SAMPLE ASSIGNMENT FIRST SEMESTER 2016 JANUARY-JUNE 2016

Course Code MS - 03 Course Title Economic and Social Environment Assignment Code MS-03/TMA/SEM - I/2016 Assignment Coverage All Blocks

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School of Management Studies

INDIRA GANDHI NATIONAL OPEN UNIVERSITY MAIDAN GARHI, NEW DELHI – 110 068

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1. a) Examine the interaction between Economic Environment and Business Management. Interaction between economic environment and business management-

The interaction between the business management and its economic environment helps in identifying the opportunities for and

threats to the business. it open up new frontiers of growth for the business firms. Environmental analysis makes the task of

managers easier in dealing with business challenges. It helps the firms to analyse the competitors’ strategies and formulate their

own strategies accordingly keeping in mind its own strength and weakness.

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(a) Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully.

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(c) Continuous Learning: -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(d) -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(e) Meeting Competition: It helps the firms to analyse the competitors’ strategies and formulate their own strategies accordingly.

(f) Identifying Firm’s Strength and Weakness: ------------------------------------------------------------------------------------------------

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Example-

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Sustainable businesses, such as the companies presented in the case study—such as Stonyfield Yogurt, Oakhurst Dairy, and Green Mountain Coffee—tend to focus on their responsibility to the environment and societal impact and also tend to recognize that government policies and programs are often necessary to help them achieve -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Businesses also use campaign contributions to support their position and to try to influence public policies that can help them increase profits. Seven of the ten largest corporations in the world are oil companies, based on revenues. Their access to funds for lobbying and campaign contributions gives them a significant voice in the political system and on policies that can impact sustainable businesses. ============================================================================================ b) Discuss the relationship between economic and non-economic factors with the help of interaction matrix, giving examples. The economic environment of business exercise a strong influence on the non-economic environment of business just as the non-

economic environment influences the economic environment. The economic environment is, thus, both exogenous and

indigenous, it determines as well as it is determined by the non-economic environment. Let us consider a few specific interactions.

The social ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Let us take another example: Social movements largely determine the economic system . If the workers cultivate an attitude of confrontation, rather than cooperation, --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The educational cultural environment and the economic environment of business are also interdependent. The state of economic development acts as a decisive factor in the choice of a system of education. For example, -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The politico-legal environment and economic environment of business are also interlocked to such an extent that we sometimes think of political economy of business . In a situation of political stability, business enterprises happen to be forthcoming and businessmen are willing to take more economic risk. But if there is political instability, business uncertainties multiply and, therefore, entrepreneurs may not like to take up new business ventures. The state of business in Punjab during the period of terrorism is a recent example. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Finally, we come to the interaction between the physical environment of a country and the economic environmental business in that country. A number of legislations have been enacted in many countries to conserver natural resources and to preserve natural the physical environment. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In Interaction Matrix above ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

------------------------------a two-way interaction. The Interaction Matrix serves as ready reference for understanding environmental relations and relations.

2. What is the rationale for private sector development? Critically examine the problems and prospects of privatization.

Rationale for private sector development-

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The private sector can be an engine of inclusive growth by generating decent jobs, contributing public revenue and providing affordable goods and services. If it invests in suitable innovation and business models, it can also improve poor peoples' lives by boosting their productive activities. The European Commission assists developing countries in their economic reforms and private sector development initiatives.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ The private sector itself can play an important role in advocating for a better business environment. Many development agencies

thus work to strengthen the capacity of businesses and business associations to engage in public-private dialogue with

governments.

The private sector itself can play an important role in advocating for a better business environment. Many development agencies thus work to strengthen the capacity of businesses and business associations to engage in public-private dialogue with governments.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Rationales for different types of PSD interventions-

1. How Business Environment Reform leads to Pro-Poor Impacts

The business environment can be defined as a complex of policy, ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ The positive impact of economic growth on poverty reduction has often been questioned in development circles. Some evidence has however been presented for this; for example, --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- However, in many developing and transition countries, the business environment is hostile to market-led growth; private enterprises suffer excessive regulatory barriers and in most respects regulatory costs are higher than in developed economies. Poor business environments are also more likely to have a disproportional negative impact on women-owned businesses, which are more likely to remain informal. It is recognised that good regulations are necessary to secure benefits, protect workers, consumers and the environment, to promote the rule of law and for the efficient functioning of market economies. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 2. How Market Development Approaches lead to Pro-Poor Impacts

Proponents of market development approaches, such as Making Markets work for the Poor (M4P), value chain development or industrial strategy, ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The priorities expressed by the poor themselves confirm this priority; the World Bank's Voices of the Poor report surveyed 60,000 poor people and asked them what they saw as their best escape route from poverty. The answer was unequivocal: through jobs or economic opportunities. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 3. How Public-Private Partnerships lead to Pro-Poor Impacts

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ For donors, partnering with individual businesses can offer a cost-effective way to achieve development goals. For example, development agencies sometimes lack capable implementing partners, while the private sector already has great capacity and outreach – and may be able to co-finance shared initiatives.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Problems and prospects of privatization-

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 1. Natural Monopoly

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 2. Public Interest

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 3. Government loses out on potential dividends.

Many of the privatised companies in the UK are quite profitable. This means the government misses out on their dividends, instead going to wealthy shareholders.

4. ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 5. Fragmentation of industries.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 6. Short-Termism of Firms.

As well as the government being motivated by short term pressures, this is something private firms may do as well. To please shareholders they may seek to increase short term profits and avoid investing in long term projects. For example, --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3. Discuss the merits and demerits of currency convertibility for a developing economy.

Currency convertibility for a developing country:- For the rapid growth of world trade and capital flows between countries convertibility of a currency is desirable. Without free and

unrestricted convertibility of currencies into foreign exchange trade and capital flows between countries cannot take place

smoothly.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- In order to maintain the exchange rate of their currencies in terms of dollar or gold various countries imposed several controls over the use of foreign exchange. This required some restrictions on the use of foreign exchange and its allocation among different uses, the currency of a nation was converted into foreign exchange on the basis of officially fixed exchange rate.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ For example, convertibility of rupee means that those who have foreign exchange (e.g. US dollars, Pound Sterlings etc.) can get

them converted into rupees and vice-versa at the market determined rate of exchange. Under convertibility of a currency there are

authorised dealers of foreign exchange which constitute foreign exchange market.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Merits-

For the rapid growth of world trade and capital flows between countries convertibility of a currency is desirable. Without free and

unrestricted convertibility of currencies into foreign exchange trade and capital flows between countries cannot take place

smoothly.

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-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- By convertibility of a currency we mean currency of a country can be freely converted into foreign exchange at market determined rate of exchange that is, exchange rate as determined by demand for and supply of a currency.

For example, ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ The exporters and others who receive US dollars, Pound Sterlings etc. can go to these dealers which are generally banks and get

their dollars exchanged for rupees at the market determined rates of exchange. Similarly, under currency convertibility, importers

and other who require foreign exchange can go to these banks dealing in foreign exchange and get rupees converted into foreign

exchange.

Convertibility of a currency has several advantages which we discuss briefly:

1. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 2. Encouragement to import substitution:

Since free or market determined exchange rate is higher than the previous officially fixed exchange rate, imports become more expensive after convertibility of a currency. This discourages imports and gives boost to import substitution.

3. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 4. A self – balancing mechanism: ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 5. Specialisation in accordance with comparative advantage: ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Since prices in competitive environment reflect that prices of those goods are lower in which the country has a comparative advantage, this will encourages exports. On the other hand, a country will tend to import those goods in the production of which it has a comparative disadvantage. Thus, currency convertibility ensures specialisation and international trade on the basis of comparative advantage from which all countries derive benefit.

6----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The Benefits of Capital Account Convertibility: The Tarapore Committee mentioned the following benefits of currency convertibility to India:

1-------------------------------------------------------------------------------------------------------------------- 2. -------------------------------------------------------------------------------------------------------------------- 3. ------------------------------------------------------------------------------------------------------------------------- 4. Improvement of the financial system in the context of global competition. Demerits-

It may be noted that convertibility of currency can give rise to some problems.

Firstly, ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Secondly, ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Thirdly, convertibility of a currency sometimes makes it highly volatile. Further, operations by speculators make it more volatile. Further, operations by speculators make it more volatile and unstable. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In developing countries if imports are cheap under complete currency convertibility then imports will increase and domestic production might be abandoned for cheap imports. This adversely affects domestic producer and employment in developing country.

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Thus it can be concluded that in developing country to make currency convertibility beneficial the domestic industry will have to be very competitive.

4. a) Briefly discuss the significance and need for financial reforms. Significance and need for financial reforms-

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Before examining the specific achievements of financial sector reforms in India, it is useful to reflect on the principles underlying

these reforms and their congruence with international practice. Financial sector reforms all over the world have been driven by

two apparently contradictory forces. The first is a thrust towards liberalization, which seeks to reduce, if not eliminate a number of

direct controls over banks and other financial market participants. The second is a thrust in favour of stronger regulation of the

financial sector. This dual approach is also evident in the reforms attempted in India and the background and rationale for it need

to be well understood.

The case for liberalization of financial markets is based on efficiency considerations similar to those used to justify liberalization in the real sector. The efficiency losses generated by various types of direct controls over banks have been extensively discussed by economists concerned with the problems of 'financial repression' in developing countries. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The case for stronger regulation on the other hand derives from the perception that financial markets are different from goods markets in important respects and liberalization of such markets aimed at allowing market forces free play can lead to inferior outcomes . Financial markets are characterized by significant asymmetries of information, moral hazard problems, and principal-agent problems and because of these features a free market equilibrium may not have the efficiency characteristics normally associated with market equilibrium in the goods market. For example, ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The broader objectives of the financial sector reform process are to formulate the policy for improving the financial health and to strengthen the institutions. As part of the reforms process many private banks were granted licence to operate in India. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- This has enabled the industrial units to avail credit facilities from a single institution. Despite the fact that the banks provide both the term loan and the working capital loans, the industrial units prefer the development banks for the following reasons.

----------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- Besides providing financial assistance, it acts as the implementing agency for the different government sponsored

schemes. Hence the industrial units can avail of both the financial assistance as well as the incentives offered under

various development schemes through a Single Window System. --------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------

The reforms currently under way in the banking sector and in the capital market, combined with the agenda for reform identified for the insurance sector, represent a major structural overhaul of the financial system. ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Finally, it is important to recognize that financial -------------------------------------------------------------------------------------------------

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---------------------------------------------------------------------------------------------------------. The impact of financial sector reforms in

accelerating growth will be maximized if combined with progress in economic reforms in other areas.

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b) What reforms have taken place in the small scale sector? Discuss with examples.

Reforms and Small Scale Industries- Small scale industries (SSIs) have grown and improved their share in international trade during the reform period. The

composition and terms of reference of the recently-appointed expert committee to review policies and programmes for the small-

scale industries sector are a clear indication of what is expected of the committee. More and better of the same thing: finance,

technology entrepreneur ship, regulation! THERE seem to be several reasons for the government's inability to enunciate a

policy towards or regarding small-scale industry and to reformulate its programme.

Firstly, the lofty ideals on which the programme for small industry ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There have been parallel developments: a number of small enterprises manufacture independently for the replacement market, some of them even spurious and unsafe products. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Secondly, the bewildering heterogeneity of the small industry sector and the steady erosion of their own representative organisations have willy-nilly aided the government's natural inclination to adjust the policy to suit the requirements of established large industry. -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Damn the wretched destitute poor who cannot have assets of even 3 crore of rupees! Clearly, the beneficiaries will be capital-intensive dependent anciMaries who can siphon off bank credit earmarked for the small-scale sector.

Several factors would have contributed to the sustained growth of small industry-

The remarkable upsurge in recent years in the growth of durable consumer goods and capital goods industries, particularly automobiles and electronics have encouraged the growth of ancillary and small scale units, directly and indirectly.

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The devaluation and depreciation of rupee in the 90s would have encouraged the growth of export oriented small scale units particularly in garments, leather products and handicrafts sectors.

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All these factors, among others, have collectively contributed to the unhindered high growth of small scale industry in the 90s.

However, small scale industry to have problems on diverse fronts which need to be tackled to further promote their growth in the

future.

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5. Examine the impact of economic reforms on growth rate of GDP and FDI. Impact of economic reforms on growth rate of GDP and FDI- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

India’s external debt has risen from Rs.130,200 crores in 1990 to Rs. 311,972 crore in 1995 indicating a growth rate of 19.1 per

cent per annum. Judged by the debt-service ratio criterion, the former Finance Minister Dr. Manmohan Singh recognised that this

ratio remains high by international standards.

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Agricultural growth has stagnated despite the privilege of having seven continuous good monsoons. Food grains production

growth rate was 1.5 per cent during the reform period which did not neutralize even the population increase.

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Food security and health security have been adversely affected for the poor as a consequences of new economic reforms. Less

than one-third of the foodgrains provided by the Public Distribution System are availed by the poor.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ exchange reserves, reducing fiscal deficit, controlling inflation etc., However, the long-term goals of reducing poverty,

achievement of full-employment, self-reliance and growth with social justice have remained unattended. The reform process

has not yet succeeded in reducing the fiscal deficit. Naturally, there is a need to re-orient economic reforms so as to achieve long-

term goals of the society, more especially full employment, self-reliance and growth with social justice.

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The Linear growth rate of FDI and other macro economic variables have been computed and provided in table 3 for the entire

period 1971 to 2009 and sub- periods i.e. 1971 to 1991 and 1992 to 2009.i.e pre and post reform period. The regression equation

used to calculate the linear growth rate is-

Yit = a + bT + εi,t

Where Yit = FDI and other macroeconomic Variable , T = time variable

a and b are parameters to be estimated, ε = error term

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The following multiple linear regression analyses were carried out to examine the impact of economic Reforms on FDI with few

macro variables in India.

Y = a + b1 X1 + b2 X2 + b3 X3 + b4 X4 + b5 D + ut Where,

Y= ----------------------------------- X1= ------------------------------------ X2= -------------------------------------

X3= --------------------------------------- X4= ----------------------------------------- D = dummy variable representing ‘0’ for pre-reform period (1971-1991) and ‘1’ for the post reform period (1992-2009). U = random error term.

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Although India begun its liberalisation process due to crisis, it is evident from the analysis that the economic reforms have

benefited a lot in terms of attracting FDI which has reached a historic high in recent years which in turn have significantly

contributed to the growth of economy in general and exports in particular. The unprecedented emergence of India in South Asian

region especially after the initiation of economic reforms program raises the issue of how well the FDI inflows exploit the reforms

process and thereby affect its economies in the region.

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Trade liberalization must proceed apace with all tariffs brought down to mutually agreeable levels in the coming decade. Infrastructure is another important area of reforms. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The good news, however, is that the experience of the past decade shows that change can occur.

It is notable that the policy framework everywhere plays an important role in determining the effects of FDI on a host country.

What then is the optimum level of FDI a country should aim for? The optimum level could be defined as that level of FDI which

generates a targeted growth rate of national income. There is also the opinion that at present, it is not FDI which promotes growth

but it is growth which attracts foreign investment. This may be so but undeniably FDI is one of the several factors which

contribute to growth. The country may need much larger volumes of FDI than it currently attracts if it were to attain growth rates

in excess of 10 percent per annum so as to bolster its economy.

6. Write short notes: a) Public Sector in the present scenario

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There is no doubt that public enterprises have played a significant role in the Indian economy. But the overall performance of

most of the public sector enterprises is not satisfactory. The rate of return on capital investment is very low. Most of them suffer

from the limitations already discussed in the earlier sections. To improve the performance of the public enterprise, Government of

India has taken several measures. On 24 July 1991 the Government of India announced its Industrial policy to improve the

performance and portfolio of public sector enterprises. The new economic policies also emphasized on liberalization, privatization

and globalization of Indian economy.

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The Government has taken every step to revive and restructure the public sector enterprises to improve their performance, productivity and profitability. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Government has approved revival plan of 15 cases till 30 March 2006. ============================================================================================

b) Economic Development

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Economic development is the development of economic wealth of countries, regions or communities for the well-being of their

inhabitants. From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-

being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The term "economic development," on the other hand, implies much more. It typically refers to improvements in a variety of

indicators such as literacy rates, life expectancy, and poverty rates. GDP is a specific measure of economic welfare that does not

take into account important aspects such as leisure time, environmental quality, freedom, or social justice. Economic growth of

any specific measure is not a sufficient definition of economic development.

In its broadest sense, economic development encompasses three major areas:

1) -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 2) ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 3) ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------This third category is a primary focus of economic development professionals. =======================================================================================

c) Importance of Balance of Payments

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- In the case of a developing country, the balance of payments shows the extent of dependence of the country’s economic

development on the financial assistance by the developed countries.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The greatest importance of balance of payments lies in its serving as an indicator of changing international economic position

of a country. The balance of payments is the economic barometer which can be used to appraise a nation’s short-term international

economic prospects, to evaluate the degree of its international solvency, and to determine the appropriateness of the exchange rate

of country’s currency.

However, ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Similarly, a favorable balance of payments should not always make a country complacent. A poor country may have a favorable

balance of payments due to large inflow of foreign loans and equity capital. A developed country may have adverse balance of

payments due to massive assistance given to developing countries.

Thus, ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------country’s economic dealings with other countries. ======================================================================================

d) Role of Government.

Governments are playing a vital role in the development of underdeveloped economies. (i) ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(ii) Institution of Controls: A high rate of investment and growth of output cannot be attained, in an underdeveloped country, simply as a result of the functioning of the market forces. -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(iii) --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Such investments will lead to the creation of external economies, which in their turn will provide incentives to the development of

private enterprise in the field of industry as well as of agriculture. The Governments, therefore, go all out in building up the

infrastructure of the economy for initiating the process of economic growth.

(iv) Institutional and Organisational Reforms: -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(v) Setting up Financial Institutions: In order to cope with the growing requirements for finance, special institutions are set up

for providing agricultural, industrial and export finance. For instance, Industrial Finance Corporation, Industrial Development

Bank and Agricultural Refinance and Development Corporation have been set up in India in recent years to provide the necessary

financial resources.

(vi) ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(vii) Economic Planning: The role of government in development is further highlighted by the fact that underdeveloped countries

suffer from a serious deficiency of all types of resources and skills, while the need for them is so great. Under such circumstances,

what is needed is a wise and efficient allocation of limited resources. This can only be done by the State. It can be done through

central planning according to a scheme of priorities well suited to the country’s conditions and need.

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