MBA 1st Year Economic Political Legal Environment Long Question Answer
MBA 1st Year Economic Political Legal Environment Long Question Answer
Economic, Political and Legal Environment: Role of government in business, Legal framework in India.
Economic Environment: Economic system and Economic policies. Concept of capitalism, Socialism and Mixed economy, Impact of business on private sector, Public sector and Joint sector, Competition Act and FEMA, Monetary and Fiscal policies.
RBI: Role and Functions, Regulations related to capital markets, Role of SEBI and Working of stock exchanges.
LONG ANSWER QUESTIONS
Q.1. Discuss the impact of political, legal and economic environment on business.
Ans. Impact of Political Environment
The political environment has a major influence on the following:
- Political ideology of the government that includes political vision, thinking and the government towards various social and economic activities of the country.
- Political system should be stable, dynamic, uniform and efficient and should ensure political involvement and safety of the citizens.
- Business activities are largely influenced by the relations of government with other countries.
- The political environment of a country largely influences every business activity regardless of its size and area of operation.
- Political environment of a country has wide range of implications to the organisations and managers.
- Diverse economic ideologies of coalition government makes the political environment of the country more complicated for business enterprises.
Impact of Legal Environment on Business
The legal environment has various significant influences on business which are as follows:
1 Deregulation by the government from certain sectors in the industry can lead to increase vector along with reduction in the profit ratios of the firmly established business enterprises.
. 2. Globalisation influences the legal environment of the country by creating need to br
changes according to the prevailing international conditions. Such changes affect the business operations.
- Environment protection norms are formulated under the legal environment. The opera
and functions of various firms are defined or influenced by various acts and laws passed
the state and central government of India so as to protect the natural environment. Impact of Economic Environment on Business
The major impacts of economic environment on businesses are as follows:
- The purchasing power of the consumers directly affects the economic environment, while
The purchasing ability depends on the income capacity of the consumers. The economic state of customers is affected by economic uncertainty, heavy taxation, high rate of unemployment inflation condition, etc. So, it is necessary for the businesses to analyse the income capacity of the customer as well as market before launching their products and services.
- The consumer spending pattern is a significant factor for the marketing of products and services of an organisation. The consumption pattern of different commodities changes with the increased income and it may cause variation in demand. The factors such as change in income, spending patterns, cost of living, etc. have a powerful impact in the market.
Ques.2. Explain the various variants (I.e. concept, assumptions, attitudes and practices) of capitalism.
Ans. Variants of Capitalism
There are two very different variants of capitalism. One familiar variant is the system traditionally practiced in the United States. This is referred to as individualistic capitalism. The other variant is the system practiced in Japan and in the unified European community. This system is referred to as communitarian capitalism. These two variants of capitalism are important because most of the assumptions and practices underlying the individualistic system are incompatible with the assumptions and practices underlying the communitarian system. The particular variant of capitalism embraced by society, determines to a large extent how individuals interact with each other, how businesses interact with other businesses and government, how companies are managed and more specifically for the purposes of this text, how internal accounting systems are designed and used to measure and evaluate performance. As a result, the dichotomy of capitalism provides a broad framework for the study of management and management accounting.
Underlying Concepts, Characteristics and Assumptions: According to George Lodge, most countries display a mix of individualism and communitarianism. However, the United States has tended to be the most individualistic and Japan has tended to be the most communitarian. Other nations are somewhere between the two extremes. A brief sketch of the key economic concepts, characteristics and assumptions underlying the two conflicting competitive models is provided in table 1. These include:
- How to optimise the performance of a system.
- The key moving force in the economy.
- The motivation for work.
- The responsibility for training prior to employment.
- The relationship between government and business.
- The purpose of government policy.
Table 1: Major Concepts and Assumptions Underlying the Economic
|Concepts and assumptions||Pure communitarian capitalism||Pure individualistic capitalism|
|How to optimise the performance of a system.|
The key driving force in the economy.
Motivation for work.
Responsibility for ski;;s and training prior to employment.
Realtionship between government and business.
|Cooperation at all leaves will optimise the system.|
The desire to build for the future
Work provides utility individuals live to work.
Responsibility of society. Strong high schools and apprenticeship programs.
Government supports and co-operates with business to optimise the system.
Promotes growth in supply.
|Comipetition at all levels will optimise the system.|
The desire for current consumption and leisure.
Work provides disutility individuals wok to live
Responsibility of the individual beyond relatively weak high schools. Few apprenticeship programs.
Government regulates business to promote competition.
Promotes growth in demand.
Major Business Concepts, Attitudes and Practices: Table 2 provides a summary comparison of twelve major business concepts, attitudes and practices underlying the two competitive models. These include:
- The organisation’s dominant objective and focus.
- Organisational structure.
- How profits are used.
- The hierarchy of the organisation’s constituencies.
- Employment and job security.
- Responsibility for training after employment.
- The route to management.
- Management’s attitude towards teamwork.
- Management’s behaviour in an economic recession.
- Management’s view of leadership.
- Management’s attitude towards problems.
- The tools of management.
Table 2: Major Business Concepts, Attitudes and Practices Concepts, attitudes and
|Concepts, attitudes and practices||Pure communitarian capitalism||Pure individualisistic capitalism|
|Dominant objective and focus.|
How profits are used.
Hierarchy of organisation’s constituencies.
Employment and job security
Route to management
Management attitude towards teamwork
Management behaviour in economic recession.
View of leadership.
Management attitude towards problems.
Tools of management
|Building for the future with long-term focus.|
Horizontal flat or lean with relatively few layears of management. Bottom up consensus decisions.
As fuel to keep investing and building.
Lifetime employment promotes bonding.
Long multi-function internship
Teamwork and cooperation are essential for optimizing the system.
2. Management compensation.
3. Workers pay and jobs as last resort
A leader manages process or work
Understands the variability within the system and tends to blame the system first
Employee empowerment group praise and profit sharing. Statistical control, managers facilitate counsel, teach and provide resources.
|Profit maximization with short-term focus.|
Vertical with many layers of management, Top down autocratic decisions.
To increase consumption and leisure for stockholders.
Uncertain employment discourages bonding.
From college, to single function specialization, to management.
Teamwork is risky, individual performance will optimise the system.
1.Workers pay and jobs.
A leader manages results.
Specialist has less understanding of the system and tends to blame employees.
Management by objectives merit ratings incentive pay quotas standard rates and quantities piecework and annual ranking of employees. Cunt results.
Q.3. What are the different constituents of socialism? What are its merits?
Ans. The term socialism is used to denote social democrats, although in many countries socialism is a broader concept including the following practices:
- Social Democracy: It is a political ideology emerging in the late 19th and early 20th centuries from supporters of Marxism who believed that the transition to a socialist society could be achieved through democratic evolutionary rather than revolutionary means. During the early and mid 20th century, social democrats were in favour of stronger labour laws, nationalisation of major industries and a strong welfare state. Over the course of the 20th century, most social democrats gradually distanced themselves from Marxism and class struggle. As of 2004 social democrats generally do not see a conflict between a capitalist market economy and their definition of a socialist society, they supported reforming capitalism in an attempt to make it more equitable through the creation and maintenance of a welfare state. Most social democratic parties are members of the socialist international, which is a successor to the second international.
Social democratic parties are among the largest parties in most countries in Europe, as well as in the majority of European-influenced parts of the world (with the notable exception of the United States). Social democrats are seen as centre left in orientation.
- Democratic Socialism: It is a political movement propagating the ideals of socialism within the framework of a parliamentary democracy. Democratic socialism has its roots in classical Marxism and the socialist movement of the 19th century; however, it is strongly opposed to Leninism and even more hostile to Stalinism as practiced by the former Soviet Union.
It should be noted, however, that many of those who describe themselves as ‘socialists’ often argue that socialism necessarily implies democracy, thus making ‘Democratic socialism’ a redundant term. The fact that one specific movement is called ‘Democratic socialism’ does not mean that other socialist movements cannot be equally democratic.
Democratic socialists and social democrats both typically advocate at least a welfare state, although social democrats, being influenced by the Third Way are now less committed to this. Democratic socialists maintain a commitment to the redistribution of wealth and the nationalisation of major industry and some believe in a planned economy; these are all concepts which social democrats have largely abandoned. In addition, many democratic socialists retain a Marxist analysis (though sometimes a reformist one), while social democrats reject Marxism.
- Communist State: In common speech in the Western World, a communist state is a state ruled by a single political party which declares its allegiance to the principles of Marxism-Leninism. The term ‘Communist state’ originated from the fact that most of the states in question were/are ruled by parties that called themselves ‘Communist Party of country. Thus, they became known as ‘Communist Partyruled states, a term that was soon contracted to ‘Communist states’. However most of these states called themselves socialist.
Taken literally, the term ‘Communist states’ is an oxymoron. Communism, as a social system, involves the abolition of the state (along with the abolition of private property and social classes). In Marxist political theory, capitalism is to be replaced by socialism (not communism) and socialism is to be replaced at some point in the future with communism. Therefore, the so-called ‘Communist states’ actually claimed to be socialist (and democratic) states, working towards the final goal of replacing socialism with communism. However, their opponents held that those states were neither socialist nor democratic, so another term had to be invented to define them. Hence the phrase ‘Communist state’ was coined, based on the fact that their ruling parties called themselves communist parties.
- Marxism: It is the political practice and social theory based on the works of Karl Marx, a 19th century philosopher, economist, journalist and revolutionary, along with Friedrich Engels. Marx drew on Hegel’s philosophy, the political economy of Adam Smith, Ricardian economics and 19th century French socialism to develop a critique of society which he claimed was both scientific and revolutionary.
Marxism holds that class struggle is the central element of social change in Western society. Since the tension between social classes is deemed to be the cause of political unrest, Marxism attempts to solve this problem by establishing public ownership as its dominant feature. While there are many theoretical and practical differences among the various forms of Marxism, most forms of Marxism share these principles:
(a) An attention to the material conditions of people’s lives and social relations among people.
(b) A belief that people’s consciousness of the conditions of their lives reflects these material conditions and relations.
(C) An understanding of class in terms of differing relations of production and as a particular position within such relations.
(d) An understanding of material conditions and social relations as historically malleable.
(e) A view of history according to which class struggle, the evolving conflict between classes with opposing interests, structures each historical period and drives historical change.
(f) Sympathy for the working class or proletariat.
(g) A belief that the ultimate interests of workers best match those of humanity in general.
- Communism: It is a term that can refer to one of several things-a certain social system, an ideology which supports that system, or a political movement that wishes to implement that system.
As a social system, communism is a type of egalitarian society with no state, no private property and no social classes. In communism, all property is owned by the community as a whole and all people enjoy equal social and economic status. Perhaps the best known principle of a communist society is ‘From each according to his ability, to each according to his need.
As an ideology, the word communism is a synonym for Marxism and its various derivatives (most notably Marxism-Leninism). Among other things, Ma Marxism-Leninism). Among other things. Marxism claims that human society has gone into various stages of development throughout its history and that capitalism is the current stage we are going through. The next stage will be socialism and the one and Therefore, it should be noted that communists do not seek to establish communism right away, they seek to establish socialism first, which is to be followed by communism at some
As a political movement, communism is a branch of the broader socialist movement. The communist movement differentiates itself from other branches of the socialist movement through various things such as, ego, the communists, desire to establish a communist system after the socialist one and their commitment to revolutionary strategies for overthrowing capitalism.
- Libertarian Socialism: Libertarian socialism is a political philosophy dedicated to opposing coercive forms of authority and social hierarchy, most famously the institutions of capitalism and the state. It has gone by various names: Libertarian communism, anarchy-communism, left-anarchism and sometimes simply anarchism. Libertarian socialists believe in the abolition of privately held means of production and abolition of the state as unnecessary and harmful institutions.
The term ‘Libertarian’ in political contexts has multiple meanings. Especially in the United States it may also refer to the philosophy associated with groups such as the United States Libertarian Party This philosophy has major differences from libertarian socialism, and where necessary, the term ‘Libertarian’ is used in reference to that philosophy.
Merits of Socialism: These are as follows:
- Absence of Class Struggle: On account of State ownership of productive resources and social distribution of income, there is no struggle between haves and have notes. Exploitation of one section of society by another section is also avoided.
- Economic Stability: The problems of overproduction, underproduction, idle capacity and business cycles are eliminated because the Central Planning Authority takes all major economic decisions. Violent fluctuations in economic activity are prevented by balancing aggregate supply with aggregate demand.
- Social Justice: Under socialism, there is a just and equitable distribution of national income. Nobody is allowed to receive large unearned incomes. Inequalities of income are reduced to the minimum. All children whether born of poor parents or rich parents are provided equal opportunities to get necessary education and training and develop their talents. No discrimination is made on the basis of caste, class or religion.
- Higher Economic Growth: Economic planning facilitates optimum utilisation of resources thereby leading to rapid economic growth. A planned economy works in a systematic and coordinated manner.
- Absence of Monopolistic Practices: In a socialist economy, the business and trade related practices are government owned. So, the scope of monopolistic practices and competition is removed.
Q.4. What are the different sectors of Indian economy? What do you mean by privatisation? What are the different forms of privatisation? Discuss the merits and demerits of private sector or privatisation.
Or Describe privatisation. How does the coexistence of public and private sectors help in economic development?
Ans. Different sectors of Indian Economy
There are three sectors in the Indian Economy, i.e. private sector, public sector and joint sector. When productive resources are owned, managed and controlled by private enterprises, it is called private sector and when they are owned, managed and controlled by state, it is called public sector and when resources are owned, managed and controlled by both jointly, it is called as joint sector.
Private Sector or Privatisation: When the ownership, management and control of business and the industrial enterprises are in the hands of private enterprises, it is called private sector or privatisation. However, it should not be understood that the private enterprises work freely without any government control or regulation. Government controls and regulates the activities of private enterprises through various policies and acts.
In a narrow sense, privatisation implies the introduction of private ownership in publicly owned enterprises, but in broader sense, private ownership is the induction of private management and control in the public sector enterprises.
Privatisation is the general process of involving the private sector in the ownership or operation of a state owned enterprise.’
Thus, privatisation covers three types of measures:
- The measures which transfer ownership of public enterprises fully or partially to private sector.
- Leasing or restructuring.
- Injecting the spirit of commercialisation in public sector units.
Forms of Privatisation: The privatisation may take the following forms:
- To appoint private entrepreneurs as franchise dealers for public sector industries,
- To give public assets on lease to private entrepreneurs.
- To permit new enterprises in private sector.
- To invite private entrepreneurs to participate in the sector which are reserved for public sector.
- To disinvest the shares of public sector units.
Merits of Private Sector or Privatisation
Merits or benefits derived from private sector can be discussed as follows:
- Incentive for Greater Efficiency and Hard Work: Private sectors inspire both enterprises and workers to become more efficient and do more work. The entrepreneurs try to get maximum output to get maximum profit and workers try to achieve maximum efficiency for more remuneration.
- Increase in Productivity and Production: As both the entrepreneurs and workers try to work with greatest efficiency, the result is that the productivity of all the resources of production increases considerably.
- Efficient Utilisation of Resources: All the resources of production are used most economically. No part of these resources is allowed to waste. These resources are utilised to the maximum extent.
- Minimum Cost of Production: As private sector encourages maximum and most efficient utilisation of resources, it results in maximum cost of the production.
- Higher Capital Formation: Private entrepreneurs try to save major part of their income so that they may invest it in their business, in order to earn more income in future and save more. This all leads to higher rate of capital formation
- Incentive to Take Risk and Bear Uncertainty: Private sector provides due incentives to undertake enterprise and bear risks. Enterprises introduce new innovations. These all lead to further development.
- Economic Growth and Affluence: It has promoted rapid economic growth. Many countries of the world have become rich and affluent on the basis of success achieved by their private sector enterprise. Due to this, the standard of living of the people of these countries has also increased.
- Helpful in the Development of Public Sector: Public sector and private sector are closely inter-related. How growth of private sector is helpful in the development of public sector can be seen in the following points:
(a) Reducing the burden of loss making public sector units. Making public sector units more competitive.
(b) Enable profit making public sector units to modernise and diversify their business.
(c) Enable government to increase investment in remaining public units
Demerits of Private Sector or Privatisation
Various disadvantages or demerits of privatisation are as follows:
- Concentration of Income and Wealth: Privatisation encourages the concentration of income and wealth in the hands of few persons. It makes the rich moron rich and the poor more poor.
- Class Struggle: Private sector encourages class struggle. It divides the society into two classes the rich and poor
- Economic Instability and Unemployment: Private sector causes instability and unemployment As a result of free working of market mechanism, sometimes there is depression and sometimes there is inflation
- Social Welfare is Ignored: Under privatisation, only those goods and services are produced which provide higher profit and are distributed according to the paying capacity of people rather than their needs and desires.
- Wastage Due to Competition: A large amount of financing resources are wasted in competitive advertising. Business firms spend large amounts of money on advertisement.
- Decline of Competition: Free competition is an important characteristic of private sector. But in the real world, we find oligopoly and monopoly. As a result, competition is declined. Co-existence of Private and Public Sectors for the Real Economic Development
Public and private sectors are not contrary to each other, the coexistence of both is essential for the real economic development of a country and particularly for the underdeveloped countries like India. In Indian economy, both sectors work together and undertake the work of production and distribution. In industrial policy of 1956, heavy and important industries have been assigned to public sector and remaining industries have been left for private sector enterprises. It helps in balanced development,
Co-existence of both public sector and private sector helps in achieving balanced and rapid growth. Government establishes and develops capital and basic industries while on the other hand, private sector establishes consumer goods industries, such as railways, roads and powers, etc.
Ques.5. What do you mean by public enterprises? Why are they needed in India? What are their main problems? How can these problems be solved?
Or Explain the meaning and importance of public enterprises in India. Explain their important problems and ways to overcome.
Ans. Meaning of Public Enterprises
Public enterprises are the enterprises which are owned, managed and controlled by Central or State or Local Government. Public enterprises are known as government enterprises, state enterprises and government industries also. The term public enterprise has been defined as under:
‘State enterprise or business, denotes an undertaking which is controlled and operated by the government as its sole owner or major shareholder’
The term public enterprise usually refers to government ownership and active operation of agencies engaged in supplying the public with goods and services which alternatively might be supplied by private enterprise operations.
Some characteristics of public enterprises are as follows:
- These are government enterprises.
- These are owned, managed and controlled by government-central, state or local.
- These enterprises produce various goods and services.
Importance or Need of Public Enterprises in India
Important advantages of public enterprises in India are as follows:
- Better Allocation of Resources: Productive resources are allocated in most rational manner under public system. The resources are directed into the directions in which they are most wanted.
2.Social Justice: Public enterprises ensure serialistice and come werpoises ensure social justice and efforts are made by these enterprises to saisty all possible home is distributed equally Weeds. Inequalities of Income are reduced to minimum and national income is distributed equally.
3.To Check the Concentration concentration of Economic Power Public enterprises check the concentration Economic power in the hands of only few people. All the efforts are made to divide in just and equitable manner
- Economic Stability Public enterprises work under the guidance of a centralp These enterprises minimise the occurrence of trade cycles. It prevents the imbalance between demand verprises work under the guidance of a central planning authority and supply and creates economic stability
- Infrastructural Development: Public enterprises help in the development of infrastructure, cessary for the development of a country. All the facilities like water power, transportation, mmunication, banking, etc. are developed by public enterprises
- Necessary for Planned Economic Developments India has adopted the path of planned economic development Public enterprises have been assigned a great responsibility in the process of economic development
- Ability to Make Huge Investment: Public enterprises are necessary for the development of basic, heavy and capital intensive industries. The fact is that public enterprises are necessary in all the Gelds of economy in which the private entrepreneurs do not take interest.
- A Check on Private Sector Monopolies: A great rational of the development of public sector enterprises in India is that these enterprises keep a check on private sector monopolies. Problems of Public Enterprises
Important problems of public enterprises may be summarised as follows:
- Problem of Organisational Structure: According to Dr. Nav Gopal Das, “Most important problem of public sector is that of the organisation and management or how should these industries be organised and managed so that national welfare may be promoted without sacrificing efficiency and economy. There are four types of organisations and management of public enterprises in India and the government has not yet decided a certain policy on this issue. These are:
(a) Departmental organisation.
(b) Public corporation
(C) Government company.
(d) Mixed ownership corporation.
- Management and Administration: (a) Generally IAS and IPS officers are deputed on the key posts of these enterprises, who are not necessarily so efficient to run the enterprise.
(b) Direct or indirect interference of politicians creates disturbances.
- C) These enterprises do not enjoy full autonomy and independence.
(d) The problem of inefficiency, irresponsibility and red-tapism is also there.
(e) Policies of different public enterprises differ from each other.
- Project and Planning: There is unnecessary gap between planning and implementation of projects in these enterprises. Actual implementation gets very late and this increases the cost.
- Financial Problems: (a) Responsibility of providing adequate finance rests with the government which is provided through budget and plans, so public enterprises often suffers from shortage of fund.
(b) Financial structure of these enterprises is not balanced.
(c) There is no effective control on income and expenditure.
- Audit Problems: Public enterprises are audited by internal auditor and final audit is performed by controller and auditor general of audit and accounts however, some investigations are performed by parliamentary committee.
- Control and Public Accountability: (a) Public enterprises involve the investment of public funds. Accountability towards parliament reduces the autonomy,
(b) Undue influence of political leaders is there.
(C) Several committees and commissions are appointed at different times to enquire different issues.
- Problem of Technical Collaboration: A number of public enterprises are established with foreign collaboration. These enterprises are dominated by foreign technicians and experts. Therefore, Indian technicians and experts do not get proper opportunity of development.
- Personal Problems: (a) Employees are appointed by public services commission. So often posts remain vacant for a long time.
(b) Generally there is labour surplus.
(c) There is a common lack of efficiency, enthusiasm and responsibility among employees.
- Other Problems: (a) Location is related on regional priority rather than on economic lines.
(b) These enterprises are found by legal and administrative formalities and often suffer from general sickness.
Suggestions for Improving the Performance of Public Enterprise
The suggestions given by committees and commissions may be summarised as follows:
- To the form of Organisation: (a) For the public utilities and defiance industries, public corporations should be preferred.
(b) For business and industrial enterprises, government company or public corporation should be set-up
(C) For joint venture enterprises, government company should be formed.
(d) For the project of national importance, boards should be set-up.
(e) For core sectors, a central corporation should be set-up and all the units of core sector should work under the guidance and control of corporation.
- To Management and Administration: (a) No politician or Bo administrative officer should be appointed for these enterprises.
(b) All concerned parties should be given representation in board justification for any of directors.
(C) An advisory Committee consisting of experts of production, finance, account, marketing, etc. should be appointed in every on the needs of distributive
enterprise to advise the board of directors.
(d) Complete autonomy should be granted.
- To Project and Planning: (a) All the aspects of feasibility should
be duly considered before finalising a plan.
(b) Techniques of forecasting and budgeting should be used while preparing project report.
(C) Directives of planning commission should be followed while finalising a report.
- To Financial Management: (a) There should be a well defined plan regarding capital structure and resources.
(b) Capital structure and debt equity ratio should be in an appropriate proportion.
(C) Responsibility centers should be established regarding income and expenses.
- Personal Suggestions: (a) There should be a well defined and clear personal policy
(b) All the employees and managers should be appointed on the basis of their ability and experience.
(C) Techniques of time, motion and fatigue study should be used while drafting policies.
(d) Wages policy should be determined in most appropriate manner.
6.Auditing Suggestion: (a) 4 or 5 audit boards should be constituted to conduct the audit of lic enterprises.
(b) Duties, rights and responsibilities of all the boards should be clearly defined.
(c) All the boards should submit their report to controller general of audit and accounts.
(d) Experts of financing, accounting and auditing should be appointed m audit de
- Other Suggestions: (a) A price board should be set up to determine the prices of products se enterprises.
(b) First service and then profit policy should be adopted.
(c) Research and development should be emphasised.
(d) Decision to continue or discontinue loss making public enterprises should be taken by the
bureau of public enterprises.
(e) Prices of the products should be determined in a manner such that these enterprises do not suffer loss.
- Suggestions to Holding Companies: A holding company should be set up for every public sector it such as iron and steel, coal, petroleum, etc. All the companies and corporations working in one ctor should be brought under holding company. There should be a memorandum of understanding tween government and holding company.
Ques.6. Explain Competition Commission of India (CCI). Describe the duties, powers and functions of CC.I
Ans. Competition Commission of India (CCI)
According to Section 7 of the competition Act, 2002, CCI was established to further the cause of competition as described in the Preamble to the Act. It is to be set-up as a quasi-judicial body and ould have a chairperson and a team comprising 2-10 members.
Objectives of CCI: CCI has been established to achieve the following objectives:
- To make the markets work for the benefit and welfare of customers.
- To ensure fair and healthy competition in economic activities in the country for faster and inclusive growth and development of economy.
- To implement competition policies so as to effectuate the most efficient utilisation of economic resources.
- To develop and nurture effective relations and interactions so as to ensure smooth alignment of sectoral regulatory laws along with competition law.
- To effectively carry out competition advocacy and spread the information on benefits of competition among all stakeholders so as to establish and nurture competition culture in Indian economy.
Duties, Powers and Functions of CCI: CCI is charged with the following:
- Eliminate Anti-Competition Practices: CCI has to consider the factors such as whether:
(a) There are barriers to new entrants in the market.
(b) Existing competitors are being driven-out.
(c) Any foreclosure of competition is attempted by hindering entry into the market.
(d) Benefits to consumers are accruing.
(e) Improvements in production and distribution of goods or services.
(f) Promotion of technical, scientific and economic growth by means of production of goods or rendering of services.
- Determine whether Enterprise is Dominant: CCI has to consider the following for the enterprise:
(a) Market share.
(6) Market size and resources.
(C) Size and importance of competitors,
(d) Economic strength including its commercial advantage over its competitors.
(e) Entry barriers.
(f )Countervailing buying power.
(g) Social cost and social obligations.
(h) Relative advantage in the economy by virtue of its contribution to its growth.
- Order an Enquiry: CCI may order an enquiry under the following conditions:
(a) On receipt of a complaint.
(b) On a reference by central or state government or a statutory authority.
(C) On its own on the basis of its knowledge and information.
- Follow-up of an Enquiry: CCI has the following powers for the follow-up of an enquiry:
(a) Put an end to the impugned agreement or to stop the abuse forth with.
(b) To impose a fine which will meet the end of justice.
(c) To award compensation to the abused parties.
(d) Order in case of cartelisation a penalty equivalent to three times of the amount of profits made out of such agreements in case of the cartel or 10 percent of the average turnover of cartel for the last preceding 3 financial years whichever is higher.
Ques.7. What are the objectives of monetary policy In India? Discuss its working in detail. (2014.15) Or What is monetary policy in India?
(2013-14) Or Discuss the meaning, nature and scope of monetary policy. Also explain the limitations of monetary policy along with instruments of monetary policy.
Ans. Monetary Policy
Monetary policy refers to the case of techniques of monetary control at the disposal of the Central Bank of the country. A development oriented economy like India, needs a sound monetary policy, which is not only helpful in the economic development of a country, but it is also able to bring out stability in the country.
Some of its definitions are:
‘Monetary policy is a policy employing Central Bank’s control of the supply of money as an instrument of achieving the objectives of general economic policy.
‘Monetary policy is a conscious action undertaken by the monetary authorities to change the quantity, availability and cost of money.
‘Monetary policy is the attitude of the political authority towards the monetary system of the community under its control!
Generally it is said that, monetary policy is a programme undertaken by the monetary authorities generally the Central Bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieve pre-determined macro economic goals.
The objectives of monetary policy are growth, employment, stability of price and foreign change and balance of payment equilibrium. Monetary policy is the use of instruments under the control of RBI to influence the demand of goods and services of the trends in certain sectors of the economy. It is said to be operating through varying cost and availability of credit and helps to show changes in the pattern of assets of credit institutions, especially banks.
Nature of Monetary Policy
Reserve Bank of India with the help of monetary policy targets a key set of indicators to ensure that there exists price stability in the country’s economy. The factors induced are as follows:
- Money supply, commonly referred as Mą.
- Interest rate.
Monetary policy gives a platform or a base to announce the rules am wend bodies as banks, Flies, non-banking finance companies, residue base to announce the rules and regulations or norms for s primary dealers in monking finance companies, residual non-banking companies, policy is said to be announced two kets and authorised dealers in foreign exchange markets. One for the slack season year in accordance with the agricultural cycles.
- One for the slack season [April-September.]
- One for the busy season (October-March).
Objectives of Monetary Policy
In the present day economy, the objectives of monetary policy are:
- Neutrality of money is only a technical device.
2 Price stability preventing changes in general price-level.
- Exchange rate stability by using interest rate mechanism.
4 Promotion of economic growth, by raising financial resources.
- Maintenance of high level of employment, by raising the level of investment.
- Achieving balance of payments equilibrium.
Scope of Monetary Policy
The area of economic transactions and the macro-economic variables that monetary authorities
influence is said to be the scope of monetary policy. The scope of monetary policy by and large depends upon two factors:
- The level of monetary economy
- The level of development of the capital market.
The entire economic activities are covered by the monetary policy in an economy. All the economic transactions in such an economy are carried out with money as the main medium of exchange. Suppose if the monetary policy works by simply changing the price level, it can affect all the economic activities, such as production, consumption, savings and investment and foreign trade. Employment, general price level, GDP and the foreign exchange are said to influence monetary policy.
A developing capital market is one which has the following features:
- A large number of financially strong commercial banks, financial institutions, credit
organisations and short-term bill market.
- A major part of financial transactions are routed through the capital markets.
- The working capital of various sub-markets is inter-linked and inter-dependent.
- The commodity sector is highly sensitive to the changes in the capital market.
It is important that the bank rates and cash reserve ratio work through the commercial banks. Therefore for a wide spread impact of monetary policy on the economy, it is essential that the capital sub-markets have strong financial links with the commercial banks.
Limitations of Monetary Policy
Various limitations of monetary policy can be described as:
- The Time Lag: Time lag means time taken in chalking out the policy action, its implementation and working time. It has two parts:
(a) Inside Lag: It is the time lost in identifying the:
(i) Nature of the problem.
(ii) Sources of the problem.
(iii) Assuming the magnitude of the problem.
(iv) Choice of appropriate policy action.
(v) Implementation of policy actions.
(b) Outside Lag: The outside lag is the time taken by the households and the firms to react in response to the policy action that is taken by monetary authorities. If operationallags are long magnitude of the problem, they may change rendering the policy ineffective.
The time lag of monetary policy particularly the response lag is found to be much longer than the time lag of fiscal policy. According to Friedman and Schwartz, an average time lag is of 18 months between peaks (or troughs ) of money supply and peaks or (troughs) of business cycles.
- Problem in Forecasting: To formulated problems must be assessed. More important is to the problem must be assessed. More important is to forecast the effects of monetary action. Prediction difficult task. An appropriate policy has An appropriate policy based on guess work is found to be unsatisfactory
3.Non-banking Financial Intermediaries: The structural change in the financial reduced the scope of effectiveness of monetary policy intermediaries including industrial finance corporation, corporations, industrial development banks etc. has reduced the share of the commercial banks, in the total credit
- Under Development of Money and Capital Market: In underdeveloped countries, the character of their money and capital markets is also underdeveloped. Their money and capital DE are fragmented while effective working of monetary policy has are Lucy has a requirement that money make the sub-market of the capital market work independently. So the effects of change in money sun in the interest rates remained confined to banking sector only. Instruments/Working of Monetary Policy
Instruments of monetary policy refer to the economic variables that the central bank can with a view to control and regulate the money supply and the available play and the availability of credits. These instrume of monetary policy are also known as weapons of monetary control.
The measures of monetary policy are generally clarified under two categories:
- Quantitative measures 2. Qualitative or selective credit controls.
- Quantitative Measures
Traditional or quantitative measures of monetary control are as follows:
(a) Open Market Operations: Sale and purchase of government securities and treasury bills the central bank of the country makes an open market operation. To increase the supply of money to the public, central bank purchases government securities, i.e. bills and bonds. Similarly, when it decides to reduce money it sells the government bonds and securities. The open market operation has not proved a powerful tool in the hands of RBI.
Effectiveness of Open Market Operations:
(i) When commercial banks possess excess liquidity, the open market operations does not work effectively.
(ii) In a very buoyant market situation, the effective control of demand for credit through opal market operation is doubtful. During the depression period, open market operations are not effective for lack of demand for credit
(iii) In underdeveloped countries where banking system is not well-developed, securities and capital markets are not interdependent
(iv) The popularity of government bonds and securities with the public also matters a lot. The
government debt instruments are not popular because of low rate of return. Central bank such a case has to use coercive power measures and force the commercial banks to buy the government bonds as in the case in India.
(b) Bank Rate Policy: Bank rate is the rate in which the central bank rediscount the first class De of exchange presented by commercial banks.
The RBL Act defines, ‘Bank rate’ as the standard rate at which the bank is prepared to buy bilis exchange or other commercial papers, eligible to purchase under this act
The central bank can change this rate-increase or decrease-depending on what it wants to do j.e expand or contract the flow of credit from the commercial bank. The bank rate policy was adopted by the Bank of England in 1839.
The working of the discount rate policy is simple. When the central bank changes its own discount rate, commercial banks raises their discount rates too and vice-versa. As for example, during inflation RBI increases the bank rate and during deflation RBI decreases the bank rate.
Cash Reserve Ratio or Statutory Res Reserve Ratio: It is the percentage of total deposits which commercial banks are required to maintain in the form of cash reserve with the central bank.
The main objective is to prevent shortage of cash in meeting the demand of
By changing the CRR, the central bank can change the money supply over night. Cen Lege of cash in meeting the demand of cash depositors. Op when conditions have the demand of contraction in monetary conditions and get the money supply over night. Central bank raises when conditions has the demand of expansion of money.
Limitations of CRR: These are as follows:
(i) Its effectiveness is limited by the existence of unorganised banking sector
(ii) It proves more handy where open market operation and bank rate policy prove less effective. (iii)Its effectiveness depends upon the share of the banking credit in the credit market.
(iv) CRR is relatively more effective in the advanced countries with advanced banking system accounting for a major share in the capital market.
2.Qualitative or Selective Credit Controls
The qualitative or selective credit control measures are resorted to, when RBI intends to control the use of credit. Its impact is uniform on all the sectors of the economy.
The monetary policy are often faced with the problems of:
(a) Rationing the credit.
(b) Diverting the flow of credit from the non-priority sectors to the priority ones.
(C) Curbing speculative tendency based on the availability of bank credit. Measures of SCC (Selective Credit Control) are as follows:
(a) Direct Controls: When all methods are ineffective, the monetary authorities resort to direct control measures. The measures are resorted to, when the commercial banks do not follow the Instructions issued by the central bank.
(b) Moral Suasion: It is a method of persuading and convincing the commercial banks to advance credit in accordance with the central bank in the economic interest of the country. Under this, the central bank writes letter to and hold meetings with banks on money and credit matters and pursue them to follow the credit policy.
(c) Credit Rationing: When there is shortage of institutional credit for the business sector, the strong sector captures a major portion in the total institutional credit. Hence, weaker sectors are starved of necessary funds. In this method, the central bank can fix the quota of credit for banks.
(d) Change in Lending Margins: ‘Lending margin’ is the difference between the values of the mortgaged property and amount advanced.
The banks provide loans only upto a certain percentage of the value of mortgaged property. RBI, by increasing the lending margin, can control the expansion of credit.
Structural Adjustments and Monetary Policy
The structural adjustment program has re-defined the objectives and instruments of monetary policy. The major considerations which underline the monetary policy in recent years are:
- Bringing about a deceleration in the monetary expansion.
- Reducing the monetary deficit, ie printing of new currency consistent with the government objective of bringing down fiscal deficit.
- Boosting exports in order to alleviate the problem of external payments deficit.
Ques.8. What do you understand by fiscal policy? Discuss its significance too.
Or What do you mean by fiscal policy? Explain its objectives in a developing country (India)
Ans. Fiscal Policy
Fiscal policy is considered to be an into ancial operations of the government on the various aspects regarding the functia national economy, such as prices, empire “conomy, such as prices, employment, consumption, production, distribution of It is also called budgetary policy. In sim Card budgetary policy. In simple words, it embraces the tax and expenditure policy. Economists have defined the fiscal policy as a policy of government where options of raising revenue and incurring expenditure to produce desirable effects and avoid und effects on various aspects of economy like national income, produ income, production and employment.
Economists have defined the fiscal policy as follows:
Fiscal policy means public expenditure and tax policy
A policy under which the government uses expenditure and revenue programmes to desirable effects and avoid undesirable effect on the national income, production and employment
Objectives of Fiscal Policy
The main objectives of fiscal policy are as follows:
- Effective mobilisation of resources for development.
- Taxation and public savings.
- Effective allocation of financial resources.
- Controlling the deficit in balance of payment
- Reducing inequalities of income and wealth.
- Price stability and inflation control.
- Employment generation.
- Increasing the capital formation rate.
- Ensuring a balanced regional development.
- Increasing the national income of the country.
Instruments of Fiscal Policy: There are three main instruments of fiscal policy, i.e. taxation, public borrowing and deficit financing which must be used in a harmonious combination so as to produce the best overall effect in realising the macro-economic goals.
- Taxation: A sound taxation policy should be made for:
(a) Curtailing consumption and thus garnering resources of public sector investment.
(b) Reshaping the pattern of investment in a socially desirable manner. Transfer of scarce resources from unproductive private sector to productive public sector.
(C) Inducing people to work hard, save and invest in production.
(d) Reducing inequalities in income and wealth.
- Public Borrowing: Public borrowing also plays an important role in mobilising savings. It is a non-inflationary method of financing government programmes as public debts divert savings of the people to government securities which are less liquid assets. They tend to curb consumption and relieve inflationary pressure.
- Deficit Financing: It is a financing of gap between public revenue and public expenditure. I done through public borrowing or a type that results in a net addition to national outlay or aggregate expenditure. In short, it implies creation of additional money supply. A country resorting to planes for development finds it easier to obtain additional resource for the plan through deficit financing In India, deficit financing constitutes an important resource of obtaining finance five year plans. When required, public expenditure exceeds public revenue collected through taxation
borrowings, public sector profits, foreign deeds, etc. restoring deeds, etc. resorting to deficit financing that becomes necessary come at par with required expenditure.
Significance of Fiscal Policy
The significance of fiscal policy may be understood with the help of following factors:
4 Full Employment: In the matter of canons of fiscal policy, Keynes has laid down some fundamentals. According to him Public finance is a compensatory finance ordained to attain and maintain full employment in the economy To pursue this goal, he suggested that:
(a) Taxation should be devised to devised to promote and sustain consumption and investment.
(b)To raise the level of effective demand and to overcome depressionary forces resort to deficit financing.
(c) Public expenditure should finance public works programmes and provide social security.
towards creation of more employment.
(d) Direct tax rates should be per low so as to encourage savings and investments that are directed se)
(e)Public expenditure must uplift the aggregate demand, investment and employment.
(f) Public borrowing should finance productive public expenditure.
- Economic Stabilisation: Fiscal policy should aim at relative price stabilisation, control on inflation and avoidance of deflation. Forces stimulating growth process should be given a boost at a time while inflationary pressures are to be curbed. In a growing economy when huge investment is undertaken to implement infrastructural projects, returns are not immediate, as such scarcity of consumption goods is felt. This results in a raise in prices and wages and cost-push inflation is provoked. This vicious circle of inflation has to be checked through appropriate fiscal policy.
- Economic Growth: Appropriate fiscal policy encourages growth process, which has the following objectives:
(a) Fiscal policy should aim at improving marginal propensity of savings and the consequent incremental saving ratio.
(b) To accelerate the rate of economic growth, fiscal policy should not adversely affect the ability and willingness to work hard, save more and invest.
(C) To induce the stimulation of private sector investment.
(d) To promote investment into socially desirable channels.
(e) To alter the pattern of investment and production to is an important instrument ensure improvement in economic welfare of general public, through which government interferes in a country’s equity in the distribution and eradication of poverty.
- Social Justice: Fiscal policy should aim at social justice by giving equitable distribution of income and wealth. Progressive tax system and re-distribution of income through public expenditure by growing allocation for programmes like free medical care, free education, subsidised housing, subsidised essential commodities like milk, etc. should be the objectives of fiscal policy.
Ques.9. What are the measures adopted by RBI to control credit? Discuss the supervisory and promotional functions performed by the RBI.
Ans. Measures Adopted by RBI
Credit control is the important tool used by RBI and a major weapon of monetary policy to control the demand and supply of money in the economy. RBI uses some methods to bring economic development with stability. It means that banks will not only control inflationary trends in the economy but also boost economic growth that leads to increase in real national income with stability.
The main methods of credit control are:
- General Methods (Quantitative): They incur
(a) Bank Rate: It is an oldest instrument of money the rate at which RBI discounts or re-discounts.
(b) Open Market Operations. These are the means of implementing monetary policy by w ral Bank controls its national money supply by buying and selling governmental relations in Reserve Requirements: RBI uses this method to control credit in India requirements are cash reserve ratio, statutory liquidity ratio.
(d) Repo rate and Reverse Reno Rate: Whenever the banks have any shortage of funds, the
borrow it from RBI. Repo rate is the rate at which banks borrow rupees from RBI. (e) Liquidity Adjustment Facility: It is a tool used in monetary policy that allows banks to borrow money through repurchase agreements.
- Selective Methods (Qualitative): They include:
(a) Rationing of Credit: It is a method of controlling and regulating the purpose for which credit is granted by Commercial Bank
(b) Margin Requirement: It is the difference between the market value of a security and maximum loan value and can be increased or decreased to control the flow of credit.
(C) Publicity: RBI uses media for the publicity of its views on the prevailing condition and its directions required to be implemented so as to control any problem.
(d) Regulation of Consumer Credit: Central Bank can reduce this credit by increasing the payment and reducing the number of instalments of such credit if there is demand of goods
(e) Direct Action: Central Bank has the authority to take strict action against any bank that
doesn’t obey the directions given by RBI.
(f) Request and Persuasion: Central Bank requests and persuades the Commercial Banks to refuse to provide loans for non-essential purposes so as to cope with the inflationary situation.
Supervisory Functions of RBI: RBI performs the following supervisory functions:
- To provide licence to the bank to commence banking business in India.
- To order the compulsory liquidation of weak banks or their merger with the stronger one.
- To open branches in a particular area so as to improve the geographical coverage.
- To issue directions on credit control.
- To provide training to bank personnel.
- To restrict loans and advances as well as guarantees given by banks to and on behalf of any one company
- To collect and supply information regarding credit facilities advanced by banks and other financial institutions.
- To spread banking habits in the country.
Promotional Functions of RBI: RBI performs the following promotional functions:
- Setting-up and development of specialised financial institutions.
- To promote regional rural banks with the cooperation of the commercial banks so as to extend banking facilities to the rural areas.
- To promote national housing bank to organise and augment resources for housing.
- To establish Export Import bank of India to provide finance to exporters.
- To encourage and promote research in the areas of banking.
Ques 10. Explain the functions, powers and role of Securities and Exchange Board of India (SEBI).
Ans. The government of India on 12th April, 1988, constituted a pre
8, constituted a precursory body ‘Securities and hange Board of India’ popularly known as ‘SEBI’ under the overall administration of Ministry Finance. The Securities and Exchange Board of India Act, 1992 provides
- To protect the interest of investors dealing in securities.
- To promote the development of the securities market.
- To regulate the securities market in India.
- To take appropriate measures in all the matters connected there
The head office of SEBI is situated in Mumbai besides regional offices in Delhi Kolkata and Chennai.
Rights and Functions of SEBI: Rights and functions of SEBI are as follow:
- To regulate the business in stock exchange and any other securities market.
2.To register and regulate the working of all collective investment schemes
- To prohibit fraudulent and unfair trade practices relating to securities market.
4.estors education and training of intermediaries of securities markets.
- To prohibit inside trade in securities.
- To regulate substantial acquisition of shares and take-over of companies.
- To levy fees and other charges for carrying out the purpose of the act.
Powers of the SEBI: Powers of the SEBI are as follows:
- To call for periodical returns from stock exchange.
- To prescribe maintenance of certain documents by the stock exchanges.
- To approve by laws of the stock exchanges for regulation and control of contracts.
- To compel any public company to list its shares.
- To grant license to dealers in securities.
- To call upon the stock exchange or any members of the stock exchange to furnish explanations, information relating to the affairs of the stock exchange or the member.
Role of SEBI: The SEBI has been making endless efforts for the growth and smooth functioning of the Indian capital market. It has also played a key role in the protection of investors. The role of SEBI would be more clear by highlighting the steps it has taken over the years to accomplish its objectives. The major steps include the following:
- Registration of brokers and sub-brokers at the stock exchanges.
- Registration and control of merchant bankers.
- Regulation and control over mutual funds.
- Regulation of insider trading.
- Issue of portfolio managers regulations.
- Issue of guidelines for disclosure and investor protection.
- Issue of guidelines for the governing boards of stock exchanges.
- Formation of advisory committees for primary and secondary capital markets.
- Launching of stock invest scheme to eliminate delayed refunds.
- Check on misuse of promoters quota.
- Issue of guidelines for free pricing of public issues.
- Making rules for entry of foreign institutional investors
- Issue of guidelines for floatation of public sector bonds.
- Launching of dematerialised (demat) trading in securities.
- Formulation of take-over code.
Thus, the SEBI has made impressive strides initiated the fulfillment of its objectives, It has initiated various measures including guidelines investments by foreign institutional investor has emerged as the presiding body over the fir funds, guidelines on take over’s, etc. Thus, SEBI has emerged services sector in India.
Ques.11. Describe in detail the working of stock exchanges.
Ans. Working of Stock Exchanges
A stock exchange is the platform where financial instruments like stocks and derivative
Market participants have to be registered with the stock exchange and SEBI to conduct These stock exchanges work in the following manner:
1.First, a company gets listed in the primary market through an Initial Public Offering (p its offer document, it lists details about the company, the stocks being issued and so on. Du the listing, the stocks issued in the primary market are allotted to investors who have bid for the same
- Once listed, the stocks issued can be traded by the investors in the secondary market. This
is where most of the trading happens. In this market, buyers and sellers gather to conduct
transactions to make profits or cut losses.
- Stock brokers and brokerage firms are entities registered with the stock exchange. They act as an intermediary between us as an investor and the stock exchange.
- The broker passes on our buy order to the exchange which searches for a sell order for the
same share. Once a seller and a buyer are fixed, a price is agreed finalised, upon which the
exchange communicates to the broker that our order has been confirmed.
- The message is then passed on to us. Even at the broker and exchange levels, there are multiple
parties which are involved in the communication chain like brokerage order department, exchange floor traders and so on. However, the trading process has become electronic today. This process of matching buyers and sellers is done through computers. So, the process can be finished within minutes.
- Meanwhile, the exchange also confirms the details of the buyers and the sellers to ensure the parties don’t default. It then facilitates the actual transfer of ownership of shares. This process is called settlement.
- The exchange ensures that the trade is honoured during the settlement. Whether the seller
has the required stock to sell or not, the buyer will receive his shares. If a settlement is not
upheld, the sanctity of the stock market is lost, because it means trades may not be upheld.
- As and when traders are conducted, share prices change. This is because prices of shares like any other goods are dependent on the perceived value. This is reflected in the rise or fall of demand for the stock. As demand for the stock increases, there are more buy orders. In leads to an increase in the price of the stock. Hence, larger the volume of trade, greater the
fluctuation in the stock’s price.
This is how our orders are processed in stock exchanges and how they work thus conducting the trades.