NCERT Class 12 Business Studies Chapter 3 PDF

BUSINESS ENVIRONMENT How a Rickshaw Puller became an entrepreneur 3 CHAPTER...

BUSINESS ENVIRONMENT How a Rickshaw Puller became an entrepreneur 3 CHAPTER LEARNING On what seemed like a regular day at work Dharamveer Kamboj, a rickshaw puller, was riding through the streets of Delhi when OBJECTIVES he met with a terrible accident. This was an event that would change his life forever. Knowing that he wouldn’t be able to go After studying this back to his work, he made the decision of returning to his native chapter you will be village in the Yamunanagar district of Haryana to begin life anew. able to: Being a school dropout with no technical training of any kind further restricted his scope in terms of employment. n Explain the The desire to do something out of the ordinary kept stirring meaning in his heart time and again. He was on the lookout for the right of business inspiration and opportunity. Such an opportunity crossed his path during one of his visits to the outskirts of Jaipur, Ajmer and environment; Pushkar regions of Rajasthan, where he observed a number of n Discuss the women self help groups at work. A common sight was women in the process of making gooseberry laddoos. While this process importance appeared to be rather simple, the grating of gooseberries of business on slabs of stone manually with hands was an excruciatingly environment; painful exercise. There were machines available that could process the gooseberrys but none of them proved to be cost n Describe the effective. The industry was so small in scale and the owners so various elements modest in means that it was impossible for them to buy machines and put them in use. Dharamveer Kamboj began to think of of business ways of making fruit and vegetable processing machines not only environment; and affordable, but also free of accidental health hazards. Observing that cutting, grating, juicing and pulverizing involved similar n Examine the techniques made him come up with the idea of a multipurpose economic processing machine that could work equally well for all of these environment tasks. There was however a big hurdle in the way of Dharamveer. in India and His limited education would prove his task to be an uphill battle. He however was not deterred. He knew problems would come the impact of his way, but to challenge and overcome them was his motto in Government life. “Sangharsh hi sabse badi kaamyaabi hai. Agar badhna hai toh policies on peeche mud kar nahin dekhna hai.” business and industry. 2020-21 Ch_03.indd 69 24-09-2019 12:09:28 PM  70 Business Studies This is the truism that Dharamveer Singh Kamboj has always lived by and was able to somehow convince him and obtain a funding of ` 25,000 for his project. He began work immediately. The first prototype of his machine was ready in March 2005. An unexpected problem of overheating however cropped up. Even after Dharamveer’s constant trials for the elimination of this problem, the issue still persisted in the second prototype. But the thought of giving up never crossed Dharamveer’s mind. In his third prototype, he had successfully solved the problem of overheating at last. This prototype was bought by GIAN North and sent to Kenya on a pilot basis. Based on the feedback, GIAN asked him to modify it further incorporating provisions that would make it portable, including the incorporation of foldable legs. In the fourth machine he also incorporated a sieve to manage the flow of juice from the machine during the extraction process. The machine that Dharamveer developed is unique in a way that it has the capacity to process a wide variety of products without damaging the seed of the fruit or vegetable. Source: The National Innovation Foundation (NIF) – India (nif.org.in) The above example shows how a universe, subtract from it the subset machine invented by Dharamveer that represents the organisation, Kamboj made life easier for women and the remainder is environment”. workers in unorganised sector. This Thus, the economic, social, political, innovation resulted in a positive technological and other forces which impact on food processing business operate outside a business enterprise i.e., social, economic and technological are part of its environment. So in addition to enhancing quality also, the individual consumers or competing enterprises as well of life. as the governments, consumer groups, competitors, courts, media Meaning of Business and other institutions working Environment outside an enterprise constitute its The term ‘business environment’ environment. The important point is means the sum total of all that these individuals, institutions individuals, institutions and other and forces are likely to influence the forces that are outside the control performance of a business enterprise of a business enterprise but that although they happen to exist may affect its performance. As one outside its boundaries. For example, writer has put it– “Just take the changes in government’s economic 2020-21 Ch_03.indd 70 24-09-2019 12:09:28 PM  Business Environment 71 policies, rapid technological (iii) Inter-relatedness: Different developments, political uncertainty, elements or parts of business changes in fashions and tastes environment are closely inter- of consumers and increased related. For example, increased competition in the market — all life expectancy of people and influence the working of a business increased awareness for health enterprise in important ways. care have increased the demand Increase in taxes by government for many health products and can make things expensive to buy. services like soft drinks, fat-free Technological improvements may cooking oil, and health resorts. render existing products obsolete. New health products and Political uncertainty may create fear services have, in turn, changed in the minds of investors. Changes people’s life styles. in fashions and tastes of consumers (iv) Dynamic nature: Business may shift demand in the market environment is dynamic in that from existing products to new it keeps on changing whether ones. Increased competition in the in terms of technological imp­ market may reduce profit margins rovement, shifts in consumer of firms. preferences or entry of new On the basis of the foregoing competition in the market. disc­ ussion, it can be said business (v) Uncertainty: Business envir­ environment, has the following onment is largely uncertain as it features: is very difficult to predict future (i) Totality of external forces: happenings, especially when Business environment is the environment changes are taking sum total of all things external place too frequently as in the to business firms and, as such, is aggregative in nature. case of information tech­ nology (ii) Specific and general forces: or fashion industries. Business environment includes (v i ) Complexity: Since business both specific and general forces. env­ironment consists of Specific forces (such as investors, numerous interrelated and customers, competitors and supp­ dynamic conditions or forces liers) affect individual enterprises which arise from different directly and immediately in sources, it becomes difficult their day-to-day working. to comprehend at once what General forces (such as social, exactly constitutes a given political, legal and technological environment. In other words, conditions) have impact on all environment is a complex business enterprises and thus phenomenon that is relatively may affect an individual firm easier to understand in parts only indirectly. but difficult to grasp in its 2020-21 Ch_03.indd 71 24-09-2019 12:09:28 PM  72 Business Studies totality. For example, it may (i) It enables the firm to identify be difficult to know the extent opportunities and getting of the relative impact of the the first mover advantage: social, economic, political, Opportunities refer to the positive technological or legal factors on external trends or changes that change in demand of a product will help a firm to improve its in the market. performance. Environment prov­ (vii) Relativity: Business environment ides numerous opportunities for is a relative concept since it business success. Early identi­ differs from country to country fication of opportunities helps an and even region to region. enterprise to be the first to exploit Political conditions in the USA, them instead of losing them to for instance, differ from those competitors. For example, Maruti in China or Pakistan. Similarly, Udyog became the leader in the demand for sarees may be fairly small car market because it was high in India whereas it may be the first to recognise the need almost non-existent in France. for small cars in an environment of rising petroleum prices and Importance of Business a large middle class population in India. Environment (ii) It helps the firm to identify Just like human beings, business threats and early warning enterprises do not exist in isolation. signals: Threats refer to the Each business firm is not an external environment trends and island unto itself; it exists, survives changes that will hinder a firm’s and grows within the context performance. Besides oppor­ of the element and forces of its tunities, environment happens environment. While an individual to be the source of many threats. firm is able to do little to change Environmental awareness can or control these forces, it has help managers to identify various no alternative to responding or threats on time and serve as an adapting according to them. A good early warning signal. For understanding of environment by example, if an Indian firm finds business managers enables them not that a foreign multinational is only to identify and evaluate, but also entering the Indian market with to react to the forces external to their new substitutes, it should act as firms. The importance of business a warning signal. On the basis of environment and its understanding this information, the Indian by managers can be appreciated if we firms can prepare themselves to consider the following facts: meet the threat by adopting such 2020-21 Ch_03.indd 72 24-09-2019 12:09:28 PM  Business Environment 73 measures as improving the (iv) It helps in coping with rapid quality of the product, reducing changes: Today’s business envir­ cost of the production, engaging onment is getting increasingly in aggr­ essive advertising, and dynamic where changes are so on. taking place at a fast pace. It is not (iii) It helps in tapping useful the fact of change itself that is so resources: Environment is a important as the pace of change. source of various resources Turbulent market conditions, for running a business. less brand loyalty, divisions and To engage in any type of sub-divisions (fragmentation) activity, a business enterprise of markets, more demanding assembles various resources customers, rapid changes in called inputs like finance, technology and intense global machines, raw materials, competition are just a few of the power and water, labour, etc., images used to describe today’s from its environment including business environment. All sizes financiers, government and and all types of enterprises are suppliers. They decide to provide facing increasingly dynamic these resources with their own environment. In order to eff­ expectations to get something in ectively cope with these signifi­ return from the enterprise. The cant changes, managers must business enterprise supplies the environment with its outputs understand and examine the such as goods and services for environment and develop suit­ customers, payment of taxes to able courses of action. government, return on financial (v) It helps in assisting in planning investment to investors and and policy formulation: Since so on. Because the enterprise environment is a source of depends on the environment as both opportunities and threats a source of inputs or resources for a business enterprise, its and as an outlet for outputs, understanding and analysis it only makes sense that the can be the basis for deciding enterprise designs policies that the future course of action allow it to get the resources (planning) or training guidelines that it needs so that it can for decision making (policy). For convert those resources into instance, entry of new players outputs that the environment in the market, which means desires. This can be done better more competition may make an by understanding what the enterprise think afresh about environment has to offer. how to deal with the situation. 2020-21 Ch_03.indd 73 24-09-2019 12:09:28 PM  74 Business Studies (vi) It helps in improving energy efficient light bulb that lasts performance: The final reason at least twenty times as long as a for underst­anding business standard bulb. Senior managers environment relates to whether or in the lighting divisions at General not it really makes a difference in Electric and Phillips recognised that the performance of an enterprise. this discovery had the potential to The answer is that it does appear significantly affect their unit growth to make a difference. Many and profitability, So they have studies reveal that the future of carefully followed the progress on an enterprise is closely bound this research and profitably used up with what is happening in its findings. A brief discussion of the environment. And, the enter­ the various factors constituting the prises that continuously monitor general environment of business is their environment and adopt given below: suitable business practices are (i) Economic Environment: Int­ the ones which not only improve erest rates, inflation rates, their present performance but changes in disposable income also continue to succeed in the of people, stock market indices market for a longer period. and the value of rupee are some of the economic factors that can Dimensions of Business affect management practices Environment in a business enterprise. Short and long term interest Dimensions of, or the factors cons­ rates significantly affect the tituting the business environment demand for product and include economic, social, techno­ services. For example, in case logical, political and legal conditions of construction companies and which are considered relevant for automobile manufacturers, low decision-making and improving the longer-term rates are beneficial performance of an enterprise. In because they result in increased contrast to the specific environment, spending by consumers for these factors explain the general buying homes and cars on environment which mostly influences borrowed money. Similarly, a many enterprises at the same time. rise in the disposable income However, management of every of people due to increase in enterprise can benefit from being the gross domestic product of aware of these dimensions instead a country creates increasing of being disinterested in them. demand for products. High For instance, scientific research inflation rates generally result has discovered a technology that in constraints on business makes it possible to produce an enterprises as they increase 2020-21 Ch_03.indd 74 24-09-2019 12:09:28 PM  Business Environment 75 Economic Social Environment Environment Business Legal Environment Technological Environment Environment Political Environment Dimensions of Business Environment the various costs of business (ii) Social Environment: The social such as the purchase of raw environment of business include materials or machinery and the social forces like customs payment of wages and salaries to employees. and traditions, values, social Components of Economic Environment n Existing structure of the economy in terms of relative role of private and public sectors. n The rates of growth of GNP and per capita income at current and constant prices n Rates of saving and investment n Volume of imports and exports of different items n Balance of payments and changes in foreign exchange reserves n Agricultural and industrial production trends n Expansion of transportation and communication facilities n Money supply in the economy n Public debt (internal and external) n Planned outlay in private and public sectors 2020-21 Ch_03.indd 75 24-09-2019 12:09:28 PM  76 Business Studies trends, society’s expectations innovations which provide from business, etc. Traditions new ways of prod­ ucing goods define social practices that and services and new methods have lasted for decades or and techniques of operating a even centuries. For example, business. For exa­mple, recent the celebration of Diwali, Eid, technological, adva­nces in Christmas, and Guru Parv computers and electro­ nics in India provides significant have modified the ways in financial opportunities for gree­ which companies advertise tings card companies, sweets or their products. It is common confectionery manufacturers, now to see computerised tailoring outlets and many other inform­ation kiosks, and World related business. Values refer to Wide Web multimedia pages concepts that a society holds in highlighting the virtues of high esteem. In India, individual products. Similarly, retailers freedom, social justice, equality have direct links with suppliers who replenish stocks when of opportunity and national needed. Manufacturers have integration are examples of major values cherished by all flexible man­ufacturing systems. of us. In business terms, these Airline com­panies have Internet values translate into freedom of and World Wide Web pages choice in the market, business’s where customers can look for responsibility tow­ ards the flight times, desti­ nations and society and non-discriminatory fares and book their tickets employ­ment practices. online. In addition, cont­inuing Social trends present various innovations in different scientific opportunities and threats to and engineering fields such as business enterprises. For example, lasers, robotics, biotech­ nology, the health-and-fitness trend has food preservatives, medi­ cine, become popular among large telecommunication and synthetic number of urban dwellers. fuels have provided numerous This has created a demand opportunities and threats for for products like organic food, many different enterprises. gyms, bottled (mineral) water Shifts in demand from vaccum and food supplements. tubes to transistors, from steam locomotives to die­seland electric (iii) Technological Environment: engines, from fou­ntain pens to Technological environment ballpoint, from propeller airplanes includes forces relating to to jets, and from typewriters to scientific improvements and computer based word processors, 2020-21 Ch_03.indd 76 21-11-2019 9:51:45 AM  Business Environment 77 have all been responsible and in the long term projects for creating new business. the growth of the economy. (iv) Political Environment: Political Political instability can shake environment includes political that confidence. Similarly, conditions such as general the attitudes of government stability and peace in the officials towards business may coun-try and specific attitudes have either positive or negative that elected gover nment impact upon business. representatives hold towards (v) Legal Environment: Legal business. The significance of envi­ronment includes various political conditions in business lations passed by the legis­ success lies in the predictability Government administrative of business activities under orders issued by government stable political conditions. authorities, court judgments as On the other hand, there may well as the decisions rendered be uncertainty of business by various commissions and activities due to political agencies at every level of the unrest and threats to law and government— centre, state order. Political stability, thus, or local. It is imperative for builds up confidence among the management of every business people to invest enterprise to obey the law Major Elements of Social Environment n Attitudes towards product innovations, lifestyles, occupational distribution and consumer preferences n Concern with quality of life n Life expectancy n Expectations from the workforce n Shifts in the presence of women in the workforce n Birth and death rates n Population shifts n Educational system and literacy rates n Consumption habits n Composition of family 2020-21 Ch_03.indd 77 21-11-2019 9:51:45 AM  78 Business Studies Activity II SOCIAL ENVIRONMENT Contact any ten families known to you. Find out the changes in their consumption habits over the last five years. Analyse the impact of these changes on the working of business enterprises. Fashion industry Electronic gadgets (shifts towards (increase in demand formal wear) of these gadgets) Cosmetic industry Food habits (increase in demand) (shift towards packed food) Impact of shifts with the presence of women in the workforce 2020-21 Ch_03.indd 78 21-11-2019 9:51:50 AM  Business Environment 79 Indian Railway Catering and Tourism Corporation ltd. (A Government of India Enterprise) E-TICKET BOOKING ON THIS WEBSITE - A GUIDE n Register as an individual. Registration is FREE. n Login by entering your user name and password. n The ‘Plan my travel and Book tickets’ page appears. n Use ‘HELP’ option for any help required to book tickets. n Fill in the details, by following the guidelines given below. Because of technological advancement, it has become possible to book railway tickets through Internet from home, office etc.. 2020-21 Ch_03.indd 79 21-11-2019 9:51:50 AM  80 Business Studies of the land. Therefore, an 2002 and host of such other legal adequate knowledge of rules enactments as amended from and regulations framed by the time to time by the Parliament, Government is a pre-requisite is important for doing business. for better business performance. Impact of legal environment Non-compliance of laws can can be illustrated with the help land the business enterprise of government regulations to into legal problems. In India, protect consumer’s interests. For Constitutional Provisions; example, the advertisement of Companies Act 2013; Industries alcoholic beverages is prohibited. (Development and Regulations) Advertisements, including Act 1951; Foreign Exchange packets of cigarettes carry the Management Act and the statutory warning ‘Cigarette Imports and Exports (Control) smoking is injurious to health’. Act 1947; Factories Act, Similarly, advertisements of 1948; Trade Union Act; 1926; baby food must necessarily Workmen’s Compensation Act, inform the potential buyer that 1923; Industrial Disputes Act, mothers milk is the best. All 1947, Consumer Protection these regulations are required Act, 1986, Competition Act, to be followed by advertisers. Major Elements of the Political Environment n Prevailing political system n The degree of politicisation of business and economic issues n Dominant ideologies and values of major political parties n The nature and profile of political leadership and thinking of political personalities n The level of political morality n Political institutions like the government and allied agencies n Political ideology and practices of the ruling party n The extent and nature of government intervention in business n The nature of relationship of our country with foreign countries 2020-21 Ch_03.indd 80 25-11-2019 12:37:46 PM  Business Environment 81 Economic Environment in chairpersons devote considerable attention to the general economic India environment prevailing in the country The economic environment in and an assessment of its impact on India consists of various macro- their companies. level factors related to the means of The economic environment of production and distribution of wealth business in India has been steadily which have an impact on business changing mainly due to the government policies. At the time of and industry. These include: Independence: (a) Stage of economic development of (a) The Indian economy was mainly the country. agricultural and rural in character; (b) The economic structure in the (b) About 70% of the working population form of mixed economy which was employed in agriculture; recognises the role of both public (c) About 85% of the population was and private sectors. living in the villages; (c) Economic policies of the Govern­ (d) Production was carried out ment, including industrial, mone- using irrational, low productivity tary and fiscal policies. technology; (d) Economic planning, including (e) Communicable diseases were five year plans, annual budgets, widespread, mortality rates were and so on. high. These was no good public (e) Economic indices, like national health system. income, distribution of income, In order to solve economic problems rate and growth of GNP, per of our country, the government took several steps including control by the capita income, disposal personal State of certain industries, central income, rate of savings and planning and reduced importance investments, value of exports and of the private sector. The main imports, balance of payments, objectives of India’s development and so on. plans were: (f) Infrastructural factors, such as, (a) Initiate rapid economic growth to financial institutions, banks, raise the standard of living, reduce modes of transportation commu­ unemployment and poverty; nication facilities, and so on. (b) Become self-reliant and set up Business enterprises in India do a strong industrial base with realise the importance and impact emphasis on heavy and basic of the economic environment on industries; their working. Almost all annual (c) Reduce inequalities of income company reports presented by their and wealth; 2020-21 Ch_03.indd 81 21-11-2019 9:51:50 AM  82 Business Studies (d) Adopt a socialist pattern of cent Foreign Direct Investment development — based on equality (FDI) was permitted. and prevent exploitation of man (e) Automatic permission was now by man. granted for technology agree­ments In accordance with the economic with foreign companies. planning, the government gave a (f ) Foreign Investment Promotion lead role to the public sector for Board (FIPB) was set up to infrastructure industries whereas promote and channelise foreign the private sector was broadly given investment in India. the responsibility of developing Appropriate measures were taken consumer goods industry. At the to remove obstacles in the way of same time, the government imposed growth and expansion of industrial several restrictions, regulations and units of large industrial houses. controls on the working of private Small-scale sector was assured all sector enterprises. India’s experience help and accorded due recognition. with economic planning has delivered In essence, this policy has mixed results. In 1991 the economy sought to liberate industry from the faced a serious foreign exchange shackles of the licensing system crisis, high government deficit and a (liberalisation), drastically reduce the rising trend of prices despite bumper role of the public sector (privatisation) crops. and encourage foreign private As a part of economic reforms, the participation in India’s industrial Government of India announced a development (globalisation). new industrial policy in July 1991. Liberalisation: The economic reforms The broad features of this policy that were introduced were aimed at were as follows: liberalising the Indian business and (a) The Government reduced the industry from all unnecessary controls number of industries under and restrictions. They signalled the compulsory licensing to six. end of the licence-pemit-quota raj. (b) Many of the industries reserved Liberalisation of the Indian industry for the public sector under the has taken place with respect to: earlier policy, were dereserved. (i) abolishing licensing requirement The role of the public sector was in most of the industries except limited only to four industries of a short list, strategic importance. (ii) freedom in deciding the scale (c) Disinvestment was carried out of business activities i.e., no in case of many public sector restrictions on expansion or industrial enterprises. contraction of business activities, (d) Policy towards foreign capital was (iii) removal of restrictions on the liberalised. The share of foreign movement of goods and services, equity participation was increased (iv) freedom in fixing the prices of and in many activities 100 per goods services, 2020-21 Ch_03.indd 82 24-09-2019 12:09:33 PM  Business Environment 83 Crisis of June 1991 Major elements of the crisis situation which led the Government of India to announce economic reform were: n A serious fiscal crisis in which the fiscal deficit reached the level of 6.6 per cent of GDP in 1990-91. n Heavy internal debt which rose to about 50 per cent of GDP with interest payments draining about 39 per cent of total revenue collections of the central government. n Low GNP growth rate which fell to 1.4 per cent from the peak level of 10.5 per cent in 1988-89 (at 1980-81 prices). n Low overall agricultural production, foodgrain production and industrial production showed negative growth rates of –2.8 per cent, –5.3 per cent and –0.1 per cent respectively. n Soaring inflation rate based both on wholesale price index and consumer price index (for industrial workers) at 13-14 per cent. n Shrinkage of foreign trade, imports (in $ terms) fell by 19.4 per cent and exports by 1.5 per cent. n Depreciation of rupee by 26.7 per cent vis-à-vis US dollars. n Fall of foreign exchange reserves to such a low level that they were barely adequate to meet the import requirements of a few weeks. Non-resident Indians (NRIs) were withdrawing their deposits at an alarmingly high rate. n The confidence of the international financial institutions was badly shaken and in just over a year its creditworthiness rating fell from AAA to BB+ (put on credit watch). n The country was on the verge of defaulting on international financial obligations and the situation warranted immediate policy action to save the situation. In May 1991, the Government had to lease 20 tones of gold out of its stock to the State Bank of India to enable it to sell the gold with repurchase option after six months. In addition, Reserve Bank of India was allowed to pledge 47 tones of gold to the Bank of England to raise a loan of $600 million. (v) reduction in tax rates and lifting Privatisation: The new set of econo­ of unnecessary controls over the mic reforms aimed at giving greater economy, role to the private sector in the nation (vi) simplifying procedures for building process and a reduced role imports and experts, and to the public sector. This was a reversal (vii) making it easier to attract of the development strategy pursued foreign capital and technology so far by Indian planners. To achieve to India. this, the government redefined the 2020-21 Ch_03.indd 83 24-09-2019 12:09:33 PM  84 Business Studies role of the public sector in the New were with respect to (a) licensing of Industrial Policy of 1991, adopted imports, (b) tariff restrictions and (c) the policy of planned disinvestments quantitative restrictions. The new of the public sector and decided economic reforms aimed at trade to refer the loss making and sick liberalisation were directed towards enterprises to the Board of Industrial import liberalisation, export promotion and Financial Reconstruction. The through rationalisation of the tariff term disinvestments used here structure and reforms with respect to means transfer in the public sector foreign exchange so that the country enterprises to the private sector. does not remain isolated from the rest It results in dilution of stake of the of the world. Globalisation involves Government in the public enterprise. an increased level of interaction and If there is dilution of Government interdependence among the various ownership beyond 51 percent, it nations of the global economy. would result in transfer of ownership Physical geographical gap or political and management of the enterprise to boundaries no longer remain barriers the private sector. for a business enterprise to serve a Globalisation: Globalisation means customer in a distant geographical the integration of the various eco­ market. This has been made nomies of the world leading towards possible by the rapid advancement the emergence of a cohesive global in technology and liberal trade economy. Till 1991, the Government policies by Governments. Through of India had followed a policy of the policy of 1991, the government strictly regulating imports in value of India moved the country to this and volume terms. These regulations globalisation pattern. A Truly Globalised Economy A truly global economy implies a boundaryless world where there is: (i) Free flow of goods and services across nations; (ii) Free flow of capital across nations; (iii) Free flow of information and technology; (iv) Free movement of people across borders; (v) A common acceptable mechanism for the settlement of disputes; (vi) A global governance perspective. Activity 3 GLOBALISATION Make a list of five Indian companies which have global operations today. Find out the major products they sell and the countries where they operate. 2020-21 Ch_03.indd 84 24-09-2019 12:09:33 PM  Business Environment 85 Early Crisis Met : Reform Measures Some of the early major steps taken to manage the economic crisis were the following: n Fiscal correction aimed at reducing fiscal deficit by about Rs. 7,700 crore in 1991-92 (compared to 1990-91); n Announcement of New Industry Policy in July 1991 seeking to deregulate the industry with the objective of promoting the growth of a more competitive and efficient industrial economy; n Abolition of industrial licensing for all industrial projects except 18 industries of high strategic and environmental importance and with high import content. About 80 per cent of the industries were delicensed; n Amendment of the MRTP Act to eliminate the need for prior approval of the Central Government by large companies for capacity expansion, diversification and merger and amalgamation. n Nine areas in basic and core industries earlier reserved for the public sector were opened to the private sector; n Limit of foreign equity holding raised from 40 per cent to 51 per cent in a wide range of priority industries; n Foreign Investment Promotion Board (FIPB) established to negotiate proposals from large international firms and expedite clearances of the investment proposals; n Rupee devaluation by 18 per cent during July 1-3, 1991 supported by a standby credit of $2.3 billion from the IMP over a 20 months period negotiated in October 1991; n Negotiation of $500 million Structural Adjustment Loan from the World Bank in April 1992 and a loan totalling SDR 1.3 billion from the International Monetory Fund (IMF) between January-September 1991; n Introduction of India Development Bond Scheme and Immunity Scheme for repatriation of funds held abroad in October 1991, under which more than $2 billion were mobilised during 1991-92; n Bringing back of gold earlier pledged to the Bank of England and the Bank of Japan; n Continuance of the measures of import control and credit squeeze; n Administered licensing of imports replaced by freely tradeable import entitlements (called Eximscrips) linked to export earnings. The measure was expected to introduce self- balancing mechanism in India’s foreign trade; n Introduction of Liberalised Exchange Rate Management System (LERMS) under which a dual exchange rate system was established, one rate being effectively floated in the market; and n Import licensing in most capital goods, raw materials, intermediates and components eliminated. Advance Licensing System considerably simplified. The initial series of measures set the tone for the future economic reforms. Any of the measures taken above was continued to form a part of the ongoing reform process. 2020-21 Ch_03.indd 85 24-09-2019 12:09:33 PM  86 Business Studies Demonetisation: The Government unaccounted wealth and pay of India, made an announcement taxes at a penalty rate. on November 8, 2016 with profound 2. Demonetisation is also implications for the Indian economy. interpreted as a shift on the part The two largest denomination notes, of the government indicating `500 `1,000, were ‘demonetised’ that tax evasion will no longer be with immediate effect, ceasing to be tolerated or accepted. legal tender except for a few specified 3. Demonetisation also led to tax purposes such as paying utility bills. administration channelizing This led to eighty six per cent of the savings into the formal financial money in circulation invalid. The system. Though, much of the people of India had to deposit the cash that has been deposited in invalid currency in the banks which the banking system is bound to came along with the restrictions be withdrawn but some of the new placed on cash withdrawals. In other deposits schemes offered by the words, restrictions were placed on banks will continue to provide a the convertibility of domestic money base loans, at lower interest rates. and bank deposits. 4. Another feature of demonetisation The aim of demonetisation was is to create a less-cash or to curb corruption, counterfeiting cash-lite economy, i.e., channeling the use of high denomination notes more savings through the formal for illegal activities; and especially financial system and improving the accumulation of ‘black money’ tax compliance. Though there generated by income that has not are arguments against this as been declared to the tax authorities. digital transactions require use Features of cell phones for customers and 1. Demonetisation is viewed as a tax Point-of-Sale (PoS) machines for administration measure. Cash merchants, which will only work if holdings arising from declared there is internet connectivity. On income was readily deposited the contrary, these disadvantages in banks and exchanged for are counterbalanced by an new notes. But those with black understanding that it helps money had to declare their people into the formal economy, Digitalisation has broadly impact three sections of society: the poor, who are largely outside the digital economy; the less largely outside the digital economy; the less affluent, who are becoming part of the digital economy who have been covered under Jan Dhan Accounts and Rupay cards; and the affluent, who are fully conversant with digital transactions. 2020-21 Ch_03.indd 86 24-09-2019 12:09:33 PM  Business Environment 87 Impact of Demonetisation 1. Money/Interest i. Decline in cash transactions rates ii. Bank deposits increased iii. Increase in financial savings 2. Private wealth Declined since some high demonetised notes were not returned and real estate prices fell 3. Public sector No effect wealth 4. Digitisation Digital transactions amongst new users (RuPay/AEPS) increased 5. Real estate Prices declined 6. Tax collection Rise in income tax collection because of increased disclosure Adapted from Economic Survey, 2016–17 thereby increasing financial (ii) More demanding customers: saving and reducing tax evasion. Customers today have become more demanding because they are well-informed. Increased Impact of Government competition in the market gives Policy Changes on the customers wider choice in purchasing better quality of Business and Industry goods and services. The policy of liberalisation, privati­ (iii) Rapidly changing technological sation and globalisation of the environment: Increased com­ Gover­nment has made a significant petition forces the firms to develop impact on the working of enterprises new ways to survive and grow in the in business and industry. The Indian market. New technologies make corporate sector has come face-to- it possible to improve machines, face with several challenges due to process, products and services. government policy changes. These The rapidly changing technological challenges can be explained as environment creates tough challe­ follows: nges before smaller firms. (i) Increasing competition: As a (iv) Necessity for change: In a result of changes in the rules of regulated environment of pre- industrial licensing and entry 1991 era, the firms could have of foreign firms, competition relatively stable policies and for Indian firms has increased practices. After 1991, the market especially in service industries forces have become turbulent as like telecommunications, airlines, a result of which the enterprises banking, insurance, etc. which have to continuously modify were earlier in the public sector. their operations. 2020-21 Ch_03.indd 87 24-09-2019 12:09:33 PM  88 Business Studies (v) Need for developing human sector outlays has declined over resource: Indian enterprises have the years. The public sector suffered for long with inadequately undertakings have realised that, trained personnel. The new market in order to survive and grow, they conditions require people with will have to be more efficient and higher competence and greater generate their own resources for commi­tment. Hence the need for the purpose. developing human resources. On the whole, the impact of (vi) Market orientation: Earlier Government policy changes firms used to produce first and particularly in respect of go to the market for sale later. In liberalisation, privatisation and other words, they had production globa­lisation has been positive as oriented marketing operations. the Indian business and industry In a fast changing world, there is has shown great resilience in dealing a shift to market orientation in as with the new economic order. Indian much as the firms have to study enterprises have developed strategies and analyse the market first and and adopted business processes and produce goods accordingly. procedures to meet the challenge (vii) Loss of budgetary support of competition. They have become to the public sector: The more customer-focused and adopted central government’s budgetary measures to improve customer support for financing the public relationship and satisfaction. Key Terms Business environment Opportunities Threats Economic Environment Political environment Social environment Technological environment Legal environment Liberalisation Privatisation Globalisation Summary Meaning of business environment: The term business environment means the totality of all individuals, institutions and other forces that are outside a business but that potentially affect its performance. Business environment can be characterised in terms of (a) totality of external forces (b) specific and general forces (c) inter-relatedness (d) dynamic nature (e) uncertainty 2020-21 Ch_03.indd 88 24-09-2019 12:09:33 PM  Business Environment 89 (f ) complexity (g) relativity Importance of business environment: Business environment and its understanding are important for (i) enabling the identification of opportunities and getting the first mover advantage, (ii) helping in the identification of threats and early warning signals, (iii) coping with the rapid changes, (v) assisting in planning and policy and (vi) improving the performance. Elements of business environment: Business environment consists of five important dimensions including economic, social, technological, political and legal. Economic environment includes such factors as interest rates, inflation rates, changes in disposable income of people, stock market indexes and the value of rupee. Social environment includes social forces like traditions, values, social trends, society’s expectations of business, and so on. Technological environment includes forces relating to scientific improvements and innovations which provide new ways of producing goods and services and new methods and techniques of operating a business. Political environment includes political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold toward business. Legal environment includes various legislations passed by the government, administrative orders issued by government authorities, court judgments as well as decisions rendered by various commissions and agencies at every level of the government— center, state or local. Economic environment in India: The economic environment in India consists of various macro-level factors related to the means of production and distribution of wealth which have an impact on business and industry. The economic environment of business in India has been steadily changing since Independence mainly due to government policies. In order to solve economic problems of our country at the time of Independence, the government took several steps including control by the state of key industries, central planning and reduced importance of the private sector. These steps delivered mixed results until 1991 when Indian economy happened to face serious foreign exchange crisis, high government deficit and a rising trend of prices despite bumper crops. 2020-21 Ch_03.indd 89 24-09-2019 12:09:33 PM  90 Business Studies Liberalisation, privatisation and globalisation: As a part of economic reforms, the Government of India announced a new industrial policy in July 1991 which sought to liberate the industry from the shackles of the licensing system (liberalisation), drastically reduce the role of the public sector (privatisation) and encourage foreign private participation in industrial development (globalisation). Impact of Government policy changes on business and industry: The government policy of liberalisation, privatisation and globalisation has made a definite impact on the working of enterprises in business and industry in terms of (a) increasing competition (b) more demanding customers (c) rapidly changing technological environment (d) necessity for change (e) need for developing human resource (f ) market orientation (g) loss of budgetary support to the public sector. In the new economic environment, the Indian enterprises have developed various strategies to meet the challenge of competition Exercises Very Short Answer Type: 1. What is meant by business environment? 2. How does understanding of business environment help in improving performance of a business? 3. Give an example to show that a business firm operates within numerous inter related factors constituting the business environment.(Hint: example highlighting the inter relatedness of dimensions of business environment). 4. Krishna Furnishers Mart started its operations in the year 1954 and emerged as the market leader in the industry because of their original designs and efficiency in operations. They had a steady demand for their products but over the years, they found their market share declining because of new entrants in the field. The firm decided to review their operations and decided that in order to meet the competition, they need to study and analyze the market trends and then design and develop their products accordingly. List any two 2020-21 Ch_03.indd 90 24-09-2019 12:09:33 PM  Business Environment 91 impacts of changes in business environment on Krishna Furnishers Mart’s operations. (Hint: increase in competition and Market orientation). 5. Name any two Specific forces of business environment affecting business. Short Answer Type: 1. Why it is important for business enterprises to understand their environment? Explain. 2. Explain the following terms: a. Liberalisation b. Privatization c. Globalisation 3. Briefly discuss the impact of Government policy changes onbusiness and industry. 4. National Digital Library of India (NDL India) is a pilot project initiated by the HRD ministry. It works towards developing a framework of virtual repository of learning resources with a single-window search facility. It provides support to all academic levels including researchers, life-long learners and differently-abled learners free of cost. State the dimensions of business environment highlighted above. 5. State the impact of demonetization on interest rates, private wealth and real estate. Long Answer Type: 1. How would you characterize business environment? Explain with examples, the difference between general and specific environment. 2. How would you argue that the success of a businessenterprise is significantly influenced by its environment? 3. Explain, with examples, the various dimensions of businessenvironment. 4. The government of India announced Demonetization of ` 500 and ` 1,000 currency notes with effect from the midnight of November 8, 2016. As a result, the existing ` 500 and ` 1,000 currency notes ceased to be legal tender from that date. New currency notes of the denomination of ` 500 and ` 2,000 were issued by Reserve Bank of India after the announcement. 2020-21 Ch_03.indd 91 24-09-2019 12:09:33 PM  92 Business Studies This step resulted in a substantial increase in the awareness about and use of Point of Sale machines, e-wallets, digital cash and other modes of cashless transactions. Also, increased transparency in monetary transactions and disclosure led to a rise in government revenue in the form of tax collection. a. Enumerate the dimensions of business environment highlighted above. b. State the features of Demonetization. 5. What economic changes were initiated by the Government under the Industrial Policy, 1991? What impact have these changes made on business and industry? 6. What are the essential features of: a. Liberalisation, b. Privatization and c. Globalisation? 2020-21 Ch_03.indd 92 24-09-2019 12:09:33 PM