ICET CODE: VRNT CBSC Regulation:2021-23

VRN COLLEGE OF COMPUTER SCIENCE AND MANAGEMENT

#Go’s colony,Perur ,Tirupathi-2-517505
III SEMESTER
4-75-301R – Business Environment

Unit – I

Theoretical Framework of Business Environment: Concept, significance and nature of business

environment. Elements of environment- Internal and External; Changing dimensions of business
environment, Techniques of environmental scanning and monitoring.

Unit – II

Planning in India: Emergence of Planning, NITI Ayog, National Development Council. Economic
Environment of Business: Significance and elements of economic environment, Economic Trends:
Savings and Investment, Industry, Growth of Infrastructure Balance of Payment. Incentives for Make in
India, PLI Scheme, Ease of doing business.

Unit – III

Problems of Growth: Unemployment, Inflation, Regional imbalances and Social Injustice. Government
Policies- Industrial policy, Fiscal and Monetary policies, EXIM policy; SEZ policy, LPG 1991, Direct and
Indirect Taxes with special reference to GST and VAT.

Unit – IV

Political and Legal Environment of Business: Changing dimensions of legal environment in India, Brief
introduction to Competition Act, 2005, FEMA, Corporate Governance and Social Responsibility of
Business

Unit – V

Foreign Investment: FDI, FII, Determinants of Foreign Investment, Multinational Corporations:

Favourable and Harmful effect of the operations of MNCs on Indian economy, Liberalization and
MNC’[Link] Business Environment: World bank, IMF, General agreement on Tariff and trade. :
the WTO agreement, TRIPS, TRIMS, Non-tariff barriers and Dispute settlement mechanism, Kyoto
Protocol, FTAs
BUSINESS ENVIRONMENT

UNIT-I
THEORITITCAL FRAME WORK OF BUSINESS ENVIRONMENT
Concept, Significance and Nature of Business Environment:
Concept:
Business organization has to interact and transact with its environment. Hence, both the
business and environment are totally interrelated and mutually interdependent. Business
environment refers to those aspects of the surroundings business enterprise, which affect or
influence its operations and determine its effectiveness.
According to Keith Davis, “Business environment is the aggregate of all conditions, events
and influence that surrounds and affect it”.
According to Andrews, “The environment of a company as the pattern of all external
influences that affect its life and development”
The business environment is always changing and is uncertain. It is because of dynamism of
environment. As it is already said that the business environment is the sum of all the factors
outside the control of management of a company, the factor, which are constantly changing,
and they carry with them both opportunities and risks or uncertainties which can, make or
mark the future of business.
Nature of Business Environment: The nature of business environment is as
follows:
1. Complex: Business environment is compound in nature. Environment consists of a
number of factors, events, conditions and influences arising from different sources which
impact business thus making the business complex.
2. Interdependence: The environment of the business is made of social, economic, legal,
cultural, technological, and political factors. These factors of the environment are
interdependable. The economic status of a country affects the development of technology.
3. Dynamic: Business environment is constantly changing process. Business environment is
dynamic as it keeps on changing in terms of technological improvement, shifts in consumer
preferences or entry of new competition in the market. The various forces in the environment
keep on changing from time to time thus making business dynamic and not static.
4. Inter-relatedness: The different factors of business environment are co-related. For
example, let us suppose that there is a change in the import-export policy with the coming of
a new government. In this case, the coming of new government to power and change in the
import-export policy are political and economic changes respectively. Thus, a change in one
factor affects the other factor.
5. Impact: Business environment has both long term and short term impact. Environment
therefore has different effects on different firms in the same industry, for example, drugs.
6. Uncertainty: Business environment is largely uncertain as it is very difficult to predict
future happenings, especially when environment changes are taking place too frequently as in
the case of information technology or fashion industries.
7. Relativity: It is a relative concept since it differs from country to country and region to
region. Political conditions in the USA, for example differ from those in China or Pakistan.
Similarly, demand for series may be fairly high in India whereas it may be almost non-
existent in France.
Significance of Business Environment: some of the direct benefits of
understanding the business environment are given below:
1. Customer Focus: Environmental understanding makes the management sensitive to the
changing needs and expectations of consumers. For example: Hindustan Lever and several
other FMCG companies launched small sachets of shampoo and other products realising the
wishes of customers. This move helped the firms to increase sales.

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2. Strategy Formulation: Environmental monitoring provides relevant information about the

business environment. Such information serves as the basis for strategy making. For example:
ITC realised that there is a vast scope for growth in the travel and tourism industry in India
and the government is keen to promote this industry because of its employment potential.
With the help of this knowledge ITC planned new hotels both in India and abroad.
3. Public Image: A business firm can improve its image by showing that it is sensitive to its
environment and responsive to the aspirations of public. Leading firms like Reliance
Industries, ICICI Bank and others have others have built good image by being sensitive and
responsive to environmental forces. Environmental understanding enables business to be
responsive to their environment.
4. Continuous learning: Environmental analysis serves as broad based and ongoing
education for business executives. It keeps them in touch with the changing scenario so that
they are never are caught unaware. With the help of environmental learning managers can
react in an appropriate manner and thereby increase the success of their organizations.
5. Giving Direction for Growth: The interaction with the environment leads opening up new
frontiers of growth for the business firms. It enables the business to identify the areas for
growth and expansion of their activities
6. Change Agent: Business leaders act as agents of change. They create a drive for change at
the grass root level. In order to decide the direction and nature of change, the leaders needs to
understand the aspirations of people and other environmental forces through environmental
scanning. For example: contemporary environment requires prompt decision-making and
power to people. Therefore, business leaders are increasingly delegating authority to
empower their staff and to eliminate procedural delays.
Theoretical Framework for Business Environment :
Introduction
The environment is always changing, and this is just as true for the business environment as it
is for the physical world around us. Managers try to avoid being “taken by surprise” by
unexpected events that would impact their organizations through an ongoing process
called environmental scanning. Environmental scanning is a high-level, broad-based process
of gathering, analyzing, and dispensing information for the purpose of developing strategies
or tactics. The process entails getting both factual data and qualitative opinions.
Organizations also scan when they are considering whether to enter a particular industry.
PESTEL
You may wonder just how you go about analyzing the total external environment that would
affect your company. A commonly used management tool is called PESTEL.
PESTEL is an organizing framework that allows decision makers to understand and make
connections with a mass of information. You may sometimes see the name of this tool written
as PESTLE or even just PEST in older sources. A PESTEL analysis examines six key macro-
environmental factors in order to understand their interactions with the organization.
Besides alerting top management to potential threats in the environment, a PESTEL analysis
is a part of the external strategic analysis when conducting research into new markets. It gives
an overview of the different macro-environmental factors that the company has to take
into consideration. Descriptions of the six key PESTEL factors follow.
Political
Political issues are a function of how much the government intrudes or is involved in an
organization’s operations. In particular, it looks at taxation and tariffs, regulations, political
stability, and elections. For example, Google and other Internet providers have financial,
legal, and ethical issues relating to operating in countries like China or Iran, where repressive
governments want to control the flow of information. In another example, Google was fined
$2.7 billion by the European Union for antitrust abuses. Google can appeal this decision with

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the European Court of Justice. Finally, the CEO of Apple is awaiting changes in the tax law
before bringing almost $250 billion in foreign reserves back to the United States. Often,
decision makers for these organizations must choose between making money or suppressing
information critical of the repressive regimes.
Economic
Economic factors start with indicators for the U.S. economy as a whole. These are growth,
employment, inflation, and interest rates. Companies with foreign operations will worry
about exchange rates. These factors are important in long-range forecasts for revenue and
expenses. Businesses in the financial industry may pull back from aggressive strategies in
times of rising interest rates.
Social
Society and culture have great impacts on the business environment. These factors include
demographics like population growth, age distribution, and attitudes toward safety and health
consciousness. For example, rising rates of obesity have forced management to look closely
at marketing campaigns in giant food corporations such as Nestle and Kraft Foods.
Technological
Technology facts include research and development (R&D), automation and robotics, and
technology incentives. The rate of technological change in the business environment is
staggering. A term often paired with technology is disruption, a description for innovations
that completely change the cast of leading competitors in an industry. Many organizations not
only scan the technological environment but also monitor closely for new and disruptive
processes.
Environmental
Weather, climate change, air quality, and natural disasters are all environmental factors.
Some industries are especially at risk from changes in the natural environment, including
manufacturing, agriculture, tourism and travel, and sports and entertainment. Many pollution
regulations limiting water and air pollution have been passed that affect the operation of
businesses.
Legal
Legal factors include discrimination laws, consumer protection laws, and employment,
health, and safety policies. Antitrust, piracy and copyright laws, as well as immigration issues
are also of growing importance in the business environment. All of these factors affect how
organizations operate, their costs, and the demand for products.
Elements of Business Environment:
Business Environment – Definition, Components, & Features
Several internal and external factors directly or indirectly influence business operations.
While some of these are within the business’s control, most of these are not; and the business
has to adapt itself to avoid being affected by changes in such factors. Both of them combined
forms the business environment.
Today’s fast-paced business world witnesses a trend of a rather dynamic business
environment – that is, it’s never stable. Hence, keeping track of these changing trends,
demands, strategies, and policies is crucial in the business world.
What Is Business Environment?
A business environment is a combination of internal and external factors and forces that
significantly influence the operations of a business.
The business environment comprises an internal and external environment that directly or
indirectly affects business operations.
 Internal Environment: It includes all the factors that are well within the control of a
company. These factors are relatively predictable and can be worked on by the
company to eliminate forces that negatively impact its operations.

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 External Environment: It includes factors that exist outside the company’s control.
They tend to be unpredictable as a company cannot possibly control or predict a
change in them. Their unpredictable nature has the potential to abruptly hinder or
even boost a company’s functioning.
Components of Business Environment
The business environment can be categorized into two types based on the factors within the
control or outside the control of a business.
Internal Environment
The internal business environment constitutes several internal forces or elements within the
control of a business that influences its operations. These include:
 Value System: It is the ethical belief that guides the business towards achieving its
mission and objective. The value system includes all components that form a
business’s regulatory framework – organizational culture, climate, work processes,
management practices and organizational norms.
 Vision, Mission, and Objectives: The vision, mission, and objective of a business
relate to what it wants to achieve or accomplish in future. It is the reason why the
business exists.
 Organizational Structure: It outlines how the activities are directed within the
organization to achieve its goals. It includes the rules, roles, and responsibilities,
along with how tasks are delegated and how the information flows among the
organization’s levels.
 Corporate Culture: It is a powerful system of shared norms and attitudes that works
as a homogenizing factor for an organization’s employees and gets appropriated by
them.
 Human Resources: Human resources form all the employees and other personnel
associated with the business. It forms the most valuable asset of the organisation as
success or failure depends on it.
 Physical Resources and Technological Capabilities: It includes tangible assets and
the technical know-how that play an essential role in ascertaining the business’s
competitive capability and future growth prospects.
External Environment
External components are those factors that a business cannot control. These exist beyond a
business’ jurisdiction and supervision limit. External components influencing a business
environment are further classified into two categories:
 Micro Environment
 Macro Environment
Micro Environment
Micro environment is the business’s immediate external environment that influences its
performance as it has a direct bearing on the firm’s regular business operations.
It includes factors outside of the business’s control but can be analysed and worked upon by
managing the business to prevent any business losses.
Micro factors include:
 Customers comprise the target group of the business.
 Competitors are other market players who target a similar target group and provide
similar offerings.
 Media is the channel the business use to market its offering to the customer.
 Suppliers include all the parties that provide the business with the resources it needs
to perform its operations.
 Intermediaries comprise the parties involved in delivering the offering to the final
customers.

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 Partners are all external entities like advertising agencies, market research
organisations, consultants, etc., who conduct business with the organisation and
satisfy customer needs.
 Public includes any group with actual or potential interest in the business’s operations
or a group that affects its ability to serve its customers.
Macro Environment: PESTLE
The macro environment includes remote environmental factors that influence an organisation.
The extent of influence a macro element can have on a business is significant as they usually
affect the industry as a whole.
These factors are classified under PESTLE: P – Political, E – Environmental, S – Social, T –
Technological, L – Legal, E – Economical.
 Political Factors comprise government policies, political stability, corruption in the
system, tax policies, labour laws, and trade restrictions that affect the business or the
industry.
 Economical Factors relate to the economy of the country. They include economic
growth, exchange rate, interest and inflation rates, etc.
 Social Factors comprise the demographics of the country. They include population
growth rate, age distribution, career attitudes, health consciousness, etc.
 Technological Factors pertain to innovation in technology that affects the operations
of the business. This refers to automation, research and development activities,
technological awareness, etc.
 Legal Factors are laws that affect business operations. They include business-
specific, industry-specific, and even state-specific laws.
 Environmental Factors comprise of all those that influence or are determined by the
environment a business operates in. It includes the weather, climate, environmental
policies, and even pressure from NGOs to care for the environment.
Techniques of Environmental Scanning and Monitoring:
Meaning:
Organizations are predominantly impacted by legal, social, economical, global, and
technological variables. The environmental examination or scanning is an investigation of
these different impacting factors. Environmental checking or scanning is concerned with
gathering and using the data or information about noticeable trending patterns, examples,
events, and connections that can unfavourably affect the business to decide future dangers,
threats, or opportunities.
Factors of Environmental Scanning:
Internal factors of environmental scanning:
The parts that exist inside the association are internal factors, and any changes in these
influence the overall performance and operating activities of the association. Human
Resources, capital assets, and technological assets are a part of the internal environmental
factors that affect environmental scanning.
External factors of environmental scanning:
The parts that fall outside the business association are called external factors. Albeit these
factors lie outside the association, they actually influence the management’s activities. The
external factors can be partitioned into macro-environmental factors and micro-
environmental factors.
Macro-environmental factors include legal, political, social, cultural, demographics, and
technological. Micro-environmental factors incorporate suppliers, organisations, consumers,
markets, and competitors.
Environmental Scanning and Its Characteristics:
Dynamic Process:

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Environmental checking isn’t static. It is a unique interaction and relies upon evolving
circumstances.
Ceaseless Process:
The investigation of the environmental scanning is a constant interaction rather than being
inconsistent. The quickly interchanging environment must be caught ceaselessly to be on
target.
Comprehensive View:
Environmental Scanning centers around the total perspective on the environment, rather than
reviewing it to some extent.
Exploratory Process:
Environmental scanning is an exploratory interaction that continues observing the
environment to draw out the conceivable outcomes and obscure components of things to
come. It focuses on the way that what could occur and not what will occur.
Procedure for Environmental Scanning:
Examining:
The most common way of breaking down the environment is to recognise the variables that
might affect the business is known as environmental scanning. It makes the organisations
aware of taking appropriate key decisions before it arrives at a critical circumstance.
Observing:
The information assembled from different sources is used to screen and discover the patterns
and trends in the environment. The fundamental sources of gathering information are spying,
conversing with clients, providers, sellers and workers.
Predicting:
The most common way of assessing future occasions dependent on recently broken down
information is known as environmental predicting, forecasting and determining.
Evaluation:
The stage in which the environmental elements are surveyed to recognize whether they give a
chance to the business or represent a danger.
Significance of Environmental Scanning:
Achieving goals and objectives:
The targets of an association can’t be satisfied except if it adjusts to the changes in the
environment. One needs to change the methodologies to fit in the changing requests of the
environment.
Identification of weaknesses and threats:
For an association to develop, it should limit its weaknesses, threats and distinguish its
shortcomings. This can be made conceivable with the assistance of filtering the environment
with better techniques, strategies that can be created.
Forecasting the future:
Environmental changes are regularly capricious. An association can’t expect every one of
things to come in the future; however, in light of the examination, it can settle on better
essential choices later on. Consequently, environmental investigation assists with determining
the possibilities of the business.
Knowledge of the market:
Every association should know about the continuous changes prevailing in the market.
Assuming it neglects to join vital changes because of evolving requests or demands, it can not
accomplish its targets.
Zero in on the Customer:
Environmental examination and scanning make an association subtle to the changing
requirements and assumptions for the client.
Identification of opportunities:

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With the examination of the current situations in the environment, an association will actually
want to recognize the potential chances and make vital strides.
Strategies of Environmental Scanning:
QUEST Analysis:
QUEST analysis represents the Quick Environmental Scanning strategy. This method is
intended to examine the environment rapidly and economically so that organisations can zero
in on basic issues that must be tended to in a limited capacity to focus.
SWOT Analysis:
SWOT analysis is an abbreviation for Strengths, Weaknesses, Opportunities and Threats
examination of the business environment. Weaknesses and Strengths are considered as
interior elements though Threats and Opportunities are outer variables. These variables
decide the game-plan to guarantee the development of the business.
ETOP Analysis:
ETOP analysis represents the Environmental Threat Opportunity Profile. It assists an
association with investigating the effect of the environment, dependent on opportunities and
dangers.
PEST Analysis:
PEST analysis represents Political, Economic, Social, and Technological examination of the
environment. It manages the macro-environment.
Impediments of Environmental Scanning:
 Over-burdening of data may bring about uncertainty here and there. Henceforth it isn’t
totally solid.
 It doesn’t predict the future or take out vulnerabilities. Associations might confront
unforeseen events. Anyway, natural checking should target limiting such dangers to
the business.
 It frequently makes an association mindful and, in this manner, defers decision making
process. It is smarter to have an essential way to deal with examining the environment
and make choices or take actions right on schedule.
 At the point when the associations depend totally on the broken-down data without
information confirmation and exactness, it might prompt deviation in the ideal results.

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UNIT-II

PLANNING IN INDIA:
Emergence of Planning:
Introduction
 As a developing country, India must improve employment and incomes, revive
investments and growth, untangle the financial sector, manage muddled international
trade, and address the recurrent issues of inadequate education and health, as well as
the mounting issues of pollution and water shortages.
 When there are few resources and a large amount of welfare to be provided, the
function of planning becomes essential. The Planning Commission was in charge of
planning efforts in India until 2014 when it was replaced by NITI Aayog, a policy
think tank with the goal of making planning more inclusive and bottom-up.
 NITI Aayog's charter defines it as a body tasked with acting as a catalyst for change in
India's federal and complex socio-economic structure.
 Experts, on the other hand, have expressed worries about NITI Aayog's independence
in guiding the government and becoming a spokesperson for the administration as
well as a project implementer.
Planning in India – Objectives
The original goals of economic planning in India were as follows:
 Economic Development: Economic development is the primary goal of Indian
planning. Increases in India's Gross Domestic Product (GDP) and Per Capita Income
are used to measure the country's economic development.
 Increased Employment: An essential goal of Indian economic planning is to better
utilize the country's abundant people resources by raising employment levels.
 Self-sufficiency: India aspires to be self-sufficient in major commodities while
simultaneously increasing exports. During the third five-year plan, from 1961 to 1966,
the Indian economy had reached a critical stage of development.
 Economic Stability: In addition to India's economic growth, India's economic
planning aims for stable market conditions. This entails maintaining a modest rate of
inflation but simultaneously avoiding price deflation. The creation of structural faults
in the economy occurs when the wholesale price index rises very high or very low,
and economic planning seeks to avoid this.
 Social Welfare and Efficient Social Service Provision: All five-year plans, as well
as plans proposed by the NITI Aayog, aim to improve labor welfare and social
welfare for all sections of society. India has planned for the development of social
services such as education, healthcare, and emergency services.
 Regional Development: India's economic strategy tries to decrease regional
development discrepancies. Some states, such as Punjab, Haryana, Gujarat,
Maharashtra, and Tamil Nadu, are economically developed, whereas others, such as
Uttar Pradesh, Bihar, Orissa, Assam, and Nagaland, are not. Others, such as
Karnataka and Andhra Pradesh, have had unequal development, with world-class
economic hubs in cities and a less developed countryside. In India, planning aims to
investigate these inequities and propose methods to address them.
 Comprehensive and sustainable development: One of the key goals of economic
planning is to develop all economic sectors, such as agriculture, industry, and
services.
 Economic Inequality Reduction: Since independence, reducing inequality through
progressive taxation, job creation, and job reservation has been a fundamental goal of
Indian economic planning.

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 Social Justice: This planning goal is linked with all the other objectives, and it has
long been a focal point of planning in India. Its goal is to lower the number of
individuals living in poverty by providing them with employment and social services.
 Increased Standard of Life: One of the key goals of India's economic planning is to
raise the standard of living by raising per capita income and ensuring equal
distribution of income.
Types of Planning
The majority of economies in today's world are mixed economies. There are different types
of planning that are discussed below:
Indicative planning
 It proposes/indicates a set of broad principles and recommendations for achieving a
set of objectives. Indicative planning is unique to France's mixed economy. However,
this is not the same as the planning that exists in other mixed economies.
 The term "mixed economy" refers to the simultaneous operation of the public and
private sectors. The state exercised control over the private sector in a variety of ways,
including quotas, prices, licenses, and so on.
 However, under suggestive planning, the private sector is not strictly supervised in
order to meet the plan's aims and priorities. The government provides full support to
the private sector but does not have control over it. Rather, it directs the private sector
to implement the plan in particular areas.
Comprehensive / Imperative Planning:
 This refers to centralized planning and implementation, as well as resource
allocation. It is utilized by socialist countries, where the state has complete control
over all aspects of planning.
 The state makes the best use of its resources in order to meet the plan's objectives.
Under this type of planning, consumer sovereignty is surrendered. Consumers receive
fixed volumes at fixed costs. The government's policies are rigid and difficult to
change. Any change might have a negative impact on the economy.
NITI Aayog:
 The National Institution for Transforming India (NITI Aayog) was founded by
a Union Cabinet decision on January 1, 2015, as the Union Government's top
policy think tank. It's a non-statutory, extra-constitutional advisory council.
 The National Institution for Transforming India (NITI Aayog) does not have the
authority to impose policies. The government aims to act as an "enabler" by
establishing NITI Aayog and giving it the responsibility of providing a forum for
cooperative federalism.
Aims and Objectives of NITI Aayog
o Working as an advisory body, providing directional and strategic suggestions
to the Union government and, on request, state governments.
o To use a bottom-up development approach instead of a top-down development
approach. It would devise processes for developing credible plans at the
village level, which would then be aggregated at higher levels of government.
o To promote cooperative federalism by forming a shared vision of national
development priorities based on the premise of "strong states, strong nations."
o Encourage inter-ministry, inter-state, and center-state coordination to put an
end to the policy's slow and tardy implementation.
 The Prime Minister of India serves as the Chairperson of the NITI Aayog.
 The Governing Council is made up of the Chief Ministers of all the states as well
as the Lieutenant Governors of the Union Territories.

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 Regional Councils will be established to address specific concerns and situations that
affect many states or regions. These will be formed for a set amount of time. They will
be called by the Prime Minister and will include the region's Chief Ministers and
Lieutenant Governors of Union Territories. The Chairperson of the NITI Aayog or his
nominee will preside over these meetings.
Economic Environment of Business:
Meaning:
The term economic environment refers to all the external economic factors that influence
buying habits of consumers and businesses and therefore affect the performance of a
company. These factors are often beyond a company's control, and may be either large-scale
(macro) or small-scale (micro).
Definition
The economic environment relates to all the economic determinants that influence
commercial and consumer compliance. The term economic environment indicates all the
external economic circumstances that affect the purchasing practices of customers and
markets. Hence, it influences the production of the business.
As a component of economic reformations, the government of India declared a new industrial
system in July 1991. The extensive characteristics of this system were as follows:
 The government decreased the number of enterprises below mandatory licensing to
six.
 Many of the businesses held for the public sector under the initial policy were
justified. The purpose of the public sector was defined only to four industries of vital
importance.
 Disinvestment was conducted in case of many public sector industrial companies.
 The policies towards foreign funds were expanded. The percentage of foreign equity
partnerships was extended. In many ventures, 100 percent of foreign direct investment
(FDI) was allowed.
 The automatic approval was now given for technology transactions with foreign
firms.
 Foreign investment promotion board (FIPB) was established to support and
channelize the foreign financing in India.
Liberalization
The economic reforms that were presented were directed at liberalizing the Indian business
and trade from all the redundant restrictions and limitations. They indicated the end of the
license-permit-quota raj. The liberalization of the Indian business has taken place with
respect to the following:
 By eliminating the licensing terms in most of the industries, excluding a shortlist
 By providing freedom in determining the range of marketing activities, i.e., no
constraints on the development or consolidation of business pursuits
 By dismissing the restraints on the transportation of commodities and services
 By providing freedom in deciding the cost prices of commodities and services
Privatization
The new set of economic changes intended at proffering a prominent position to the private
sector in the nation-building rule and a diminished role to the public sector. This was a
withdrawal of the growth policy attempted so far by the Indian directors. To accomplish this,
the administration redefined the role of the public sector in the new industrial policy of 1991,
approved the policy of proposed disinvestments of the public sector, and determined the loss-
making and weak industries to the Board of Industrial and Financial Reconstruction (BIFR).

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Globalisation
Globalization implies the combination of different economies of the world heading towards
the development of a united (closely-knitted) global marketplace. Till 1991, the government
of India had followed a course of stringently controlling imports in terms of price and
quantity. These laws were with respect to the following:
 Licensing of imports
 Tariff limitations
 Quantitative constraints
The new economic reforms directed at business liberalization were focused towards import
liberalization, export improvement through rationalization of the tax structure, and changes
with respect to the foreign exchange so that the nation does not remain separate from the rest
of the world.
Significance and elements of business environment
Meaning: Business environment is the total or aggregate of all the internal and external
factors that influence the business. These can include employees, suppliers, customers,
government etc. All the internal and external forces directly or indirectly affect the way a
business functions.
Business Environment Definition
The term “Business environment" is the sum of all conditions, events, and influences that
surround and affect business activities and growth.
Components of Business Environment
Internal - It combines the factors that exist within the company. These are –
 Human resources
 Value system
 Vision and mission
 Labour union
 Corporate culture
External - An external Environment includes those outside factors that exercise an influence
on a business’s operations. It is further classified into two segments.
 Macro - Socio-cultural, political, legal, and global factors fall into this
category.
 Micro - This environment has a direct and immediate impact on a business. It
consists of customers, investors, suppliers, etc.
Features of Business Environment
 The business environment is the sum of all external factors that affect its growth.
 The business environment includes both general and specific forces. Specific forces
include investors, customers, competitors, and suppliers. These factors affect
individual enterprises directly and immediately in their day-to-day working. General
forces include social, political, legal, and technological conditions. The general forces
affect the business environment individually.
 The business environment is dynamic.
 The business environment is highly uncertain.
 The business environment is a relative concept as it differs from country to country
and even region to region.
Dimensions of Business Environment
The dimension of the business environment refers to the sum of all factors, enterprises, and
forces that constitute direct or indirect influence over business activities. Such five key
elements are listed below.
1. Social Environment

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It implies the tradition, culture, customs, and values of a society in which the business
exists.
 Tradition: In India, festivals like Diwali, Christmas, and Holi provide a
financial opportunity for several market segments like sweet manufacturers,
gifting products suppliers, etc.
 Value: A company that follows long-held values like social justice, freedom,
equal opportunities, gender equality, etc. excels in that given society.
 Recurrent Trends: It refers to development or general changes in a society
like consumption habits, fitness awareness, literacy rate, etc. which influence a
business. For example, the demand for organic vegetables and gluten-free food
is increasing; therefore, companies that manufacture food items keep this in
mind to attract more crowds.
2. Legal Environment
It includes the laws, rules, regulations, and acts passed by the government. A
company has to operate by abiding by the rules and regulations of laws like the
Consumer Protection Act 1986, Companies Act 1956, etc. A proper understanding of
these laws assists in the smooth operations of a company.
Example: A cigarette-selling company compulsorily has to put the slogan “smoking
is injurious to health” on every packaging.
3. Economic Environment
It involves market conditions, consumer needs, interest rate, inflation rate, economic
policies, etc.
 Interest Rate - For example, interest rates of fixed-income instruments
prevalent in an economic environment impact the interest rate it will offer on
its debentures.
 Inflation Rate - A rise in the inflation rate leads to a price hike; hence, it
limits businesses.
 Customer’s Income - If the income of customers increases, the demand for
goods and services will rise too.
 Economic Policies - Policies like corporate tax rate, export duty, and import
duty influence a business.
4. Political Environment
It consists of forces like the government's attitudes towards businesses, ease-of-doing-
business policies, the stability of the governing body, and peace within the country.
All of these factors are extremely crucial for a company to sustain itself. If the central
and local government sanctions, policies, or acts are in favour of businesses, the
nation's overall economy strengthens due to increasing employment, productivity, and
import and export of various products.
Technological Environment
It comprises the knowledge of the latest technological advancements and scientific
innovations to improve the quality and relevance of goods and services.
A company that regularly keeps track of these news can mould its business strategies
accordingly.
Economic Trends:
Saving and Investment Pattern in India
Domestic savings mainly fund domestic investment in India. Foreign capital inflows account
for less than 1% of GDP (. India was a primary beneficiary of foreign aid, but the total
amount of aid was not yet necessary compared to the size of the economy.

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Reflecting the Indian government's hesitation in inviting foreign investment uncritically and
the highly restricted capital accounting system, foreign direct investment and other forms of
private capital, portfolio investment and banking flows, The role was even less important.
The relationship between savings and investment has not changed significantly since the
reform in 1991. The temporary pattern of domestic investment rates effectively reflected the
savings rate during the period. The relative share of the public and private sectors in the GDP
mix changed significantly from the early 1950s to the early 1980s.
Public investment
Which increased from about 30% to 50%, accounted for most of the total increase in
investment? However, the rise in investment rates since the mid-1980s may be primarily due
to increased private investment. Private investment since the 1990s has been a primarily
private investment.
Corporate investment accounted for more than 45% of total private investment in the 1990s.
In terms of GDP, private sector investment increased by 4.3% in the late 1980s. Up to 7.1 per
cent in the mid-1990s. (On the other hand, domestic investment fell from 9.3% of GDP to
8.5%.) Investors recognize that the cost of capital will fall due to import liberalization.
On September 15, 2018, the Reserve Bank of India (RBI) published its latest annual
statistical publication, The Handbook of Statistics on the Indian Economy-2018. Through this
publication, the bank offers time-series data storage on various economic and financial
indicators of the Indian economy.
You can find a lot of valuable data related to:
● Macroeconomic indicators
● Money and banks
● Financial markets
● Finance
● Trade and balance of payments
Socio-economic indicators, etc. Based on this statistic, we will compare and publish some
critical/interesting points and trends related to personal finance (since 2014). For example,
household savings habits, total investment in bank deposits, etc., Investing in stocks and
investment trusts, information on total bank loans, stock market performance, inflation data,
NRI deposits and more.
Before talking about statistics, let's look at family savings, monetary wealth, and real estate.
Household savings correspond to the total income saved by the household over some time.
Savings and investments in banks, stock exchanges, postal systems, company deposits, etc.,
are considered financial assets / financial savings. Investing in real estate, gold, silver, etc., is
a physical savings/asset. Indian Household Savings, Investment and Responsibility Patterns
2018
Financial and Physical Assets:
What are our preferred assets
From 1990 to 2000, Indian households preferred to invest in financial assets rather than
tangible assets.
● from 2000 to 2007, more savings were spent on physical assets. Interestingly, investment in
financial assets increased in 2007/08. This indicates that retailers / small investors entered the
stock market when they received the highest ratings. The market finally collapsed in 2008.
● From 2008 to 2015, we prioritized physical savings over economic savings.
● Total financial savings in 2014-15, 2015-16 and 2016-17 were Rs 12.572 billion, Rs 1.5207
billion and Rs 14.48 billion. Based on 2017-18 data, approximately Rs. 18.8 billion was
invested in financial assets.

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● Physical asset savings in 2013-14, 2014-15 and 2015-16 were Rs 14,164, Rs 15,000 and Rs
12,700, respectively. Data for 2016-'17 was around Rs. 13.9 billion was invested in physical
assets.
● Earlier data in recent years clearly show that physical asset savings have recovered slightly
and financial asset savings have increased significantly (2017 and 2018).
Based on the above data, we can see that from 2017 to 2018, bank deposit savings fell
sharply, and equity investment increased significantly. We can also conclude that pension
funds and reserve funds are in constant influx.
Financial Responsibility of Indian Households (2018):
● From 2017 to 2018, approximately Rs 6,739 million was received as loans from banks and
financial institutions. This figure was around Rs 3,700 in the 2016-17 fiscal year. Therefore,
the financial burden on Indian households has almost doubled.
Bank Time Deposit Data-The following idea of the total amount of unpaid amounts saved by
bank time deposits and deposit holdings (as of March 2018).
● Bank loans in 2015-16, 2016-17 and 2017-18 were 2,747 million, 2.509 and 4.3 trillion,
respectively. A one- to two-year forward deposit was most preferred, followed by a five-year
term deposit (which could be a tax-saving FD).
FD / RD / Avoid long-term investments in conventional life insurance
NRI deposit:
● 2015-16 data: Total due NRI deposits totaled Rs 8.419 trillion, of which NU, FCNR and
NGO deposits were approximately Rs. 4.74 trillion, Rs 3.5 trillion and Rs 672 billion,
respectively. (NGO-Non-resident (external) Rupee account, FCNR-Foreign currency
denominated non-resident and NGO-Non-resident regular Rupee account)
● 2016-17 figures: Total unpaid NRI deposits totaled Rs 7,757 million, of which NRE,
FCNR and NGO deposits were approximately Rs 5,395 million, Rs 1,361 million and Rs 820
billion, respectively.
● 2017-18 figures: total unpaid NRI deposits totaled Rs 8,207 billion, of which NRE, FCNR
and NGO deposits were approximately Rs 5,856 billion, Rs 1.432 trillion and Rs 918 billion,
respectively. .. (Bank deposit interest rate patterns (2012-2018))
You may find that interest rates on deposits and loans are declining from 2014-15 to 2017-18.
In the current fiscal year 2018-19, we see an increase in the deposit rate and MCLR (loans).
Post Office Small Savings Plan (SSS) Deposit
● In 2017, Indian households' time deposits and time deposit savings also increased slightly.
● Since 2011-15, investment in other typical schemes such as NSCs, KVP certificates, and
credit schemes has declined.
Senior Savings or Monthly Income Scheme (MIS); However, this trend reversed between
2015 and 2017. (Read: "Latest Interest Rates on Post Office Small Savings Plans 2017-
2018")
● Debt fund long-term savings are steadily increasing.
Import of gold and silver
● The Fiscal Year 2014-'15 imported Rs 2.106 billion and $ 276 billion of gold and silver,
and Fiscal Year 2015-'16 imported Rs 207.4 billion and Rs 244 billion, to approximately Rs
1.843 trillion. Rs 123 billion was introduced in the 2016-'17 fiscal year.
● The 2017-18 figures were that 2.1 billion gold and 207 billion silver were imported.
Therefore, there was a reversal in the trend of gold and silver imports in India last year.
● The average annual price of gold (10 grams) in 2016-17 was 29,655 rupees, and that of
silver (1 kg) was 42,748 rupees.
● In 2017-8, the average annual price of gold (10 grams) was 29,300 rupees, and silver (1 kg)
was 39,072 rupees. (Investment Trust Scheme: Assets Under Management Until 2018)
Between 2017-18, the AUM of Indian investment trusts increased by 22

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Industry, Growth of Infrastructure Balance of Payment

PLI Scheme:
Introduction to Production Linked Incentive Scheme (PLI)
Understanding Production Linked Incentive Scheme (PLI)
Highlights of Production Linked Incentive Scheme (PLI)
Introduction to Production Linked Incentive Scheme (PLI)
PLI Scheme, as the Production Linked Incentive Scheme is commonly abbreviated as, is an
initiative started by the Government of India to not only encourage foreign companies to find
workforce in the country and thereby generate employment, but also encourage domestic and
local production to create micro jobs.
Understanding Production Linked Incentive Scheme (PLI)
Like the name means, PLI scheme is an initiative that provides incentives to domestic
industries to boost local production. When that happens, specifically tailored products emerge
that satisfy a selected niche of target audience. Domestic businesses also help in cutting down
import bills. As per the PLI scheme, the government encouraged domestic companies and
establishments to set up or expand on manufacturing units to increase production, to which
the government provides incentives on incremental sales. According to the PLI scheme
update in November 2020, the scheme aimed to include ten more labour intensive sectors of
production—examples include food processing, textiles etc
Highlights of Production Linked Incentive Scheme (PLI)
 The PLI scheme can also bring back old designs and product customs that can
contribute heavily to the diversity, while also empowering forgotten artistry buried
due to colonialism.
 The framework of the PLI scheme is to reward increased production.
 Due to the niche and specificity of PLI linked sectors, that mostly involve careful and
attentive focus on man force and creating, PLI can enhance building systems to adjust
to climate change and even essentially reverse it in the many years to come.
Related Terms
Financial System
A financial system is a collection of institutions which allow the exchange of funds, such as
banks, insurance companies, and stock exchanges.
Economically Weaker Section,EWS
The economically weaker section (EWS) is the section of the society in India that belongs to
the un-reserved category and has an annual family income of less than 8 lakh rupees.
The full form of BPL is Below Poverty Line.
Gross National Product,GNP Gross National Product or GNP is defined as the value of all the
final goods and services produced by the national of the country in a specific time period.
Beyond a reasonable doubt is a substantive standard of proof which is required to justify a
criminal conviction in most adversarial justice systems.
The labour force participation rate is the portion of the working population in the 16-64 years'
age group in the economy currently in employment or seeking employment.
Recent Terms
Elasticity of Demand
When it comes to goods and services and demand of consumers for them, it is pretty obvious
that the demand of goods is affected by its price.
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BUSINESS ENVIRONMENT

Ease of Doing Business:

Meaning
RANKINGS. The Ease of Doing Business (EoDB) index is a ranking system established by
the World Bank Group. In the EODB index, 'higher rankings' (a lower numerical value)
indicate better, usually simpler, regulations for businesses and stronger protections of
property rights.
RANKINGS
The Ease of Doing Business (EoDB) index is a ranking system established by the World
Bank Group. In the EODB index, ‘higher rankings’ (a lower numerical value) indicate better,
usually simpler, regulations for businesses and stronger protections of property rights.
The research1 presents data for 190 economies and aggregates information from 10 areas of
business regulation:
1. Starting a Business of all
2. Dealing with Construction Permits
3. Getting Electricity
4. Registering Property
5. Getting Credit
6. Protecting Minority Investors
7. Paying Taxes
8. Trading across Borders
9. Enforcing Contracts
10. Resolving Insolvency
Rankings and weights on each of the mentioned parameters are used to develop an overall
EoDB ranking. A high EoDB ranking means the regulatory environment is more conducive
for starting and operating businesses.
INDIA – EASE OF DOING BUSINESS RANKING
Among the chosen 190 countries2, India ranked 63rd in Doing Business 2020: World Bank
Report. In 2014, the Government of India launched an ambitious program of regulatory
reforms aimed at making it easier to do business in India. The program represents a great deal
of effort to create a more business-friendly environment.
India has emerged as one of the most attractive destinations not only for investments but also
for doing business. India jumps 79 positions from 142nd (2014) to 63rd (2019) in 'World
Bank's Ease of Doing Business Ranking 2020'.
Positive changes have led to this impressive improvement in India’s ranking in the EoDB
index. India’s major achievement is summarized here:
Construction Permits: India’s ranking on this parameter has improved from 184 in 2014 to
27 in 2019.4 This improvement has been mainly on the account of a decreasing the number
of procedures and time taken for obtaining construction permits in India.
Getting Electricity: India’s ranking on this parameter has improved from 137 in 2014 to
22 in 2019. It takes just 53 days and 4 procedures for a business to get an electricity
connection in India
Apart from these significant improvements, among the 190 economies, India ranks 13th in
Protecting Minority Investors and 25th in Getting Credit.
Central Government Initiatives Actions Completed
STARTING A BUSINESS
1. Permanent Account Number (PAN), Tax Deduction & Collection Account Number
(TAN), Director Identification Number (DIN) has now been merged into a single form
(SPICe) for company incorporation.

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2. Five-page form and other attachments for reserving the name of the Company with the
Ministry of Corporate Affairs has been simplified into a simple web service with only
three fields to be filled.
3. Registration under Employee State Insurance Corporation (ESIC) and Employee
Provident Fund Organization (EPFO) are available at Shram Suvidha portal as a common
online service with no physical touch point.
4. No requirement of inspection for before registration under Shops & Establishment Act in
Mumbai and Delhi.
5. Companies Act was amended to eliminate the requirement of a common company seal.
DEALING WITH CONSTRUCTION PERMITS
1. Municipal Corporations of Delhi, as well as Municipal Corporation of Greater Mumbai,
have introduced fast track approval system for issuing building permits with features such
as Common Application Form (CAF), provision of using digital signature and online
scrutiny of building plans.
2. Delhi has uniform building by-laws which allow for risk-based classification regimes for
different building types. It has a provision of deemed approval of sanctioning building
plans within 30 days.
3. For construction permits, the time reduced from 128.5 to 99 days in Mumbai and from
157.5 to 91 days in Delhi between Doing Business 2018 and 2019 reports.
4. Total number of procedures reduced to 20 in Mumbai and 16 in Delhi.
5. Cost of obtaining construction permits reduced from 23.2% to 5.4% of the economy’s per
capita income.
TRADING ACROSS BORDERS
1. The Central Board of Excise and Customs (CBEC) has implemented ‘Indian Customs Single
Window Project’ to facilitate trade. Importers and exporters can electronically lodge their Customs
clearance documents at a single point.
2. The number of mandatory documents required for customs purposes, for both import and export of
goods, has been reduced to three.
3. e-Sanchit, an online application system, allows traders to file all documents electronically.16
4. The electronic self-sealing of the container at the factory has reduced time and cost for exporting
firms.
5. A computerized risk management system has brought transparency and reduced frequency of
custom inspections significantly.
6. Central Board of Indirect Taxes and Customs has provided a facility for Advance Bill of Entry
(Advance Import Declaration).
ENFORCING CONTRACTS
1. The Commercial Courts and Appellate Division of High Courts have been established in Mumbai
and Delhi.
2. National Judicial Data Grid (NJDG), provides case data including case registration, cause list, case
status and orders/ judgments of courts district-wise across the country. NJDG is open for public
since 2015.
3. New cases in district courts are assigned to Judges randomly through an automated system in
Delhi and Mumbai.
4. e-filing of cases has been introduced in district courts of Delhi and Mumbai.21 5. A case
management tool has been developed with functionality of sending a notification to lawyers,
viewing court orders/ judgments, tracking the status of cases, to semi-automatically generate court
orders etc.
GETTING CREDIT
1. Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI) is
a geographically unified electronic registry that provides for registration by asset type.
Since 2017, CERSAI also provides search through debtor's name.

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2. Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interest (SARFAESI) (Central Registry) Rules, 2011 was amended to include additional
types of charges, including a security interest in - immovable property by the mortgage,
hypothecation of plant and machinery, stocks, debt including book debt or receivables,
intangible assets, patent, copyright, trademark, under-construction building.
3. The definition of property, which now includes immovable as well as intangible, allows
CERSAI to register these additional charges.
GETTING ELECTRICITY
1. Electricity connection is provided within 7 days if no Right of Way (RoW) is required and
within 15 days where RoW is required.
2. Service line cum Development charges is now capped at US$ 357.6 in Delhi.
3. The number of documents required for getting electricity connection has been reduced to
two and no physical documents are accepted.
4. Total number of procedures reduced to 3 in Delhi and 4 in Mumbai.
REGISTERING PROPERTY
1. All sub-registrar offices have been digitized and its records have been integrated with the
Land Records Department, in both Delhi and Mumbai.
2. In Mumbai, all property tax records have been digitized. Property is mutated automatically
after registration.30 The digitization of property records ensures transparency and allows
citizens to ascertain the history of transactions in digital mode.
3. Online service for charges search at Registrar of Companies reduces the time taken for
this procedure significantly.
4. Statistics regarding the number of land disputes at Revenue Courts are available online in
both Delhi and Mumbai.
RESOLVING INSOLVENCY
1. The Insolvency and Bankruptcy Code of 2016 has introduced new dimensions in resolving
insolvency in India. It is India’s first comprehensive legislation on corporate insolvency.
2. Under Fast-track Corporate Insolvency Resolution Process (CIRP) for mid-sized
companies, the process for insolvency shall be completed within 90 days with a maximum
grace period of another 45 days.
PAYING TAXES
1. Reduction of corporate tax from 30% to 25% for mid-sized companies.
2. Domestic companies can opt for concessional tax regime @ 22% (effective tax rate:
25.17% inclusive of surcharge and cess). Such a company cannot claim any income tax
incentive or exemption. Such companies are not liable to pay the Minimum Alternate Tax
(MAT).
3. The tax rate for new domestic manufacturing companies is now 15% (17.01% inclusive of
surcharge and cess). Companies that have been incorporated on or after 1st October 2019,
making fresh investment manufacturing and commencing production on or before 31
March 2023, may opt for such concessional tax regime. Such companies cannot avail of
any other income tax exemption/ incentive under the Income-tax Act.
4. A company that does not opt for the above concessional tax regime and avails any tax
exemption/ incentive, shall continue to pay tax at pre-amended rates. However, the option
of availing of the lower tax regime of 22% can be opted for after the expiry of tax the
holiday/ exemption period. Once the same has opted for it cannot be subsequently
withdrawn by the taxpayer. MAT rate for companies availing exemptions/ incentives
reduced from 18.5% to 15%.
5. Robust IT infrastructure of online return filing for Indian taxpayers.
6. The Goods and Service Tax came into effect from 01 July 2017. It subsumes eight taxes at
the Central and nine taxes at the State level.

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7. The Employee State Insurance Corporation (ESIC) has developed a fully online module
for electronic return filing with online payment. This has substantially reduced the time to
prepare and file returns.
8. With the introduction of the e-verification system, there remains no physical touch point
for document submission to income tax authorities.
MEASURES UNDERWAY
1. Paying Taxes: GST implementation.
2. Resolving Insolvency: Increased usage of Fast-track Corporate Insolvency Resolution
Process (CIRP) as more insolvent companies opt for reorganization plans instead of
liquidation.
3. Enforcing Contracts: The faster resolution of commercial disputes through dedicated
commercial courts.40 Registering Property: Digitization of land records and maps will
bring transparency on encumbrances and ease the process of registering property.
STATE REFORMS
1. DPIIT has launched the latest Business Reform Action Plan for the year 2020 (BRAP 2019-20). It
consists of 301 reform points across 15 areas. The highlights of State Reforms Action Plan 2020 are
• ‘Investment enablers’ - To incorporate reforms related to ‘Access to information and transparency’,
‘Online Single Window System And more.
• Single Window system- To enable the single window system including online submission of
application, payment of application fee and many more
• Sectoral reforms pertaining to sectors like Tourism, Telecom, Hospitality, Trade License,
Healthcare, Legal Metrology, Cinema Halls and Movie shooting.
• Public procurement has been introduced first time by Industries department in this year’s Action
Plan.
• Reforms related to ‘elimination of the requirements of renewals of certificates/ approvals/ licenses’
and ‘implementation of computerized central random inspection system’.
2. For BRAP 2018-19, DPIIT has proposed to undertake a 100% feedback based assessment.
The reform areas included.42
 Access to Information and Transparency Enabler
 Single window system
 Land administration and Transfer of Land and Property
 Land availability and allotment
 Environment Registration Enablers
 Construction Permit Enablers
 Labour Regulation-Enablers
 Obtaining Utility Permits
 Paying Taxes
 Inspection Enablers
 Contract Enforcement
 Sector Specific: Healthcare and Miscellaneous
4. BRAP 2017-18 was updated to 372 action points. It included new sectors such as
Healthcare and Hospitality, Central Inspection system, Trade License, Registration under
Legal Metrology, and Registration of Partnership Firms & Societies. Assessment for
BRAP 2017-18 included feedback score which was sought on 78 reform points from
actual users.
4. In 2016, DPIIT released a 340-point BRAP. It included recommendations on 58
regulatory processes and policies spread across ten reform areas spanning the lifecycle of
a typical business.
5. Department for Promotion of Industry and Internal Trade (DPIIT) launched Business
Reforms Action Plan (BRAP) and its assessment report in September 2015, capturing the
findings of reforms implemented by States/Union Territories.

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UNIT-III
PROBLEMS OF GROWTH:
Unemployment and inflation:
Inflation is the term used to describe the drop of a currency's purchasing power over time. As
such, one unit of currency buys less than it did before inflationary pressures hit the
economy. Unemployment is the situation that economists refer to when the number of jobless
people who are willing to work exceeds the supply of jobs in the workforce. So what's the
relationship between these two economic metrics?
Inflation and unemployment have traditionally had an inverse relationship. When one rises,
the other drops and vice versa. Governments typically rely on monetary and fiscal policies in
order to keep the economy from overstimulation or from slowing it down too much.
 Monetary policy is enacted when a central bank wants to promote growth by
controlling the money supply. More money is injected into the economy by lowering
interest rates and printing more currency to spur growth. Rates increase when central
banks want to slow down growth.
 Fiscal policy refers to a country's tax and spending policies. Economic growth is
encouraged when governments loosen their fiscal policy. They slow down growth
when they tighten the reins.
So let's put this all into perspective. Policies that are effective at boosting economic output
and bringing down unemployment tend to exacerbate inflation, while policies that rein in
inflation frequently constrain the economy and worsen unemployment.
KEY TAKEAWAYS
 Economic theory suggests that the rate of inflation rises as unemployment rates fall.
 This has been formalized according to what is known as the Phillips Curve.
 According to the Phillips Curve, lower unemployment means people spend more,
leading to more pressure on prices.
 The relationship has broken down over time, which is especially obvious during the
period of stagflation in the 1970s when both inflation and unemployment rose.
 The positive correlation between inflation and unemployment may be economically
beneficial as long as both levels are low, which was the case in the 1990s.
The Relationship between Inflation and Unemployment
Inflation and unemployment have historically maintained an inverse relationship, as
represented by the Phillips curve. Low levels of unemployment typically corresponded with
higher inflation, while high unemployment corresponded with lower inflation and even
deflation.
From a logical standpoint, this relationship makes sense. When unemployment is low, the
demand for workers exceeds the number available. Put simply, there are more jobs available
than people waiting for work. When unemployment rises, on the other hand, the availability
of individuals looking for work far exceeds demand. That's because not many employers are
hiring even if more people want to get to work.
The Phillips Curve
The Phillips Curve was developed by A. W. Phillips. This economic concept suggests that
inflation and unemployment are inversely related. As such, it states that inflation is ushered
into the economy by growth and expansion. According to Phillips' theory, this cuts
the unemployment rate since expansion leads to job growth.
This theory worked, to some degree. At least until things got out of control in the 1970s. This
period was characterized by high levels of inflation and unemployment, thus disproving the
historically contrasting relationship that these two economic metrics had.
Stagflation
The most famous period during which inflation and unemployment were positively correlated
in the U.S. was the 1970s. Termed stagflation, the combination of high inflation, high

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unemployment, and sluggish economic growth that plagued this decade came about for
several reasons. President Richard Nixon removed the U.S. dollar from the gold standard,
after which its value was left to float rather than be tied to a commodity. The move left it
vulnerable to market whims.1
Nixon implemented wage and price controls, which mandated the prices businesses could
charge customers.1 Even though production costs increased under a shrinking dollar,
businesses could not raise prices to bring revenues in line with costs. Instead, they were
forced to cut costs by slashing payrolls to remain profitable. The value of the dollar shrank
while jobs were being lost, resulting in a positive correlation between inflation and
unemployment.
Recent Trends
The positive correlation between inflation and unemployment can also be a good thing,
provided both levels are low. The late 1990s featured a combination of unemployment below
5% and inflation below 2.5%. An economic bubble in the tech industry was largely
responsible for the low unemployment rate, while cheap gas amid tepid global demand
helped keep inflation low. And there were other factors at play that contributed to this
relationship during this time, including:
 An increasing number of baby boomers leaving the workforce that wasn't being
replaced
 A cap on prices by U.S. producers in the wake of increasing global competition
 An increase in the adoption of technology, which led to higher productivity
The tech bubble burst in 2000, resulting in an unemployment spike. At the same time,
consumers say a rise in gas prices, too. From 2000 to 2020, the relationship between inflation
and unemployment once again followed the Phillips curve, but to a much lesser degree.
Regional imbalances and social injustice:
1. Introduction to Regional Imbalances in India:
Regional Imbalances implies that there is difference in ‘economic development’ of different
regions. In India ‘region’ means a state or district or union territory. Regional imbalances
may be inter-state or intrastate. Economic development of an economy like India is possible
only when there is balanced economic development of all regions in the country i.e. of 28
states and 7 union territories. Balanced economic development of different regions does not
mean that rate of development of regions should be uniform. It implies that difference in the
economic development of different regions should be minimized.
Regional imbalances may be:
(i) Natural Regional Imbalances:
These are the imbalances in inter regional or intra-regional development due to unequal
distribution of natural resources by the nature. Each region is different from the other region
in respect of natural resources, water capacity, transport etc.
(ii) Man Made Regional Imbalances:
There may be some regions where more efforts have been made for development by giving
preference for investment and other development efforts like – subsidies, grants etc.
2. Indicators of Regional Imbalance:
There are a number of factors which have to be studied and understood in detail to understand
the pattern of regional development of the Indian economy.
In a country like India socio-economic indicators are very prominent to reflect the regional
imbalances.
1. Per Capita Income:
The table clearly indicates that Goa is the state with highest per capita income amongst these
states. Haryana stands second in number with Rs. 78,781. Punjab, Haryana, Maharashtra,
Gujarat and Tamil Nadu have more than average per capita income of India. Bihar has the

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lowest per capita income. States of the southern region of India, Tamil Nadu, Andhra
Pradesh, Kerala etc. seem to be better developed, than most of the states of northern India.
The present trend of growing income disparity among various states of India has been
continuing in recent years.
2. Population:
State wise analysis of population reveals that maximum population of India is concentrated in
four states i.e. Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh (BIMARU). The major
task of Population Commission is to bring about a decline in birth rate in BIMARU states
which are the main contributors to population growth in the country. To step up its efforts,
the outlay for the Department of Family Welfare has been increased from Rs. 6,500 crores in
the Eighth Plan to Rs. 15,120 crores in the Ninth Plan.
Bihar, U.P., Orissa and M.P are four states which have the highest percentage of population
below poverty line. Punjab is a state maintaining the status of lowest percentage of
population living below poverty line because of a strong production base and distribution of
income in Punjab.
3. Agricultural Production and Agricultural Productivity:
While discussing the share of agricultural production of different states we concentrate on
production of food-grains as it forms the major proportion of agricultural production in India.
Share of food-grain production has been highest in case of Uttar Pradesh. Next stands Punjab
although it is seventh in India with regard to area.
Agricultural productivity is calculated per hectare of yield of different crops. Punjab, Uttar
Pradesh and Haryana have maximum productivity in rice and wheat. One of the main items
of daily consumption in food is rice in Kerala, but it’s per hectare productivity is low. Punjab
and Haryana have maximum productivity of wheat. Southern states i.e. Tamil Nadu, Andhra
Pradesh and Karnataka have shown maximum productivity of sugarcane while Rajasthan has
shown the minimum productivity.
4. Net Domestic Product:
It is quite evident from the above table that Maharashtra’s contribution to National income of
India is the maximum. Bihar is a state which contributes the minimum.
5. Development of Factories and Employment:
Although Industrial development in India has been at a fair rate but distribution of industries
to different states is quite uneven. 15 percent of total factories in India are located alone in
Maharashtra. Also the credit goes to four states i.e. Maharashtra, Gujarat, Tamil Nadu and
Andhra Pradesh only for having more than 50 per cent contribution in respect of factories,
industrial production, employment generated by factories and investment in India. Bihar
being rich in mineral wealth and Punjab being an agricultural state their share in respect of
number of factories, output, generated employment and investment has been very low. It has
been observed that states maintaining higher degree of industrialization are maintaining
higher proportion of industrial workers to total population.
6. Infrastructure Disparities:
Development of infrastructure is the backbone of economic and social development of any
economy.
Sh. Montek S. Ahluwalia, “Good infrastructure not only increases the productivity of existing
sources going into production and therefore helps growth, it also helps to attract more
investment which can be expected to increase growth further.”
Causes of Regional Imbalances or Disparities in India:
1. Historical Factors:
Regional imbalances in India started from its British regime. British industrialists mostly
preferred to concentrate their activities in two states like West Bengal and Maharashtra and
more particularly to three cities like Calcutta, Bombay and Madras and neglecting the rest of

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the country to remain backward. The uneven pattern of investment had resulted in uneven
growth of some areas keeping other areas neglected.
2. Geographical Factors:
Geographical factors play an important role in the developmental activities of a developing
economy. Adverse climate and floods are also responsible factors for poor rate of economic
development of different regions of the country which is shown by low productivity and lack
of industrialization. Natural factors resulted in uneven growth of different regions of India.
3. Locational Advantage:
Due to some locational advantages, some regions are getting special favour in respect of site
selections of various developmental projects. Regional imbalances arise due to such
locational advantages accrue to some regions and the locational disadvantages to some other
regions.
4. Inadequacy of Economic Overheads:
Economic overheads like transport and communication facilities, power, technology and
insurance etc. are considered very important for the development of a particular region. Due
to adequacy of such economic overheads, some regions are getting a special favour in respect
of settlement of some developmental projects whereas due to inadequacy of such economic
overheads some regions of the country i.e. North-Eastern region, Himachal Pradesh, Bihar
etc. remained much backward.
5. Failure of Planning Mechanism:
Although balanced growth has been accepted as one of the major objectives of economic
planning in India, since, it did not make much headway in achieving this object. In fact
planning enlarged the disparity among states. In respect of allocating plan outlay developed
states get much favour than less developed states. Due to such divergent trend, imbalance
between the different states in India has been continuously widening, inspite of framing
achievement of regional balance as one of the important objective of economic planning in
the country.
4. Measures Taken by Indian Government to Control Regional Imbalances:
It is clear that regional imbalances are threatening the development of a country. Therefore it
becomes the need of the hour to control it. In India regional disparities are persisting even in
recent years since the very beginning inspite of repeated attempts made from different
corners to contain it.
In order to tackle the problem of regional imbalances and backwardness the Planning
Commission in India has been adopting a three-fold strategy in the following manner:
(i) While transferring resources from the centre to the states, backwardness of the region has
been given due recognition and weightage.
(ii) For the development of backward areas, special area development programmes are being
formulated.
(iii) Necessary measures have been taken for promoting private investment in those backward
regions of the country.
1. Resource Transfer and Backwardness:
While making necessary awards; the Finance Commission in India has been giving due
weightage to backwardness of a state as an important criteria for resource transfer from the
center to the states. The following table shows the share of backward states and special
category states in plan outlay and central assistance.
The table clearly shows that since the 1st plan the Government is continuously giving
assistance to these states. Again there are some peculiar difficulties to solve the problem of
regional imbalance and backwardness/through resource transfers from centre to states. Again
resources so transferred are not always utilised for the development of backward areas of
such backward states.

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Rather there is a growing tendency to “divert” funds intended for backward and difficult
areas to more forward areas and easier programmes. Again the problem of backward areas in
non-backward states remained more or less unattended.
2. Special Area Development Programme:
In order to develop hilly areas, tribal areas, drought-prone areas specific plan schemes have
been designed with full central assistance. The Tribal Sub-plans are implemented through
194 Integrated Tribal Development Projects (ITDP) and 250 modified Area Development
(MADP).
In this manner, different special schemes for particular target groups located in the backward
areas are being included for block level planning for attaining integrated rural development
and considerable employment opportunities. All these programmes, IRDP (Integrated Rural
Development Programme) Drought Prone Area Programme (ODAP), Crash Scheme for
Rural Employment (CSRE) etc. have been formulated.
3. Incentives for Promoting Investment in Backward Regions:
In order to fight the problem of industrial backwardness of some backward regions and also
to promote private investment in backward regions, various fiscal and other incentives have
been provided by the centre, states and other financial institutions under public sector.
5. Weaknesses of Regional Planning in India:
It is being pointed out that inspite of adopting a long standing approach to remove regional
imbalances in the country; the regional planning in India could not meet the desired rate of
success due to its following weaknesses:
(a) Refusal of richer states to transfer some of their surplus resources to the poorer states.
(b) Lack of self-reliance on the part of poorer states and thereby too much dependence on the
transfer of resources from richer states.
(c) Area development programmes for the backward areas are lacking an integrated approach.
(d) Failure of large central projects located in the backward areas to improve their economies.
(e) Non-approaching attitude of the entrepreneurs to seek concessional finance from the
public sector financial institutions.
(f) Too much concentration of Central Government investment subsidy meant for specific
backward areas into a few areas of some districts and too much of such investment subsidy
on capital related investments leading to creation of lesser employment opportunities.
(g) Lack of infrastructural facilities like power transport communication etc. and lack of
adequate fiscal and monetary incentives from state Government have led to no development
of ancillary industries, secondary and territory industries is and around those major central
industrial undertakings.
Considering the above weaknesses of the regional planning strategy in India, the problem of
regional imbalances has to be considered not only in financial terms but also in physical
terms. In order to develop these backward regions, the central assistance should be directly
linked with specific programmes. Development potentials of the backward areas should be
clearly identified and proper steps should be taken to develop such potentialities in order to
remove such relative backwardness of those areas.
Government Policies:
Fiscal policies and monetary policies
Fiscal Policy vs. Monetary Policy: Pros and Cons
When it comes to influencing macroeconomic outcomes, governments have typically relied
on one of two primary courses of action: monetary policy or fiscal policy.
Monetary policy involves the management of the money supply and interest rates by central
banks. To stimulate a faltering economy, the central bank will cut interest rates, making it
less expensive to borrow while increasing the money supply. If the economy is growing too

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rapidly, the central bank can implement a tight monetary policy by raising interest rates and
removing money from circulation.
Fiscal policy, on the other hand, determines the way in which the central government earns
money through taxation and how it spends money. To stimulate the economy, a government
will cut tax rates while increasing its own spending; while to cool down an overheating
economy, it will raise taxes and cut back on spending.
There is much debate as to whether monetary policy or fiscal policy is the better economic
tool, and each policy has pros and cons to consider.
KEY TAKEAWAYS
 Central banks use monetary policy tools to keep economic growth in check and
stimulate economies out of periods of recession.
 While central banks can be effective, there could be negative long-term consequences
that stem from short-term fixes enacted in the present.
 Fiscal policy refers to the tools used by governments to change levels of taxation and
spending to influence the economy.
 Fiscal policy can be swayed by politics and placating voters, which can lead to poor
decisions that are not informed by data or economic theory.
 If monetary policy is not coordinated with a fiscal policy enacted by governments, it
can undermine efforts as well.
An Overview of Monetary Policy
Monetary policy refers to the actions taken by a country's central bank to achieve
its macroeconomic policy objectives. Some central banks are tasked with targeting a
particular level of inflation. In the United States, the Federal Reserve Bank (the Fed) has been
established with a mandate to achieve maximum employment and price stability.
This is sometimes referred to as the Fed's "dual mandate." Most countries separate the
monetary authority from any outside political influence that could undermine its mandate or
cloud its objectivity. As a result, many central banks, including the Federal Reserve, are
operated as independent agencies.123
When a country's economy is growing at such a fast pace that inflation increases to
worrisome levels, the central bank will enact restrictive monetary policy to tighten the money
supply, effectively reducing the amount of money in circulation and lowering the rate at
which new money enters the system. Raising the prevailing risk-free interest rate will make
money more expensive and increase borrowing costs, reducing the demand for cash and
loans.
Monetary Policy Pros and Cons
 Interest Rate Targeting Controls Inflation
A small amount of inflation is healthy for a growing economy as it encourages investment in
the future and allows workers to expect higher wages. Inflation occurs when the general price
levels of all goods and services in an economy increase. By raising the target interest rate,
investment becomes more expensive and works to slow economic growth a bit.
 Can Be Implemented Fairly Easily
Central banks can act quickly to use monetary policy tools. Often, just signaling their
intentions to the market can yield results.
 Central Banks Are Independent and Politically Neutral
Even if monetary policy action is unpopular, it can be undertaken before or during elections
without the fear of political repercussions.
 Weakening the Currency Can Boost Exports
Increasing the money supply or lowering interest rates tends to devalue the local currency.
A weaker currency on world markets can serve to boost exports as these products are

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effectively less expensive for foreigners to purchase. The opposite effect would happen for
companies that are mainly importers, hurting their bottom line.
 Effects Have a Time Lag
Even if implemented quickly, the macro effects of monetary policy generally occur after
some time has passed. The effects on an economy may take months or even years to
materialize. Some economists believe money is "merely a veil," and while serving to
stimulate an economy in the short-run, it has no long-term effects except for raising the
general level of prices without boosting real economic output.
 Technical Limitations
Interest rates can only be lowered nominally to 0%, which limits the bank's use of this policy
tool when interest rates are already low. Keeping rates very low for prolonged periods of time
can lead to a liquidity trap. This tends to make monetary policy tools more effective during
economic expansions than recessions. Some European central banks have recently
experimented with a negative interest rate policy (NIRP), but the results won't be known for
some time to come.
 Monetary Tools Are General and Affect an Entire Country
Monetary policy tools such as interest rate levels have an economy-wide impact and do not
account for the fact some areas in the country might not need the stimulus, while states with
high unemployment might need the stimulus more. It is also general in the sense that
monetary tools can't be directed to solve a specific problem or boost a specific industry or
region.
 The Risk of Hyperinflation
When interest rates are set too low, over-borrowing at artificially cheap rates can occur. This
can then cause a speculative bubble, whereby prices increase too quickly and to absurdly high
levels. Adding more money to the economy can also run the risk of causing out-of-control
inflation due to the premise of supply and demand: if more money is available in circulation,
the value of each unit of money will decrease given an unchanged level of demand, making
things priced in that money nominally more expensive.
EXIM Policy:
Introduction
Export Import Policy or better known as Exim Policy is a set of guidelines and instructions
related to the import and export of goods. The Government of India notifies the Exim Policy
for a period of five years (1997 2002) under Section 5 of the Foreign Trade (Development
and Regulation Act), 1992. The current policy covers the period 2002 2007. The Export
Import Policy is updated every year on the 31st of March and the modifications,
improvements and new schemes becames effective from 1st April of every year. All types of
changes or modifications related to the Exim Policy is normally announced by the Union
Minister of Commerce and Industry who coordinates with the Ministry of Finance, the
Directorate General of Foreign Trade and its network of regional offices.
1. Service Exports
Duty free import facility for service sector having a minimum foreign exchange earning of
Rs. 10 lakhs. The duty free entitlement shall be 10% of the average foreign exchange earned
in the preceding three licensing years.
However, for hotels the same shall be 5 % of the average foreign exchange earned in the
preceding three licensing years. Imports of agriculture and dairy products shall not be
allowed for imports against the entitlement. The entitlement and the goods imported against
such entitlement shall be non transferable.
2. Status Holders

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Duty free import entitlement for status holder having incremental growth of more than 25%
in FOB value of exports (in free foreign exchange). This facility shall however be available to
status holder having a minimum export turnover of Rs. 25 crore (in free foreign exchange).
Annual Advance Licence facility for status holder to be introduced to enable them to plan for
their imports of raw material and component on an annual basis and take advantage of bulk
purchase.
Status holder in STPI shall be permitted free movement of professional equipments like
laptop/computer.
3. Hardware/Software
To give a boost to electronic hardware industry, supplies of all 217 ITA1 items from EHTP
units to Domestic Tariff Area (DTA) shall qualify for fulfillment of export obligation.
To promote growth of exports in embedded software, hardware shall be admissible for duty
free import for testing and development purpose. Hardware up to a value of US$ 10,000 shall
be allowed to be disposed off subject to STPI certification.
100% depreciation to be available over a period of 3 years to computer and computer
peripherals for units in EOU/EHTP/STP/SEZ.
4. Gem & Jewellery Sector
Diamonds & Jewellery Dollar Account for exporters dealing in purchase /sale of diamonds
and diamond studded jewellery .
Nominated agencies to accept payment in dollar for cost of import of precious metals from
EEFC account of exporter.
Gem & Jewellery units in SEZ and EOUs can receive precious metal Gold/silver/platinum
prior to export or post export equivalent to value of jewellery exported. This means that they
can bring export proceeds in kind against the present provision of bringing in cash only.
5. Removal of Quantitative Restrictions
Import of 69 items covering animals products, vegetables and spice antibiotics and films
removed from restricted list
Export of 5 items namely paddy except basmati, cotton linters, rare, earth, silk, cocoons, and
family planning device except condoms, removed from restricted list.
6. EOU Scheme
Provision b, c, i, j, k and l of SEZ (Special Economic Zone) scheme, as mentioned above,
apply to Export Oriented Units (EOUs) also. Besides these, the other important provisions
are:
EOUs are now required to be only net positive foreign exchange earner and there will now be
no export performance requirement.
Period of Utilization raw materials prescribed for EOUs increased from 1 year to 3 years.
Gems and jewellery EOUs are now being permitted sub contracting in DTA.
Gems and jewellery EOUs will now be entitled to advance domestic sales.
7. DEPB Scheme
Facility for pro visional Duty Entitlement Pass Book(DEPB) rates introduced to encourage
diversification and promote export of new products.
DEPB rates rationalize in line with general reduction in Customs duty.
8. DFRC Scheme
Duty Free Replenishment Certificate (DFRC) scheme extended to deemed export to provide a
boost to domestic manufacturer.
Value addition under DFRC scheme reduced from 33% to 25%.
9. Miscellaneous
Actual user condition for import of second hand capital goods up to 10 years old dispensed
with.

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Reduction in penal interest rate from 24% to 15% for all old cases of default under Exim
policy
Restriction on export of warranty spares removed.
IEC holder to furnish online return of importers/exporters made on yearly basis.
Export of free of cost goods for export promotion @ 2% of average annual exports in
preceding three years subject to ceiling of Rs. 5 lakhs permitted.
SEZ Policy:
Government of India announced the Special Economic Zones (SEZs) Policy in April 2000
with a view to create world-class infrastructure and ease out multiplicity of controls and
clearances and provide stable fiscal policy regime to attract larger foreign investments in
India.
Subsequently, in order to instill confidence in investors and signal the Government's
commitment to a stable SEZ policy regime and thereby generating greater economic activity
and employment through the establishment of new SEZs, a comprehensive legislation i.e., the
Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 and received
Presidential assent on the 23rd of June, 2005. This act was followed by adoption of SEZ
Rules, which came into effect on 10th February, 2006. The Act and Rules provided the basic
framework of establishment and management of SEZs in India with drastic simplification of
procedures and for single window clearance on matters relating to central as well as state
governments.
1. Permissible Activities in SEZ units
 SEZ Units can be set up for Manufacture of export goods, rendering Services & Trading of
goods.
 Manufacture means: to make, produce, fabricate, assemble process or bring into existence
by hand or by machine, a new product having a distinctive name, character or use and shall
include processes such as refrigeration, cutting, polishing, blending, repair, re-making, re-
engineering and includes agriculture, aquaculture, animal husbandry, floriculture,
horticulture, pisciculture, poultry, sericulture, viticulture & mining.
 Services permitted in SEZ include: Trading, warehousing, research and development
services, computer software services, including information enabled services such as back-
office operations, call centers, content development or animation, data processing,
engineering and design, graphic information system services, human resources services,
insurance claim processing, legal data bases, medical transcription, payroll, remote
maintenance, revenue accounting, support centers and web-site services, off-shore banking
services, professional services
2. Investment Limits
No Minimum investment condition in Plant and Machinery for setting up units in SEZs.
3. Easy Foreign Direct Investment Norms
 100% FDI through automatic approval route for setting up units in SEZ, except for arms
and ammunition, explosives, atomic substances, narcotics and hazardous chemicals,
distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco
substitutes.
 Shifting of SEZ Unit from one SEZ to another SEZ allowed.
4. Relaxed Labour Laws
 The Unit enjoy public utility status, which protects the interests of the units preventing
sudden disruption of work (flash strikes) etc. Several States are amending labor laws by
providing exemptions to SEZs from contract labour, industrial disputes Act and other Acts.

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5. Export Performance and NFE conditions

 There is no condition for minimum export performance. However, the units will have to
achieve positive Net Foreign Exchange, which shall be calculated cumulatively for a period
of 5 years from the date of commencement of production. Following supplies are considered
towards achievement of Net foreign exchange earnings:
o Direct Exports
o Exports through Third Parties
o Exports to Nepal & Bhutan against freely convertible currency.
Direct and Indirect Taxes with special reference to GST and VAT:
In India, whether you are earning or making a purchase of any goods or services, you as an
individual or any corporate entity are obliged to pay taxes. Tax is a kind of mandatory recurring
fee which is paid to the central and state government. It is also regarded as the main source of
revenue for the government which helps them to build the economy of a country.
At a broad level, taxes in India are categorized into: Direct and Indirect taxes.
What is Direct Tax?
Direct Tax is a tax where the taxpayer pays directly to the authority imposing the tax. Here, the
taxpayer has to bear the tax and will not be able to transfer this liability to another entity. In India,
the Central Board of Direct Taxes (CBDT), is responsible for the collection and administration of
direct taxes. CBDT is governed by the Department of Revenue which provides inputs to the
government related to the implementation of direct taxes.
Types of Direct Taxes in India
Income Tax: The most common example of direct tax is income tax, which one pays directly to
the government. Income tax is imposed on the income that is being earned in a financial year. The
tax is paid on the basis of income tax slabs of the IT department.
Capital Gains Tax: If anyone is making capital gains; they are required to pay tax on those gains
to the government. Capital gains may arise out of land or from investments such as equities. Based
on the duration for which one held the investments, the capital gains tax is charged as long-term
capital gains (LTCG) or short-term capital gains (STCG).
Securities Transaction Tax (STT): If one is involved in security trading, then they are required
to pay securities transactions tax, irrespective of any gains made out of it or not.
* Evasion is quite possible.
What is Indirect Tax?
Direct taxes are levied on taxpayer’s income and profits; however, indirect taxes are charged on goods and services.
The taxpayers pay the indirect tax to the government via intermediary and thus they are indirectly paid to the
government. The Central Board of Indirect Taxes and Customs (CBIC) is responsible for the collection and
administration of indirect taxes which is governed by the Department of Revenue, just like CBDT.
Types of Indirect Taxes in India
Goods and Services Tax (GST): GST is the most common example of indirect tax, which has replaced an array of
other indirect taxes in India such as value added tax, service tax, excise duty, purchase tax and more. GST is a single,
unified and the most comprehensive indirect tax which is imposed on the goods and services on the basis of the tax
slabs laid by the GST council of India.
Customs Duty: Customs duty is levied on you, if you purchase any goods and service from abroad. This duty has to be
paid, irrespective whether the product has reached you by air, sea or land. Thus, customs duty is an indirect tax
which is imposed to make sure that each and every product coming into India is taxed.
After the introduction of GST, a huge change has come in the entire tax landscape of the country.
The various indirect taxes such as VAT, service tax, sales tax and others that were mandatory earlier,
have now been abolished. GST truly goes by its slogan of “One Nation, One Tax, One Market”.

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UNIT-IV

POLITICAL AND LEGAL ENVIRONMENT OF BUSINESS:

Definition
The political-legal environment is a combination of a lot of factors such as the current
political party in power, the degree of politicization of trade and industry, the efficiency of
the current government, government policies, current legal framework, the public attitude
towards the economy, etc.
The legal and political environment - introduction
Governments want to encourage business activity, but they also need to pass laws and put in
place rules and regulations to control business activity and avoid undesirable outcomes or
negative externalities. They may pass regulations concerning the employment of people,
environmental impact or perhaps constraints to ensure that all advertising is legal, decent and
truthful.
The legal environment therefore impacts on all business behaviour and can be split into a
number of different areas:
 Employment legislation - rules, regulations and laws concerning the employment of
people.
 Environmental legislation - laws, rules and regulations concerning the environmental
impact that then operations of firms create.
 Consumer law - businesses sell to consumers and it is important that consumers have
protection to ensure they are not misled or treated unfairly by firms.
 Competition law - competition is a healthy way to ensure that prices are kept down and
that businesses innovate. Without competition firms may be in a position to exploit
consumers and so governments often legislate to try to ensure competition is fair and to
prevent the development of monopolies.
 Information /reporting law - governments often legislate to ensure that the information
that firms provide is accurate and reflects the true state ('a true and fair view') of the business.
These types of rules and regulations may include accounting regulations/standards to ensure
firms represent their financial position accurately and ensure that firms do not keep
information on consumers that they are not entitled to retain.
 Social legislation - here government attempts to promote the consumption of merit goods,
which enhance human welfare such as education and health services, and discourages or
prevents the consumption of demerit goods such as tobacco, and petrol. Demerit goods result
in higher social costs.
Changing Dimensions of Legal Environment in India:
Dimensions of Business Environment
Get detailed study material on the Dimensions of Business [Link] description -
Notes on Dimensions of Business Environment. Understand the business environment, its
important features, dimensions and other related topics in detail..
The business environment is the most critical part of any organisation that includes many
internal and external entities such as suppliers, competitors, the media, the government,
customers, economic conditions, investors, and so on that together make up the business
environment.
Dimensions of the Business Environment
The business environment dimensions can be described as the total sum of factors, forces,
and enterprise which directly or indirectly influences the business activities. Here are five
major dimensions of the business environment. Let’s have a look –
Legal environment

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 There are several rules, regulations, and laws passed by the government that need to be
followed by the organizations.
 For the smooth functioning of your business, having a thorough understanding of the laws or
rules generated is important.
 Understanding the legal business environment helps businesses not to fall into the trap.
 Several laws are a part of the legal environment; these include Consumer Protection Act
1986, Companies Act 2013, Policies related to licensing & approvals, policies regarding
foreign trade, and so on.
Political environment
 There are certain actions that the government takes that might affect the routine functioning
of the business.
 Business success and growth is majorly affected by the government’s attitude towards the
particular industry, peace in the country, and government stability.
Economic environment
 The overall economic environment includes economic policies, economic conditions, and the
economic system that prevails in a country.
 The economic environment is affected by several factors, including Taxes, Inflation, Interest
Rates, Unemployment rate, Value of Rupee, Stock Market Indices, Personal Disposable
Income, and so on.
Social environment
 As the name suggests, the social environment includes all the social forces such as social
trends, traditions, values, level of education, living standard, etc. These forces vastly affect
the environment of the business.
Technological environment
 In recent years, several technological improvements have rendered new services, suggested
exciting ways to produce products, and so on.
Conclusion
With this, we come to an end to our study material on Dimensions of Business Environment.
The business environment is the most critical part of any organisation that includes a bunch
of internal and external entities such as suppliers, competitors, the media, the government,
customers, economic conditions, investors, and so on that together make up the business
environment.
Brief Introduction to Competition Act , 2005:
History of the Competition Act, 2005
The Monopolies Inquiry Commission was established in April 1964 under Justice KC Das
Gupta, a Supreme Court judge. The objective of the commissions was to inquire about the
effect and extent of monopolistic and restrictive trade practices in important sectors of the
Indian economy.
The Monopolies and Restrictive Practices Act of 1969 was enacted to limit the concentration
of wealth in a few hands and limit monopolistic practices, but it was too archaic in its
definitions of what is a ‘monopolistic practice’. Thus, it was decided that a new law
governing competition in India was required.
Keeping the above purpose in mind the Competition Act was introduced in Lok Sabha on
6 August 2001.
Definitions under the Competition Act
The following are the definitions cited under the Competition Act
1. Acquisition: Acquisition is defined as the direct or indirect agreement to acquire shares,
voting rights or control of assets over any enterprise.
2. Cartel: A cartel is defined as an association of producers, sellers who limit control
distribution, sale or promotions on goods through an arrangement previously made.

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3. Position: A dominant position means a position of power held by an enterprise in the

related market. It enables the enterprise to function freely and influence the market to its
directions.
4. Predatory pricing: Predatory pricing is where the price of goods and services is reduced
to well below the cost of production in order to eliminate competition.
5. Rule of reason: The interpretation of activity on the basis of business justification, market
impact on competition and on the consumer.
Salient Features
The following are the features of the Competition Act:
1. Anti Agreements: Any individual or enterprises shall not deal in production supply or
distribution that may cause a negative impact regarding competition in India. Any existence
of such agreements is considered illegal.
2. Abuse of dominant position: In the event, an enterprise or an associated individual, it is
found to indulge in practices that are unfair or discriminatory in nature shall be considered an
abuse of dominant position. If a party is found to be in abuse of its position, then they will be
subjected to an investigation from the concerned authorities.
3. Combinations: As per the act a combination is defined as terms which lead to acquisitions
or mergers. But should such combinations cross the limits as put forth by the Act, then the
parties involved would be under the scrutiny of the Competition Commission of India.
4. Competition Commission of India: The Competition Commission of India is an
independent body with the powers to enter into contracts and should the contracts be broken
they can sue the parties involved. The Commission consists of a maximum of six members
who are tasked with sustaining and promoting the interests of consumers in order to foster an
ideal environment for economic competition.
The other function of the Commission is to advise the Government of India regarding
competition in the economy and create public awareness on the same issue.
Corporate Governance and Social Responsibility of Business:
Corporate Governance is a continuous process of applying the best management practices,
ensuring the law is followed the way intended, and adhering to ethical standards by a firm for
effective management, meeting stakeholder responsibilities, and complying with corporate
social responsibilities.
It contains policies and rules to maintain a strong relationship between the owners of the
company (shareholders), the Board of Directors, management, and various stakeholders like
employees, customers, Government, suppliers, and the general public. It applies to all kinds
of organizations-profit or not-for-profit.
Principles of Corporate Governance:
1. Accountability
Accountability means to be answerable and be obligated to take responsibility for one’s
actions. By doing so, two things can be ensured-
1. That the management is accountable to the Board of Directors.
2. That the Board of Directors is accountable to the shareholders of the company.
This principle gives confidence to shareholders in the business of the company that in case of
any unfavourable situation, the persons responsible will be held in charge.
2. Fairness
Fairness gives shareholders an opportunity to voice their grievances and address any issues
relating to the violation of shareholder’s rights. This principle deals with the protection of
shareholders’ rights, treating all shareholders equally without any personal favouritism, and
granting redressal for any violations of rights.
3. Transparency

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Providing clear information about a company’s policies and practices and the decisions that
affect the rights of the shareholders represents transparency. This helps to build trust and a
sense of togetherness between the top management and the stakeholders. It ensures accurate
and full disclosure timely on material matters like financial condition, performance,
ownership.
4. Independence
Independence means the ability to make decisions freely without being unduly influenced.
Decisions should be made freely without having any personal interest in the company. It
ensures the reduction in conflict of interest. Corporate governance suggests the appointment
of independent directors and advisors so that decisions are taken responsibly without
influence.
5. Social Responsibility
Apart from the 4 main principles, there is an additional principle of corporate governance.
Company social responsibility obligates the company to be aware of social issues and take
action to address them. In this way, the company creates a positive image in the industry. The
first step towards Corporate Social Responsibility is to practice good Corporate Governance.
Corporate social responsibility of business
Meaning
Corporate social responsibility (CSR) refers to strategies that companies put into action as
part of corporate governance that are designed to ensure the company’s operations are ethical
and beneficial for society
Categories of CSR
Although corporate social responsibility is a very broad concept that is understood and
implemented differently by each firm, the underlying idea of CSR is to operate in an
economically, socially, and environmentally sustainable manner.
Generally, corporate social responsibility initiatives are categorized as follows:
1. Environmental responsibility
Environmental responsibility initiatives aim to reduce pollution and greenhouse gas
emissions and the sustainable use of natural resources.
2. Human rights responsibility
Human rights responsibility initiatives involve providing fair labor practices (e.g., equal pay
for equal work) and fair trade practices, and disavowing child labor.
3. Philanthropic responsibility
Philanthropic responsibility can include things such as funding educational programs,
supporting health initiatives, donating to causes, and supporting community beautification
projects.
4. Economic responsibility
Economic responsibility initiatives involve improving the firm’s business operation while
participating in sustainable practices – for example, using a new manufacturing process to
minimize wastage.

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UNIT-V
FOREIGN INVESTMENT:
FDI and FII:
Foreign direct investment (FDI) is when a company takes controlling ownership in a business
entity in another country. With FDI, foreign companies are directly involved with day-to-day
operations in the other country. This means they aren’t just bringing money with them, but
also knowledge, skills and technology.
Generally, FDI takes place when an investor establishes foreign business operations or
acquires foreign business assets, including establishing ownership or controlling interest in a
foreign company.
Where is FDI made
Foreign Direct Investments are commonly made in open economies that have skilled
workforce and growth prospect. FDIs not only bring money with them but also skills,
technology and knowledge.
FDI in India
FDI is an important monetary source for India's economic development. Economic
liberalization started in India in the wake of the 1991 crisis and since then, FDI has steadily
increased in the country. India today is a part of top 100-club on Ease of Doing Business
(EoDB) and globally ranks number 1 in the Greenfield FDI ranking.
Routes through which India gets FDI
Automatic route: The non-resident or Indian company does not require prior nod of the RBI
or government of India for FDI.
Govt route: The government's approval is mandatory. The company will have to file an
application through Foreign Investment Facilitation Portal, which facilitates single-window
clearance. The application is then forwarded to the respective ministry, which will
approve/reject the application in consultation with the Department for Promotion of Industry
and Internal Trade (DPIIT), Ministry of Commerce. DPIIT will issue the Standard Operating
Procedure (SOP) for processing of applications under the existing FDI policy.
Sectors which come under the ' 100% Automatic Route' category are
Agriculture & Animal Husbandry, Air-Transport Services (non-scheduled and other services
under civil aviation sector), Airports (Greenfield + Brownfield), Asset Reconstruction
Companies, Auto-components, Automobiles, Biotechnology (Greenfield), Broadcast Content
Services (Up-linking & down-linking of TV channels, Broadcasting Carriage Services,
Capital Goods, Cash & Carry Wholesale Trading (including sourcing from MSEs),
Chemicals, Coal & Lignite, Construction Development, Construction of Hospitals, Credit
Information Companies, Duty Free Shops, E-commerce Activities, Electronic Systems, Food
Processing, Gems & Jewellery, Healthcare, Industrial Parks, IT & BPM, Leather,
Manufacturing, Mining & Exploration of metals & non-metal ores, Other Financial Services,
Services under Civil Aviation Services such as Maintenance & Repair Organizations,
Petroleum & Natural gas, Pharmaceuticals, Plantation sector, Ports & Shipping, Railway
Infrastructure, Renewable Energy, Roads & Highways, Single Brand Retail Trading, Textiles
& Garments, Thermal Power, Tourism & Hospitality and White Label ATM Operations.
Sectors which come under up to 100% Automatic Route' category are
 Infrastructure Company in the Securities Market: 49%
 Insurance: up to 49%
 Medical Devices: up to 100%
 Pension: 49%
 Petroleum Refining (By PSUs): 49%
 Power Exchanges: 49%
Government route
Sectors which come under the 'up to 100% Government Route' category are

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 Banking & Public sector: 20%

 Broadcasting Content Services: 49%
 Core Investment Company: 100%
 Food Products Retail Trading: 100%
 Mining & Minerals separations of titanium bearing minerals and ores: 100%
 Multi-Brand Retail Trading: 51%
 Print Media (publications/ printing of scientific and technical magazines/ specialty
journals/ periodicals and facsimile edition of foreign newspapers): 100%
 Print Media (publishing of newspaper, periodicals and Indian editions of foreign
magazines dealing with news & current affairs): 26%
 Satellite (Establishment and operations): 100%
FDI prohibition
There are a few industries where FDI is strictly prohibited under any route. These industries
are
 Atomic Energy Generation
 Any Gambling or Betting businesses
 Lotteries (online, private, government, etc)
 Investment in Chit Funds
 Nidhi Company
 Agricultural or Plantation Activities (although there are many exceptions like
horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc)
 Housing and Real Estate (except townships, commercial projects, etc)
 Trading in TDR’s
 Cigars, Cigarettes, or any related tobacco industry
FDI inflow
During the fiscal ended March 2019, India received the highest-ever FDI inflow of $64.37
billion. The FDI inflows were $45.14 billion during 2014-15 and $55.55 billion in the
following year.
Multinationals Corporations:
Favorable and Harmful Effect of the Operations of MNC’s on Indian
Economy:
Multinational corporations — can provide their host countries with many benefits such as
employment opportunities and the latest technological innovations. At the same time,
multinationals use their considerable size to select the most favorable conditions for the
organization. They have the potential to drive local operators out of business because local
firms, on average, do not enjoy the same economies of Companies that operate across
national borders — so-called multinational scale.
Players on a Global Stage
Multinational corporations (MNC) are enterprises that have control over assets, facilities
and subsidiaries overseas in addition to their headquarters in the home country. In other
words, they are global players with budgets to match. Due to their size and reach, MNCs
have the power to influence both the world economy and local trading conditions in each of
their host nations.
Supply Chain Advantages of Multinational Corporations
The drive to optimize the supply chain means that multinationals will often partner
with local vendors for raw materials, components and other supplies. These contracts are a
great opportunity for local companies, which will help boost revenues and reputations,
because signing a contract with a large MNC sets the local firm apart as an organization
that supplies major international chains.
Beneficiary of Technology Transfer

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When an MNC invests in a host country, it brings with it advanced methods of conducting
business, with standards in such areas as lean production methods, safe working
conditions, technology and staff training programs. Affiliating with an MNC often puts
local firms in direct contact with these standards, and they can learn a lot from the so-
called "technology transfer."
Riding the Wave of R&D
Research and development — the act of looking for gaps in the market, uncovering new
customer trends and developing products that add something of value to consumers —
can be prohibitively expensive, and local firms may not have the resources to conduct any
type of research and development. Multinational corporations have far more resources at
their disposal. Many will dedicate large budgets to finding and tapping new markets that
are potentially lucrative for the MNC.
More Cash in the System
Given the size of MNCs, any investment in a host country is likely to be significant. The
profits generated will be subject to local taxes in most cases, which is a boon for the vaults
of domestic governments. Indeed, governments typically will incentivize MNCs in the form
of subsidies and tax breaks to attract investment into their countries.
For local firms, this is good news. MNCs often work with local governments to enhance
trading conditions in the local area, in order to make doing business in the host country that
little bit easier. So, you might see investment in roads, railways, utilities and
communication infrastructure when an MNC comes to town. Investment improves the
economic development of the entire area, and local firms benefit as a result.
David versus Goliath
Despite the many positives, for some local firms, the arrival of an MNC can be a death
sentence. Where once they might have enjoyed a dominant position in the local
market, suddenly they have to compete with a huge multinational and all that comes with it
— huge cash reserves, advanced technology, economies of scale in production, desirable
products, gold-standard marketing strategies and a powerful brand name. How can local
firms compete?
It's not a strategy that every local firm can follow, however, and many will be forced
to reevaluate and change direction. As the MNC pushes them hard on cost.
Losing the War on Talent
By definition, MNCs are global businesses that produce goods at the lowest possible price
and then sell them at the highest possible price in foreign markets. The profits they make
can be substantial, and they can afford to pay better wages and invest in a highly skilled_
workforce.
For local businesses, this can be disastrous. Either they must match the higher wage scale
to retain staff in their own operations or they must watch their best and most talented
people jump ship to go to the MNC.
Disproportionate Political Influence
Multinational dollars can be highly beneficial to a host country, and the promise of deep
investment pockets can give the MNC disproportionate power over the host government.
Local firms may benefit from relaxed trading regulations, as has been observed. At the
same time, governments may be pressured into agreeing with policies that are suitable for
the MNC but which may do very little to support the long-term welfare of the local
business community.
Diluting Traditional Cultures
The sociologist George Ritzer coined a name for the negative impacts of multinational
corporations on the local community — McDonaldization. It describes what happens

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when MNCs take hold and force the same characteristics of predictability, efficiency,
consumer experience and standardization on the host nation.
Liberalization and MNC ‘S International Business Environment
Impact of Liberalization, Privatization, and Globalization
In the early 1990s, India faced a major crisis followed by a foreign exchange deficit, resulting
in its economic downfall. To overcome the crisis, the government came up with adjustments
to the economy by bringing new reforms. The reforms introduced were called ‘structural
reforms’ and launched under the ‘New Economic Policy (NEP)’.
The New Economic Policy was introduced in 1991. There are three broad concepts of New
Economic Policy: Liberalisation, Privatisation, and Globalisation, or the LPG Model. The
LPG Model was introduced to replace the LQP Model, i.e., Licensing, Quotas, and Permits.
Liberalisation
Liberalization of the economy is considered a key component of NEP. Before the New
Economic Policy of 1991, the private sector was in control of the government. Because of
this, the domestic industries were not allowed to take any decisions regarding the industry’s
work without the government’s interference. This resulted in a fall in professionalism and
inefficiency of work within the industry. With the introduction of the liberalisation policy,
this sector gained the freedom of decision-making without any interference from the
government.
Privatization
Privatization refers to the partial or full ownership and operation of the public sector
enterprises by the private sector. It implies the withdrawal of government ownership from the
public sector. It can be done in two ways:
1. Outright sale of part of the equity of Public Sector Undertakings (PSUs) to private
entrepreneurs (also known as Disinvestment), or
2. Withdrawal of ownership and management of the public sector companies from the
government to the private sector.
The need for privatization was felt mainly because of the poor performance of the Public
Sector Undertakings, PSUs. As a result, the consumers were facing a major loss, as they did
not receive quality products, and other services, such as the delivery system were also very
poor. With the introduction of the privatisation policy, this factor was eliminated as
Globalization
Globalization refers to the integration of the economy of a country with the economies of
other countries. The process of globalization is associated with the free flow of trade, capital
across borders, increasing openness, growing economic independence, and deepening of
economic integration in the world. The main aim of globalization was to integrate the Indian
economy with the global economy. As a result, there will be an unrestricted flow of
information, goods and services, technologies, and even people across countries, which will
eventually enhance the development of the country.
Impact of LPG
Positive Impacts
 Increase in GDP growth rate in India. After 1991, India’s GDP growth rate increased
year by year, and in the year 2015-16, it was estimated to be 7.5%, whereas it was only
1.1% during the year 1990-91. Because of the privatisation, advanced foreign technology,
reduction of taxes, and the abolition of industrial licensing, there was major growth in the
GDP of the country.
 The rate of unemployment was high before the adaptation of the new economic policy.
But, in 1991, the rate of employment increased as the MNCs started investing in India,
which resulted in the new job opening, and the requirement for employees was created. And
due to the removal of the industrial licensing, many individuals started their businesses.

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 An increase in the country’s per capita income. Per capita income refers to the average
income earned by a person in a given country. In 1991, the Per capita Income of India was
11,235, but in 2014-15 Per Capita Income reached to85, 533.
 Increase in Foreign Direct Investment from 408 Crores in 1991 to 106,693 Crores in
2015 after the introduction of the new economic reforms of globalisation.
 Decrease in the Fiscal Deficit. A fiscal deficit refers to a situation where the revenue
generated is exceeded by the expenditures made by the government. The fiscal deficit of
India before 1991 was 8.5% of Gross Operating Profit, but it came down to 4% of the Gross
Operating Profit in 2015.
World Bank and IMF:
IMF vs. WTO vs. World Bank: An Overview
The International Monetary Fund (IMF), the World Bank, and the World Trade
Organization (WTO) are highlighted in the financial press or on television nearly every day.
From loans to Greece to trade deals in Asia, these organizations make headlines across the
globe. Understanding these entities and their missions will provide greater insight into how
these organizations help to shape the global economy.
The International Monetary Fund (IMF) is a global organization with 190 member countries
currently based in Washington, D.C. The fund's purpose is to promote financial stability and
economic growth among other objectives.
The World Trade Organization (WTO is also a global association with 164 member
countries. The organization's purpose is to promote fair trade between nations. The World
Bank is also an international organization and has a goal to reduce poverty through financial
assistance.
The International Monetary Fund (IMF)
The IMF promotes itself as “an organization of 190 countries, working to foster global
monetary cooperation, secure financial stability, facilitate international trade, promote high
employment and sustainable economic growth, and reduce poverty around the world.”1 It
was created in 1944, while World War II was still raging, as part of the Bretton Woods
Agreement. The agreement sought to create a monetary and exchange rate management
system that might prevent a repeat of the currency devaluations that contributed to the
economic challenges of that period.
The IMF Mission
The IMF advances its mission in a variety of ways. Monitoring and reporting on economic
developments is a large part of the effort, including making recommendations to member
countries on future courses of action. For example, in 2021, the IMF reviewed the state of the
U.S. economy and recommended that the U.S. Federal Reserve hold off on its plans to
increase interest rates because it might harm the economy as it emerges from the COVID-19
pandemic. Although the IMF's recommendations are not legally binding, they are made
public. Economic policymakers are certainly aware of them and are undoubtedly influenced
by them.
The World Bank
The World Bank Group, like the IMF, was created at Bretton Woods in 1944. The group is
self-funded and has its home office in Washington, D.C. Its goal is to provide “financial and
technical assistance to developing countries around the world” in an effort to “reduce poverty
and support development.” It consists of five underlying institutions, the first two of
which are collectively referred to as The World Bank. International Bank for
Reconstruction and Development (IBRD). This is the World Bank's lending arm. It
provides financial assistance to credit-worthy, middle- and low-income nations.
International Development Association (IDA). IDA provides loans and grants to poor
countries.

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1. International Finance Corporation (IFC). In contrast to the World Bank, which focuses
its efforts on governments, the IFC provides money and advice to private sector entities.
2. Multilateral Investment Guarantee Agency. MIGA seeks to encourage foreign direct
investment in developing nations.
3. International Centre for Settlement of Investment Disputes. ICSID provides physical
facilities and procedural expertise to help resolve the inevitable disputes that arise when
money is at the heart of a disagreement between two parties.
4. Advancing the World Bank Mission
The World Bank pursues its objectives by delivering financial assistance to developing
nations. It gives low- or no-interest loans and grants to finance “a wide array of investments
in such areas as education, health, public administration, infrastructure, financial and private
sector development, agriculture, and environmental and natural resource
management.”15 For example, the World Bank loaned India $500 million in 2015 to support
micro-, small- and mid-sized businesses.
The World Trade Organization (WTO)
The World Trade Organization (WTO) claims to be “the only global international
organization dealing with the rules of trade between nations.”17 The WTO’s efforts center
on developing trade agreements between nations to encourage cross-border commerce. This
includes setting up the agreements, interpreting the agreements, and facilitating dispute
settlement.2
Officially founded in 1995, the WTO traces its roots back to Bretton Woods where
the General Agreement on Trade and Tariffs (GATT) was crafted in an effort to encourage
and support trade between nations. Following up on GATT, the 1986-1994 Uruguay
Roundtable trade negotiations resulted in the formal creation of the WTO.18 The WTO
headquarters is located in Geneva, Switzerland. Like the IMF and the World Bank, the WTO
is funded by its members.
Advancing the WTO Mission
The WTO seeks to facilitate cross-border trade. Negotiations are conducted in an all-or-
nothing format, with every issue on the table discussed until resolved. Accordingly, there are
no partial deals, so missed deadlines and protracted efforts that continue for many years are
not uncommon. In addition to large-scale trade initiatives, the WTO also facilitates trade
dispute negotiations, such as a disagreement between Mexico and the United States over tuna
fishing.
The Bottom Line
While all three organizations promote themselves as fostering positive developments, not
everyone agrees with their self-assessments. The organizations do provide financial
assistance to countries in need, but like just about every other known method of obtaining
financial resources, the money comes with strings attached and the motives behind the
initiatives are often in question.
General Agreements on Tariff and Trade:
The General Agreement on Tariffs and Trade (GATT) covers international trade in goods.
The workings of the GATT agreement are the responsibility of the Council for Trade in
Goods (Goods Council) which is made up of representatives from all WTO member
countries.
Functions of General Agreement on Tariffs and Trade (GATT)
Functions of GATT
In fulfillment of its objectives, GATT adopted certain measures. These may be discussed
under the following headings.
1. Most favored nation clause
2. Trade negotiations

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3. Tariff and non-tariff measures

4. Safeguards
5. Complaints and waivers
6. Settlement of disputes
1. Most Favored Nation clause
The “Most favored Nation clause is one of the significant provisions adopted by GATT.
Under the concept of Most Favored Nation, all contracting parties of the agreement would be
treated as most favored nations. The principal objective is that the benefits extended to one
should also be extended to all contracting parties. There should be no discrimination among
nations. Trading should be carried on the principle of non-discrimination and reciprocity.
This clause discouraged the member countries from granting any new trade concessions
unless those were mutually agreed upon. However, many escape clauses were found. Under
specific circumstances, less developed countries were allowed to exercise the right to
discriminate.
2. Tariff and Non-tariff measures
Tariffs were the important obstacle to international trade. Therefore, GATT encouraged
negotiations for the reduction of hig4 tariffs, The participating countries agreed to cut tariff of
thousands of industrial products. Reduction of tariff was on reciprocal and mutually
advantageous basis. Article 11 of the GATT provided that all concessions granted by
contracting parties must be entered in a schedule of concessions. Once a concession was
included in the schedule of concessions, it could not be withdrawn except under specified
circumstances.
3. Non-tariff measures
Post-World War II witnessed reduced distorting effects of non-trade barriers world trade. The
Tokyo Round held during 1973 — 1979 tackled the problems of non-tariff barriers under
more effective international discipline. All the agreements provide for special and more
favorable treatment for developing countries. The negotiations led to the following non-tariff
measures:
 restriction on use of subsidies,
 technical barriers,
 import licensing procedures,
 government procurement,
 custom valuation,
 permission of anti-dumping code.
To read more about the non-tariff measures of GATT, refer this article: Non-tariff measures
of GATT
4. Complaints and waivers
Article XXII of the GATT entertains complaints from contacting party relating to the
operation of the agreement. The contracting party who is likely to be deprived of the benefits
under GATT agreement can request the other party for consultation. The basic principle of
GATT is that member countries should consult one another on trade matters and
problems. Article XXV of the GATT provides the procedure for granting waiver to some
contracting party from the application of the provisions of the GATT. Waivers are granted on
the approval by two thirds of voting contracting parties.
5. Settlement of disputes
GATT aimed at the smooth settlement of disputes among the contracting parties. GATT
allows the member countries to settle problems among them by consulting one another on
matters of trade. Initially, the contracting parties should resolve the disputes by holding talks
on bilateral basis. In case of failure, the dispute may be referred to panels of independent

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experts formed under GATT council. The panel members are drawn from countries which
have no direct interest in the disputes.
WTO agreements, TRIPS, TRIMS:
It is an agreement on Trade-Related Investment Measures which specifies the rules that are
applicable to the domestic regulations a country applies to foreign investors. The agreement
is applicable to all members of the World Trade Organization (WTO). The agreement was
formalized in 1994 and came into effect in 1995.
GATT and Foreign Investment
Prior to the Uruguay Round negotiations, the linkage between trade and investment received
little attention in the framework of the GATT.
Havana Charter
The Charter for an International Trade Organization (1948) contained provisions on the
treatment of foreign investment as part of a chapter on economic development. This Charter
was never ratified and only its provisions on commercial policy were incorporated into the
General Agreement on Tariffs and Trade (GATT).
1955 Resolution on International Investment for Economic Development
In 1955, the GATT CONTRACTING PARTIES adopted a resolution on International
Investment for Economic Development in which they, inter alia, urged countries to conclude
bilateral agreements to provide protection and security for foreign investment.
The FIRA Panel
Perhaps the most significant development with respect to investment in the period before the
Uruguay round was a ruling by a panel in a dispute settlement proceeding between the
United States and Canada. In Canada — Administration of the Foreign Investment Review
Act (“FIRA”) (BISD 30S/140, 1984) a GATT dispute settlement panel considered a
complaint by the United States regarding certain types of undertakings or engagements which
were effectively required from foreign investors by the Canadian authorities as conditions for
the approval of investment projects.
These undertakings pertained to the purchase of certain products from domestic sources
(local content requirements) and to the export of a certain amount or percentage of output
(export performance requirements). The Panel concluded that the local content requirements
were inconsistent with the national treatment obligation of the GATT but that the export
performance requirements were not inconsistent with GATT obligations.
The Panel emphasized that at issue in the dispute before it was the consistency with the
GATT of specific trade-related measures taken by Canada under its foreign investment
legislation and not Canada's right to regulate foreign investment per se.
The TRIMS Agreement:
The objectives of the Agreement, as defined in its preamble, include “the expansion and
progressive liberalization of world trade and to facilitate investment across international
frontiers so as to increase the economic growth of all trading partners, particularly developing
country members, while ensuring free competition”.
Limitation of Coverage to Trade in Goods
The coverage of the Agreement is defined in Article 1, which states that the Agreement
applies to investment measures related to trade in goods only. Thus, the TRIMs Agreement
does not apply to services.
What is a “Trade-Related Investment Measure
The term “trade-related investment measures” (“TRIMs”) is not defined in the Agreement.
However, the Agreement contains in an annex an Illustrative List of measures that are
inconsistent with GATT Article III:4 or Article XI:1 of GATT 1994.
The TRIMs Agreement and Regulation of Foreign Investment

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As an agreement that is based on existing GATT disciplines on trade in goods, the Agreement
is not concerned with the regulation of foreign investment. The disciplines of the TRIMs
Agreement focus on investment measures that infringe GATT Articles III and XI, in other
words, that discriminate between imported and exported products and/or create import or
export restrictions. For example, a local content requirement imposed in a non-discriminatory
manner on domestic and foreign enterprises is inconsistent with the TRIMs Agreement
because it involves discriminatory treatment of imported products in favour of domestic
products. The fact that there is no discrimination between domestic and foreign investors in
the imposition of the requirement is irrelevant under the TRIMs Agreement.
Basic Substantive Obligations: Article 2 and the Illustrative List
Article 2.1 of the TRIMs Agreement requires Members not to apply any TRIM that is
inconsistent with the provisions of Article III (national treatment of imported products) or
Article XI (prohibition of quantitative restrictions on imports or exports) of GATT 1994. An
Illustrative List annexed to the TRIMs Agreement lists measures that are inconsistent with
paragraph 4 of Article III and paragraph 1 of Article XI.
Mandatory and Non-mandatory Measures
The Illustrative List covers both TRIMs which are mandatory or enforceable under domestic
law or under administrative rulings and TRIMs compliance with which is necessary to obtain
an advantage.
Distinction between Paragraphs 1 and 2 of the Illustrative List
TRIMs identified in paragraph 1 of the Illustrative List as being inconsistent with Article III:4
concern the purchase or use of products by an enterprise, while the TRIMs listed in
paragraph 2 as inconsistent with Article XI:1 of GATT 1994 concern the importation or
exportation of products by an enterprise.
General exceptions
Article 3 of the TRIMs Agreement provides that all exceptions under GATT 1994 shall
apply, as appropriate, to the provisions of the TRIMs Agreement.
Developing countries
Article 4 allows developing countries to deviate temporarily from the obligations of the
TRIMs Agreement, as provided for in Article XVIII of GATT 1994 and related WTO
provisions on safeguard measures for balance-of-payments difficulties.
Limitation of the benefits of the transition period to existing measures
TRIMs introduced less than 180 days before the date of the entry into force of the WTO
Agreement did not benefit from these transition periods. Thus, the transition provisions of the
TRIMs Agreement did not permit the introduction of new TRIMs that are inconsistent with
the Agreement.
“Standstill” requirement during the transition period
The Agreement precluded Members from changing measures notified under Article 5.1 in a
manner which would increase their inconsistency with the Agreement (Article 5.4). However,
if a Member had notified a TRIM under Article 5.1, it could have applied, during the
transition period, the same TRIM to a new investment in order to avoid a distortion of
competition between the new investment and existing investments (Article 5.5).
Possible extension of the transition period
Under Article 5.3, the Council for Trade in Goods may, on request, extend the transition
period for the elimination of TRIMs in the case of a developing country which demonstrates
particular difficulties in implementing the provisions of the Agreement.
In August 2001, the Council for Trade in Goods adopted a series of Decision to extend the
transition period for eight Members to December 2001, with the possibility of a further
extension of two years. In November 2001, the CTG adopted another series of Decisions to

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extend the transition period for these same members for another two years, to December 2003
(for one Member the period was extended to May 2003 and for another to June 2003).
Transparency
Provisions designed to ensure transparency with respect to the application of TRIMs are
contained in Article 6 of the TRIMs Agreement. This Article provides in particular for the
notification to the WTO Secretariat of lists of publications in which TRIMs may be found.
Notifications received under these provisions are listed in the document G/TRIMS/N/2/-
series.
Committee on Trade-Related Investment Measures
Article 7 of the TRIMs Agreement establishes a Committee on Trade-Related Investment
Measures as a forum to examine the implementation operation of the Agreement. The
Committee meets not less than once a year. Much of the early work of the Committee
focused on the notifications received under Article 5.1 of the Agreement. Today, the
Committee's work is mainly focused on discussing specific concerns raised by certain
Members regarding other Members' trade-related investment measures.
Dispute Settlement
The general WTO dispute settlement procedure, as laid down in the Dispute Settlement
Understanding, applies to disputes arising under the TRIMs Agreement (Article 8). Issues
relating to the alleged inconsistency of particular measures with the TRIMs Agreement have
been raised in 34 requests for consultations under the DSU. 16 of these cases have moved to
the establishment of a panel, while 6 have been settled or terminated through a mutually
agreed solution. The remainders are still in consultation phase. A full listing of these
disputes with summaries of the reports and findings can be found here..
Non Tariff Barriers and Disputes Settelements Mechanism:
The transition from tariffs to non-tariff barriers
One of the reasons why industrialized countries have moved from tariffs to NTBs is the fact
that developed countries have sources of income other than tariffs. Historically, in the
formation of nation-states, governments had to get funding. They received it through the
introduction of tariffs. This explains the fact that most developing countries still rely on
tariffs as a way to finance their spending. Developed countries can afford not to depend on
tariffs, at the same time developing NTBs as a possible way of international trade regulation.
The second reason for the transition to NTBs is that these barriers can be used to support
weak industries or compensation of industries which have been affected negatively by the
reduction of tariffs. The third reason for the popularity of NTBs is the ability of interest
groups to influence the process in the absence of opportunities to obtain government support
for the tariffs.
Administrative and bureaucratic delays at the border[
Among the methods of non-tariff regulation should be mentioned administrative and
bureaucratic delays at the border, which increase uncertainty and the cost of maintaining
inventory. For example, even though Turkey is in a (partial) customs union with the EU,
transport of Turkish goods to the European Union is subject to extensive administrative
overheads that Turkey estimates cost it three billion euros a year.
Censorship
Testifying before the United States Senate Committee on Finance, Subcommittee on
International Trade, Customs, and Global Competitiveness on "censorship as a non-tariff
barrier" in 2020, Richard Gere stated that economic interest compel studios to avoid social
and political issues Hollywood once addressed, "Imagine Marty Scorsese's Kundun, about the
life of the Dalai Lama, or my own film Red Corner, which is highly critical of the Chinese
legal system. Imagine them being made today. It wouldn't happen

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Embargoes
Embargoes are outright prohibition of trade in certain commodities. [9] As well as quotas,
embargoes may be imposed on imports or exports of particular goods in respect of certain
goods supplied to or from specific countries, or in respect of all goods shipped to certain
countries. Although an embargo may be imposed for bio security reasons, more often the
reasons are political (see economic sanctions and international sanctions). Embargoes are
generally considered legal barriers to trade, not to be confused with blockades, which are
often considered to be acts of war.
Foreign exchange restrictions and foreign exchange controls
Foreign exchange restrictions and foreign exchange controls occupy an important place
among the non-tariff regulatory instruments of foreign economic activity. Foreign exchange
restrictions constitute the management of transactions between national and foreign
operators, either by limiting the supply of foreign currency (to restrict imports) or by state
manipulation of exchange rates (to boost exports and limit imports).
Import deposits
Another example of foreign trade regulations is import deposits. Import deposits is a form of
deposit, which the importer must pay the central bank for a definite period of time (non-
interest bearing deposit) in an amount equal to all or part of the cost of imported goods ]
Administrative regulation of capital movements
At the national level, administrative regulation of capital movements between states is carried
out mainly within a framework of bilateral agreements, which include a clear definition of the
legal regime, the procedure for the admission of investments and investors] It is determined
by mode (fair and equitable, national, 'most favoured nation'), order of nationalization and
compensation, transfer profits and capital repatriation and dispute resolution]
Licenses
The most common instruments of direct regulation of imports (and sometimes export) are
licenses and quotas. Almost all industrialized countries apply these non-tariff [Link]
license system requires that a state (through specially authorized office) issues permits for
foreign trade transactions of import and export commodities included in the lists of licensed
merchandises. Product licensing can take many forms and procedures. The main types of
licenses are general license that permits unrestricted importation or exportation of goods
included in the lists for a certain period of time; and one-time license for a certain product
importer (exporter) to import (or export
Localization requirement
An importing country may require the prospective exporter to include a degree of local
participation in the product or service. Options include a designated importer, a joint-venture
company with majority local control, requirement for complete local manufacture which
may imply transfer of intellectual property. The WTO has not reached a conclusion on the
legitimacy of these measures
Standards
Standards take a special place among non-tariff barriers. Countries usually impose standards
on classification, labelling and testing of products to ensure that domestic products meet
domestic standards, but also to restrict sales of products of foreign manufacture unless they
meet or exceed these same standards. These standards are sometimes entered to protect the
safety and health of local populations and the natural environment.]
Quotas
Licensing of foreign trade is closely related to quantitative restrictions – quotas – on imports
and exports of certain goods. A quota is a limitation in value or in physical terms, imposed on
import and export of certain goods for a certain period of time. This category includes global

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quotas with respect to specific countries, seasonal quotas, and so-called "voluntary export
restraints". Quantitative controls on foreign trade transactions are carried out through one-
time license.
Quantitative restrictions on imports and exports are direct administrative forms of
government regulation of foreign trade. Licenses and quotas limit the independence of
enterprises with a regard to entering foreign markets, narrowing the range of countries in
which firms can conduct trade for certain commodities. They regulate the range and number
of goods permitted for import and export.
Agreement on a "voluntary" export restraint
In the past decade widespread practice of concluding agreements on the "voluntary" export
restrictions and the establishment of import minimum prices imposed by leading Western
nations upon exporters that are weaker in an economical or political sense. These types of
restrictions involve the establishment of unconventional techniques] when trade barriers are
introduced at the border of the exporting country instead of the importing country.
Thus, the agreement on "voluntary" export restraints is imposed by the exporter under the
threat of sanctions to limit the export of certain goods to the importing country. Similarly, the
establishment of minimum import prices should be strictly observed by the exporting firms in
contracts with the importers of the country that has set such prices.
Kyoto protocal, FTA’S
Kyoto Protocol
The Kyoto Protocol was an international agreement that aimed to reduce carbon
dioxide (CO2) emissions and the presence of greenhouse gases (GHG) in the atmosphere.
The essential tenet of the Kyoto Protocol was that industrialized nations needed to lessen the
amount of their CO2 emissions.
The protocol was adopted in Kyoto, Japan in 1997, when greenhouse gases were rapidly
threatening our climate, life on the earth, and the planet. Today, the Kyoto Protocol lives on
in other forms, and its issues are still being discussed.
Understanding the Kyoto Protocol
The Kyoto Protocol mandated that industrialized nations cut their greenhouse gas emissions
at a time when the threat of global warming was growing rapidly. The Protocol was linked to
the United Nations Framework Convention on Climate Change (UNFCCC). It was adopted in
Kyoto, Japan on Dec. 11, 1997, and became international law on Feb. 16, 2005.
Countries that ratified the Kyoto Protocol were assigned maximum carbon emission levels for
specific periods and participated in carbon credit trading. If a country emitted more than its
assigned limit, then it would be penalized by receiving a lower emissions limit in
the following period.
Major Tenets
Developed, industrialized countries made a promise under the Kyoto Protocol to reduce their
annual hydrocarbon emissions by an average of 5.2% by the year 2012. This number would
represent about 29% of the world's total greenhouse gas emissions.
Targets depended on the individual country. As a result, each nation had a different target to
meet by that year.
Members of the European Union (EU) pledged to cut emissions by 8%, while the U.S. and
Canada promised to reduce their emissions by 7% and 6%, respectively, by 2012
Responsibilities of Developed vs. Developing Nations
The Kyoto Protocol recognized that developed countries are principally responsible for the
current high levels of GHG emissions in the atmosphere as a result of more than 150 years of
industrial activity. As such, the protocol placed a heavier burden on developed nations than
less-developed nations.

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The Kyoto Protocol mandated that 37 industrialized nations plus the EU cut their GHG
emissions. Developing nations were asked to comply voluntarily, and more than 100
developing countries, including China and India, were exempted from the Kyoto agreement
altogether.

A Particular Function for Developing Countries

The protocol separated countries into two groups: Annex I contained developed nations, and
Non-Annex I referred to developing countries. The protocol placed emission limitations on
Annex I countries only. Non-Annex I nations participated by investing in projects designed to
lower emissions in their countries.
For these projects, developing countries earned carbon credits, which they could trade or sell
to developed countries, allowing the developed nations a higher level of maximum carbon
emissions for that period. In effect, this function helped the developed countries to continue
emitting GHG vigorously.

Kyoto Mechanisms
The Kyoto Protocol established three different mechanisms to enable countries additional
ways to meet their emission-limitation target. The three mechanisms are:
 The International Emissions Trading mechanism: Countries that have excess emission
units permitted to them but not used can engage in carbon trading and sell these units to
countries over their target.
 The Clean Development mechanism: Countries with emission reducing or limiting
commitments may implement emission-reducing projects in developing countries to earn
certified emission reduction credits.
 The Joint Implementation mechanism: Countries with emission reducing or limiting
commitments to earn emission reducing units from a project in another party.
Additional Kyoto Protocol Changes
Global emissions were still on the rise by 2005, the year the Kyoto Protocol became
international law—even though it was adopted in 1997. Things seemed to go well for many
countries, including those in the EU. They planned to meet or exceed their targets under the
agreement by 2011. But others continued to fall short.
The United States and China—two of the world's biggest emitters—produced enough
greenhouse gases to mitigate any of the progress made by nations who met their targets. In
fact, there was an increase of about 40% in emissions globally between 1990 and 2009.

The Doha Amendment Extended Kyoto Protocol to 2020

In December 2012, after the first commitment period of the Protocol ended, parties to the
Kyoto Protocol met in Doha, Qatar, to adopt an amendment to the original Kyoto agreement.
This so-called Doha Amendment added new emission-reduction targets for the second
commitment period, 2012–2020, for participating countries.
The Doha Amendment had a short life. In 2015, at the sustainable development summit held
in Paris, all UNFCCC participants signed yet another pact, the Paris Climate Agreement,
which effectively replaced the Kyoto Protocol.

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The Paris Climate Agreement

The Paris Climate Agreement is a landmark environmental pact that was adopted by nearly
every nation in 2015 to address climate change and its negative effects. The agreement
includes commitments from all major GHG-emitting countries to cut their climate-altering
pollution and to strengthen those commitments over time.
Every five years, countries engage in the Global Stock take, which is an assessment of their
progress under the Paris Climate Agreement.
A major directive of the deal calls for reducing global GHG emissions to limit the earth's
temperature increase in this century to 2 degrees (preferring a 1.5-degree increase) Celsius
above preindustrial levels. The Paris Agreement also provides a way for developed nations to
assist developing nations in their efforts to adapt climate control, and it creates a framework
for monitoring and reporting countries’ climate goals.

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