Month: January 2021

An economic system is a means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country. Economic systems regulate the factors of production, including land, capital, labor, and physical resources. An economic system encompasses many institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.

An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes and patterns of consumption that comprise the economic structure of a given community.

An economic system is a type of social system. The mode of production is a related concept. All economic systems must confront and solve the three fundamental economic problems: what kinds and quantities of goods shall be produced, What and how much economic resources will be used and how will the output be distributed?

The study of economic systems includes how these various agencies and institutions are linked to one another, how information flows between them, and the social relations within the system (including property rights and the structure of management). The analysis of economic systems traditionally focused on the dichotomies and comparisons between market economies and planned economies and on the distinctions between capitalism and socialism. Subsequently, the categorization of economic systems expanded to include other topics and models that do not conform to the traditional dichotomy.

Today the dominant form of economic organization at the world level is based on market-oriented mixed economies. An economic system can be considered a part of the social system and hierarchically equal to the law system, political system, cultural and so on. There is often a strong correlation between certain ideologies, political systems and certain economic systems (for example, consider the meanings of the term “communism”). Many economic systems overlap each other in various areas (for example, the term “mixed economy” can be argued to include elements from various systems). There are also various mutually exclusive hierarchical categorizations.

Types of Economic Systems

There are many types of economies around the world. Each has its own distinguishing characteristics, although they all share some basic features. Each economy functions based on a unique set of conditions and assumptions. Economic systems can be categorized into four main types: traditional economies, command economies, mixed economies, and market economies.

1. Traditional economic system

The traditional economic system is based on goods, services, and work, all of which follow certain established trends. It relies a lot on people, and there is very little division of labor or specialization. In essence, the traditional economy is very basic and the most ancient of the four types.

Some parts of the world still function with a traditional economic system. It is commonly found in rural settings in second- and third-world nations, where economic activities are predominantly farming or other traditional income-generating activities.

There are usually very few resources to share in communities with traditional economic systems. Either few resources occur naturally in the region or access to them is restricted in some way. Thus, the traditional system, unlike the other three, lacks the potential to generate a surplus. Nevertheless, precisely because of its primitive nature, the traditional economic system is highly sustainable. In addition, due to its small output, there is very little wastage compared to the other three systems.

2. Command economic system

In a command system, there is a dominant, centralized authority usually the government that controls a significant portion of the economic structure. Also known as a planned system, the command economic system is common in communist societies since production decisions are the preserve of the government.

If an economy enjoys access to many resources, chances are that it may lean towards a command economic structure. In such a case, the government comes in and exercises control over the resources. Ideally, centralized control covers valuable resources such as gold or oil. The people regulate other less important sectors of the economy, such as agriculture.

In theory, the command system works very well as long as the central authority exercises control with the general population’s best interests in mind. However, that rarely seems to be the case. Command economies are rigid compared to other systems. They react slowly to change because power is centralized. That makes them vulnerable to economic crises or emergencies, as they cannot quickly adjust to changed conditions.

3. Market economic system

Market economic systems are based on the concept of free markets. In other words, there is very little government interference. The government exercises little control over resources, and it does not interfere with important segments of the economy. Instead, regulation comes from the people and the relationship between supply and demand.

The market economic system is mostly theoretical. That is to say, a pure market system doesn’t really exist. Why? Well, all economic systems are subject to some kind of interference from a central authority. For instance, most governments enact laws that regulate fair trade and monopolies.

From a theoretical point of view, a market economy facilitates substantial growth. Arguably, growth is highest under a market economic system.

A market economy’s greatest downside is that it allows private entities to amass a lot of economic power, particularly those who own resources of great value. The distribution of resources is not equitable because those who succeed economically control most of them.

4. Mixed system

Mixed systems combine the characteristics of the market and command economic systems. For this reason, mixed systems are also known as dual systems. Sometimes the term is used to describe a market system under strict regulatory control.

Many countries in the West follow a mixed system. Most industries are private, while the rest, comprised primarily of public services, are under the control of the government.

Mixed systems are the norm globally. Supposedly, a mixed system combines the best features of market and command systems. However, practically speaking, mixed economies face the challenge of finding the right balance between free markets and government control. Governments tend to exert much more control than is necessary.

Economic policies

The economic policy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the economy.

Most factors of economic policy can be divided into either fiscal policy, which deals with government actions regarding taxation and spending, or monetary policy, which deals with central banking actions regarding the money supply and interest rates.

Such policies are often influenced by international institutions like the International Monetary Fund or World Bank as well as political beliefs and the consequent policies of parties.

Types of economic policy

Almost every aspect of government has an important economic component. A few examples of the kinds of economic policies that exist include:

• Macroeconomic stabilization policy, which attempts to keep the money supply growing at a rate that does not result in excessive inflation, and attempts to smooth out the business cycle.
• Trade policy, which refers to tariffs, trade agreements and the international institutions that govern them.
• Policies designed to create economic growth

Policies related to development economics

• Policies dealing with the redistribution of income, property and/or wealth
• As well as: regulatory policy, anti-trust policy, industrial policy and technology-based economic development policy.

Tools and goals

Policy is generally directed to achieve particular objectives, like targets for inflation, unemployment, or economic growth. Sometimes other objectives, like military spending or nationalization are important.

These are referred to as the policy goals: the outcomes which the economic policy aims to achieve.

To achieve these goals, governments use policy tools which are under the control of the government. These generally include the interest rate and money supply, tax and government spending, tariffs, exchange rates, labor market regulations, and many other aspects of government.

Macroeconomic stabilization policy

Stabilization policy attempts to stimulate an economy out of recession or constrain the money supply to prevent excessive inflation.

• Fiscal policy, often tied to Keynesian economics, uses government spending and taxes to guide the economy.
• Fiscal stance: The size of the deficit or surplus
• Tax policy: The taxes used to collect government income.
• Government spending on just about any area of government
• Monetary policy controls the value of currency by lowering the supply of money to control inflation and raising it to stimulate economic growth. It is concerned with the amount of money in circulation and, consequently, interest rates and inflation.
• Interest rates, if set by the Government
• Incomes policies and price controls that aim at imposing non-monetary controls on inflation
• Reserve requirements which affect the money multiplier

Impact of business on Public Sector

In India, a public sector company is that company in which the Union Government or State Government or any Territorial Government owns a share of 51 % or more. Currently there are just three sectors left reserved only for the government i.e. Railways, Atomic energy and explosive material. Private sectors/players are not allowed to operate in these sectors.

Before the independence of India, there were only a few public sector companies in the country this includes, Indian Railways, the Port Trusts, the Posts and Telegraphs, All India Radio and the Ordinance Factory are some of the major examples of the country’s public sector enterprises. However, post Indian independence, some policies for the development of the socio-economic status of the country were planned out by the then visionary leaders, where the public sector were used as a tool for the self-reliant growth of the nation’s economy.

This was the reason that the second five year plan of India was solely based on the development of the different industries. Till 1990s major sectors of the economy were reserved only for the government, this caused the great loss of our precious natural resources and the whole country trapped into the great economic problem. From the very first five year plan till 1980s our country grows with the average rate of 3.5% per year (which is called Hindu rate of growth by Prof. Rajkrishna).

But later on the in 1991, july our new economic policy was launched under the leadership of Mr. Manmohan Singh and P.V. Narsimha Rao.

The main objectives of this new economic policy were:

• To maintain a sustained growth in productivity
• To enhance gainful employment
• To achieve optimum utilization of human resources
• To transform India into a major partner and player in the global arena.
• To take out Indian economy from the vicious circle of poverty.
• Open the Indian economy to interact openly with the rest of the world.

The main result of this new policy was that reserved sectors were opened for the private players. Public sectors were not able to operate at its optimum pace.

Objectives: The public sector aims at achieving the following objectives:

To promote rapid economic development through creation and expansion of infrastructure

• To generate financial resources for development
• To promote redistribution of income and wealth
• To create employment opportunities
• To promote balanced regional growth
• To encourage the development of small-scale and ancillary industries, and
• To accelerate export promotion and import substitution

Role of public sectors in the development of the country is explained below:

• Public Sector and Capital Formation: The role of public sector in collecting saving and investing them during the planning ear has been very important. During the first and second five year plan it was 54% of the total investment, which declined to 24.6 % in the 2010-11.
• Employment Generation: Public sector has created millions of jobs to tackle the unemployment problem in the country. The number of persons employed in the as on march 2011 was 150 lakh. Public sector has also contributed a lot towards the improvement of working and living conditions of workers by serving as a model employer.
• Balanced Regional Development: Public sector undertakings have located their plants in backward parts of the county. These areas lacked basic industrial and civic facilities like electricity, water supply, township and manpower. Public enterprises have developed these facilities thereby bringing about complete transformation in the socio-economic life of the people in these regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, are few examples of the development of backward regions by the public sector.
• Contribution to Public Exchequer: Apart from generation of internal resources and payment of dividend, public enterprises have been making substantial contribution to the Government exchequer through payment of corporate taxes, excise duty, custom duty etc. gross internal resource generation in 1990- 2000 was 36000 cr which rose to 1, 11,000 cr in 2008-09, while net profit was 92,077 cr in 2010-11.
• Export Promotion and Foreign Exchange Earnings: Some public enterprises have done much to promote India’s export. The State Trading Corporation (STC), the Minerals and Metals Trading Corporation (MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd., the Hindustan Machine Tools, etc., have done very well in export promotion.
• Import Substitution: Some public sector enterprises were started specifically to produce goods which were formerly imported and thus to save foreign exchange. The Hindustan Antibiotics Ltd., the Indian Drugs and Pharmaceuticals Ltd. (IDPL), the Oil and Natural Gas Commission (ONGC), the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved foreign exchange by way of import substitution.
• Promotion of Research and Development: As most of the public enterprises are engaged in high technology and heavy industries, they have undertaken research and development programmes in a big way. Public sector has laid strong and wide base for self-reliance in the field of technical know-how, maintenance and operation of sophisticated industrial plants, machinery and equipment in the country. Expenditure on research and development reduces the cost of production.

Impact of business on Private Sector

India, being a mixed economy, has assigned a great importance on the private sector of the country for attaining rapid economic development. The Government has fixed a specific role to the private sector in the field of industries, trade and services sector.

The most dominant sector of India, i.e., agriculture and other allied activities like dairying, animal husbandry, poultry etc. is totally under the control of the private sector. Thus private sector is playing an important role in managing the entire agricultural sector and thereby providing the entire food supply to the millions.

Moreover, the major portion of the industrial sector engaged in the non-strategic and light areas, producing various consumer goods both durables and non-durables, electronics and electrical goods, automobiles, textiles, chemicals, food products, light engineering goods etc., is also under the control of the private sector.

Private sector is playing a positive role in the development and expansion of aforesaid group of industries. Besides, the development of small scale and cottage industries is also the responsibility of the private sector.

Finally, the private sector is also having its role in the development of tertiary sector of the country. The private sector is managing the entire services sector providing various types of services to the people in general. The entire wholesale and retail trade in the country is also being managed by the private sector in a most rational manner.

Moreover, the major portion of the transportation, especially in the road transport is also managed by the private sector. With the growing liberalisation of Indian economy in recent years, the private sector is being assigned with much greater responsibility in various spheres of economic activities.

Characterstics

High Potentiality:

Most of the small scale and cottage scale industries are using labour intersine technologies, they create huge employment opportunities. These industries are owned by private sector. About 80% of the total working forces are employed in either organized or unorganized private sector units. Private sector contributes about three-forth of the country’s national income. Moreover, this sector also plays a vital role to increase gross domestic saving (CDS) and gross domestic capital formation'(GDCF) within the economy.

According to 1956 resolution, “industries producing intermediate goods and machines can be set up in the private sector.” A good number of ultra modern industries are constructed under the control of private sector. This includes several consumers’ good industries like sugar industry, edible oil industry, textile industry, paper industry, spice industry and fast food or semi-finished food industries.

Even in the sphere of capital goods, iron and steel heavy engineering, chemical, motors etc. private sector plays a dominant role for their development. In the post liberalisation phase (after introduction of New Industrial Policy, 1991), the working of few private industries became huge.

Contribution to Agriculture:

India is an agro based economy. The share of agriculture and its allied activities like fishing, poultry, cattle rearing, animal husbandry, dairy farming etc. to the national income is nearly 22%. On the other hand, about 60% of the total working population is engaged in this area. Hence, this large agriculture sector is controlled by the private sector.

Helpful for Development:

According to Schumpeter peter private sector plays a dominant role in economic development. It enhances the process of industrialisation. All the private entrepreneurs are worked for profit motive. They actually played a leading role for the introduction of new commodities, new techniques of production, new plants equipment’s and machineries. Private entrepreneur has innovative ideas and always modifies the total method of production. After the introduction of new industrial policy in 1991, private sector leads a vital role in country’s industrial development.

Employment Generation:

Private sector plays a dominant role for generating employment opportunities inside the country. A huge number of large scale, small scale, cottage scale units are under the control of private sector. It proves that small scale and cottage scale industries contribute four times more employment in compare to large scale industries. According to 2001-02 statistics, as far as employment is concerned, the share of private sector was 51.2% against 44.3% of the public sector.

Most Important Sector:

In-spite of huge progress of the public sector during the plan period, the importance of private sector is tremendous in the India economy. On the basis of the latest data available for the country’s industrial development, the number of private sector companies in 2001- 02 was 1, 10, 634 in compare to the total number companies of 1,28,549. In other way 86.1% of the total companies were under the control of private sector in compare to only 11.67o companies under public sector.

Impact of business on Joint Sector

The joint sector represents a new ideology of economic management geared to sub serve a new economic system.

The term is applied to an under­taking only when both its ownership and control are effectively shared between public sector agen­cies on the one hand and a private group on the other.

Joint sector was emerged as an alternative to both the public and private sector in the mixed economy of India to help the Government by providing the ‘nuclei’ for a healthy growth of certain important industries making the best possible use of available technical and managerial experience in the existing enterprise.

The radical shift in Government policy has brought the concept of the joint sector into sharp focus. It is nothing but a form of partnership between the public sector and the private sector.

Although the Joint Sector concept was conceived by the authors of the 1956 Industrial Policy Resolution, it was really the brainchild of the Industrial Licensing Policy Enquiry Committee, popularly known as the Dutta Committee.

Besides the public and the private sector, there was need for a new sector a joint sector for the harmonious industrial development of the economy. The joint sector is envisaged as something in between the public and the private sector and in which the state could actively participate in management, control and decision-making.

It is claimed that the joint sector scheme has the advantages of both the public and the private sectors and at the same time avoids the evils of both sectors and thus fulfils the basic socio-economic objectives of the country.

Moreover, it offers an avenue of growth when all other gates to growth seem to have been closed.

The concept of a joint sector is basically an extension of the idea of mixed economy in which the public and private sector units are separate and function independently but are nevertheless part of a national plan.

It is a compromise between total nationalisation and complete private autonomy. In the joint sector, the relationship between the representatives of the private and public sectors is much closer as they have to work together within the same unit.

The joint sector was recommended for units where a large proportion of the cost of a new project was to be met by public financial institutions either directly or through their support.

There are three different concepts of joint sector: First, financial institutions can exercise the right to convert debt into equity and appoint directors on company boards.

Secondly, Government may appoint directors on company boards through the exercise of powers granted by the Monopolies and Restrictive Trade Practices Act to check malpractices.

This need not involve share participation and must not be confused with the joint sector. The third form is the real joint sector where the Government directly, or through its agencies, is a co- shareholder in an enterprise. The Government in this case plays a promotional and entrepreneurial role and is an active majority partner.

In a memorandum submitted to the Government, JRD Tata suggested a slightly different definition of the joint sector. “A joint sector enterprise is intended to be a form of partnership between the private sector and the Government in which the State participation of capital will not be less than 26 per cent, the day-to-day management will normally be in the hands of the private sector partner, and control and supervision will be exercised by a board of directors on which government is adequately represented”.

The Dutta Committee advocated conversion of some of the private sector units into joint sector enterprises as an important means of curbing the concentration of economic power in certain private groups.

A number of new industrial projects had been established in the private sector with the help of funds provided by public financial institutions but the latter had not asked for a voice in the management.

It was strange that huge private industrial empires should be built up with funds provided by public institutions without knowing how the money was actually spent. The Dutta Committee asked the Government to enunciate a new industrial policy whereby this anomaly could be rectified.

There was a change in the industrial policy without there being a change in the 1956 Policy Resolution. The Government announced the new industrial policy in February 1970. The joint sector concept as suggested by the Dutta Committee was accepted in principle.

It was laid down that while sanctioning loans or subscribing to debentures, public financial institutions should in future have the option to convert them into equity within a specified period of time. Specific guidelines had been laid down.

In case the aggregate loans granted were below Rs. 25 lakh, the financial institutions are not to insert any convertibility clause in the agreement. If the loans granted were between Rs. 25 lakh and Rs. 50 lakh, it is optional for the financial institutions to insert a convertibility clause in the agreement. Once convertibility was agreed to, the undertaking is required to appoint representatives of the lending institutions as directors on company board.

It is not difficult to understand the logic behind the joint sector. As has been emphasised by the then Prime Minister, the old concepts of exclusive private ownership and private profit do not fit in with today’s social values and priorities.

An open society requires an open corporate structure; the joint sector provides this openness without taking away the advantages of private enterprise and initiative. The joint sector is a departure from exclusive private ownership but it should be welcomed in preference to outright nationalisation.

The joint sector experiment has been viewed with misgivings by many industrialists. It has been assailed as “nationalisation by the backdoor”.

But others have welcomed it on the ground that it is preferable to wholesale nationalisation of existing private undertakings. There is one serious objection to the joint sector.

The concept is based on mutual trust and confidence, yet the idea originated because the private sector could not be trusted enough to grow on its own. Thus, conceived in mistrust, the marriage might be a disastrous failure.

The joint sector was evolved to check the concentration of economic power of private groups. But some think it is not necessary to check the concentration of economic power as the existing Monopolies and Restrictive Trade Practices Act was adequate for the purpose.

Features of Joint Sector:

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

(i) The Central Govt. and private entrepre­neurs may jointly set up new enterprises. Sometimes the Central Govt. and one or more State Govts, together may set up enterprises in partnership with the pri­vate sector.

(ii) The State Govt. or their industrial devel­opment corporations may set up new companies jointly with private partners, involving equity participation by both the partners.

(iii) Public financial institutions may, through equity participation or conver­sion of loans or debentures into equity, transform enterprises promoted by pri­vate entrepreneurs into joint sector com­panies.

(iv) The existing private enterprises may be transformed into joint sector enterprises by the govt. or govt. companies acquir­ing a part of the equity or converting debt into equity or by contributing to an increase in the share capital.

(v) The existing public sector companies may be transformed into joint sector en­terprises through the sale of some eq­uity shares to private entrepreneurs or the general public.

Advantages

Growth with Welfare:

Growth with wel­fare can be achieved more readily through the agency of joint sector; for expansion and diversifi­cation in this sector will not generate concentra­tion of economic power. The joint sector run and managed on business lines, with specific emphasis on welfare of the surrounding community can be the most useful formula.

In fine, it may be stated that the joint sector, if managed properly, can be a viable alternative to both state capitalism with its risk of bureaucratisation on the one hand and private capi­talism with its acute inequality in the distribution of wealth and income.

Curbing the Concentration of Economic Power:

Govt. participation in the ownership and management of enterprises jointly with private entrepreneurs could be an effective means for con­trolling monopoly, concentration of economic power and business malpractices.

The Dutt Com­mittee even regarded the joint sector as possibly more effective than licensing in achieving this ob­jective.

Social Control over Industry:

Govt. par­ticipation in equity and management is expected to give a social orientation to the enterprise. The joint sector would ensure that the management of industry is conducted according to the overall poli­cies laid down by the Govt. and that public interest and not merely private profit would guide the op­erations of the enterprises.

Alternative to Public and Private Sectors:

The joint sector has the potential to grow as an al­ternative to both the public and private sectors in the mixed economy of India. The main advantage of the joint sector is that it combines the favourable points in the public as well as the private sector and seeks to eliminate the negative points in both.

Broad-Basing of Entrepreneurship:

Another advantage of the joint sector is that it helps Broad base entrepreneurship by encouraging new and small entrepreneurs. The joint sector enables potential entrepreneurs, with small financial resources and less experience to participate in large enterprises as the public sector shares investment and the risk.

Promotion of Mixed Economy:

It is also expected that the joint sector will promote the mixed economy and help achieve development ob­jectives. The basic justification of the idea of mixed economy is to harness all the productive forces of society, state as well as private, to the task of eco­nomic development with a view to accelerating the process.

By allowing the private sector to play its part in the process, the state is able to develop entrepreneurship outside the govt. and enlist it to sup­plement its entrepreneurial role. Similarly, a mixed economy allows the state to take advantage of vol­untary savings in society for purpose of investment to supplement the resources it is able to mobilise for this purpose.

Acceleration of Economic Growth:

The joint sector, by mobilising and augmenting the pro­ductive resources, can accelerate the pace of eco­nomic growth. It enables private entrepreneurs and the state agencies to promote or invest in a greater number of projects than would otherwise be possi­ble.

The resources of the private sector in savings, investments and entrepreneurship can be harnessed in the joint sector with active state help to supple­ment the efforts made by them in the public sector without the private profit motive being allowed to vitiate the effort.

An effective regulatory and legal framework is indispensable for the proper and sustained growth of the company. In rapidly changing national and global business environment, it has become necessary that regulation of corporate entities is in tune with the emerging economic trends, encourage good corporate governance and enable protection of the interests of the investors and other stakeholders. Further, due to continuous increase in the complexities of business operation, the forms of corporate organizations are constantly changing. As a result, there is a need for the law to take into account the requirements of different kinds of companies that may exist and seek to provide common principles to which all kinds of companies may refer while devising their corporate governance structure.

The important legislations for regulating the entire corporate structure and for dealing with various aspects of governance in companies are Companies Act, 1956 and Companies Bill, 2004. These laws have been introduced and amended, from time to time, to bring more transparency and accountability in the provisions of corporate governance. That is, corporate laws have been simplified so that they are amenable to clear interpretation and provide a framework that would facilitate faster economic growth.

Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of India Act, 1992 and Depositories Act, 1996 have been introduced by Securities and Exchange Board of India (SEBI), with a view to protect the interests of investors in the securities markets as well as to maintain the standards of corporate governance in the country.

Legal Framework of Doing Business in India

Legal Framework of Doing Business in India is intended to provide foreign investors and their advisors a broad legal perspective on foreign investment in India. The guide is written in general terms and its application to specific situations will depend on the particular circumstances involved. It summarizes all major foreign investment regulations and procedures that are currently in force in India. It has been prepared in order to facilitate multinational companies, start-ups and venture capital investor’s set-up business operations in India and includes valuable regulations, forms and policies for ready reference of entrepreneurs and senior managers of foreign entities. It also includes a step-by-step guide to compliance and filings of forms in India. The information in this guide is accurate as of March 20, 2014.

Citizens of India have the option to set-up their business operations either in the form of incorporated entities, (a company or limited liability partnership) or unincorporated entities like a sole proprietorship. On the other hand, a foreign company opting to enter India can do so either by incorporating a wholly owned subsidiary (“WOS”) or by way of joint venture collaboration with an Indian company (“JV Company”). For registration and incorporation of WOS or JV Company, one would first need to incorporate an Indian company and then file an application with Registrar of Companies (“ROC”). The WOS and JV Company will be subject to Indian laws and regulations as applicable to other domestic Indian companies.

Additionally, a foreign company not opting to be incorporated in India, either by way of a JV Company or WOS, is permitted to conduct its business operations through any of the following offices, namely i) liaison office, also known as a representative office; ii) branch office; or iii) project office. Such offices can undertake activities permitted to them under the regulations framed by Foreign Exchange Management Act, 1999 (“FEMA”) for such offices. The approvals for these offices are accorded by the Reserve Bank of India (“RBI”) on a case-to-case basis.

The Government of India is making all efforts to attract and facilitate foreign direct investment (“FDI”) from abroad including investment from non-resident Indians (“NRIs”) to compliment and supplement domestic investment. To make the investment attractive, returns on them are freely repatriable subject to certain legislative restrictions. In addition to approval for bringing FDI in India, many other clearances and approvals, such as registration of company, environment and land related clearances, permission for import of plant and machinery, land acquisition etc are required for starting a business in India.

Legislature

Governing, as we have seen, is about making decisions which affect the lives of large numbers of people. Some of these decisions require new laws or changes to existing laws to bring them into effect so that the individuals and/or groups to whom they apply become aware of the government’s wishes and requirements. In a democratic system of government this formal power to make the law (i.e. to legislate) is vested in a legislative body (the legislature) which is elected either wholly or partly by the people. As indicated above, this process of choosing a representative decision-making body by popular election is a central feature of the democratic approach to government.

Leaving aside for one moment the relative power of the legislative and executive branches of government, it is possible to identify a number of common features which apply to legislatures and the legislative function in most, if not all, democratic states. These include the following:

• A bicameral legislature, that is, a legislature with two chambers: an upper house and a lower house, each with specific powers and roles in the legislative process.In most countries each chamber comprises representatives chosen by a separate electoral process and hence may be dominated by the same party or different parties or by no single party, depending on the electoral outcome. For a legislative proposal to be accepted, the consent of both chambers is normally required.

This is one of the many checks and balances normally found in democratic systems of government.

• A multi-stage legislative process involving the drafting of a legislative proposal, its discussion and consideration, where necessary amendment, further debate and consideration and ultimate acceptance or rejection by either or both legislative chambers. Debates on the general principles of a proposed piece of legislation would normally involve all members of each chamber, whereas detailed discussion tends to take place in smaller groups or committees.
• An executive-led process, that is, one in which most major legislative proposals emanate from the executive branch of government. In a presidential system of government (e.g. the USA) the chief executive (the President) is normally elected separately by the people and is not part of the legislature (in other words there is a ‘separation of powers’). In a parliamentary system (e.g. the UK) members of the executive may also be members of the legislative body and hence may be in a position to control the legislative process.
• Opportunities for legislative initiatives by ordinary representatives, that is, arrangements which permit ordinary members of the legislative assembly to propose new laws or changes to existing laws. In practice such opportunities tend to be limited and dependent to a large degree for their success on a positive response from the political executive.
• Opportunities to criticize and censure the government and, in some cases, remove it from office (e.g. through impeachment) this is a vital function within a democratic system of government in that it forces decision makers to defend their proposals, explain the logic of their actions and account for any mistakes they may have made. Opposition parties play an important role in this context with in the legislative body and through media coverage can attack the government and articulate alternative views to the wider public. Specialist and Standing Committees for scrutinizing legislation and the day-to-day work of the executive branch of government also usually exist in democratic regimes.
• Control of the purse strings, that is, the power to grant or deny government the money required to carry out its policies and legislative program. In theory this is a formidable power, given that no government can operate without funds. In practice the power of the legislature to deny funding to a democratically elected government may be more apparent than real and, where necessary, compromise tends to occur between the executive and legislative branches of government.

As will be evident from the comments above, legislating is a complex and time consuming process, offering numerous opportunities for individuals and groups both within and outside the legislative body (e.g. pressure groups) to delay and disrupt the passage of legislation. While no government can guarantee to achieve all its legislative aims, there is a cultural expectation in a democracy that, as far as possible, promises made before an election will be put into effect at the earliest opportunity by the democratically elected government. Such an expectation usually provides the incumbent administration with a powerful argument for legislative support on the occasions when it is confronted with intransigence within the legislative assembly or hostility from outside sectional interests.

Executive

Governing is not only about making decisions; it is also about ensuring that these decisions are put into effect in order to achieve the government’s objectives. Implementing governmental decisions is the responsibility of the executive branch of government.

In modern states the term ‘the executive’ refers to that relatively small group of individuals chosen to decide on policy and to oversee its implementation; some of these individuals will hold political office, others will be career administrators and advisers, although some of the latter may also be political appointees. Together they are part of a complex political and administrative structure designed to carry out the essential work of government and to ensure that those responsible for policy making and implementation are ultimately accountable for their actions.

The policy-making aspect of the executive function is normally the responsibility of a small political executive chosen (wholly or in part) by popular election. Under a presidential system of government, the chief executive or President is usually chosen by separate election for a given period of office and becomes both the nominal and political head of state. He/she subsequently appoints individuals to head the various government departments/ministries/bureaux which are responsible for shaping and implementing government policy. Neither the President nor the heads of departments normally sit in the legislative assembly, although there are sometimes exceptions to this rule (e.g. the Vice-President in the United States).

In contrast, in a parliamentary system the roles of head of state and head of government are separated, with the former usually largely ceremonial and carried out by either a president (e.g. Germany, India) or a monarch (e.g. UK, Japan). The head of government (e.g. Prime Minister), while officially appointed by the head of state,is an elected politician, invariably the head of the party victorious in a general election or at least seen to be capable of forming a government, possibly in coalition with other parties. Once appointed, the head of government chooses other individuals to head the different government departments/ministries and to be part of a collective decision-making body (e.g. a Cabinet) which meets to sanction policy proposals put forward through a system of executive committees and subcommittees (e.g. Cabinet Committees). These individuals, along with the head of government, are not only part of the executive machinery of the state but also usually members of the legislative assembly and both ‘individually’ and ‘collectively’ responsible to the legislature for the work of government.

The day-to-day administration of government policy is largely carried out by non-elected government officials (sometimes referred to as civil servants or bureaucrats) who work for the most part in complex, bureaucratic organisations within the state bureaucracy. Apart from their role in implementing public policy, government officials help to advise ministers on the different policy options and on the political and administrative aspects of particular courses of action. Needless to say, this gives them a potentially critical role in shaping government policy, a role which has been substantially enhanced over the years by the practice of granting officials a significant degree of discretion in deciding on the details of particular policies and/or on how they should be administered.

Whereas politicians in the executive branch of government tend to be transitory figures who come and go at the whim of the head of government or of the electorate most, if not all, officials are permanent, professional appointees who may serve a variety of governments of different political complexions and preferences during a long career in public administration. Whatever government is in power, officials are generally expected to operate in a non-partisan (i.e. neutral) way when advising their political masters and when overseeing the implementation of government policy. Their loyalty in short is to the current administration in office,

a principle which helps to ensure a smooth transition of government and to guarantee that the upheaval caused by a general election does not prevent the business of the state from being carried out as usual.

Judiciary

Governing is not just about making and implementing laws; it is also about ensuring that they are applied and enforced; the latter is essentially the role of the third arm of government, namely the judiciary and the system of courts. Like political institutions, legal structures and processes tend to a degree to be country specific and vary according to a number of influences including history, culture and politics. For example, while some states have a relatively unified legal system, others organised on a federal basis usually have a system of parallel courts adjudicating on federal and state/provincial law, with a Supreme Court arbitrating in the event of a dispute. In some countries a proportion of the judges may be directly or indirectly elected by the public, in others they may be appointed by government and/or co-opted by fellow judges. Business students should make themselves familiar with the legal arrangements within their own country. In this section we look briefly at the judicial function as related to the concept of democracy.

Whereas in total itarian systems of government the judiciary is essentially the servant of the ruling élite (e.g. the ‘party’), in a democracy it is an accepted principle that there should be a separation between the judicial function and the other two branches of government in order to protect the citizen from a too powerful state. This notion of an impartial and independent judiciary, free to challenge the government and to review its decisions, is regarded as one of the hallmarks of a democratic system of government; a further manifestation of the doctrine of the separation of powers.

In practice of course, notions of judicial independence and role within the democratic political process tend to be the subject of certain amount of debate, particularly in countries where senior appointments to the judiciary appear to be in the gift of politicians (e.g. Supreme Court judges in the United States are nominated by the President with the consent of the Senate) or where individuals with judicial powers also have an executive and/or legislative role (e.g. the Lord Chancellor and Home Secretary in Britain). Equally there are questions over the degree to which the courts should have the power to review the constitutionality of decisions made by a democratically elected government. In the United States, for example, the Supreme Court has a long-established right to declare a law void if it conflicts with its own interpretation of the American constitution. In contrast in Britain, the legal sovereignty of Parliament and the absence of a codified written constitution push the judiciary towards trying to interpret the intentions of the framers of government legislation and any legal decision unwelcomed by the government can be reversed by further legislation. That said, it is interesting to note that in recent years there has been an increased willingness on the part of the British judiciary to review administrative decisions, particularly those made by ministers.

Other aspects, too, call into question how far in modern democratic states there is a total separation between the different arms of government (e.g. increasing use of administrative courts/tribunals) and whether it makes sense to rigidly distinguish between rule making and rule adjudication. Certainly some of the past judgments by the United States Supreme Court (e.g. in the area of civil rights) demonstrate that the courts can be influential in shaping decisions on major issues of policy and suggest that the judiciary are susceptible to influences from their own values or to general societal pressures. In short it seems fair to suggest that under current legal arrangements, legal adjudication is not far removed from the world of politics; arguably we may like to perpetuate the myth of an entirely separate and independent judiciary since this is a necessary aspect of the stability of many existing political systems.

To run the business successfully, it is necessary to understand the environment with in which the business operates. Business environment j is a set of external factors that affects the business decisions.

The environment, which lies outside the organization, is known as external environment. External factors are unpredictable and uncontrollable. They are beyond the control of the company.

According to William Glueck and Jauck, “In environment there are several factors which constantly bring opportunities and threats to the business firm. It includes social, economic, technological and political conditions”.

1. Firm

The plans and policies of the firm should be properly framed taking into consideration the objectives and resources of the firm. Proper plans and policies help the firm to accomplish its objectives.

The higher authority must analyze the internal environment to foresee the changes and frame appropriate policies well in time.

For example: the personnel policy in respect of promotion should be based on merit rather than seniority.

The survival and success of the firm largely depends on the quality of human resources. The social behaviour of the employees greatly affects the working of the business. The characteristics of human resource like skill, quality, morale, commitment can contribute to the success of the organization

Capital is the lifeblood of every business. Finance relates to money. A firm needs adequate funds to meet its working capital and fixed capital requirements. There is a need to have proper management of working capital and fixed capital.

A firm should develop, maintain and enhance a good corporate image in the minds of employees, investors, customers etc. Poor corporate image is a weakness of the firm.

2. Customer

Consumer is the king of the market. They are the centers of the business. They are one of the most important factors in the external environment. Customer satisfaction has become more challenging due to globalization.

Nowadays, consumer expectations are high. Therefore the firm must keep in mind the customer’s expectations, their requirements and accordingly make market decisions. The success of the business depends upon identifying the needs, wants, likes and dislikes of the customers and meeting with their satisfaction.

Businesses have different classes of customers like wholesale customers, retail customers, industrial customer’s foreign customers etc. To enhance growth, it is necessary for the business firm to identify the needs of these customers and should undertake research and developmental activities.

3. Suppliers

Suppliers supply raw material, machines, equipment’s and other supplies. The company has to keep a watch over prices and quality of materials and machines supplied. It also has to maintain good relations with the suppliers.

It is necessary to have reliable source of supply for the smooth working of the firm. Uncertain supplies compel the firm to maintain high inventories resulting into increase in the cost. The business should not only rely on the single supplier but also have relations with multiple suppliers.

4. Distributors

Distributors include agents and brokers who help the business firm to find the customers. They help the firm to promote and distribute the goods to the final consumers.

They are the link between the firm and the final customers. Market intermediaries include wholesalers, retailers, advertising firm, media, transport agencies, banks, financial institutions etc. They assist the company in promoting and targeting its product to the right market.

5. Competitors

The company has to identify its competitor’s activities. Information must be collected about competitors in respect of their prices, products, and promotion and distribution strategies. World is becoming a global market.

Business firm has to face tremendous competition not only from Indian business firm but also from foreign firms. To achieve growth and success they have to monitor various activities of their competitors.

Liberalization, privatization and globalization have promoted competition that has created threats to domestic units. The business must understand the strategies framed by the competitors to respond in an effective manner.

6. Society

Society affects company’s decisions. The expectation of the society from the business is increasing. Therefore the business firm maintains public relations department to handle complaints, grievances and suggestions from general public. The members of the society include:

(i) Financial institutions

(ii) Shareholders

(iii) Government

(iv) Employees

(v) General public

Everything you need to know about the components of business environment. Business environment refers to those aspects of the surroundings of business enterprise which affect or influence its operations and determine its effectiveness.

Andrews has also rightly defined the environment of a company as the pattern of all external influences that affect its life and development. Keith Davis too has also observed that business environment is the aggregate of all conditions, events and influences that surround and affect it.

The business environment is always changing and is uncertain. It is because of this that it is said that the business environment is the sum of all the factors outside the control of management of a company the factors which are constantly changing and they carry with them both opportunities and risks or uncertainties which can make or mar the future of business.

(i) Economical Environment:

Economic Environment consists of Gross Domestic Product, Income level at national level and per capita level, Profit earning rate, Productivity and Employment rate, Industrial, monetary and fiscal policy of the government etc.

The economic environment factors have immediate and direct impact on the businessman so businessmen must scan the economic environment and take timely actions to deal with these environments. Economic environment may put constraints and may offer opportunities to the businessman. After the new economic policy of 1991, lots of opportunities are offered to businessmen. The common factors which have influenced the Indian economic environment are

(a) Banking sector reform has led to many attractive schemes of deposits and lending money. The Banks are offering loans at very nominal rate of interest and with minimum formalities to be completed.

(b) Recent changes in economic and fiscal policy of country have encouraged NRIs and foreign investors to invest in Indian companies.

(c) Lots of economic reforms are taking place in leasing and financing institutions. The private sector is allowed to enter in financial institutions; as a result customers are gaining.

Some Aspects of Economic Environment:

1. Role of Private and Public sector
2. Rate of growth of GDP, GNP, and Per Capita Income
3. Rate of Saving and Investment
4. Balance of Trade
5. Balance of Payment
6. Transport and Communication System
7. Money Supply in the Economy
8. International Debt

(ii) Social Environment:

Social Environment consists of the customs and traditions of the society in which business is existing. It includes the standard of living, taste, preferences and education level of the people living in the society where business exists.

Social Environment

The businessman cannot overlook the components of social environment as these components may not have immediate impact on the business but in the long run the social environment has great impact on the business.

For example, when the Pepsi Cola Company used the slogan of “Come Alive” in their advertisement then the people of a particular region misinterpreted the word “Come Alive” as they assumed it means Coming out of Graves. So, they condemned the use of the product and there was no demand of Pepsi Cola in that region. So, the company had to change its advertisement slogan as it cannot survive in market by ignoring the sentiments of the people.

In India also, there are many Social reforms taking place and the common factors of Indian Social Environment are:

(a) Demand for reservation in jobs for minority and women

(b) Demand for equal status of women by paying equal wages for male and female workers

(c) Demand for automatic machines and luxury items in middle class families

(d) The social movements to improve the education level of girl child.

(e) Health and Fitness trend has become popular.

Some Aspects of Social Environment:

1. Quality of life
2. Importance or place of women in workforce
3. Birth and Death rates
4. Attitude of customers towards innovation, life style etc.
5. Education and literacy rates
6. Consumption habits
7. Population
8. Tradition, customs and habits of people

(iii) Political Environment:

Political environment constitutes all the factors related to government affairs such as type of government in power, attitude of government towards different groups of societies, policy changes implemented by different governments etc. The political environment has immediate and great impact on the business transactions so businessman must scan this environment very carefully.

Political Environment

The businessman has to make changes in his organisation according to the changing factor of political environment. For example, in 1977 when Janata Government came in power they made the policy of sending back all the foreign companies. As a result the Coca Cola Company had to close its business and leave the country.

The common factors and forces which have influenced the Indian political environment are:

(a) The government in Hyderabad is taking keen interest in boosting I.T. industry, as a result the state is more commonly known as Cyber bad instead of Hyderabad.

(b) After the economic policy of liberalisation and globalisation, the foreign companies got easy entry in India. As a result, the Coca Cola which was sent back in 1977 came back to India. Along with Coca Cola, Pepsi Cola and many other foreign companies are establishing their business in India.

Some Aspects of Political Environment:

1. Present political system
2. Constitution of the country
3. Profile of political leaders
4. Government intervention in business
5. Foreign policy of government
6. Values and ideology of political parties

(iv) Legal Environment:

Legal environment constitutes the laws and various legislations passed in the parliament. The businessman cannot overlook the legislations because he has to perform his business transactions within the framework of legal environment.

Legal Environment

The common legislation passed which has affected the business transactions are Trade Mark Act, Essential Commodity Act, Weights and Measures Act, etc. Most of the time legal environments put constraints on the businessman but sometimes they provide opportunities also. The common instances of Indian legal environment which have influenced business transactions recently are:

1. Deregulation of capital market has made it easy for businessman to collect capital from primary market.
2. Removal of control from the foreign exchange and liberalisation in investment is encouraging foreign investors and NRIs to invest in Indian capital market.
3. Advertisement of alcoholic product is prohibited.
4. Compulsory to give statutory warning in Tobacco production.
5. Delicencing policy of industries.

Some Aspects of Legal Environment:

1. Various laws and legislative acts.
2. Legal policies related to licensing.
3. Legal policies related to foreign trade.
4. Statutory warnings essential to be printed on label.
5. Foreign Exchange Regulation and Management Act.
6. Laws to keep a check on Advertisements.

(v) Technological Environment:

Technological environment refers to changes taking place in the method of production, use of new equipment and machineries to improve, the quality of product. The businessman must closely monitor the technological changes taking place in his industry because he will have to implement these changes to remain in the competitive market.

Technological Environment

Technological changes always bring quality improvement and more benefits for customers. The recent technological changes of Indian market are:

1. Digital watches have killed the prospects and the business of traditional watches.
2. Color T.V. technology has closed the business of black and white T.V.
3. Artificial fabric has taken the market of traditional cotton and silk fabrics.
4. Photo copier and Xerox machines have led to the closure of carbon paper business.
5. Shift in Demand from vacuum tubes to transistors.
6. Shift from steam locomotives its diesel and electric engine.
7. From typewriter to World Processors.

Some Aspects of Technological Environment:

1. Various Innovations and Inventions.
2. Scientific Improvements.
3. Developments in IT sector
4. Import and Export of Technology.
5. Technological Advances in Computers.