agricultural and Small Scale industries development like Fertilizers, Pesticides, Petrochemicals

NEW INDUSTRIAL POLICY, 1991

• In June 1991, Narsimha Rao Govt. took over charge and a wave of economic reforms and Liberalization come in the economy

• In this new atmosphere, the Govt. declared broad changes in IP on July 24, 1991

Cntnd

MAIN FEATURES OF IP, 1991

• To maintain the sustained growth in productivity

• To enhance gainful employment• To achieve optimum utilization of resources • To attain international competitiveness• To transform India into a major partner and

players in the global arena

POLICY MEASURES TO ATTAIN OBJECTIVES

• Liberalization of Industrial licensing policy• Introduction of Industrial Entrepreneur’s

Memorandum• Liberalization of location policy• Liberalized policy for small scale sectors• NRI’s are allowed to invest up to 100 %• Electronic Hardware technology park(EHTP) and

Software technology park(STP) to be build to enhance exports

• Liberalized FDI policy

INDUSTRIALISAITON PATTERN

• Industrialization is the hallmark of economic growth

• It is the process whereby industrial activity comes to play a dominant role in the economy of the country

• Industrialization involves replacement of small scale cottage industry supplying limited local markets by the large units

• Early years of the British Rule ( 1750-1850)

cntnd

EFFECT OF WORLD WAR I(1914) ON INDUSTRIALISATION

• Localization of Industries

For Sugarcane North Bihar & Eastern UP-1904&1936

For Cotton Mumbai followed by Ahmedabad, Kanpur, Chennai, Madurai

• Diversification of Industries

Cotton-----Steal--------Coal--------Jute

MAIN FEATURES OF INDUSTRIALISATION DURING BRITISH

RULE

• Import Substitution

• Increased disparity in the Indian economy

• Lack of Integration

• Minimal speed effect

• Organizational Imperfections

• Lack of Institutional finances

• Beginning of the modern factory system (1850-1947)

• First Cotton textile mill by a Parsi Businessman C.N.Davar started in 1884 in Bombay

• Development of Sugar,Paper and Steel Industries

• Development of the railways and other public works and rise of modern industry after 1850 made India a large number of Iron and Steel in India

• The first Iron Production started at Barkar Iron works in 1875

• This was followed by the setting up of the Tata Iron and Steel Company(TISCO) at Sakchi(Jamshedpur) in 1907

INDUSTRIALISATION DURING FIVE YEAR PLANS

1. FIRST FIVE YEAR PLAN(1951-56)• The first five year plan concentrated on the

development of agriculture. Industrial activity was mostly directed towards the development of

Infrastructure facilities like power and irrigation

Development of consumer goods industries such as Jute, plywood, cotton textile, sugar, edible oil,paints etc

Expansion of capital goods industries like iron and steel, aluminium, fertilizers, chemicals and heavy machine tools

2. Second Five Year Plan(1956-61)The second five year plan

accorded a very high priority to industrial development. The major objectives were:

Increased output in the basic and heavy industries such as Fertilizer,chemicals,iron and steel, aluminium and heavy engineering

Expansion of the capacity of cement,chemical,phosphatic fertilizer,bulk drugs

Modernization of traditional industries like sugar, cotton textile, jute,etc where the productivity had declined due to the age structure of these plants.

Maximum utilization of installed capacity, especially in the public utilities and infrastructural services.

During the second plan, investment in the PSU’s was Rs.870 crores, whereas investment in the private sector was Rs. 675 crores

3. Third five year plan(1961-66)The third five year plan was governed

by the overriding need to complete on-going projects in basic heavy industries. The objectives of this plan were :

Rapid completion of all projects.Increased emphasis on raw

materials and producer’s input.Diversification of capacity in the

capital and producer goods.The plan envisaged a total outlay

of Rs.3000 crores in the organized industries and mining of which 1700 cr. For PSU’s and 1300 cr in private sector.

4. Fourth Five Year Plan(1969-74)The objectives of the fourth five year

plan were :Maximum utilization of installed

capacity in industriesTo achieve self-reliance through

import substitution and export expansionTo curb monopolistic tendenciesTo channelise new investments in

strict accordance with the plan priorities.Total outlay on the industrial

sector was Rs.5300 crores.

5. Fifth Five Year Plan(1974-79)The objectives of the fifth plan were:

To achieve substantial increase in production capacity through technological expansion and improvement.

Creation of new capacities in accordance with the plan priorities and initiation of advance action in cases of long gestation projects.

To introduce a package of incentives to desire sectors of economy.

Total outlay was Rs.10200.

6. Sixth Five Year Plan(1980-85)The Plan had five fold strategy to

achieve rapid industrialization :To increase manufacturing

capacities of a variety of consumer goods and durables both in the public and private sectors.

To support industrial growth through the supply of intermediate and capital goods.

To attain technological excellence for encouraging exports of engineering goods.

Total outlay was Rs.20407 crores.

7. Seventh five year plan(1985-90)

The objectives of this plan were:

To integrate science and technology into the main stream of development

To create conditions for and to promote modernization, efficiency and competition in industry

To promote diversification of industrial production

To ensure balanced regional dev.

Total outlay was Rs.22460 crores

8. Eighth five year plan(1992-97)

The broader objective of the plan were:

To ensure efficiency and competitiveness was of the industrial sector through modernization and technology upgradation

Expansion and fuller utilization of installed capacities in power, transport, communication and water resources.

Greater private participation

9. Ninth five year plan(1997-2002)

The objectives of plan were :

Priority to agriculture and rural development

Ensuring environment sustainability of the development process through social mobilization and participation of people at all levels.

Strengthening efforts to build self-reliance.

GLOBALISATION• Globalization is the process by which a firms

activity become worldwide in scope• Doing, or planning to expand , business globally• Giving distinction between the domestic market &

foreign market• Locating the production and other physical

facilities of global business dynamics• Basic product development and production

planning on the global consideration• Global sourcing of factors of production• Global orientation of organizational structure and

management culture

FEATURES OF GLOBALISATION

1. NEW MARKETSGrowing global markets in services

New financial markets

Deregulation of antitrust laws of mergers

Global Consumer markets with global brands

Cntnd

2. NEW ACTORS

Multinational corporations

The World Trade Organization

International Criminal Court System

Regional Blocs

More policy Coordination groups-

G-77,G-7, OPEC, OECD

3. NEW RULES AND NORMS

Multilateral agreements in trade new agendas on environment and social conditions

Cntnd

New multilateral agreements for services property rights and communication

Conventions and agreements on the Global environment

4. NEW TOOLS OF COMMUNICATION

Internet and electronic communication

Cellular phones

Fax machines

Faster and cheaper transport

Computer aided design

FACTORS LEADS TO GLOBALISATION

• Human Resources• Wide Base• Growing Entrepreneurship• Growing Domestic Market• Niche markets• Expanding Markets• Economic Liberalization• Competition

OBSTACLES TO GLOBALISATION• Government Policy and Procedures• High cost of basic inputs• Poor Infrastructure• Obsolescence• Resistance to change• Poor Quality Image• Supply problems• Small Size• Lack of Experience• Limited R&D and marketing research• Growing Competition• Trade barriers

PUBLIC SECTOR ENTERPRISES REFORMS

PSE’s includes Government companies in the Central and State Sectors

These industries covers a wide spectrum of activities in basic and strategic industries like:Steal Heavy Eng. TourismCoal Chemicals FinancialMinerals Fertilizers TradingPetroleum Transp. Marketing

WHY THE PSE’S ? Public enterprises help in rapid economic

growth It creates the necessary infrastructure for

economic development To earn return on investment and generate

resources for development To promote redistribution of income and

wealth To generate employment opportunities To promote balanced regional development To assist the development of small-scale ind. To earn foreign exchange for the economy

Investment in the PSE,s during plansFive year Investment No.of PSE,s Plan (in crores)Ist plan 29 52nd 81 213rd 953 484rth 3902 855th 6237 1226th 18,225 1867th 42,811 2218th 1,18,492 2379th 2,01,500 2381999 2,73,700 2352002 3,24,614 2402003 3,33,475 240

NEED FOR PUBLIC SECTOR ENTERPRISES REFORMS

Lack of Competition Over employment Long Gestation period Over capitalization Inefficient Management Absence of Appropriate pricing policy Social Objectives Lack of Efficient and Trained Staff

HIGHLIGHTS OF PUBLIC ENTERPRISES SURVEY (2002-2003)

Gross turnover of all 240 PSU’s during 2002-03 has been Rs.544390 crore against Rs.478732 crore during 2001-02

Net profit of all 240 PSU’s during 2002-03 has been Rs. 32141 crore against Rs. 25978 in 2001-02

During 2002-03 profit earning PSU’s earned net profit of Rs. 43085 crore while loss making PSU gave net loss of Rs. 10944 crore. cntnd

PSU earning highest turnover is Indian Oil Corporation with Rs.123628 crore. Second, third & fourth places gone to HPCL, BPCL and ONGC respectively.

PSU earning highest net profit is ONGC with Rs. 10529 crore.

PSU showing highest deficit is FCI with Rs.1166 crore. Hindustan Fertilizer stand second with Rs.1058 crore deficit during 2002-03

IDENTIFICATION OF PUBLIC SECTOR ENTERPRISE AS NINE GEMS

SAIL IOCL VSNL HPCL BPCL ONGC BHEL NTPC IPCL GAIL MTNL

Two of these namely IPCL and VSNL have since been privatized and as on July 2003 there are only 9 NAVRATNA PSEs. The profitability of these 9 ratna was Rs.15508 crore during 2001-02

Besides granting the status of Gems of the country, the Government also announced on October 3, 1997 to grant the status of Mini-Gems to 97 selected public sector profit earning enterprises.

DISINVESTMENT PROGRAMMES IN PSE’S The disinvestment process, which began in

1991-92 with the sale of minority stake in some public sector undertakings

The new policy in this regard is that the government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning

The Govt. is committed to devolve full managerial and commercial autonomy to successful, profit making companies operating in a competitive environment

Generally, profit making companies will not be privatized

As per the National Common Minimum Programme (NCMP) the Government retain existing ‘Navratna’ Companies in the Public Sector

Loss making companies either sold off or closed, after all workers get their legitimate dues and compensation

The Government has approved the constitution of a National Investment Fund (NIF) comprising of proceeds from disinvestment of public sector units

The Govt. has also given in principle approval for listing of currently unlisted profitable PSEs each with a net worth in excess of Rs.200 crore, through an initial public offer (IPO)

OBJECTIVES OF DISINVESTMENT Modernization and up gradation of

PSEs Creation of new assets Generation of Employment Retiring of Public Debt To ensure that disinvestments does

not result in alienation of national assets, which through the process of disinvestments, remain where they are cntnd

Setting up a Disinvestment Proceeds Fund

Formulating the guidelines for the disinvestments of natural asset companies

Preparing a paper on the feasibility and modalities of setting up of Asset Management company to hold, manage and dispose the residual holding of the government in the companies in which government equity has been disinvested to a strategic partner

THE WAVE OF ECONOMIC REFORM The wave of economic reforms was born out of

the crisis in the economy. Which climaxed in 1991.

The main reasons which leads to economic reforms are :

Increasing Fiscal deficitInternal debtOverall agricultural promotion, food grain product and industrial production showed negative growth.

cntnd

Foreign Exchange reserves fell

Inflation rate increases to 14%

Confidence of International financial institutions was badly shaken

Due to Gulf war, the prices of oil rises

TYPES OF ECONOMIC REFORMSTYPES OF ECONOMIC REFORMS

LIBERALISATION

PRIVATISATION

GLOBALISATION

LIBERALISATION

Liberalization of the economy means to free it from direct or physical controls imposed by the Government.

The various types of controls are as follows:Industrial licensing system

Price control or financial control on goodsImport licenseForeign exchange controlRestrictions on investment by big business houses

MEASURES FOR LIBERALISATION Abolition of Industrial Licensing and Registration Concession from monopolies Act Freedom for expansion and production to

Industries Increase in investment limit of SSI Freedom to import capital goods Freedom to import technology Free determination of Interest rate

ADVANTAGES OF LIBERALISATION

Improvements in Industries & service sector Free flow of FDI & MNCs More availability of imported goods at cheaper

rates Quality education and careers to people Improvement of technology in the field of SSI &

LSI Improvement in means of communication and

Transport.

DISADVANTAGES OF LIBERALISAION

Common man fails to enjoy the imported goods as they lack purchasing power

Danger in political independence Agricultural dominated countries Underdeveloped countries fail to increase

their exports in comparison to imports

PRIVATISATION

Privatization of Industries means opening the gates of Public Sector to Private sector

The term privatization is used in two sense Transferring the ownership of public sector to

private sector Management and controlling of public sector

by private sector without transferring the ownership

CAUSES OF PRIVATISATION

Disintegration of Socialist Economies Inefficient public sector Uneconomic pricing policy Burden on the Government Inefficient management control

OBJECTIVE OF PRIVATISATION

To increase the efficiency and competitive power. To reduce deficit financing and public deficit To strengthen industrial management To earn more and more foreign currency To make optimum use of economic resources To achieve rapid industrial development

MEASURES FOR PRIVATISATION

Privatization covers three sets of measures

1. OWNERSHIP MEASURES

Total denationalization

Joint Venture

Liquidation

Management buy-out

Cntnd

2. ORGANISATIONAL MEASURESA holding company structureLeasingRestructuring( Financial, Basic )

3. OPERATIONAL MEASURESGrant of autonomy to PE s in decision makingProvision of incentives to the employeesFreedom to acquire certain inputs from the marketDevelopment of proper investment

criteria

GLOBALISATION Globalization is the process by which a firms activity

become worldwide in scope Doing, or planning to expand , business globally Giving distinction between the domestic market &

foreign market Locating the production and other physical facilities of

global business dynamics Basing product development and production planning

on the global consideration Global sourcing of factors of production Global orientation of organizational structure and

management culture

FEATURES OF GLOBALISATION1. NEW MARKETS

Growing global markets in services

New financial markets

Deregulation of antitrust laws of mergers

Global Consumer markets with global brands

Cntnd

2. NEW ACTORS

Multinational corporations

The World Trade Organization

International Criminal Court System

Regional Blocs

More policy Coordination groups-

G-77,G-7, OPEC, OECD

3. NEW RULES AND NORMS

Multilateral agreements in trade new agendas on environment and social conditions

Cntnd

New multilateral agreements for services property rights and communication

Conventions and agreements on the Global environment

4. NEW TOOLS OF COMMUNICATION

Internet and electronic communication

Cellular phones

Fax machines

Faster and cheaper transport

Computer aided design

FACTORS LEADS TO GLOBALISATION Human Resources Wide Base Growing Entrepreneurship Growing Domestic Market Niche markets Expanding Markets Economic Liberalization Competition

OBSTACLES TO GLOBALISATION Government Policy and Procedures High cost of basic inputs Poor Infrastructure Obsolescence Resistance to change Poor Quality Image Supply problems Small Size Lack of Experience Limited R&D and marketing research Growing Competition Trade barriers

FINANCIAL ENVIRONMENT

FINANCIAL ENVIRONMENT

Financial environment consists of decision taken by the companies acc.to the Monetary Policy, Fiscal Policy, & Financial Market Structure.

Monetary and Fiscal policy are important determinants of business prospects and investment decision

These policies encourage investment and production in certain priority sectors and discourages them in non-priority sector.

The Monetary, fiscal and financial market structure influence the aggregate supply and demand, level of employment etc.

MONETARY POLICY Monetary policy refers to the use of

instruments within the control of the RBI to influence the level of aggregate demand for goods and services

Monetary policy is based on money supply and money stock

Measures of money stock are :M1 = Currency with the public +

Deposits with banksM2 = M1+ Post office savings bank

depositsM3 = M2+ Fixed deposits with

banksM4 = M3+ Total post of deposits.

HOW THE RBI CONTRACT & CREATE THE CREDIT

Different instruments have been used by the RBI to contract and create the credit in the market

1. Bank Rate : It is the minimum rate at which the RBI provides financial accomodation to the commercial banks

2. Open Market Operations : Purchase and sale of foreign exchange, Gold and company shares

3. Cash Reserve Ratio : The commercial banks has to keep their cash with RBI

4. Statutory Liquidity Ratio : Maintaining a minimum amount of liquid assets in terms of cash

SELECTIVE CREDIT CONTROL METHODS OR QUALITATIVE METHODS

Change in margin requirement of loans

Rationing of credit Moral persuasion Credit Authorization Scheme Credit Monetary arrangements Loan system for delivery of bank

credit

FISCAL POLICY

Fiscal policy is related to income and expenditure of Govt. It refers to budgetary policy of Govt.

Fiscal policy means the use of Public finances or expenditure, taxes, borrowings and its administration to further our national income

OBJECTIVES OF FISCAL POLICY

Mobility of Resources Promotion of saving and investment Removal of poverty and

unemployment Growth of Public Sector Economic stability To achieve favourable BoP To support private sectors

TECHNIQUES OF FISCAL POLICY

1. Taxation policy of Govt of IndiaMobilization of ResourcesCapital FormationEquality of Income and Wealth

2. Public Expenditure PolicyDevelopment of Public EnterprisesInfrastructure DevelopmentSocial Welfare

3. Public Debt PolicyInternal DebtExternal Debt

DRAWBACKS OF FISCAL POLICY

Instability Defective Tax Structure Inequality of Income Failure Public Sectors

SUGGESTIONS FOR THE REFORM OF FISCAL POLICY

Reduction in Non-Development Expenditure

Agricultural Taxation Control over Black Money More Direct Taxes Reduction in Tax Evasion