facors affecting economic enviornment

8/9/2019 Facors Affecting Economic Enviornment

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FACTORS AFFECTING

THEECONOMIC

ENVIORNMENT

CAPITAL MARKET

A nation's capital market includes such financial institutions as banks, insurancecompanies, and stock exchanges that channel long-term investment funds to commercialand industrial borrowers. Unlike the money market, on which lending is ordinarily short

term, the capital market typically finances fixed investments like those in buildings andmachinery.

Nature and Constituents

The capital market consists of number of individuals and institutions (includingthe government) that canalize the supply and demand for long-term capital and claims oncapital. The stock exchange, commercial banks, co-operative banks, saving banks,development banks, insurance companies, investment trust or companies, etc, areimportant constituents of the capital markets.

The capital market, like the money market, has three important components,namely the suppliers of loanable funds, the borrowers and the intermediaries who deal

with the leaders on the one hand and the borrowers on the other.The demand for capital comes mostly from agriculture, industry, trade and the

government. The predominant form of industrial organization developed capital Marketbecome a necessary infrastructure for fast industrialization. Capital market not concernedsolely with the issue of new claims on capital, but also with dealing in existing claims.

Importance of Capital Market


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The capital market serves a very useful purpose by pooling the capital resourcesof the country and making them available to the enterprising investors well-developedcapital markets augment resources by attracting and lending funds on the global scale.

A developed capital market can solve this problem of paucity of funds. For anorganized capital market can mobilize and pool together even the small and scattered

savings and augment the availability of investible funds. While the rapid growth ofcapital markets, the growth of joint stock business has in its turn encouraged thedevelopment of capital markets. A developed capital market provides a number ofprofitable investment opportunities for a small savers.

Nature of the Indian Capital Market

Like the money market, the Indian capital market also consists of an organizedsector and an unorganised sector. In the organized market the demand for capital comesmostly from corporate enterprises and government and semi-government institutions andthe supply comes from household savings, institutional investors like banks investmenttrusts, insurance companies, finance corporations, government and international

financing agencies. Whereas, the unorganized market consists mostly of the indigenousbankers and moneylenders on the supply side.

Development of the market

The Indian capital market has undergone remarkable changes in the post-independence era. Certain steps taken by the government to place the market on a strongfooting and develop it to meet the growing capital requirements of fast industrializationand development of the economy have significantly contributed to the developments thattook place in the Indian capital market over the last five decades or so.

The important facts that have contributed to the development of the capitalmarketing India are the following.

1. Legislative measures: Laws like the companies act, the securitiescontracts(Regulations) and the capital issues(Control). Act empowered the government toregulate the activities of the capital market with a view to assuring healthy trends in themarket, protecting the interests of the investors, efficient utilization of the resources, etc.

2. Establishment of development banks and expansion of the public sectors: Startingwith the establishment of the IFCI, a number of development banks have been establishedat national and regional levels to provide financial and other development assistance tothe entrepreneurs and enterprises. These institutions today account for a large chunk ofthe industrial finance.

3. Growth of underwriting business: There has been a phenomenal growth in theunderwriting business thanks mainly to the public financial corporations and thecommercial banks. In the last one decade the amount underwritten as percentage of totalprivate capital issues offered to public varied between 72 per cent and 97 per cent.


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4. Public confidence: Impressive performance of certain large companies encouragedpublic investment in industrial securities.

5. Increasing awareness of investment opportunities: The improvement in educationand communication has created more public awareness about the investment

opportunities in the business sector. The market for industrial securities has becomebroader.

6. Capital Market Reforms: A number of measures have been taken to check abuses andto promote healthy development of the capital market.

DISINVESTMENT

Twelve years after it was started, the liberalization of the Indian economy remains anideological and operational battleground. There is mainstream national consensus on theneed and irreversibility of reforms, but widespread disagreement about its pace and thesharing of its benefits. A basic aspect of the withdrawal of the state from the economicsphere has been the divestment to private parties of the shares (and in some cases control)of public sector enterprises (PSUs) [or state-owned enterprises (SOEs)]. This has affectedthousands of Indians, and triggered fierce political debates

Disinvestment, which has now become a universal trend, means transfer of ownershipand/management of an enterprise from the public enterprise from an industry or sector tothe private sector, partially or fully. Another dimension if disinvestments is opening up of

an industry that has been reserved for the public sectors to the private sector.Disinvestment is an inevitable historical reaction to the indiscriminate expansion of thestate sector and the associated problems. Today even in communist countriesdisinvestments and privatization has become a vital measure of economic rejuvenation.Disinvestment has its advantages in several ways. It would help reduce the fiscal burdenof the state by relieving it of its losses and reducing the size of bureaucracy,Enabling the government to mop up funds, better management of the enterprises,encourage entrepreneurship and help accelerate the pace of economic development as itattracts more recourses from the private sector for development.It may increase the number of workers and common man who are shareholders and thiscould make enterprises subject to more public vigilance .

Disinvestment also helps the government to concentrate more on the essential statefunctions

Government may confront several obstacles to privatization and disinvestment. Tradeunions and political parties may oppose it. In developing countries, the relativelyundeveloped capital markets sometimes makes it difficult for governments to sell shares.


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Another problem is that governments usually want to sell the least profitable enterprises,those that the private sector is not willing to buy at a price acceptable to the government.

Disinvestment will be successful only if certain conditions are satisfied. The policyshould be very clear and there should be proper privatization strategies. Equally

important are the commitment and political boldness on the part of the government.Thefollowing are the ways in which the procedure for disinvestments is generally carried out.

Public offering: This maintained the state ownership on the company butdiversified the shareholding among various entities.

Internal restructuring: One of the most popular methods of restructuring, whichmaintained state ownership of assets. This process could involve the breaking upof the company in to smaller units producing different products or setting up of anew entity to just take over owner ship of productive assets. Debt equity swap isalso part of the internal restructuring process.

Bankruptcy and reorganization: Restructuring could also involve the bankrupt

firms being dissolved. Employee shareholding: This has been one of the most popular forms of

restructuring employed in China. Being a communist mindset where collectiveholding of assets was always emphasized, this form of restructuring was popularsince the employees were not threatened with retrenchment and hence this was themost socially acceptable restructuring exercise at that point of time.

Open sale: This form of restructuring has become more popular in recent years.The firm is openly sold to insiders or outsiders, perhaps through auction. This hasbeen the most radical form of privatization because it can involve the transfer ofthe firm to a single private owner or a management group.

Leases: Under this form of restructuring, the assets of a PSU were leased out. The

assets were leased out to legal entities independent of the government or ex-employees who formed their own companies. Leasing is often adopted when thelessee has insufficient financial resources to buy the firm.

Joint ventures: Formation of a joint venture or merger falls under this categoryof restructuring. This type of reform companies to obtain long-term access tocapital and technology.

The role of the State vs. Market has been one of the major issues in developmenteconomics and policy. In a mixed economy such as India, historically the public sectorhad been assigned an important role. However, in the year 1991 the national economic

policy underwent a radical transformation. The new policy of liberalization, privatizationand globalization de-emphasized the role of the public sector in the nations economy.The faculty at IIT-Bombay has been studying various aspects of the New EconomicPolicy such as financial sector reforms, fiscal implications of reforms, and ofglobalization.To date the apologists of market-oriented economic structures have proffered severalarguments:


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1. The government must not enter into those areas where the private sector canperform better

2. Market-driven economies are more efficient than the state-planned economies3. The role of the state should be as a regulator and not as the producer

Government resources locked in commercial activities should be released for their

deployment in social activities. It is also contended that the functioning of many public sector units

(PSUs) has been characterized by low productivity, unsatisfactory qualityof goods, excessive manpower utilization, and inadequate human resourcedevelopment and low rate of return on capital. For instance, between 1980and 2002, the average rate of return on capital employed by PSUs wasabout 3.4% as against the average cost of borrowing, which was 8.66%.Disinvestment (or divestment) of the PSUs has therefore been offered asone of the solutions in this context.

Disinvestment involves the sale of equity and bond capital invested by the government inPSUs. It also implies the sale of governments loan capital in PSUs through

securitization. However, it is the government and not the PSUs who receive money fromdisinvestment.The fixation of share/bond price is an important aspect of disinvestment. Now, theDisinvestment Commission determines the share/bond price. Disinvested shares arelisted, quoted and traded on the stock market. Indian and foreign financial institutions,banks, mutual funds, companies as well as individuals can buy disinvested shares / bondsDisinvestment is generally expected to achieve a greater inflow of private capital and theuse of private management practices in PSUs, as well as enable more effectivemonitoring of management discipline by the private shareholders. Such changes wouldlead to an increase in the operational efficiency and the market value of the PSUs. This inturn would enable the much needed revenuegeneration by the government and help

reduce deficit financing.

Rangarajan Committee On Disinvestment

The committeee on disinvestment in public sector enterprises set up by the government ofIndia under the chairmanship of c. Rangaragan in 1993 had submitted a report in which itmade a lot of recommendations these important recommendation of the committee havebeen considered while carrying out the disinvestment

The best method for disinvestment is offering shares to the general public at fixed price

through a general prospecting. However, since these shares have not been traded so faron the stock markets, it would be difficult to decide the fixed rate at which they shouldbe established in the market, this indeed would be the best method. Till then, the auctionmethod with wide participation may be adopted.The target level of disinvestment should be decided on the basis of the desirable level ofpublic ownership in an activity or unit consistent with industrial policy. In all those units,which are reserved for the public sector, the percentage of equity disinvested should be49 percent so that the government, by holding majority of the shares, retains control over


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the management. In other cases, the percentage of equity to be disinvested should be 74percent.Instead of year-wise targets of disinvestment, a clear action plan should be evolved.Disinvestment shall be in stages and sales shall be staggered so as to get the best possibleprice.

A number of steps need to be undertaken for efficiently carrying out privatization. Thesemay include corporatisation of the public enterprises, restricting of finance with a properdebt-equity gearing and on independent regulatory commission for the concerned sector,if necessary.A scheme of preferential offer of shares to workers and employees may be devised.Ten percent of the proceeds ;of the privatization may be set apart for lending to the publicenterprises on concessional terms for meeting their expansion and rationalization needs.

Milestones in DISINVESTMENT

The company Pradeep Phosphates Ltd was launched as a joint venture of theGovernment. of India and the Republic of Nauru and was incorporated on 24thDecember, 1981. Commercial DAP production started from 1st August, 1986. In June1993 the Company became a Public Sector Undertaking (PSU) wholly owned by theGovt. of India.In its PSU avatar, the Company faced problems right from the beginning and continuedin very poor financial health. By early 2000 the position had became untenable with

cumulative losses of Rs. 4,315 million as of 31st March, 2001, estimated losses of overRs. 2,000 million in 2001-02 and zero net worth. The Company had also chalked upmassive outstanding liabilities on account of raw materials import, of around Rs. 5,000million.On February 28, 2002, in a path-breaking move, aimed at breathing new life into thishitherto beleaguered and loss making PSU, the Government of India divested 74% of itsstake in favour of selected strategic partner, Zuari Maroc Phosphates Pvt. Ltd.


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Today Paradeep Phosphates Limited (PPL) is an enterprise of the K.K. Birla and OCP(Morocco) Groups and is a complex fertiliser unit engaged in the production ofDAP/NPK. The plant also produces Phosphoric Acid and Sulphuric Acid, which arecritical intermediates in the manufacture of the above mentioned phosphatic fertilisers.The plant which is located at the Port Town of Paradeep in the district of Jagatsinghpur in

Orissa, has an installed annual capacity of 7,20,000 metric tonnes of DAP (2400 metrictonnes per day)and other Phosphatic (NPK) fertilizers PPL is the second largestintegrated DAP plant in India and ranks among the largest in Asia. The Unit today is a51-49 joint venture of Zuari Industries Limited, the flagship fertiliser company of theK.K. Birla Group and Maroc Phosphore SA, a wholly owned subsidiary of the fertilisergiant, OCP of Morocco.

AnINTRESTING ARTICLEIn The TIMES OF INDIA(ITS GOOD READING)

Paranoia, followed by delusions of grandeur. That describes the soap opera that thegovernments disinvestment programme became last week. Originally, the governmenthoped to raise Rs 12,000 crore through disinvestment.

To maximise prices and improve efficiency, Disinvestment Minister Arun Shouriepleaded for strategic sales (selling a controlling stake to businessmen). He argued, with awealth of facts and data, that selling minority stakes in PSUs fetched lower prices and didnot improve efficiency.

But politics triumphed. Shouries strategic sales were foiled, and disinvestment stalled.But then something else happened. The comatose stock market took off. The Sensexdoubled between March and December 2003, spurred mainly by foreign institutionalinvestors (FIIs).

In this boom, the government realised that it could sell minority stakes in PSUs at decentprices. Public sector banks like Vijaya Bank and UCO Bank, came out with issues thatwere oversubscribed.

Building on this, the government decided to sell a whopping Rs 15,000 crore of minoritystakes in six PSUs, over three weeks in February-March.

Why the rush? Why not spread the sales over several months, as finance experts hadsuggested? Because the financial year ends in March and the government wanted to usethe sales to reduce its fiscal deficit to decent levels. India Shining, you see!

Now, this constitutes poor politics and poor economics too. I have been at the veryforefront of those calling for the privatisation of public sector undertakings. But I viewthe current round of disinvestment as populist politics rather than economic sense.


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Shourie used to be an economist with the World Bank. So he is doubtless aware of theelementary maxim that increased supply depresses prices, others things constant.

Increasing the supply of shares in the stock market by Rs 15,000 crore will tend to

depress prices, especially in an overheated market that is due for correction anyway.

Yet when the market did indeed fall last week, Shourie suddenly discovered plots hatchedby supposed bear cartels and other dastardly investors engaged in the sinful pursuit ofprofit.

These slimes, said Shourie, aimed to hammer down the market and spoil his littledisinvestment party. SEBI, the rather ineffective watchdog of the markets, was asked tolaunch an inquiry.

Shourie proposed an Economic Intelligence Unit under the Cabinet to oversee the slimes.

His old lieutenant, Pradeep Baijal, described market operators as sharks attempting toboost profit margins.

Now, why would anybody be in the stock market save to boost margins and make bigprofits? Even in the USA, market operators routinely sell shares before a big public issue,hoping to buy them back at a lower price.

Shourie accelerated this process in India by setting price bands for disinvestment thatwere well below the prevailing market rate.

But his main concern was not falling prices so much as the possibility that the issueswould not be subscribed to. Subscriptions got off to a slow start. This was not unusual:big investors typically wait till the last day before putting in their bids.

But the slow start led Shourie to press panic buttons, issuing threats to market operatorsand issue managers.

Nowhere else in the world does a minister call the Prime Minister because of a 5 per centfall in the stock market.

As the week progressed, subscriptions to the issues picked up. Ultimately, they wereoversubscribed. End of drama. Obvious conclusion: Shourie went into an unwarranted,panicky funk.

But this interpretation does not go down well with Shining India. So instead, Shourieclaimed that his threats exorcised the evil demons of the market, and made them behave.

Really? If indeed economic miracles can be achieved by commands and threats of arrest,surely we need to return to socialism rather than sell PSU shares.


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The law-and-order approach to prices is an old socialist one. I remember when YBChavan shifted from the Home ministry to Finance ministry. Laxman had a brilliantcartoon of Chavan telling the police to go out and arrest inflation. So sad to see Shouriefollowing suit. Politics, politics!

I preferred the old Shourie who denounced the sale of minority shares in PSUs. What heis doing today will not improve efficiency. It will not even reduce the fiscal deficit, as heshould know as an economist.

A deficit arises when spending exceeds revenue. This can be funded either by borrowingmore (thus increasing the governments liabilities) or by selling assets like PSU shares.

India persists in the accounting fiction that selling shares reduces the deficit whileadditional borrowing increases it. In fact the governments net worth remains the samewhether it sells assets or increases liabilities.

So, the disinvestment has little economic significance. Mainly, it is a political ploy to sellshares cheaply to a large number of voters, hoping to reap electoral dividends.

ECONOMIC PLANNING

MEANING OF ECONOMIC PLANNING: Economic planning implies proper utilization of resources to ensure rapideconomic development and social justice. The method of planning was first adopted bythe U.S.S.R (Russia) in 1928.Economic planning is a time bound programme to achievecertain aims and objectives by allocating the available resources under the control of acentral planning authority.

Economic planning is the making of major economic decisions like what andhow much to produce, when and here it is to be produced and to whom it is to beallocated.

FEATURES OF ECONOMIC PLANNING:

1. Existence of central planning authority like the planning commission in India.2. Well defined goals and objectives.3. Survey of the resources of the economy.4. Fixing of the targets and priorities.5. Mobilisation of resources.6. Choice of techniques: should be according to the need and the available resources inthe country.7. Time bound programme.


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8. Assessment of the plan.

TYPES OF ECONOMIC PLANNING:

1. Centralised planning: In this type of planning all the economic decisionregarding allocation of resources, pattern of investment etc.are taken by the central

authority. The formulation, implementation and execution of the plan rest in the hands ofcentral authority.2. Democratic planning: The decision is taken by local and regional bodiesdepending upon their needs and other priorities. It is done with the due consent of the people. The implementation of the plan depends on the approval of the nationalparliament. This plan is adopted in a democratic country like India.3. Totalitarian planning: There is no peoples participation in this planning. It is aplanning by direction.4. Functional planning: Functional planning is to improve the efficiency and thefunction of the different sectors of the economy.5. Structural planning: In this planning, along with the improvement in

performance and efficiency of the different sectors, there are structural changes like themodernization of agriculture, implementation of land reforms etc.6. Perspective planning: It is a long term planning for a period of 15 to 20 years.7. Short term planning: This is a planning for short period. The objectives and thetargets fixed are to achieved within a specific period.

NEED AND OBJECTIVES OF ECONOMIC PLANNING

1. Optimum utilization of the available resources.2. Balanced growth of the sectors.3. Capital formation: Planning is needed to increase the savings and investmentwhich will lead to capital formation and growth of the economy.4. Development of the infrastructure: Planning helps in the development ofinfrastructure like transport and communication, health, education etc.5. To raise national income, per capita income and standard of living.6. Rapid industrialisation: Planned economic development enables us to exploit thenatural resources and accelerate the industrial growth.7. Modernisation of agriculture: India is basically an agrarian economy. So planningis needed to modernize the agriculture and increase productivity.8. Rural development: Industrial sector is backward. Through economic planningproper rural development programmes can be started.9. To achieve self reliance and self sufficiency: Agricultural and Industrialproduction can be increased through planning and economy can become self-reliant andself-sufficient.10. To attain economic stability: Planning is needed to overcome the evils of themarket system like inflation and depression. Economic planning helps to maintain pricestability. Thus economic growth with stability is possible.PLANNING STRATEGIES IN INDIA:

Plan strategy refers to the methods used in formulating a development plan orgeneral methods or policies used for achieving specified objectives.


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1. The first five year plan was started in the year 1951.Its aim was to solve the foodproblem. It was an agrarian plan.2. The second plan aimed to develop basic and heavy industries and thereby topromote rapid economic development.3. The third plan gave more attention to the development of agriculture.

4. The fourth plan strategy was development with stability.5. The fifth plan was fast rural development.6. The sixth plan was structural transformation of the economy so as to achieve ahigh and sustained rate of growth.7. The seventh plan strategy was elimination of poverty and creation of employmentopportunities.8. The eighth five year plan was a transition towards greater market orientation underthe new economic policy of liberalization, privatization and globalization of the Indianeconomy.9. In the ninth plan strategy, importance was given to agriculture and ruraldevelopment with a view to generate productive employment and eradicate poverty.

THE EXIM POLICY

Economic environment refers to all those economic factors which have a bearingon the functioning of business. The importance of economic environment is reinforced bythe fact that more and more economists are finding place in industrial establishments. It is

rightly said, business is one unit of the total economy.It is difficult to be precise about the factors that constitute the economicenvironment of a country but we can try to list a few. We do not restrict ourselves tomicroeconomics but we also include macro-economic factors which have a considerableeffect on business. Such factors are:

(a) Growth strategy,(b) Economic system,(c) Economic planning,(d) Industry,(e) Agriculture,(f) Infrastructure,

(g) Financial and fiscal sectors,(h) Removal of regional imbalances,(i) Price and distribution controls,(j) Economic reforms,(k) Population, and(l) Percapita and national income.


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EXIM policy 2002-2007

In exercise of the powers conferred under Section 5 of The Foreign Trade (Developmentand Regulation Act), 1992 (No. 22 of 1992), the Central Government hereby notifies theExport and Import Policy for the period 2002-2007. This Policy shall come into forcewith effect from 1st April, 2002 and shall remain in force upto 31st March, 2007 and will

be co-terminus with the Tenth Five Year Plan (2002-2007).

Now lets check in detail the effect on each and every economic factor on the EXIM policy :

(a) Growth strategy: the economic environment as it is now in our country is theresult of the economic growth strategy relentlessly pursued during the past fourdecades by the government of India. It creates five year plans for economicgrowth, something similar has been seen in the EXIM policy - Murasoli Maran,Union Minister of Commerce & industry, on Sunday unveiled the first Five-YearExport & Import (Exim) Policy of the new millennium for the period 2002-2007containing a comprehensive package intended to give a massive thrust to India's

exports. Announcing the Policy which removes all quantitative restrictions onexports at a news conference here, Maran said that the new Policy wascomprehensive in scope as it encompassed the agricultural sector, cottage &handicrafts and the small scale sectors, thus taking care of more than 80% ofIndias population living in the rural areas which would also benefit a wide-rangeof the countrys population and give an additional fillip to the countrys exports.Outlining the broad approach of the new Exim Policy in what he called a MissionStatement, Maran stressed the need for taking radical steps, away from "abusiness as usual approach" and said that the Policy was geared towards doublingIndias present exports of $46 billion to more than $ 80 billion over the TenthFive Year Plan by 2007, envisaging a compound annual growth rate of 11.9% in

exports.

(b) Basic Economic System: there are three distinct economic systems, viz.capitalism, socialism, communism. Each economy has its own strength andweakness. Socialism comes somewhere between communism and capitalism andis hence called mixed economy like ours. It resembles the concept of co-existenceof private enterprises along with public policy. When it comes to EXIM policysocialism comes as follows - The Export-Import Bank of India (Exim Bank) is apublic sector financial institution created by an Act of Parliament, the Export-import Bank of India Act, 1981. The business of Exim Bank is to finance Indianexports that lead to continuity of foreign exchange for India. The Bank's primaryobjective is to develop commercially viable relationships with a target set ofexternally oriented companies by offering them a comprehensive range ofproducts and services, aimed at enhancing their internationalisation efforts. Thushere we see that there is an existence of a give and take relationship between the public and the private sectors due to EXIM.

(c) Economic Planning: a mixed economy is necessarily a planned economy. Thegovernment should prepare and implement a comprehensive economic plan


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integrating the private sector with the public sector. In exercise of the powersconferred under Section 5 of The Foreign Trade (Development and RegulationAct), 1992 (No. 22 of 1992), the Central Government notified the Export andImport Policy for the period 2002-2007. This Policy came into force with effectfrom 1st April 2002 and shall remain in force upto 31st March 2007 and will be

co-terminus with the Tenth Five Year Plan (2002-2007). This plan has thefollowing objectives

(i) To facilitate sustained growth in exports to attain a share of atleast 1% ofglobal merchandise trade.

(ii) To stimulate sustained economic growth by providing access to essentialraw materials, intermediates, components, consumables and capitalgoods required for augmenting production and providing services.

(iii) To enhance the technological strength and efficiency of Indianagriculture, industry and services, thereby improving their competitivestrength while generating new employment opportunities, and toencourage the attainment of internationally accepted standards of quality.

(iv) To provide consumers with good quality goods and services atinternationally competitive prices while at the same time creating a levelplaying field for the domestic producers.

(d) Industries: the aspects covered here are industrial policy, industrial licensing,regulation of trade practices harmful to public interest, regulation of foreign

exchange, regulation of companies, industrial labour, public enterprises, SSI

sector, industrial sickness, privatization, etc. With EXIM one of the principalobjectives is to enhance the technological strength and efficiency of Indian

agriculture, industry and services, thereby improving their competitive strengthwhilegenerating new employment opportunities, and to encourage the attainmentof internationally accepted standards of quality. It also says that every exporter orimporter shall comply with theprovisions of the Foreign Trade (Development and Regulation) Act, 1992. Duty free import facility for service sector having aminimum foreign exchange earning of Rs.10 lakhs. The duty free entitlement shallbe 10% of the average foreign exchange earned in the preceding three licensingyears. However, for hotels, the same shall be 5% of the average foreign exchangeearned in the preceding three licensing years. Forrevival of sick units, extension ofexport obligation period to be allowed to such units based on BIFR rehabilitationschemes.

(e) Agriculture: about 30% of our GDP comes from agriculture alone. Agriculture isthe backbone of any countrys economic development & is a major source oflivelihood fro the peopled. With EXIM - The Policy gives a major thrust toagricultural exports from India by removing export restrictions like registrationrequirement, minimum export price or the requirement of export through the statetrading regime on whole and infant milk food, butter, wheat & wheat products,coarse grains, groundnut oil, and on cashew exports to Russia under Rupee Debt


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Repayment Scheme. Export restrictions on non-basmati rice, pulses, grain andflour of barley, maize, bajra, ragi and jowar have already been removed on 5th

March 2002. Further, transport assistance will be made available for export offresh and processed fruits, vegetables, floriculture, poultry, dairy products andproducts of wheat & rice. This will also lead to diversification of agriculture

activity. Further, it is also proposed to work out suitable Transport Assistance forexport of accumulated stocks of rice and wheat from FCI (Food Corporation ofIndia) to facilitate their liquidation, Shri Maran announced. The Minister said thatthe government would, in consultation with the state governments, catalyse thedevelopment of necessary infrastructure, flow of credit and other facilities forpromoting agro-products, adding that 20 Agri-Export Zones had already beensanctioned. Corporate sector with proven credential will be encouraged to sponsorAgri Export Zone for boosting agro exports. The corporates to provide servicessuch as provision of pre/post harvest treatment and operations, plant protection, processing, packaging, storage and related R&D.

(f) Infrastructure: infrastructural facilities are also called the social overheads andbelong to the core sector of the economy. Infrastructure includes energy, transport,communications, etc. one of the objectives of this policy calls for Upgradation ofinfrastructure in existing clusters/industrial locations under the Department ofIndustrial Policy & Promotion (DIPP) scheme to increase overall competitivenessof the export clusters.

(g) Removal of regional imbalances: with EXIM - Foreign bound passengers will nowbe allowed to take goods from SEZs to promote trade, tourism and exports. Thereare many such other trade practices under EXIM that reduce regional imbalances.

(h) Population:population is the strongest part of an economy, as it constitutes of bothhuman resources as well as consumers. And in our country there is over populationdue to which it becomes a big factor affecting EXIM. Today every consumer wantsquality and timely supply of goods at reasonable prices. With EXIM one of themain objectives of the policy is to provide consumers with good quality goods andservices at internationally competitive prices while at the same time creating alevel playing field for the domestic producers. Foreign bound passengers will nowbe allowed to take goods from SEZs to promote trade, tourism and exports.

Thus we see that all these various factors that constitute the economic environment are

affected the EXIM policy in different ways. All of them have their own unique role in the

plan. Thus we see that is the EXIM policy goes well in hand with the 10th

five year plan wecan see a lot of economic growth in our country and at the global level

INDUSTRIAL SICKNESS


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Industrial sickness is a natural concomitant of the market economy. In the U K

over 10000 units fall sick every year. In the U S A the figure is much higher. In ourcountry, the problem of sickness is serious and likely to grow worse in the years to come.The usage Industrial sickness came into being during 1970s when large units were

facing closure in West Bengal.

DEFINITION

Definition of a sick unit is given by Sick Industrial companies act, 1985. According to theact The sick industrial company is a company which has at the end of any financial yearaccumulated losses equal to or excluding its entire net worth and has also suffered cashlosses in that financial year and in the financial year immediately preceding it.

EXTENT OF SICKNESS

Industrial sickness is growing at an annual rate of about 28% and 13% respectively in

terms of number of units and out standing number of bank credit. It is reckoned that as oftoday there are more than 2 lakhs sick units with an outstanding bank credit of overRs7000crore nearly 29000 units are added to sick list every year. Almost every 3 rd or 4 th

SSI unit and every 10th unit in the medium and large sectors is sick or dying

CAUSES OF SICKNESS

Causes of industrial sickness can be classified into two categoriesa) Internalb) External

Internal factors mainly relate to the poor quality of top management poor quality of topmanagement may take one of the several forms:- excessive conservatism, excessivecomplacency, growth-mania, poor financial control etc.

External Causes can be further classified into:1. Industry specific factors2. Government related factors3. Financial institutions related factors4. Others

1. INDUSTRY SPECIFIC FACTORS: These relate to stagnation or recession in theindustry (e.g.: the textile industry), competition faced by the unit (e.g.: small units, rayongrade, pulp unit )And excess capacity in the industry (e.g.: the type of industry)

Entry of MNCs and strict quality and hygiene specifications prescribed and enforcedby them has contributed to the sickness of several firms, particularly in the SSI sector.


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2. GOVERNMENT RELATED FACTOR: These include tax burden on the unit ,especially import duties and sales tax ; legal restrictions on the units ;expansion/diversification ; frequent changes in government policies effecting the unit ;liberal imports that compete with the units products ; the government or its agenciesgoing back on its promises made to the unit ; poor law and order situation etc

3. FINANCIAL INSTITUTIONS RELATED FACTORS: These include harshness indealing with the unit; delay in providing finance to the unit; inadequate working and / orlong term capital provided by them and their inexpert assessment of the clients financeproposal

4. OTHERS: Other external factors include customer resistance to the units products;erratic availability of raw materials / components to the units e.g.; paper and sugarindustries; inadequate transport facilities available to the unit (e.g.: for transporting coal),etc

SIGNALS OF SICKNESS

The following actions of the unit indicate that the unit is sick or going to be sick:

Continuous irregularity in cash credit accounts ;

Low capacity utilization;

profit fluctuations, downward sales and fall in profits followed by contraction inthe share market;

failure to pay statutory liabilities; larger and longer outstanding in the bills accounts;

non submission of periodical financial data /stock statement etc. in time;

financing capital expenditure out of funds provided for working capital purposes;

rapid turn over of key personnel;

existence of large no. of law suits against a company;

rapid expansion and too much diversification within a short time;

Any major change in the share holdings.

EFFECT OF SICKNESS

Impact of sickness is very easy to guess. Firstly Industrial Sickness contributes to highcost economy. This in turn, will affect the competitiveness of the economy at home andabroad. Secondly dead investment is a burden on both banks and budgets and ultimatelyconsumers should pay the high cost. Thirdly persistent nature of Industrial Sickness,especially when policies dont allow flexibility for exit and other forms of adjustment,not only tends to restrict new employment opportunities but also constrict technologicalinnovation, thus keeping the employment stagnant. Finally I.S worsens the problem ofstringency of financial resources in the economy. Money locked up in sick units gives noreturns and effects the availability of resources to the other viable units


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amended in December 1991 so as to bring government companies within the preview ofthe Act.

Further, there is the Industrial Reconstruction Bank of India (IRBI) which came into being on March 20th 1985 by converting the erstwhile Industrial Reconstruction

Corporation of India. It provides assistance for reconstructions and rehabilitation of thesick industrial units by granting those loans and advances, underwriting shares anddebentures etc.

For the sick units in the small scale sector, separate facilities are available. State FinanceCorporations and commercial banks will be asked to devise a scheme for therehabilitation of sick units in the small scale sector, and the assistance given by them forthe revival of such units will be eligible for refinancing by the IRBI at the concessionalrate of interest.

INFLATION

Definitions of inflation

1) A rise in the prices of goods and services which occurs when economic demandexceeds supply. The economy may grow so fast demand for products and services isgreater than the available supply. This situation causes prices to rise. Over time, evenwith a relatively low inflation rate, the purchasing power of a dollar is reduced. Thingscost more; your dollar buys less.

2) An increase in the general price level of goods and services; alternatively, a decreasein purchasing power of the dollarThe increase in the cost of living (prices for goods and services). Inflation is measured asan annual average by the CPI (Consumer Price Index.)

3) A rise in prices of goods and services, as measured by the Consumer Price Index,which is based on a "market basket" of about 400 goods and services. Inflation candecrease the value of money. Therefore, money today is worth less than moneytomorrow.

4)An increase in the cost of goods and services which, in turn, decreases the buyingpower of money over time. Inflation is usually measured by the Consumer Price Indexand Product Price Index.


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What Is Inflation?Simply put, inflation is a situation in the economy where, there is more money chasing

less of goods and services. In other words, it means there is more supply/availability of

money in the economy and there is less of goods and services to buy with that increasedmoney. Thus goods and services commands a higher price than actual as more people arewilling to pay a higher value to buy the same goods. In this inflationary situation, there isno real growth in the output of the economy per se. Its simply more money chasing fewgoods and services.Eg: With Rs. 100 you can buy 5kgs of apple when the inflation is say, zero. Now whenthe inflation rate is 5%, then you will need Rs. 105 to buy the same quantity of apples.This is because there is more money chasing the same produce.

What Are The Types Of Inflation?

While there are many types of inflation the prominent ones are:Modest Inflation (2-3%)Creeping Inflation (5-!0%)Running Inflation (Over 10%)

Is Inflation Good For The Economy?Yes and No. Yes because Inflation helps producers realise better margins. This incitesthem to do better and produce more. No because it reduces the buying power of theconsumer in real terms. Inflation always gives rise to inequalities of income because thepoor are hit badly by the price rise. This has further increased. The gap the between thepoor and rich. The value of assets appreciates due to this the rich becomes more rich and

poor becomes poorer.

How Do Governments/Central Banks Control Inflation?The following are the tactics used to control inflation:Control the supply of money in the economy; by using monetary policy and fiscal policy,Encourage measures to increase the productivity in the economy,Use government borrowing programs to suckout the excess liquidity in the economy,Use CRR/SLR margin requirements to maintain the required liquidity in the economyetc.Changes in the interest rates in the economy to ensure correct liquidity

Issue of money : Central Bank can control the supply of money by controlling the issueof money.Bank rate : Bank rate is a ate of interest at which the central bank rediscounts the firstclass securities of other banks. Increase in bank rate help in contraction of credit in thecountry as it leads to expensive central bank loan to commercial banks.


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Open market operation : Bank can control the inflation by controlling the credit byselling the government securities in open market. When these securities are to be sold inmarket, money will come to central bank from circulation. It will also affect the creationof credit. As the money supply will decline, rise in price can be controlled.Cash reserve ratio : Cash reserve is that percentage of their deposits which the

commercial banks have to deposit in cash with central bank. Higher the cash reserveratio, higher the amount to be kept with central bank and lesser will be the capacity ofcommercial banks too create credit. Thus, supply of money will reduce.Statutory liquidity ratio : Statutory liquidity ratio is the proportion of total assets ofcommercial banks to be kept in liquid form with them. Higher the ratio, lesser is thecapacity of commercial banks to create credit and thus supply of money will be reduced.All these techniques are helpful in reducing the supply of money which will ultimatelyhelp in controlling the inflation.

What Are the Ways of Measuring Inflation?Consumer Price Index (CPI) This measures the consumer prices of a basket of

commodities in different cities.Wholesale Price Index (WPI) This measures the different prices of a basket ofcommodities in the wholesale markets. The basket is broadly made up of Primaryproducts, Fuel products, and manufactured products.

Why Do We Need To Know About Inflation?This is necessary as it tells you what is the real return on your investments and the realrate of growth in the company/economy.Eg: If you deposit Rs. 100000 @ 12% p.a., with the annual inflation rate being 5% in theeconomy, then the real return on your deposit is 12%(nominal rate) minus 5%(inflationrate), i.e. 7% p.a.(real rate) This is because after one year when your deposit matures youwill have to pay 5% more for any purchases owing to that being the rate of interest in theeconomy for a year.

SMALL SCALE INDUSTRY


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DEFIFNTION OF SSI:

In the very expression small scale industry has become outdated and has been discardedin many countries. In Japan the expression used is small enterprise, in the U.S.A smallbusiness and in the U.K small firm. While it does not matter how a sector is expressed,it seems more appropriate to call it small enterprise since, in future, it may include all

entrepreneurial activities including services. In India small industry is referred to asmanufacturing activities. But recently the expression has included, to some extent,servicing activities like repair, maintenance and a few community services.

There are wide variation in the definition of small scale industries in different countriesof the world based on investment, employment and some other criteria. Accordingly,some countries are defined small scale industries on the basis of investment.

ANCILLARY UNITUnits having investment in fixed assets in plant and machinery not exceeding Rs. 75lakhs engaged in the manufacture of parts, components, sub-assemblies, tooling or

intermediates and supplying 30 percent of the production or service to other units.

TINY SECTOR

The industrial policy resolution of 1977 was directed towards removing the distortions ofthe past so that the aspirations of the people may be met within a time boundprogrammed of economic development .The main thrust was on an effective promotionof the cottage and small scale industries which are dispersed in rural areas and smalltowns. With this end in view a new sector-the tiny sector was created for the firsttime .All industries with a capital investment of Rs 2 lakh in plant and machinery andlocated in rural areas and small towns are included in the tiny sector so that financialinstitutions and other development agencies may give special attention to their rapiddevelopment .It was the objective of the policy to achieve a rapid increase in:

Employment

Productivity

Income of industrial workers

CHARACTERISTICS OF SMALL SCALE INDUSTRIES:-

Although there is no such thing as the typical small industries, they do share many uniquecharacteristics. Small is a relative term.

1) Capital investment is small.2) Most have fewer than 10 workers.3) Generally engaged in the production of light consumer goods, processing etc.

4) Located in rural and semi-urban areas.5) There is a plethora of one-person firms.


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6) Virtually all of these firms are privately owned and organized as soleproprietorships.

7) Proprietor and family workers generally form the largest component of small-industry labour force.

8) Hired worker are unorganized.

9) The average person does not work full-time in one activity over the entire year.10) Fixed assets form the largest component of small units.11) Most of the funds come from the entrepreneurs savings.12) According to the available evidence the small-scale industrial activity has been

growing at a faster rate even than large-scale industries.13) The incidents of infant mortality are also highest.14) Very few of small-scale industries have grown up to medium and large

industries.15) Small-scale industries activity is beehive of entrepreneurship.16) Most of the small-scale industries, especially chemical units have been

polluting the environment.

17) Exploitation of natural resources is another characteristic of small-scaleindustries.18) Human resources is exploited (child and women in particular) instead of

developing it.19) Due to various constraints corruption, cheating is a common feature.20) Small-scale industries are quality conscious.21) Most of them desire to make huge profit in a short time by hook or crook.22) Invariably organization and management are very poor and negligible in many

cases.

Scope of small scale industries in selected countries

Country Terminology Scope

Japan Small enterpriseManufacturing ,mining ,servicing,trading(wholesale and retail)

India Small scale industries Manufacturing ,repair, and maintains

Korea Small enterpriseManufacturing ,mining, constructioncommerce(limited)

Canada Small business Manufacturing, services ,trading

UK Small firmsManufacturing commerce,construction, mining ,transport

Indonesia Small industry Manufacturing service


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CLASSIFICATION OF SMALL-SCALE INDUSTRIES

Small-scale industries are broadly classified into two sectors:

1. Traditional industries: Traditional industries includea. Khadi and village industriesb. Handloomsc. Handicraftsd. Coir e. Sericulture2. Modern industries

Modern industries can be further classified into power looms and small scale with powerand without power Small-scale with power and without power includes:-

a. Export oriented

b. Ancillariesc. Tiny enterprisesd. Small scale service and business enterprises

ADDITIONAL INFORMATION

Small-scale industries occupy a place of strategic importance in Indian economy in viewof its considerable contribution to employment, production and exports. However, since1991 small-scale industries in India find themselves in an intensely competitiveenvironment due to globalization, domestic economic liberalization and dilution of sectorspecific protective measures. This paper probes the implications of globalization anddomestic economic liberalization for small-scale industries and analyses its growthperformance in terms of units, employment, output and exports. The paper concludeswith policy recommendations to ensure the sustenance and competitive growth of small-scale industries in India.

In India, the latest definition of a small-scale industry (SSI) is any unit with an upperlimit on investment (in plant and machinery) of from Rs. 0.20 million to Rs. 0.35 millionin the case of SSI and Rs. 0.45 million in the case of ancillary units. What is called thevillage and small industries (VSI) sector comprises both traditional and modern smallindustries; it is constituted by eight specific groups viz. Handloom, Handicrafts, Coir,Sericulture, Khadi, Village Industries, Small-Scale Industries and Power looms. The lasttwo items constitute the modern group of industries, the others being traditional.

Key Problems


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The impressive recent growth of village and small industries recorded above suggests ahealthy sector. This is in general true but a number of problems continue to face thesector. An important one is that the interdependence of the different strata of industry(large, medium and small) has not been fully realized. Thus, for example, schemes formaking VSI ancillaries of large industries have not spread as widely as had been hoped

for. The second problem is that many VSI are technologically obsolete and this hasrestrained their growth. They are also undercapitalized, use outmoded equipment andexhibit low productivity and high production costs.

Wood products in the Indian SSI sector in 1983.

Industry Group Percentage of

Number of Units Employment Investment

Wood Products 9.0 6.7 5.7

Leather and LeatherProducts

9.9 4.1 2.3

Metal Products 9.7 9.0 7.6

Food Products 17.9 18.6 21.7

Some specialization exists in types of lending: the commercial banks provide the bulk ofshort-term advances to SSI units and the state finance corporations provide long-termloans. Both types of finance are made available at relatively low rates of interest for theSSI sector, the present schedule being as under:

Type of loan (%) Rate of interest

Composite loans up to Rs. 25,000

i) Backward areas 10.0

ii) Other areas 12.0

Short-term advances

i) Up to Rs. 0.2 million 14.0ii) Over Rs. 0.2 million to Rs. 2.5 million 16.5

iii) Above Rs. 2.5 million 18.0

Term loans

i) Backward areas 12.5

ii) Other areas 13.5


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List of forest-based products reserved for exclusive production by the

SSI sector

Seats for buses and trucksWooden truck bodies

Wooden cratesTea chest plywoodSeasoned woodWooden sewing machine coversCable drums

Wooden storage cupboardsShelves and racks

Wood-woolHockey stocksWooden flooring tilesWooden boatsNatural oils of cashew shell, sandalwood, pine, eucalyptus

Tent poles

Wooden plugsWooden or bamboo handles

Turpentine

Wooden furniture and fixtures

Teak blocks

List of forest-based items which can only be purchased by government

from the SSI sector

Wooden items Other

- Crates- Tool handles- Hand drawn carts- Teak Blocks- Tent poles- Shelving- Wood wool- Plugs- Ammunition boxes

- Chairs- Mallets- Flush doors- Wooden Pins- Veneers

- Cane baskets- Bamboo cool handles- Brooms

Mats and matting (which includes items made from forest materials) can only bepurchased from the handicraft: sector. Wood products in the Indian SSI sector in 1983.


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facors affecting economic enviornment

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