SECTION-A

(i) What is meant by economic environment?

Economic Environment is made up to two words Economic + Environment Economic activity In ordinary sense, a person to satisfy his
wants is called economic activity. Economic is all about in economy, about its limited or scarce resources and limited human wants
environment we have already defied it above.
Environment can be divided into two categories

Economic conditions economic policies and the economic system are important external factors that constitute economic
environment. E-E The economic conditions of a country for example. The nature of the economy the stage of development of the
economy, economic resources the level of Y its distribution etc.

(ii) Differentiate between inflation & deflation.

BASIS FOR
INFLATION DEFLATION
COMPARISON

Meaning When the value of money Deflation is a situation,

decreases in the international when the value of money
market, then this situation is increases in the
termed as inflation. international market.

Effects Increase in the general price Decrease in the general

level price level

National income Does not declines Declines

Gold prices Falls Rises

 Classification Demand pull inflation, cost Debt deflation, money
push inflation, stagflation supply side deflation, credit
and deflation. deflation.

Good for Producers Consumers

Consequences Unequal distribution of Rise in the level of

income. unemployment

Which is evil? A little bit of inflation is a Deflation is not good for an

symbol of economic growth of economy.
the country.

(iii) What is fiscal policy?

It is also known as budgetary policy. The word fiscal is used to describe something that related to Govt. money or
public money, especially taxes. Fiscal policy refers to Government Policy regarding revenue and expenditure of the
Government
According to G.K. Shaw, “We define to change the level composition or timing of Government expenditure or change
the burden structure and frequency of the structure.”

(iv) What do you understand by globalization & privatization?

Globalization: It refers to the extended area of activity and interaction among

the nations. Globalization is a new trend in human cognitive structure or
disposition. It can be an attitude towards interaction among the nations. This
interaction encompasses the mutual interest of the nation towards development
especially economic one.
Liberalization: It refers to the spirit of freedom and openness. In relation to
rules and regulatory structures of word nations, it aims at to bring relaxation,
flexibility, accommodation of diversities, tolerance of others' interests. It leads
to fast development and economic growth.
Privatization: It refers to a mode of doing things of his own without any control
of the Government. This practice may be at an individual level or at
organizational level. Once has freedom to do a task or perform an activity for
material development or otherwise. When Govt. takes over the control of an
organization, industry or company in a commercial sector or service sector like
education, freedom of function is restricted. Hence it leads to retardation or
slowing down the process of development activity. In case of education,
 privatization in higher education can be one alternative since it needs huge
funds for developing physical infrastructure and conducting basic researches.

(vi) What is political environment?

Political Environment is the state, government and its institutions and
legislations and the public and private stakeholders who operate and interact
with or influence the system. The political atmosphere should be good and
very stable for a firm to operate successfully. Political Environment forms the
basis of business environment in a country. If the policies of government are
stable and better then businesses would get impacted in a positive way and
vice versa.
Changes in government often results in changes in policy.
Example: -

 The policies made by the government have a significant impact on any company’s international market
 Also the tax rates decided by the government impact the firms in different ways

Promotion of self-business by the government

(vii) What is Indian constitution?

There is a constitution in every country to guide the government and to govern the people. Both the
government and people are bound to obey it. The constitution contains provisions relating to the
powers and duties of government, the relations between government and people and the rights and
duties of people.

This helps in maintaining discipline in the society, makes government responsible and makes people
aware that the government belongs to them.

The views of some eminent scholars about constitution have been given below. Aristotle says,
"Constitution is the way of life the state has chosen for itself." According to Dicey, the constitution is a
combination of those rules which, directly or indirectly, influence the distribution and use of sovereign
power.

Woolsey has observed that the constitution is "the collection of principles according to which the
powers of the government, the rights of the governed, and the relations between the two are adjusted."
According to Bryce, "the constitution of a state consists of those of its rules or laws which determine the
form of its government and the respective rights and duties of it towards the citizens and of the citizens
towards the government."

Gettel has said that the constitution consists of those basic principles which determine the form of the
state. K. C. Wheare observes, "The constitution is that body of rules which regulates the ends for which
and the organs through which governmental power is exercised."
Gilchrist says, the constitution consists of "that body of rules or laws, written or unwritten, which
determine the organization of the government, the distribution of powers to various organs of the
government and the general principle on which these powers are to be exercised.

The constitution is the most important legal document of the country. It helps maintain law and order
in the country. Without a constitution, there will be anarchy in the state or country. Jellinek has argued
that in the absence of constitution, every individual, every institution and even the government itself
will ignore law and as a result, there will be 'reign of anarchy.'

SECTON B

3. What are the various economic factors affecting environment?

Ans - Definition

All businesses, whether domestic or international, are affected by the

dynamic economic environment conditions prevalent in the market.
Among many economic factors affecting business some are; interest
rates, demand and supply, recession, inflation, etc. Let us take a look at
such economic factors.

All businesses want to maximize on their profits. All this can be achieved
by analysis of demands of consumers, provision of appropriate supplies to
them and the maintenance of high quality of goods and services. As
simple as this operation is, many factors affect it. The sales, production
and procurement processes of a business are greatly impacted by these
economic elements. Below is a list of economic factors that affects
businesses. Consider, all of them are interconnected.

Economic Factors Affecting Business Environment

Demand and Supply

There are two great economic factors affecting business models work –
demand and supply. Demand is how willing and able a consumer is to
purchasing what a business offers and supply is how able the business is to
make available what the consumer needs. For example, when a mobile
phone infused with the latest technology is introduced to the market, it
fetches a higher price due to the high demand in markets, and the prices
remain high if the demand is more than the supply.

Marginal and Total Utility

The amount of satisfaction that is derived by consumers from the amount

of goods they have is referred to Utility. After continuous and successive
consumption of units of same goods, the fulfilment that is experienced by
the consumer starts depreciating. This results in short-term or long-term
fall in sales of the business. Most Organization prepare for the launch of a
different brand before the collapse in utility and sales is experienced. The
hurl of a new brand ensures that the revenue trend of business does not
drop down. The fall down of utility is one of the economic factors
affecting businesses.

Such is, when we purchase a pizza, the first few pieces give us great
satisfaction. Nonetheless, there is a down fall in the satisfaction levels
when we continue eating the rest of the pizza. Suppose, the marginal
utility derived on consuming the first slice was 90%. Nonetheless, due to
the dwindling of utility, the second piece had the score of 80% and the
third piece had 70%. The satisfaction derived on consumption will be in a
deteriorating order.

Money and Banking

Banking facilitates monetary and fiscal policies that affect business and
the economic environment also the consumers of business. Money in
circulation dictates the demand of the consumers. On the contrary,
banking facility dictates the borrowing capacity of individuals as well as
the business. Banking polices play a crucial role in affecting the prices of
goods and interest rates together with assets prices and investments.
The economic environment activities and inflation are influenced by the
monetary policies of a particular country. This whole dynamic situation is
also known as monetary policy transmission mechanism.

Economic Growth and Development

The amount of money that is being invested into channels of long-term

upgradation and the finances of the people living in the society at large in
a particular country is decreed by the economic growth of a country.
Among all the economic factors that are affecting business,
development is the upmost important one. As a business needs to cater for
the demands of an economic environment potent society.eg, The luxury
brands perform hearty during an economic upswing, much more than the
organizations which their outcome is essential offerings.

Income and Employment

Another crucial aspects of the economy that affects a business operation,

are the rate of income and employment varsity in a particular country. The
density of employment determines the rate of demand in a company and
even the country including the purchasing power of individuals.

Example

During an economic upswing, opportunities for work are available to

enable people to generate income and have a stronger purchasing power.
Nonetheless, the purchasing power of most people goes down, as
employment density and the rate of income goes up during the recession
period in a given economic environment.

General Price Level

General price levels of commodities is also a key economic factor

affecting businesses and plays a huge part in its growth. You could talk
about the cost of raw materials for the production of commodities in
any economic environment, the paying power of potential clients, the
cost of production and transportation rates as some of the most important
elements that end up contributing to the retail price, thereby lowering the
profits generated by a business.

Example

In most economic environments, when prices go up, the total revenue

generated has a high chance to go down because there might be a decrease
in demand. Assuming consumers have bought sixteen pizzas for the price
of $4. But because of increase in price of the pizzas, the consumers may
only be able to afford 8 pizzas for a higher cost of $6.

Trade Cycles

This too plays an integral part in the fluctuation of cost of goods and
services sold by a business. The cycles include but are not limited to;
depression, recession, recovery, prosperity. These are all phases that make
up a business cycle that dictates the demand and supply of all goods and
services and general prices of all commodities, whether essential or non-
essential.

Inflation

Inflation usually occurs when the supply of money is too much in

the economic environment market while not equally supported by a
similar availably of goods and services. Now, there is a lot floating around
in this situation. The prices of goods have to increase one way or the other,
in order to sustain the businesses. And so there is an increase in the cost of
raw materials needed for production. This upsurge in the cost of raw
materials obviously translates to the retail price.

Let’s break this down. The buying power of consumers decreases, their
incomes remain constant, but the prices of products and services shoots
up. This will definitely affect the businesses in that, the demand for the
goods is directly dependent on its availability and its price.

Example
 In 2008, the worst case of inflation affected the central African nation,
Zimbabwe. This proved very disastrous for its economy leading to the
country adopting a foreign currency as a way of solving the crises.

Recession

Companies usually make great losses and face dips in sales and profits
during recession. And in order to reduce their costs most of them usually
resort to staff cuts, retrenchment and firing, reducing capital expenditure,
advertising budgets, research and development activities, and so on. Of
course this affects companies and organizations of all sizes regardless of
the economic environments they are in.

4. A sick unit is one which has reported cash loss for the last
year of its operation and in the judgement of the financing
bank is likely to incur cash loss for the current year as also in
the following year.”

A major symptom of sickness is a steady fall in debt-equity ratio and

an imbalance in the financial position of the unit.

Simply put, a sick unit is one which is unable to support itself through
the operation of internal resources (that is, earnings from plough
back). As a general rule, the sick units continue to operate below the
break-even point and are, thus, forced to depend on external sources
of funds for their long-term survival.

In order to examine the bottlenecks in industrial and corporate

restructuring and to suggest suitable measures for the early closure of
unviable units and quick revival of viable ones, the Government
appointed a Committee on Industrial Sickness and Corporate
Restructuring in May 1993 under the chairmanship of Onkar
Goswami. It submitted its report in July 1993.
The Committee suggested a change in the definition of
sickness:
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(i) Default of 180 days or more on repayment to term-lending

institutions, and

(ii) Irregularities in cash-credits or working capital for 180 days or

more.

External and Internal Causes of Industrial Sickness:

Industrial sickness has become a major problem of the Indian
corporate industrial sector. Of late, it has assumed serious
proportions. A close look reveals that there are, at least, five major
causes of industrial sickness, viz., promotional, managerial, technical,
financial, and political.

The causes of industrial sickness may be divided into two

broad categories:
(i) External, and

(ii) Internal

External causes are those which are beyond the control of its
management, and seem to be relatively more important than internal
causes.

The external causes which have been identified so far

include:
(a) Delay in land acquisition and building construction;

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(b) Delay in obtaining financial assistance from public financial

institutions;

(c) Delayed supply of machinery by the manufacturers;

(d) Problems related to recruitment of technical and managerial staff;

(e) Dilatoriness on the part of the government in sanctioning licences,

permits, etc.;

(f) Shortages of basic inputs like power. Other causes include;

(g) Cost overruns due to factors beyond the control of management;

(h) Lack of demand for products or shift of demand to products of

rival firms due to delays in project implementation;

(i) Unsatisfactory performance by collaborators— financial and

technical; and, last but not the least,

(j) Changes in the policy of the Government relating to movement of

goods from one place to another within the country, or the
Government’s export-import policy.

Internal causes are many. The primary one seems to be (i) “lack of
experience of the promoters in the line of activity.” The other causes
are: (ii) differences among various persons associated with the
promotion and management of the enterprise; (iii) mechanical defects
and breakdown; (iv) inability to purchase raw materials at an
economic price and at the right time; (v) failure to make controls
effective in time in case of deficiencies in workings; (vi) deteriorating
labour management relations and the consequent fall in capacity
utilisation, and, above all; (vii) faulty financial planning and lack of
balance in the financial (capital) structure.

It is often observed that many projects are started without making any
proper feasibility study. Hardly any long-term view of the future is
taken. Often industrial projects are started on an ad hoc basis without
gathering much about the expertise and competence needed for the
purpose.

Internal causes for sickness are summarised as:

(i) Project appraisal deficiencies,

(ii) Project management deficiencies, and several external factors like,

(iii) Shortage of raw materials,

(iv) Power crisis,

(v) Changes in government policy,

(vi) Transport and financial bottlenecks,

(vii) Increase in overhead costs, etc.

Marketing problems in the form of market saturation, product

obsolescence and demand recession are considered to be other factors
responsible for industrial sickness.

Incidence:
As at the end of March 2006, the total number of sick units stood at
1,31,553 units involving an outstanding bank credit of about Rs.
38,819 crore. 1,26,824 units (i.e., 99 p.c.) were in the small scale
sector. Of these, their share in the aggregate locked in bank credit was
only 17.5 p.c. The three major industries affected by industrial sickness
are jute, engineering goods, and textiles.

Government Policy to Deal with Industrial Sickness:

The policy framework in respect of measures to deal with the problem
of industrial sickness has been laid down in the guidelines issued in
October 1981 (which were subsequently modified in February 1982)
for guidance of administrative ministries of the Central Government,
State Governments, and financial institutions.

The Central Government has set up a Board for Industrial and

Financial Reconstruction (BIFR) with effect from January 12, 1987 in
pursuance of enactment of the SICA—Sick Industrial Companies
(Special Provisions) Act, 1985. This is a major step for intervening at
an early stage and detecting, preventing as well as taking ameliorative,
remedial, and such other measures which need to be taken with
respect to sick and potentially viable companies.

A number of measures have been taken to tackle the problem of

industrial sickness. The importance of detection of sickness at the
incipient stage has been emphasised by the RBI. Since its inception
(1987) up to the end of March 1998, BIFR received 7,7,158
applications. It is to be remarked here that the number of cases being
registered with the BIFR has been decreasing gradually.

Till October 2002, the Board has sanctioned rehabilitation schemes of

748 central and state PSUs. It has so far recommended Winding up of
1,303. A small set of 485 companies have been declared no longer
‘sick’ and have been discharged from the purview of SICA, since net
worth of these public and private companies turned positive after the
implementation of rehabilitation schemes.

The Industrial Reconstruction Bank of India (IRBI) set up in 1985 has

initiated various steps for checking the growth of industrial sickness
and helping in industrial revival. Out of 393 units assisted by the IRBI
till the end of June 1986, 136 units have been revived. By March 1997,
cumulative financial assistance sanctioned and disbursed stood at Rs
4,312 crore and Rs 2,954 crore, respectively.

The IRBI was taken over by the Industrial Investment Bank of India in
1997. It functions as the principal credit and reconstruction agency for
industrial revival. A significant measure taken during 1986 was the
setting up of Small Industries Development Fund (SIDF) in the IDBI.
This is meant to provide special financial assistance to the small-scale
sector.

The Government has set up two funds, the Textile Modernisation

Fund and the Jute Modernisation Fund—for modernisation in the
textiles and jute sector. Under these two funds, assistance is provided
not only to the healthy units for modernisation at 11.5 p.c. rate of
interest, but also to sick but potentially viable units. Special loans are
given to the weak units for meeting a part of the promoters’
contribution. These special loans carry 6 p.c. rate of interest with a
repayment period of 12 years and an initial moratorium period of 6
years.

Meanwhile, the Government appointed a ‘Committee on Industrial

Sickness and Corporate Restructuring’ in 1993 under the
chairmanship of Onkar Goswami. The Committee recommends
liquidation of sick concerns instead of their rehabilitation.

Government is now considering the repeal of SICA and winding up of

the BIFR. It is feared that, in view of the 2008 recession, in the
immediate future large number of sick units would be closed down
thereby raising the bogey of unemployed workers.

6. The framers of the constitution provided every state with some guiding principles which
are meant for promoting the ideal of social and economic democracy. These guiding principles
have been named as Directive Principles of State Policy. These directive principles ensure to avoid
the violation of fundamental rights of the citizen of a state. They are meant to establish a ‘welfare
state’. The directive principles are non-justifiable in nature. They cannot be enforced by the court of
law for their violation. However, these directive principles have been declared as the fundamental
principles in the governance of the country and it shall be the duty of the state to apply these
principles in making laws. Hence, they impose a moral responsibility on the state authorities for their
application.

The Directive Principles of State Policy are enumerated from Articles 36 to 51 in Part IV of the
Constitution.

Features of The Directive Principles

1. The term Directive Principles of State Policy signifies the ideals that the State should keep in
mind while making policies and enacting laws. These are the constitutional instructions or
recommendations to the State in legislative, executive and administrative matters. According
to Article 36, the term ‘State’ in Part IV has the same meaning as in Part III dealing with
Fundamental Rights. Therefore, it includes the legislative and executive organs of the central
and state governments, all local authorities and all other public authorities in the country.
 2. The Directive Principles resemble the ‘Instrument of Instructions’ enumerated in the
Government of India Act of 1935. According to Dr B. R. Ambedkar, ‘the Directive Principles
are like the instrument of instructions, which were issued to the Governor-General and to the
Governors of the colonies of India by the British Government under the Government of India
Act of 1935. What is called Directive Principles is merely another name for the instrument of
instructions. The only difference is that they are instructions to the legislature and the
executive’.

3. The Directive Principles constitute a highly extensive economic, social and political
programme for a modern democratic State. They aim at realising the high ideals of justice,
liberty, equality and fraternity as outlined in the Preamble to the Constitution. They embody
the concept of a ‘welfare state’ and not that of a ‘police state’, which existed during the
colonial era. In brief, they seek to establish economic and social democracy in the country.

4. The Directive Principles are non-justiciable in nature, that is, they are not legally enforceable
by the courts for their violation. Therefore, the government (Central, state and local) cannot
be compelled to implement them. Nevertheless, the Constitution (Article 37) itself says that
these principles are fundamental in the governance of the country and it shall be the duty of
the State to apply these principles in making laws.

5. The Directive Principles, though non-justiciable in nature, help the courts in examining and
determining the constitutional validity of a law. The Supreme Court has ruled many a times
that in determining the constitutionality of any law, if a court finds that the law in question
seeks to give effect to a Directive Principle, it may consider such law to be ‘reasonable’ in
relation to Article 14 (equality before law) or Article 19 (six freedoms) and thus save such law
from unconstitutionality.

Classification of The Directive Principles

The classification of Directive Principles of State Policy have not been mentioned in the constitution
of India. On the basis of their direction in various perspectives, we can divide them into three
categories, i.e. socialistic, Gandhian and liberal–intellectual.

Socialistic Principles

These principles reflect the ideology of socialism. They lay down the framework of a democratic
socialist state, aim at providing social and economic justice, and set the path towards welfare state.
Following Articles state the guidelines of Socialistic Principles of state policy:

 Article 38: To promote the welfare of the people by securing a social order permeated by
justice social, economic and political and to minimise inequalities in income, status, facilities
and opportunities.

 Article 39: To secure

1. the right to adequate means of livelihood for all citizens;

2. the equitable distribution of material resources of the community for the common
good;

3. prevention of concentration of wealth and means of production;

4. equal pay for equal work for men and women;

5. preservation of the health and strength of workers and children against forcible
abuse; and

6. opportunities for healthy development of children.

 Article 39 A: To promote equal justice and to provide free legal aid to the poor.

 Article 41: To secure the right to work, to education and to public assistance in cases of
unemployment, old age, sickness and disablement.

 Article 42: To make provision for just and humane conditions for work and maternity relief.

 Article 43: To secure a living wage7, a decent standard of life and social and cultural
opportunities for all workers.

 Article 43 A: To take steps to secure the participation of workers in the management of

industries.

 Article 47: To raise the level of nutrition and the standard of living of people and to improve
public health.

Gandhian Principles
These principles are based on Gandhian ideology. They represent the programme of reconstruction
enunciated by Gandhi during the national movement. In order to fulfil the dreams of Gandhi, some of
his ideas were included as Directive Principles.

Following Articles state the guidelines of Gandhian Principles of state policy:

 Article 40: To organise village panchayats and endow them with necessary powers and
authority to enable them to function as units of self-government.

 Article 43: To promote cottage industries on an individual or co-operation basis in rural

areas.

 Article 43 B: To promote voluntary formation, autonomous functioning, democratic control

and professional management of co-operative societies.

 Article 46: To promote the educational and economic interests of SCs, STs, and other
weaker sections of the society and to protect them from social injustice and exploitation.

 Article 47: To prohibit the consumption of intoxicating drinks and drugs which are injurious
to health.

 Article 48: To prohibit the slaughter of cows, calves and other milch and draught cattle and
to improve their breeds.

Liberal–Intellectual Principles

The principles counted in this category signify the ideology of liberalism. Following articles state the
guidelines of Liberal–Intellectual Principles of state policy:

 Article 44: To secure for all citizens a uniform civil code throughout the country.

 Article 45: To provide early childhood care and education for all children until they complete
the age of six years.

 Article 48: To organise agriculture and animal husbandry on modern and scientific lines.

 Article 48-A: To protect and improve the environment and to safeguard forests and wild life.
  Article 49: To protect monuments, places and objects of artistic or historic interest which are
declared to be of national importance.

 Article 50: To separate the judiciary from the executive in the public services of the State.

 Article 51: To promote international peace and security and maintain just and honourable
relations between nations; to foster respect for international law and treaty obligations, and to
encourage settlement of international disputes by arbitration.

8.

Public sector occupied a worthy place for achieving

systematic and planned development in a developing country
like India. In a country like India suffering from multi-dimensional
problems, private sector is not in a position to make necessary effort
for the development of its various sectors simultaneously.

Thus, in order to provide the necessary support to the development

strategy of the country, the public sector offers the necessary
minimum push for bringing the economy to a path of self sustained
growth.

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Thus it is now well recognised that public sector plays a positive role in
the industrial development of the country by laying down a sound
foundation of industrial structure in the initial stage of its
development.

Following are some of the important relative roles of the

public sector in the economic development of a country like
India:
(a) Promoting economic development at a rapid pace by filling gaps in
the industrial structure;
(b) Promoting adequate infrastructural facilities for the growth of the
economy;

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(c) Undertaking economic activity in those strategically significant

development areas, where private sector may distort the spirit of
national objective;

(d) Checking monopolies and concentration of power in the hands of

few;

(e) Promoting balanced regional development and diversifying natural

resources and other infrastructural facilities in those less developed
areas of the country;

(f) Reducing the disparities in the distribution of income and wealth

by bridging the gap between the rich and the poor;

(g) Creating and enhancing sufficient employment opportunities in

different sectors by making heavy investments;

(h) Attaining self-reliance in different technologies as per

requirement;

(i) Eliminating dependence on foreign aid and foreign technology;

(f) Exercising social control and regulation through various public

finance institutions;

(k) Controlling the sensitive sectors such as distribution system,

allocating the scarce imported goods rationally etc.; and

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(l) reducing the pressure of balance of payments by promoting export

and reducing imports.