Business Environment Class Notes by K K BHARTIY

Business Environment class notes By K K BHARTIY
Business Environment
The combination of internal and external factors that influence a company's operating situation. The
business environment can include factors such as: clients and suppliers; its competition and owners
; improvements in technology; laws and government activities; and market, social and economic
trends.
Business environment is of two types-

(i) Micro environment or the internal environment
(ii) Macro environment or the external environment
Micro environment / Internal Environment of Business
Micro environment comprises of the factors in the immediate environment of the company that
affect the performance of the company. In includes the suppliers, competitors, Marketing
intermediaries, customers, pressure groups and the general public. Supplier form an important
factor of the micro environment of business as the importance of reliable sources of supply are
obvious. Supplier includes the financial labor input. Stock holders, banks and other similar
organizations that supply money to the organization are also termed as suppliers. Managers always
strive to ensure a study flow of inputs at the lowest price. Customers are also an important factor in
the internal environment of business. The customers or the clients absorb the output of an
organization and a business exists to meet the demands of the customers. Customers could be
individuals, industries, government and other institutions. Labor force is also an important part of
the internal environment of business. Other than these the business associates, competitors,
regulatory agencies and the marketing intermediaries are also a part of the micro business
environment.
Macro environment / External environment of Business:
The forces and institutions outside of the organization that can potentially affect the performance of
the organization come under the external environment of Business. The macro environment of
business consist of the economic, demographic, natural, cultural and political forces. The external
environment of business is often categorized into the economic environment, political and
government environment, socio cultural environment and the international environment.
Approaches and Techniques Used for Environmental Scanning
The external environment in which an organization exists consists of a bewildering variety of
factors. These factors are events, trends, issues and expectations of different interested groups.
Events are important and specific occurrences taking place in different environmental sectors.
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Trends are the general tendencies or the courses of action along which events take place. Issues are
the current concerns that arise in response to events and trends. Expectations are the demands made
by interested groups in the light of their concern for issues.
By monitoring the environment through environmental scanning, an organization can consider the
impact of the different eve trends, issues and expectations on its strategic management process.
Similarly any organization-facing environment as a complex the scanning is absolutely essential, and
strategists have to deal cautiously with process environmental scanning.
The effort has to be to deal with it is such a manner that unnecessary time and effort is not
expended, while important facts are not ignored. For this to take place, it is important to devise an
approach or a combination of different approaches, to environmental scanning.
Approaches to Environmental Scanning:
The experts have suggested three approaches, which could be adopted for, sort out information for
environmental scanning.
1. Systematic Approach:
Under this approach, information for environmental scanning is collected systematically.
Information related to markets and customers, changes in legislation and regulations that have a
direct impact on an organization’s activities, government policy statements pertaining the
organization’s business and industry, etc, could be collected continuous updating such information
is necessary not only for strategic management but also for operational activities.
2. Ad hoc Approach:
Using this approach, an organization may conduct special surveys and studies to deal with specific
environmental issues from time to time. Such studies may be conducted, for instance, when
organization has to undertake special projects, evaluate existing strategy or devise new strategies.
Changes and unforeseen developments may be investigated with regard to their impact on the
organization.
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3. Processed-form Approach:
For adopting this approach, the organization uses information in a processed form available from
different sources both inside and outside the organization. When an organization uses information
supplied by government agencies or private institutions, it uses secondary sources of data and the
information is available in processed form.
Sources of Information:
A company can obtain information from different sources, but it should be ensured that the
information is correct. The correct source should be tapped for specific information for more
accuracy. Information received form secondary sources may sometimes even misguide strategy
managers.
Hence it is important that information should be verified for correctness before it is processed and
decisions are taken based on it.
The various sources from where information can be gathered include:
1. An internal document viz, files, records, management information system, employees, standards,
drawings, charts, etc.
2. Trade directories, journals, magazines, newspapers, books, newsletters, government publications,
annual reports of companies, case studies, etc.
3. Internet, television, radio news etc.
4. External agencies like customers, suppliers, inspection agencies, marketing intermediaries,
dealers, advertisers, associations, unions, government agencies, share holders, competitors, etc.
5. Market research reports, consultants, educational institutions, testing laboratories etc.
6. Spying considered as a powerful way of extracting information from other companies.
It is found that chronological order of information is also quite important for strategy managers.
Usually information received from government agencies is quite complex since processing takes
more time. The information received from competitors is quite expensive but it is usually fresh and
is quite useful.
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Techniques Used for Environmental Scanning:
The techniques used for environmental scanning may be either very systematic to intuitive. Selection
of a technique depends on data required, source of data, timelines of information, relevance, cost of
information, quantity, quality and availability of information, etc.
Some of the methods widely used can be categorized as follows: Scenario Writing, Simulation,
Single Variable Extrapolation, Morphological Analysis, Cross Impact Analysis, Field Force Analysis,
Game Theory, etc. The techniques are either statistical or mathematical in nature. However,
judgmental and institutive techniques are also widely used.
The entire process consists of following steps:
1. Major events and trends in environment are studied.
2. A cause and effect relationship established with regard to events and trends for long and short
term. This is done through brain storming in a group.
3. Diagrams showing interrelationships amongst various factors are prepared and an attempt is
made to quantify the results.
4. The study is reviewed by a group of experts who deliberate on each aspect and on the possible
strategies that may be decided.

PESTLE analysis consists of components that influence the business environmentand each letter in
the acronym denotes a set of factors that directly or indirectly affect every industry. The letters
denote the following things:
P for Political factors: These factors take into account the political situation of a country and the
world in relation to the country. For example, what sort of government leadership is affecting what
decisions of a country? All the policies, all the taxes laws and every tariff that a government levies
over a trade falls under this category of factors.
E for Economic factors: Economic factors include all the determinants of an economy and its
condition. The inflation rate, the interest rates, the monetary or fiscal policies, the foreign exchange
rates that affect imports and exports, all these determine the direction in which an economy might
move, therefore businesses analyze this factor based on their environment so as to build strategies
that fall in line with all the changes that are about to occur.
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S for Social factors: Every country is different and every country has a unique mindset. These
mindsets cast an impact on the businesses and the sales of their products and services;
therefore PESTLE analysis includes these factors as well. The cultural implications, the gender and
connected demographics, the social lifestyles, the domestic structures; all of these are studied by
companies to understand the market and the consumer better.
T for Technological factors: Technology greatly influence a business, therefore PESTLE analysis is
conducted upon these factors too. Technology changes every minute and therefore companies need
to stay connected along the way and integrate as and when needed. Also, these factors are analyzed
to understand how the consumers react to technological trends and how they utilize them for their
benefit.
L for Legal factors: Legislative changes occur from time to time and many of them affect the
business environment. For example, if a regulatory body would set up a regulation for the
industries, then that law would impact all the industries and business that strife in that economy,
therefore businesses also analyze the legal developments happening in their environment.
E for Environmental factors: The location of countries influence on the trades that businesses do.
Adding to that, many climatic changes alter the trade of industries and the way consumers react
towards a certain offering that is launched in the market. The environmental factors include
geographical location, the climate, weather and other such factors that are not just limited to climatic
conditions. These in particular affect the agri-businesses, farming sectors etc.
On July 24, 1991, India instituted a series of ongoing economic reforms, which is now known as the
Economic Liberalization of 1991.
Economic liberalization, in general, refers to a government applying a series of deregulation

measures, reducing the amount of government control, allowing foreign capital in, allowing greater
privatization, lowering taxes (and other economic barriers), etc to allow room for private players to
enter its market. Hence the word "liberalization".
In countries like India and China, the term is used mainly in context of opening up the economy to
foreign investments, capital, service providers, etc and allow room for international players to enter
its economy.
Pre-liberalization India (Nehru's socialist growth rate): The Indian economy was in a deep hole by
1985. We suffered a Balance of Payment (payments for export and import of goods, services and
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capital) crisis. We were unable to pay off essential imports, ran a high deficit, borrowed from
external sources to finance those deficits and inflation was on the rise. What had caused this to be?
(A picture showing India's growth rate compared to countries with similar independence time
lines):
Since her independence, India had only been able to maintain a growth rate of 3-3.5%; Our capital
growth rate was even worse, at around 1.3%. There were a lot of reasons for this, starting with the
financial burden of the partition. Since the partition, India drove a centralized economic planning
model (inspired by the Soviet Union), in place of distributing out controls.
A natural outcome of this was to give rise to extensive bureaucracy, red tape, unnecessary
regulations and trade barriers. India's protectionist policies, Nehru's five year plans, several failed
reform policies like Indira Gandhi's "Garibi Hatao" program , License Raj driven economic planning
, and a failure to open up our markets to foreign investments, all contributed to our economy
stagnating at dismal growth rates.
Although these socialist reform measures were instigated to alleviate poverty, the opposite became
were true. India faced food shortages and there was mass starvation in states like Bihar. Farmers in
India struggled to meet her agricultural production needs and industrialists suffered from the death-
grip of License Raj. The state intervened with industrialization, businesses, labour and financial
markets, leading to a *huge* public sector.
India also relied on foreign import for several essential imports, like oil. The "Oil Shock" of 1979,
combined with agricultural subsidies and a consumption based strategy pushed the fiscal deficit up
even higher. In addition to this, there were several other economic drains like the Indo-Pakistani
wars (1965, 1971), the Sino-Indian war (1962), etc, which not only drove up our defence spending,
but also alienated India from the foreign aid of certain countries. The current account deficit
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averaged 2.2 % of GDP from 1985-1990.
India dealt with this in the worst possible way - borrow from external sources to finance the deficit.
From 1980-1985, half of our external financing needs were met with outside assistance. External debt
grew to as much as 38.7% of the GDP in 1991-1992. Finally, we reached a Balance of Payments crisis
and Prime Minister Chandra Sekhar pawned gold (airlifted to London), as collateral for IMF
bailouts.
Liberalization of India in 1991:
After the assassination of Rajeev Gandhi in 1991, India (still persisting with a Fixed Exchange rate)
delved deeper into the crisis, when massive investor confidence decline caused India to be on the
verge of economic bankruptcy.
With just three weeks left to completely depleting the last loan from IMF, P V Narasimha Rao took
over as India's Prime Minister and announced India's liberalization. The goal of his visionary policy
was to remove unnecessary bureaucratic controls, take careful measures to integrate India with the
world's economy, remove restrictions on foreign investments and crack down on public sector
enterprises that yielded very low returns.
Rao's ability to steer tough reform measures through the Parliament enabled India to move quickly
through the financial crisis. Although people give credit to Manmohan Singh for India's economic
reforms, it is actually Rao's political statesmanship that helped bring about massive reform.
The following steps were taken:
- In a brilliant political move, he instituted Dr Manmohan Singh (an economist rather than a
politician) as Finance Minister, and began India's Economic Reform (New India) by first devaluing
the Rupee
- Industrial de-licensing followed shortly afterward. Industrialists could finally breathe free of the
License Raj. Narasimha Rao announced the de-licensing on the same day that Manmohan Singh
presented his budget. Before anyone knew it, industrial licensing was abolished
- The MRTP Act (that protected businesses from monopolies) was reformed and India could finally
be on the path to producing competitive and productive industries
- Gradual reduction of import duties followed, allowing foreign investments to slowly start flowing
in. More clearance was given to capital goods
- Slowly, taxes were lowered (income and corporate taxes) and Foreign Technology Agreements
started getting signed
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- In cities where the population was less than a million, they didn't even need Government permits
for industries
- The threats of massive layoffs were avoided by legislating judiciously and exercising regulations
carefully
Role of Narasimha Rao and Manmohan Singh: The result of all this was that Licensing slowly
became the exception rather than the rule. Every industry (except two) was opened to private
sectors. Foreign technology was accepted liberally and foreign investment was allowed in a large
number of industries. The monopoly laws were revised and there was no more restrictions on
companies wanting to grow big.
Narasimha Rao and Manmohan Singh, basically braked with careful deregulation and accelerated
by reducing bottlenecks.
They had to continually assure every worker striking (from the banking sector to farmers, from
opposition Yatras led by the BJP to the trade unions) that there wouldn't be layoffs and that workers
would be protected. These reforms were both revolutionary and incremental.
The result of this was that the Indian economy grew to 7.5% of GDP (from USD 130 million in 1992,
to USD 5 billion, in 1996).
Cities started to grow and became centers of post-liberalization industrialization. Atal Bihari
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Vajpayee continued with Manmohan Singh's economic reforms and India welcomed IT and BPOs.
Manmohan Singh's government in 2004, again continued with market liberalization and larger role
for enterprises.
Capitalism, Socialism, Communism & Mixed economy
Capitalism is an economic and political system in which individuals own economic resources and
industry, whereas under socialism, the state plans and produces goods, and either owns or
redistributes resources among its citizens. In a capitalist economy, the political system emphasizes
competition for resources as a means of increasing capital (or wealth) and developing personal
success. In a socialist economy, the emphasis is on distributing wealth so that individual needs are
met with collective capital. There are many different versions of both capitalism and socialism, and
most modern societies are a blend of the two.
Capitalism
Individualism and competition are fundamental to capitalism. In a purely capitalist society,

individuals are responsible for protecting their own interests in the marketplace and within their
communities. The potential success of each individual is also valued. People are encouraged to
direct their talents in a way that benefits themselves, such as by starting a business or entering a
highly profitable profession.
Capitalism relies on a system of checks and balances brought about through competition.
Individuals who own capital can compete with others to provide goods and services to the
marketplace; those who produce and effectively market goods that are in demand and at a price that
people want to pay are likely to succeed. Similarly, businesses that treat their workers well and pay
good wages are most likely to attract good employees, which is more likely to mean success for the
business. Those who offer inferior service or fail to attract good workers will eventually fail and
leave the marketplace.
Low taxes are generally a goal of capitalistic governments. In addition, government funding for
public services, like social service benefits, is generally kept to a minimum. Health care systems may
also be primarily funded by the private sector, requiring citizens to purchase their own health
insurance or rely on an employer to provide insurance.
Types of Capitalism
When discussed theoretically, capitalism has several unique defining characteristics. In practice,
however, nuance has developed and as a result, it can be separated into a variety of types:
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• Free-market capitalism: This type of capitalism leaves all aspects of a society to be governed by the
market, with little or no intervention from the government. Here, the role of the government is
limited to protect the lives and property of the citizens.
• Corporate capitalism: In this type of economy, large, bureaucratic corporations dominate the
economy. This allows for long-term planning and efficiency, but less innovation. Large corporations
may also have an equally large influence over the government, leading to legislation designed to
protect the interests of those companies.
• Social-democratic or social market economy: This economic system is an attempt to balance the
benefits of a free-market system with a strong social support structure. While most industries are
privately owned, the government is more heavily involved in making sure that competition is fair,
unemployment is low, and social welfare is provided for those who need it.
• State-lead capitalism: In this economy, the means of production are owned by the government, but
run in a “capitalistic” way — meaning for profit. The term is also sometimes used to describe an
economy in which the government steps in to protect the interests of businesses.
Socialism
Socialism relies on governmental planning, rather than the marketplace, to distribute resources.
While it is usually possible for individuals living in a socialist country to own businesses or offer
professional services directly to consumers, they are usually taxed heavily on their profits. Public
services are typically numerous and funded by taxpayer money. Citizens are expected to work, but
the government provides services such as education, healthcare, and public transportation for free
or at very low cost. Socialist countries also often have extensive social welfare systems to aid the
unemployed, disabled, and elderly.
In addition to paying higher taxes, business owners in socialist countries are often expected to
comply with very strict labor laws designed to protect workers against exploitation. These laws
include restrictions on work hours and mandate regular vacations, sick time, and leave for
numerous reasons, such as the birth or adoption of a baby. Employers are typically not expected to
provide health insurance coverage, however, as medical care is usually provided through national
health care systems.
Types of Socialism
There are a wide range of socialist political philosophies, including Marxism and reformism.
Marxism, originating from the works of Karl Marx and Friedrich Engels, argues that socialism is the
mid-point between capitalism and communism, with the means of production controlled by the
working class but with the state guiding the economy on the workers’ behalf. Reformism, sometimes
called social democracy, is focused on changing capitalist societies from within, through the political
process and government reform.
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In addition, there are a number of different economic theories of socialism:
• Market socialism involves running public or cooperative companies within the free market. Rather
than depending on taxes, the government takes all profits and redistributes them by paying
employees, funding public institutions, and offering social services.
• In a planned economy, the government owns the means of production, and plans out what will be
produced, how much will be made, and the price it will sell for.
• Self-managed economies depend on the collective actions of specific groups to make decisions. For
example, a self-managed company may be owned by its workers, who collectively decide the
direction of the business.
• State socialism or state-directed economies have industries that are owned cooperatively, but
which operate with some planning or direction from the government.
Communism
While it is a different economic system, many people confuse socialism with communism. Under
communism, everything is owned communally, or by everyone. Ideally, there is no government or
class division, and no money; each person contributes to society as best as he or she is able, and
takes from that society only what he or she needs. The decisions made by that society are supposed
to benefit the people as a whole, not any individual.
Historically, countries that have been called “communist” actually practiced some form of socialism,
usually run by one political party. The state typically owned all forms of production and practiced
very strict central planning — meaning that the government decided how all resources were to be
used. Many critics argue that most governments that are called “communist” are really very
different from the word’s true meaning.
Mixed Economies
Very few societies are purely capitalist or purely socialist, although most are more strongly one than
the other. The United States, for example, is considered to be a capitalist society, but the Social
Security system, which provides support for people who are unable to work, is socialistic. Sweden is
considered by some people to be a socialist country because of its high tax rate and large welfare
system, but the majority of industry in the nation is in private hands, which is capitalistic.
Critiques
The criticisms of both capitalism and socialism largely stem from different opinions about how
economic forces should shape governments and societies. Some critics believe that the human spirit
needs competition to fully develop, while others emphasize the need for people to cooperate with
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each other, ensuring that the needs of all citizens are met. Within each philosophy, there are
additional critics who disagree about how each economic or political system would work best.
Critics of capitalism note that the marketplace can be unstable, presenting real dangers to the well-
being of those who are not wealthy or who are otherwise vulnerable. Giving business owners free
rein to set the terms of employment and to keep most of the profits from their enterprises to
themselves, can establish a wealthy class which, in turn, can suppress the freedom of others. These
critics also note that a purely capitalist society does not address the needs of those who are truly
unable to compete either as business owners or as laborers. Without some social support systems,
such as Social Security or welfare, those who cannot work or earn enough money to survive must
lead a precarious existence, and may be forced to rely on family or private charity for support.
Those who criticize socialism observe that heavy taxation to provide equal social services for all
citizens can discourage business owners from innovation and excellence, given that the owner won’t
personally profit from his or her efforts. In addition, when the government plans the economy, some
critics question whether officials and their policy advisors really understand what is best for a
country’s citizens; such socialist governments may give their citizen’s no choice in deciding what
kinds of services they really want or need. In addition, capitalist critiques of generous socialist social
welfare programs note that these programs may discourage people from working, as people may be
able to live reasonably well on government benefits rather than having to hold a job. As a result,
families may slip into generational poverty, as the children may grow up feeling entitled to
government support.
Democracy, Dictatorship & Princely states

Democracy is "a system of government in which all the people of a state or polity ... are involved in
making decisions about its affairs, typically by voting to elect representatives to a parliament or
similar assembly."Democracy is further defined as (a :) "Government by the people; especially : rule
of the majority (b:) " a government in which the supreme power is vested in the people and
exercised by them directly or indirectly through a system of representation usually involving
periodically held free elections.
Dictatorship is a form of government where political authority is monopolized by a single person or

political entity, and exercised through various mechanisms to ensure the entity's power remains
strong.
Monarchy is a form of government which was very common during ancient and medieval times.
Supreme power is bestowed on an individual and it can be absolute or nominal. The ‘head of
state’ of a land with this kind of government often holds the title for life or until abdication. The
leader, who is called a monarch, is wholly set apart from all other members of the state. The
monarch typically makes all the law and decisions (legislative, judicial, and executive).
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Liberalization, Privatization and Globalization

The economy of India had undergone significant policy shifts in the beginning of the 1990s. This
new model of economic reforms is commonly known as the LPG or Liberalisation, Privatisation and
Globalisation model. The primary objective of this model was to make the economy of India the
fastest developing economy in the globe with capabilities that help it match up with the biggest
economies of the world.
The chain of reforms that took place with regards to business, manufacturing, and financial services
industries targeted at lifting the economy of the country to a more proficient level. These economic
reforms had influenced the overall economic growth of the country in a significant manner.
Liberalisation
Liberalisation refers to the slackening of government regulations. The economic liberalisation in
India denotes the continuing financial reforms which began since July 24, 1991.
Privatisation and Globalisation

Privatisation refers to the participation of private entities in businesses and services and transfer of
ownership from the public sector (or government) to the private sector as well. Globalisation stands
for the consolidation of the various economies of the world.
LPG and the Economic Reform Policy of India

Following its freedom on August 15, 1947, the Republic of India stuck to socialistic economic
strategies. In the 1980s, Rajiv Gandhi, the then Prime Minister of India, started a number of
economic restructuring measures. In 1991, the country experienced a balance of payments dilemma
following the Gulf War and the downfall of the erstwhile Soviet Union. The country had to make a
deposit of 47 tons of gold to the Bank of England and 20 tons to the Union Bank of Switzerland. This
was necessary under a recovery pact with the IMF or International Monetary Fund. Furthermore, the
International Monetary Fund necessitated India to assume a sequence of systematic economic
reorganisations. Consequently, the then Prime Minister of the country, P V Narasimha Rao initiated
groundbreaking economic reforms. However, the Committee formed by Narasimha Rao did not put
into operation a number of reforms which the International Monetary Fund looked for.
Dr Manmohan Singh, the present Prime Minister of India, was then the Finance Minister of the
Government of India. He assisted. Narasimha Rao and played a key role in implementing these
reform policies.
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Narasimha Rao Committee's Recommendations

The recommendations of the Narasimha Rao Committee were as follows:
Bringing in the Security Regulations (Modified) and the SEBI Act of 1992 which rendered the
legitimate power to the Securities Exchange Board of India to record and control all the mediators in
the capital market.
Doing away with the Controller of Capital matters in 1992 that determined the rates and number of
stocks that companies were supposed to issue in the market.
Launching of the National Stock Exchange in 1994 in the form of a computerised share buying and
selling system which acted as a tool to influence the restructuring of the other stock exchanges in the
country. By the year 1996, the National Stock Exchange surfaced as the biggest stock exchange in
India.
In 1992, the equity markets of the country were made available for investment through overseas
corporate investors. The companies were allowed to raise funds from overseas markets through
issuance of GDRs or Global Depository Receipts.
Promoting FDI (Foreign Direct Investment) by means of raising the highest cap on the contribution
of international capital in business ventures or partnerships to 51 per cent from 40 per cent. In high
priority industries, 100 per cent international equity was allowed.
Cutting down duties from a mean level of 85 per cent to 25 per cent, and withdrawing quantitative
regulations. The rupee or the official Indian currency was turned into an exchangeable currency on
trading account.
Reorganisation of the methods for sanction of FDI in 35 sectors. The boundaries for international
investment and involvement were demarcated.
The outcome of these reorganisations can be estimated by the fact that the overall amount of
overseas investment (comprising portfolio investment, FDI, and investment collected from overseas
equity capital markets ) rose to $5.3 billion in 1995-1996 in the country) from a microscopic US $132
million in 1991-1992. Narasimha Rao started industrial guideline changes with the production zones.
He did away with the License Raj, leaving just 18 sectors which required licensing. Control on
industries was moderated.
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Highlights of the LPG Policy

Given below are the salient highlights of the Liberalisation, Privatisation and Globalisation Policy in
India:
Foreign Technology Agreements

Foreign Investment
MRTP Act, 1969 (Amended)
Industrial Licensing
Deregulation
Beginning of privatisation
Opportunities for overseas trade
Steps to regulate inflation
Tax reforms
Abolition of License -Permit Raj
Globalization:
The term globalization can be used in different contexts. The general usages of the term
Globalization can be as follows:
i. Interactions and interdependence among countries.
ii. Integration of world economy.
iii. Deterritorisation.
Globalization
By synthesising all the above views Globalization can be broadly defined as follows:
It refers to a process whereby there are social, cultural, technological exchanges across the border.
The term Globalization was first coined in 1980s. But even before this there were interactions among
nations. But in the modern days Globalization has touched all spheres of life such as economy,
education. Technology, cultural phenomenon, social aspects etc. The term “global village” is also
frequently used to highlight the significance of globalization. This term signifies that revolution in
electronic communication would unite the world.
Undoubtedly, it can be accepted that globalization is not only the present trend but also future
world order.
Effect of Globalization on India:
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Globalization has its impact on India which is a developing country. The impact of globalization can
be analysed as follows:
1. Access to Technology:
Globalization has drastically, improved the access to technology. Internet facility has enabled India
to gain access to knowledge and services from around the world. Use of Mobile telephone has
revolution used communication with other countries.
2. Growth of international trade:
Tariff barriers have been removed which has resulted in the growth of trade among nations. Global
trade has been facilitated by GATT, WTO etc.
3. Increase in production:
Globalization has resulted in increase in the production of a variety of goods. MNCs have
established manufacturing plants all over the world.
4. Employment opportunities:
Establishment of MNCs have resulted in the increase of employment opportunities.
5. Free flow of foreign capital:
Globalization has encouraged free flow of capital which has improved the economy of developing
countries to some extent. It has increased the capital formation.
Negative effect of globalization:
Globalization is not free from negative effects. They can be summed up as follows:
1. Inequalities within countries:
Globalisation has increased inequalities among the countries. Some of the policies of Globalization
(liberalisation, WTO policies etc.) are more beneficial to developed countries. The countries which
have adopted the free trade agenda have become highly successful. E.g.: China is a classic example
of success of globalization. But a country like India is not able to overcome the problem.
2. Financial Instability:
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As a consequence of globalization there is free flow of foreign capital poured into developing
countries. But the economy is subject to constant fluctuations. On account of variations in the flow of
foreign capital.
3. Impact on workers:
Globalization has opened up employment opportunities. But there is no job security for employees.
The nature of work has created new pressures on workers. Workers are not permitted to organise
trade unions.
4. Impact on farmers:
Indian farmers are facing a lot of threat from global markets. They are facing a serious competition
from powerful agricultural industries quite often cheaply produced agro products in developed
countries are being dumped into India.
5. Impact on Environment:
Globalization has led to 50% rise in the volume of world trade. Mass movement of goods across the
world has resulted in gas emission. Some of the projects financed by World Bank are potentially
devastating to ecological balance. E.g.: Extensive import or export of meat.
6. Domination by MNCs:
MNCs are the driving force behind globalization. They are in a position to dictate powers.
Multinational companies are emerging as growing corporate power. They are exploiting the cheap
labour and natural resources of the host countries.
7. Threat to national sovereignty:
Globalizations results in shift of economic power from independent countries to international

organisations, like WTO United Nations etc. The sovereignty of the elected governments are
naturally undermined, as the policies are formulated in favour of globalization. Thus globalization
has its own positive and negative consequences. According to Peter F Drucker Globalization for
better or worse has changed the way the world does business. It is unstoppable. Thus Globalization
is inevitable, but India should acquire global competitiveness in all fields.
Liberalisation:
It is an immediate effect of globalization. Liberalisation is commonly known as free trade. It implies

removal of restrictions and barriers to free trade. India has taken many efforts for liberalisation
which are as follows:
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New economic policy 1991.
Objectives of the new economic policy.
i. To achieve higher economic growth rate.
ii. To reduce inflation
iii. To rebuild foreign exchange reserves.
FEMA:
Foreign exchange Regulation Act 1973 was repealed and Foreign exchange Management Act was
passed. The enactment has incorporated clauses which have facilitated easy entry of MNCs.
i. Joint ventures with foreign companies. E.g.: TVS Suzuki.
ii. Reduction of import tariffs.
iii. Removal of export subsidies.
iv. Full convertibility of Rupee on current account.
v. Encouraging foreign direct investments.
The effect of liberalisation is that the companies of developing countries are facing a tough
competition from powerful corporations of developed countries.
The local communities are exploited by multinational companies on account of removal of

regulations governing the activities of MNCs.
Privatisation:
In the event of globalization privatisation has become an order of the day. Privatisation can be
defined as the transfer of ownership and control of public sector units to private individuals or
companies. It has become inevitable as a result of structural adjustment programmes imposed by
IMF.
Objectives of Privatisation:
To strengthen the private sectors.
Government to concentrate on areas like education and infrastructure.
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In the event of globalization the government felt that increasing inefficiency on the part of public
sectors would not help in achieving global standards. Hence a decision was taken to privatise the
Public Sectors.
Causes of Inefficiency of Public Sectors:
i. Bureaucratic administration
ii. Out dated Technology
iii. Corruption
iv. Lack of accountability.
v. Domination of trade unions
vi. Political interference.
vii. Lack of proper marketing activities.
Privatisation has its own advantages and disadvantages Viz:
Advantages:
i. Efficiency
ii. Absence of political interference
iii. Quality service.
iv. Systematic marketing
v. Use of modern Technology
vi. Accountability
vii. Creation of competitive environment.
viii. Innovations
ix. Research and development
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x. Optimum utilisation of resources
xi. Infra structure.
However, privatisation suffers from the following defects.
i. Exploitation of labour.
ii. Abuse of powers by executives.
iii. Unequal distribution of wealth and income.
iv. Lack of job security for employees.
Privatisation has become inevitable in the present scenario. But some control should be exercised by
the government over private sectors.
Changes across Euro, Third World, USA and Their Impact on India:
Changes across Euro and USA:
Significant changes have taken place across Euro and USA on account of globalization, particularly
in the field of international business politics etc. Such changes have given rise to change in cultural
and social aspects as well.
The economy of European countries and US are getting integrated with the global economy.
Different arrangements have been made in this regard which are as follows:
1. Free Trade Area:
It is an agreement among a group of countries to abolish all trade restrictions and barriers, in
carrying out international trade.
2. Customs Union:
The member countries abolish all the restrictions and barriers and adopt a uniform commercial
policy.
3. European Economic Community:
It was initially formed by six countries viz: France, Federal Republic of Germany, Italy, Belgium,
Netherlands and Luxembourg. It came into existence on 1.1.1958. How EEC has 15 members. In
order to become a member of EEC, a country must be European country and it must be democratic.
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Activities of EEC:
i. Elimination of custom duties and quantity restrictions on export and import of goods.
ii. Devising a common agricultural policy.
iii. Devising a common transport policy.
iv. To control disequilibrium in balance of payments.
v. Development of a common commercial policy.
4. North American Free Trade Agreement:
NAFTA
i. It came into being in 1994 Developed countries like US, Canada and a developing country Mexico
became the members.
Objectives and Activities of NAFTA:
i. Removing barriers among the member countries to facilitate free trade.
ii. To enhance Industrial development.
iii. To enhance competition.
iv. To improve Political relationship among member countries.
v. To develop industries in Mexico. the international market.
European Free Trade Association:
It was formed in 1959. The member countries are: Austria, Norway, Denmark, Sweden and
Switzerland and Great Britain.
Objectives of EFTA
i. To eliminate trade barriers.
ii. To remove tariffs.
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iii. To encourage free trade.
iv. To enhance economic development of member countries.
Changes in the Third World:
The concept of Third World does not have much significance in the present scenario. This term was
popular prior to the disintegration of Soviet Union. USA and USSR were considered as super
powers and the countries in the world were divided in supporting them. The countries which did
not have an alliance with both the countries were considered as Third World countries. But with the
disintegration of USSR the concept of Third World has almost disappeared. However changes in
Asian countries and other countries (other than Europe and USA) have affected India. Such changes
can be discussed as follows:
Trade blocks in Asia:
South Asian Association for Regional Cooperation (SAARC)
It came into being in 1983 countries like India, Bangladesh, Bhutan, Pakistan, Maldives and Sri
Lanka adopted a declaration on SAARC.
Objectives of SAARC:
i. To promote economic social and cultural development among member countries.
ii. To improve the life of people among member countries.
iii. To enhance cooperation with other developing economies.
iv. To liberalise trade among member countries.
v. To promote economic cooperation among member countries.
Changes in Asian Countries:
Chinese Market:
China has introduced many economic reforms. It started privatisation in 1984. China has formed
special economic Zones. It has attracted heavy foreign investments. It has also formed economic and
Technical Development Zones in towns and cities. These zones are free zones which allow quick
business operations.
Japanese Market:
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There is a rapid growth in Japan during the past Fifty years. Japanese maintained a close link with
ministry of international trade and investment. The Strategies of Japanese-corporate sector was
directed by ministry of international trade.
Impact on India:
Changes across Euro, USA and Third World has its own impact on India which can be summarised
as follows:
i. India’s economic dependence on other countries has significantly increased.
ii. Extensive opportunities in the field of information technology.
iii. Extensive opportunities for India’s Telecom sector.
iv. Strategic alliances. Joint ventures, mergers have become the order of the day.
v. Extensive research and development.
vi. Bilateral treaties to promote free trade.
vii. Membership of WTO.
viii. Amending the domestic laws to suit the liberalised economy. E.g.: FEMA. Amendment of Patent
Act
ix. Active participation in global politics.
x. Improvement in Productivity.
On the whole it can be concluded that changes across Euro, USA and other countries have
significantly changed the Indian economy. India has realised that its business can’t survive without
focusing on changes in other countries. Indian economy has become a major economy of the world
and a significant trading partner. In the new era, India is looking at the potentials of the new
products.
Management Perspective:
Globalization has led to the practice of management across culture. Modern business organisations
have adopted Global management practices. Efforts are being made by India to understand
Japanese, Chinese style of management. Issues in Motivation, communication across culture has
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gained significance. Every functional area of management is being studied with a global perspective.
E.g.: International HRM, International Financial management, International marketing etc.
Disinvestment
At the very basic level, disinvestment can be explained as follows:
“Investment refers to the conversion of money or cash into securities, debentures, bonds or any
other claims on money. As follows, disinvestment involves the conversion of money claims or
securities into money or cash.”
Disinvestment can also be defined as the action of an organisation (or government) selling or
liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or ‘divestiture.’
In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a
government-owned enterprise.
A company or a government organisation will typically disinvest an asset either as a strategic move
for the company, or for raising resources to meet general/specific needs.
Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very
negative rate of return on capital employed. Inefficient PSUs had become and were continuing to be
a drag on the Government’s resources turning to be more of liabilities to the Government than being
assets. Many undertakings traditionally established as pillars of growth had become a burden on the
economy. The national gross domestic product and gross national savings were also getting
adversely affected by low returns from PSUs. About 10 to 15 % of the total gross domestic savings
were getting reduced on account of low savings from PSUs. In relation to the capital employed, the
levels of profits were too low. Of the various factors responsible for low profits in the PSUs, the
following were identified as particularly important:
 Price policy of public sector undertakings
 Under–utilisation of capacity
 Problems related to planning and construction of projects
 Problems of labour, personnel and management
 Lack of autonomy
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Hence, the need for the Government to get rid of these units and to concentrate on core activities
was identified. The Government also took a view that it should move out of non-core businesses,
especially the ones where the private sector had now entered in a significant way. Finally,
disinvestment was also seen by the Government to raise funds for meeting general/specific needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as an
active tool to reduce the burden of financing the PSUs. The following main objectives of
disinvestment were outlined:
 To reduce the financial burden on the Government
 To improve public finances
 To introduce, competition and market discipline
 To fund growth
 To encourage wider share of ownership
 To depoliticise non-essential services
Importance of Disinvestment
Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the
Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of
funds for:
 Financing the increasing fiscal deficit
 Financing large-scale infrastructure development
 For investing in the economy to encourage spending
 For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards
repaying public debt/interest
 For social programs like health and education
Disinvestment also assumes significance due to the prevalence of an increasingly competitive
environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid
erosion of value of the public assets making it critical to disinvest early to realize a high value.
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Business cycle
The term business cycle refers to economy-wide fluctuations in production, trade, and general
economic activity.
Business Cycle Phases:
Business cycles are identified as having four distinct phases: expansion, peak, contraction, and
trough.An expansion is characterized by increasing employment, economic growth, and upward
pressure on prices. A peak is realized when the economy is producing at its maximum allowable
output, employment is at or above full employment, and inflationary pressures on prices are
evident. Following a peak an economy, typically enters into a correction which is characterized by a
contraction, growth slows, employment declines (unemployment increases), and pricing pressures
subside. The slowing ceases at the trough and at this point the economy has hit a bottom from which
the next phase of expansion and contraction will emerge.
Business Cycle Fluctuations
Business cycle fluctuations occur around a long-term growth trend and are usually measured by
considering the growth rate of real gross domestic product.
In the United States, it is generally accepted that the National Bureau of Economic Research (NBER)
is the final arbiter of the dates of the peaks and troughs of the business cycle. An expansion is the
period from a trough to a peak, and a recession as the period from a peak to a trough. The NBER
identifies a recession as "a significant decline in economic activity spread across the economy, lasting
more than a few months, normally visible in real GDP, real income, employment, industrial
production. " This is significantly different from the commonly cited definition of a recession being
signaled by two consecutive quarters of decline in real GDP.
Features of Business Cycles:

Though different business cycles differ in duration and intensity they have some common features
which we explain below:
1. Business cycles occur periodically. Though they do not show same regularity, they have .some
distinct phases such as expansion, peak, contraction or depression and trough. Further the duration
of cycles varies a good deal from minimum of two years to a maximum of ten to twelve years.
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2. Secondly, business cycles are Synchronic. That is, they do not cause changes in any single industry
or sector but are of all embracing character. For example, depression or contraction occurs
simultaneously in all industries or sectors of the economy. Re-cession passes from one industry to
another and chain reaction continues till the whole economy is in the grip of recession. Similar
process is at work in the expansion phase, prosperity spreads through various linkages of input-
output relations or demand relations between various industries, and sectors.
3. Thirdly, it has been observed that fluctuations occur not only in level of production but also
simultaneously in other variables such as employment, investment, consump-tion, rate of interest
and price level.
4. Another important feature of business cycles is that investment and consumption of durable
consumer goods such as cars, houses, refrigerators are affected most by the cyclical fluctuations. As
stressed by J.M. Keynes, investment is greatly volatile and unstable as it depends on profit
expectations of private entrepreneurs. These expec-tations of entrepreneurs change quite often
making investment quite unstable. Since consumption of durable consumer goods can be deferred, it
also fluctuates greatly during the course of business cycles.
5. An important feature of business cycles is that consumption of non-durable goods and services
does not vary much during different phases of business cycles. Past data of business cycles reveal
that households maintain a great stability in consumption of non-durable goods.
6. The immediate impact of depression and expansion is on the inventories of goods. When
depression sets in, the inventories start accumulating beyond the desired level. This leads to cut in
production of goods. On the contrary, when recovery starts, the inventories go below the desired
level. This encourages businessmen to place more orders for goods whose production picks up and
stimulates investment in capital goods.
7. Another important feature of business cycles is profits fluctuate more than any other type of
income. The occurrence of business cycles causes a lot of uncertainty for businessmen and makes it
difficult to forecast the economic conditions. During the depression period profits may even become
negative and many businesses go bankrupt. In a free market economy profits are justified on the
ground that they are necessary payments if the entrepreneurs are to be induced to bear uncertainty.
8. Lastly, business cycles are international in character. That is, once started in one country they
spread to other countries through trade relations between them. For ex-ample, if there is a recession
in the USA, which is a large importer of goods from other countries, will cause a fall in demand for
imports from other countries whose exports would be adversely affected causing recession in them
too. Depression of 1930s in USA and Great Britain engulfed the entire capital world.
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Theories of Business Cycles:
We have explained above the various phases and common features of business cycles. Now, an
important question is what causes business cycles. Several theories of business cycles have been
propounded from time to time.
Each of these theories spells out the factors which cause business cycles. Before explaining the
modern theories of business cycles we first explain below the earlier theories of business cycles as
they too contain important elements whose study is essential for proper understanding of the causes
of business cycles.
Sun-Spot Theory:
This is perhaps’ the oldest theory of business cycles. Sun-spot theory was developed in 1875 by
Stanley Jevons. Sun-spots are storms on the surface of the sun caused by violent nuclear explosions
there. Jevons argued that sun-spots affected weather on the earth.
Since econo-mies in the olden world were heavily dependent on agriculture, changes in climatic
conditions due to sun-spots produced fluctuations in agricultural output. Changes in agricultural
output through its demand and input-output relations affect industry. Thus, swings in agricultural
output spread throughout the economy.
Other earlier economists also focused on changes in climatic or weather conditions in addition to
those caused by sun-spots. According to them, weather cycles cause fluctuations in agricultural
output which in turn cause instability in the whole economy.
Even today weather is considered important in a country like India where agriculture is still
important. In the years when due to lack of monsoon there are drought in the Indian agriculture, it
affects the income of farmers and therefore reduce demand for the products of industries.
This causes industrial recession. Even in USA in the year 1988 a severe drought in the farm belt
drove up the food prices around the world. It may be further noted that higher food prices reduce
income available to be spent on industrial goods.
Critical Appraisal:
Though the theories of business cycles which emphasise climatic con-ditions for business cycles
contain an element of truth about fluctuations in economic activity, especially in the developing
counties like India where agriculture still remains important, they do not offer an adequate
explanation of business cycles.
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Therefore, much reliance is not placed on these theories by modern economists. Nobody can say
with certainty about the nature of these sun-spots and the degree to which they affect rain. There is
no doubt that climate affects agricultural production.
But the climate theory does not adequately explain periodicity of the trade cycle. If there was truth
in the climatic theories, the trades cycles may be pronounced in agricultural countries and almost
disappear when the country becomes completely industrialised. But this is not the case.
Highly industrialised countries are much more subject to business cycles than agricultural countries
which are affected more by famines rather than business cycles. Hence variations in climate do not
offer complete explanation of business cycles.
Hawtrey’s Monetary Theory of Business Cycles:
An old monetary theory of business cycles was put forward by Hawtrey. His monetary theory of
business cycles relates to the economy which is under gold standard. It will be remembered that
economy is said be under gold standard when either money in circulation consists of gold coins or
when paper notes are fully backed by gold reserves in the banking system.
According to Hawtrey, increases in the quantity of money raises the availability of bank credit for
investment. Thus, by increasing the supply of credit expansion in money supply causes rate of
interest to fall. The lower rate of interest induces businessmen to borrow more for investment in
capital goods and also for investment in keeping more inventories of goods.
Thus Hawtrey argues that lower rate of interest will lead to the expansion of goods and services as a
result of more investment in capital goods and inventories. Higher output, income and employment
caused by more investment induce more spending on consumer goods.
Thus, as a result of more investment made possible by increased supply of bank credit economy
moves into the expansion phase. The process of expansion continues for some time. Increases in
ag-gregate demand brought about by more investment also cause prices to rise. Rising prices lead to
the increase in output in two ways.
First, when prices begin to rise businessmen think they would rise further which induces them to
invest more and produce more because prospects of making profits increase with the rise in prices.
Secondly, the rising prices reduce the real value of idle money balances with the people which
induces them to spend more on goods and services. In this way rising prices sustain expansion for
some time.
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However, according to Hawtrey, the expansion process must end. He argued that rise in incomes
during the expansion phase induces more expenditure on domestically produced goods as well as
more on imports of foreign goods. He further assumes that domestic output and income expand
faster than foreign output.
As a result, imports of a country increase more than its exports causing trade deficit with other
countries. If exchange rate remains fixed, trade deficit means there will be outflow of gold to settle
its balance of payments deficit. Since the country is on gold standard, outflow of gold will cause
reduction in money supply in the economy.
The decrease in money supply will reduce the availability of bank credit. Reduction in the supply of
bank credit will cause the rate of interest to rise. Rising interest rate will reduce investment in
physical capital goods. Reduction in investment will cause the process of contraction to set in.
As a result of reduced order for inventories, producers will cut production which will lower income
and consumption of goods and services. In this state of reduced demand for goods and services,
prices of goods will fall. Once the prices begin to fall businessmen begin to expect that they will fall
further. In response to it traders will cut order of goods still causing further fall in output.
The fall in prices also causes real value of money balances to rise which induce people to hold larger
money holdings with them. In this way contraction process gathers momentum as demand for
goods start declining faster and with this economy plunges into depression.
But after a lapse of sometime depression will also come to an end and the economy will start to
recover. This happens because in the contraction process imports fall drastically due to decrease in
income and consumption of households, whereas exports do not fall much.
As a result, trade surplus emerges which causes inflow of gold. The inflow of gold would lead to the
expansion of money supply and consequently availability of bank credit for investment will
increase. With this, the economy will recover from depression and move into the expansion phase.
Thus, the cycle is complete. The process, according to Hawtrey, will go on being repeated regularly.
Critical Appraisal:
Hawtrey maintains that the economy under gold standard and fixed exchange rate system makes his
model of business cycles self-generating as there is built-in tendency for the money supply to change
with the emergence of trade deficit and trade surplus which cause movements of gold between
countries and affect money supply in them.
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Changes in money supply influence economic activity in a cyclical fashion. However, Hawtrey’s
monetary theory does not apply to the present-day economies which have abandoned gold standard
in 1930s. However, Hawtrey’s theory still retains its importance because it shows how changes in
money supply affect economic activity through changes in price level and rate of interest. In modern
monetary theories of trade cycles this relation between money supply and rate of interest plays an
important role in determining the level of economic activity.
Under-Consumption Theory:
Under-consumption theory of business cycles is a very old one which dates back to the 1930s.
Malthus and Sismodi criticised Say’s Law which states ‘supply creates its own demand’ and argued
that consumption of goods and services could be too small to generate sufficient demand for goods
and services produced. They attribute over-production of goods due to lack of consumption demand
for them. This over-production causes piling up of inventories of goods which results in recession.
Under-consumption theory as propounded by Sismodi and Hobson was not a theory of recurring
business cycles. They made an attempt to explain how a free enterprise economy could enter a long-
run economic slowdown.
A crucial aspect of Sismodi and Hobson’s under-consump-tion theory is the distinction they made
between the rich and the poor. According to them, the rich sections in the society receive a large part
of their income from returns on financial assets and real property owned by them.
Further, they assume that the rich have a large propensity to save, that is, they save a relatively large
proportion of their income and therefore, consume a relatively smaller proportion of their income.
On the other hand, less well-off people in a society obtain most of their income from work, that is,
wages from labour and have a lower propensity to save.
Therefore, these less well-off people spend a relatively less proportion of their income consumer
goods and services. In their theory, they further assume that during the expansion process, the
incomes of the rich people increase relatively more than the wage-income.
Thus, during the expansion phase, income distribution changes in favour of the rich with the result
that average propensity to save falls, that is, in the expansion process saving increases and therefore
consumption demand declines.
According to Sismodi and Hobson, increase in saving during the expansion phase leads to more
investment expenditure on capital goods and after some time lag, the greater stock of capital goods
enables the economy to produce more consumer goods and services.
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But since society’s propensity to consume continues to fall, consumption demand is not enough to
absorb the increased production of consumer goods. In this way, lack of demand for consumer
goods or what is called under-consumption emerges in the economy which halts the expansion of
the economy.
Further, since supply or production of goods increases relatively more as compared to the
consumption demand for them, the prices fall. Prices continue falling and go even below the average
cost of production bring losses to the business firms. Thus, when under-consumption appears,
production of goods becomes unprofitable. Firms cut their production resulting in re-cession or
contraction in economic activity.
Karl Marx and Under-consumption:
It is worth mentioning that Karl Marx, the philoso-pher of scientific socialism had also predicted the
collapse of the capitalist system due to the emergence of under-consumption. He predicted that
capitalism would move periodically through expansion and contraction with each peak higher than
its previous peak and each crash (i.e., depression) deeper than the last.
Ultimately, according to Marx, in a state of acute depression when the cup of misery of working
class is full, they will overthrow the capitalist class which exploits them and in this way the new era
of socialism or communism would come into existence. Like other under-consumption theorists,
Marx argues that driving force behind business cycles is ever increasing income inequalities and
concentration of wealth and economic power in the hands of the few capitalists who own the means
of production.
As a result, the poor workers lack income to purchase goods produced by the capitalist class
resulting in under-consumption or over-production. With the capitalist producers lacking market for
their goods, capi-talist economy plunges into depression. Then the search for ways of opening of
new markets is started.
Even wars between capitalist countries take place to capture other countries to find new markets for
their products. With the discovery of new methods of production of finding new markets, the
economy recovers from depression and the new upswing starts.
Critical Appraisal:
The view that income inequalities increase with growth or expansion of the economy and further
that this causes recession or stagnation is widely accepted. Therefore, even many modern economies
suggest that if growth is to be sustained (that is, if recession or stagnation is to be avoided), then
consumption demand must be increasing sufficiently to absorb the increasing production of goods.
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For this deliberate efforts should be made to reduce inequalities in income distribution. Further,
under-consumption theory rightly states that income redistribution schemes will reduce the
amplitude of business cycles.
Besides, the suggested behaviour of average propensity to save and consume of the property owners
and wage earners in this theory have been found to be consistent with the observed phenomena.
Even in the theory of economic development the difference in average propensity to save (APS) of
the property owners and workers has been widely used.
It is clear from above that under-consumption theory contains some important elements, especially
the emergence of the lack of consumption demand as the cause of recession but it is regarded as too
simple. There are many features other than growing income inequalities which are responsible for
causing recession or trade cycles. Although under-consumption theory concentrates on a significant
variable, it leaves too much unexplained.
Over-Investment Theory:
It has been observed that over time investment varies more than that of total output of final goods
and services and consumption. This has led economists to investigate the causes of variation in
investment and how it is responsible for business cycles.
Two versions of over-in-vestment theory have been put forward. One theory offered by Hayek
emphasises monetary forces in causing fluctuations in investment. The second version of over-
investment theory has been developed by Knut Wickshell which emphasises spurts of investment
brought about by innovation.
We explain below both these versions of over-investment theory. It is worth noting that in both the
versions of this theory distinction between natural rate of interest and money rate of interest plays
an important role.
Natural rate of interest is defined as the rate at which saving equal’s investment and this equilibrium
interest rate reflects marginal revenue product of capital or rate of return on capital. On the other
hand, money rate of interest is the rate at which banks give loans to the businessmen.
Hayek’s Monetary Version of Over-investment Theory:
Hayek suggests that it is mone-tary forces which cause fluctuations in investment which are prime
cause of business cycles. In this respect Hayek’s theory is similar to Hawtrey’s monetary theory
except that it does not involve inflow and outflow of gold causing changes in money supply in the
economy.
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To begin with, let us assume that the economy is in recession and businessmen’s demand for bank
credit is therefore very low. Thus, lower demand for bank credit in times of recession pushes down
the money rate of interest below the natural rate.
This means that businessmen will be able to borrow funds, that is, bank credit at a rate of interest
which is below the expected rate of return in investment projects. This induces them to invest more
by undertaking new investment projects. In this way, investment expenditure on new capital goods
increases.
This causes investment to exceed saving by the amount of newly created bank credit. With the spurt
in investment expenditure, the expansion of the economy begins. Increase in investment causes
income and employment to rise which induces more consumption expenditure. As a result,
production of consumer goods increases. According to Hawtrey, the competition between capital
goods and consumer goods industries for scarce resources causes their prices to rise which in turn
push up the prices of goods and services.
But this process of expansion cannot go on indefinitely because the excess reserves with the banks
come to an end which forces the banks not to give further loans for investment, while demand for
bank credit goes on increasing. Thus, the inelastic supply of credit from the banks and mounting
demand for it because the money rate of interest to go above the natural rate of interest.
This makes further investment unprofitable. But at this point of time there has been over-investment
in the sense that savings fall short of what is required to finance the desired investment. When no
more bank credit is available for investment, there is decline in investment which causes both
income and consumption to fall and in this way expansion comes to an end and the economy
experiences downswing in economic activity.
However, after a lapse of sometime the fall in demand for bank credit lowers the money rate of
interest which goes below the natural rate of interest. This again gives boost to investment activity
and as a result recession ends. In this way alternating periods of expansion and con-traction occur
periodically.
Wicksell’s Over-investment Theory:
Over-investment theory developed by Wicksell is of non-monetary type. Instead of focusing on

monetary factors it attributes cyclical fluctuations to spurts of investment caused by new
innovations introduced by entrepreneurs themselves.
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The introduction of new innovations or opening of new markets make some investment projects
profitable by either reducing cost or raising demand for the products. The expansion in invest-ment
is made possible because of the availability of bank credit at a lower money rate of interest.
The expansion in economic activity ceases when investment exceeds saving. Again it may be noted
that there is over-investment because the level of saving is insufficient to finance the desired level of
investment. The end of investment expenditure causes the economy to go into recession.
However, another set of innovations occurs or more new markets are found which stimulates
investment. Thus, when investment picks up as a result of new innovations, the econ-omy revives
and moves into the expansion phase once again.
Appraisal:
Though the over-investment theory does not offer an adequate explanation of business cycles, it
contains an important element that fluctuations in investment are the prime cause of business cycles.
However, it does not offer a valid explanation as to why changes in investment take place quite
often.
Many exponents of this theory point to the behaviour of banking system that causes diverges
between money rate of interest and natural rate of interest. However, as Keynes later on
emphasised, investment fluctuates quite often because of changes in profit expectations of
entrepreneurs which depends on several economic and political factors operating in the economy.
Thus, the theory fails to offer adequate explanation of business cycles.
RBI
The Reserve Bank of India is India's Central Banking Institution, which controls the Monetary Policy
of the Indian Rupee. It commenced its operations on 1 April 1935 during the British Rule in
accordance with the provisions of the Reserve Bank of India Act, 1934. The original share capital was
divided into shares of 100 each fully paid, which were initially owned entirely by private
shareholders. Following India's independence on 15 - August - 1947, the RBI was nationalised in the
year of 1 January 1949.
Major functions of the RBI are as follows:
1. Issue of Bank Notes:
The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which
are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared
unlimited legal tender throughout the country.
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This concentration of notes issue function with the Reserve Bank has a number of advantages: (i) it
brings uniformity in notes issue; (ii) it makes possible effective state supervision; (iii) it is easier to
control and regulate credit in accordance with the requirements in the economy; and (iv) it keeps
faith of the public in the paper currency.
2. Banker to Government:
As banker to the government the Reserve Bank manages the banking needs of the government. It
has to-maintain and operate the government’s deposit accounts. It collects receipts of funds and
makes payments on behalf of the government. It represents the Government of India as the member
of the IMF and the World Bank.
3. Custodian of Cash Reserves of Commercial Banks:
The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash
reserves of the commercial banks.
4. Custodian of Country’s Foreign Currency Reserves:
The Reserve Bank has the custody of the country’s reserves of international currency, and this
enables the Reserve Bank to deal with crisis connected with adverse balance of payments position.
5. Lender of Last Resort:
The commercial banks approach the Reserve Bank in times of emergency to tide over financial
difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of
interest.
6. Central Clearance and Accounts Settlement:
Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier
to deal with each other and settle the claim of each on the other through book keeping entries in the
books of the Reserve Bank. The clearing of accounts has now become an essential function of the
Reserve Bank.
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7. Controller of Credit:
Since credit money forms the most important part of supply of money, and since the supply of
money has important implications for economic stability, the importance of control of credit
becomes obvious. Credit is controlled by the Reserve Bank in accordance with the economic
priorities of the government.
SEBI
Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities
market. SEBI promotes orderly and healthy development in the stock market but initially SEBI was
not able to exercise complete control over the stock market transactions.
It was left as a watch dog to observe the activities but was found ineffective in regulating and
controlling them. As a result in May 1992, SEBI was granted legal status. SEBI is a body corporate
having a separate legal existence and perpetual succession.
Reasons for Establishment of SEBI:
With the growth in the dealings of stock markets, lot of malpractices also started in stock markets
such as price rigging, ‘unofficial premium on new issue, and delay in delivery of shares, violation of
rules and regulations of stock exchange and listing requirements. Due to these malpractices the
customers started losing confidence and faith in the stock exchange. So government of India decided
to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI).
Purpose and Role of SEBI:
SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest
of investors. It was set up to meet the needs of three groups.
1. Issuers:
For issuers it provides a market place in which they can raise finance fairly and easily.
2. Investors:
For investors it provides protection and supply of accurate and correct information.
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3. Intermediaries:
For intermediaries it provides a competitive professional market.
Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the development
of stock exchange and to regulate the activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business and
its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
Functions of SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.
1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and provide safety of
investment.
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging:
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Price rigging refers to manipulating the prices of securities with the main objective of inflating or
depressing the market price of securities. SEBI prohibits such practice because this can defraud and
cheat the investors.
(ii) It Prohibits Insider trading:
Insider is any person connected with the company such as directors, promoters etc. These insiders
have sensitive information which affects the prices of the securities. This information is not available
to people at large but the insiders get this privileged information by working inside the company
and if they use this information to make profit, then it is known as insider trading, e.g., the directors
of a company may know that company will issue Bonus shares to its shareholders at the end of year
and they purchase shares from market to make profit with bonus issue. This is known as insider
trading. SEBI keeps a strict check when insiders are buying securities of the company and takes strict
action on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI does not allow the companies to make misleading statements which are likely to induce the
sale or purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of
various companies and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot
change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and
imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market
prices.
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2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock exchange and
increase the business in stock exchange. Under developmental categories following functions are
performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in
following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange. To regulate the
activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such
as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private placement
has been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustees, merchant bankers and all those who are associated with stock exchange in any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.
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(vi) SEBI conducts inquiries and audit of stock exchanges.
The Organisational Structure of SEBI:
1. SEBI is working as a corporate sector.
2. Its activities are divided into five departments. Each department is headed by an executive
director.
3. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and Delhi.
4. SEBI has formed two advisory committees to deal with primary and secondary markets.
5. These committees consist of market players, investors associations and eminent persons.
Objectives of the two Committees are:
1. To advise SEBI to regulate intermediaries.
2. To advise SEBI on issue of securities in primary market.
3. To advise SEBI on disclosure requirements of companies.
4. To advise for changes in legal framework and to make stock exchange more transparent.
5. To advise on matters related to regulation and development of secondary stock exchange.
Money Supply
The Reserve Bank of India defines the monetary aggregates as
 Reserve Money (M0): Currency in circulation + Bankers’ deposits with the RBI + ‘Other’
deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector +
RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public
– RBI’s net non-monetary liabilities.
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 M1: Currency with the public + Deposit money of the public (Demand deposits with the banking
system + ‘Other’ deposits with the RBI).
 M2: M1 + Savings deposits with Post office savings banks.
 M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank
credit to the commercial sector + Net foreign exchange assets of the banking sector +
Government’s currency liabilities to the public – Net non-monetary liabilities of the banking
sector (Other than Time Deposits).
 M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).
Page 42 of 42

Business Environment Class Notes by K K BHARTIY

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Business Environment class notes By K K BHARTIY

Business environment is of two types-

Micro environment / Internal Environment of Business

Macro environment / External environment of Business:

Approaches and Techniques Used for Environmental Scanning

The external environment in which an organization exists consists of a bewildering variety of

by interested groups in the light of their concern for issues.

strategists have to deal cautiously with process environmental scanning.

approach or a combination of different approaches, to environmental scanning.

Approaches to Environmental Scanning:

Under this approach, information for environmental scanning is collected systematically.

direct impact on an organization’s activities, government policy statements pertaining the

information is available in processed form.

decisions are taken based on it.

The various sources from where information can be gathered include:

drawings, charts, etc.

2. Trade directories, journals, magazines, newspapers, books, newsletters, government publications,

annual reports of companies, case studies, etc.

3. Internet, television, radio news etc.

4. External agencies like customers, suppliers, inspection agencies, marketing intermediaries,

5. Market research reports, consultants, educational institutions, testing laboratories etc.

6. Spying considered as a powerful way of extracting information from other companies.

Techniques Used for Environmental Scanning:

information, quantity, quality and availability of information, etc.

judgmental and institutive techniques are also widely used.

The entire process consists of following steps:

1. Major events and trends in environment are studied.

term. This is done through brain storming in a group.

made to quantify the results.

strategies that may be decided.

Economic liberalization, in general, refers to a government applying a series of deregulation

averaged 2.2 % of GDP from 1985-1990.

Liberalization of India in 1991:

The following steps were taken:

Capitalism, Socialism, Communism & Mixed economy

Individualism and competition are fundamental to capitalism. In a purely capitalist society,

In addition, there are a number of different economic theories of socialism:

Democracy, Dictatorship & Princely states

Dictatorship is a form of government where political authority is monopolized by a single person or

Liberalization, Privatization and Globalization

Privatisation and Globalisation

LPG and the Economic Reform Policy of India

Narasimha Rao Committee's Recommendations

Highlights of the LPG Policy

Foreign Technology Agreements

i. Interactions and interdependence among countries.

ii. Integration of world economy.

Effect of Globalization on India:

2. Growth of international trade:

Establishment of MNCs have resulted in the increase of employment opportunities.

5. Free flow of foreign capital:

Negative effect of globalization:

1. Inequalities within countries:

7. Threat to national sovereignty:

Globalizations results in shift of economic power from independent countries to international

It is an immediate effect of globalization. Liberalisation is commonly known as free trade. It implies

New economic policy 1991.

Objectives of the new economic policy.

i. To achieve higher economic growth rate.

ii. To reduce inflation

iii. To rebuild foreign exchange reserves.

i. Joint ventures with foreign companies. E.g.: TVS Suzuki.