TUTOR MARKED ASSIGNMENT
Course Code: ECO - 13
Course Title: Business Environment
Assignment Code: ECO – 13/TMA/2015-16
Coverage: All Blocks
Maximum Marks: 100
Attempt all the questions.
1. What is meant by business
environment? Describe briefly various components of non-economic business
environment. (5+15)
Ans:
Business is any activity undertaken for the purpose of producing or selling a
particular commodity or service and earns a profit. The business has several
dimensions such as purchasing the inputs, converting the inputs into the
output, selling that output at a profitable price. Every dimension of a
business depends upon several factors. Hence a business is influenced by several
factors, all them put together are described as Business Environment. A
business can grow and prosper in a particular environment just as a plant can
grow in a particular soil, climate, water supply etc. Hence the entrepreneur has to pay attention
to the environment in which he has to conduct his business activities. If he is
able to adapt his business to the environment effectively and efficiently the
business can make higher profits. This makes the study of business environment
important.
According to Keith Davis, ”Business environment is the aggregate
of all conditions, events and influences that surrounds and affect the
business.”
According to wheeler, ”Business environment is the total of all
things external to business firms and industries which affect their
organisation and operations.
The various elements of non-economic environment are as follow:
(a) Social Environment: The social
environment of business includes social factors like customs, traditions,
values, beliefs, poverty, literacy, life expectancy rate etc. The social
structure and the values that a society cherishes have a considerable influence
on the functioning of business firms. For example, during festive seasons there
is an increase in the demand for new clothes, sweets, fruits, flower, etc.
(b) Political Environment: This
includes the political system, the government policies and attitude towards the
business community and the unionism. All these aspects have a bearing on the
strategies adopted by the business firms. The stability of the government also
influences business and related activities to a great extent. It sends a signal
of strength, confidence to various interest groups and investors.
(c) Legal Environment: This refers to set of laws, regulations,
which influence the business organisations and their operations. Every business
organisation has to obey, and work within the framework of the law. The
important legislations that concern the business enterprises include:
(i)
Companies Act, 1956
(ii) Foreign
Exchange Management Act, 1999
(iii) The
Factories Act, 1948
(iv)
Industrial Disputes Act, 19112
(v)
Payment of Gratuity Act, 19112
(vi)
Industries (Development and Regulation) Act, 1951
(vii)
Prevention of Food Adulteration Act, 1954
(viii)
Essential Commodities Act, 2002
(ix) The
Standards of Weights and Measures Act, 1956
(x)
Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade
Marks Act, 1999
(xii)
Bureau of Indian Standards Act, 1986
(xiii)
Consumer Protection Act, 1986
(xiv)
Environment Protection Act
(xv)
Competition Act, 2002
Besides, the above legislations, the following are also form part
of the legal environment of business.
(i) Provisions of the Constitution:
The provisions of the Articles of the Indian Constitution, particularly
directive principles, rights and duties of citizens, legislative powers of the
central and state government also influence the operation of business
enterprises.
(ii) Judicial Decisions: The
judiciary has to ensure that the legislature and the government function in the
interest of the public and act within the boundaries of the constitution. The
various judgments given by the court in different matters relating to trade and
industry also influence the business activities.
(d) Technological Environment: Technological environment include the
methods, techniques and approaches adopted for production of goods and services
and its distribution. The varying technological environments of different
countries affect the designing of products. In the modern competitive age, the
pace of technological changes is very fast. Hence, in order to survive and grow
in the market, a business has to adopt the technological changes from time to
time.
(e) Demographic Environment: This refers to the size, density,
distribution and growth rate of population. All these factors have a direct
bearing on the demand for various goods and services.
(f) Natural Environment: The natural environment includes
geographical and ecological factors that influence the business operations.
These factors include the availability of natural resources, weather and
climatic condition, location aspect, topographical factors, etc. Business is
greatly influenced by the nature of natural environment. For example, sugar
factories are set up only at those places where sugarcane can be grown. It is
always considered better to establish manufacturing unit near the sources of
input.
2. Explain the concept of
monetary policy. Describe its objectives. (5+15)
Ans: Monetary Policy: Monetary policy refers
to policy formulated and implemented for achieving the following objectives:
1. Regulating the supply of money including
credit money and adjusting it to the needs of the economy
2. To control the cost of money by regulating the
rates of interest.
3. Directing the supply of money to the required
channels in accordance with the plan of priorities prepared by the planning
authority.
According to A.G.
Hart "A policy which influences the
public stock of money substitute of public demand for such assets of both that
is policy which influences public liquidity position is known as a monetary
policy." From the above
discussion, it is clear that a monetary policy is related to the availability
and cost of money supply in the economy in order to attain certain broad
objectives.
Objectives
of Monetary Policy: The objectives
of a monetary policy in India are similar to the objectives of its five year
plans. In a nutshell planning in India aims at growth, stability and social justice.
After the Keynesian revolution in economics, many people accepted
significance of monetary policy in attaining following objectives.
a) Rapid Economic Growth
b) Price Stability
c) Exchange Rate Stability
d) Balance of Payments (BOP) Equilibrium
e) Full Employment
f) Neutrality of Money
g) Equal Income Distribution
a) Rapid Economic
Growth: It is the most important objective
of a monetary policy. The monetary policy can influence economic growth by
controlling real interest rate and its resultant impact on the investment. If
the RBI opts for a cheap or easy credit policy by reducing interest rates, the
investment level in the economy can be encouraged. This increased investment
can speed up economic growth.
b) Price Stability: All the economics suffer from inflation and
deflation. It can also be called as Price Instability. Both inflation and
deflation are harmful to the economy. Thus, the monetary policy having an
objective of price stability tries to keep the value of money stable. It helps
in reducing the income and wealth inequalities.
c) Exchange Rate
Stability: Exchange rate
is the price of a home currency expressed in terms of any foreign currency. If
this exchange rate is very volatile leading to frequent ups and downs in the
exchange rate, the international community might lose confidence in our
economy. The monetary policy aims at maintaining the relative stability in the
exchange rate.
d) Balance
of Payments (BOP) Equilibrium: Many developing countries like India
suffer from the Disequilibrium in the BOP. The Reserve Bank of India through
its monetary policy tries to maintain equilibrium in the balance of payments.
The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. The
former reflects an excess money supply in the domestic economy, while the later
stands for stringency of money. If the monetary policy succeeds in maintaining
monetary equilibrium, then the BOP equilibrium can be achieved.
e) Full Employment: Full Employment refers to absence of
involuntary unemployment. In simple words 'Full Employment' stands for a
situation in which everybody who wants jobs get jobs. However it does not mean
that there is Zero unemployment. In that senses the full employment is never
full. Monetary policy can be used for achieving full employment.
f) Equal Income
Distribution: Many economists
used to justify the role of the fiscal policy are maintaining economic
equality. However in recent years economists have given the opinion that the
monetary policy can help and play a supplementary role in attaining an
economic equality.
3. Define collective bargaining.
Explain its different types. How is it done? What are its pre-requisites? (5+5+5+5)
Ans: Collective
Bargaining is a process involving discussions and negotiations between two
groups representing Labour and Management regarding terms of employment. Collective Bargaining, a collective and
continuous process, involves formation of bargaining agreements and the
implementations of such an agreement. It is a flexible approach that attempts in
achieving peace and discipline in the Industry. The principle of ‘give and
take’ has been infused in the principle of Collective Bargaining. As workers
mainly in the formal sector are organized, collective bargaining is more
commonly in vogue in the formal sector.
Collective bargaining is a technique that has been adopted by the
unions and the managements to reconcile their conflicting interests. It is
called ‘collective’ because the employees as a group, select representatives to
meet and discuss differences with the employer.
Donovan Commission “ A right which is and should be the
prerogative of every worker in democratic society”.
Byar & Rue (1991) “ CB is a process that involves the
negotiation, drafting, administration and interpretation of a written agreement
between an employer and a union for a specific period of time”.
J.T. Dunlop & J.T.
Healey “ CB as a mixture of a poker game combining deception, bluff, luck and
ability”.
TYPES
OF BARGAINING
1. Conjunctive/Distributive Bargaining: Here, the parties try to
maximize their respective gains. In this method, the parties try to settle
economic issues through a zero-sum game. Zero-sum game is where ‘my gain
is your loss and your gain is my loss’. Neither party is willing to yield
an inch.
2. Co-operative Bargaining: Both parties are more open to coming
down from their high horses and co-operating. They are willing to
negotiate the terms of employment in a flexible way. This willingness is
because of recession and the need to be able to survive in such difficult
times. This would not be possible without each other’s support and hence
co-operative bargaining.
3. Composite Bargaining: Workers tend to argue that productivity
bargaining increases their workload. Rationalization, introduction of high
technology, tight productivity norms hit the unions and workers below the belt.
As a result, workers tend to favour composite bargaining. In this method,
labour bargains for wages as usual.
In addition, they also bargain for such issues that, if permitted, may result in lower employment in some other plant, diluting the bargaining powers of unions.
In addition, they also bargain for such issues that, if permitted, may result in lower employment in some other plant, diluting the bargaining powers of unions.
COLLECTIVE BARGAINING PROCESS
The collective bargaining process comprises of five core steps:
1)
Prepare: This phase involves composition of a
negotiation team. The negotiation team should consist of representatives of
both the parties with adequate knowledge and skills for negotiation. In this
phase both the employer’s representatives and the union examine their own
situation in order to develop the issues that they believe will be most
important. The first thing to be done is to determine whether there is actually
any reason to negotiate at all. A correct understanding of the main issues to
be covered and intimate knowledge of operations, working conditions, production
norms and other relevant conditions is required.
2)
Discuss: Here, the parties decide the ground
rules that will guide the negotiations. A process well begun is half done and
this is no less true in case of collective bargaining. An environment of mutual
trust and understanding is also created so that the collective bargaining
agreement would be reached.
3)
Propose: This phase involves the initial
opening statements and the possible options that exist to resolve them. In a
word, this phase could be described as ‘brainstorming’. The exchange of
messages takes place and opinion of both the parties is sought.
4) Bargain:
Negotiations are easy if a problem solving attitude is adopted. This stage comprises
the time when ‘what ifs’ and ‘supposals’ are set forth and the drafting of
agreements take place.
5) Settlement:
Once the parties are through with the bargaining process, a consensual
agreement is reached upon wherein both the parties agree to a common decision
regarding the problem or the issue. This stage is described as consisting of
effective joint implementation of the agreement through shared visions,
strategic planning and negotiated change.
a)
Trade Union
Recognition: The existence of the freedom of association does not necessarily
mean that there would automatically be recognition of unions for bargaining
purposes. Especially in systems where there is a multiplicity of trade unions,
there should be some pre-determined objective criteria operative within the
industrial relations system to decide when and how a union should be recognised
for collective bargaining purposes. The accepted principle is to recognise the
most representative union, but what criteria is used to decide it and by whom
may differ from system to system. In some systems the issue would be determined
by requiring the union to have not less than a stipulated percentage of the
workers in the enterprise or category in its membership. The representativeness
may be decided by a referendum in the workplace or by an outside certifying
authority (such as a labour department or an indepenedent statutory body).
There could be a condition that once certified as the bargaining agent, there
cannot be a change of agent for a prescribed period (e.g. one or two years) in
order to ensure the stability of the process.
b)
Observance of
Agreements: Especially in developing countries where there is a multiplicity
of unions, unions are sometimes unable to secure observance of agreements by
their members. Where a labour law system provides for sanctions for breaches of
agreements, the labour administration authorities may be reluctant to impose
sanctions on workers. Where there is frequent non-observance of agreements or
understandings reached through the collective bargaining process, the party not
in default would lose faith in the process.
c)
Support of Labour
Administration Authorities: Support by the labour administration
authorities is necessary for successful collective bargaining. This implies
that they will Provide the necessary climate for it. For instance, they should
provide effective conciliation services in the event of a breakdown in the
process, and even provide the necessary legal framework for it to operate in
where necessary, e.g. provision
for the registration of agreements, will not support a party in breach of
agreements concluded consequent to collective bargaining.
d)
Good Faith: Collective
bargaining is workable only if the parties bargain in good faith. If not, there
will be only the process of bargaining without a result viz. an agreement. Good faith is more likely where certain
attitudes are shared among employers, workers and their organizations e.g. a belief and faith in the value
of compromise through dialogue, in the process of collective bargaining, and in
the productive nature of the relationship collective bargaining requires and
develops. Strong organizations of workers and employers contribute to
bargaining in good faith, because there would be some parity in the bargaining
strength of the two parties.
e)
Proper Internal
Communication: Both the management and union should keep their managers and
members respectively well informed, as a lack of proper communication and
information can lead to misunderstandings and even to strikes. Sometimes
managers and supervisors who are ill-informed may inadvertently mislead workers
who work under them about the current state of negotiations, the management's
objectives and so on. In fact, it is necessary to involve managers in deciding
on objectives and solutions, and such participation is likely to ensure greater
acceptance - and therefore better implementation - by them.
4. Distinguish between the
following: (10+10)
a) Cash Reserve Ratio and
Liquidity Reserve Ratio
Ans: The
cash reserves that banks keep with the central bank is called the Cash Reserve
Ratio (CRR). A CRR requires only a cash reserve so a portion of the cash
deposits that banks receive are kept with the central bank as a reserve. A
decrease in the CRR would mean a higher amount of money that banks can lend
generating more income for
them. It controls the liquidity in the economy.
The Statutory Liquidity Ratio (SLR), on the other hand, is cash,
precious metals, or certificates that a bank keeps with them as a reserve. It
limits the influence that banks have on putting more money into the economy. An
SLR guarantees the stability of banks and is used to limit the increase in bank
credit.
Differences between SLR and CRR is given below
1.“CRR” stands for “Cash Reserve Ratio” while “SLR” stands for
“Statutory Liquidity Ratio.”
2. A commercial bank’s CRR is maintained with the central bank
while its SLR is maintained at the bank.
3. The SLR can be in the form of
cash, precious metals like
gold, or securities while a CRR can only be in the form of cash.
4. The CRR controls the liquidity in the economy and staves off
inflation while the SLR controls the credit growth in the economy and limits
the influence banks have in putting more money into the economy.
5. An SLR is intended to make banks invest in government
securities while a CRR is intended to maintain the purchasing power of money in
order to curb inflation.
b) Foreign direct investment and
foreign portfolio investment
Ans: FDI-
Foreign Direct Investment refers to international
investment in which the investor obtains a lasting interest in an enterprise in
another country. Most concretely, it may take the form of buying or
constructing a factory in a foreign country or adding improvements to such a
facility, in the form of property, plants, or equipment.
FDI is calculated to include all kinds of capital contributions,
such as the purchases of stocks, as well as the reinvestment of earnings by a
wholly owned company incorporated abroad (subsidiary), and the lending of funds
to a foreign subsidiary or branch. The reinvestment of earnings and transfer of
assets between a parent company and its subsidiary often constitutes a
significant part of FDI calculations. FDI is more difficult to pull out or sell
off. Consequently, direct investors may be more committed to managing their
international investments, and less likely to pull out at the first sign of
trouble.
On the other hand, FPI (Foreign Portfolio Investment) represents
passive holdings of securities such as foreign stocks, bonds, or other
financial assets, none of which entails active management or control of the
securities' issuer by the investor.
Unlike FDI, it is very easy to sell off the securities and pull
out the foreign portfolio investment. Hence, FPI can be much more
volatile than FDI. For a country on the rise, FPI can bring about rapid
development, helping an emerging economy move quickly to take advantage of
economic opportunity, creating many new jobs and significant wealth. However,
when a country's economic situation takes a downturn, sometimes just by failing
to meet the expectations of international investors, the large flow of money
into a country can turn into a stampede away from it.
Difference
between FDI and FPI
Basis
|
FDI
|
FPI
|
Involvement
- direct or indirect
|
Involved
in management and ownership control; long-term interest.
|
No active involvement in management. Investment instruments that
are more easily traded less permanent and do not represent a controlling
stake in an enterprise.
|
Sell off
|
It is more
difficult to sell off or pull out.
|
It is fairly easy to sell securities and pull out because they
are liquid.
|
Comes
from
|
Tends to
be undertaken by Multinational organisations
|
Comes from more diverse sources e.g. a small company's pension
fund or through mutual funds held by individuals; investment via equity
instruments (stocks) or debt (bonds) of a foreign enterprise.
|
What is
invested
|
Involves
the transfer of non-financial assets e.g. technology and intellectual
capital, in addition to financial assets.
|
Only investment of financial assets.
|
Stands
for
|
Foreign
Direct Investment
|
Foreign Portfolio Investment
|
Volatility
|
Having
smaller in net inflows
|
Having larger net inflows
|
Management
|
Projects
are efficiently managed
|
Projects are less efficiently managed
|
5. Write short notes on the
following: (4×5)
a) Central Bank
Ans: A
central bank is the most important institutions responsible for safeguarding
the financial stability of the country. It
is the one bank acting as the leader of the money market. In the words of R.P
Kent, “Central Bank is an institution charged with the responsibility of
managing the entire monetary and banking affairs of the country in the national
interest”.
A central bank is responsible for regulating the supply of money
and credit in the economy for which it is given special powers by the state.
Unlike the commercial banks, it is guided by the motive of economic welfare of
the people and not by the profit motive. It holds the ultimate reserves of the
action, acts as a banker’s bank and a banker to the state.
Inspite of controversies regarding the functions of a central
bank, the functions which are invariably performed by almost all central banks
of the world are: -
1. Monopoly of note issue
2. Banker to the state
3. Banker’s Bank: The central bank is the parent bank of
all other banks. In this capacity the central bank performs three important
functions.
i) Custodian of the cash reserves
ii) Lender of the last resort
iii) Clearing and Settlement:
4. Credit Control
5. Regulation of Foreign exchange
b) Public Sector
Public Sector means the various economic, industrial and
commercial activities taken up by the State i.e., Central Government, state government, union territories or
local self-governments. The public sector in India has taken up projects
involving highly sophisticated technology and difficult construction. It has
played a very important role in the economic development of country. They are
the medium through which rapid industrial development has resulted. They have
helped in producing enough infrastructural facilities (production of
electricity, coal, steel, petroleum etc.) so that private sector may grow. Even
in the agricultural field the Green Revolution could be possible through public
sector by providing power and fertilizers. They have by and large developed
substantial capacities for production of coal, iron-ore, steel, petroleum
products, fertilizers, heavy machines, basic drugs, electricity, power
equipments and ships. They have contributed to India’s export earrings as-
well-as successful efforts towards import substitution. In addition, they are a
source of employment to a large number of people.
c) Collective Bargaining
Ans: It was
Adam Smith in the 18th Century who made the first reference to
collective bargaining in the labour market.
The Bargaining Theory Proponents have argued that short-run wages have
always been determined by the process of bargaining. Collective bargaining is
possible because there exist today the bilateral monopoly situation in the
labour market. That is to say that labour market is neither perfectly
competitive nor is it marked by monopoly conditions only. Both the employers
and employees have now equal strength to negotiate on problems of wage
settlement. This situation is called bilateral monopoly situation. Collective
bargaining is conducted under bilateral monopoly.
Under bilateral monopoly conditions
wages rate and volume of employment will depend on the relative bargaining strength
of the Employer’s associations and Worker’s unions. If the Employer’s
Association is stronger than Trade Union, it will push the wage below the
competitive equilibrium level or very near to the subsistence level. On the
contrary if the Trade Union is stronger than the Employers Association the wage
rate will be pushed up above competitive equilibrium rate or to marginal
productivity or at least to the level of the capacity to pay of the employers.
Thus, there is no definiteness about the levels of wage under collective
bargaining. In other words wages under bilateral monopoly situation are
indeterminate. We can only indicate the broad limits within which the wages
rate and the volume of employment would come to be settled according to
relative bargaining power of the parties.
d) Balance of Payments
Ans: The Balance of Payments
(BOP) of a country is a systematic record of all economic transactions
between the residents of a country and the rest of the world. It
is composed of all receipts on account of goods exported, services rendered and
capital received by residents and payments made by them on account of goods
imported, services received and capital transferred to non-residents or
foreigners.
The Balance of Payment or BOP is shown in the form of an Account
or Balance sheet which enumerates how much has been received from foreigners
and how much has been paid to them during a particular accounting period.
Usually the accounts are prepared on an annual basis. The Balance of Payments Account
of a country shows, on its credit side, the different items for which it has
received payment and the amount of such payments. These are called the credit
items. On the debit side the Account shows the items for which the country had
paid to foreigners and the amount of such payments.
They are the Debit Items. If the total of the debit items and the
total of the credit items are equal in value, the country’s international
payments are balanced. In other words, if the entries are done in a proper way
debits and credits will always be in balance, so that in an accounting sense
the BOP will always be in balance. Each debit has a corresponding credit entry.
If the credit items are larger, so that there is a net balance due to it, the
country is said to have a Favourable Balance. If the debit items are larger,
so that there is a net balance due to foreigners, the country is said to have
an Unfavourable Balance. The terms ‘favourable’ and ‘unfavourable’ are
misleading but have the sanction of long usage.
The Balance of Payment (BOP) statement is divided into two major
accounts.
(i) Current Account and
(ii) Capital Account.