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BUSINESS ENVIRONMENT IN INDIA:
So far we have analyzed various types of environment economic, political etc. that surround and affect the functioning of business. These factors are independent but are closely interlinked with each other. Of all the factors, political, economic and social environments exert more pressure on business enterprise. For example, a change in government is likely to have its effects on economic regulatory environment of business. It is also seen that the various, components of business have cumulative effect on. Society in general and business in particular. Considering the relationship between business and its environment, the business firm should study its environment in totality and not in bits and pieces. ← ← Having studied the business environment in detail, let us now preview the business environment prevailing in India. Like any other country India has its own unique environment. It is one of the largest democratic countries in the world, with vast untapped natural and human resource. It is the third country in the world (After U.S.A. and USSR) having scientific and technical man power. It has well developed infrastructure and Research and development facilities. India is being view the many foreign countries as a growing super power of Asia country provides most favorable atmosphere and resources for business growth and expansion. Let us take the various components of environment in India separately. ← ← Political Environment in India : ← India is a democratic country having parliamentary form of system. Ours' is a written constitution which guarantees fundamental rights to citizen to move and conduct business in any part of the country. The constitution protects political, economic, and social life of every Indian. The three pillar of democracy i.e. legislature, executive and judiciary are quite independent and operate satisfactorily. India is a union of states and the central state relations on the whole have been cordial. The country has established good relations and reputations at the world level. India is a founder member and a leader of non-aligned movement at international level. ← ←
← India has multi-party system and since independence (except 1977 & 1989) the congress party has been ruling the country. An interesting feature of Indian politics is that the country has been ruled by one family (i.e. Nehru Family) for most of the time. The one party and one family rule have brought about much needed political stability and consistency of economic policies for a long time. From 1984 onwards there has been a significant change in the political environment. The Bofors scandal, Punjab and Assam agitations did pollute the political atmosphere of the country. Subsequent elections to parliament and assembly had witnessed erosion in the support to congress party. The congress party did get slander majority but not the 3/4 or 2/3 as it used to enjoy in the past. ← ← The decade of 1990 has witnessed emergence of coalition governments at the centre. Elections to Loksabha were held in 1991, 1996 and 1998, 1999 and non of the leading political parties could get absolute majority in the parliament. Resulting into formation of political groups. From long-term point of view the present trend in Indian political system has its effects like: ← a) Emergence of regional parties on national scene, which according to some experts may lead to rise of regionalism. ← b) Dependence of major political parties on smaller groups is likely to have its adverse effect on political stability. ← c) Polarisation of political parties is not conducive for country like India. ← ← Despite all odds, the political system in India is able to provide much needed political stability. The political system is able to provide consistency to economic policies. Politically the parties may, differ but on economic front there is unanimity among them as regards foreign investment, economic priorities etc. This is evidence from export earnings, foreign investments in India, improved credit rating at international level. Thus, barring few exception, the country is politically stable and mature ← ← ← 2. Economic Environment in India: ← The 'Government of India has taken a number of steps to attain the social, economic& and political objectives laid down in the constitution. Prior to independence then British rulers, did not pay much attention to the economic industrial development of the country. India was treated as a source of raw materials and a ready market by the British indusial However, after independence, the situation changed considerable real Indian Government took over the reins of power and responsibility of economic development.
The economic policies of the Government are based on the provision of the constitution and Directive Principles. The important economic objectives are as under: ← i) To promote social, economic, and political welfare and en justice to every citizen. ← ii) To provide equal employment opportunities and adequate means of livelihood. ← iii) To prevent or minimize concentration of wealth and mean of production in the hands of few people. ← iv) To prevent exploitation of women, Workers and child labour. ← To speed up economic development and improve the general standard of living. ← ← ← In order to accomplish the economic objectives and balanced economic growth, the Government of India had passed Industrial Policy Resolution of 1948 and the second in 1956. These two policy resolutions outlined the steps the government would take to meet its economic objectives. Further, it provided a foundation planning, promoting and regulating the industrial development of country. The Industrial Policy Resolutions of 1948 and 1956 provided a basic framework for industrial development and have been amended in subsequent years to meet the changing socioeconomic needs the country. This is evident from the subsequent Industrial statements of 1977, 1980, 1990, and 1991 ← ← The government has taken a number of steps to provide favorable atmosphere for industrial growth. A summary important step, being taken by the government is given below:← i) The reservation of industries to small'- scale, defense, public sector and cooperative sector. ← ii) To build up and provide necessary developmental infrastructure such as power, transport, finance, facilities for technical development, manpower development and other promotional facilities. ← iii) Provision for monetary and other incentives like tax rebate, concessions in sales, excise tax etc, to Indian and foreign company ← iv) To invest in capital-intensive projects like 'Steel, fertilizers, chemicals etc. ← v) To set national priorities and make best use of available scarce resources to its optimum level. ← vi) To promote exports and reduce imports, Government has taken following measures: ← a) Introduction of convertibility of Rupee. ← b) Liberalized imports of raw materials and capital goods. ← c) Abolition of industrial licensing for most industries. ← Dilution of the provisions of the MRTP and FERA Act. ←
← Reduction in the items reserved for public sectors. ← f) Automatic approval for directs foreign investment upto 51% foreign equity holding in priority industries. ← g) Reduction and rationalization of import duties on imported raw materials and capital goods. ← h) Special pre and post-shipment financial assistance to Indian exporters. ← ← The, Indian economic environment has witnessed many ups and down. However, from 1990 onwards there has been a positive change in the Indian economy. ← ← The Government of India has introduced a number of changes in its industrial, foreign investment, Trade, Taxation and Finance, NRI investment and other business related policies. ← ←
Brief Summary:
← A brief summary of the changes indicated by the Government is given below: ← ← A) Industrial Policy: ← i) No investment limit for large Indian and Foreign compani ← ← ii) Opening of Telecommunication and power sector for private enterprises. ← ← iii) Private investment allowed to build-operate-transfer roads and bridges in selected and specified areas. ← ← iv) An open sky policy for Air-Cargo Services. ← ← v) The items reserved for public sector restricted to only 6 sensitive areas. ← ← vi) Total de-licensing except f6r 15 selected industries -etc. ← ← ← B) Trade Policy ← Exemption of export profit from tax burden. ← Liberalization of imports of capital goods. ← Full convertibility of rupee on current account. ← Post-Shipment credit facilities at confessional rate of interest etc. ← C) Foreign Investment Policy ← i) Foreign investment above 51% equity allowed on approval basics
← ii) Foreign equity participation in small-scale sector allowed. ← iii) Higher royalty of 8% in case of export-oriented production is permitted ← iv) No restrictions on hiring foreign technicians or on repatriation ← of dividends and profits. ← D) Taxation Policy ← i) Rationalization and simplification of tax structure ← ii) Reduction in the rates of income-tax, excise and customs duties ← iii) Major reforms in financial and banking sector. ← ← The introduction of liberalization of policies, minimum government, control, globalization of the economy has brought about a and conceptual change in the government policy and approach before, the Indian business environment was as free and favorable as it is now. The corporate, monetary, import-export policies and other, industrial policies have been made simple, liberal and practical. The introduction of economic reforms has a salutary effect on the environment of business. This is evident from increase in competition, quality consciousness, increased foreign investment, an all time high export reserved (Around $ 15 billion), and an improved credit rating national level. In short, today, the economic environment is much more favourable for domestic and foreign business ← 3. Social Environment in India: ← The various groups like share consumers, employees, local community etc., and their expectation collectively constitute the social environment. It also includes religion; rate of illiteracy, level of income and many more the sociocultural environment in India has undergone significant changes over the years. The important features of such changes are as under:← There has been a general rise in the income and literacy-,' level of people. ← Consumer is well aware about his rights. Consumer movement is getting good support from the society. The passing of the consumer Protection Act of 1986 has added more five powers to consumer movement. ← The society is well aware about the problems of pollution and ecological imbalance. ← The working class and consumers from urban areas are well organized, united and try to put pressure on management to accept their demands. ← Some companies have already taken note of the social changes and have started consumer redressed cell, suggestion box etc. to come further closer to consumers. ←
Technological Environment in India: The government has realized the importance of technology in the development plan and has accorded high priority. The following measures have been taken by the government to develop indigenous technology and import technology from outside. ← The government gives incentives and provides financial and other assistance to upgrade obsolete machines or technology. ← Foreign collaborations for import of technology are given more importance. ← The import of computers and modem technology is allowed at reduced rates of import duties. ← The government wants bridge the technology gap and thereby improve the quality of output. In the long run it will help Indian companies to compete successfully in the domestic and international market. ← ← ← Regulatory environment in India: ← It means the legal environment of business. In India, industrial policies, industrial licensing policy, law relating to companies to consumers, labour-employee relations, and other relevant laws, rules and regulations, govern the working of business. In the earlier days the regulatory environment was not conducive for industrial growth. There were many restrictions and controls like, reservation of items for priority sectors; control over capital issues etc. These controls were necessary to ensure planned and priority wise industrial development. However, in reality, it created many problems and resulted into concentration of economic power, regional imbalances in industrial growth. In recent years the government has initiated far reaching changes in important commercial and labour laws. The laws are being made more simple and practical to allow growth of Indian industries and invite foreign investment. ← ← ← ← ← ← ← ← ← ← ← ← ← ← ← ← ←
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← ← INTERFACE BETWEEN BUSINESS AND ENVIRONMENT ← ← Interface is a point of contact between business and its environment. It is a link between business on one side and environment on other. Business and environment are like the two sides of the same coin i.e., one cannot survive without the other. Business and environment are independent but interdependent on each other for survival and growth. Business depends on its environment for supply of resources for production and to sell the finished product. Similarly, environment depends on business to exploit natural resources, and to produce want satisfying goods and services. Further, business is a part of a broader system called environment, therefore, its survival and success depends up on the capacity of business to adjust and coordinate with its economic, social and political environment. In other words, a close like between business and the environment is necessary to all ensure survival growth of business. Let us see how business and its environment are interconnected with each other. ← Business and Natural Environment: ← Natural environment supplies the basic raw materials, and other resources like coal, land, water etc., much needed to conduct business activities. A business enterprise depends on natural resources for attainment of personal and social goals. The ever increasing use of natural resources by businessmen has resulted into depletion of natural resources, deforestation etc. Further, it has also created problems of pollutions, disposal of wastes and scrap, change in earth temperature etc. considering the importance of natural environment, a business firm should use minimum natural resources, minimise waste and take steps to prevent pollution of all types. Business enterprises should conserve than to consume natural resources carelessly. This is how business can have an interface with its natural. ← Business and Economic Environment : ← Economic environment is the immediate surrounding of a business enterprise. The working of business is influenced by the economic policies relating to licensing, money supply, import-export etc. A change in economic policy has both positive and negative effect of industry positive change in the policy provides opportunities for growth and expansion. For example, the change made in MRTP and FGRA Act, are likely to have wide spread effect on the present and future of, some companies may find opportunities to expand whereas, others will be exposed to stiff competition from domestic and foreign companies.
← Business has limited scope to influence the economic environment. However, through joint efforts or trade association or representations to the government it can bring some changes in those policies affecting the business activities. A business firm can interact with its economic environment either by making best use of opportunities or through adjustment of resources and policies to face adverse situation. ← Business and Social Environment – ← A business enterprise should conduct its' activities on moral, ethical and cultural values. It should try to promote and protect the interest of various social groups like consumers, employees, investors and society at large. Better reward and welfare facilities to employees, supply of quality goods at reasonable price to consumers, higher dividend to investors etc. will certainly enhance the status of business. Further changes in social environment like increase in literacy rate, change in consumer behaviour, social values etc., can be used to produce newer and a variety of goods. An interface with social environment is useful to expand market, adopt new technology, to compete effectively, to perform social responsibilities and to increase profitability. ← Business and Political Environment: ← Political and economic stability is essential for the smooth functioning of business activities. A strong and stable government brings stability in its economic policies and implement forcefully. Political stability brings consistency and firmness in government policy. This in turn instills a sense of security and confidence against investors. Finally, a stable political environment extends constructive support to business enterprises to operate free of tension. ← ← ←
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BRIEF NOTES ON INDUSTRLAL POLICIES:
← 1. The Industrial policy Resolution of 1948: The Resolution of 1948 envisaged greater role to the state in the development of industries. The policy emphasized rapid industrialization and growth in national and per capital income. The salient features of the resolution are as under ← I. It advocated the concept of mixed economy i.e. Both private and public sector to play an important role in the industrialization of the country. ← II. Defence, strategic and atomic industries should be under exclusive control of the central government. ← iii. Basic and key industries like coal, iron, transport etc. will continue to work under government control. ← IV. Consumer oriented industries were left to private sector, their working should be regulated and controlled by government. ← v. The rest of the industries were left open to the individual cooperative societies and private sector. ← vi. The government reserved the right to participate in any of these industries and to take over any industry in the national interest. ← ← 2. Industrial Policy Resolution of 1956: On 30th April, 1956 the Government of India announced the Industrial Policy 1956. This policy has provided the basic framework for industrial activities of the country. The important features of the policy are as under: ← i. The policy reflected the goal of socialism and expanded the scope of the public sector. ← II. The state to play dominate role in setting industrial undertakings and develop infrastructural facilities. ← iii. The private sector was assigned and expected to play constructive role in the nation's economy. ← iv. All industries of basic and strategic importance or in the nature of public utility services should be in the public utility services should be in the public sector. ← V. The Resolution classified industries into 3 categories: ← a) The first category included 17 industries like railway, arms and ammunition, atomic energy etc. which where to be exclusively developed by central Government. ← b) The second category included those 12 industries listed in schedule B attached to the resolution. These industries were to be jointly developed by state and private sector. ← c) The third category contained all remaining industries. It was expected that state should take all steps to encourage and develop these industries in private sector. ←
← v. The Government to provide all sorts of incentive for the promotion and development of small scale, cottage and village industries. ← vi. The resolution spelt out the importance of removal of regional disparities in development. ← ← The Resolution reiterated the importance 'of mixed economy' and dominant government role in industrial sector. ← ← Industrial Policy Statement of 1980: ← Objectives of the policy: ← Optimum utilization of available resources and installed capacity; ← iiMaximization of output and improvement in productivity, ← Correction of regional imbalances through a preferential development of industrially backward areas; ← Promotion and development of agriculture and agro-based industries; ← Promotion export oriented and import substituting industries; ← vi. Protection of consumers against high prices and poor quality; ← ← In order to accomplish the above objectives, the government has taken number of steps like: ← ← i. Delicensing of a number of industries, ← ii. Relaxations in the Provisions of MRTP and FERA Act, ← iii. Re-defines of small, Ancillary and large scale industries; ← ← iv. Greater thrust to the industrialization of backwardareas, ← V. Liberalisation of import policy; and ← ← vi. Reduced restrictions on foreign collaboration. ← ← 4. Industrial policy of 1991: this policy was, announced on July 24, 1991. Through this policy, the government has made major changes in the industrial sector. The policy envisaged changes in the industrial licensing, foreign investment, foreign technology agreements, public sector policy and M.R.T.P. Act. Those changes have been introduced to attain following objectives. ← ← i. To integrate Indian economy with world economy. ← ← ii. To redefine the role of public sector ←
← iii. To attain international competitiveness. ← ← iv. To maintain a sustained growth in productivity and gainful employment. ← v. To preserve the natural environment and ensure the efficient use of available resources ← vi. To encourage public and private, small and big industries to grow and improve on their past performance. ← vii. Delicensing of certain industries with certain exceptions. ← To attain the above mentioned objectives, the government initiated the following changes. ← ← A. Industrial Licensing. ← i) Enhancement in the Industrial licence limit Rs.5 crores to Rs-15 crores for non-MRTP and non-Fera companies in case of projects in non-backward areas, and to Rs-50 crores in backward areas. ← ii) Abolition of industrial licensing, irrespective of levels investment, for all industries except 18 specified industries. ← iii) All regulation schemes with various authorities like DGTD registration have been abolished. ← iv) The benefits and provisions of delicensing should extended to the large companies and foreign companies. ← ← B. Public Sector Policy: ← i) The number of industries reserved for public sector has' been brought down to eight. ← ii) The public sector to play vital role in strategic and industries important from military considerations. ← The policy has proposed selective privatization and closure of unviable public enterprises ← iv) Formation of a separate body similar to BIFRC (board for Industrial and Financial Reconstruction) to deal public sectors only. ← ← C. M.R.T.P. Act: ← The Monopolies and Restrictive Trade practices Act of 1969 was passed to ← i) prevent concentration of economic power and ← ii) Prohibit monopolistic, restrictive and unfair trade practices. ← ← The new policy has repealed the provisions relating to prevention of concentration of economic power. In other words, the policy has abolished provisions relating to establishment of new undertakings expansion of existing one, merger, amalgamation or take over business houses. As per the proposed changes, the Act will look after the unfair and restrictive trade practices.
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D.
Foreign Capital and Technology
← ← i) Automatic approval for technology agreements related to high priority industries like metallurgical, elect transport etc. ← ← ii) Approval for direct foreign investment upto 51% foreign equity in these 34 high priority industries. ← ← iii) Foreign equity proposal need not necessarily be accompanied by foreign technology agreements. ← ← iv) No permission would be required to hire foreign technicians. ← ← v) Non-resident Indians and overseas corporate bodies permitted to acquire share upto 24% listed on the stock exchange. ← ← vi) Non-resident Indians also allowed to invest directly upto 100% of the equity in 34 high priority specified industries. ← ← E. Small Scale Sector ← ← i) Deregulation and simplification of laws, regulations and procedure. ← ← ii) Investment limit of tiny sector raised from Rs.2 Lakhs to RS 5 Lakhs, of small-scale unit to Rs.60 lakhs and ancillary unit to Rs.75 lakhs. ← ← iii) The policy proposes to meet 100 percent credit demand of ← small and tiny industries. ← ← iv) Setting up of technology development cell to meet the technical needs of the small scale sectors. ← ← ← ← ← ←
