Lecture Date: 06 Aug 05 Subject: Business Environment ... · Business Environment By Francis...

Mgmt study material created/ compiled by - Commander RK Singh [email protected]

of 79 - Business Environment

Jamnalal Bajaj Institute of Mgmt Studies

Lecture Date: 06 Aug 05

Subject: Business Environment

Professor: Dr VP Raja

Recommended Books

1. Business Environment By Suresh Bedi

Excel Books

2. Business Environment By Raj Agrawal (Second Edition)

Excel Books

3. Business Environment By Francis Cherunilam (15th

Edition 2004)

Himalaya Publishing House

Availability – Banarasidas & Sons, Near Mahalaxmi Temple, Warden Road, Sterling Book

Depot, Near VT, Strand Book Depot, Fort

It was suggested by the professor that it is important to read all the three books as the

subject matter covered in each book is entirely different despite the title being same.

In addition to above books, a list of 15 books was given. Each student is required to choose

one book out of 15 and submit an essay or a book review, (approximately 12-15 typed

pages long in A-4 size paper), based on an in-depth study of the book, on or before 22 Oct

05.

Study of this subject is basically sensitisation to the external environment affecting the

business. In SWOT analysis (Strength, Weaknesses, Opportunities and Threats) Strength

and Weaknesses are internal to the business, while Opportunities and Threats belong to the

external environment of the business (Business Environment).

The business in the yester years was much simpler. As the world is shrinking in distances,

the complexities are growing in exponential fashion. Events in a distant region of the world

affect the business in our domain. Gulf war affected the Indian Economy despite no direct

link with it. Bird Flue virus attack in China and other countries affected the poultry

business in India both ways. First chicken demand/prices plummeted due to local

population’s fear about chicken and then it sent the overseas demand for Indian chicken

soaring when it was considered a safe source.

Thus, knowledge of global events and assessment of their impact on our business can alert

us to be able to take advantage of the opportunities or take corrective action about

impending threats.




The above diagram indicates as to how an organization is nestled in a sector, which

in turn is affected by the domestic economy which is influenced by the global economy.

Global Economy is itself dictated to a large extent by the Global Geopolitical Environment.

Take for instance following scenario.

America’s meddling in the Iraq has caused the crude oil prices to reach $ 62 per

barrel from the three year old level of $ 22 a barrel. The oil prices are threatening to touch

$ 100 a barrel. India imports almost two thirds of its oil requirement. Oil import bill in

2003-04 at @ $29 a barrel was Rs 93,000 crores, which means that now the bill would

touch Rs 2 lakh crores. Govt can not pass the entire burden to the consumers and would

have to subsidise part of the increased costs which would increase its fiscal deficit. Increase

in fiscal deficit would lead to higher inflation and interest rates. Higher the interest rates

lesser the investment into new projects due to less number of projects passing the IRR test.

Less investment means less job opportunities and increase in joblessness among the youth.

This would result in increase in crime as people would adopt any means to earn a living.

Thus, in medium term, Mr Bush’s dislike of Saddam’s face can lead to increase in crimes

in our country.

Thus, for success in business, it is important for today’s managers and

entrepreneurs to keep abreast with day to day developments in business environment not

only in the immediate neighbourhood but in the whole globe.

Org




Various elements of the business environment are as follows: -

(a) Internal Environment

(b) Domestic macroeconomic environment

(i) Economic System

(aa) Market Economy

(ab) Command Economy

(ac) Mixed Economy

(ad) Socialist Market Economy

(ii) Growth and Distribution Environment

(iii) Macroeconomic stability

(iv) Economic policy

(aa) Monetary Policy

(ab) Fiscal Policy

(ac) Industrial Policy

(ad) Trade Policy

(v) Competitive Environment

(vi) Non Economic Environment

(c) Sectoral Environment

(d) External Public Relations Environment

(i) Suppliers

(ii) Customers

(iii) Distribution Channel Members

(iv) Rivals

(v) Other Entities

(e) International Environment

(f) International Geo Political Environment





Economic Environment Let us examine the economic environment prevailing in the country since independence,

i.e. since 1947.

In 1947, Indian society was a predominantly agrarian society. 90% of population lived in

villages. Bombay, Calcutta and Ahmedabad were the only industrialized cities with

Calcutta being the most industrialized city. Calcutta had ship building and jute industry

while Bombay and Admedabad had cotton textile mills.

Indians were a heavily exploited lot in those days. There were various sources of

exploitation. The main were:

(a) Zamindari System

(b) Money Lenders

(a) Zamindari System was order of the day in those days. “Zamindari” was a

system whereby the king used to hand over the lordship of an area (a few

villages) to an influential person on a fixed yearly rent. There after, how that

person collected the money (Lagaan) from the villagers under his command was

no concern of the king. This became a big source of exploitation of the poor

Indian villagers. The British too had adopted this system from the erstwhile

kings and it continued for some time even after independence.

(b) Money lenders were other exploiters. There were professional money lenders

like ‘Pathans’ and village traders who use to lend money against gold, silver,

property, etc, at exorbitant rate of interest and usurp those assets in due course.

Then there were land lords who also use to lend money to the peasants and

convert them into bonded labours. The interest rates were often as high as 345%

per annum.

India, in those times, had very few industries. Indian Business Class was in deed a trading

class. Most of the industrialists were first a trader and then an industrialist. The cotton

textile mill owners use to earn more money by trading in cotton than converting cotton into

fabric. They use to finance the farmers for cotton crop and buy back entire crop in lieu at

dirt cheap rates. There after, they use to hoard the cotton and sell it at a premium later in

the year to the handloom owners.

Bengal Presidency was the area of today’s West Bengal, Bangladesh, Bihar, Jharkhand and

Orissa. In the post independence era, land reforms were instituted. CPM Government in

West Bengal carried out the reforms admirably well and as a result Bengal is the most

egalitarian society today. This land reform has also been the source of support for the party

till date. In addition, brutal force used by Mr Siddartha Shankar Ray’s congress govt in




order to suppress the Naxalite Movement in Bengal’s colleges, caused severe alienation of

people from the congress party.

In contrast to successful land reforms of Bengal, land reforms in Bihar and Orrisa were not

executed with same zeal and sincerity and therefore, did not succeed. As a result, populace

in both the states are even today of highly feudal mindset. The feudal power in Bihar kept

changing hands from one caste group to other. It was Bramhins during independence,

Thakurs some time later, and now it is Yadavs. However, common man’s exploitation

never stopped irrespective of who the feudal lord was.

In Maharashtra, land reforms were well executed in the Konkan (Western Maharashtra)

region due to efficient performance of Peasants and Workers Party. However, it was poorly

done in Central and Eastern Maharashtra. It is now reflected in economic disparity in the

two regions.

Central Govt abolished the bonded labour system after the Independence. However, it was

also not well implemented and it continues in some pockets of the country even today.

Indian Economy was poor since there was lot of Disguised Unemployment. Disguised

Unemployment means employing 25 people to do a job which can be as efficiently done by

10 people. The marginal productivity of these 15 extra people is NIL. However, on face of

it, they are employed doing some job. This is precisely what was happening in Indian Farm

Sector. A land which could be cultivated as efficiently by one brother, had 2 or 3 brothers

and more employed. Prime cause of this disguised unemployment was non availability of

avenues for employment. Family sizes were multiplying, mechanised farm equipment were

reducing manpower requirements but land holdings of families were static or shrinking.

There were not many avenues of employment available in villages.

An economy grows when the productivity of its people grows.

Prime Minister Nehru was quick to realize this Disguised Unemployment and felt that

“Industrialization” was the key to eradicate it and improve productivity. While most of his

contemporary leaders agreed with him, Mahatma Gandhi was of a slightly contrarian view.

He believed in self sufficiency of Indian Villages not through mechanised methods but

through “Charkha”.

Pt. Nehru’s economic outlook was influenced by two historical events during his lifetime:

1. Bolshevik or Russian Revolution of 1917 which was headed by Mr Lenin.

In the years preceding 1917, working conditions in the industry in Russia

were far worse than on the agriculture field. From 1917 to 1923, it was total

anarchy and chaos there. However, order was restored by Mr Stalin (St

Petersburg, capital of Russia, was renamed as Stalingrad in his honour, but

was reverted back to original name recently). He introduced the “5 Year

Plan” concept in Russia for its development. He built up a huge Military




Industrial Complex. However, he also took up production of consumer

goods for manufacture by the Public Sector Plants.

2. Pt Nehru had studied first in Harrods and then in Oxford university. This is

where he came under the influence of “Fabian Thinkers” Like George

Bernard Shaw. These people were later called the socialists. Robert Owen

had started writing about Sweat Shop (Industries) causing a upheaval in the

British society.

Pt Nehru married the politics of England with the economics of Russia and created the

Mixed Economy. While the state took up huge investments on Basic & Heavy industries

and infrastructure, consumer goods industries were left to the private sector. He sought help

of prominent industrialists like JRD Tata to help establish light and consumer goods

industries.

Also, in line with Russian model, he set up a Planning Commission in 1952 for drawing

Five Year Plans. First Five year Plan period is considered to be from 1952 to 1957 which

basically consisted of completing the ongoing projects started in the pre-independence era.

2nd

Five Year Plan – 1957 to 1962, was truly a well conceived Five Year Plan. Even though

the people who planned, as well as those who executed it, did not have much formal

training either in planning or management, it is the best planned and executed Plan of the

10 Five Year Plans till date. Their lack of knowledge and skills were compensated more

than adequately by the hard work, commitment and sincerity. 10th

Five Year Plan is

currently in progress from 2002 -07.

While deciding on the economic model to be adopted for the country, Pt Nehru sought help

of Professor PC Mahalonobis, who was Director, Industrial Statistical Institute, Calcutta.

He is credited with converting Nehru’s idea into a proper economic model (by converting

Harrods- Dammar model).

His economic model, later called as Nehru – Mahalonobis model, was based on following

premises:

(a) Investment in Capital Goods Industry is primary requirement as those goods

would then be used by small entrepreneurs for starting business. Private

enterprises would be averse to invest in such industries.

(b) But such industries would require some basic raw material, like iron, copper,

aluminium, etc which are even more capital intensive to expect private sector to

invest.

(c) Allow private entrepreneurs to produce consumer goods.

Above model became the basis for the Industrial Policy Resolution of 1956.

During the implementation of the model, various hurdles were faced by the Govt.




(a) Required technology for Heavy and Basic industries was not available. –

Thus, Govt sought foreign help for transfer of technology.

(b) Technical manpower not available. - While technology was not there, there

was equal dearth of technical man power also - Managers, supervisors,

skilled labour, which were hard to import. So, a three tier technical training

set up was planned.

(i) Tier I – Engineering Colleges (for Techno Managers) including 05

IITs starting with IIT Kharagpur in 1957.

(ii) Tier II – Polytechnics (for Supervisors)

(iii) Tier III – Industrial Training Institutes (ITIs) for training skilled

machine operators.

Now we will see how country went through the learning experience and had to constantly

alter its investment and development priorities.

Years 1962 to 1972 were calamitous for our country. We fought 3 wars, in 1962 against

China, and in 1965 and 1972 against Pakistan. Chinese War was a total surprise to India as

the country enjoyed very warm relations with China and Chinese Premier Mr Chou En Li

had visited India just a few years back. ‘Hindi Chini Bhai Bhai’ slogans used to fill the air.

China had by then annexed Tibet and was laying claim for Arunachal Pradesh. There were

also problem of delineation of McMohan Line. But despite above simmering problems with

China, country had not given adequate priority to defence of the country in its quest for

quick economic development. The soldiers did not have even proper footwear for mountain

and high altitude (snow clad region) warfare and were sent to those freezing heights in

Nov/Dec months in summer uniforms. Secondly, all the Indian forces were concentrated on

Western Front along Pakistan border. India did not have enough air crafts to be able to

quickly transport soldiers and armament to Eastern Sector. America then helped India with

C-140 transport aircrafts and pilots for transportation of troops. But this help came as a

result of their paranoid fears of expansionist communism expanding its cover than any love

for India.

But we lost the war badly. Chinese had come up to Tejpur but declared unilateral ceasefire

on 20 Dec 1962 and withdrew.

War in 1962 taught us that Economic Development without National Security is

meaningless since decades of economic development can be lost in a single war. India had

to perforce divert those scarce economic resources from Industrial Development to

National Security. There were tremendous psychological and emotional cost too. Nehru did

not survive his monumental diplomatic blunder and passed away on 27 May 1964.

India won both the wars in 1965 and 1972 convincingly.




But wars, whether won or lost, always carry gargantuan economic and human costs and

therefore plunge the economy in throws of recession in the post war period. There is, if at

all, only a marginal difference in cost incurred between the winner and the loser.

Nation’s tryst with calamities did not end here.

Loss of 1962 war was followed by 3 successive years of draught and there was fear of

famine looming large on the horizon. Once again Americans came to the rescue of India

with supply of American wheat called PL 480. India learnt once again that International

Aid does not come without the riders. While no riders were imposed in the beginning,

American Consulate General began to seek regular appointments with Prime Minister to

convey his government’s missives for American expectations of India’s voting in various

International Forums like United Nations, else food aid would be frozen. India then was

leader and founder member of the Non Aligned Movement along with Mr Nasser of Egypt

and Marshall Tito of Yugoslavia. For the leaders, who were bred on staple diet of opposing

Imperialism, it was hard to accept American dictates. But they had to swallow their pride

and accept them since allowing millions of countrymen to starve to death for ideological

leanings of its leaders would have been a horrendous crime against humanity.

This episode taught the leaders another lesson that food security is paramount for a nation.

So, while more money was allocated to Defence from 3rd

Five Year Plan, Agriculture

began to get enhanced share from 4th

Five Year Plan.

India’s agriculture in those days was primarily rain fed. There used to be a single crop per

field in most of the country in absence of irrigation facilities in post monsoon period. India

wanted to transcend to 2 and 3 crop a year agriculture model. But it meant construction of

dams and canals for storage and taking water to the fields. Further, ground water was to be

used for which electrical power was required in the rural India. Per capita cost of electrical

distribution network in rural area is prohibitively high as density of consumers is very thin.

India’s power generation capacity was barely 3,400 MW in 1947. (Today it is

approximately 1,20,000 MW) So, massive investments were required in the sectors of

power generation and distribution. Poor farmers did not have wherewithal to buy the pump

sets and pay the electricity charges. So, to help the farmers, Govt initially provided highly

subsidized pump sets and free power.

When God closes one door, he leaves at least a window open. India had the fortune of

having the troika of Mr C Subramanyam, Union Agriculture Minister, Mr MR Sivaraman,

Secretary Agriculture, and Mr Swaminathan, Director Agriculture Research. In their quest

to increase the production of food grains, they hit upon a Mexican variety of wheat which

had yield as high as 3-4 times the Indian variety. This variety was recommended by Mr

Norman Borlough who later won Nobel Prize for his agricultural research work.

However, this new high yield variety was highly prone to pest attack and needed water and

fertilizers. This led to upping the investment in pesticides and fertilizers industry.




Alongside above, two agriculture universities, one each at Ludhiana and Pant Nagar were

set up on Land Grant Basis for further research and development in the field of agriculture.

(Land Grant Basis is a method where in a trust is allotted large tract of land to regenerate

revenue from it and finance it operations).

Green Revolution was a great success. But, together with successes a thitherto unthought-

of effect came to be noticed. The Green Revolution had made the rich richer while poor

remained where they were.

Technology is scale neutral (It can be applied on 1 acre land or 1 million acres of land with

same effect) but it is not resource neutral (Proportional resources are required for size of

land). Money was required to buy new seeds, fertilizers and other requirements which was

not available with poor and marginal farmers. Thus, while rich farmers benefited by using

new technology and reinvested extra profits to earn even more profits, poor could not

afford the cost of new technology and continued to remain where they were. Thus, it

caused huge income differentials in the villages. The inequity caused also led to social

tensions. (Those were the days when approx 40% population lived below poverty line.)

Such inequitable distribution of gains of new technology prompted the Govt to concentrate

on poverty alleviation program.

Mr VS Page, a contemporary of Mr VB Chawan, CM of Maharashtra, launched Page

Yojna to help the poor and marginal farmers in Western Maharashtra and it was a great

success. These small initiatives became Central Theme of 5th

Five Year Plan.

Mrs Gandhi led a peaceful coup within Indian National Congress in 1969 to overthrow the

old guard of Mr Morarji Desai, BD Jatti, etc and became the Prime Minister. In order to

consolidate her position, she took some populist measures like: -

(a) Banks nationalisation

(b) Abolition of Privi Purses

(c) Launching Poverty Alleviation Programmes.

Dr Man Mohan Singh was the architect of “Direct Attack on Poverty” programme. It led to

micro credits by Nationalised banks to the marginal section of the society to facilitate small

businesses to improve their income. In order to broad base the programme, reach of the

banks had to be increased and therefore new branches were opened in small towns and

rural areas. Many of these branches subsequently became unviable as they provided

Directed Lending at sub optimal rates.

India was following a modified Russian model of industrial development. In the Russian

Model, complete industrial sector was in public sector whereas in Indian Model, consumer

goods production was handed over to the private entrepreneurs. But realising the handicaps

of shortage of capital, technology and trained man power, Govt had followed the Nascent

Industry Argument (providing protection to the new industry through competition

restrictive policies of regulating production licences and creating tariff walls to protect




against cheap imports). Due to historical reasons, Indian leadership was suffering from

deep suspicion of the West. Self Reliance was the mantra every leader worth his salt, right

from Mahatma Gandhi downwards, was chanting. India, therefore, followed the policy of

Export pessimism and Import substitution. While import of equipment/goods and CKD kits

(Completely Knocked Down Kits) had to be allowed in many sectors initially, strict norms

of gradually increasing indigenous content in those products were laid down in order to

stimulate local vendor development.

But with such kind of strict control on every aspect of economy, its negative aspects started

surfacing. Centralised control of day to day financial matters of the nation led to growth of

bureaucracy and corruption. Industrialists were often busy liaisoning with powers that be to

ensure that no competition is allowed in their monopoly. Further, factories were

deliberately under-producing to ensure scarcity of products so that prices can be artificially

jacked up. Education system was growing quantitatively but at the cost of quality. The

result was that the skill level of people was not matching their responsibilities. Performance

index of people was plummeting.

Rise of Mrs Gandhi as Prime Minister had another adverse impact on the polity of India.

While Pt Nehru encouraged dissent and debate, Mr Gandhi, probably because of her

insecurity, promoted sycophancy. She placed ill qualified sycophants as the head of various

institutions. Place in central ministry was again reserved for the sycophants. Such crass

devaluation of merit and rewarding of sycophancy destroyed institutions and perpetrated

sycophancy down the line. Indian psyche, which is culturally feudal, only helped the matter

further.

Surfeit of rules and govt controls on basic necessities of life, promoted what was popularly

called License Permit Raj. Licence Permit Raj, prevalence of sycophancy and incapable

people reaching undeserving heights, made a heady brew for corruption. In fact, License

Permit Raj became the prime engine for growth of corruption in the Indian society. While

on one hand corruption caused fiscal indiscipline, on the other hand it caused revenue

leakages.

From 1947 to 1982, India always had revenue surplus. Revenue surplus means Govt

revenue collection through taxes (direct and indirect) and non tax earnings like entry fees to

monuments, dividends from PSUs, etc, exceeded the expenditure on running of govt, ie,

salary to staff, office expenditures, maintenance of foreign consulates, etc. Due to fiscal

indiscipline and revenue leakages, started from 1969, India had its first revenue deficit

budget in 1982 and has not recovered till date. Govt has though passed a “Fiscal

Responsibility and Budget Management Act” which promises to gradually bring down the

budget deficit to ‘0’ level by 01 Apr 2008.

Revenue deficit has a spiralling effect. During the last year (2004-05), Govt borrowed Rs

1,40,000 crores. Out of this money, only Rs 42,000 crores was for capital investment

purpose, while Rs 98,000 crores were for meeting budget deficit. Servicing of this loan and

interest in successive years will cause further deficiency of revenue and lead to further

borrowing to fund those shortages unless a way is found out of this morass.




Such borrowings are called Intergenerational Equity which means we are borrowing

against the liability of our future generations. We, instead of leaving a legacy of healthy

economy for our children, will be leaving a debt liability to be serviced by them.

While corruption, nepotism and fiscal indiscipline were some of the causes of revenue

deficit, time and cost overrun of projects and over staffing of Govt Deptts and PSUs were

equally responsible.

Severe time and cost overrun of projects in the range of 300 to 400 % had become the rule

rather than exception by then. It happened due to variety of reasons, like

(a) Projects were approved more on political expediency than their financial

viability. In order to get the approval, project costs were often understated.

Subsequent processes in securing additional finances were long drawn and

caused delays in project completion.

(b) Corruption was another reason for cost overrun. In the economic parlance,

corruption is called “Rent Seeking”.

(c) New projects approved beyond the financial capability of the govt purely

on political expediency by diverting the funds earmarked for the ongoing

projects. Five years later there was a new govt, new minister and another

round of shelving and revival cycle. This had spiralling effect as the

projects got stalled mid way through due to paucity of funds. Delays in

completion of projects also led to delay in generation of the revenue stream

expected out of the project.

Foreign Exchange Situation

British had left a very healthy sterling balance for India when they left in 1947. Because of

export pessimism and requirement to import capital goods for setting up industries, the

foreign exchange reserves kept gradually depleting. A time came when India had to resort

to commercial and bilateral borrowings to fund its import requirements.

In the Balance of Payments Account, first head on receipt side is export earnings. Second

head is Invisibles which are incomes like remittances and deposits made by NRIs,

expenditure by visiting tourists etc. Similarly, one the Expenditure side, there is a head

Invisibles, which includes FE outgo by way of educational expenses of students in foreign

universities, medical expenses of people in foreign hospitals, etc.

India’s foreign exchange situation became critical in 1990. India’s FE holdings were

reduced to just $ 1 bn which was enough to fund only 14 days worth of imports. This

situation was result of a host of domestic and international events: -




(a) Collapse of Soviet Union. India had special import arrangements with

erstwhile Soviet Union whereby India could import Russian goods, mainly

military hardware at highly concessional rates. Even those highly subsidised

payments were to be made in Indian Rupees. Those Indian Rupee payments

were held by the Russian Consulate and Indian consumer products were

purchased with that money in consultation with Ministry of Trade and

commerce so that domestic market does not get unduly disturbed due to

such purchase. It was in essence a barter arrangement and therefore highly

beneficial to India in every respect. Post collapse of Soviet Union, not only

the subsidy disappeared jacking up the cost of those materials many times

over, there was also demand to make payments in dollars thus increasing FE

requirement.

(b) Collapse of Trading arrangement with 2nd

World Countries. Along

with collapse of Soviet Union, India’s trading arrangement with other

countries of Communist Block also collapsed.

(c) Gulf War. First Gulf War started because of which large number of

Indians Expatriates working in those countries were repatriated. The

remittances made by them as invisibles in BOP dried up substantially. In

addition, there was hike in price of crude oil causing hike in Oil import bill.

(d) Flight of Capital. Those were the days when Indian polity was in great

turmoil first due to VP Singh’s politics of Mandal Commission and then

BJP’s politics of ‘Mandir-Masjid’. There have been many who believed that

India can not sustain itself as a nation. Such events lent credence to their

theory. Scared by the near civil war situation unfolding in the country, many

super rich NRIs who were maintaining substantial accounts in India, quickly

transferred their accounts to safety of Swiss and other banks. So, there was a

flight of foreign capital from the country.

(e) Crash of Credit Ratings. Mr Devilal, Deputy Prime Minister, in an effort

to consolidate his constituency of farmers, addressed a massive Farmers

Rally in Boat Club in Delhi where in he announced a complete loan waiver

for farmers. Within 24 hours of this calamitous fiscal indiscretion by Mr

Devilal, two leading Credit Assessment Agencies of the world, viz M/s

Standard and Poor and M/s Moody lowered the country’s investment ratings

to “Below Investment Limit”.

All foreign funding agencies immediately shut the lending tap. Visits by some of the

articulate ministers to various world capitals did not yield any fruits. India was in the

throws of declaring a Financial Emergency. Dr Man Mohan Singh’s advice was sought

who also expressed helplessness in the prevailing situation. Some time was needed to

restore the order and 14 days was far too short. India then bought some time by pawning

away 60 tonnes of gold to England which was airlifted and deposited in the vaults of Bank




of England. Elections were announced in the meanwhile and Mr Man Mohan Singh

became the new Finance Minister in the new government headed by Mr PV Narsimha Rao.

Dr Man Mohan Singh adopted a two step approach. First being to stabilise the economy

and then attempt the structural adjustment. Stabilising the economy involved stabilising the

micro economic indicators like inflation. All investments were stopped.

His prescription for Structural Adjustment was: -

(a) Eradicate the monopolies whether in private sector like in Car

Manufacturing or in public sector like telecom.

(b) Nascent Industry Argument had long outlived its utility and it was stunting

the growth of economy by promoting inefficiency and curtailment of

production. Many of the industries were deliberately under producing to

keep the prices artificially high and earn profits. Economy needed to be

opened up not only to internal competition but to external competition as

well to bring in new technologies, new work culture and FE.

(c) Multiplicity of players in the same segment needed Regulators to ensure that

practices like predatory pricing are kept under check.

(d) Trade Policy

(i) Exim Policy

(ii) Small negative list of import items

(iii) Custom duty cut down from 350% to 30%.

(iv) Export Promotion





Economic Environment contd……

Western Dominance of India actually began with arrival of Vasco De Gama in 1498.

Those were the days of Princely States with no concept of Nation. Control of territories

kept changing hand frequently and people and army changed their loyalty to whoever

became the new king. Napoleon was the one who developed the concept of Nation State

and National Army in Europe. India had seen some amount of such thoughts first by

Ashoka and then by Akbar. But no sooner did the strong central power withered, it was

again a bunch of small princely states, each one to his own.

Imperialism actually originated from trade. Traders from European Nations were

adventurous and travelled far and wide in search of cheap goods and new markets for their

own goods. They were often supported in their quest by their governments. Subsequent to

setting up their trade in new territories, they began to take political control of the territories

to maximise their trade profits. By the policy of divide and rule, supporting one king today

and another one tomorrow, they weakened the kings and eventually took control of the

territories.

England, France, Spain and Portugal were the major imperial powers from 18th

to 20th

century. During those days, Most of South America was Spanish colony. America had

declared independence from British Rule in 1776. Northern Africa was mostly French

colony. Infrastructure development in colonies, whether roads or rails or anything else, was

aimed at supporting trade. The train track in Mumbai was laid to bring the raw material

from various parts of the country for export to England by ships.

The Freedom Movement in India started with demand for limited self governance.

However, some incidences, most notable among them being Jallianwala Bag in 1919, led to

hardening of the attitude of people. Poorna Swaraj or complete independence was first

sought in 1930 during Annual Congregation of Indian National Congress.

Luxury of having a clean board to write on is impossible for a leader. Decision making is

never in a vacuum. Historical events cast their shadow on decisions of the day. India and

the world was exploited and abused by the European countries for centuries. Those leaders

had experienced them first hand and this experience was going to affect their judgement for

rest of their life. All the leaders of that era harboured deep distrust of imperialist European

countries and white man. The white man invariably went as a trader in every country to

become the king eventually. The story repeated in every country that was colony of the

white men. Therefore, anti colonial mindset and deep distrust of the white trading

community was only natural. Self Reliance was an automatic choice against this invasion

though trading route. Even subsequent arm twisting by Americans for support in

International Forums in lieu of food aid only hardened those self reliance convictions. And

therefore, Indian leadership of that era put an overbearing emphasis on self reliance.




During the World War II, Japan, Italy and Germany, the extreme right wing countries, were

on one side and the rest of the world including Russia, America and England were on other

side (called Allies). Despite being allies in WW –II, there was great ideological divide

between the communist block counties and the Western countries. West was almost

paranoid about communism. They feared the communism so much that market economy

states turned partially welfare states.

The reasons for this fear of communism were complex. Communism is expansionist in its

outlook. It seeks to take into its fold as many people as possible. Theories of Karl Marx had

tremendous persuasive power. Karl Marx was no alien to Europe. He was German by birth

who had spent most of his life in England. Therefore, his influence reaching the shores of

England and America was not difficult.

He was a very articulate and convincing writer. He writings could secure ideological

conversions with ease. Russian revolution of 1917 had shaken the powers in Western

countries. The conditions in America and the Europe were no better than those leading to

the revolution in Russia. America had a huge population of slaves who were forcibly

brought from African countries and were treated like and at par with domestic animals.

They were chained and lived in stable. They suffered whipping, caning and other physical

abuse. Rubber, Indigo and tea plantations in British colonies was done by the indentured

labour. Even the poor among the citizens in Europe were being exploited by the rich in the

sweat factories.

So, under the prevailing socioeconomic conditions, there was a real fear of communists

starting a revolution in America and Europe leading to upsetting of the political, social and

economic order.

French philosopher Jean J Rousseau had written the book – The Social Contract. The

books contributed immensely to French Revolution. Marx was also influenced by “Hegal”

of Germany who is credited with the word – Dialectics. Dialectics are procesess which

cause conflicts that cannot be resolved.

Max had written a theory through which history could be predicted. As per this theory, he

had predicted doom of capitalism. He also gave a road map as to how this eventual doom

can be expedited. This road map was what we called Communism.

In order to overcome the spell cast by the Marxian thought, two books by Karl Popper:

(a) Open society and its enemies

(b) Poverty of Historicism - (This book attacks on Marxist thinking)

(Historicism is a theory that all sociological phenomena are historically determined: a

strong or excessive concern with and respect for the institutions of the past)




Power corrupts and absolute power corrupts absolutely. Democracy recognises this fact but

communism does not. However, history has proved it right. Whosoever has assumed

absolute power, what ever was the method of attaining power or kind of power, political,

financial, social or religious, with some noted exceptions, has always abused it. But

because of refusal of communist to accept this fact, absolute power rests with just chosen

few in a communist setup. In Russia, while the ordinary man suffered, each of the senior

member of the communist party had Dachas (Russian equivalent of Indian Farm Houses).

And therefore, Trotsky propagated Perpetual Revolution.

However, Democracy recognises the corrupting influence of Power and therefore it first

divides the power and then it provides for a system of checks and balances.

The power is first divided horizontally between Executive (means Prime Minister and

Council of Ministers), Parliament (The elected representatives including opposition) and

the Judiciary. Then the power is divided vertically between Centre, States and the local

bodies. Despite occasional aberrations, this division of power has been working reasonably

well in keeping the people in high places under check.

Indian model of economic development (Nascent Industry Argument) was emulated by

most of the countries of the world who got independence in 1950s after Indian

Independence. However, they started changing track from late 60s when socialism was

deepening its roots in India under the regime of Mrs Gandhi. They changed from export

pessimism to export led growth. South East Asian countries had momentous shift in their

economic growth in just 10-12 years.

In the post 1969 era of socialistic leanings, Banks’ SLR rate was 38% and CRR rate was

12%. Which means 50% of the inventible funds of banks were Directed Credit at sub

optimal rates with poor rate of recovery. Financial Institutions were doomed.

As discussed earlier, debt trap began in external sector in 1990. It triggered the need for

economic reforms in the country.

The collapse of the economic order of the country was not sudden. It gripped the country

gradually over almost 2 decades. But the common public was mostly not aware and a few

those were aware did not care. We, as countrymen, do not participate in the government.

We generally accept government actions without questions. This also has a historical

reason. We may have democracy in the country for over half a century, but we are still

feudal in our mindset. We accept authority. Royals of the yesteryears, royal families of

Jaipur, Gwalior, Mysore and many others still enjoy unqualified respect of the masses in

their old kingdom. So, we have a democratic system superimposed on our feudal outlook.

In England, family values are same as social values. But in India, the two are radically

different. We are highly feudal in our family matters, Father or grand father’s word is final

in all family matters. Mother-in-law will rule the house. Political parties’s premiership is

more of hereditary than merit based. Party leader’s word is rarely questioned. Rebels rarely

get much support. There have been very few instances of splinter groups from political




parties surviving. So, we had a Pilot, Mr Rajeev Gandhi, as Prime Minister after

assassination of Mrs Gandhi and a house wife, Mr Rabri Devi, as Chief Minister of Bihar

when Mr Lalu Prasad Yadav had to vacate his seat due to legal troubles. In both the cases

the party members were more than eager to accept them as their leaders. The story repeats

in every state of the country. Mr OP Chautala in Haryana, Mr Navin Patnaik in Orrisa,

Abdullas in Kashmir and so on.

So, questionable fiscal decisions of the govt went unchallenged.

Original economic road map, formulated by Nehru, went through changes and

modifications in every successive Five Year Plan based on learning experience of the

leaders. But they had been in the form of incremental adjustments. Priority to Defence

spending post 1962 or investments in Green Revolution post arm twisting by Americans

during drought years in 1963 – 65, or poverty alleviation programmes, were all add-ons to

original policy roadmap. But the Economic Reforms of 1991 were paradigm shift. It was a

total break from the past model and some policies were rather antithesis of original

policies. The corner stone of original policy i.e. protection against competition to the local

industry had become anathema in the new economic policy. The entire prescription for

remedy of economy rested on introducing the competition rather than protecting them from

it.

Structural adjustments introduced by Mr Man Mohan Singh included multiplicity of

players in every field so that only the most efficient few survive. But to ensure against any

malpractices, regulators were planned for each of the sectors being opened up for

competition.

Telecom sector was the first one to be opened up. Results are there for every one to see. It

has been an unbridled story of success. Easy availability, rock bottom tariffs, improved

quality, value added services, etc are result of opening up the sector for competition.

Airlines are next success story. Despite extremely slow opening up of this sector, it has

shown great success. Those regular strikes by pilots, cabin crew, engineers, baggage

handlers and so on are rare occurrences now. There are more routes covered, fares are

falling, punctuality improved and services have also improved.

The first baby steps towards liberalisation were taken by Mr Rajeev Gandhi government

when he introduced Broadbanding of Licenses which allowed a firm to manufacture any

item in a particular sector rather than extremely narrow definitions of product

manufacturing licences. A jeep licence which did not allow manufacturing of a car in the

earlier definition became a licence for manufacture of any vehicle on 4 wheels under

broadbanding of licences.

3rd

success story has been electronic media. Proliferation of TV channels and FM radio has

been at unprecedented pace.




However, Power sector has been a big failure so far. Power sector can be broadly divided

into three segments:

Production

Transmission

Distribution

Power sector reforms were started with opening of production to private sector. Enron was

one of the first private equity into power sector. However, Enron story got into a muddle

from which nation and Maharashtra are still grappling to get out from.

India was quick to realise that actual problem lies in distribution sector which need reforms

on urgent basis. And the first step in that direction is to trifurcate the three segments clearly

in every state electricity board. Due to vested interests, there has been lot of opposition at

all levels for this proposal. However, some states have succeeded in separating out the

segments. Delhi has handed over the distribution part to Reliance.

BSE reforms were heading in no direction despite all the pleas by FM. So, NSE was

created. Post creation of NSE, BSE reformed itself within 2 years. But by then it had

already lost its Prima Donna status to NSE.

Similarly, there were severe opposition to Banking sector reforms from within and outside

due to vested interests. However, carrot and stick approach worked. Once Private and

Foreign banks started functioning, old banks started to reform. VRS was introduced to get

rid of excess staff as also to create new vacancies for infusion of new blood conversant

with computerised functioning rather than old ledgers.

Capital Market reforms got stalled. Controller of Capital Issues office was closed and SEBI

was introduced instead. However, even before SEBI could settle down in its job, infamous

Harshad Mehta securities scam took place shaking the very roots of small investors’

confidence in the stock market. Small investors are necessary for the health of the stock

market. Current stock market boom is on support of FIIs which can wreck havoc in the

market at any time.

While there is a broad consensus on economic reforms among cross section of the political

parties (any opposition is only for opposition sake – like Left opposing the central govt

policies while following the same policies in Bengal and Kerala), there are real and serious

differences regarding speed and sequencing of reforms. Many leaders are of the opinion

that the market should first be opened to domestic competition and then gradually to

foreign investors. There are also differences regarding which sectors to be opened up for

reforms first and which ones later.

India has opened to international competition in most of the sectors. Custom duty has been

reduced from 350% peak rate to about 30% now. There is further commitment by the govt

to reduce it further to 7% level, same as South East Asian countries. Leaving aside a small

negative list, almost any item can be imported by any one any time.




Off late, there is a debate, like the one after green revolution, as to who have been the real

beneficiaries of these economic reforms of 15 years. Have the masses in Rural India reaped

any benefits? Apparently, very little has reached the villages and most of the gains of

reforms, Telecom, Roads, Media/Communications, etc, are concentrated in Urban India. In

some cases there has been adverse impact on poor, like the locksmiths of Aligarh have

been rendered jobless due to import of locks from China at much lower rates. Therefore,

there is a need to carryout reforms with a human face so that there is equity of growth and

prosperity among all sections of the society.





Besides power sector, another sector where reforms have not taken place is Labour Sector.

Labour sector reforms are a big drag on the economy. Economic growth is dependent on

the investors. Two factors governing the investors’ confidence for investing his money in

business are Entry and Exit conditions. While reforms since 1990 have made the entry into

business very easy, exit routes have still not been opened.

Govt permission is required to close down any industry which employs 100 labours and

more. Govt permission is riddled with vote bank politics which does not favour the investor

as there are 100 votes of workers pitted against the few votes of the investors’ family.

Thus, an investment becomes like a Hindu marriage where divorce is very difficult. Once

married, you have no choice but to live with your spouse. Even if divorced, you have to

provide for her maintenance for life time. Investment conditions are very similar. Once a

factory is setup, there is no exit route even if the business fails and the entrepreneur suffers

heavy losses. He has to continue to pay the salary of the workers. Therefore, there has been

serious reluctance among the entrepreneurs to invest. Those who invest, keep the

manpower at the lowest and prefer machines instead of men. Even if men are necessary,

they outsource or merchandise their product to the unorganised sector. Like a garment

export house prefers to outsource the stitching of clothes to various small group of tailors

distributed across city rather than hiring them himself and locating them in a single

workshop. Similarly, many reputed firms are getting their products manufactured by small

and medium enterprises in unorganised sector and only market those products under their

brand name. Draconian labour laws have forced investor to find such escape routes which

have harmed the workers’ interest. But for presence of such laws, investment climate in

the country would have been more favourable leading to creation of more jobs. Hire and

fire policy if effect is pro-labour in the long run. There is impetus for the workers to

produce more to keep their job leading to improved productivity and lower costs. Lower

costs induce higher affordability and consumption leading to further demand and

investment. Lower costs also give competitive edge for exports creating more jobs in the

country.

Tough labour laws are strongly in favour of the workers who have already got jobs in the

organised sector. However, organised sectors accounts for less than 5% of the labour in the

country. Remaining 95% labour suffer because of these laws.

The fear of rampant exploitation of workers if Hire and Fire is allowed have been proved to

be unfounded in the sectors where hire and fire is permitted. Take for instance BPO

industry. The industry is suffering from the problem of retaining the labour rather than

labour getting exploited in the hands of the employer.

Reforms are still taking place but through deception and camouflage. But pace of reforms

is slow.




LEGAL ENVIRONMENT

Indian Constitution was adopted by the Parliament in 1949 and was brought into force on

26 Jan 1950.

Indian constitution was formulated on the premise that

Power corrupts and absolute power corrupts absolutely.

This hypothesis has been proved umpteen numbers of times in the history. Right from

Magna Carta Revolution in 1300 AD to Chinese revolution against Chiang Kai Shek in

1949, and in between revolutions like American war of independence in 1776, French

revolution in 1789, German revolution in 1848, Bolshevik revolution in 1917, have all

proved only this theory.

Therefore, Indian constitution was drafted on following principles

(a) Power should not become permanent in any hand,

(b) Divide the power so that its concentration in one or few hands is avoided,

(c) Institute a system of internal checks and balances within and by the power

sharers.

The constitution provides for re-election of every elected body every 5 years to ensure that

power does not become permanent in hands of any person or group. We have seen peaceful

change of power at Centre and States so very often. The constitution divided the power

horizontally and vertically. In the horizontal division, three power centres were created

namely, Parliament, Executive and Judiciary. Executive, i.e. the Prime Minister and his

ministers who run the affairs of the govt on day to day basis are answerable to the

Parliament for every act and decision of theirs. Also every decision is subject to judicial

review. Any act of the govt that does not find favour with the Parliament or is not in

accordance with the constitutional provisions, would have to be withdrawn. Similarly, any

act of Parliament that is not in consonance with the constitution of country can be declared

null and void by the Judiciary. Judges, if found not worthy of the high chair they occupy,

can be impeached by the parliament with 2/3 majority voting for it. Impeachment

proceedings had once been initiated against Justice Ramaswamy of Supreme Court.

However, same were dropped a day before voting when the judge resigned on his own.

Each the three pillars of the democracy act as the watchdog for the other two pillars. And

then we have the fourth pillar, the media, which acts as watch dog for all the three pillars.

Even the judicial verdicts, if not considered to be in public interest can be remedied by

passing new laws by the parliament. Supreme Court had once declared the Bombay Rent

Control Act as Ultra Virus. However, Legislature passed new law making is lawful once

again. Judiciary, in the normal course of things, is not expected to go into virtues of the

case but give judgement based on the law passed by the parliament. Take the case of Gutka

which was banned by Govt of Maharashtra. The ban was declared null and void because




despite desirability of the ban on gutka, considering its adverse impact on health of the

people, govt of Maharashtra has no jurisdiction to ban the item since it comes under the

centre’s list of jurisdiction.

In the vertical division, power is divided among central govt, state govt and the local

bodies. Again among these bodies , power is divided horizontally between state legislature,

Executive (Chief Minister and his council of ministers) and the judiciary (except of the

local bodies).

In a democracy, ultimate power resides with the people. Therefore, it is called

SOVEREIGNITY.

During the French Revolution, the Monarch was beheaded and the power was transferred

to the third estate. Monarchy was completely abolished.

First House – Monarch

Second House – House of Lords in England (Rajya Sabha in our country).

Third House – House of Commons (Lok Sabha). It is house of people’s representative.

Lok Sabha or House of commons is more powerful. Purpose of Rajya Sabha is to act as a

brake on Lok Sabha. Rajya Sabha can not reject a bill passed by the Lok Sabha. It can only

send it back for reconsideration. However, in case it is passed a second time by the Lok

Sabha, it would have to pass it mandatorily.

In order to facilitate easy and smooth functioning of the govt, some powers and rights of

the people are handed over to the govt. Govt can take over certain rights and privileges

enjoyed by the citizens as and when required depending upon the socio-political and

economic conditions. However, there are certain rights and powers which can not be taken

over by the govt. These rights are called Bill of Rights. These rights are listed in Part III of

the constitution under Fundamental Rights. Art 12-34 of Constitution of India. Almost

same list of rights are also included in UN charter as Human Rights.

Legislative relationship between Parliament and Legislative councils: -

Seventh schedule of the constitution has 3 lists of subjects: -

Union List – Subjects which are entirely under the jurisdiction of Central Govt and

therefore only Parliament can make laws on the subjects.

State List – Subjects which are exclusively purview of the state govts and only

state legislature can make laws on them.

Concurrent List – Areas which are being governed by both, centre as well as

state. So both can make laws. However, central laws overwrite the state laws in case

of any contradiction between the two, to the extent of contradiction.




Criminal Procedure Code is on the concurrent list. Similarly, Education is also on

the concurrent list. It was earlier on the state list but was brought on concurrent list by a

constitutional amendment during the Emergency in 1977

Financial Relationship

There are different kinds of taxes that the citizens pay and collected and utilised by

different authorities.

Taxes which are wholly kept by the centre. Like custom duty

Taxes which are compulsorily shared between centre and state. Like Income Tax.

Taxes which may be shared by centre with states. Like excise duty

Taxes which are collected and retained by the states. Like Sales Tax (now rechristened as

VAT), Motor Vehicle Tax, Toll Tax, etc

Administrative Relationship

Centre has powers to instruct states on various matters which it deems to be not being

conducted properly.

Watch Dogs

Comptroller and Auditor General of India

UPSC

Election Commission

Salient Features of the Constitution

Art 13(2) states that no law can be made which interferes with or abridges Fundamental

Rights (Part III of constitution). If any such law is enacted, courts can declare it ultra virus.

There are two types of laws

1. Procedural Laws (Only three)

(i) Indian Evidence Act

(ii) Civil Procedure Code

(iii) Criminal Procedure Code

2. Substantive Laws – Laws on a particular subject. Like Indian Penal Code is a

collection of laws on crime and therefore substantive law. Similarly, Army Act

and Navy Act are also substantive laws.

Indian Evidence Act lays down what is admissible as evidence and what is not. Like in

civil cases, previous conduct is relevant. But it does not carry any relevance in criminal

cases.

(Indian Evidence Act is recommended for reading for developing analytical ability.)




Supreme court normally looks into matter of law and not into matters of fact. And

therefore, it normally deals with appeal cases. However, in cases where fundamental right

is violated, any citizen can directly approach the Supreme Court under Art 32.

Similarly, under Art 226, High Court can be approached in certain matters.

Courts can issue writs issued against any one.

There are 5 kinds of writs

(a) Habeas Corpus is a writ issued by a judge ordering that a prisoner be

brought before the court.

(b) Mandamus means directions to any functionary of Govt to do a job that

he is expected to do

(c) Prohibition means stopping some one from proceeding any further on

the matter. Like declaration of result of counting of votes in case of

complaints of malpractices during voting.

(d) Certio-rari. Decision given by any lower body is set aside.

(e) Quo Warranto. This writ petition is issued against a usurper of the

public office. Like a person not meeting eligibility criteria appointed to a

post. He can be asked to produce the evidence of meeting the eligibility

criteria.

Habeas Corpus: The name also refers to a specific writ known in full as Habeas Corpus

Ad Subjiciendum, a prerogative writ ordering that a prisoner be brought to the court so it

can be determined whether or not he is being imprisoned lawfully. It is normally issued

against law enforcement agencies like police and Army. In a case in Kerala, a person Mr

Rajan was arrested by police and then was untraceable. His father then wrote a post card to

the Chief Justice of Supreme Court who took the post card as an appeal and issued a

Habeas Corpus to Kerala Govt. An inquiry set to investigate the case when govt failed to

produce the person led to conviction of DIG and other officers and punishment dismissal

from service and 10 years of rigorous jail term.

Mandamus a writ petition filed against Ratlam Municipal Corporation for directions for

clearing the garbage. Court issued a mandamus to Municipal Corporation to clear the

garbage. But corporation pleaded that due to non availability of funds post payment of

salaries to its staff, the job could not be done. Court directed that either the salaries be cut

or the staff be reduced else charge additional taxes but job should be done since it is basic

duty of the Municipal Corporation.

These acts have relevance in business as they relate to equality of opportunity and fair play.

Just treatment of all contenders in the award of public contract is one of the opportunities.




Laws (passed by the parliament or legislature)

Rules (enabling provisions) Subordinate legislation made by the executive. Copies of these

rules are kept in the parliament and its library for members to read and raise objections if

any.

Notifications





POLICY DEVELOPMENT ENVIRONMENT

Knowledge of external environment and its cause/effect relationship with one’s own

business enables scenario building which may not be accurate but still reduces the

uncertainties to a great extent and therefore future shocks. It improves ability to cope with

future changes.

External environment is always in a state of dynamic flux. Therefore, this course only

equips with instruments to gauge the effect of various events in external environment and

estimate their impact on the business in a foreseeable future. It requires continuous study of

a variety of subjects right from history to literature to international political commentary in

order to broaden the knowledge base. There is no alternative to a broad based knowledge.

In order to understand Policy Development Environment, a good sense of history, national

as well as international, is very important. Historical events invariably cast their shadow on

people’s psyche and decisions. Policy makers being well read and informed lot are even

more prone to these events.

United States suffered the great economic depression in 1929. President Roosevelt revived

the economy with the help of Keynesian concept. Keynesian concept propounds increased

govt spending in the times of recession to put money in people’s hand to create demand

backed by purchasing power and thereby creating conditions for utilisation of

unutilised/under utilised resources. Increased demand calls for increased utilisation of

machinery which generates jobs. More jobs means even more money in hands of people

and further more demand. It becomes self feeding cycle till recession is overcome.

While the Keynesian concept did wonders for recovery of US economy post the great

economic depression of 1929 and for Europe in rebuilding their countries and economies

post devastation of World War II, it did not work for developing and under developed

countries. The prime reason for its failure to boost the economies of poor countries lay in

non-availability of capital resources with them. Govt’s enhanced expenditure in the times

of recession helps in putting back idle capital resources (like machines lying idle due to

lack of demand) into productive use. In developing or underdeveloped countries, there

were few idle capital resources (machines). Therefore, even if demand was created,

economic growth did not take place in absence of idle capital resources. It only helped in

increasing the import and inflation. This event also teaches us that all social sciences are

dependent on time and space. So, all the theories are valid only in certain time and space

combination. Any further application needs close scrutiny as to how applicable and useful

it would be in the prevailing situation.

Nehru & Mahalonobis were quick to realise this. Therefore, Nehru Mahalonobis model

first concentrated on creation of heavy industries, so that capital accumulation can take

place in the country.




Labour was in abundance even in 1947 even though India’s population was only 347

million at that time. Most of this labour was either unemployed or disguisedly unemployed.

Economic activity happens in three different sectors : -

Primary Sector – In covers all agricultural produce including fisheries, dairies,

orchards, etc.

Secondary Sector – It covers manufacturing sector, like various industries Light,

Medium, Heavy and Basic including food processing.

Tertiary Sector – It covers all service industries.

ICOR – Incremental Capital Output ratio, which is a measure of output earned out of every

Rs 100 invested as capital. So, if there are two projects with equal funds requirements, the

one having higher ICOR is preferable.

Dr Manmohan Singh, as Finance Minister, realised the need to convert Outlays to

Outcomes. Outlays are the funds that are invested for a specific purpose. Results achieved

are the outcomes. This is in real sense Efficiency of Investment. Experience has taught us

that Efficiency of Investment improves substantially under pressure of competition.

In India, we have adopted Westminster System of Parliamentary Democracy. This is the

system where President is only Figure Head of the state. Actual power lies in the hands of

Prime Minister. Prime Minister is elected by the elected representatives. In case of

parliamentary majority of the ruling party falling short, the Govt (meaning Prime Minister

and his council of Ministers) have to resign (Like Mr Atal Bihari Bajpai did when Mrs

Jayalalitha had withdrawn her support). In case of Presidential form of Govt, as followed in

United States of America, President is de-facto head of the govt and is directly elected by

the people. In Presidential form of Govt it is possible that the parliamentary majority is

with some party other than the President’s. There the president’s continues for full term

whether or not he enjoys the support of the Parliament.

American constitution is Federal in nature. America is a Federation of States. Individual

states have formed a Union and given up some areas of governance for administration by

the Central Govt (called Federal Govt) while retaining others within their folds. Each

individual state has joined the Federation by choice and therefore they retain much higher

autonomy than states in India. Even today, there are huge differences in laws between state

to state. European Union is trying to form another Federation of States with its parliament

in Brussels.

Indian constitution is outwardly Federal in nature with provision for converting it into

Unitary form any time should the circumstances so demand. Provisions like Imposition of

President’s Rule, Declaration of National Emergency, Direction to the states.

Indian Constitution was debated provision by provision by the Constituent Assembly with

active participation by some luminaries before it was passed in 1949. But why did our Law

Makers adopted this Flip-Flop model of constitutional structure?




Indian unity lies in its diversity. India is a country of gigantic diversities. No country in the

world has kind of diversities that are faced by Indian. The diversities range from

geographical, cultural, societal and so on. Indian society is a pluralistic society. Due to this

pluralistic nature there are various fault lines which most of the time lie dormant in sub

surface but become active with little warning causing severe disruptions in society. These

fault line are

(a) Ethnic – Naga demand for separate home land

(b) Linguistic – Anti Hindi demonstrations in Tamilnadu

(c) Caste – Upper caste and lower caste battles (Ranvir Sena Vs Maoist

Communist Party) in Bihar

(d) Religion – Demand for Khalistan by Sikhs

(e) Region – Pan Tamil demand rearing its head in Tamilnadu, Kashmir

(f) Income, etc – Naxal movement in Andhra Pradesh, Bihar, Jharkhand, MP

and Chhattisgarh.

Some of these fault lines give rise to fissiparous (division, separatist) tendencies in people

which threatens the very fabric of nationhood. Some other fault lines threaten the existing

social and political order of the society. Often vote bank considerations or outright

sympathy of ruling class with the ultra sentiments can act as impediment for local govt to

effectively deal with the situation. These are the times when unitary nature of the

constitution allows the central govt to take control of the otherwise state matters and bring

situation under control.

However, these labels (fault lines) are important because they also act as fracture

binds/unifying forces in normal times. That is how we say that India’s unity lies in its

diversity. This humongous diversity of various multitudes that we experience on day to day

basis has made us the most tolerant society in the world.

This Federal/unitary structure of our constitution has served the nation well except for

some aberrations like Emergency in 1977 and imposition of Presidential Rule in States

overthrowing duly elected govts for political considerations. Emergency was imposed after

Mrs Indira Gandhi was pronounced guilty of committing an electoral offence by Allahabad

High Court. During Emergency, though fundamental rights continued to exist, their

enforcement, ie Art 32 of the constitution vide which allows an aggrieved person to

approach Supreme Court for redressal, was suspended. While most of the judges of

Supreme Court, including then Chief Justice of SC capitulated, Justice HR Khanna, did not.

Similarly, Mr Nani Palkhiwala who had agreed to represent Mrs Gandhi’s appeal against

Allahabad High Court order, withdrew when Emergency was declared.

To make the Emergency Provisions even more effective, MISA (Maintenance of Internal

Security Act) was imposed. Under MISA, any one could be arrested on mere suspicion.

However, the arrests were to be confirmed by an advisory group headed by a High Court

Judge within 12 days of the arrest. In many cases, advisory groups showed courage and

refused to blindly ratify the arrests made by the police. Preventive arrests are actually a




violation of fundamental rights and therefore any arrests made under section 151 are to be

produced before a Judicial Magistrate within 24 hours for permission to continue the

detention any further.

Post Emergency, safeguards have been incorporated through constitutional amendments in

provisions which were exploited for and during Emergency.

Govt headed by Mr Manmohan Singh can go ahead with the reforms at much faster pace if

they join hands with BJP. But that is not possible since Secularism is of much higher value

than the economic development of the country.

Economic Relationship

There is a serious mismatch between revenue raising capabilities of states and their

expenditure responsibilities. Whereas centre generates much more revenue than it has been

burdened to expend.

In order to correct this anomaly, constitution provides for devolution of resource. There are

two kinds of devolution

(a) Mandatory Devolution, Like Income tax which is presently shared in the

ration of 77.5: 22.5 between states and centre

(b) Enabling Devolution, (discretionary) like excise duty which the central govt

may or may not share with states.

In order to ensure that resources are shares equitably, constitution provides for Finance

Commission which is constituted every 5 years. Though its recommendations are not

binding on the Govt, traditionally govt has been accepting the recommendations in toto.

Last Finance Commission was the 12 Finance Commission headed by Mr Rangarajan, Ex

RBI Governor. 13th

Finance Commission is likely to be constituted by end 2005 so that its

report is ready before commencement of 11th

Five Year Plan in 2007.

Finance Commission while deciding the devotion of resources tackles the issue in two

steps. It first decided as to the ratio of taxes which are to be shared with states by the

Centre. In the second step, it lists down as what will be individual states’ share out of funds

being devolved to the states. The share of individual states is based on following factors: -

(a) Population

(b) Area

(c) Revenue raising capability

(d) Population below poverty line

In addition to mandatory devolution of taxes, Art 280/282 of constitution gives central govt

omnibus powers to devolve money to any state or institution. This discretionary power

though was given to meet any unforeseen requirements of states, it has been more abused

to garner political gains than used.




Apart from mandatory devolution, central govt also devolves funds to the states under Plan

Assistance. The difference between the two is that while former is primarily meant for

bridging the revenue gap between expenditure and income, Plan Assistance is to provide

for capital expenditures required for development.

Planning Commission is not a constitutional body. There is no mention of Planning

Commission in the Constitution. There were certain plan holidays due to extraordinary

circumstances prevailing in the country.

The money that is given to states as Plan Assistance was initially given under Gadgil

Formula as the formula was given by the Chairman of Planning Commission Mr Gadgil.

Then there was modified Gadgil formula. Now it is called Mukherjee Formula.

Planning commission has bifurcated the states in two categories

(a) Special Category States – 7 sisters of NE (Assam, Arunachal Pradesh,

Manipur, Meghalaya, Mizoram, Nagaland, Tripura) Sikkim and

J&Kashmir. These special category states get 90% of the plan assistance as

grant and remaining 10% as loan.

(b) Other states – All the remaining states fall in this category. They get the plan

assistance in ratio of 30:70 as grant and loan.

Resources devolved as plan assistance are considerably large. However, this also became a

tool for centre to push its own agenda. Programs like Family Planning were given as 100

grant. In some other cases, centre gave a contribution in certain ratio of state’s share, like

50:50; for every Rs 100 invested by state, central govt pooled in with another Rs 100. This

was used as incentive for state govt to invest their resources in development.

Operation Black Board is a central scheme wherein central govt is financing the project

100%. It is providing for one class room, one teacher schools in every village.

Family Planning, Education etc are all state subjects and should be completely controlled

by states. However, these are being controlled by central govt through purse strings of

Planning Commission. Again the devolution was not always equitable and often marred by

political considerations. State Govt leadership which owed its existence to the leadership at

central govt could not contest for its rightful share.

There is huge differential in financial resources of various states. Just to cite a few

examples; Brihan Mumbai Municipal Corporation budget is larger than 12 states’ annual

budget. Similarly, Atomic Energy Commission has budget allocation which dwarfs annual

budgets of 15 states.

During its dealing with state govt, central govt often went by letter of the constitution but

not the spirit. So, while it could not be faulted on the legality, truth was apparent. Thus,




resentment among states could not be avoided and it led to new fault lines. This led to rise

of regional parties in the last two decades.

There was effort to bridge this arbitrariness of central govt through appointment of Sarkaria

Commission to give its recommendation on central and state govt relationship. However,

unless rules are followed in spirit, no amount of law making can help.

Thus we see that a constitution which was essentially federal in character, with provision to

turn it into a Unitary constitution in the times of emergency, was converted into a Unitary

constitution by controlling the Purse Strings of the Planning Commission. State Chief

Ministers who were supposed to draw their support from the elected representatives and be

autonomous in function, be it selection of their cabinet or decision making in policy

matters, became puppet in the hands of “High Command”. This is a culture which has

spread and afflicted even BJP which is the only other pan Indian party in the country. At

present, Kesu Bhai Patel is trying to dislodge Modi Govt in Gujrat not by political

machinations in Gujrat but in Delhi. Such subversion of constitution had its delirious effect

on performance of those govts. Centre State relations have been on a boil continuously.

In 1956, reorganisation of states was done on the basis on language. Constitution had

provided for a window period of 15 yrs for English to be used as link language while

development of Hindi as link language took place. At the end of the window, when Hindi

was to replace as link language, there were violent demonstrations in Tamilnadu in

opposition to Hindi being imposed on them. Old and rich language that it is, Tamils have

always considered Tamil language to be superior to any other language including Sanskrit.

Thus another fault line was created. Dravidian parties utilised this fault line by stoking the

linguistic pride of Tamils. Under the linguistic cover was their political agenda to create

political space for themselves which was till then ruled by Congress. Their success in the

venture ensured that no national party has come to power in Tamilnadu ever since.

Opposition to Hindi in Tamilnadu has its own history. Political and social empowerment of

Dalits and other backward castes that is being witnessed in Hindi heartland of Bihar and

UP now had happened much earlier in Tamilnadu.

Dravidians consider themselves to be the aboriginals of Indian subcontinent. They consider

Aryans, and probably rightly so, to be the invaders from west who defeated and pushed

them to south of Vindhyas. This undercurrent of resentment among the Tamil academicians

always existed. Similarly, Brahmins and Sanskrit were considered to be legacies of Aryan

dominance over them.

Sanskrit revival took place in 9th

Century AD. Sanskrit had edged out commoners’

language Pali to be the language of the elite much as English is making inroads into Hindi

and other regional languages’ bastions in the country. Due to hegemony of Sanskrit at that

time, Dravidian languages also got influenced by Sanskrit with induction of lot of Sanskrit

words into those languages. Some Tamil nationalist raised this issue in late 1920s which

culminated in strong anti Brahmin movement in 1930s in South India. Periyar was leader of

this movement. The movement was so strong that there were crazy attempts at creating a




distinct history and culture for Tamils. In the process, Ravana, much reviled demon king

of Hindu epic Ramayan, was begun to be worshipped. Worship of Hindu deities, for that

matter any deities, was opposed. Children begun to be named sans any Sanskrit or any

deities names.

With this fault line pre-existing, imposing of Hindi was only the proverbial last straw on

camel’s back for same forces to raise their head once again. Political parties seized the

initiative for their own political agenda and only stoked the fires further.

Growth of coalition politics is a comparatively recent phenomenon in Indian politics. With

increasing clout of regional parties in state politics, single party rule at centre seems to be a

distant phenomenon now.

Reasons for growth of coalition politics are as follows: -

(a) Congress was the only party with pan Indian presence till late 1980’s. There

was no viable political alternative. Even today, no other party besides BJP

exists which has a presence large enough to form the govt on its own in near

future. Even BJP’s pan Indian presence in only marginal as there are many

states in south as well as east where they still draw a blank.

(b) Growth of Bhartiya Janata Party in north, western and central India at the

cost of Congress Party, thus weakening it.

(c) Shift of traditional vote bank of Congress party, i.e. Dalits and Muslims to

regional parties and upper castes and middle income group to BJP.

(d) Growth of regional parties in erstwhile congress bastions like UP, Bihar,

Maharashtra, Andhra Pradesh, Orrisa and North Eastern states.





Like it has been pointed out in the lecture of 17 Aug 05, one key area where reforms have

not begun in right earnest is the labour reforms. Exit policy in labour sector is absolute

must to entice more entrepreneurs to invest money in industry. Not that reforms have not

taken place at all. Though govt could not proceed with labour reforms due to spirited

opposition of trade unions, left parties and organised labour force, there has been

substantial improvement in labour related environment in the last 15-20 years. Trade

unions have lost much of their sheen. Labour force is much less militant. Strikes, which

had become bane for the industrialist in 1970s are rare occurrence now a days.

In general, reforms have been lacking in subjects under state list, subject like Agriculture,

irrigation, health and education. While agriculture and irrigation have seen virtually no

reforms till date, health and education have seen small progress.

Education system

Universalization of basic education is govt aim. Education is divided into 3 parts: -

(a) Basic Education – Till the age of 14 years which is till class VIII.

(b) High School Level

(c) University Education

Education fetches two kinds of return

(a) Individual Return – Direct benefits accrued to the student

(b) Societal Return – Benefits accrued to the society due to education of the a

member of the society.

In case of basic education, both returns, Individual as well as Societal, are very high. The

student learns reading, writing, arithmetic, basic hygiene, etc which improve his own and

the society’s productivity in various ways. Thus both are equal gainer in the process.

Higher education gives more of individual return than the societal returns in most of the

cases. Leave the odd case of outstanding scientists and other luminaries like Dr APJ Abdul

Kalam, great economist Mr Mahalonobis or Dr Manmohan Singh who touch lives of

millions by their path breaking work.

In a poor country like ours, basic education should be provided free/cheap to ensure that it

reaches every one. It can be done only by the govt. But higher education needs reforms to

ensure that the colleges compete to attract students rather than students competing to get

the college. When colleges begin to compete to attract the students, they perforce have to

hire best teachers, provide good infrastructure and ensure quality education.




Health System

Reforms in health sector are still to take off. Except in some big cities, private medical care

is still not available. In small towns, health care is still largely provided by Govt Civil

Hospital. In villages occasional dispensary is the only health care available.

Health care is an expensive proposition. In countries like USA, health care is completely

privatised. Health care is supported by Medical insurance else hospitalisation expenses are

beyond the reach of most people even in a rich country like USA.

Britain had become a welfare state after WW-II. Health care in Britain is mostly govt

facility and reforms have not been there either. As a result, there is a long waiting queue

(up to 12 months) for operations like hip joint replacement, bypass surgery, etc. Situation

has become so severe that the cases are being outsourced to hospitals in Hyderabad and

Bangalore. Other than that patients are travelling to India and other countries on their own

for medical help which has now been officially named in our country as Medical Tourism.

Health provisioning is a big drain on British exchequer as increase in longevity of its

subject has also compounded health problem the England.

Economics is not value based. There is no right or wrong in economics. These is only cause

and effect on economic well being of people. Take the case of ban on bar dancers in

Mumbai. Desirability or otherwise of ban is a question that is not in the domain of the

economics. It only considers economic effect on lives of bar girls and other peripheral

people whose source of livelihood has got affected. Value judgement/Moral issues

involved in the matter are to be looked into by politics based on public opinion. Parliament

and legislature are bodies of elected people’s representatives. They represent people’s

aspirations and voice. So, their opinion can be considered to be the collective opinion of the

main stream population.

Policy Environment is affected by economic as well as political environment.

Honda Factory episode in Gurgaon has given the Trade Unions and Left Parties a fresh

lease of life. They are trying to reorganise themselves once again after getting marginalised

in the last 10 years.

However, events there have affected the investment climate in the city and state. Earlier,

Maharashtra suffered flight of capital from the state in late 1970s when trade unions in

Mumbai turned militant under the leadership of Datta Samant. It killed the blooming textile

industry in the state which eventually shifted base to Gujarat, Tamilnadu and Andhra

Pradesh. Similarly, militancy in Punjab led to flight of industrial investment to Noida and

Gurgaon. West Bengal which was the most industrialised state post independence lost

industries in quick succession due to extremely volatile and militant labour unions

supported by successive State Govts. Today either most of the industries have shifted base

out of the state else are sick.




Orrisa is another state which has lagged behind in industrialisation. While labour in Orrisa

in quite docile, the problem there emanates from the lackadaisical and lazy attitude of

people. The average productivity of people there is very low. So, it is the problems of

work culture.

Atomic Power Plants can not compromise on safety aspects due to immediate as well as

long term catastrophic effects on people in case of any major accident. Chernobyl accident

is a constant reminder to the world. Safety records of our Atomic Power Plants in South

India is pretty good. However, it is dismally poor in plant at Narora in UP. This is despite

AEC conducting a 6 weekly safety training for the employee against 12 weekly schedule in

other plants in the country. The problem lies in the attitude and culture of the people.

Chalta hai attitude and willingness to take risk among people in UP. As against people in

UP, Tamil culture is highly Rule Book oriented. Rational of rules is rarely questioned

which suits the safety requirements of Atomic Power Plants. Given UPs attitude towards

risk, there is little likelihood of any more nuclear power plants planned there in future.

With different real life cases of flight of capital or de-industrialisation of various states

cited above, it becomes amply clear that environment assessment is required not only from

economic view points like availability of raw material, labour, proximity to markets,

infrastructure, taxes, etc but also the general climate which covers attitude and culture of

people in the area. These factors are more subjective in nature and therefore hard to

quantify.

SOCIOLOGY OF INDIA

There is no country in the world, including communist countries, where society has

achieved complete homogeneity and equality of all men. 100% egalitarian society has

never existed in any era any where in the world. Division and classification has existed in

every country at all times. But this division has mostly been on class basis – Aristocrates,

artisans, business class, farmers and so on.

India is unique in this regard to have another dimension of inequality among people – Caste

System. No other society apart from Hindus is known to have this caste system. Caste

system is a social institution with long history. There is no unanimity regarding its origin or

commencement. Caste system or “VARNA” finds mention in even in the oldest text known

to mankind i.e. Rig Veda. It is surmised that Caste system was more of a profession

identification tool in its original avatar much like we have names like Mr Carpenter or

Smith in England and Lokhandwalla, Batliwalla, etc in Parsis. Professions were often

passed down the generations and became rigid with time as a social aberration.

Let us examine the social development since 1947.

Like stated earlier, caste system and Hindu religion are interrelated. Manusmriti, an ancient

Hindu social order book, prescribes different punishments for same offence on the basis of

caste of the offender.




Professor MN Srinivas, probably the biggest authority of our times on caste system in

India, describes social movement among the caste in two distinct pattern: -

(a) Westernisation

(b) Sanskritisation

Sociology has a concept called Reference group. It states that no body is happy with what

he is and wants to be like some one else individually or as a group. That group is called

reference group for this person or group. Highest among Hindu castes are Brahmins who

are almost worshipped as Brahman Devta. Lower caste people in villages and small towns

actually touch the feet of Brahmins. They are fed and showered with gifts on special

occasions in the family. But even Brahmins are not happy with being the Brahmins. They

want to be like Westerners. So, their reference group is Westerners.

Similarly, lower castes aspire to be like Brahmins. Brahmins were priests and teachers and

therefore well educated and well versed in Sanskrit. So, this group aspires to be educated

and knowledgeable in Sanskrit like Brahmins. This is called Sanskritisation.

Relevance of Sociology to Business Manager

Each social group, in which ever way it may be classified, caste basis, class basis, religion

basis or region basis, has its own peculiar characteristics and sensitivities. If beaf is a

delicacy for Muslims, it is highest form of sin for a devout hindu. We have already seen the

risk taking/rule book adherence profile of Tamilnadu V/s UP or work ethics of Orrisa vis a

vis other states.

If Bengali’s wont compromise on Durga Puja festival and Vishwakarma Puja,

Maharashtrians are equally fanatic about Ganesh Chaturthi and Gokul Ashtami and a

Gujrati about Garba and Dandia Raas during Deshahra. A business manager who is not

sensitised to these passions of these social groups, may damage labour relations by his

unintentional obstinate behaviour in granting certain concessions to particular groups

during these days.

Traits of people, groups, region, religion, nation are important while making certain

decisions. Like it has been pointed out earlier about safety consciousness of Narora Atomic

Power Plant vis a vis plants in Tamil Nadu or lackadaisical attitude of Orria people towards

work have all impact on business decision making.

As a nation, we the Indians, are anti govt while US citizens are highly pro govt in

international matters. We invent a hole in govt story, where probably none exists. US

media rarely flogs its govt in international policy matters. Our praise or condemnation

depends which side of the political divide we stand irrespective of its impact on country’s

reputation or finances. Political parties oppose the international policies of the govt for the

sake of earning political points. Once they assume the power, they follow the same policies

with often re-enforced vigour which they had so vociferously opposed while in opposition.

The media and public also change their opinion overnight. We have seen it happen during

successive changes in Govts since 1991. Even diehard anti Globlisation proponent, CPM,




is following the footsteps of Man Mohan Singh in West Bengal and Kerala while putting

every possible spanner in efforts of Man Mohan Singh, P Chidambaram and Montek Singh

Ahluwalia troika of reformers.

Japanese have been found to carry a large team for every negotiation, howsoever small,

though only one person speaks and others are merely spectators. No one speaks out of turn.

Some of the members in the delegation may be just a couple of months old in the

organisation. They follow this apparently costly practice for two reasons: -

(a) Train the next generation of business leaders in business negotiation skills.

(b) Sharing the information with every one. After having seen the netotiations,

all the present members have moral obligation to work towards making the

contract a success. So, 100% involvement of every team member.

Japanese are able to adhere to this expensive investment on its young executives because of

another trait of theirs – Loyalty to the company and company’s commitment to its workers’

welfare. Often an employee never sees another company in his life time. Cases of lay off

and retrenchment of workers by the employers in Japan are most rare occurrence. But in

India, neither the workers are so committed to their company nor are the companies

committed to welfare of their workers. An employee trained at company’s expense, is

willing to leave the company and join a rival company for just a few dollars more.

Therefore, there is a cautious approach while investing too much of resources on training

and development of workers in India.

Caste policy of the govt is a affirmative action. Caste system is too deeply entrenched in

psyche of Indian people. A manager needs to be alive to this aspect of Indian psyche.

Quite often caste bias manifests itself in Annual Assessment of subordinates. Unless such

afflictions of people are identified and corrective actions taken to neutralise their harmful

effects, we would have wrong people at the wrong places.

Changes in technology have made us part of the global village. Events in distant part of the

globe, half of which would never even be known to but a few amongst us, affect us in

myriad ways. (As explained in pages 2,3. (Scenario building as to how Bush’s dislike of

Saddam’s face could lead to increase in crimes in our country). Therefore, understanding of

global forces is also necessary for being an effective business manager.

World Stage Since 1945, End of World War –II

Last 60 years, since end of world war II, have seen tumultuous changes in International

Stage. The first development in post WW-II era was spitting of the world into two

Ideological Blocks, Western Block, headed by United States and Communist Block,

headed by USSR. Interestingly, both the countries were allies during the WW-II. Two

blocks, almost paranoid about each other’s ideology, began a Cold War. This cold war led

to massive arms race to gain superiority over each other. Technology and weapon power

became important means to keep the upper hand. Two new weapons of war, Air Power and




Nuclear Power, began to be piled up to the levels where they could destroy entire world

many times over individually.

India’s independence in 1947 was the clarion call for end of imperial dominance of west

over poor countries. Next 10-15 years saw most of the colonies of west gaining

independence. This large scale decolonisation of the world was indeed voluntary on part of

Colonial powers. But this voluntary act should not be mistaken for any

philanthropic/humanistic awakening. In the changed international political, social, and

technological environment, as well as rise of communist Russia as a super power, colonial

occupancy had become more of a liability than asset that it was thus far.

Along with splitting of world along capitalist and communist block, there was the rise of

Non Aligned Movement under the leadership of Nehru, Sukarno of Indonesia, Nasser of

Egypt and Marshall Tito.

There was also this North - South divide. North was generally rich and South was poor

with some notable exceptions like Australia which was counted along with North.

Therefore, “North South Council was established. Mr Willy Brandt, German Counsellor

and a Humanist who was trying to build bridges between Germany and poor East Germany

had also devoted himself to the cause of poor south. He propounded “New Economic

Order” to bridge economic divide. It was called OST politics (Ost in German means

“Looking east”)

After the Bolshevik Revolution of Russia in 1917 and rise of Russia thereafter, coupled

with other forces like devastation caused by WW-II, and Keynesian concept, Britain was

forced to become a welfare state. It became highly unionised. In fact, Labour Party was a

federation of Labour Unions. From then to the time during Margaret Thatcher, most of the

industrial towns resembled complete disorder.

Most of the developments till then were taking place within a paradigm. Come 1990 and

Mr Gorbachev.

Mr Gorbachev introduced Perestroika and Glasnost. Russia junked communism and

embraced Capitalism. The side effect was collapse of Soviet Union. This was a tectonic

shift in the international order. Instead of one gigantic USSR, there were 15 new states.

Russia’s capacity to act as deterrent to USA was hugely diluted. Crash of its economy

made it dependent on western economic assistance, which further weakened its position to

intervene against USA in international disputes. Geopolitical situation completely changed.

Bipolar world had suddenly changed into a Uni-polar world. American hegemony of the

world was complete.

Before disintegration of Soviet Union, Soviets had invaded Afghanistan. But they pulled

out of Afghanistan due to high human and financial costs. The vacuum created by Russian

pull out was filled by Taliban which was raised, funded and armed by USA to fight

occupation army of Russia.




Lecture Date: 03 Sep 05

TRADE ENVIRONMENT

Trade Environment has its root much older than any other environment. Trade has affected

the world history more than most other things. International Trade has been practiced in

India and the world over for over a millennium. There are records of trade taking place

through the land route between various countries in middle East, China and India even in

first millennium.

In the later part of the last millennium, trade was used as a tool for imperialistic expansion

of countries in the West. India came in contact with Europe during the regime of Akbar as

traders. A few centuries later, those traders in the form of East India Company, begun to

usurp political role and eventually became the rulers. A little while later, India was taken

over from those traders by Britain and formally annexed it as colony.

Even before India, it was America which was annexed by Britain. America got its

independence in 1776 through American war of Independence.

Australia, Andaman & Nicobar and some other countries were used as prisoner settlements.

India’s struggle for independence though is recorded to have begun by Mangal Pandey in

1857 who led Sepoy Mutiny of 1857, it was demand for limited autonomy. It was as late as

1930, when congress demanded Poorna Swaraj or full freedom. The irony of this

independence struggle for British was that almost the entire leadership of this struggle was

British educated.

Trade was free in those days. European countries did not intervene in the trade but gave all

possible support. Biggest barriers to free trade during those days were robbers, thugs and

pirates. Imperialistic powers sent their ships to far off locations to ensure that sea routes are

kept clear of pirates.

There was free flow of raw material from India to England and finished products back to

India. Some finished products were also exported from India. But on the whole, raw

materials and finished products from India were purchased at very cheap rates but imports

were at very high rates. Thus, the imperialists who came in the garb of traders, not only

became rulers but also exploited and milked the country to enrich their own country. The

most unusual part of British rule in the country is that British could never naturalise in

India unlike so many foreign invading races to name a few, Sak, Hun, Pashan, Mughals,

etc. South Africa, even after independence, has mixed population of whites and Blacks. But

when British left India, they left lock, stock and barrel. Today we see no British in India

left behind from Raj era. And they left by choice. The people in power, disciples of

Gandhi, professing Ahimsa, would definitely not have thrown out any British by force if

they had decided to stay put.




Thus, India came under British rule not by direct military defeat, but by manipulation of

traders. It is again a curious fact of History that Robert Clive, who laid the foundation of

British dominance over India, had less than 400 British people with him. Rest were hired

from India only. With this background, it was only natural for the leadership at the time of

independence to eye the foreign trade with suspicion. India wanted itself to be insulated

from eddy currents of imperialism. Self reliance emanated from this philosophy. Export

pessimism and Import substitution were natural extensions of self reliance policy.

Foreign trade can be controlled by either of the two methods: -

(a) Tariffs based controls – Levy of custom duties to increase the landed cost of

goods to make in uncompetitive compared to local goods.

(b) Non Tariff Measures – These are restrictions imposed on imports on

different pretexts, like

(i) Quotas (Quantitative Restrictions)

(ii) Restrictions in the name of Child labour

(iii) Restrictions in the name of good produced in Prison

(iv) Restrictions in the name of Environmental Laws

(v) Restrictions in the name of Human Rights violations

(vi) Restrictions in the name of NPT

(vii) Visa restrictions (Labour movement)

The list is not exhaustive. There are many more excuses that are used to

restrict import of goods from any country.

India, in its attempt to cocoon itself from foreign trade, chose the simplest route of

imposing high customs duties on all imports. In some cases custom duties were as high as

over 500%. In addition, there were long procedures to get approval for import. Quota

system was also used in some cases.

However much India wanted to cocoon itself, it was not possible to completely dissociate

itself from world market. There were a great deal of essential items which had to be

imported because India had not developed the infrastructure to produce them. In some

cases like Oil, India did not have natural resources to produce them.

GATT (General Agreement on Tariffs and Trade)

The Genesis of GATT. In 1946, the newly-created Economic and Social Council of

the United Nations called a conference at the Brettonwoods to consider the creation of the

International Trade Organization (ITO) which was envisaged as the final leg of a triad of

post-War economic agencies (the other two were the International Monetary Fund and the




International Bank for Reconstruction and Development - later the World Bank). A

preparatory committee was established to draft the ITO charter.

During 1946-1947, the committee worked on the draft charter. However, independent of

this official task under the UN mandate, the committee members conducted tariff-cutting

negotiations among themselves in advance of the ITO (ITO never came into existence).

These negotiations resulted in about 45,000 tariff concessions affecting some US$ 10

billion of world trade.

The committee members also agreed to protect the value of the tariff concessions by early

acceptance of some of the trade rules of the draft ITO charter. Thus, tariff concessions and

trade rules together became known as the General Agreement on Tariffs and Trade

(GATT) which was signed on 30 October 1947 by 23 countries and came into force from

01 Jan 1948.

GATT was an agreement which was based on the principle of non-discrimination in trade

relations on a multilateral basis. Through this principle the same rights of market access

were extended to all 23 of the original signing nations, developed and developing alike.

Today, the World Trade Organization, the offspring of the GATT, has 132 members, all of

which have adopted the principle of non-discrimination.

Preamble: - Recognizing that their relations in the field of trade and economic endeavour

should be conducted with a view to raising standards of living, ensuring full employment

and a large and steadily growing volume of real income and effective demand, developing

the full use of the resources of the world and expanding the production and exchange of

goods,

Being desirous of contributing to these objectives by entering into reciprocal and mutually

advantageous arrangements directed to the substantial reduction of tariffs and other

barriers to trade and to the elimination of discriminatory treatment in international

commerce,

Have through their Representatives agreed as follows……………..

Paradoxically, despite its desire to cocoon itself, India was the founder member of GATT.

Founder members were a mix from developed and developing nations. The list of founding

members was as follows: -

1. Commonwealth of Australia,

2. The Kingdom of Belgium,

3. The United States of Brazil,

4. Burma,

5. Canada,

6. Ceylon,

7. The Republic of Chile,

8. The Republic of China,




9. The Republic of Cuba,

10. The Czechoslovak Republic,

11. The French Republic,

12. India,

13. Lebanon,

14. The Grand-Duchy of Luxemburg,

15. The Kingdom of the Netherlands,

16. New Zealand,

17. The kingdom of Norway,

18. Pakistan,

19. Southern Rhodesia,

20. Syria,

21. The Union of South Africa,

22. The United Kingdom of Great Britain and Northern Ireland, and

23. The United States of America:

GATT was based on 4 building blocks: -

1. MFN. Most Favoured Nation concept, which meant that the tariffs charged to

imports from the most favourable nation among the GATT members should be

charged to all the members. In simple terms it meant NO DISCRIMINATION

in tariffs.

2. Principle of Providing Equal Market Access Opportunity to all Signatories.

3. Principle of Trade Liberalisation through reciprocal concessions being granted.

4. Dispute settlement mechanism in operation.

“Rounds” of GATT trade negotiations

The countries who signed GATT negotiated new trade agreements that all would enter into.

Each such set of agreements was called a “round”. In general, each of these agreements

bound the members to reduce certain tariffs, with many special-case treatments of

individual products, and in many cases with exceptions and modifications for each country.

1. Geneva Round (1948): 23 countries. GATT enters into force.

2. Annecy Round (1949): 13 countries.

3. Torquay Round (1951): 38 countries.

4. Fourth Round (1956): 26 countries. Tariff reductions. Strategy set for future

GATT policy toward developing countries, improving their positions as treaty

participants.

5. Dillon Round (1962): 26 countries. Tariff reductions.

6. Kennedy Round (1967): 62 countries. Tariff reductions. This was an across-the-

board reduction rather than a product-by-product specification, for the first time.

Anti-dumping agreement (which, in the United States, was rejected by Congress).




7. Tokyo Round (1979): 102 countries. Reduced non-tariff trade barriers. Also

reduced tariffs on manufactured goods. Improvement and extension of GATT

system.

8. Uruguay Round (1993): 123 countries. Created the World Trade Organization to

replace the GATT treaty. Reduced tariffs and export subsidies, reduced other import

limits and quotas over the next 20 years, agreement to enforce patents, trademarks,

and copyrights, and open up foreign investment

India participated in all the 8 rounds and gained admission into WTO as the founder

member by virtue of being member of GATT. China which was the founder member of

GATT but had later withdrawn from it, is yet to get the membership of WTO. It has

currently been accorded an observers status. To become the full member, it requires the

vote of 2/3 members of WTO.

GATT had succeeded to a reasonable extent in removing tariffs but was only partly

successful in removing the non-tariff barriers.

Dunkel Draft. Dunkel Draft had generated lot of heat after the Uruguay round.

Dunkel Draft was named after Arthur Dunkel, then President of GATT. Dunkel Draft

brought in non-trade issues like patents and other intellectual property rights and foreign

investments into the fold. (Originally only trade and tariff was the subject matter of

GATT). These were the issues which were prime concern of Western Countries due to

rampant piracy of drug patents, films and books in the third world countries. Thus, the draft

was heavily tilted in favour of West. By forcing third world countries to Dunkel Draft,

Western Countries stood to gain the most. This was the prime reason for its resentment

outside the West.

IMF – The purpose of IMF is to help the countries with short term “Balance of Payment”

problems.

World Bank – World Bank takes care of long term funding requirements of the countries.

These two institutions are similar to Money Market and Capital Markets who have similar

roles in the economy of a country.

The trio of Mr Willy Brandt, the German Chancellor and Nobel Peace Prize winner, Mr

Robert McNamara, US Secretary of Defense and the World Bank President from 1968 to

1981, and Norwegian President (some lady) proposed New International Economic Order

through North South Commission in 1977. Mr Man Mohan Singh was a member of this

commission. However, this initiative did not work out and died a quiet death over time. But

these were extremely well meaning people who proposed integration of poor South with

rich North.

Post termination of cold war, re-alignation of the world order is in progress. Eastern Europe

which was till then communist in their ideology broke away from the Russia and has been

integrating with Western Europe and America because of their geographical proximity and




religious and cultural similarities. Some of them have already been admitted into NATO

also. However, the Central Asian Republics have not been able to integrate with the West.

Central Asian Republics are essentially Muslim dominated countries. Also, they are located

closer to the Middle East Countries. So, they are religiously and cultural attracted to the

Middle East.

India is today completely out of sync with the world trade. Prior to disintegration of Russia,

India had special relationship with Russia and all other communist countries with the

exception of China. India had special trade treaties with them which allowed India to

import their goods (primarily Defence goods/Weapons) on rupee payment. This rupee

account was used by them to purchase consumer goods like tea leaves etc from India. But

after the breakup of USSR, all such arrangements were lost leaving India out in the cold. It

was member of no trading block. There were NAFTA (North Atlantic Free Trade

Association), European Common Market, ASEAN (Association of South East Asian

Nations), OPEC and a few more which encompassed almost all the major trading nations in

the world. India was only member of the SAARC (South Asian Association for Regional

Cooperation), a body which could never discuss any trade issues due to severe distrust

among the member countries. Today, India’s share in world trade is just 0.82% and share

of exports in GDP is barely 6 % against an average of 30-40% of most of the advanced

countries.

Although India professed Non-Alignment, it was viewed with scepticism or even down

right smirk by the West because of more than obvious tilt of India towards USSR. India

had even entered into a Friendship Treaty with Russia prior to launching 1971 offensive

against Pakistan. This treaty unambiguously stated that attack on one country would be

construed to be attack on other country and therefore …………. This was one of the

deterrents for USA to give full support to Pakistan in Bangladesh as this could have led to

direct confrontation with USSR and could have become cause for WW III.

China is managing a great paradox. There are two systems in operation parallelly. While

the Eastern Coastal China has embraced the Free Market Economy, Central and Western

China are still steeped deep in communist market economy. The difference in per capita

income between poorest and richest province is of the order of 11 times.

India embraced the free market economy in 1991. In 1993, the exchange rates were

liberalized to be determined by the market rather than Govt fixing it artificially. RBI still

intervenes to maintain the exchange rates at desired rates but it does so by market operation

(selling and buying the dollars from market).

India has huge trade development potential in Pakistan, Afghanistan and beyond. However,

Kashmir disputes has shut the door for trade with Pakistan. Route to Afghanistan passes

through Pakistan. Other route is too circuitous to be cost effective. Similarly, central Asian

Republics markets are difficult to access due to Pakistan factor. Solution to Kashmir

problem will not only open huge Pakistani Markets but also other markets.

Economic Integration between different states is achieved through a five step process:




1. Free Trade Zone

2. Customs Union

3. Common Market

4. Economic Union

5. Federation

1. Free Trade Zone – A group of countries decide to remove all the restrictions of

trade and services among them.

2. Customs Union – Free trade among members. But custom rates with non

member countries would be higher.

3. Common Markets – In addition to trade and customs, all barriers for capital

and labour are also removed.

4. Economic Union – The group of countries follow common macro economic

policies. European Union is example of Economic Uni0on. An Economic Union

involves giving up part of the economic sovereignty. Like the fiscal deficit of

any country in the EU can not exceed 3% of the GDP. In case it exceeds 3%,

certain measures would have to be taken by the concerned country immediately

to check the inflation. It also involves harmonizing various laws. EU also has a

separate parliament in Brussels which has been announced to be the capital of

EU.

5. Federation – Like United States of America.

Such economic integration is also called formation of trading blocks between different

states. But these trading blocks promote protectionism rather than free trade. Free trade

between a few states is always at the cost of free trade with rest of the nations.

Trade is a major fault line among nations. Trade leads to money. And MONEY, WOMAN

and LAND are the three major contributors to the reasons for war besides RELIGION. In

the past, quite a few wars have been fought on trade disputes.

Resources are the second fault line among nations. Oil resources led to Iraq annexing

Kuwait and consequential intervention by USA alarmed by its energy security getting

compromised. The second war on Iraq by USA on the pretext of weapons of mass

destruction was also fought to garner 11% of the world proven oil resources.

The third fault line is the civilization or religion. Islam V/s Christianity.





As stated earlier, India followed a policy of Export Pessimism and Import Substitution till

1990. Imports, as well as exports, were a difficult exercise, with imports being far worse

than exports. Import of an item required a great deal of processing through the bureaucratic

channels apart from high import duties.

But there was a small Open General License List. Items in this list could be imported with

little hassles compared to other items. But Govt permission for import had still to be

obtained which promoted “Rent Seeking” behaviour (Economic jargon for Bribe).

From 1991, we have embarked upon export led growth. While we are trying to make

amends for the follies of the past, there is greater realisation of missed opportunity

presented by the world trade explosion in the late part of the last century. East Asian

countries, viz, Thailand, Singapore, Hong Kong, South Korea, Taiwan, etc, encashed it to

earn the sobriquet of Asian Tigers. These were the countries which had almost similar level

of per capita income and poverty level among the masses. But while we kept chanting the

GARIBI HATAO slogans and begun to embrace the socialism ever more tightly

(Nationalisation of Banks, Airlines and so on), the export led growth that they embraced in

1970s and 80’s has almost completely removed poverty in those countries. We forgot the

basic maxim that charity never makes anyone rich. Don’t give a hungry man a bread,

instead teach him how to earn one. We concentrated on finding ways to make prices

affordable for the poor artificially (through subsidised sale from controlled price shops

(Ration Shops), permits, etc) but never bothered to see as to how even that small money

would reach the hands of poor. India moved in the opposite direction of growth for two

decades. We finally began to walk on the export led growth path only from 1991. But even

this walk is haltingly. While in the decade from 1991-2000 the journey was more or less

secretive, we are still following politics of deceit, deception and camouflage to promote

reforms. There are enough strong lobbies within each party including Congress and BJP

who are still not convinced about the merits of Free Trade and open economy. Left Parties

in any case have ideological hang ups in addition to fear of survival. In the new market set

up, Marxist philosophy does not have much relevance and thus they would get completely

marginalised. Although there are some welcome signs off late. Even left parties have

begun not to see red each time some one utters MNC. Mr Buddhadeb Bhattacharjee, CM of

West Bengal, is singing the reform tune loudest and others in the party are forced to sing in

chorus. It is ironical that these self styled champions of poor working class have caused

them maximum harm. In any case, Left Parties have always espoused and promoted the

cause of the organised labour who form a very small percentage of the total labour in the

country.

Since 1991, India has gradually removed most of the import restrictions. Now there is a

small negative list called SCOMET List. This is the list of items which have dual use. On

one hand they can be used in various industries for beneficial purposes, on the other hand

they could also be used for creating dangers to public health and safety. SCOMET stands

for Special Chemicals, Organisms, Materials, Equipment and Technology. Chemicals like

Phosgene gas, Methyl Isocyanides, nerve gas, or materials like radio active sources, or




organisms like small pox can cause havoc if they fall into terrorist hands. Cobalt 60 which

is held by almost 40-50 hospitals in Mumbai alone for dealing with any nuclear fall-out can

be used to make dirty bomb.

EUROPE and WTO

European Union has a “Common Agricultural Policy” which is the biggest stumbling block

in WTO.

Importance of Food-Security was realised by European countries early on due to regular

wars amongst them. As a result, they promoted their agriculture through massive subsidies.

This subsidy is continuing even today and any attempt to reduce the same is met with

violent protests. France followed by Germany are two leaders in subsidy in Europe.

Similarly, in America, there are grain mountains which are kept as security against any

draught and are dumped into the sea after regular intervals. India itself has Food Security

policy which caters for sustenance for two years in case of continuous draught in whole

country. Various food for work and mid day meals programmes are sustained from this

stock.

Effective rate of protection in Europe for agricultural products is almost 250 times

compared to India.

Developing countries have been continuously demanding phasing out of the agricultural

subsidy by rich countries but have not succeeded so far. Agriculture will therefore remain a

difficult item for negotiation in WTO.

During Singapore Ministerial Conference, West is keen on including Profession sector

(Like permission for lawyers from other countries to practice in India) in WTO.

________________

Anti Dumping – Any product by country ‘A’ can not be sold in country ‘B’ at prices less

than domestic prices in country ‘A’. If a case of below par selling is reported and proved,

importing country is at liberty to levy anti dumping duties on such products. Wooden

furniture was being imported from China at almost 1/3 of local rates. Complaint was made

to DGFT. On investigation, it was found that the rates of import are marginally higher than

domestic prices and therefore complaint was dismissed.

GATT has an exclusion clause also. This special clause is to exclude the items that are

critical to the economy of the country. India has refused to allow export of Iron ore with

high iron content.

In case of protectionism, while producers gain due to monopolistic pricing in absence of

adequate competition, consumers lose. Losses to individuals are substantially higher than

gain to the producers and thus country loses too.




WTO is the beginning of end of concept of Nation States. In order to allow WTO to

function smoothly, some economic sovereignty is required to be surrendered by each

member country. As the WTO becomes strong and markets open up, more and more

sovereignty would need to be surrendered making the borders less and less relevant. Thus

the concept of Nation States gets diluted. In case of America and Canada or among the EU

states, there is free flow of man and material. Bus from Srinagar to Muzzafarabad in POK

will weaken the stranglehold of political parties on people on both sides of the border and

promote harmony thus weakening separate state philosophy.

European Union is currently an economic union but it may aspire to become a political

union in future.





Marxist philosophy had predicted death of capitalism due to its internal contradictions. The

great economic depression of 1930 looked like Marxist philosophy coming true. But,

Keynes saved capitalism by propounding the Keynesian Model of development.

The cause of WW-II was Treaty of Versailles which was arrived at after the WW-I. The

treaty was heavily loaded in favour of the victors and very humiliating for the losers.

Germany lost tens of thousand Km2 in territory and over 132 billion gold marks in war

reparations besides military restrictions. Germany suffered this humiliation for some time

and eventually it lead to WW-II. Keynes had written about this lopsidedness of the treaty.

While it was alright for India to start with Nehru Mahalonobis model of development, it

should have changed over to export oriented growth from late 1960s onwards. Instead, we

delved deeper into socialist fold till 1990 when foreign exchange crisis led to change in the

export policy.

Apart from loss of economic growth, another social cost that India paid for its longer than

required honeymoon with socialism was institutionalisation of corruption in the society.

Prior to 1970, there were occasional instances of corruption. But events post 1970

promoted corruption in social life to such an extent that now we have occasional instances

of Honesty in public life. Corruption itself has greately contributed to stunted growth of

economy due to leakage of resources at all levels.

One of the first act of Mr Narsimha Rao govt with Mr Man Mohan Singh as the FM from

1990 was to free the Foreign Exchange from Administered Price Regime. The FE was

finally freed from Govt control in 1993.

The Oil PSUs privatisation failed because of the Supreme Court ruling that the companies

who were nationalised earlier by the Act of Parliament, can be Denationalised only by

passing another Act of Parliament. BJP Govt did not have enough majority in the

Parliament to get this piece of legislation passed by both houses of Parliament. And

therefore it dropped the legislation itself. But the privatisation of Oil PSUs has a history

going back to 1971 war. During the war with Pakistan, in which USA supported Pakistan,

two international Oil giants, viz Burma Shell and Esso, did not cooperate fully with the war

effort. They were reluctant to follow govt orders with required speed and alacrity while

Indian Oil went all out to support the war effort. It is difficult to say at this point whether

their responses were tardy because of profit considerations (Govt purchases were at

controlled rates) or due to directions from their political masters in Washington. Post war,

when Mrs Gandhi returned to Parliament with 2/3 majority, privatisation of oil PSUs was

her first task. Thus, Oil is strategically important for national security.

West is allowing increased emigration due to various reasons: -

1. Population in West has stabilised and even got negative growth in some

countries.




2. Due to increased longevity, ratio of old people has got higher, leaving few

people for productive jobs.

3. They do not have enough graduates in science, maths and other higher

disciplines to keep their laboratories running.

But they want only skilled and semi skilled population emigrating. They don’t want the

unskilled labour coming in. VISA is an effective non tariff barrier to eliminate unwanted

emigrants entering the country legally.

India has abundant supply of skilled as well as unskilled labour. The old cliché of Brain

Drain is almost dead now. India now wants the labour sector to be opened by the world so

that more and more skilled and unskilled personnel can move out.

Services were an alien concept to GATT before the Uruguay round. GATT was committed

to “Trade in Goods” only. However, West was keen to include the services as part of

GATT. And they pushed for its inclusion. USA is especially keen on opening up of the

world market in Finance, Insurance and Law.

India has been very reserved in opening up the services sector for foreign competition and

there has been very selective opening till date despite tremendous pressure and arm

twisting by USA.

8th

round of GATT negotiations commenced at Punta del Este in Uruguay in 1986 and

lasted till 1994. This round of negotiations generated maximum heat as West utilised it to

include their multiple agenda of TRIPs, TRIMs and Services.

TRIPs – Trade Related Intellectual Property Rights

TRIMs – Trade Related Investment measures

While TRIMs was not a very contentious issue, TRIPs was conceived to be highly

disadvantageous to the developing and under developed countries, especially in areas of

agriculture (seed patent, Genetically Modified products and related issues) and

pharmaceutical industry (cost of medicines going up exponentially). Even the economists

of West were not very convinced about it but USA and Europe under pressure from their

business lobbies pushed ahead for their inclusion. India till then had only process patent

which allowed companies to steal the idea of drug from the West and develop a separate

process in a few years for producing the same drug. Thus, drugs in India were available at

prices which were in the range of 2.5% to 10% of their cost in West or even in Pakistan.

This became a major concern for people and NGOs. In addition to mandatory product

patent, West was able to increase the life of patent to 20 years from approximately 7-14

years earlier.

India and Brazil were the two countries who opposed the inclusion of services in GATT

negotiations charter vehemently. GATT had 15 agenda items for negotiations. 15th

agenda

point was services.




The 15 agenda points were: -

1. Tariffs

2. Non Tariff measures

3. Tropical products – Natural goods especially agricultural raw material produced

in tropical areas.

4. Natural Resources based products

5. Textiles and clothing – Multi Fibre agreement (MFA) (expired on 01 Jan 2005)

6. Agriculture

7. GATT articles

8. Safeguards

9. MTN agreements and arrangements

10. Subsidies and countervailing duties

11. Disputes settlement mechanism

12. Trade Related Intellectual Property Rights (TRIPs)

13. Trade Related Investment Measures (TRIMs)

14. Functioning of GATT system

15. Trade in Services.

Tariffs – India has reduced its tariffs a great deal. However, even today with reduced

tariffs, India is the highest taxed country in the world. India is gradually reducing the tariffs

with aim to reduce them to an average of 7 % in line with East Asian Countries since India

wants to join ASEAN where current duty structure is in the same range.

Tropical Products – Typical tropical products are cocoa, rubber, coffee etc.

Agriculture – It is highly vexed issue as West does not want to reduce the subsidies on

Agriculture. The agriculture in West is directly and highly subsidised and has very strong

farm lobby. Indian subsidy to the agriculture is indirect in the form of cheap power,

insurance scheme, subsidised water and fertilisers. The paradox is that international price

of Urea is far below the subsidised cost of urea. However, if import of Urea is allowed in

the country, the Indian companies would shut down and then cost of urea in international

market would shoot up. This is called predatory pricing.

Another issue relating to Agriculture is Sanitary and Phytosanitary. It relates to Germ,

Plasma and viruses in food products. Thus, in case of food products, the inspection is not at

the end of the production line but right from the beginning to the end process at every

stage. In a typical case of milk products, the inspection will commence from the field

where the cattle graze to their shed and upto packing process. Some times these standards

are artificially raised to create artificial non tariff barriers for developing countries’ exports.

Indian Development has strong Urban bias. The investments in urban areas in social and

infrastructure sector are much higher. Infrastructure is also a kind of subsidy. Thus a urban

dweller enjoys much more govt subsidy than his counterpart in villages. Indian Govt and

bureaucracy has been very sympathetic to the farmers for current and historical reasons. To

begin with, agriculture is a high risk low yield profession. Vagaries of nature like, draught




and flood create havoc year after year. Secondly, farmers were the most exploited lot in pre

independence era. Land revenue was the only tax collected in Raj period. And the

collection was absolutely ruthless. Not a penny was spared by the British or Zamindars. All

the infrastructure created in Raj era, was through the surplus extraction from farmers.




Lecture Date: 01-09 Oct 05 Paulo Friere, a Brazilian educationist of 20

th century had proposed two education concepts:

1. Banking Concept of Education

2. Problem Posing Concept

Banking Concept of education is what is being widely followed in India. Its one about

teachers transferring information to students. It works exactly like Bank Account. Each day

of studies accumulates more information into account of the student. At the end of certain

period, student gets a certificate that student has so much balance in his account

(information). It works on the principle of memorisation of facts and figures. Accumulation

of information is not necessarily learning. He may have collected lot of information, but

has he really learnt how to use it effectively to know his environment and derive benefits

from it? In other words, has he been able to convert the information into knowledge? Has

he learnt the art of piecing together those separate pieces of information to arrive at a

conclusion?

The real problem in Banking Concept is that students don’t understand what they have

learnt. They have only become familiar with something which was unfamiliar till

yesterday. The element of self analysis is missing.

As opposed to Banking Concept, in the Problem Posing Concept, teachers assist students

in finding knowledge rather than just shooting out facts and figures and readymade logic

for memorisation. The students are given problems to solve and the teacher is there to

guide them to solve it. It is a two way interaction between teacher and student rather than

monologue that happens in most of the classes.

Because of this “Banking Concept of Education” being continued even at college level, the

quality of graduate level education imparted in most of the colleges in India is far more

inferior than “West” even though their basic education quality is decidedly inferior.

Book Reading Strategy (For books having long term relevance)

A book should be read thrice over. The first two readings should be sympathetic readings.

Read the first time absolutely nonchalantly without allowing any question to pop up in the

mind. The effort should be understand what the author is trying to convey. Do not begin to

question his writing then. Grasp the theme and wider structure of his philosophy and

arguments. Second reading should be little more thorough but still without any questioning

of his statements and argument. Grasp the finer points of his arguments. The critical

analysis of facts, figures, arguments, hypothesis, etc, starts during the third reading. This is

the time when one should question whether he agrees with the author and if yes why. Can

you think of any arguments beyond what author has forwarded? Is there some thing that

author has missed out? Or you disagree with the author. Why?




The most important aspect of learning is “to learn the art of learning”. We are living in the

most exciting part of human existence till date. It is said that the only thing that is constant

in today’s world is “Change”. Change has been continuous. But the rate of change that we

are experiencing today is a great deal faster than ever before. Life of technical knowledge

has reduced from one life time to just about a decade. A person would need to learn lot of

things probably four to five times in 50 years of active life. And if learning has become

continuous process, art of learning would keep you apace with young generation and ahead

of peers.

Technical Knowledge V/s Knowledge of History

Technical Knowledge gives skills where as Historical knowledge gives wisdom to apply it.

Knowledge of history is very important because it will tell you which part of the technical

knowledge to use where. To cite a real life example – Professional Cook will know how to

cook the best of Italian, French, Mughlai, South Indian, etc, dishes. But your regular waiter

will know by knowledge of history of your past orders and comments what you like to eat

and with how much salt, spices and chillies. Mother will know what you like to eat. She

may not be the best cook in the world, but she can give you satisfaction like no one else

because she is armed with your maximum history.

Knowledge of immediate history is important. Nothing happens in vacuum. There is

nothing like Robinson Crusoe Island in real life. What ever happens today, including your

reaction to an event, has some relation to some event in your past. Therefore, knowledge of

past forewarns us about possible effects of certain events. It also helps us understand an

event in correct perspective and find appropriate solution because understanding “why” of

problems is half the solution. Take the case of reluctance of farmers to pay the electricity

bills. If you refer to page 8 above, you will find that farmers were given free power from

late 1960s till recently to help them increase farm output and thereby achieve food security

for the country. It is only natural for any one to object if he is asked to pay for something

which he is accustomed to use free of charge. This historical fact about farmers’ reluctance

to pay electricity bill can help in finding correct solution to this problem.

Though a little far fetched and even hilarious, we can find a historical relation between free

power to farmers and pesticide in soft drinks. Free power to farm sector led to over

irrigation of crops. Due to over watering of the crop, excess water seeped into the earth into

underground water. Seeped water carried the washed away fertiliser and pesticides. Thus,

the underground water bodies got contaminated with pesticides and other chemicals. Same

pesticides were detected in soft drinks.

Management of Change

Russia has often gone for change with discontinuity. Bolshevik Revolution of 1917 and

then Glasnost and Perestroika of 1990s were such examples of change with discontinuity.

There was anarchy of almost a decade before some order was finally restored both the

times. For a manager it is very important to manage change with continuity. (Or else he

will also lose his job like Gorbachov)




In order to manage change with continuity, i.e. gradual change, knowledge of history is

very important. Knowledge of immediate history, say past 40-50 years is more relevant

because that is what is active life span of people.

India was induced into accelerated change process in 1990 by the Balance of Payment

(BOP) crisis, but without discontinuity. We achieved some headway in the initial years but

thereafter the rate of change has been rather moderate. We, the Indians, as a society have

remained oppressed even after independence. Before the Independence, it was British and

Kings. After independence, middle class has assumed the same role. Unfortunately, in

India government is not the solution but part of the problem itself. The dispossessed vote

out a government in election. But the new set is no different. Names are different but

ideology and philosophy of governance remains same. There is a lobby (vested interests) of

politician, government officials and businessmen that benefits from the status quo, though

at great cost to the general masses. And we have been suffering them. This is what

Bertrand Russell, noted British Philosopher and anti war protestor, had termed – The Crime

of Silence. This crime of silence gets the boost from the reward system. Keeping mouth

shut against injustice is often more profitable than raising the voice in the convoluted

justice system of the country. This suppresses the change.

India’s backwardness in 21st century is result of this refusal to change. Today, India is

where Germany was in 1814, before arrival of Bismarck. South Korea and India had parity

in economic status just 30 years back. Today, Korea has wiped out poverty and we still

have 26% of people living below poverty line even in the best monsoon year. In the years

of bad monsoon, this figure rises to 45%. We may have done reasonably well on the

external front, but we are still not out of shadows of bankruptsy on the domestic front.

Example of Maharashtra, with over Rs 1,10,000 crore debt burden is there for every one to

see. Central Govt spends almost 70 paise of every rupee that it earns towards debt

servicing. As a matter of fact today entire budget deficit is on account of debt servicing.

India’s productivity comes not from the organised labour, which is highly overpaid, but

from the unorganised labour sector. To take example of Mumbai, the productivity comes

not from Nariman Point but from the slum of Dharavi where every rupee counts for

workers.

India’s Vote Against Iran in International Atomic Energy Agency (IAEA)

India’s vote against Iran in IAEA has more than what is visible, i.e. India’s proximity to US

in recent times or even beyond India’s pressing energy needs.

India’s energy needs are becoming even more important than atomic bomb needs in the

current scenario. With minimum deterrence of nuclear weapons in place, and current

geopolitical situations, war, especially nuclear war, is only a remote possibility. However,

energy needs are casting an evil shadow on the development efforts and poverty eradication

programs.




In order to be able to remove poverty in near future, growth rates of minimum 8% year on

year basis (compounded growth) are necessary. But this growth rate is possible only if we

have abundance of energy. After all, energy is required every where. Farm sector requires it

for irrigation and production factories require it for running their machines. General public

requires it to be able to use the goodies in life and that fuels the industrial growth.

Current Energy Scenario in India

Coal: India has vast reserves of coal but it is of relatively poor quality with very

high ash content. Therefore, it has to be blended with imported high quality coal to

improve calorific value (heat producing capacity) and decrease net ash content.

Latest estimates suggest that even these large reserves of coal may last for only 40

years on conservative estimates and 80 years on liberal estimates.

Petroleum: India’s crude oil production has been falling over the years. There has

been no major discovery of oil field since Bombay High. Though we had some

large finds of Natural Gas but even they are insufficient to meet the growing needs.

India has therefore been scouting for oil fields in foreign countries as also long term

agreements to import petro products from oil and gas rich nations. Pipe line projects

being negotiated with Iran and Bangladesh are under this policy. However, even

world oil reserves are expected to last no more than 40-50 years on liberal

estimates. Besides, prior to current boom in oil prices, India was already paying

close to 26% of its imports bill as petro bill alone. This situation can not be allowed

to exist for too long.

Nuclear Energy: Nuclear Power Plant have a contribution of about 16% to world

energy. In France, it is as high as 80% with South Korea following with 50% share

in local production. This is one source which has tremendous growth potential.

Given the current local as well as world energy scenario, India does not have much

choice but to embark on Nuclear Power development drive. However, we are constrained

by the technology due to sanctions imposed by USA post India’s nuclear explosions in

1974 and 1998. It is ironic that India’s nuclear program started with training of top Indian

scientists by USA under “Atoms for Peace” program launched by US President Mr Dwight

Eisenhower in 1953.

Even though we are attempting to develop the technology indigenously, it is time

consuming. If we can import the technology and fuel, we can save lot of time.

Nuclear Reactors can be either Uranium based or Thorium based. India has very

small resources of Uranium but very high reserves of Thorium. We have Uranium reactor

technology but not Thorium based reactor technology. This technology is still under

development.




U238 is a naturally occurring substance with small percentage (0.72%) of U235

isotope. This U235 is what is used in reactors. It can be separated from U238 by centrifuging

at the speed of 100,000 RPM. While theoretically it is easy to design a centrifuge working

at such high speed, in real life problems are faced in finding metals that can withstand such

high forces. “Maraging Steel” and Titanium alloys are used for manufacture of such

centrifuges. SAIL’s Rourkela Steel Plant and L&T have begun to manufacture this steel.

The other method is to use Plutonium 239. Plutonium 239 is found in the used fuel

rods of the nuclear reactor in tiny quantities. It is separated from the fuel rods by Solvent

Extraction process called Reprocessing. It involves dissolving the Uranium rods in nitric

acid and then precipitating the Plutonium 239 by using Bismuth Phosphate process. India is

using Plutonium 239.

All nations barring India, Pakistan and Israel have signed the Non Proliferation

Treaty. Iran is also a signatory. However, despite being the signatories, Iran and North

Korea are pursuing the Nuclear Weapon program. US and West fear this bomb and want to

stop this program.

Indo-Iran (erstwhile Persia) relations date back to over 800 years in history. Iran is

the only Sunni ruled state in the world. India also has substantial Sunni population. Iraq is

other Sunni dominated state in the world. While Iraq was a moderate Islamic state under

Saddam Hussein, Iran has always been a Radical Islamic state. (Malaysia and Indonesia are

other moderate Muslim states).

There is a historical civilisational divide between Islam and Christianity. After, the

fundamentalist movement of the last few years, especially after 9/11 and London

bombings, this divide has deepened, not withstanding reconciliatory utterances by Bush

and Tony Blair.

There is a fear against Pan Islamic brotherhood. In the event of dispute, Islamic

states tend to support other Islamic state irrespective of their relations with the other

country. Thus, there is a fear that if Iran make the bomb, they would pass it on to any other

Islamic states in the world. Iran has been as such providing shelter to various militant

outfits like Hamas of Palestine.

India has been cultivating friendship with Iran for two reasons. Firstly, the strategic

reason. Pakistan does not have the geographical depth. Being a narrow strip of land along

Indian border, entire Pakistan is within the striking range of Indian Air Force bombers. It is

a major disadvantage in war for Pakistan. India can damage Pakistan’s entire vital

installations in no time. Therefore, Pakistan has been trying to befriend Afghanistan and

Iran so that some of the war machinery could be based there for retaliation.

Simultaneously, India has also been trying to befriend both countries. While India was

quite successful in its attempt to befriend both countries otherwise, Iran is an unlikely ally

in case of conflict of any kind with Pakistan due to their Islamic brotherhood. Similarly,

India’s attempt to befriend Central Asian Republics with high Muslim population, like

Kyrgyzstan, Kazakhstan, etc have not been very successful where as Pakistan has made




good inroads in to those countries. Pakistan, by virtue of being an Islamic state, carries so

much influence in Muslim world that it has been effectively blocking India’s entry into

World Islamic Conference despite India having the second largest Muslim population in

the world. Thus, Iran’s nuclear capabilities would boost Pakistan’s nuclear capabilities.

Secondly, Iran has ample gas and petroleum reserves. India can tap those resources

for its mid term energy security. But, India’s long term energy interests lie with USA’s

nuclear supplies.

Iran’s list of friends in the world is not too long. Losing a friend would only harm

Iran’s interest. Thus, the fear of Iran’s severe retaliation is limited.




TECHNOLOGICAL ENVIRONMENT

Japan was the fastest growing economy in 60s, 70s, and 80s. It was clocking a

growth rate of 5% when other developed economies were languishing in the growth range

of 2%.

But come 1990s and Japan is out of the scene. Its economy has stagnated. In Japan

it is called the lost decade. 2000s is the second of the lost decade. But why did it happen?

Japan was the world leader in production. Every one talks of Toyota’s way of working

even today.

Japan had mismanaged its macro economy. With very low interest rates and very

high land prices, massive credits were taken and invested in stock market and real estate.

But once the bank interest rates were increased, there was sudden economic crisis and most

of the loans turned bad loans. This led to failure of many banks. Today, there are just 4

national banks in Japan. Credit was then not available for expansion leading to stagnation.

Another reason possibly was missing the technological bus. Japanese had mastered

the art of production. Their strength in the sunrise years of 60s, 70s and 80s was production

of quality electronics and automobiles at cheap rates. But world moved on to next

technological revolution of IT, internet and knowledge industry while Japan has no pie in

it. While Japan was still trying to achieve incremental savings by improving the production

processes, US entrepreneurs were making a killing by venture capital in knowledge based

industry.

Indian industry had also missed the micro electronics revolution. We don’t have a

single microprocessor manufacturer in the country even today.

If we see the history of Industrial revolution, we find that the first Industrial

Revolution was fuelled by Steam. Second Industrial Revolution was based on Electricity.

And now we are the door of the third Industrial Revolution and it is going to be

Biotechnology based.

Genetic engineering and pharmaceutical research are going to fuel the growth for

the next few decades. Even though ethical issues like tampering with nature are being hotly

debated, research in the field is progressing nonetheless. While Europe has capped many

research programs on the ethical grounds, US is pressing ahead full speed with it.

Insights into functioning of the human body have revealed that the behind the

biology is the chemistry. Human body works on chemistry. Even the feelings generated in

the heart are result of production of certain chemicals in the specific parts of the body.

Similarly, pains are induced by concentration of various chemicals in affected part of the

body. Bio revolution will be based on merging of Nano and Bio technologies.




Similar to computer field, India has good pool of professional in Bio field as well

and is in a decent position to take advantage of it. Bangalore is not only the IT capital of

the country but is also leading in Biotechnology research. Many companies are outsourcing

the bio-research jobs to India.

Indian Institute of Science, Bangalore is churning out research professional in a

wide spectrum of subjects. Fortunately, not many IISc grads head for foreign destinations.

Similarly, IIT Kharagpur has the reputation of little brain drain.

US benefited from the Anti – Semitism in Europe after the WW-II. (Anti-Semitism

is “Hostility towards the Jews”). There was exodus of Jews from Europe to USA. These

Jews have formed the base of “Knowledge Industry” in USA. Today, maximum research in

US is taking place not in the R&D institutes of manufacturing firms but in various

Universities by professors and undergrads. Of course, they are funded by the American

corporations. This is where India is lagging behind.

Like noted earlier, advanced nations are shunning the manufacturing sector as

engine of growth. Most of the manufacturing is being shifted to third world countries, by

design or default. Chemical and polluting industries are almost completely being shifted

out of the developed countries. They are rather concentrating on growth through cutting

edge technological developments (Knowledge Industry).

For India, max growth in the coming few decades is expected to be in the auto and

auto ancillaries. Indian companies have already started supplying components to leading

car manufacturers of the world. But India is also coming out as the prime source for

research professionals. Fortunately, this time around, we may not end up – just as many

cynics would like to term it- as “Cyber coolies”. However uncharitable it may sound, but

truth of the matter is that despite being the technical nursery of the world, India is still the

technical labour contractor of the world. We have few entrepreneurs in the field, and none

in the research field.

But this may not be the case in Biotechnology. We already have a few

entrepreneurial companies in place and many more would follow.

Genetics is an exciting field and tremendous research is underway around the

world. There are approximately 30,000 genes and 100000 teams working on them all over

the world.

Appropriate Technology and Not the Best Technology. Experience has taught us that

for every problem, the technology to use is the appropriate technology and not the best

technology available. Technologies are available but the initial cost as well as running cost

are prohibitive. Therefore, their affordability is a serious factor to be considered. In

addition, biggest problem being faced by many technologies is the human-technological

interface. Not every one is adept at using the new gadgets. There are even fewer to

maintain them. Gadgets are launched in the market with hundreds of features. But who is

going to train the users to exploit them to their full potential?




Vaccines have been invented for lot of diseases like ongoing Polio drive in the

country. But India does not have the “Cold Chain” to take benefit of same. Cold Chain

means an uninterrupted chain of refrigerated spaces from production process to

transportation, to storage up to village level. These vaccines are so sensitive to

temperatures that a few hours at room temperature leads to loss of their effectiveness.

Similarly, cancer treatment is affected by unreliable power supply in the country.

The best method available for cancer treatment is electron beam therapy. But India is

forced to use Cobalt-60 method for treatment despite associated dangers because of

unreliable power supply.

Nuclear Power Corporation Limited (NPCL) has 14 operational reactors. 08 more

reactors are under various stages of construction. One reactor in Rajasthan is being

decommissioned. Rajasthan has currently 4 operational reactors, 02 more are under

construction and 02 are planned. But the decommissioning itself is a 10 years long exercise

due to environmental safety issues involved in disposing off the radioactive material.

Disposal process often involves Vitrification. Vitrification means boiling the radioactive

material with molten glass and solidifying the amalgamation.

CIS countries have orphaned nuclear sources which were left by Soviet scientists

when they left those countries upon disintegration of USSR. India is helping these

countries in locating and disposal of these sources. Kazakhstan has huge mines of Uranium.

Bhartiya Nabhikiya Vidyut Mandal has been formed to oversee production and sale

of nuclear electrical power.

Indian Rare Earths Ltd is involved in mining of Monozite from which Thorium is

extracted. This thorium is being accumulated for future use once the technology for its use

is fully developed and perfected. Thorium is fertile material but not fissile. Fertile means it

can be used to produce fissile radioactive material.

Fission process is breaking of a big atom into two smaller atoms. But the net mass of these

two atoms is less than original atom which is called mass defect. This mass is what

converts into energy as per Einstein’s E=mc2.

India has a Uranium reserves in Jaduguda in Singhabhum district of Jharkhand.

Uranium deposits are there in Lambapur in Andhrapradesh also. However, these mines can

not be exploited as they are stuck in environmental clearance.

India’s uranium resources are modest with low concentration of uranium. They are

good enough to generate 10000 MW power for approx 40 years. Canada and Australia have

very large resources and the ore has extremely high concentration of Uranium238 to the tune

of 15%. Fortunately, all these mines there are in unpopulated area as against in India where

the areas are thickly populated.




India’s low concentration U238 is then enriched for increasing U235 content from

0.7% to 2.5% which is called low enrichment. This low enriched uranium is used in

Boiling Water Reactor at Tarapur. (There are 460 Boiling Water reactors in the world)

As against Open Fuel Cycle used in most countries, India uses Closed Fuel Cycle.

Spent fuel from Boiling Water Reactors in rich in Plutonium 239. It is then used in

Pressurised Heavy Water Reactors which were initially developed by Canada. This fuel can

be further processed using technology called “Reprocessing” which is a sensitive

technology since it can be used to produced weapon grade fissile material. If the

enrichment of Plutonium reaches 20%, the material becomes weapon grade. Plutonium

based reactors are called Fast Breeder Reactors since they breed further Plutonium in the

process itself.

Electronic Corporation of India (ECIL) uses technologies developed by BARC and

produces controls and instrumentation for BARC and other defence projects.

Other three organisation in the field of Nuclear Technologies are

(a) Heavy Water Corporation

(b) Nuclear Fuel Complex

(c) BRIC.

Only NPCIL borrows money from market but is not listed company. Other

companies are fully funded by the Govt due to sensitive nature of their job.

Containers have become big security threat for the nations. 1000s of large large

containers arrive in country every day and it is physically impossible to inspect the contents

of each container thoroughly. Therefore a technology for scanning of computer is being

developed which can ensure content inspection without opening. One technology is based

on the old X Ray concept. Latest technology is based on Fast neutron scanning.

In the post 9/11 paranoia of security, Americans have taken container security

initiative. They are insisting on all countries to accept their resident custom inspectors who

would inspect the US bound containers and seal them prior to dispatch. Thus, the container

would not have to wait at US port for security inspection and clearance. India is averse to

allow these resident inspectors at JNPT which is so close to Naval facilities. However,

refusal would harm business interest as there are about 7000 containers being shipped

every month to US and delays in security clearance would thwart the competitive edge of

Indian exporters.

Infrastructure development is necessary to take advantage of the technology.

Rakesh Mohan Committee is the road map on which Indian Govt is working.

There are four major forces working in the atmosphere

1. Electromagnetic Force (EMF)




2. Gravitational Force

3. Small Interaction Force

4. Big Interaction Force

While EMF has been partly understood and advantage taken of to fuel IT and

telecommunication revolution, little or nothing is understood about the other three forces.




Lecture Date: 16 Oct 05

Ethical Choices in Business

What is ethics?

Ethics has often been misunderstood to be conforming to law. On the contrary, ethics is

about voluntarily conforming to what is good/acceptable/desirable behaviour without the

force of any legal/social obligation. The key word here is VOLUNTARILY. It is about

choosing to do some thing that is not mandated by the law or not doing some thing that is

permitted by the law but may cause harm to some one.

Ethics are not universal. Ethics are derived from social values. Word “Ethnicity” is a

derived word from Ethics which means relating to a specific social group. Thus, a set of

ethical values relate to certain group which may not completely match with other group.

Ethics keep changing from place to place, group to group, country to country and time to

time. What is considered ethical today may have been considered unethical a few centuries

back. What is ethical in one religious group may be considered unethical in other group.

So, ethics are time and space dependent. Ethics are what you have learnt from the society

as right or wrong behaviour. Law of the land might change from time to time but ethics

remain relatively constant over a fairly long period of time. Whatever is bound by the law,

does not remain ethics any longer. An ethical practice today might be coded into a law

tomorrow. That practice would loose the high ground of ethics from that moment because

ethics is about “voluntarily conforming to a good behaviour”.

Ethics almost always appear on the fringes of the law. It might often cross the boundaries

either way by small margins. What it means is that some thing which is lawful could still

be unethical and even vice versa. Ethics is what a true human being is expected to do in a

certain situation without the binding of law. No breach of law is committed by a person

who accosts and demands his outstanding loan from his debtor in front of marriage party of

the debtor’s daughter. But would any person support such an act? It would be termed

outright unethical. Similarly, many consider Robin Hood to be perfectly ethical, though his

acts were downrightly unlawful. It is widely accepted norm that any act which achieves

greater good for greater number of people is ethical. Even a refusal to forego one’s lawful

right would be termed unethical if it is going to cause a disproportionate and catastrophic

loss to other person.

Business is as old as human civilisation. Laws came into existence much much later. But

code of ethics began to take roots when man began to live in groups. Laws are nothing but

formal codification of ethics of the society. But laws are constrained by the infinite

contingencies and subjectivity of the situations to codify every thing. Thus, ethics will

continue to be there to guide the mankind on to the right path. Bhagwad Gita is the oldest

treatise on code of ethics.

Role of ethics in business has been a perpetual issue. It has been gaining importance in the

recent times due to geographical spread, growing size of businesses and their ever growing




capability to impact the lives of millions and millions of people. It has also been

highlighted by the colossal scams in some businesses in recent times. The purpose of

business is to earn profits. And almost every business tries to maximise its profits. But the

question that arises here is how much profit and at what social and other costs? In a market

place, beyond a certain point, one man’s profit is at the cost of loss to some one else.

Market forces generally are able to balance the amount of profit among all participants in a

trade. But situations arise when there is concentration of power, legal or illegal, in certain

pockets which can be exploited to usurp unduly large share of profit to great detriment of

others. Any amount of law making can not cover every contingency. At such times, a good

corporate citizen is expected to limit his greed and not indulge in irrational behaviour even

though the existing laws may be helpless in curbing such practices. Sense of fair play

should prevail.

Take the recent case of TCS IPO. The IPO was heavily oversubscribed at the upper band of

offering. There was nothing stopping Tata management from charging maximum amount

from its subscribers. Yet the management decided to charge Rs 50 less than it could have.

It was a profit the company left voluntarily for its prospective shareholders to encash. On

the other hand take the case of Allahabad Bank. Share prices just before the IPO were

manipulated to almost twice its earlier prices and then sold at the maximum offering

despite share prices having fallen at the time of actual allotment. Allahabad Bank can not

be nailed legally, but were they ethical?

Tatas have been at the forefront in establishing and financing various institutions of social

and national relevance like Tata Institute of Fundamental Research, Tata Institute of Social

Sciences, Tata Cancer Hospital, IISc and so on. Tatas have no legal commitment to invest

such huge sums in these esteemed centres of social and national cause. And yet they do it

out of corporate ethics of considering it as their pay back to society.

In the western world, oldest work on ethics is by Aristotle, a Greek philosopher and

student of Plato, from 384 to 322 BC. And the latest work is by English philosopher

George Edward Moore who wrote about 70 years ago.

Between these two extremes was the German philosopher Emmanuel Kant who lived in

18th

Century. His idea of ethics was to think of an act and then trying to universalise it.

(Each person committing that act). Check if it leads to any contradiction. If it leads to no

contradiction, it is ethical. If it does, it is not. For example, if every poor person is allowed

to steal wheat from rich person, a stage will eventually be reached when no rich would be

left with any wheat to be stolen by remaining poor. This is a contradiction. Therefore, it is

not ethical. But a reverse stipulation does not lead to a situation where some people would

be left who could not exercise the option. Thus not stealing is ethical.

Kant’s Proposition: Never use a human being merely as means to an end. Remember

that he is also a rational end in him/herself.

He also wrote the books (1) Critique of Pure Reason and (2) Critique of Practical Reason.




Gedanken Experiment (also called “thought experiment”) are used to attempt to understand

something about the universe. – Wear a spectacle and colour the glasses red. Whole world

will look red. But is the world really red? Thus, a subjective apparatus has been imposed on

the objective world to make it look red. Our subjective perceptions make the people,

incidences, happenings, events, and the whole world appear different from the reality.

Kantian philosophy was a cusp between Aristotle and post Kantian philosophy. Bertrand

Russell was another contemporary philosopher of Kant who is more famous than Kant.




CORPORATE GOVERNANCE

Corporate Governance is acceptance by management to safeguard the rights of

shareholders as true owner of the corporation and their role as trustees on behalf of the

shareholders. Corporate Governance is all about commitment to values, about ethical

business conduct and about making a distinction between personal and corporate funds in

the management of a company.

Corporate Governance emanates from business ethics. It is about conducting the business

in an honest and transparent manner where by every stake holder, viz, owners, employees,

shareholders, suppliers, customers, government, society and even competitors, gets its

rightful share from the business and no single entity is able to corner disproportionate share

of profits.

Voluntary adherence to business ethics has been eroding over the years as evident by recent

exposures. Enron/Arther Anderson, Worldcom and Zerox are rather recent examples, but

there have been many in the recent past. Watergate scam of 80’s in US had led to formation

of what is now popularly called Cadbury’ Committee. Some very large multinational banks

have failed in the last decade. Failure of Bank of Credit and Commerce International in

1992 being the largest and most rattling one. The malpractices were so heinous and

rampant that it earned the epithet of “Bank of Crooks and Criminals International”.

But such happenings are not new. Only their scale has grown due to globalization. But such

failures of seemingly healthy businesses brought into focus the need for corporate

governance. It led to a feeling that many of the good business practices, hitherto left as

ethical choice, need to be codified. And thus took the birth of concept of Corporate

Governance.

In India the concept of Corporate Governance took its birth after the Stock Market scams of

90s first led by Harshad Mehta and later by Ketan Parikh. Securities and Exchange Board

of India was formed in 1992 to check Irregularities and ensure smooth functioning of Stock

Exchanges. However, even before it could get its act together, Harshad Mehta scam broke

out. Even later, there were large scale scams involving Co-operative Banks, Finance

companies, Plantation companies, large Stock broking houses and so on. Even Unit Trust

of India was not spare of the irregularities. But while so many companies turned sick and

small investors lost billions of their hard earned money, promoters continued to prosper

nevertheless.

SEBI constituted a committee on corporate governance under the leadership of Mr Kumar

Mangalam Birla, a leading Industrialist and member of Board of SEBI.

Need for Corporate Governance:

1. No information is given to investors regarding diversification, expansion,




change in business, loss of business etc and instead used by promoters and top

management for insider trading at the cost of small investors.

2. Many large companies are known to manipulate rules and even Govt Policies

with the help of bureaucracy and political meddling.

3. If investors, FII and general public, put their money, they have every right to

ask information about company.

Objective of Corporate Governance:

The fundamental objective of Corporate Governance is the enhancement of shareholder’s

value, keeping in view the interest of other stake holders. This harmonises the need to

strike a balance at all times between the need to enhance shareholder’s wealth whilst not

being too detrimental to the interests of other stakeholders in the company.

Factors Influencing Corporate Governance: Four factors which influence corporate

governance: -

1. The ownership structure of company

2. Financial Structure

3. The structure of the company Board

4. The Legal, political and regulatory environment within which company

operates.

How to Achieve Good Corporate Governance?

Since the voluntary compliance to sound corporate practices have failed in large measure,

there is a need to codify the good practices as law. There is a need to institute checks and

balances in the functioning of the Management and the Board. Some of such measures are:

1. Increasing the number of independent directors. It is recommended that at

least 50% of the directors should be non executive (independent) directors.

2. Audit Committee. It should consist of at least 3 members and all non

executive directors.

3. Transparency in declaring remuneration of all directors.

4. Formation of Share Holders/Investors Grievance Committee.

5. Transparency and honesty in declaring in company’s major issues to

investors.

6. Appointing auditors at random from a pool of auditors: This could be one of

the most effective methods of ensuring corporate governance because most of

the malpractices eventually are revealed at the audit stage. However, since audit

company is selected by the company itself, most of the auditors tend to toe the

company’s line to ensure future business. It is like asking the accused to appoint

his own prosecutor and judge.




Unfortunately, there is more of lip service than real intent in this field. The industry,

Company Law Board, SEBI and even Government have all been less than keen on

achieving good corporate governance. Despite the reports on Corporate Governance being

available with every implementation agency for over 10 years, little has been done to

implement the recommendations. While there is talk of SEBI issuing a guideline increasing

the number of independent directors, there is virtually no talk in any quarter on the

suggestion to introduce a random appointment of auditor from a selected pool of auditors.




"THE BUSINESS OF BUSINESS IS BUSINESS!"

This is the phrase first articulated by Mr Milton Friedman. The issue here is about

business’s role in society. For many years, this, as the credo of General Motors President

Alfred T. Sloan, Jr., in 1923, had justified virtually every decision made in the business

world. Especially in the United States, there was little doubt that the function of the private

sector was to provide for the needs of society and thereby generate wealth for itself. Other

matters, where wealth generation was not commensurate, would be dealt with by public-

sector bodies and agencies.

But sooner than later, this view begun to looked at with askance. If every citizen was

expected to shoulder some social responsibility, then why should businesses not be? To be

sure, corporations were called upon to assume a reasonable degree of responsibility

towards social welfare. Even this assumption of social responsibility has its financial

rewards. Society returned the investment in its affairs by reposing better faith in the

company’s products and thus spurring growth of business.

If corporates claim that business of business is business, then the governments may stick to

mantra, Government got to govern. That will set the stage for confrontation. The

regulations will toughen and taxes will increase. In the pharmaceutical sector, the past

decade's storm of social pressures—stemming from issues such as public perceptions of

excessive prices charged for HIV/AIDS drugs in developing countries—are now translating

into a general (and sometimes seemingly indiscriminate) toughening of the regulatory

environment in various countries. Secondly, company’s philosophy percolates down to its

employees. Employee satisfaction level in such companies is often low and thus high

turnover of employees.

But off late, some sort of fundamental change is taking place. Some trends are clearly

visible to us and generally assumed to be positive; globalization of the economy, continued

economic growth, spreading democratization, accelerating technological advance,

burgeoning global communication, etc. Other trends are less positive and are, so far,

unyielding to remedial efforts; increasing inequality, progressive destruction of the natural

environment, increasing concentration of power and wealth, rising unemployment and

underemployment together with "jobless growth." Meanwhile, there is talk of a new

worldview and a "new paradigm" in the business world. This new world view mandates

that we transcend the traditional view of the role of business.

Business people in decision-making positions who can influence the way their companies

affect the world, Executives, managers, financial officers, investors, consultants, business

professors, and government policy makers - need to reflect on these issues.

So, in conclusion, business of business is NOT JUST BUSINESS but business with a little

mix of social responsibility.

(Note - Major portion of this has been downloaded from internet)




Indian Family Business

These are tumultuous times for Indian Family Businesses. We have seen some mega

upheavals in family businesses in recent times. Vertical split in the Reliance Group is the

biggest and most recent, then there are Modis, Goenkas, Birlas, Bajaj, etc. The list is fairly

long. There are a few exceptions too. Tatas, Wipro, Godrej, TVS group, Murugapa Group,

etc, are sustaining their family business. However, there are very few among these

successful family businesses, likes of TVS and Murugappa groups, who have retained the

original flavour of family business. Most are left with only semblance of family control.

While the ownership is still largely retained by the family and the final decision still lies

with the patriarch of the family, the management has been completely corporatised with

little or no interference of family. The board meeting does not resemble a family reunion

any more. The fact of the matter is that only a few enterprises of each family business

empire are in actual control of the family. Other business units have been spinned off as

professionally managed enterprises. In the case of Tatas, less than six per cent of 160 firms

bearing the Tata brand name are actually owned by the founding family.

The bane of Indian Family business is sibling rivalry and succession planning. The problem

lies in the fact that while family grows exponentially, the business growth rarely matches it.

And then, as family grows in all directions, brothers, cousins, nephews, etc, bondings

become weaker and jealousy, suspicion, greed and rivalry among extended family begin to

surface. There are also problems of appreciation, perception and natural inclinations. Like

in any group, there are Status Quoists, Capital Venturists and Middle Coursists. Balancing

so many diverse interests and views becomes unmanageable at some stage unless it has

been meticulously planned. Reliance is the classic case of such failure.

Another problem lies in speed of change in the way businesses are being conducted.

Liberalisation and globalisation have changed the business landscape beyond recognition in

just over a decade. The paradigms of business have gone for a quantum change. Our local

companies are turning into Multinationals. They are venturing into new businesses. Such

tectonic shifts in business paradigms are difficult to assimilate in a family set up. However,

many business families have been forward looking and trained their future scions in best

business schools of the world.

Next issue with Indian Family Businesses is HR policies. Family Businesses have been

traditionally relying on loyalty than professionalism and meritocracy. Loyalty is virtue

which is on a steep decline. Manpower attrition rate has grown manifold across the

industry. Even the best of the companies are not able to retain their employees. Even Tatas,

Infosys and Wipro, the top three companies in HR policies are dogged by the employee

attrition. Product life cycles are getting shorter by the day and profit margins are shrinking

due to cut throat competition in a liberalised and globalised economy. In such a scenario,

meritocracy has no substitute. Job market has changed from employers to employees

market. Therefore, old HR policies are losing their effectiveness. HR departments have to

be strengthened to attract and retain the best talent available.




Trust and faith are hall mark of Indian Family Businesses. Traditional Family businesses

generally worked on explicit faith on employees, business partners and customers. Entire

diamond trade in India is in the hands of Gujarati community. India is world’s Diamond

hub for policing with 80% world caratage being polished here. Entire trade is run on

explicit faith. Crores rupees worth of diamonds are sent through trusted employees to

customers and rarely even receipt is taken. Such trust makes the business model much

simpler to function. Even retail customers are able to avail merchandise on credit from

family run businesses without any receipt. But such customer often reciprocate the loyalty.

Thus, the trust and loyalty run both ways.

Another hall mark of Family business is their resilience. Feeling of ownership and

concomitant commitment does not allow the family to quit the business so easily even at

worst of the times. Long association with same business, often since childhood, gives them

kind of insight into intricacies of a particular business that no Business School can ever

aspire to teach.

CASE STUDY: WIPRO

Wipro Corporation, based in Bangalore is a family business run by Mr Azim Premji. This

is a business house founded by his father and handed down to him. Though the company

has become a Pvt Ltd Company and listed in the stock exchanges, Indian as well as some

foreign, Mr Premji has divested only about sixth of the stocks and still owns over 83% of

the shares. It was initially a consumer product company manufacturing oils, soaps, talcum

powder etc but diversified into IT and computer.

Mr Ajim Premji was sent to Stanford University USA for his graduation in electrical

engineering. This tactical and farsighted decision of his father paid off handsomely in

subsequent years. Wipro, under the guidance of Mr Premji, was one of the first brick and

mortar old technology manufacturing based companies to spot the potential in computer

and IT field and exploit it. Today, it is counted among the front runners in the IT and

computer industry in the world. So much so, that the original business of consumer

products has gone into the background and very few even know about it.

Despite having the complete control over the company, Mr Premji has turned the business

from Family business to corporate one. He hires the best talent available any where. Wipro

is also rated as one of the best employers in the country. But his business is so far

completely insulated from his family. His two sons are unknown entities to Wipro

employees. While one is busy earning a MBA degree in US, other is busy helping his

mother run a charitable trust (Azim Premji Foundation) funded by his father.




Sustainable Development

As per the definition coined by United Nations Division for Sustainable Development, it is

“Development that meets the needs of the present without compromising the ability of

future generations to meet their own needs.”

Another definition is “Sustainability’ implies that the activities are ecologically sound,

socially just, economically viable and humane, and that they will continue to be so for

future generations.”

Emphasis in both cases in on “Future Generations” which means that in our quest for

development, we have to keep a perspective which goes beyond our lifetime and keep the

future of human race as a whole in mind as well.

Sustainable development has three dimensions, economic, environmental, and social. If

sustainability is to occur, it must meet needs of all these three dimensions. However, the

most important factor in sustainability of development is Environmental. We are greatly

dependent on natural resources for our sustenance. Starting from some thing as basic as air

for breathing, to fossil fuels for energy generation, most of the natural resources can sustain

only a limited rate of use and abuse. While some resources are completely non-renewable,

others can renew only at limited rate.

Environmental issue can also be subdivided into following categories: -

1. Energy;

2. Forests;

3. Water:

4. Land/Industrial Development;

5. Air/Atmosphere pollution and Climate Change.

Energy. Fossil fuels are examples of non-renewable resource. Forests can be

renewed but at a very slow rate. As per the current estimates, world stock of fossil fuels

will last 50 years at the most. And therefore, unless alternate sources of energy are

discovered, we may land into energy crisis. Some signs of same are already visible.

Therefore, development of a viable alternate to fossil fuels before fossil fuels get exhausted

is the biggest challenge facing us today. France had turned to Nuclear Energy to meet its

power generation needs. Its 80% of power generation is nuclear against world average of

just 6%. India is attempting to expand its basket of nuclear energy. Otherwise, sun is the

cheapest, most sustainable, most widely available and cleanest source of energy available.

But the real problem is that we are yet to find an economical method of large scale storage

of energy.

Use of fossil fuels is having another impact on the environment, ie, increasing level of

oxides of carbon like CO2 and Carbon Mono Oxide. While deteriorating the quality of air




for breathing, it is also causing global warming. Global warming is leading to melting of

glaciers in Arctic and Antarctic regions as also in higher mountains. Many low lying areas

in the world are feared to be inundated/submerged/lost by increase in sea level.

Forests. Ruthless destruction of forests for wood, farming and Industrial/economic

development is damaging the ecology and leading to climatic changes like rainfall pattern,

CO2 level in air, global warming, Flash floods, etc. Unless efforts are taken to ensure

adequate forest cover, we may have irreversible catastrophic changes in climate.

Water. “Water water every where, not a drop to drink” is a situation that seafarers

often face. But it may be a situation that cities like Mumbai and Chennai may have to face

in the near future. Water resources are getting polluted at increasing rate. Mithi river in

Mumbai, Yamuna in Delhi and Ganga in Kanpur have turned into stinking sewers. In

addition, because of inadequate irrigation facilities, there is over dependence on ground

water for irrigation. There are many countries like India, where there is over exploitation of

ground water and thus water table is falling at the alarming rate. Warnings have already

been issued by world bodies about impending water crisis in India, may be just two

decades hence. We have to learn to use, conserve and enhance our fresh water resources.

Ways to recharge the ground water are necessary lest we leave our future generation

thirsty. River Interlinking Project is one such idea to reduce the dependence on ground

water.

Land. Entire land mass available on earth has already been explored and there is no

more possibility of any new land mass. World population which today stands at about 6

billion in growing and we need to provision space of living, water and food for them. We

can not afford to waste any land mass due to any nuclear accidents like Chernobyl. Nor can

we afford to lose existing land mass due to effects of global warming like melting of

glaciers and polar ice cap.

But more importantly, we can not even afford to waste any land as a result of careless

Industrial Development. Liquid pollutants as a result of Industrial Development of a

region are cause of concern. Certain industries discharge highly toxic chemical wastes and

release them either to rivers or to open fields from where ground water gets polluted

causing diseases in the local population. Careless discharge of cement dust from Cement

Factories is affecting crop yield in the surrounding areas due to soil damage by cement

dust. Smoke and Oxides of Carbon, like CO2 and Carbon Mono Oxide are in any case

almost inevitable products of any production process.

Fact of the matter is that there are very few production industries which do not have any

adverse impact on environment. And the cost of reducing those impacts is fairly high and

can make the entire process economically unviable. Rich countries are therefore shifting

away from production to knowledge based industries. Production is getting increasing

shifted to developing countries like India, China, Brazil, Mexico, etc. Developed countries

have almost completely exited from most polluting of all, chemical industries.




Also, many consumer products, like computers, TV monitors, etc have highly toxic

chemicals and metals like mercury, etc which are being discarded at increasing rate in

every country. These discarded products find way to poor countries, like India and China,

where poor resident process them to recover some value (recovery of metals). Remaining

plastic and mercury etc gets dumped in their neighbourhood and pollutes the environment.

Even excessive use of chemical based fertilizers, like Urea, etc, have negative long term

impacts on the ground and water.

Air/Atmospheric Pollution/ Climatic Changes. These are the issues which are

interlinked. One leads to other. Emissions from fossil fuels cause air pollution. Increased

concentration of air pollutants is partly responsible for Global warming along with

CFC/Halon gases which have been identified as the major sources of climatic

changes/Global warming. CFC gases have a tendency to deplete the Ozone layer, and thus

increased level of UV rays causing global warming and skin cancer incidences. Halon

gases are being replaced with other environment friendly gases. However, Kyoto treaty,

which was supposed to limit CO2 emission, is awaiting ratification by some major

offenders since 1988.

Sustainable Economic Development. Sustainable economic development is one which

is based on policies, methods and resources which can be sustained for a long term and do

not get exhausted in near future. Take for instance, economic development based on natural

products, like wood. If the exploitation rate is faster than renewal rate of jungles, there will

be no jungles left after some time and the source of economic development will dry up.

Middle East economy is currently based on export of petroleum oil. But this is not a

perpetual source and will dry up after some time. Therefore, most of these governments are

investing the funds in other economic activities which can be sustained even after oil

revenue is not there.

Sustainable Social Development. Any economic and environmental development has to

be broad based. All segments of the society need to be taken into account. If an economic

or environmental development creates wide gap between two sections of society, or

severely impacts a relatively large section, it will cause social upheavals like it happened in

Russia in 1917. Such economic upheavals have capacity to nullify all the gains made till

that day.

Thus, sustainable development is demand of the day. We need it not only for us but for our

future generations.




TECHNOLOGICAL ENVIRONMENT

Broadly speaking, technology refers to the application of knowledge, skills, scientific

principles or ideas to the production or improvement of goods and services that have utility

or value. Technology lies at the heart of economic development.

Unfortunately, India has suffered in this field. India missed the first and second Industrial

revolutions which were based on steam and electricity due to poor technological

environment in the country. Third technological revolution, based on computer and IT, has

been taken advantage of to some extent. Many people don’t accept IT and computer

revolution as third generation technological revolution. Call it third or fourth, next

generation Industrial Revolution is going to be Bio Technology based for which India is

well poised. This revolution will be based on marriage of Bio and Nano technologies.

Today, there are over 1,00,000 teams working on 30,000 genes. India has the required

number of research professionals, Entrepreneurs and research labs and institutions, like

IISc, where cutting edge research is progressing at par with rest of the world.

Let us go back to 1947 when India got freedom. We were technological extremely

backward. We did not have technology, nor did we have the technical manpower. Nehru

Mahalobanis model of economic development identified this as priority and begun to

import technology for setting up basic and heavy industry. In order to produce technical

manpower, they set up a three tier educational system which consisted of

(a) Engineering colleges including IITs starting with IIT Kharagpur in 1957 for

producing Techno Managers

(b) Polytechnic Colleges for producing Technical Supervisors

(c) ITIs for producing machine operators and technicians.

Today we produce close to 2,00,000 engineers in addition to large number of MBAs,

MBBS and computer professional which is the largest pool of technical manpower in the

world. Yet it is not commensurate with our population and need to be further augmented.

Privatisation of Higher Education is required to achieve this growth.

Research. This is one field where we are still far behind. India’s R&D budget is still

0.8% of the GDP with most of it being contributed by the Govt. Govt is aiming to increase

this budget to 2% of the GDP by 2007. Govt has given liberal concessions like Weighted

concessions in Income Tax for investments in GDP, Excise Duty exemptions for goods

produced with indigenous technology, Import Duty Concessions and accelerated

depreciation benefits for R&D equipment. It is an irony of fate that despite having the best

technical talent in the world, we are technically backward. Indian scientists and

professionals are making their mark in research field all over the world. However, policy

environment like research facilities, investment, regulations, remunerations, poor

incentives, patent laws, etc, have played against those bright minds coming out of the IITs




and other top notch institutes to flourish in the country. Govt’s over done Nascent Industry

Argument, which sheltered the private industry against local as well as international

competition also contributed a great deal in holding back the industrialists from investing in

new technologies.

Another area requiring attention is research facilities in our colleges and universities. In

USA and England, maximum research is being undertaken by Universities and undergrads

rather than the research labs in the industry. We need to adopt the same model in our

country too.

Current Trend. There is a shift in technological environment in the world.

Technology Development, from being a tool to support industry, has become an Industry

by itself. The rich countries are giving up the manufacturing sector and moving towards

Technological Development as engine of economic growth. Manufacturing sector is

shifting towards Developing countries. West is investing large amounts in R&D in

computers, IT, Pharmaceuticals and various other fields. It is now popularly called

Knowledge Industry. India with its vast pool of entrepreneurs and technically trained

manpower is ready to take maximum advantage of this development. However, it is still

some time away. In the meanwhile, maximum growth is expected in the auto and auto

ancillary sector. India has already become hub for supply of auto ancillaries to the best auto

makers in the world.

While technologies are available, we need to know which technology to use. We need to

follow the principle of Appropriate Technology and not the best technology. Given the

constraints of initial and running costs, maintainability, ease of use, etc, appropriate

technology needs to be selected for use. Take the case of Electron Beam Therapy for

cancer. Despite this being the best technology available, we have to use Cobalt 60

notwithstanding inherent risks associated with this technology due to unreliable power

supply situation in the country.

Similarly, India is constrained by availability of technology and raw material for use of

nuclear energy. India has vast reserves of Thorium but does not have technology to use it

for energy generation. India’s agreement with USA is likely to accelerate this process.




LIBERALISATION MEASURES IN PRE 1990 ERA

Though the Liberalisation, Privatisation and Globalisation process got kick started from

1991 after the Balance of Payment crisis in 1990, liberalisation in small measures had

begun since mid 1980s during Mr Rajeev Gandhi’s Prime Ministership.

In the beginning of 1980s, the success of East Asian Economies had brought alive the folly

of regimented socialist economy that India was practicing. Having been educated abroad

and trotted the globe as an Air India Pilot, Mr Rajeev Gandhi had seen the growth in other

countries. In a sense, he was a fresh blood in the Indian Political system who could think

beyond the box. In addition, he had brought some good advisors like Mr Sam Pitroda who

was a successful entrepreneur in IT field in USA.

After packing off Coca-Cola and other MNCs out of country in 1977 by the Janta Party

Govt, the first entry of a Multinational in the country was by Suzuki in the form of a Joint

Venture for Maruti car. Soon after, approval was given to Lohia Machines Ltd to

manufacture LML scooters, thus giving an effective challenge to monopoly enjoyed by

Bajaj Scooters. In the mid 1980s, after Mr Rajeev Gandhi took over as Prime Minister,

liberalisation began in industrial environment.

The first step in the direction was in form of Public Sector Reforms. Selected Public Sector

units were given increased functional autonomy. However, even these attempts were highly

discretionary. There was little method in the selection of Public Sector Units for giving

autonomy. The attempt was half hearted and could not be carried to conclusion due to

heavy resistance from within and outside.

The second step was liberalisation of import licences. However, this attempt also back fired

as the exports did not grow along with imports and caused trade deficit after initial growth

of economy.

Next three steps in the path of liberalisation were path breaking and far reaching in their

impact.

Broad-banding of Licences began. Broad-banding means the definition of licences for

manufacture were broad based. Earlier, a car could not be manufactured against a jeep

licence. Under Broad-banding, any four wheeler could be manufactured under the same

licence. This killed the monopolistic behaviour of many industries.

Next in line was Liberalisation in the field of communication. Mr Sam Pitroda who was the

father of communication revolution in India, set out to expand the Telephone and related

services in India. STD telephone booths begun to sprout in every nook and corner of India.

New technologies were researched and experimented in this field under the auspices of

Centre for Development of Telematics (CDOT).




Finally, computerisation took its real birth in the country. Railways were the first large

industry where a public utility service was computerised and made a huge difference to the

lives of people. Rail Reservation System was computerised making system more efficient,

transparent and passenger friendly. Computer education got a flip and large strides that

country took in the subsequent years in the field of computer are result of those defining

changes in policy.

All the above changes were largely incremental steps through minor changes in policy here

and there. They were unlike the paradigm shift which began in 1991. But the beginning

was made then, however small “baby steps” they were.

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