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MBA 1st Year Economic Political Legal Environment Short Question Answer

MBA 1st Year Economic Political Legal Environment Short Question Answer

MBA 1st Year Economic Political Legal Environment Short Question Answer

MBA 1st Year Economic Political Legal Environment Short Question Answer
MBA 1st Year Economic Political Legal Environment Short Question Answer

MBA 1st Year Economic Political Legal Environment Short 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.

Section B


Ques.1. Explain the role of government in business.

Ans. Role of Government in Business: Government plays an important role in business. This can be understood from the following points:

  1. To Pass and Execute Proper Laws: Laws are the controller of people’s behaviour in the society. They should ensure the security of every individual as well as create a helpful atmosphere in the society.
  2. Providing Money and Credit: These are important in economy. Capital and money market act as the sources of finance for businesses. The government is responsible for regulating the sources of finance so that maximum amount of capital can be directed to the businesses,
  3. Building Infrastructure: This can help businesses rapidly expand and prosper. Infrastructure works as a channel for various activities like information sharing, supply of credit and energy, communications and transport, etc.)
  4. Maintenance of Law and Order: This can ensure the existence of businesses, as changes and alterations in laws create hurdles for many business operations and affect their existence in the society.
  5. Providing Information: Government gathers information on various issues and topics that can be helpful for the businesses to develop their marketing strategies, policies and manufacturing processes.
  6. Controlling Growth of Monopolies and Preserving Competition: Monopolies arise under free market economy and create an environment of inequality and concentrated political and economic power which is both socially and economically harmful.
  7. Awarding Patent Rights and Copyrights: Innovations and inventions are essential for the growth and development of businesses. They need protection so that no other competitor or rival can misuse or reuse the idea or the concept.
  8. Research: It is an essential element to conduct business and perform effective decision-making. It also fosters innovation along with providing reliable information.

Ques.2. What are the economic roles of government in India?

Or “Government plays an important role in development of business in every nation’s economy.’ Explain the above statement with suitable examples.

Ans. Economic Roles of Government in India: Government is a very powerful institution which can create a favorable business environment. We can study its economic roles under the following heads:

  1. Government: Regulator of Business: The entire regulatory legislations and policies are covered under this segment. On the one hand, there is a very large indirect area of government control over the functioning of private sector business through budgetary and monetary policies.

But against this, there is also a fast expanding area of direct administrative or physical controls through which the government seeks to ensure that private investment and production in industry and the use of scarce resources conform to government’s basic socio-economic objectives.

They have become necessary tools in a system which seeks to avoid total nationalisation of resources.

Government’s regulatory functions with regard to trade, business and industry aim at laying down the limits for the private enterprise. The regulatory functions of the Government include: (a) restraints on private activities, (b) control of monopoly and big business, (c) development of public enterprises as an alternative to private enterprises to ensure competitive dualism, (d) maintenance of a proper socio-economic infrastructure.

  1. Government: Promoter of Business: The promotional role of the government in relation to industries can be seen as providing finance to industry, in granting various incentives and in creating infrastructure facilities for industrial growth and investment.

For example, our government has identified certain backward areas as ‘No industry district To promote development of such areas, Government provides subsidies and tax holidays to attract investment in backward areas.

In this way, the government will help the process of balanced development and thereby remove regional disparities. The government is assisting the development of small scale industries.

The District Industrial Centres are assisting the development of small industries. The government is actively helping the industrial development of the country by providing finance to them through the development banks.

  1. Government as an Entrepreneur: The impressive growth of the public sector in India from a small beginning bears testimony to the role of the government as an entrepreneur.

Private investors are solely guided by private profit motive and hence they are not interested in developing products of common public use and social services which yield relatively lower returns. But as a ‘Social entrepreneur, the government does not hesitate to take them up.

  1. Government as the Planner: In its role as a planner, the government indicates various priorities in the Five Year Plans and also the sectoral allocation of resources. Mixed economies are democratically planned economies.

The government tries to manage the economy and its business activities through the exercise of planning. Planning is the most important activity in a modern mixed economy. The idea of economic planning can be traced to three different sources: Rationalism, Socialism and Nationalism

Economists advocate a planned economy on the ground that it can be a rational economy which can utilise the available resources in an optimal manner. In other words, the planned economy is a rational economy which attempts to secure the maximum return with minimum wastage of productive resources.

MBA 1st Year Economic Political Legal Environment Short Sample Model Peper

Ques.3. Describe the legal framework In India.

Ans. Legal Framework in India: Foreign investors including companies looking to enter India or already operating in India need to understand the Indian legal and regulatory environment.

  1. Entry Options: An appropriate entry strategy is a must for every foreign investor seeking to do business in India or with counter parties based in India. Entry strategy would usually vary depending upon the nature of business, the concerned sector, scale of operations and costs and other commercial objectives. Broadly, foreign investors can set up either a company, branch/liaison office or a Limited Liability Partnership (LLP) in India. Indian companies are governed by the new company law, the Companies Act, 2013. LLPs are governed by a separate legislation, the Limited Liability Partnership Act, 2008. It may be pointed out that the Indian government has launched a series of initiatives aimed at enhancing the ease of doing business in India.
  2. Foreign Investment Policy: Foreign investments into India are governed by a comprehensive Foreign Direct Investment (FDI) policy issued annually by the department of industrial policy and promotion, which works under the aegis of the Ministry of Commerce and Industry, Government of India. The FDl policy is supplemented by various press notes that are issued throughout the year as and when a policy change is announced. This policy framework is operationalised by rules, regulations and circulars issued by India’s Central Bank, the Reserve Bank of India.

3 Taxation: Income tax in India is governed by a Central legislation, the (Indian) Income Tax Act, 1961. while indirect taxes such as value added tax, customs and excise duty are subject to both Central and State laws. Currently the corporate tax rate stands at 30% (excluding surcharge and cess), however, the Government has announced that this would be progressively reduced to 25% over the next 4 years.

India also has transfer pricing rules that apply to related party transactions. On the indirect taxes front, a comprehensive Goods and Services Tax (GST) is likely to be introduced in India in 2016. This will go a long way in reducing complexity and eliminating multiple taxation.

  1. Exit Strategy and Dispute Settlement in India: Since entering a new market is a major commitment for every investor, the exit strategy should also be planned in advance as the cost and barriers to exit can often determine the entry strategy. Maintaining a comprehensive exit strategy is important for the following reasons:

(a) Changes in business conditions or regulatory environment.

(b) Cashing out on a venture that is successful.

(C) If the goals and objectives of the company/partners involved change with time.

(d) If one of the partners involved in an agreement is acquired or gets into financial trouble.

(e) For settlement of disputes when a partnership is not working out.

  1. Employment Laws: An investor should familiarise himself with Indian labour laws at the time of commencing operations in India. Though several labour laws are formulated by the centre, there are state specific rules that the investor should take note of and these would vary depending on the state where the investor commences operations. The investor should ensure that appropriate registrations are obtained and all HR records, files, documents and correspondences are maintained according to the requirements under Indian labour laws.
  2. Anti-trust Regulation in India: India’s Competition Act, 2002 (the Act) is the principal legislation dealing with anti-trust issues. The Act prohibits or regulates (a) anti-competitive agreements, (b) abuse of a dominant position and (c) combinations.

Anti-competitive agreements are broadly defined as any agreement in respect of ‘Production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India’. Certain agreements such as tie-in arrangements or bid-rigging are presumed to cause an appreciable adverse effect on competition.

Ques.4. What are the legal and economic factors affecting business? 

Ans. Legal Factors Affecting Business: The legal forces that influence business are:

  1. Provisions of the constitution influence different operations of a business enterprise and they

include the directive principles, fundamental rights of the citizens, etc.

  1. Judicial decisions protect the interest and concern of public. This is achieved by ensuring that

both the government and legislature serve the interests of the public as per the constitution of


  1. Law administrators include lawyers, government agencies, police, etc.

They are directed towards confirming execution of laws and the judgement of the courts of law.

Economic Factors Affecting Business: There are various economic factors that affect the functioning of business organisation and these are as follows:

  1. Demand and supply are interdependent economic factors that influence the operations of business organisations.
  2. Money and banking affect the business and its customers. The purchasing power and demand of the customers is influenced by the circulation of money.
  3. Economic growth and development is reflected by the total earnings of individuals in the society as well as the amount of funds invested in the enhancement of the society.
  4. The employment level and per capita income of the economy also affects the business,
  5. The general price level of the product affects the sales of the business enterprise. The elements involved in setting up of general price of a product comprises of the cost of raw material, production cost, labour cost and transportation cost.

Ques.5. Explain the major economic policies concerning the development of the economy of the country. Why are they important?

Ans. The major economic policies concerning the development of the economy of the country are:

  1. Fiscal Policy: It aims at increasing the revenue receipts of the government and bringing the expenditure under control while ensuring that the various developmental and societal objectives of the government are not impacted adversely.
  2. Monetary Policy: It is responsible for regulating the money supply in the market with the help of controlling the interest rates. It is devised to attain the significant economic growth as well as the price stability
  3. Foreign Trade Policy: Foreign trade refers to exchanging goods, services as well as capital across international borders. The policy is focused towards improving foreign trade as well as balance of payments, developing export capacity and facilitating export performance.
  4. Industrial Policy: It is a declared and official plan with the strategic attempt to influence the growth of various sectors. The policy involves specific activities that stimulate and promote structural changes.
  5. Labour Policy: It is designed by the government of India to support the economic development and social justice. The policy is responsible for maintaining the relations between the employers and the employees and is engaged in effectively training, employing and distributing the labour in the labour market
  6. Agricultural Policy: This is devised by the government of the concerned country to improve the standard of living as well as the level of income of the farmers through improving the agricultural production. The policy aims to develop the agricultural sector of the country.

Importance of Economic Policies: Economic policies are important because of the following reasons:

  1. Help in improving the rate of economic growth of the country.
  2. Help to reduce poverty and economic inequality spread in the country.
  3. Improve efficiency of the public sector.
  4. Help to maintain price stability in the country.
  5. Important to improve the balance of payment level of the economy.
  6. Concerned with continuous development of small-scale industries.
  7. Help to improve the efficiency level of the country by introducing new and unique schemes and strategies.

Ques.6. What do you mean by economic system?  What are its various constituents? 

Ans. Meaning of Economic System: An economic system is a system designed by a nation to utilise its resources for the purpose of satisfying the needs and wants of people.

“An economic system consists of those institutions which a given nation or group of nations has chosen or accepted as the means through which their resources are utilised for the satisfaction of human wants

An economic system comprises of all the institutions, organisations and policy mechanisms by which the people of a country manage and utilise the country’s resources to obtain the things they need. It is the network of economic relationships in the society arising from the organisation and/or mode of production, distribution, consumption and exchange. Economic system embodies the nature of property rights, ownership of resources, market mechanism, role of the state, etc.

Basic Constituents of an Economic System: An economic system consists of several entities, one of which are given below:

  1. Household: The simplest but the most significant unit is the household which means all the persons living together as one family. The ultimate purpose of all economic activities is the satisfaction of household needs and wants. Every household has limited means but multiple needs. This gives rise to the problem of allocation of scarce resources. For example, a household has to decide whether to buy a car or to send the child abroad for higher education. In the same manner, a household has to decide what part of family income to consume and what part to save,
  2. Firm: Firm is a unit of ownership, management and control. It is a business unit that owns and controls one or more factories/branches/offices and is engaged in the production and/or distribution of some product or service. A firm is that unit of the economic system which performs some Industrial or commercial activity. While the household represents the demand side, firms represent the supply side of the economy. The person who launches a firm is called an entrepreneur. The entrepreneur takes decisions relating to the size of the firm, location of plant/office, nature and quality of the product to be manufactured, the factors of production to be employed, fixation of price, sales promotion, distribution channel, source of finance, etc.
  3. Industry: Industry means all the firms producing the same or similar products. According to E.S. Florence, An industry is a group of firms tending to specialise in the same transactions or series of transactions. A firm is a single unit of production whereas an industry comprises all the firms producing the same type of product. For example, Maruti Undying is a firm while all the firms producing cars constitute the car industry.
  4. Government: Government consists of all public agencies, State bodies and other units which govern the country. In India, there are two types of governments:

(a) Central Government, and (b) State Government.

Each type of Government maintains law and order and provides public services (for example, education, health, water, electricity, telephone, public transport, etc.). In addition, there are government or public enterprises (for example, Indian Oil Corporation, State Bank of India, Steel Authority of India) which are engaged in the production and supply of certain commodities or services. As a political entity, government is empowered to create laws for regulating business.

Ques.7. What are the characteristics and functions of an economic system? Ans. Characteristics of an Economic System: Economic systems differ from country to country according to the nature of economic institutions which a country chooses for the satisfaction of people’s wants. However, all economic systems are characterised by the following features:

  1. National Entity: An economic system always covers the entire country. However, more than one country may adopt the same type of economic system.
  2. Institutional: An economic system comprises various institutions which a nation has devised and adopted for satisfying the needs of its people. Households, firms, industries, government, price mechanism, economic planning are examples of such institutions.
  3. Interdependence: The different institutions of an economic system do not work in isolation from one another, rather they are interdependent and interacting. Therefore, proper balance and coordination between them is necessary for the smooth functioning of the economic system.
  4. Scarcity of Resources: Every economic system has limited resources at its disposal in comparison with the demand for these resources.
  5. Need Satisfaction: All the activities of an economic system are undertaken for the satisfaction of human wants which are unlimited.
  6. Dynamic: An economic system is dynamic rather than a static organisation. It is made up of man-made institutions. These institutions are created, destroyed and modified as per the needs of the people. Some economic systems change slowly while others change fast. For example, Indian economic system changed very little during 1947-1990. But since 1991, there have been rapid changes in it.

Functions of an Economic System: The basic function of an economic system is to ensure maximum possible satisfaction for the people of the country. For this purpose, the scarce resources of the nation have to be allocated and utilised towards the unlimited wants. The economic system has to tackle the following central problems:

  1. What to Produce: An economy has first of all to decide the goods and services that are to be produced. The nature and amount of goods to be produced are decided keeping in view the requirements of people and the availability of resources. A choice has also to be made between consumer goods and capital goods. If the amount of one type of goods is increased, the quantity of the other type may have to be reduced due to the scarcity of resources.
  2. How to Produce: The second fundamental problem is to decide the mode of production. Choice of suitable techniques of production is important because it affects the efficiency in the use of resources and the mix of factor of production. For example, in a heavily populated country like India, highly capital-intensive technique of production in all areas may result in scarcity of capital and widespread employment.
  3. For Whom to Produce: This problem is concerned with the distribution of total output among the people. An economic system is expected to satisfy the needs of all sections of the society. However, in a capitalist economy, goods are produced for those who can afford to buy them. On the other hand, in a communist system, the state ensures that goods are produced and distributed for all types of people.
  4. Choice between Current Needs and Future Needs: Some wants are urgent and must be satisfied immediately. Other wants are however not urgent and can be postponed for the future. A rational allocation of resources is needed between the present needs and future needs. The economic system must also preserve the environment from all types of pollution so as to serve the interests of both the present and the future generations.
  5. Economic Growth: In order to increase productivity and improve living standards of people, it is necessary to discover and utilise new resources in addition to better utilisation of the existing resources,

MBA 1st Year Economic Political Legal Environment Short Question Answer

Ques.8. What do you mean by capitalism or capitalist economy? What are its characteristics?

Ans. Capitalism: In a capitalist economy, households and firms are the basic production units. The capitalist system is also known as free enterprise economy and market economy. It is characterised by the private ownership of the means of production, individual decision-making and the use of the market mechanism to carry out the decision of individual participants and facilitate the flow of goods and services in markets.

According to Karl Marx, ‘Capitalism is a particular mode of organisation of production which is characterised by Wage slavery, Production and Creations of surplus value..

According to Looks and Hoots, Capitalism is a system of economic organisation featured by the private ownership and the use for private profit of man-made and nature made capital

In a pure market economy, all productive activities are privately owned or supposed to being owned by the state. The goods and services that a country produces and the quantity in which they are produced are not planned by anyone. Rather, production is determined by the interaction of supply and demand and signalled to produce through the price system. If demand for a product exceeds supply, prices will rise, signaling producers to produce more and if supply exceeds demand, prices will fall, signaling producers to produce less. In this system, consumers are sovereign.

Characteristics of Capitalism

The following are the main characteristics of capitalism:

  1. Free Enterprise: The term ‘free enterprise’ implies that private firms are allowed to obtain resources, to organise production and to sell the resultant product in any way they choose. It means that there will not be any government or other artificial restrictions on the freedom and ability of the private individuals to carry out any business.
  2. Private Ownership: The factors of production-land, labour and capital are privately owned and production occurs at private initiative. Individuals have their property rights protected and usually free to use their property as they like and as long as they do not infringe on the legal property rights of others.
  3. Limited Role of Government: Government interference is necessary to ensure some of the essential features and smooth functioning of the capitalist system, eg, to define and protect property rights, ensure freedom of entry and exit, enforce contractual agreements among private entrepreneurs, ensure the satisfaction of certain community wants, etc.
  4. Absence of a Central Plan: The activities of the numerous economic units in a capitalist system are not guided, coordinated or controlled by a central plan. Resource allocation and investment decisions in a free market economy are influenced by market forces rather than by the state. This clearly shows that there is an absence of a control plan.
  5. Consumer’s Sovereignty: The consumer occupies a key position in the economic system. They have complete freedom of choice of consumption. The production decisions are based on consumer desires. Customer is the king,
  6. Competition: Competition reduces market imperfections and associated problems. It is necessary in a private enterprise economy to keep initiative constantly on alert, to protect the consumer and to maintain a sufficiently flexible price system.
  7. Freedom to Save and Invest: The term saving implies the sacrifice of consumption, as saving depends on income and consumption. The freedom to save, inherit and accumulate wealth is a right which perhaps is more typical for the private enterprise system than is free choice of consumption and occupation.
  8. Freedom of Choice of Occupation: The freedom of choice enables the worker to make the best possible bargain for his labour. This implies that the employers have to competitively Capitalismu s bid for labour. But this does not mean the guarantee of job a

is a system of economic worker opts for. The choice is practically limited by the extent of

organisation featured by the private ownership and the use availability of the jobs.

  1. The Market System: In a market economy, the buyers and

of private profit of man-made and nature made capital. sellers express their opinion about how much they are willing to pay for or how much they command of goods and services. Prices guide the purchase decisions of the consumers. The market prices reflect the desires of millions of consumers. It also provides guidance to investors and other business persons.

Ques.9. What are the merits and demerits of capitalism? 

Ans. Merits: The merits of capitalism are as follows:

  1. Democratic Nature: People enjoy full economic freedom under capitalism. The entrepreneurs, the consumers, the workers and the owners of capital are all free to do work as they like to fulfil their needs and wants. Individual freedom makes capitalism democratic.
  2. Rapid Economic Growth: The capitalist system helps in rapid economic growth due to incentive and initiative.
  3. Incentive: In the capitalist economic system, entrepreneurs have sufficient incentive to undertake enterprise and bear risks. The profit motive induces them to invest money even in those industries which involve great risks.
  4. Innovation: In order to survive in a competitive market, entrepreneurs introduce new products, new techniques of production and distribution and other improvements. They introduce new innovations to increase profits.
  5. Efficient Utilisation of Resources: Under capitalism, the scarce resources of the country are used most economically and with minimum waste.
  6. Capital Formation: People have the incentive to save money and invest it in order to earn larger incomes in future due to the right of private property and inheritance.
  7. Flexibility and Adaptability: Capitalism has an inherent ability to change according to hanging requirements and circumstances. It is a dynamic system and can be adapted to the changing environment. That is why capitalism has survived for centuries.

Demerits: The demerits of capitalism are as follows:

  1. Lack of Maximum Social Satisfaction at Minimum Social Cost: Maximum social satisfa can be achieved when goods produced are made available to those consumers who will have maximum satisfaction from them. But in the capitalist system goods go in the hands of the people he can offer the best prices. In other words, goods are distributed according to the ability to pay than according to the needs of people.
  2. Social Waste: Cut-throat competition among business firms results in unnecessary ture on advertising and ruthless exploitation of natural and human resources of the nation. The misallocation of the country’s resources because producers are guided by profit motive. They n those goods which rich people can afford to but rather than those which poor people actually ne
  3. Concentration of Economic Power: Right to private property and the law of inheritance the concentration of wealth in a few hands. The concentration of wealth and property in the hando

vreme inequalities in the incomes of people. On the one hand, a few enjoy luxurio living and on the other, a large section of society is deprived of even the basic necessities of life.

  1. Social Discrimination: Capitalism leads to the division of the society into two classes, i.e. Trich) and have not’s (poor). The rich exploit the poor. Thus, capitalism may benefit a few at the cost of many
  2. Economic Instability: Capitalism does not provide stability of the price level. Free workin. of market mechanism results in business cycles wherein business booms are followed by business depression Market mechanism results in business cycles because savings and investment are not coordinated as these are determined by two different classes of people.
  3. Loss of Human Values: Capitalism promotes materialistic attitudes in the people. The lust for profits and wealth gives rise to several social evils. It is alleged that capitalism has to conscience, its god is gold. It contains the seeds of its own destruction.
  4. Rise of Monopoly: Big business and giant corporations dominate the country’s economy in a capitalist system. They weaken the forces of competition and reduce consumer sovereignty. They influence public opinion and life styles to suit their business. Free play of market mechanisms is distorted.

Ques.10. Define socialism or socialistic economy. What are its characteristics?

Ans. Socialism: Socialism is an economic system where the means of production are either owned or controlled by the state and the resource allocation, investment pattern, consumption, income distribution, etc. are directed and regulated by the state. Socialism is quite distinct from capitalism, which is based on the institutions of private property and private enterprise. In a socialist state, there is no place for private property and private enterprise. In the socialist state, production is controlled by the state itself, which decides what to produce, how to produce and how to distribute the total product among the population. Since there is no private capital, land or enterprise, there is no necessity to pay interest, rent or profit. The entire national income is distributed as wages among the workers.

Historically, socialist or command economies were found in communist countries where collective goals were given priority over individual goals. Since the demise of communism in the late 1980s, the The essence number of command economies has fallen dramatically. Some of socialism lies in the elements of a command economy were also evident in a number of democratic nations led by socialist-inclined governments. absence of exploitation of any France and India both experimented with extensive government individuals in the society. planning and state ownership, although government planning has fallen into disfavour in both countries. has fallen into disfavour in both countries.

While the objective of a command economy is to mobilise economic resources for the public good, the opposite seems to have occurred. In a socialist economy, state owned enterprises have little

incentives to control costs and be efficient, because they cannot go out of business. Also the abolition of private ownership means there is no incentive for individuals to look for better ways to serve consumer needs; hence dynamism and innovation are absent from command economies. Instead of growing and becoming more prosperous, such economies tend to be characterised by stagnation.

‘Socialism is an economic organisation of society in which the material means of production are owned by the whole community and operated by organs representative and responsible to the community according to a general economic plan, all members of community being entitled to benefit from the results of such socialised production on the basis of equal rights

Characteristics of Socialism

Following are the characteristics of socialism:

  1. Government Ownership. The major means of production are either owned by the government or their use is controlled by the government. The government directs and regulates investment allocation and production pattern in accordance with national priorities.
  2. Distribution of Income: Socialist system aims at an equitable distribution of income. But this does not refer to perfect equity. Wage differentials are there, depending on the nature and requirements of the job.
  3. Restriction on Occupation: The freedom to choose any occupation is absent or restricted. Individuals are restricted to choose the occupation he is qualified for.
  4. Central Authority: Central authorities like the central planning agency are there to formulate the national plan for development and to direct resource mobilisation, allocation and investment to achieve the plan targets. Socialist economies are also called command economies or planned economies for the same reason.
  5. Restriction on Consumption: No consumer sovereignty is there because the state decides what may be made available to consumers, unlike the market economies where the consumers have the freedom to choose from a wide variety.
  6. Social Welfare: A socialist economy has a welfare motive in contrast to the profit motive of market economy.
  7. Peaceful and Democratic Evaluation Socialism, as distinct from communism, often advocates the peaceful and gradual extension of government ownership-revolution by ballet rather than bullet.
  8. Absence of Competition: Since the state owns all the major means of production, there is no competition between the different production units. These units are made to supplement each other.
  9. Equality of Opportunity: Every member of the society is given equal opportunity to rise in life. Education and training facilities are made available to all. The state provides health care and educational facilities to those who cannot afford these.
  10. Classless Society: Socialism is based on a classless society. There are no classes of capitalists and labour due to the absence of the institution of private property.

Ques.11. How capitalism is different from socialism? Explain with an example.

Ans. Differences between Capitalism and Socialism: The following are the major differences between capitalism and socialism:

  1. The economic system, in which the trade and industry are owned and controlled by private individuals is known as capitalism. Socialism, on the other hand, is also an economic system, where the economic activities are owned and regulated by the state itself.
  2. The basis of capitalism is the principle of individual rights, whereas socialism is based on the principle of equality..
  3. Capitalism encourages innovation and individual goals while socialism promotes equality and fairness among society.
  4. In the socialist economy, the resources are state-owned but in the case of the capitalist

economy, the means of production are privately owned.

  1. In capitalism, the prices are determined by the market forces and therefore, the firms can

exercise monopoly power, by charging higher prices, Conversely, in socialism government

decides the rates of any article which leads to shortages or surfeit.

  1. In capitalism, the competition between firms is very close whereas in socialism, there is no or marginal competition because the government controls the market.
  2. In capitalism, there is a large gap between rich class and poor class because of unequal distribution of wealth as opposed to socialism where there is no such gap because of equal distribution of income.
  3. In capitalism, every individual works for his own capital accumulation, but in socialism, the wealth is shared by all the people equally.
  4. In capitalism, every person has the right to freedom of religion which also exists in socialism but socialism gives more emphasis on secularism.
  5. In capitalism, the efficiency is higher as compared to socialism because of the profit

incentive that encourages the firm to produce such products that are highly demanded by the customers while in a socialist economy, there is a lack of motivation to earn money,

which leads to inefficiency.

  1. In capitalism, there is no or marginal government interference which is just opposite in the case of socialism.

Thus, capitalism and socialism are different political, economic and social systems in use by countries around the world. The United States, for instance, is usually considered a prime example of a capitalist country, Sweden is often considered a strong example of a socialist society. Sweden is not socialist, however, in the true sense of the word. In practice, most countries have mixed economies with economic elements of both capitalism and socialism.

MBA 1st Year Economic Political Legal Environment Short Question Model Peper

Ques.12. Define mixed economy. What are its main features and types? 

Or Explain the concept of ‘Mixed economy’.

Or Explain the concept of mixed economy. Do you think our country has benefitted by following the mixed economic system? Support your answer with suitable examples. 

Ans. Mixed Economy: It is a golden mixture of capitalism and socialism. Under this system, there is

freedom of economic activities and government interference for the social welfare. Hence, it is a blend of both the economies. The concept of mixed economy is of recent origin.

The developing countries like India have adopted a mixed economy to accelerate the pace of economic development. Even the developed countries like UK, USA, etc. have also adopted ‘Mixed capitalist system

“Mixed economy is that economy in which both public and private sectors cooperate!

‘Mixed economy is that economy in which both government and private individuals exercise economic control’

-Murat Main Features of Mixed Economy

Mixed economy has following main features:

  1. Co-existence of Private and Public Sectors: Under this system, there is co-existence of public and private sectors. In public sector, industries like defiance, power, energy, basic industries, etc. are set up. On the other hand, in private sector all the consumer goods industries, agriculture, small-scale industries are developed. The government encourages both the sectors to develop simultaneously.
  2. Personal Freedom: Under mixed economy, there is full freedom of choice of occupation, although consumer does not get complete liberty but at the same time government can regulate prices in public interest through public distribution system
  3. Private Property is Allowed: In mixed economy, private property is allowed. However, here it must be remembered that there must be equal distribution of wealth and income. It must be ensured that the profit and property may not concentrate in a few pockets.
  4. Economic Planning: In a mixed economy, government always tries to promote economic development of the country. For this purpose, economic planning is adopted. Thus, economic planning is very essential under this system.
  5. Price Mechanism and Controlled Price: Under this system, price mechanism and regulated price operate simultaneously. In consumer goods industries, price mechanism is generally followed. However, at the time of big shortages or during national emergencies, prices are controlled and public distribution system has to be made effective.
  6. Profit Motive and Social Welfare: In mixed economy system, there are both profit motives like capitalism and social welfare as in socialist economy.
  7. Check on Economic Inequalities: In this system, government takes several measures to reduce the gap between rich and poor through progressive taxation on income and wealth. The subsidies are given to the poor people and also job opportunities are provided to them. Other steps like concessions, old age pension, free medical facilities and free education are also taken to improve the standard of poor people. Hence, all these help to reduce economic inequalities.
  8. Control of Monopoly Power: Under this system, government takes huge initiatives to control monopoly practices among the private entrepreneurs through effective legislative measures. Besides, government can also take over these services in the public interest.

Types of Mixed Economy

The mixed economy may be classified into two categories:

  1. Capitalistic Mixed Economy: In this type of economy, ownership of various factors of production remains under private control. Government does not interfere in any manner. The main responsibility of the government in this system is to ensure rapid economic growth without allowing concentration of economic power in a few hands.
  2. Socialistic Mixed Economy: Under this system, means of production are in the hands of state. The forces of demand and supply are used for basic economic decisions. However, whenever and wherever demand is necessary, government takes action so that basic idea of economic growth is not hampered.

However, this system is again sub-divided into two parts:

  1. Liberal Socialistic Mixed Economy: Under this system, the government interferes to bring about timely changes in market forces so that the pace of rapid economic growth remains uninterrupted.
  2. Centralised Socialistic Mixed Economy: In this economy, major decisions are taken by central agency according to the needs of the economy,

India is the best example of mixed economy.

(a) In India, we have both public and private banks. 

(b) The awesome thing about the mixed economy is that capitalism and socialism works


(c) Consider the railway system of India. Actually what happens is that the trains are owned by

the government but the railway stations are owned by the capitalist also.

(d) Take the example of airline sector, we have both public and private airlines. We can see that

Air India works well with the other capitalist company,

(e) India has a problem with its distribution of income and access to free markets, since many

of its residents are poor and have no way out of poverty. Most residents of India are hindus

and although they either worship Shiva or Vishnu, India still struggles with the caste sys ranking humans in inherited socioeconomic classes. For this reason, a person is either born rich or born poor and has no way to reverse that status going forward. With the idea u much of its population is considered ‘untouchable’ dalit or unclean, it should be difficult for the country as a whole to prosper. But in fact, the rich get richer despite these internal issues. In the early part of the century, the caste system hampered India’s development, but today, lower castes are demanding to be sified and given full paying jobs which allow them to qualify for benefits, privileges and the chance at a higher quality life which was not possible in years past.

(f) Although many Indian residents are still illiterate (though Indian literacy rates

improving), they are realising that it is possible to pull themselves out of poverty by any means possible. At the upper levels of education, India excels and produces very high qualified graduates who go on to study and work in other countries around the world.

Ques.13. Define private sector. What are Its features?

Ans. Private Sector: It is the division of economy which is managed by private groups or individuals with the prime objective of profit earning without any direct interference of government. Different types of private companies available in the market are sole traders, partnership firms, joint stock companies, etc

Features of Private Sector: The various features of private sector are as follows:

  1. Private Ownership and Control: Private sector is being owned and controlled by private entrepreneurs who individually or collectively handle a private company
  2. Private Finance: In private sector, the required finance is procured privately. The owners of the companies manage the finance for their respective business ventures. Also, different loans can be availed by private companies for their short as well as long-term requirements,
  3. Profit Oriented: Private sector companies are profit oriented with the main objective of profit maximisation. Profit is the factor that stimulates entrepreneurs to go for private company.
  4. Independent Management Private sector companies are featured by independent management. Owners have the responsibilities of overall management of private companies. They are directly or indirectly involved in the management of private companies.
  5. No role of Government: Private sector companies are not influenced by government. The state or central governments do not have any role in the control and ownership of private companies.
  6. Number of Members: Private sector companies are featured by a pre-defined number of minimum and maximum members. Minimum limit is of 2 members and the maximum limit is not more than 50 members.
  7. Capital: There is no limitation of minimum and maximum paid-up capital for a private company The owners can manage as much funds as possible required for the smooth operations of the company.

Ques.14. Explain the difference between public sector and private sector.

 Ans.       Difference between Public Sector and Private Sector

S. No. Basis of difference Public sector Private sector




















Public enterprise








Political interference


Decision –making




Response time




Customer satisfaction

Public enterprise cannot be held responsible for any lapse.

One account of government ownership they have easy access to credit a budgetary support irrespective of their performance.



Political interference is unavoidable in public corporations.

Many public sector enterprises remain headless for long periods of time. This causes confusion and delay in decision-marking

In public enterprises, the concept of response time is almost totally absent.


Caring for the customer is generally not a priority with public sector enterprises.

The areas of responsibility in the private sector are clearly defined.

Private sector firms are subject to capital market disciplines and scrutiny by financial experts and ability to raise funds in the capital market is crucially dependent on performance.

Political interference is avoidable.



Such a situation does not exist in private sector.



In private sector response time is very quick to fast changing situation.



Private sector enterprises since only such satisfaction can ensure mire widespread a repeat buying.


Ques.15. Define Joint sector. Explain Its features and problems.

Ans. Joint Sector: The joint sector represents a new ideology of economic management geared to sub serve a new economic system. The term is applied to an undertaking only when both its ownership and control are effectively shared between public sector agencies on the one hand and a private group on the other. The basic idea underlying the concept is combination of joint ownership, joint control and professional management.

According to Dutt Committee (Industrial Licensing Policy Inquiry Committee), the joint sector includes units in which both public and private investments have taken place and where the state takes an active part in direction and control.

According to JRD Tata, a joint sector enterprise is intended to form a partnership between the private sector and the govt. in which the govt. participation of the capital will not be less than 26 p.c., the routine management will be normally in the hands of the private sector partner and control and supervision will be duly exercised by a governing board on which government is adequately represented.

The Tata concept of joint sector is heavily private sector oriented, whereas the Dutt Committee concept of the joint sector was public sector oriented and aimed at curbing concentration of industries in the private sector.

Features of Joint Sector: Joint sector enterprises may be brought into being by any of the following ways:

  1. The central govt. and private entrepreneurs may jointly set up new enterprises. Sometimes the central govt. and one or more state govts., together may set up enterprises in partnership with the private sector.
  2. The state govt. or their industrial development corporations may set up new companies jointly with private partners, involving equity participation by both the partners.
  3. Public financial institutions may, through equity participation or conversion of loans or

debentures into equity, transform enterprises promoted by private entrepreneurs into joint sector companies.

  1. The existing private enterprises may be transformed into joint sector enterprises by the govt. or govt. companies acquiring a part of the equity or converting debt into equity or by contributing to an increase in the share capital.
  2. The existing public sector companies may be transformed into joint sector enterprises through the sale of some equity shares to private entrepreneurs or the general public.

Problems of the Joint Sector: Apart from other problems common to all Industrial activities, three specific problems to the joint sector have been identified:

  1. While in principle the concept appears acceptable, guidelines in terms of the roles of the govt. and private partners in managing and controlling joint sector enterprises still remain to be spelt out. From the point of view of private investors, uncertainty about their role in management and control has been a major inhibiting factor.
  2. The rationale for setting up joint sector projects was mainly for developing backward area reducing concentration of economic power and to accelerate industrial development. But in reality, often the purpose for which the joint sector projects were set up was unrelated to these basic objectives. The joint sector enabled private entrepreneurs to promote large projects with less of equity participation and it also enabled them to obtain certain concessions which were denied to projects in the private sector.
  3. The interfacing between a purely govt, agency whose commitment and accountability

are vastly different and a private group whose main motivation is likely to be commercial, profitability is not always smooth.

Economic Political Legal Environment Short

Ques.16. Explain the features of Competition Act, 2002. Also, explain its objectives.

Or Write a note on Competition Act, 2002 with its major areas. 

Ans. Features of Competition Act, 2002: The Competition Act, 2002 was passed by the Parliament in the year 2002, to which the President accorded assent in January, 2003. It was subsequently amended by the Competition (Amendment) Act, 2007.

In accordance with the provisions of the Amendments Act, the competition commission of India is now fully functional with a chairperson and six members. The provisions of the Competition Act relating to anti-competitive agreements and abuse of dominant position were notified on May 20, 2009.

To prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interest of the consumers and to ensure freedom of trade carried on by other participants in markets in India are some of the features of this Act.

Objectives of Competition Act, 2002

The various objectives of this Act include:

  1. Promoting economic efficiency in both static and dynamic sense.
  2. Protecting consumers from the undue exercise of the market power.
  3. Facilitating economic liberalisation, including privatisation, deregulation and reduction of external trade barriers.
  4. Preserving and promoting the sound development of a market economy.
  5. Ensuring fairness and equity in market place transactions.
  6. Protecting the public interest including in some cases considerations relating to industrial competitiveness and employment.
  7. Protecting opportunities for small and the medium business.
  8. Ensure freedom of trade carried on by other participants in markets in India.
  9. Promote and sustain competition.
  10. Eliminate practices having adverse effects on competition.

Major Areas: Competition Act, 2002 covers the following areas in line with prevailing pattern of modern competition laws:

  1. Anti-competitive Agreements: No enterprise can enter into agreement in respect of production supply, distribution, storage, acquisition or control of goods or provision of services.
  2. Abuse of Dominant Position: No enterprise shall abuse its dominant position which occurs when an enterprise directly or indirectly imposes unfair or discriminatory purchase of selling prices on condition.
  3. Regulation Combination: Any person who proposes to enter into an agreement or combination shall give a notice to the commission in the prescribed form accepting a proposal of merger.
  4. Advocating Competition Policy: It is an instrument to achieve efficient allocation of resources, etc.

Ques.17. What are the main objectives and scope of FEMA Act?

Ans. Objectives of FEMA Act: The objective is to consolidate and amend FERA in order to promote foreign trade while promoting the country’s foreign exchange market. The main objectives are:

  1. To facilitate external trade and payments.
  2. To promote the orderly development and maintenance of foreign exchange market.

Scope of FEMA Act: The scope of FEMA Act includes the following points:

  1. The Act extends to the whole of India.
  2. It shall apply to all branches, offices and agencies outside India owned or controlled by a

person resident in India and also to any contravention there under committed outside India

by any person to whom this Act applies.

  1. FEMA, 1999 as also the rules, notifications and orders issued by the Government of India and Reserve Bank of India under the Act, form the statutory basis of Foreign Exchange Management in India.
  2. The Act has received the assent of President of India on 29th December, 1999 and has come

into force with effect from 1st June, 2000. 

Ques.18. Explain some of the features of FEMA, 1999.

Or Discuss the salient features of FEMA.

Or Briefly highlight the theme of FEMA.

Ans. FEMA, 1999 has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA came into force on 1st day of June, 2000. Its main features are:

  1. Restrictions are imposed on people living in India who carry out transactions in foreign

exchange, foreign security or who owns or holds immovable property abroad.

  1. Activities, such as payments made to any person outside India or receipts from them along

with the deals in foreign exchange and foreign security is restricted.

  1. Deals in foreign exchange under the current account by an authorised person can be restricted by the central govt. based on public interest.
  2. Although selling or drawing of foreign exchange is done through an authorised person, RBI is empowered by this act to subject the capital account transactions to a number of restrictions.
  3. Exporters are needed to furnish their export details to RBI. To ensure that the transactions are carried out properly, RBI may ask the exporters to comply to its necessary requirements.
  4. Without general or specific permission of management, the act restricts the transactions

involving foreign exchange or foreign security and payments from outside the country to

India—the transactions should be made only through an authorised person.

  1. People living in India will be permitted to carry out transactions in foreign exchange, foreign

security or to own or hold immovable property ahead.

Ques.19. Explain the important provisions under FEMA which have significant implications for an importer. 

Ans. The important provisions under FEMA are:

  1. Dealing in Foreign Exchange: According to the rules, no person shall:

(a) Deal in or transfer any foreign exchange or foreign security to any person not being an authorised person.

(b) Make any payment to or for the credit of any person residing outside India in any manner.

(C) Receive otherwise through an authorised person any payment by order or on behalf of any person residing outside India in any manner.

  1. Holding of Foreign Exchange: Save as otherwise provided in this act no person residing in India shall acquire,, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.
  2. Current Account Transactions: Any person may sell on authorised person if such sale or draw is a current account transaction.

Ques.20. ‘Money policy plays a key role in controlling Inflation. Des policy in India.

Or Describe the objectives of monetary policy in India. 

Ans. Objectives of Monetary Policy in India: Monetary policy decides the money supply in a country which has far reaching impact on the level of income, employment and prices in the econ thus, playing a key role in controlling inflation. It refers to measures designed to influence the cost availability of money for the purpose of influencing the working of the economy

The monetary policy is designed to influence the supply of money, cost of money and rate of inter and the availability of money for achieving specific objectives. There can be the following objectives a monetary policy:

  1. Rapid Economic Growth: The monetary policy can influence economic growth by controlling real interest rate and its impact on investment.
  2. Price Stability: Monetary policy tries to keep the money stable thereby reducing income and wealth inequalities.
  3. Exchange Rate Stability: The policy aims at maintaining the relative stability in the exchange rate by altering the foreign exchange reserves.
  4. Balance of Payments Equilibrium: RBI through its monetary policy tries to maintain equilibrium in BOP. It regulates the money supply in the market through effective monetary policy.
  5. Full Employment: It stands for a situation in which everybody who wants job gets job and in this, monetary policy can be used.
  6. Neutrality of Money: Monetary policy should regulate the supply of money and hence neutralise the effect of money expansion.

Ques.21. Examine the impact of monetary policy on stock markets and money supply. 

Ans. Impact of Monetary Policy: The impacts of monetary policy on stock markets and money supply are as given below:

  1. Interest Rates: Monetary policy directly impacts interest rates. The central bank raises or lowers the prime rate or interest rate. The central bank loans money to other banks as a tool to impact the economy.
  2. Control Inflation: The main goal is to control inflation or the value of currency through the changes in monetary policy tools.
  3. Business Cycles: Business is cyclic in nature and goes through periods of expansion and contraction. So, monetary policy aims to minimise the speed and severity of these fluctuations to maintain steady growth or decrease a negative contraction.
  4. Spending: Monetary policy impacts the amount of money spent in an economy. When interest rates are decreased, more money is spent in an economy.
  5. Employment: It relates to the health of an economy. Changes in monetary policy tends to keep the unemployment low.

Ques.22. Define the main tools for monetary policy.

Ans. Monetary policy is declared by the Central Bank of any country. Monetary policy comprises all the monetary measures applied by the monetary authority with a view to produce a deliberate impact on the volume of the money.

Money here can broadly be divided into four categories:

  1. Mi (Narrow money) = Currency with the public (currency notes, coins) + demand deposits with bank (current and savings A/C) + other deposits  with RBI.

2, M2= M1 + Savings deposit with the post office.

  1. M3 (Broad money) =M,+ other deposits with banks.
  2. MA=M3 + other deposits with post office.

Tools for Monetary Policy: The main tools for monetary policy are as follows:

  1. Monetary Base: Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in an economy. A Central Bank can use the open market operations to change the monetary base. The Central Bank can buy and sell bonds in exchange of hard money. When the Central Bank disburses or collects this hard money, it alters the amount of money in an economy.
  2. Reserve Requirements: The monetary authority exerts regulating control over banks. Monetary policy can be implemented by changing the proportion of the total assets as needed by the bank to reserve it with the Central Bank, Banks only maintain a small proportion of their assets as cash available for immediate withdrawal. The rest of incomes are invested in non-liquid assets like mortgage and loans.
  3. Discount Window Lending: Many Central Banks have the authority to lend funds to the financial institutions within their country. The lended funds represented an expansion in the monetary base.
  4. Interest Rates: Monetary authority in different nations has differing levels of control over economy-wide interest rates. This rate has effect on the other market interest rates, but there is no direct definite relationship. By altering the interest rate under its control, a monetary authority affects the money supply.
  5. Bank Rate Policy: The bank rate is also known as the discount rate. It is the oldest instrument of monetary policy. The bank rate is the rate at which the Central Bank re-discounts the eligible bills. Today, the term bank rate is used in  broader sense and refers to the minimum rate at which the Central Bank provides financial accommodation to commercial banks in the discharge of its function as the lender to the last resort. The importance of bank rate lies in the fact that it acts as a pace-setter to all other rates of interests.
  6. Open Market Operations: Open market operations broadly refer to the purchase and sale of the variety of assets by the Central Bank, such as foreign exchange, gold, government securities and even company shares.
  7. Variable Cash Reserve Ratio (CRR): Commercial banks in every country have to keep a certain amount of total deposits with the Central Bank and can lend the remaining into other investment projects. So, if the CRR is increased, the money supply will also be decreased and vice-versa.

Q.23. Explain the concept of fiscal policy.

Or Write a note on fiscal policy and its objectives. 

Ans. Concept of Fiscal Policy: Fiscal policy is a part of economic policy of the government which is related to government income and expenditure. It includes public expenditure policy, taxation policy, public debt policy and deficit financing.

It is aimed at achieving certain objectives like rapid economic development, reduction in economic inequalities, promoting capital formation. In short, fiscal policy is the policy that is concerned with the management of government’s taxation system, public expenditure and public debt, with a view to achieve definite objectives.

objectives of Fiscal policy in India are as follows: 

  1. To reduce regional disparities.
  2. To remove poverty and unemployment.
  3. To reduce economic inequalities,
  4. To mobilise resources for rapid economic development of the country.
  5. To increase the rate of investment in the economy so as to promote capital formation.
  6. To increase the rate of saving in the country so that sufficient financial resources can be.

obtained from within the economy.

  1. To have effective allocation of financial resources.
  2. To control the deficit in balance of payments.
  3. To ensure balanced regional development.
  4. To have price stability and inflation control.
  5. To increase capital formation rate.
  6. To give importance to infrastructural development of the country.

Fiscal policy of the government is reflected in its annual budget. To have its knowledge, it is essential to study its different techniques that can help in achieving full employment:

  1. Public Expenditure Policy: Public expenditure influences the economic activities of a count. very much. This may be made by development of state enterprises, support to  private sector and social welfare.
  2. Taxation Policy: It is one of the powerful instruments that affects changes in disposable income consumption and investment. It relates to new amendments in direct and indirect tax.
  3. Public Debt Policy: This policy can be used to increase the treasure of government through internal or external sources.
  4. Deficit Financing Policy: It is a serious issue in front of  government. Government should use it if there is no other source of government earnings.

Ques.24. Explain the problem of unemployment in underdeveloped economy. Discuss the role of fiscal policy in achieving full employment. Explain the limitations of fiscal policy.

Ans. Problems of Employment in Underdeveloped Economy and Role of Fiscal Policy: Full employment in an economy means a state where all the persons who have readiness to work at current rates of wages get work to do. In no case, it means absence or zero unemployment in the economy. Not all those seeking employment will be employed at any one time because, in a changing economy, some persons will always be between jobs and seeking new employment

In an underdeveloped economy, the problem of unemployment is slightly different from that in an advanced economy, i.e. in developed economies, it is oriented primarily to the necessity of maintaining full employment against cyclical depressions. On the other hand, in the underdeveloped economy, the problem has two dimensions, namely cyclical as well as disguised. The cyclical unemployment in the underdeveloped economy originates from external causes. Mostly the underdeveloped countries are export oriented as they export their primary products to advanced countries through full prices of primary goods exported by them to the developed countries. Thus, cyclical unemployment in the underdeveloped countries can be traced back to external factors.

In underdeveloped countries, disguised unemployment refers to a situation where too many people are engaged in agriculture on account of over-population and because of unavailability of sufficient employment opportunities, people migrate to land and generally more people than required are engaged in agriculture. In other words, if some people engaged in agriculture are withdrawn, this will not affect the agricultural production, which will remain as before. This is disguised unemployment To overcome the problem of disguised unemployment also, a policy of increased capital formation and planned economic development, through which it can diversify and modernise the economy, is required. Hence, the fiscal policy in an underdeveloped country should aim at increasing the rate of capital formation to deal with its unemployment problem in an effective manner.

In underdeveloped economies, fiscal policy alone cannot effect results and side by side monetary policy should also be combined with fiscal policy in inflationary as well as depression condition Only this combination and coordination between fiscal and monetary policy can give lasting results, as both are important instruments for securing economic stabilisation in country. Thus, a judicious combination of two policies are necessary to obtain ever lasting results.

To achieve the conditions of full employment, following measures have been suggested by J.M. Keynes

  1. Deficit Budgeting: The government should follow a policy of deficit budget in order to fight depression and unemployment, wherein expenditure of the government exceeds its revenue.
  2. Encouragement of Consumption and Investment: Taxation policy should encourage consumption and investment both. Indirect taxes should be reduced to encourage consumption and corporation tax and taxes on profits should be reduced to encourage investment.
  3. Launching Public Work Programmes. The expenditure of the government should be planned and directed towards financing public work programmes and providing social security measures.
  4. Public Debt Management: The policy should be directed for the achievement of full employment In this context, the government should follow a cheap money policy and try to borrow this money from those people with whom the funds are lying idle.
  5. Progressive Taxation: It is suggested that progressive taxation should be levied on saved income of the people rather than on income, which is to be spent.

Limitations of Fiscal Policy: The fiscal policy has the  following limitation:

  1. It is unable to adjust distribution of money flows.
  2. Time lags in diagnosing recessions and inflation and devising appropriate fiscal measures

bring operational limitations.

  1. Structural adjustments are hard to deal with fiscal policy.
  2. It is difficult to decide the magnitude of fiscal action and the optimum size of the budget.
  3. Efficiency of fiscal policy depends upon strict financial discipline on the part of government and its correct value judgement
  4. In democratic countries, fiscal policy changes in accordance with policy of political party coming to power, hence sometimes it suffers from instability.

Ques.25. Describe the role and function of RBI in India.

Ans. RBI is the apex monetary institution of India which is responsible for the regulation of currency, printing of bank notes and minting coins. It is also called as the central bank of the country. RBI was initially privately owned but since nationalisation in 1949, the Reserve Bank is owned by the govt. of India

The preamble of RBI is to regulate the issue of bank notes and keeping reserves with a view to securing monetary stability in India and to operate the currency and credit system of the country to its advantage.

A central board of directors govern all the affairs of Reserve Bank. The board is appointed by the govt. of India in keeping with the RBI Act. The members of RBI are appointed or nominated for a period of four years. The board constitutes full time governor and upto four deputy governors as the official directors and non-official directors nominated by government.

The four local boards are located in four regions of the country in Mumbai, Kolkata, Chennai and New Delhi. Each of the local board consists of five members each who are appointed by the central govt. for a term of four years.

Role and Functions of RBI: The role and functions of RBI includes:

  1. To formulate, implement and monitor the financial policies of India. It maintains the price stability and ensures adequate flow of credit to productive sectors.
  2. The RBI suggests parameters of banking operations for the country’s banking and financial system functions. The aim is to maintain public confidence in the system, protect the interest of depositors and provide cost-effective banking solutions to the public.
  3. The Reserve Bank promotes external trade and payment and orderly development and maintenance of foreign exchange market in India as per the Foreign Exchange Management Act, 1999.
  4. RBI issues currency and coins and exchanges or destroys the currency and coins that are

in circulation.

  1. RBI provides loans to the central and the state governments whenever they are in need. acts as a merchant banker.
  2. RBI regulates the cost of credit, amount of credit and the purpose of credit and hence prom the economic growth in the country,

Ques.26. Write a brief note on SEBI.

Or Explain the objectives of SEBI.

Ans. Securities and Exchange Board of India (SEBI): The SEBI stands for Securities Exchange Board of India, which is often in the news because of its supervisory and regulatory role over the functioning of stock exchanges spread throughout the country. The SEBI has been set up a statutory body under the SEBI Act, 1992 with a view: (1) to protect the interests of the investors securities (2) to promote the development of the securities market and (3) to regulate the functioning of the securities market.

The number of investors in securities in the country increased considerably during the 1980s. At the same time, several unfair practices were observed on the part of companies, brokers, merchant bankers, investment advisors, etc. In order to protect the interests of investors, the Central Government constituted the Securities and Exchange Board of India (SEBI) in April 1988 under the administrative control of the finance ministry. Later, it became a statutory body having perpetual succession and a common seal under the Securities and Exchange Board of India Act, 1992.

Objectives of SEBI: SEBI has been empowered to conduct inspection of stock exchanges by providing a fair, equitable and the growing market to investors. The main objectives of SEBI include:

  1. To protect the interest of investors in securities.
  2. To promote the development of the securities market.
  3. To regulate the securities market.
  4. To provide license to dealers and brokers.
  5. To control frauds in capital market.
  6. To diversify trading products and to register and regulate working of stock brokers.

Ques.27. Discuss the various functions of SEBI. 

Ans. Functions of SEBI: The main functions of the SEBI can be classified as follows:

  1. Protective Functions: The SEBI protects the interests of investors through its following activities:

(a) It checks ‘price rigging by prohibiting unfair practices in the securities market. It keeps a watch on the operators so that they may not inflate or depress the market price of securities.

(b) It checks fraudulent practices by the companies that are entering the market with fr issues of securities. For instance, it takes stern action against the directors of a company if the prospectus contains misleading statements so as to induce the purchase of securities by the investors

(c) It has prohibited Insider trading! It takes action against the insider promoters and directs the company who makes use of internal information to deal in company’s securities and thereby earn huge profits. The insiders often have privileged information, such as company’s proposal to issue bonus shares to the shareholders. They may use the unpublished information to purchase shares from the market at lower prices and later sell them at higher prices. The SEBI has power to investigate the cases of Insider trading and impose penalties on the defaulters.

(d) The SEBI has undertaken several steps (such as issue of booklets and training of investors) to educate the investors. In fact, investors’ education is an important function of the SEBI.

  1. Developmental Functions: The SEBI performs the following functions for the development of capital market:

(a) It undertakes programmes for the training of intermediaries in the securities market.

(b) It has permitted internet trading through the registered stock brokers.

(c) It has made optional the underwriting of new issues.

(d) It educates the investors by providing necessary information about the working of the

securities market

  1. Regulatory Functions: The SEBI plays the role of a regulator by performing the following functions:

(a) It regulates business in the securities market by enforcing its rules and regulations.

(b) It registers and regulates the working of stock broker, sub-brokers, shares transfer agents,

bankers to issue, trustees of trust deeds, registrars to issue, merchant bankers, underwriters, portfolio managers, investment advisors and such other intermediaries who may be associated

with the securities market in any manner.

(c) It registers and regulates the working of collective investment schemes including mutual funds.

(d) It promotes and regulates self-regulatory organisations.

(e) It regulates substitutional acquisition of shares and takeover of companies.

It takes steps to check fraudulent and unfair trade practices prevailing in the securities market. It also checks insider trading in securities.

(g) It Undertakes inspection, conduct inquiries and audit of the stock exchanges and intermediaries in the securities market.

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