UNIT-3

INDIAN BUSINESS ENVIRONMENT

 New Economic Policy and Economic
Reforms
• Meaning :-
Economic Policy refers to the actions that governmment takes in the economic
field of an econommy.

It includes levels of taxation, government budgets, money supply, interest rates , etc

New Economic Policy :-

The New Economic Policy refers to various policy measures undertaken since July
1991 with a view to increase productivity and effeciency of the economy by
creating an atmosphere of competition.

According to C. Rangarajan, former Governor of RBI, ‘’ the thrust of new economic

policy is towards creating a more competitive environment in the economy as a
means of improving the productivity and effeciency of the system’’
 Need of new economic policy
• Pre-reforms scenario :-
The economic policy was initiated because of economic crisis
1991 which included :
1. Very low foreign exchange reserve of only Rs. 2,400 crore
which was sufficient to buy from abroad only three weeks
requirements.
2. Increased borrowings resulting in increasing national debt.
[ the fiscal deficit of previous five years compelled the
government to borrow more and more.
3. High price level and inceased money supply due to the excess
liquidity .
 Factors of New Economic Policy
New Economic policy comprises mainly of :-
1. New Industrial Policy 1991
2. New Trade Policy [ Globalisation ]]
3. New fiscal Policy
4. New Monetary Policy
Thus the new economic policy of 1991, relates
to the various changes that have taken place in
the field of trade, industry, finance and foreign
investments.
• Features of New Economic Policy :-

1. Liberalisation :-

Refers to liberating the economy , trade and industry from unwanted restrictions.

It also means the end of license, quota and many more restrictions and controls which were put on industries before 1991..

This includes :-

[Link] of license except in few

2. No restrictions on expansion or contractiion ofbusiness activities

3. Freedom in fixing prices

4. Liberalisation in export and import

5. Easy and simple procedures to attract foreign capital in India

[Link] in movement of goods and services

7. Freedom in fixing the prices of goods and services

 Privatisation
• Meaning :-
Introduction of private ownership in public owned units and public
managed enterprises and also signnifies introduction of public control
and management in public sector enterprises .
This involves
1. Greater participation of private individuals
2. Institutional credit support to private sector enterprises from the
national and financial institutions
3. Disinvestment of public sector
4. Settting up of Board of Industrial and Financial Reconstruction
[ BIFR ] to revive sick units in public sector enterprises suffering loss
 Globalisation of the economy
• Meaning : -
It means opening up the economy for world market by attaining international competitiveness.
It is nothing but integration of various economies of world

Initiativeness towards golabalisation:-

1. Specified list of high technology and high investment priority sectors under new economic policy was prepared in which automatic permission
granted under Foreign Direct Investments.

2. No permission required for hiring foreign technicians or for testing indigenously developed technology abroad

3. Foreign Exchange Regulation Act [ FERA ] waas replaced by Foreign Exchange Management Act [FEMA]

4. Rupee has been made fully convertible.

5. As a step towards Import Liberallisation , government removed many restrictiions from import of capital goods.

6. Rationalisation of Tariff structure

7. Abolition of Export duty

8. Reduction of Import duty

9. r

r
 New Public sector policy
• The new policy has shifted its emphasis from public to
private sector. Four major decision are undertaken:

1. Reduction in list of reserved industries from 17 to 8.

2. Disinvestments of shares in Public sector Enterprises to
raise resources and encourage wider participation of
general public.
3. Policy for sick PSE s be designed at par with that of private
sector.
4. Improving performance through the performance contract
or memorandum of understanding system.
 Modernisation
1. Provided high priority to the introduction of
modern techniques in production system.
2. Facilitated the growth of sunrise industries, that is,
electronics and computers.
3. Special provisions have been made of tax initiatives
to facilitate corporate mergers and collaborations
to face new challenges ahead.
4. Steps have been taken for the revival and
modernisation of sick industrial units established
both under private and public sectors.
 Financial Reforms
• 1. Reduction in Liquidity ratio
• 2. Abolition of direct credit programme
• 3. Free determination of interest rates.
• 4. Making provisions for Non performing assets.
• 5. Establishment of speedy machinery for recovery of loans
by special tribunals.
• 6. Reconstitution of banking system.
• 7. Liberal treatment to foreign banks
• 8. Giving more freedom to banks and ending dual contract of
RBI and Finance Ministry.
• 9. Introducing capital market reforms.
Arguments in favour of economic Policy
• Rate of growth has remarkably increased to 8 % at par with other Asian
countries
• Reforms have helped the country in attaining growing competitiveness in the
Industrial sector to face global competition.
• It aims to reduce the extent of poverty and inequality.
• Steps taken to raise the effeciency and profitability of public sector enterprises.
• Increased investment in areas of private
• Increased flow of foreign direct invesstments
• Steps taken to constrain fiscal deficits. [ The difference between total revenue
and total expenditure of the government ]
• Steps taken to control the inflationary rise in prices by checking deficit
financing [ government spends more money than it receives as revenue , the
difference being made up by borrowing or minting new funds ] and also by
better supply management.
Arguments against Economic Policy
• 1. Neglected the agricultural sector as compared to industry, tra
• de and service sectors.

• 2. The economy had to surrender itself to the international bodies like World Bank and IMF With liberalisation and
globalisation of the economy .

• 3. Increased the dependency of the economy on foreign technology

• 4. Multiplied the volume of external debts.

• 5. Led to loss of economic sovereignity by allowing the sale of equities of Indian Companies to foreign investors

• [Link] the problems of unemployment by introducing exit policy without making any adequate provision for
alternative scope for emplyment.

• [Link] much stress of privatisation

• 8. Encouraged a dangerous trend of consumerism by encouraging the production of luxuries items for consumption of
upper class of society.

• 9. Failed to control the rising trend in prices, check fiscal deficit, control subsidies and non plan expenditure.
 Economic Reforms
• The term Economic Reforms refers to the changes made by a country to strengthen the
economic structure.
Characteristics :-
1. Its aim is to make the economy more effecient and flexible by using domestic and external
sources .
2. Reduce the fiscal deficit through reduction of import restrictions and elimination of export
restrictions.
3. The policy was completely break away from the previous policy which was characterised by
extensive government regulations and control over private sector , preferential treatment
for public sector, excessive encouragement to domestic production and restrictive approach
to foreign investment.

Areas in which reforms were initiated:-

Financial sector reforms

Fiscal reforms
Trade reforms
 Financial Sector Reforms
Initiated in the early 1990s based on the
recommendations of Mr. Narasimhan.
Basic objective is to create effecient, competitive and
stable financial sector that could stimulate
economic growth.
It also aims to change the previous scenario marked
by weak banking sector, directed credit
programme, lack of proper transparency and
accountability in major financial participants and so
on.
Major areas of reforms in Financial sector

• 1. Banking sector reforms

• 2. Capital market reforms
• 3. Insurance sector reforms
 Banking sector reforms
Objectives :-
• Gradual increase of competition with focus on better supervisory and prudential norms.
• Improvement in the legal framework and technological system in banking.

Major initiatives :-

• 1. Reduction in statutory Cash Reserve Ratio [CRR] and statutory Liquidity Requirements [SLR]

[ current CRR is 4 % and SLR is 20 % and earlier it was CRR 15 % and SLR 38.5 % ]
CRR refers to that percentage of its total deposits with RBI as cash reserves.

SLR refers to the proportion of deposits the commercial bank is required to maintain with them in the formof liquid assets
in addition to the cash reserve ratio.

Liquid assets refers to that assets which can be readily convertible into cash like government bonds, gold and cash
reserves.

The objective of SLR is to prevent the banks from liquidating their liquid assets during the time when CRR is raised.

Reduction in these will make the availability of more resources with banks which will have positive impact on the
profitability of the banks.
 2. Deregulation of Interest Rates
Meaning of Deregulation :-
Deregulation refers to the removal of control by RBI
on the interest charged by commercial banks on
deposits except savings bank deposits.
A major reforms during 1990 was deregulation of
complex structure of deposit and lending interest
rates .
Banks are allowed to determine interest rates on
deposits and loans based on prevailing market
conditions.
[Link] of prudential norms
The norms which are to be followed while investing funds are called Prudential Norms.

Prudential norms like capital adequacy, asset classification, provisioning norms for non- performing
assets, etc to provide transparency and increase public confidence about banks.
[ capital Adequacy Ratio is also known as capital to Risk [weighted] Assets Ratio [CRAR].
The Risk Weighted Assets refer to the fund based assets such as cash , loans, investments and other
assets.

This is to protect the banks against insolvency and protect the interest of the depositors.

CRAR is the comparison between bank’s net worth [ amount by which assets exceed liabilities ] with
risk weighted assets which appear on the assets side of the balance sheet.
Know your customer and Anti money Laundering are the two initiatives towards this.

KYC and AML guidelines require banks to be familiar with their customers and their monetary
dealings better, so that it can administer their accounts carefully
 Supervisory Measures
• Establishment of Board for Financial Supervision [BFS].
• It conducts on site supervision of banks and off-site
monitoring based on quaterly reporting system.
• Inspections are based on CAMELS [ capital adequacy, asset
quality,management, earning, liquidity and systems and
controls ] model and aim at achieving the set objectives.
• Enhanced emphasis on corporate governance with ‘fit and
proper’ test for directors and due diligence on important
shareholders.[ corporate governance is the system of rules,
practices, and processes by which a company is directed
and controlled]
 Competition enhancing measures
• 1. Reduction of entry barriers for private banks.
• 2. Public sector Bank’s Reforms
operational autonomy granted to public sector
banks.
Reduction in equity holding in public sector
banks by 49 %.
Creation of Financial Conglomerates to provide
variety of financial services through mergers and
amalgamations of banks and Non-bank financial
companies
 Institutional and Legal measures
• 1. CAMELS
• 2. Financial Conglomerates [ multi-purpose and multi-functional
financial super market that provides wide range of financial services
under one roof]
• 3. Lok Adalats [People’s courts], debt recovery tribunals, etc for
quicker recovery of loans.
• 4. Publisising SARFAESI Act, 2002 [ Securitisation and Reconstruction
of Financial assets and Enforcement of Securities Interest ]which
allows banks and other financial institution to auction residential or
commercial properties to recover loans.
• 5. Setting up of CIBIL [ Credit Information Bureau of India Limited ]
for sharing information on defaulters as also other borrowers
amongst banks
 New Instruments and Technology Related
Measures
• Introduction of electronic technology for bank’s transactions,
settlement of accounts and other relared functions
• Computerisation of the banking system
• Introduction of CBS [Core Banking System ] to allow customers
to avail banking facilities from any branch of the bank any time
anywhere.
• Introduction of screen based trading in government securities.
• Introduction of credit instruments, telebanking, ATMs,
Elecronic Funds Transfer [EFT] and Electronic Clearing Services
[ECS] for development of an effecient and speedy retail
payments and settlement systems.
Enhanced transparency and Disclosures
• Disclosure of
profitability and financial ratios
details of capital structure
movements in non-performing loans
movements in provisions
advances to sensitive sectors etc
 Recent Banking Sector Reforms
• Financial Inclusion :-
providing wider access and better quality of banking services to
the larger sections of the society.

Internet and Mobile e- Banking :-

Internet banking enables a customer to do banking transactions
through the bank’s website in the Internet. [ also known as
virtual banking, net banking or anywhere banking ]

Mobile Banking means performing banking transactions like

performing balance checks, account transactions, payments etc,
through mobile devices.
 CAPITAL MARKET REFORMS
1. Repeal of Capital Issues Control Act :-
Abolishment of the requirement of Government permission for companies issuing securities as well as the system of control over the pricing of new issues of equity.

2. Establishment of Securities and Exchange Board of India :-

with the objective of regulating the capital market , to protect the interests of investors and to promote the development of, and to regulate, the securities market.
Functions :-

1. Empowered to control entry to the market

2. Monitor market participants
3. Issue regulations and guidelines to establish market standards
4. Prohibit fraudulent and unfair trade practices
5. Regulate substantial acquistions of shares and takeovers
6. Enforce the securities laws

3..Technological Innovations :-

Initiated by the National stock Exchange [ NSE ] in November 1992,

Introduced a modern market infrastrucure with fully automated , screen-based trading systems and state of the art settlement systems

Introduction of Dematerialisation of securities to minimise the problems related with physical transfer and custody of securities.

4 Significant participation of Foreign Instututional Investors :-

Due to the increase in confidence, fairness and effeciency of the market and the elimination of barriers to foreign institutional investment in 1994

[Link] of Mutual Fund Industry :-

In 1993, . private sector mutual funds including funds managed by foreign managers have been permitted.

The number of mutual fund schemes went up tremendously.

6. Creation of Innovative Financial Instruments

 Derivatives
• It is a security with a price that is dependent upon or derived
from the underlying asset. The underlying asset can be
stock, bonds, commmodities,interest rates and so on.
• Types of derivatives :-
1. Forward contract :-
It is a contract between two parties to buy or sell an asset at
a certain future date for a certain price.
Unlike a future contract , they are not traded on a exchange,
rather than traded over the counter market, usually between
two financial institutions or between a financial and its client.
•
2. Future contract :-
Like a Forward contract, Future contract is a
conntract to buy or sell a specified quantity of
an asset at a specified price and at a specified
time and place. Futures contracts are normally
traded on an exchange which sets the certain
standardized norms for trading in the futures
contracts.
• Options Contracts:-

• Options are the most important group of derivative securities. Option

may bedefined as a contract, between two parties whereby one party
obtains the right, and not the obligation to buy or sell a particular
asset, at a specified price, on or before a specified date.

• The person who acquires the right is known as the option buyer or
option holder, while theother person (who confers the right) is known
as option seller or option writer.

• The sellerof the option for giving such option to the buyer charges an
amount which is known as the Option premium
Swap options:-
A swap is an agreement between two counter parties
to exchange cash flows in the future.
• Under the swap agreement, various terms like the
dates when the cash flows are to be paid, the
currency in which to be paid and the mode of
payment are determined and finalized bye parties.
Usually the calculation of cash flows involves the
future values of one or more
market variables.
7. Improved disclosure norms and transparency:-
upgradation of financial disclosure and corporate governance standards
for the market participants closer to international standards by SEBI

Adoption of international quality trading and settlement mechanisms and

the reduction of transaction costs.

Initiaive towards making the Indian securities market present a picture

of better effeciency, liquidity, transparency and regulatory mechanisms.
 Insurance sector reforms
• 1. Opened for competition in the year 2000,
allowing private players both domestic and
foreign , with government to operate in both life
and non life insurance sectors.

• Establishment of Insurance Regulatory and

Development Authority in 2000 to protect the
interest of insurance policy and to regulate,
promote and ensure orderly growth of insurance
industry.
 Fiscal Reforms
• The fiscal reforms are aimed at reducing the financial burden of the Government. The following are some of the fiscal
reforms-

• 1. Tax Reforms:-

The main focus of the tax reforms was on simplification and rationalisation of both direct and indirect taxes drawing mainly
from the recommendations of the Tax Reforms Committee, 1991. The following are some of the important tax reforms
initiated –

[a] Drastic reduction in the personal income tax rate.

[b] Reduction in the corporate tax rate on both domestic and foreign companies

[c ] Rationalisation of tariff rates through reduction in both average and peak tariff rates. The peak rate of customs duty on non-
agricultural products was also reduced.

[d ] There has been a considerable siimplification and rationalisation of union excise duties.

[e] Rationalising sales tax by replacing it with Value Added Tax [VAT ].

[f] Improving the administration and enforcing the tax with simplified assessment procedures, out of court settlement on
pending tax cases, computerisation of tax returns, etc
 Government’s Expenditure Management
It is aimed at curtailing government expenditure. The following are
some of the measures undertaken –
[a] Assessment of man power requirements of all government
departments.
[b] Introduction of the Voluntary Retirement Scheme and the
redeployment of surplus staff in various government departments.
[c] Optimising governnment staff strength through a ban on the
creation of new posts for a specified period.
[d] creation of a national food security buffer stock and minimisation
of cost of buffer stock operations.
[e] Rationalisation of fertiliser subsidies through dismantling of
controls in a phased manner
 Systematic reforms in Government’s
borrowing process
1. Switchover to borrowings by government at
market related interest rates.
2. Development of government securities
market
 Fiscal consolidation
The main aim is to reduce government deficits
and debt accumulation .
Enactment of the Fiscal Responsibility and
Budget Management Act in 2003 which
provides the responsibility on the central
government to ensure equity in the fiscal
management and long term macro economic
stability.
 Trade Reforms
• The main thrust of trade reforms have been to open Insia’s
trade and emphasis is on export promotion and import
liberalisation.
1. Simplification of custom tariff structure
2. Elimination of quantitative restrictions on imports[ in terms
of quotas and import licensing requirements]
3. Transformation of exchange rate policy
4. Current account convertability [ which means free inflows and
outflows of foreign currency for all purposes other than for
capital purposes at market determined exchange rate.]
5. Export friendly environment by simplifying the exports
procedures and exports promotion.
 Liberalisation
• Objectives :-
• 1. To accelerate the rate of industrial development.
• 2. To ensure better utlilisation of capacity.
• 3. To achieve economies of scale.
• [Link] reduce and in some cases to remove the procedural
impediments.
• 5. To work towards the development of backward areas.
• 6. To ensure export promotion and import substitution
• 7. To increase competitiveness in Indian industry and to
ensure healthy competition.
 Components of liberalisation
• 1. Industrial Liberalisation
[a] Abolition of industrial licensing
[b] Reduction in the reservation for public sector
[c] Facilitation of easy access to foreign
technology
[d] Removal of restrictions on expansion
[e] opening of the economy to FDI
 Trade Liberalisation
• 1. Elimination of import licensing
• 2. Rationalisation of tariff structure
• 3. Adoption of flexible exchange rate

Financial liberalisation:-

Reforms in banking sector

Reforms in capital markeforms

Reforms in insurance

Fiscal sector reforms :-

Raising the rate of saavings and investment

Economic Growth

Improvement in literacy

Improvenment in GDP

• .
Impact of Liberalisation on Indian Economy
• 1. shift from the producermarket to the buyer market
• 2. Intensity of competition
• 3. corporate vulnerability
[ due to pressure from MNCs Indian companies are facing takeover, subordinate
position in Joint Venture, unequal battle among the competitors and financial
weskness]
4. Rapidly changing Technological Environment
[ with the increased investment in R&D]
5. Necessity for change
6. Need for developing Human Resources
7. Market orientation [shift from selling concept to marketing concept]
8. Loss of budgetary support to public sector
[ withdrawal of government support]
9. Export as amater of survuval
10. Threat from multinational companies
 Globalisation
Meaning :-
It is the process by which regional economies, societies and cultures have been integrated through a global
network of communication, transportation and trade.
Effects of Globalisation :-
Merits of Globalisation :-
[Link] competition among producers, both foreign and domestic which resuled in greater advantages to the
consumers.
2. There is a greater choice before consumers who enjoy improved quality and lower prices for consumers.
3. Increase in flow of investments from developed countries to developing countries, which can be used for
economic reconstruction.
4. Greater and faster flow of information between countries and greater cultural interacton has helped to
overcome cultural barriers.
5. Technological development has resulted in reverse brain drain in developing countries.

Demerits of Globalisation:-
1. The outsourcing of jobs to developing countries has resulted in loss of jobs in developed countries
2. There is a greater thick of communicable diseases
3. There is an underlying threat of multinational corporations with immense power ruling the globe.
4. For smaller developing nations at the receiving end , it could indirectly lead to a subtle form of
colonisation.
Measures to promote Globalisation
1. The Indian rupeewas devalued to align the exchange rates with world exchange rate.

2. Liberalisation in the foreign direct investments .

3 Foreign institutional investors are given permission to invest in the Indian capital market

4. Replacement of FERA with FEMA.

[FEMA –to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments ]

5. Guidelines have been specified for setting up of Indian Joint Ventures Abroad which will enable 90 % of the proposals to be converted through the
automatic approval routes.

6. Automatic permission given for foreign technology agreements upto certain ceilings covering the high priority industries

7. Guidelines have issued for the floating of Euro-issues by the Indian companies

8. Import of capital goods has been allowes without any specific license if the payment is made out of foreign exchange received for the purpose of equity
participation.

9. Reduction of import duties from 150 % to 110 %.

10 . Items under the purview of government agencies opened to private companies.

11. Foreign technicinas can be hired by Indian companies without prior approval of the RBI if certain conditions are met.

12. Inflation has been controlled to control the cost of production.

 Privatisation
Privatisation may be understoos as the process whereby activities of enterprises that
were once performed by the Government and its employees are now performed ,
managed or owned by private business and individuals.

Advantages of privatisation :-
1. Reduction in monopoly of public sector units.
2. Effecient management
3. More funds available with Government.
4. Increase in profitabiility
5. High Industrial growth rate.
6. Increases in effeciency of public sector
7. International level with international standards
8. Encouragement to Innovations and Investment
9. Quick decision making
10. Promotes globalisation
• Arguments against privatisation:-
1. Results in the large scale retrenchment of workers
2. Privatisation of sick mills will not help in
improving their effeciency and productivity
3. Revenue maximisation still continues to be the
main objective rather than improving the
effeciency.
4. Privatisation may result in greater concentration
of assets.
 Measures of privatisation
1. Ownership measures:-

in the form of
a. Total denationalisation
b. Joint ventures
c. Liquidation
d. Management buy out [the purchase of a controlling share in a company by its executive directors
and/managers

2. Organisational measures:-

Holding company structure

Leasing
Restructuring

3. Operational measures:-

Grant of autonomy to PSU s in decision making

Provision of incentives for increasing the effeciency of workers,
Permitting PSUs to raise fund from capital workers
 The new Industrial policy 1991
• Objectives :-
• 1. To maintain the sustained growth in
productivity
• 2. To enhance gainful empolyment
• 3. To achieve maximum utilisation of human
resources
• 4. To attain international competitiveness
• 5. To transform India into a major partner and
players in the global arena
 Main focus
1. Deregulating Indian industry
2. Allowing the industry freedom and flexibility
in responding to market forces and
3. Providing a policy regime which facilitates
and fosters growth of Indian industry
 Policy measures

• 1. Liberalisation of Industrial Licensing policy

• 2. Introduction of Industrial Entrepreneur’s Memorandum [ no industrial approval is required for industries

not requiring compulsory licensing]

• 3. Liberalisation of Locational Policy

• 4. Liberalised policy for small scale sectors

• 5. Non-resident Indian schemes [ NRI s are allowed to invest upto 100 % equity on non-repatriation basis in
all activities except for a small negative list]
• [ Non – repatriable investment is one where NRI cannot convert invested money back to foreign
currency[ to an investor’s home country]

• 5. Electronic Hardware Technology Park [ EHTP] / software Technology Park [ STP ] scheme for building up
strong electronic industry to enhance exports.

• 6. Liberalised policy for Foreign Direct Investments [FDI]

•
 Changes in Industrial Policy 2007
• [Link] following industries require compulsory
industrial licence;
• Distillation and brewing of alcoholic drinks
• Tobacco and manufactured tobacco substitutes
• Electronic aerospace and defence equipment
• Industrial explosives
• Hazardous chemicals

• [Link] Act replaced by Competition Bill

• Print
• XClose
• Press Information Bureau
Government of India
Ministry of Commerce & Industry
29-August-2017 17:38 IST
• Formulation of a new Industrial Policy

• The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry initiated the process of formulation of a new Industrial Policy in May
2017. Since the last Industrial Policy announced in 1991, India has transformed into one of the fastest growing economies in the world. With strong macro-
economic fundamentals and several path breaking reforms in the last three years, India is equipped to deploy a different set of ideas and strategies to build a
globally competitive Indian industry. The new Industrial Policy will subsume the National Manufacturing Policy.
•
• A consultative approach has been taken for industrial policy formulation wherein six thematic focus groups and an online survey on DIPP website have been
used to obtain inputs. Focus groups, with members from government departments, industry associations, academia, and think tanks have been setup to delve
deep into challenges faced by the industry in specific areas. The six thematic areas include Manufacturing and MSME; Technology and Innovation; Ease of
Doing Business; Infrastructure, Investment, Trade and Fiscal policy; and Skills and employability for the future. A Task Force on Artificial Intelligence for India’s
Economic Transformation has also been constituted which will provide inputs for the policy.
•
• It is proposed that the new Industrial Policy will aim at making India a manufacturing hub by promoting ‘Make in India’. It will also suitably incorporate the
use of modern smart technologies such as IOT, artificial intelligence and robotics for advanced manufacturing.
•
• Hon’ble Minister of State(i/c) for Commerce & Industry Smt Nirmala Sitharaman will hold consultations with stakeholders, including industry captains, think
tanks and State governments in Chennai, Guwahati and Mumbai. The Industrial Policy is likely to be announced in October 2017.
•
• DIPP invites comments, feedback, suggestions from the public regarding framing of the new Policy. A discussion paper in this regard is attached herewith. All
comments, suggestions, feedback on the new Industrial Policy may be sent to DIPP at [Link]@[Link] or jsvk-dipp@[Link] by September 25, 2017.
•
 Competitive Market
Meaning of competitive market :-
• A competitive market is one in which a large numbers of
producers compete with each other to satisfy the wants
and needs of a large number of consumers.

• In a competitive market no single producer, or group of

producers, and no single consumer, or group of consumers,
can dictate how the market operates.
• Nor can they individually determine the price of goods and
services, and how much will be exchanged. Competitive
markets will form under certain conditions.
Conditions necessary for the formation of market:-
• 1. The profit motive
• 2. Diminishability of private goods
• 3. Rivalry
• 4. Excludability
• 5. Rejectability
• 6. Ability to charge
• [Link] information failure
• 8. No time lags
• 9. No externalities
• 10. Property rights
• 11. Incentives for entrepreneurs
 Different types of competitive market
[Link]:-
A monopoly is the exact opposite form of market system
as perfect competition.
In a pure monopoly, there is only one producer of a
particular good or service, and generally no reasonable
substitute.
In such a market system, the monopolist is able to charge
whatever price they wish due to the absence of
competition, but their overall revenue will be limited by
the ability or willingness of customers to pay their price.
 [Link] :-
• An oligopoly is similar in many ways to a monopoly.
• The primary difference is that rather than having only
one producer of a good or service, there are a handful of
producers, that make up a dominant majority of the
production in the market system.
• While oligopolists do not have the same pricing power
as monopolists, it is possible, without diligent
government regulation, that oligopolists will collude with
one another to set prices in the same way a monopolist
would.
.[Link] competition:-
• Monopolistic competition is a type of market system
combining elements of a monopoly and perfect competition.
• Like a perfectly competitive market system, there are
numerous competitors in the market.
• The difference is that each competitor is sufficiently
differentiated from the others that some can charge greater
prices than a perfectly competitive firm.
• An example of monopolistic competition is the market for
music. While there are many artists, each artist is different
and is not perfectly substitutible with another artist.
4. Monopsony:-
• Market systems are not only differentiated according to
the number of suppliers in the market.

• They may also be differentiated according to the number

of buyers.
• Whereas a perfectly competitive market theoretically has
an infinite number of buyers and sellers, a monopsony has
only one buyer for a particular good or service, giving that
buyer significant power in determining the price of the
products produced.
5. Perfect competition:-
• Perfect competition is a market system characterized
by many different buyers and sellers.
• In the classic theoretical definition of perfect
competition, there are an infinite number of buyers
and sellers.
• With so many market players, it is impossible for any
one participant to alter the prevailing price in the
market. If they attempt to do so, buyers and sellers
have infinite alternatives to pursue.
Perfect competition and its characteristics
Meaning and definition:-
• A Perfect Competition market is that type of market in which the
number of buyers and sellers is very large, all are engaged in buying
and selling a homogeneous product without any artificial restrictions
and possessing perfect knowledge of the market at a time.

Definition:-

According to Boulding—”A Perfect Competition market may be defined

as a large number of buyers and sellers all engaged in the purchase
and sale of identically similar commodities, who are in close contact
with one another and who buy and sell freely among themselves.”
 characteristics
1. Large Number of Buyers and Sellers
2. Homogeneity of the Product
3. Free Entry and Exit of Firms
4. Perfect Knowledge of the Market
5. Perfect Mobility of the Factors of Production and Goods
6. Absence of Price Control
7. Perfect Competition among Buyers and Sellers
8. Absence of Transport Cost
9. One Price of the Commodity
10. Independent Relationship between Buyers and Sellers
 Imperfect competition
Meaning:-
In economic terms, imperfect competition is a market situation under
which the conditions necessary for perfect competition are not
satisfied.

In other words, imperfect competition can be defined as a type of

market that is free from the stringent rules of perfect competition.
Imperfect competition is characterized by
1. differentiated products.
2. buyers and sellers do not have any information related to the market
as well as prices of goods and services
[Link] dealing in products or services can influence the market
prices of their output.
 Different forms of imperfect competition
[Link] and its characteristics
The term monopoly has been derived from a Greek word
Monopolian, which signifies a single seller.
Monopoly refers to a market structure in which there is a single
producer or seller that has a control on the entire market. This
single seller deals in the products that have no close substitutes.

Main features of the monopoly market structure:

2. Single Seller
3. No Substitutes of the Product
4. Barriers to Entry
5. Restriction on Information
• Some of the barriers to entry of new
organizations are as follows:
• i. Legal Restrictions:
• ii. Resource Ownership:
• iii. Efficiency in Production:
• iv. Economies of Scale:
 Monopolistic competition
• The term monopolistic competition represents the
combination of monopoly and perfect competition.
• Monopolistic competition refers to a market situation in
which there are a large number of buyers and sellers of
products.
• However, the product of each seller is different in one
aspect or the other.

According to J.S. Bains, “Monopolistic competition is market

structure where there is a large number of small sellers,
selling differentiated but close substitute products.”
• Characteristics:-
• 1. Large Number of Sellers and Buyers:
• ii. Differentiated Products:
• iii. Free Entry and Exit:
• iv. Restricted Mobility of Factors of
Production:
• v. Price Policy:
 Oligopoly

• Meaning :-
The term oligopoly has been derived from two
Greek words, oligoi means few and poly means
control.
Therefore, oligopoly refers to a market form in
which there are few sellers dealing either in
homogenous or differentiated products.
In India, the aviation and telecommunication
industries are the perfect example of oligopoly
market form.
• The main characteristics of oligopoly are as
follows:
i. Few Sellers and Many Buyers:
ii. Homogeneous or Differentiated Products:
iii. Barriers in Entry and Exit:
iv. Mutual Interdependence:
v. Lack of Uniformity:
vi. Existence of Price Rigidity:
 Trends in International Business and their
impact in India
• Meaning of International Business:-
In simple words, manufacturing and trade
beyond the boundaries of one’s own country
is known as International Business
According to Roger Bennett, ‘’International
buiness involves commercial activities that
cross national frontiers’’
• Sectors having potential for International business in India :
Information Technology and Electronics Hardware.
• Telecommunication.
• Pharmaceuticals and Biotechnology.
• R&D.
• Banking, Financial Institutions and Insurance & Pensions.
• Capital Market.
• Chemicals and Hydrocarbons.
• Infrastructure
• Agriculture and Food Processing.
• Retailing.
• Logistics.
• Manufacturing.
 Impact of International business
• 1. Growth of business in formats like Mergers and Aquisitions, Joint ventures, imports and exports, etc

• 2. Improve in the standard of production,more financial margin to companies,optimum utilisation of

resources,more profits and maximisation on ROI.

• [Link] revolution in the form of production, design, shape ,quality and reduction in the
manufacturing cost.

• 4. Everyday launch of new products through innovation and creation.

• 5. Emergence of competition healthy for the improvement of the levels of production and quality of
products.

6. Production and access to market lead to improvement in gross domestic product (GDP) of the
nations and as a consequence of this there is an increase in per capita income of the masses. The
increment in per capita income leads to more buying power and consequently standard of living..

7 .Helps to earn foreign exchange which can be used to pay for imports
• [Link] business helps to spread risks
as a loss in one country can be off set with a
profit in another country.

• [Link] business has helped in

improving the effeciency of the organisation
through the use of modern techniques, hiring
of skilled and highly qualified employees,
Modes of entering International Business

1. Exporting
2. Licensing
3. Joint venture
4. Franchising
5. Wholly owned subsidiaries
6. Turnkey projects
7. Strategic Alliances.
 Exports
• Meaning:-
The term Export means sending of goods or services
produced in one country to another country.
Importance :-
1. Helps to get higher prices
2. Earn foreign exchange
3. Expansion of exports help in the expansion of
domestic production
4. Increases employment opportunities
5. Reduces current accouunt deficit
 Licensing
• Meaning :-

Under this , a firm in one country permits a company in another country to use manufacturing , processing, trademark,
technical how.

The person who gives the license is known as the Licensor and the person who obtains the license is known as the
Licensee.

Advantages :-
1. Revenue to the licensing company as the licensing agreement requires the payment from the licensee company.

2,Promotion of Brand Recognition.

3. quick, easy entry into foreign markets, allowing a company to “jump” border and tariff barriers

4. lower capital requirements

5. potential for large return on investment (ROI), which can be realised fairly quickly

6. low risk, since the entry is with an established product and hence fewer financial and legal risks.
• Disadvantages:-
[Link] level of control.
2. Licensee may become a competitor.
3. Loss of intellectual property
4. The license period is usually limited
5. Poor quality management can damage the liensor
company’s brand’s reputation in other licence
territories.
 Licensing
• In this mode of entry, the manufacturer of the home country leases the right of intellectual properties, i.e., technology,
copyrights, brand name, etc., to a manufacturer of a foreign country for a predetermined fee

• . The manufacturer that leases is known as the licensor and the manufacturer of the country that gets the license id
known as the licensee

• Advantages −
• Low investment of licensor;
• Low financial risk of licensor;
• Licensor can investigate the foreign market;
• Licensee’s investment in R&D is low;
• Licensee does not bear the risk of product failure;
• Any international location can be chosen to enjoy the advantages;
• No obligations of ownership, managerial decisions, investment etc.

• Disadvantages −
• Limited opportunities for both parties involved;
• Both parties have to manage product quality and promotion;
• One party’s dishonesty can affect the other
• ; Chances of misunderstanding;
• Chances of trade secrets leakage of the licensor.
Franchising

• In this mode, an independent firm called the franchisee does the business using the name of another company
called the franchisor.
• In franchising, the franchisee has to pay a fee or a fraction of profit to the franchisor
. The franchisor provides the trademarks, operating process, product reputation and marketing, HR and operational
support to the franchisee.
• Advantages −
• Low investment;
• Low risk
• Franchisor understands market culture, customs and environment of the host country;
• Franchisor learns more from the experience of the franchisees;
• Franchisee gets the R&D and brand name with low cost;
• Franchisee has no risk of product failure.
• Disadvantages −
• Franchising can be complicated at times
• ; Difficult to control;
• Reduced market opportunities for both franchisee and franchisor;
• Responsibilities of managing product quality and product promotion for both;
• Leakage of trade secrets
• Turnkey Project
• It is a special mode of carrying out
international business.
• It is a contract under which a firm agrees – for
a remuneration – to fully carry out the design,
create, and equip the production facility and
shift the project over to the purchaser when
the facility is operational
• Mergers & Acquisitions
• In Mergers & Acquisitions, a home company may merge itself with a foreign company to
enter an international business.
• Alternatively, the home company may buy a foreign company and acquire the foreign
company’s ownership and control.
• M&A offers quick access to international manufacturing facilities and marketing networks.
• Advantages
• − Immediate ownership and control over the acquired firm’s assets;
• Probability of earning more revenues
• The host country may benefit by escaping optimum capacity level or over capacity level.

• Disadvantages −
• Complex process and requires experts from both countries;
• No addition of capacity to the industry;
• Government restrictions on acquisition of local companies may disrupt business;
• Transfer of problems of the host country’s to the acquired company.
• Joint Venture
• When two or more firms join together to create a new business entity, it is called a joint
venture.
• The uniqueness in a joint venture is its shared ownership.
• Environmental factors like social, technological, economic and political environments
may encourage joint ventures.

• Advantages − Joint ventures provide significant funds for major projects;

• Sharing of risks between or among partners;
• Provides skills, technology, expertise, marketing to both parties.

• Disadvantages − Conflicts may develop;

• Delay in decision-making of one affects the other party and it may be costly;
• The venture may collapse due to the entry of competitors and the changes in the
partner’s strength;
• Slow decision-making due to the involvement of two or more decision-makers.
• Wholly Owned Subsidiary
• Wholly Owned Subsidiary is a company whose
common stock is fully owned by another
company, known as the parent company.
• A wholly owned subsidiary may arise through
acquisition or by a spin-off from the parent
company.