Business and Its Environment

Lesson 1
BUSINESS AND ITS ENVIRONMENT
NATURE OF BUSINESS
Business may be understood as the organized efforts of enterprise to supply consumers with goods and services for a profit. Businesses vary in size, as measured by the number of employees or by sales volume. But, all businesses share the same purpose: to earn profits.
The purpose of business goes beyond earning profit. There are:
• It is an important institution in society.
• Be it for the supply of goods and services
• Creation of job opportunities
• Offer of better quality of life
• Contributing to the economic growth of the country.
Hence, it is understood that the role of business is crucial. Society cannot do without business. It needs no emphasis that business needs society as much.
BUSINESS TODAY
Modern business is dynamic. If there is any single word that can best describe today’s business, it is change. This change makes the companies spend substantially on Research and development (R & D) to survive in the market.
Mass production and mass marketing are the norms followed by business enterprises. The number of companies with an annual turnover of Rs.100 crore each was only three in 1969-70.The figure has gone up by hundreds these days.
Today’s business is characterized by diversification, which may be:
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Concentric Diversification - It refers to the process of adding new, but relates products or services.
Horizontal Diversification - Adding new, unrelated products or services for present customers is called horizontal Diversification.
Conglomerate Diversification - It refers to adding new and unrelated products or services.
Going international is yet another trend followed by modern business houses.
Business houses are exposed to global competition, which argues well for consumers. Also occupying a major role is science in the global economic scenario. BUSINESS IN 21ST CENTURY
Large organizations, with a large workforce will not exist. They will be
‘Mini’ organizations. Business during the 21st century will be knowledge-based, tomorrow’s manager need not spend his time on file pushing and paper-shufling.
Information technology will take care of most of that work. Organizations will become flat. Linear relationship between the boss and manger and authority flowing downwards and obedience upward will disappear. Employees will have no definite jobs. Most of the jobs will last for two to five years. Remuneration will depend on one’s contribution to organization.
BUSINESS GOALS
Profit - Making profit is the primary goal of any business enterprise.
Growth - Business should grow in all directions over a period of time.
Power - Business houses have vast resources at its command. These resources confer enormous economic and political power.
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Employee satisfaction and development - Business is people. Caring for employee satisfaction and providing for their development has been one of the objectives of enlightened business enterprises.
Quality Products and Services - Persistent quality of products earns brand loyalty, a vital ingredient of success.
Market Leadership - To earn a niche for oneself in the market, innovation is the key factor.
Challenging - Business offers vast scope and poses formidable challenges. Joy of creation - It is through business strategies new ideas and innovations are given a shape and are converted into useful products and services. Service to society - Business is a part of society and has several obligations towards it.
BUSINESS ENVIRONMENT
Environment refers to all external forces, which have a bearing on the functioning of business. Environment factors “are largely if not totally, external and beyond the control of individual industrial enterprises and their managements. The business environment poses threats to a firm or offers immense opportunities for potential market exploitation.
TYPES OF ENVIRONMENT
Environment includes such factors as socio-economic, technological, supplier, competitor and the government. There are two more factors, which exercise considerable influence on business. They are physical or natural environment and global environment.
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Technological Environment
Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. Technology changes fast and to keep pace with it, businessmen should be ever alert to adopt changed technology in their businesses.
Economic Environment
There is close relationship between business and its economic environment.
Business obtains all its needed inputs from the economic environment and it absorbs the output of business units.
Political Environment
It refers to the influence exerted by the three political institutions viz., legislature executive and the judiciary in shaping, directing, developing and controlling business activities. A stable and dynamic political environment is indispensable for business growth.
Natural Environment
Business, an economic pursuit of man, continues to be dictated by nature. To what extend business depends on nature and what is the relationship between the two constitutes an interesting study.
Global or international Environment
Thanks to liberalization, Indian companies are forces to view business issues from a global perspective. Business responses and managerial practices must be fine-tuned to survive in the global environment.
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Social and culture Environment
It refers to people’s attitude to work and wealth; role of family, marriage, religion and education; ethical issues and social responsiveness of business.
ENVIRONMENT – BUSINESS RELATIONS
Business is the product of the technological, political-legal, economic, social – cultural, global and natural factors amidst which it functions. Three features are common to this web of relationship between business and its environment.
• There is symbolic relationship between business and its environment and among the environmental factors. In other words, business is influenced by its environment and in turn, to certain degree, it will influence the external forces. Similarly, political-legal environment influences economic environment and vice versa. The same relationship between other environment factors too.
• These environmental forces are dynamic. They keep on changing as years roll by, so does business.
• The third feature is that a particular business firm, by itself, may not be in a position to change its environment. But along with other firms, business will be in a position to mould the environment in its favor.
IMPORTANCE OF ENVIRONMENTAL STUDY
The benefits of environmental study are as follows;
• Development of broad strategies and long-term policies of the firm.
• Development of action plans to deal with technological advancements.
• To foresee the impact of socio-economic changes at the national and international levels on the firm’s stability.
• Analysis of competitor’s strategies and formulation of effective countermeasures.
• To keep oneself dynamic.
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ENVIRONMENTAL ANALYSIS PROCESS
The analysis consists of four sequential steps:
Scanning
It involves general surveillance of all environmental factors and their interactions in order to:
• Identify early signals of possible environmental change
• Detect environmental change already underway
Monitoring
It involves tracking the environmental trends, sequences of events, or streams of activities. It frequently involves following signals or indicators unearthed during environmental scanning.
Forecasting
Strategic decision-making requires a future orientation. Naturally, forecasting is an essential element in environmental analysis. Forecasting is concerned with developing plausible projections of the direction, scope, and intensity of environmental change.
Assessment
In assessment, the frame of reference moves from understanding the environment- the focus of scanning, monitoring and forecasting – to identify what the understanding means for the organization. Assessment, tries to answer questions such as what are the key issues presented by the environment, and what are the implications of such issues for the organization. 7
Lesson 2
CORPORATE GOVERNANCE, SOCIAL RESPONSIBILITY AND
BUSINESS ETHICS
CORPORATE GOVERNANCE
Corporate failures and widespread dissatisfaction with the way many corporate functions have led to the realization, globally, of the need to put in place a proper system for corporate governance.
Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals.
The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources.
The aim is to align as nearly as possible the interest of individuals, corporations, and society. The incentive to corporations and to those who own and manage them to adopt internationally accepted governance standards is that these standards will help them to achieve their corporate aims and to attract investment.
The incentive for their adoption by states is that these standards will strengthen the economy and discourage fraud and mismanagement.
RELEVANCE
At least three reasons have triggered off concern in corporate governance in our country.
• Since 1991, the country has moved into liberalized economy and one of the victims of the market-based economy is transparent fair business practice. Several instances of mismanagement have been alleged, with some well-known and senior executive being hauled
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up for non-performance and /or non-compliance with legal requirements. • Both domestic as well as foreign investors are becoming more demanding in their approach towards the companies in which they have invested their funds. They seek information and want to influence decisions.
• Interests of non-promoter shareholder and those of small investors are increasingly being undermined. Several MNCs have sought to set up 100 percent subsidiaries and transfer their businesses to them .In many cases, there was no thought of consultation with non-promoter shareholders.
In this context, some norms of behavior to ensure responsive behavior are of great help. Hence, corporate governance.
FOCUS
Corporate governance is concerned with the values, vision and visibility. It is about the value orientation of the organization, ethical norms for its performance, the direction of development and social accomplishment of the organization and the visibility of its performance and practices.
Corporate management is concerned with the efficiency of the resources use, value addition and wealth creation within the broad parameters of the corporate philosophy established by corporate governance.
IMPORTANCE
• Studies of firms in India and abroad have shown that markets and investors take notice of well-managed companies, respond positively to
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them, and reward such companies, with higher valuations. In other words they have a system of good corporate governance.
• Strong corporate governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection.
• Corporate governance prevents insider trading.
• Under corporate governance, corporates are expected to disseminate the material price sensitive information in a timely and proper manner and also ensures that till such information is made public, insiders abstain from transacting in the securities of the company.
• The principle should be ‘disclose or desist’. Good corporate governance, besides protecting the interests of shareholders and all other stakeholders, contributes to the efficiency of a business enterprise, to the creation of wealth and to the country’s economy.
• Good corporate governance is considered vital from medium and longterm perspectives to enable firms to compete internationally in sustained way and make them, not only to improve standard of living materially but also to enhance social cohesion.
PRE-REQUISITES
A system of good corporate governance requires the following:
• A proper system consisting of clearly defined and adequate structure of roles, authority and responsibility.
• Vision, principles and norms, which indicate development path, normative considerations, and guidelines and norms for performance.
• A proper system for guiding, monitoring, reporting and control.
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SOCIAL RESPONSIBILTY
Social responsibility is the obligation of decision-makers to take actions, which protect and improve the welfare of society as a whole along with their own interests. Every decision the businessman takes and every action he contemplates have social implications.
Be it deciding on diversification, expansion, opening of a new branch, and closure of an existing branch or replacement of men by machines, the society is affected in one way or the other. Whether the issue is significant or not, the businessman should keep his social obligation in mind before contemplating any action. ARGUMENTS FOR SOCIAL RESPONSIBILITY
• Business has to respond to the needs and expectations of society.
• Improvement of the social environment benefits both society and business. • Social responsibility discourages additional governmental regulation and intervention. • Business has a great deal of power, which should be accompanied by an equal amount of responsibility.
• Internal activities of the enterprise have an impact on the external environment. • The concept of social responsibility protects interests of stockholders.
• Social responsibility creates a favorable public image.
• Business has the resources to solve some of society’s problems.
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• It is better to prevent social problems through business involvement than to cure them.
ARGUMENTS AGAINST SOCIAL RESPONBILITY
• Social responsibilities could reduce economic efficiency.
• Social responsibility would create excessive costs for business.
• Weakened international balance of payments
• Business has enough power, and social involvement would further increase its power and influence.
• Business people lack the social skills necessary to deal with the problems of society.
• Business is not really accountable to society.
SOCIAL STAKEHOLDERS
Managers, who are concerned about corporate social responsibility, need to identify various interest groups which may affect the functioning of a business organization and may be affected by its functioning. Business enterprises are primarily responsible to six major groups:
• Shareholders
• Employees
• Customers
• Creditors, suppliers and others
• Society and
• Government.
These groups are called interest groups or social stakeholders. They can be affected for better or worse by the business activities of corporations.
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SOCIAL RESPONSIVENESS
Social responsiveness (SR) is “the ability of a corporation to relate it operations and policies to the social environment in ways that are mutually beneficial to the company and to society”.
In other words, it refers to the development of organizational decision processes whereby managers anticipate, respond to, and manage areas of social responsibility. The need to measure the social responsiveness of an organization led to the concept of social audit.
The social responsiveness of an organization can be measured on the basis of the following criteria:
• Contributions to charitable and civic projects
• Assisting voluntary social organizations in fund-raising
• Employee involvement in civic activities
• Proper reuse of material
• Equal employment opportunity
• Promotion of minorities
• Direct corporate social responsiveness investment
• Fair treatment of employees
• Fair pay and safe working conditions
• Safe and quality products to consumers
• Pollution avoidance and control
BUSINESS EHTICS
The two issues - an organization’s social responsibility and responsiveness- ultimately depend on the ethical standards of mangers. The term
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ethics commonly refers to the rules or principles that define right and wrong conduct. Ethics is defined as the “ discipline dealing with what is good and bad and with moral duty and obligation”. Business ethics is concerned with truth and justice and has a variety of aspects such as expectations of society, fair competition, advertising, public relations, social responsibilities, consumer autonomy, and corporate behavior in the home country as well as abroad.
TYPES OF BUSINESS ETHICS
Moral management
Moral management strives to follow ethical principles and precepts, moral mangers strive for success, but never violate the parameters of ethical standards.
They seek to succeed only within the ideas of fairness, and justice.
Moral managers follow the law not only in letter but also in spirit. The moral management approach is likely to be in the best interests of the organization, long run.
Amoral management
This approach is neither immoral nor moral. It ignores ethical considerations.
Amoral management is broadly categorized into two types – intentional and unintentional. • Intentional amoral managers exclude ethical issues because they think that general ethical standards are not appropriate to business.
• Unintentional amoral managers do not include ethical concerns because they are inattentive or insensitive to the moral implications.
Immoral management
Immoral management is synonymous with “unethical” practices in business. This kind of management not only ignores concerns, it is actively opposed to ethical behavior.
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NEED FOR BUSINESS ETHICS
• Ethics corresponds to basic human needs. It is human trait that man desires to be ethical, not only in his private life but also in his business.
These basic ethical need compel the organizations to be ethically oriented. • Values create credibility with public. A company perceived by the public to be ethically and socially responsive will be honored and respected.
The management has credibility with its employees precisely because it has credibility with the public.
• An ethical attitude helps the management make better decisions, because ethics will force a management to take various aspects- economic, social, and ethical in making decisions.
• Value driven companies are sure to be successful in the long run, though in the short run, they may lose money.
• Ethics is important because the government, law and lawyers cannot do everything to protect society.
ETHICAL GUIDELINES
• Obeying the law: Obedience to the law, preferably both the letter and spirit of the law.
• Tell the Truth: To build and maintain long-term, trusting and win-win relationships with relevant stockholders.
• Uphold human dignity: Giving due importance to the element of human dignity and treating people with respect.
• Adhere to the golden rule: “Do unto others as you would have others do unto you”
• Premium Non-Nocere: (Above all, do no harm)
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• Allow Room for participation: Soliciting the participation of stakeholders rather than paternalism. It emphasizes the significance of learning about the needs of stakeholders.
• Always Act When You Have Responsibility: Managers have the responsibility of taking action whenever they have the capacity or adequate resources to do so.
TOOLS FOR ETHICAL MANAGEMENT
• Top management commitment: Managers can prove their commitment and dedication for work and by acting as role models through their own behaviors. • Codes of Ethics: A formal document that states an organization’s primary values and the ethical rules it expects employees to follow. The code is helpful in maintaining ethical behavior among employees.
• Ethics committees: Appointment of an ethics committee, consisting of internal and external directors is essential for institutionalizing ethical behavior. • Ethics Audits: Systematic assessment of conformance to organizational ethical policies, understanding of those policies, and identification of serious deviations requiring remedial action.
• Ethics training: Ethical training enables managers to integrate employee behavior in ethical arena with major organizational goals.
• Ethics Hotline: A special telephone line that enables employees to bypass the normal chain of command in reporting their experiences, expectations and problem. The line is usually handled by an executive appointed to help resolve the issues that are reported.
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Lesson 3
ECONOMIC SYSTEMS
MEANING
Economic system is a social organism through which people make their living. It is constituted of all those individuals, households, farms, firms, factories, banks and government, which act and interact to produce and consume goods and services. Individuals and households put their resources (land, labour, capital and skill) to one or more of their alternative uses and make their living; firms buy factors of production and organize them in the process of production, produce goods and services, and sell them to their users to make projects.
Consumers are able to get the goods and services of their requirement; producers are able to produce and sell various kinds of products in appropriate quantities and so on. The system is operated by, What Adam Smith called “ invisible hands”, the market forces of demand and supply.
A modern economic system is enormously complex. Millions of people participate and contribute to its working in different capacities – as producers, traders, workers, consumers and financers and so on. Thousands of people are involved in production and distribution of single commodity. A community, before it reaches its final consumer, passes through a complex process of production and through a number of intermediary hands.
KINDS OF ECONOMIC SYSTEMS
Free Enterprise Economy
This economic system works on the principle of Laissez Faire system, i.e., the least interference by the government or any external force. The primary role of
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the government, if any, is to ensure free working of the economy by removing obstacles to free competition.
A free Enterprise Economy is characterized as follows:
• Means of production are privately owned by the people who acquire and posses them
• Private gains are the main motivating and guiding force for carrying out economic activities
• Both consumers and firms enjoy the freedom of choice; consumers have the freedom to consume what they want to and firms have the choice to produce what they want to
• The factor owners enjoy the freedom of occupational choice, i.e., they are free to use their resources in any legal business or occupation;
• There exists a high degree of competition in both commodity and factor markets and
• There is least interference by the government in the economic activities of the people; the government is in fact supposed to limit its traditional functions viz, to defence, police, justice, some financial organizations and public utility services.
Government Controlled Economy
The government-controlled economies are also called as Command, Centrally planned or Socialist economies. Such economies are, in contradistinction to the free enterprise economies, controlled, regulated and managed by the government agencies. The other features of a pure socialist economy are:
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• Means of production are owned by the society or by the state in the name of the community – private ownership of factors and property is abolished; • Social welfare is the guiding factor for economic activities – private gains, motivations and initiatives are absent,
• Freedom of choice for the consumers is curbed to what society can afford for all, and
• The role of market forces and competition is eliminated by law.
Mixed Economy
A mixed economy is one in which there exist both government and private economic systems. It is supposed to combine good elements of both free enterprise and socialist economies. A mixed economy is widely known as one, which had both “public sector” (the government economy) and “private sector” (the private economy). The private sector has features of a free enterprise economy and the public sector has features of socialist economy. It is important to note here that most economies in the world today are Mixed
Economies.
There are two different forms of the Mixed Economies.
• Mixed Capitalist Economies
A mixed Capitalist economy is a varient of the free enterprise economic system.
To this category fall the highly developed nations like the United States, U.K.,
France, Japan etc. though these economies have a very large government sector, their private sectors work on the principles of the free enterprise system. The government plays a significant role in preserving capitalist mode of production, ensuring a workable competition in factor and product markets, providing infrastructure for promotion of private sector economic activities.
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• Mixed Socialist Economies
To the category of the Mixed Socialist Economies belong the countries which have adopted “ socialist pattern of society: and economic planning as he means of growth and social justice (e.g. India) and the former communist countries (eg.
Russia and china) which have of late carried out drastic economic reforms and liberalized their economies for private entrepreneurship. The government of these countries takes upon themselves to control and regulate the private sector activities in accordance with the plan objectives.
BASIC PROBLEMS OF AN ECONOMY AND THE ROLE OF
GOVERNMENT
Whatever the nature of the economic system, all types of economies have been faced with certain common basic problems. The major economic problems faced by an economy may be classified into two broad groups: (i) micro-economic problems called basic problems, which are related to the working of the constituents of the economic system; and (ii) macro-economic problems related to the growth, stability, and management of the economy as a whole.
The way the basic problems of an economy are solved depends on the nature of the economy. While in a socialist economy they are solved by the government agencies, like central planning authority, in a free enterprise or mixed capitalist economy this task is performed by the Price Mechanism or Market Mechanism.
Though free enterprise system is capable of bringing economic growth, it does not ensure a stable, sustained, and balanced growth. It becomes therefore inevitable for the government to intervene fair competition, and help the economy in achieving its goals – efficiency, stability, growth and economic justice. 20
Now, the question arises as to what should be the appropriate role of the government in economic management of the country or what should be the form, nature and extent of government’s interference with market mechanism.
Nevertheless, the economic role of the government can be broadly categorized on the basis of the three economic systems which presently prevail in the world, viz., Capitalist System or Free Enterprise System, Socialist System, and the
Mixed-Economy System.
Capital Society: In this system, the primary role of the government are: (i) to preserve and promote free market mechanism wherever it is possible to ensure a workable competition, (ii) to remove all unnecessary restrictions on the free operation of competitive market, and (iii) to provide playground and rules of the market game through necessary interventions and controls so that free competition can work effectively.
It may be inferred that the government’s role in a capitalist society is supposed to be limited to (a) restoration and promotion of necessary conditions for efficient working of free market mechanism; and (b) to enter those areas of production and distribution in which private entrepreneurship is lacking or is inefficient. Socialist Economy: In contract with the capitalist system, the role of government in a Socialist economy is much more exhaustive. While in the former, the government is supposed to play a limited role in the economic sphere, in the latter, it exercises comprehensive control on almost all economic activities. In the socialist system, not only there is a complete disregard for free enterprise and market mechanism but also these systems are abolished by law.
The private ownership of factors of production is replaced by the State ownership. All economic activities are centrally planned, controlled and regulated by the State. All decisions regarding production resources, allocation,
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employment, pricing etc., are centralized in the hands of government or the
Central Planning Authority.
Mixed Economy: In this system, a major part of the economy, the private sector, is allowed to function on the principles of free enterprise system or free market mechanism within a broad political and economic policy framework.
The other part of the economy, the public sector, is organized and managed along the socialist pattern. The public sector is created by reserving certain industries, trade, services, and activities for the government control and management. The government prevents by an ordinance the entry of private capital into the industries reserved for the public sector. Another way of creating or expanding the public sector is nationalization of existing industries. The promotion, control and management of the public sector industries is the sole responsibility of the State.
Apart from controlling and managing the public sector industries the government controls and regulates the private sector through its industrial, monetary and fiscal policies. If necessary, direct controls are also imposed.
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Lesson 4
ECONOMIC TRANSITION IN INDIA:
PRIVATISATION AND GLOBALISATION
PRIVATISATION
Privatization, which has become a universal trend, means transfer of ownership and/or management of an enterprise from the public sector to the private sector.
It also means the withdrawal of the state from an industry or sector, partially or fully. Another dimension of privatization is opening up of an industry that has been reserved for the public sector to the private sector.
Privatization is an inevitable historical reaction to the indiscriminate expansion of the state sector and the associated problems. Even in the ‘communist’ countries it became a vital measure of economic rejuvenation.
OBJECTS
The objects are:
• To improve the performance of PSUs so as to lessen the financial burden on taxpayers.
• To increase the size and dynamism of the private sector, distributing ownership more widely in the population at large.
• To encourage and to facilitate private sector investments, from both domestic and foreign sources.
• To generate revenues for the state
• To reduce the administrative burden on the state
• Launching and sustaining the transformation of the economy from a command to a market model.
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PRIVATISATION ROUTES
The important ways of privatization are:
• Divestiture, or privatization of ownership, through the sales of equity. • Denationalization or reprivatisation.
• Contracting - under which government contracts out services to other organizations that produce and deliver them.
• Franchising- authorizing the delivery of certain services in designated geographical areas- is common in utilities and urban transport. • Government withdrawing from the provision of certain goods and services leaving then wholly or partly to the private sector.
• Privatization of management, using leases and management contracts
• Liquidation, which can be either formal or informal. Formal liquidation involves the closure of an enterprise and the sale of its assets. Under informal liquidation, a firm retains its legal status even though some or all of its operations may be suspended.
BENEFITS
The benefits of privatization may be listed down as follows:
• It reduces the fiscal burden of the state by relieving it of the losses of the SOEs and reducing the size of the bureaucracy.
• Privatization of SOEs enables the government to mop up funds.
• Privatization helps the state to trim the size of the administrative machinery. • It enables the government to concentrate more on the essential state functions 24
• Privatization helps accelerate the pace of economic developments as it attracts more resources from the private sector for development.
• It may result in better management of the enterprises.
• Privatization may also encourage entrepreneurship.
• Privatization may increase the number of workers and common man who are shareholders. This could make the enterprises subject to more public vigilance.
CRITICISMS
Some of the important argument against privatization is as follows:
• The public sector has been developed with certain noble objectives and privatization means discarding them in one stroke.
• Privatization will encourage concentration of economic power to the common detriment.
• If privatization results in the substitution of the monopoly power of the public enterprises by the monopoly power of private enterprises it will be very dangerous.
• Privatization many a time results in the acquisition of national firms by foreign firms.
• Privatization of profitable enterprises, including potentially profitable, means foregoing future streams of income for the government. • Privatization of strategic and vital sectors is against national interests.
• There are well managed and ill-managed firms both in the public and private sectors. It is not sector that matters, but the quality and commitment of the management.
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• The capital markets of developing countries are not developed enough for efficiently carrying out privatization.
• Privatization in many instances is a half-hearted measure and therefore it is not properly carried out. As a result that the expected results may not be achieved.
• In many instance, there are vested interested behind privatization and it amounts deceiving the nation. In many countries privatization often has been a “garage sale” to favored individuals and groups.
CONDITIONS FOR SUCCESS
• Privatization cannot be sustained unless the political leadership is committed to it, and unless it reflects a shift in the preferences of the public arising out of dissatisfaction with the performance of other alternatives. • Replacement of a government monopoly by a private monopoly may not increase public welfare-there must a multiplicity of private suppliers. Freedom of entry to provide goods and services.
• Public services to be provided by the private sector must be specific or have measurable outcome.
• Lack of specificity makes it more difficult to control services provided by the private sector. Service delivery by non-governmental organizational or local governments may be more appropriate under these conditions.
• Consumers should be able to link the benefits they receive from a service to the costs they pay for it, since they will then shop more wisely for difficult services.
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• The importance of educating consumers and disseminating information to the public is necessary.
• Privately provided services should be less susceptible to fraud than government services if they are to be effective.
• Equity is an important consideration in the delivery of public services. Broadly speaking, the benefits of privatization can accrue to the capital owner to the consumer and to public at large.
PRIVATISATION IN INDIA
In India, although there were some isolated cases of privatization, no definite policy decision was taken until the new economic policy was been ushered in
.The accumulated loses of many SOEs, including some state transport corporations, are larger than the capital invested in them. Privatization of certain sectors and enterprises are, therefore, necessary to reduce the budgetary burden on the public, to make available more resources for the development activities, to enable the government to concentrate more on the essential and priority areas.
The new industrial policy, which has abolished the public sector monopoly in all but a very few industries is a significant step towards
Privatization. The new policy also proposes Privatization of enterprises by selling shares to mutual funds, workers and the public. The central government has been reviewing the existing portfolio of public investment with a view to offloading public investment.
The disinvestments Commission was set up by Government of India in
August 1996, for suggesting the modalities for undertaking disinvestments of equities for select PSUs. The commission has recommended disinvestments at varying levels for a number of PSUs
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PRIVATISATION POLICY
The current direction of Privatization policy is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our public sector enterprises.
The policy of disinvestments specifically aimed at:
• Modernization and up gradation of Public Sector Enterprises.
• Creation of new assets.
• Generation of Employment
• Retiring of public debt
• To ensure that disinvestments does not result in alienation of national assets, which through the process of disinvestments, remain where they are. It will also ensure that disinvestment does not result in private monopolies.
• Setting up a Disinvestments Proceeds Fund.
• Formulating the guidelines for the disinvestments of natural assets companies. GLOBALISATION
India’s economic integration with the rest of the world was very limited because of the restrictive economic policies followed until 1991. Indian firms confined themselves, by and large, to the home market.
Foreign investment by Indian firms was very insignificant. With the new economic policy ushered in 1991, there has, however, been change.
Globalization has in fact become a buzzword with Indian firms now and many are expanding their overseas business by different strategies.
Globalization may be defined as “ the growing economic interdependence of countries worldwide through increasing volume and variety
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of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology”.
Globalization may be considered at two levels .Viz, at the macro level
(i.e., globalization of the world economy) and at the micro level (i.e., globalization of the business and the firm).
Globalization of the world economy is achieved, quite obviously, by globalising the national economies. Globalization of the economies and globalization of business are very much interdependent.
REASONS FOR GLOBALISATION
• The rapid shrinking of time and distance across the globe thanks to faster communication, speedier transportation, growing financial flows and rapid technological changes.
• The domestic markets are no longer adequate rich. It is necessary to search of international markets and to set up overseas production facilities. • Companies may choose for going international to find political stability, which is relatively good in other countries.
• To get technology and managerial know-how.
• Companies often set up overseas plants to reduce high transportation costs. • Some companies set up plants overseas so as to be close to their raw materials supply and to the markets for their finished products.
• Other developments also contribute to the increasing international of business. • The US, Canada and Mexico have signed the North American Free
Trade agreement (NAFTA), which will remove all barriers to trade among these countries.
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• The creation of the World Trade Organization (WTO) is stimulating increased cross-border trade.
FEATURES
The following are the features of the current phase of globalization:
New markets
• Growing global markets in services – banking, insurance, transport.
• New financial markets - deregulated, globally linked, working around the clock, with action at a distance in real time, with new instruments such as derivatives.
• Deregulation of anti - trust laws and proliferation of mergers and acquisitions. • Global consumer markets with global brands.
New actors
• Multinational corporations integrating their production and marketing, dominating food production
• The World Trade Organization - the first multilateral organization with authority to enforce national governments compliance with rule
• An international criminal court system in the making
• A booming international network of NGOs
• Regional blocs proliferating and gaining importance – European Union,
Association of South- East Asian Nations, Mercosur, North American
Free Trade Association, Southern African Development Community, among many others
• More policy coordination groups – G-7, G40, G22, G77, OECD
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New rules and Norms
• Market economic policies spreading around the world, with greater privatization and liberalization than in earlier decades
• Widespread adoption of democracy as the choice of political regime
• Human rights conventions and instruments building up in both coverage and number of signatories – and growing awareness among people around the world
• Consensus goals and action agenda for development
• Conventions and agreements on the global environment – biodiversity, ozone layer, disposal of hazardous wastes, desertification, climate change • Multilateral agreements in trade, taking on such new agendas as environmental and social conditions
• New multilateral agreements- for services, intellectual property, communications – more binding on national governments than any previous agreements
• The multilateral agreements on investment under debate
New Tools of communication
• Internet and electronic communications linking many people simultaneously • Cellular phones
• Fax machines
• Faster and cheaper transport by air, rail and road
• Computer-aided design
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STAGES OF GLOBALISATION
There are five different stages in the development of a firm into global corporations. First stage
The first stage is the arm’s length service activity of essentially domestic company, which moves into new markets overseas by linking up with local dealers and distributors.
Second stage
In the stage two, the company takes over these activities on its own.
Third stage
In the next stage, the domestic based company begins to carry out its own manufacturing, marketing and sales in the key foreign markets.
Four stage
In the stage four, the company moves to a full insider position in these markets, supported by a complete business system including R & D and engineering.
This stage calls on the managers to replicate in a new environment the hardware, systems and operational approaches that have worked so well at home. Fifth stage
In the fifth stage, the company moves toward a genuinely global mode of operation. GLOBALISATION STRATEGIES
The various strategies of transiting a firm into global corpatation are as follows:
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Exporting
Exporting, the most traditional mode of entering the foreign market is quite a common one even now.
Licensing and Franchising
Under international licensing, a firm in one country (the licensor) permits a firm in another country (the licensee) to use its intellectual property (such as patents, trademarks, copyrights, technology, technical know-how, marketing skill or some other specific skill).
Franchising is “a form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner.
Contract manufacturing
A company doing international marketing, contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibilities of marketing the product.
Management contracting
In a management contract the supplier brings together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership. The arrangement is especially attractive if the contracting firm is given an option to purchase some shares in the managed company within a stated period.
Turnkey contracts
A turnkey operation is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller.
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Turnkey contracts are common in international business in the supply, erection and commissioning of plants, as in the case of oil refineries, steel mills, cement and fertilizer plants etc.
Wholly Owned Manufacturing Facilities
Companies with long term and substantial interest in the foreign market normally establish fully owned manufacturing facilities there. This method demands sufficient financial and managerial resources on the part of the company. Assembly operations
A manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does not want to go that far may find it desirable to establish overseas assembly facilities in selected markets. The establishment of an assembly operation represents a cross between exporting and overseas manufacturing.
Joint Ventures
Any form of association, which implies collaboration for more than a transitory period is a joint venture. Types of joint overseas operations are:
Sharing of ownership and management in an enterprise
Licensing / franchising agreements
Contract manufacturing
Management contracts
Third country location
When there are no commercial transactions between two nations because of political reasons or when direct transactions between two nations are difficult due to political reasons or the like, a firm in one of these nations which wants to enter the other market will have to operate from a third country base. For
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example, Taiwanese entrepreneurs found it easy to enter People’s Republic of china through bases in Hong Kong.
Mergers and acquisitions
Mergers and acquisitions (M & A) have been a very important market entry strategy as well as expansion strategy. A number of Indian companies have also used this entry strategy.
Strategic alliance
This strategy seeks to enhance the long-term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas, instead of competing with each other. Strategic alliance is also sometimes used as a market entry strategy. For example, a firm may enter a foreign market by forming an alliance with a firm in the foreign market.
Counter trade
Counter trade refers to a variety of unconventional international trade practices which link exchange of goods- directly or indirectly – in an attempt to dispense with currency transactions. Counter trade is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by export of goods, instead of money payments. BENEFITS
The important arguments in favour of globalisation are:
• Productivity grows more quickly when countries produce goods and services in which they have comparative advantage.
• Living standards can go up faster.
• Global competition and imports keep a lid on prices, so inflation is less likely to derail economic growth.
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• An open economy spurs innovation with fresh ideas from abroad.
• Export jobs often pay more than other jobs.
• Unfettered capital flows give access to foreign investment and keep interest rates low.
DISADVANTAGES
Following are the cases against globalisation:
• Millions have lost jobs due to imports or production shifts abroad. Most find new jobs that pay less.
• Millions of others fear losing their jobs, especially at those companies operating under competitive pressure.
• Workers face pay cut demands from employers, which often threaten to export jobs.
• Services and white-collar jobs are increasingly vulnerable to operations moving offshore.
• Employees can lose their comparative advantage when companies build advanced factories in low-wage countries, making them as productive as those at home.
ESSENTIALS FOR GLOBALISATION
They are some essential conditions to be satisfied on the part of the domestic economy as well as the firm for successful globalization of the business.
• Business freedom
There should not be unnecessary government restrictions like import restriction, restrictions on sourcing finance or other factors from abroad, foreign investments etc. the economic liberalization is regarded as a first step towards facilitating globalization.
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• Facilities
The extent to which an enterprise can develop globally from home country base depends on the facilities available like the infrastructural facilities. • Government support
Government support may take the form of policy and procedural reforms, development of common facilities like infrastructural facilities, R & D support, financial market reforms and so on.
• Resources
Resourceful companies may find it easier to thrust ahead in the global market.
Resources include finance, technology, R & D capabilities, managerial expertise, company and brand image, human resource etc.
• Competitiveness
A firm derives competitive advantage from any one or more of the factors such as low costs and price, product quality, product differentiation, technological superiority, after sales services, marketing strength etc.
• Orientation
A global orientation on the part of the business firms and suitable globalization strategies are essential for globalization.
GLOBALISATION IMPACT ON INDIAN ECONOMY
In India, the process of dismantling trade barriers was started in 1991 and subsequently, every year the Government has been announcing reduction in custom duties and removing quantitative restrictions. It is argued that this shall enable free flow of goods, capital and technology and thus globalization becomes a motivating force for nations to develop themselves at a faster rate.
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For a developing country like India, it opens access to new markets and new technology. Thus, the import-substitution strategy has been replaced by exportled growth during the last decade in India. The recent developments in information and communications technology have further facilitated and accelerated the pace of globalization. International financial markets, transborder production networks and acceleration in capital flows across national frontiers have been the driving forces leading to greater global integration of the economies. 38
Lesson 5
NATURAL RESOURCES AND ECONOMIC DEVELOPMENT
NATURAL RESOURCES
Natural resources include land, water resources, fisheries, mineral resources, forests, marine resources, climate, rainfall and topography. But nature possess more in its bosom and in order to discover what it hides, man is required to develop techniques of knowing the undiscovered resources. Some times the discovery of the use of a resource can immediately increase its use value.
When we talk about the natural resources of a country, we have obviously in mind the extent of the known or discovered natural resources with their present uses. With the growth of the knowledge about the unknown resources and their use, the natural endowment of a country will be materially altered. Another consideration regarding the nature of natural resources is that some resources; e.g., land, water, fisheries and forests are renewable and there are others like minerals and mineral oils which are exhaustible and can be used only once. Consequently, careful use of the exhaustible resources and maintenance of the quality of renewable resources like land are a sine qua non in the process of development.
PRINCIPLES OF RESOURCE DEVELOPMENT
The principal objective of resource development is to maximize Gross Domestic
Output (GDP) and for this purpose there should be optimum utilization of resources not only in the short period but, in a sustained manner, over the long period. Various guiding principles for resource development are:
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• Economic use of resources to achieve minimum waste
• Sustained use of economic resources through conservation of renewable resources and economic use of exhaustible resources
• Multi-purpose use of resources: if a certain resource has a number of uses, it is necessary to have all the uses
• Integrated planning in the use of natural resources
• Location of industries with a view to reducing transport costs to the minimum • Abundant supply of energy resources, specially electric power so as to utilize other resources in the best possible manner
LAND RESOURCES
The total geographical area of India is about 329 million hectares of which 42 million hectares or 14% of the total reporting area in India is classified as:
• Barren land, such as mountains, deserts, etc. which cannot be brought under cultivation and
• Area under non-agricultural uses, that is, lands occupied by buildings, roads and railways, rivers and canals, and other lands put to uses other than agricultural.
• The rest of the land is put under three major uses, viz., forests, pastures and agriculture.
FOREST RESOURCES
Forests are important natural resources of India. They help control floods and thus they protect the soil against erosion. They supply timber, fuel wood, fodder and a wide range of non-wood products. They are the natural habitat for bio40 diversity and repository of genetic wealth. Forests, thus, play an important role in environmental and economic sustainability. Under land utilization pattern, the
Government of India estimated the total area under forests as 68 million hectares or 22 % of the total geographical area. In our country, forests have generally been undervalued in economic and social terms.
The contribution of the forest sector to GDP was put as 1% in 1996 – 97
(measured at 1980 – 81 prices). A recent estimate puts the gross value of goods and services provided by the forest sector at 2.4% GDP. There is concentration of forests in a few states in Assam, Madhya Pradesh, Orissa and a few union territories. Northern India is particularly deficient in forests. There is a need to increase forest areas in the entire country as also to develop them in deficient states. Forest policy, 1952
Appreciating the necessity of developing forests, the government of
India declared its first forest policy in 1952. According to this policy, it was decided to raise steadily the area under forests to 100 million hectares or 33 % for the country as a whole. The target area was to provide green cover over two thirds of the land area in the hills and mountains. The main objectives of forest policy under the Five-Year Plans were:
• To increase the productivity of forests
• To link up forest-development with various forest-based industries and
• To develop forests as a support to rural economy.
New forest policy, 1988
The 1952 forest policy had failed to stop the serious depletion of forest wealth over the years. Accordingly, it became imperative to evolve a new
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strategy of forest conservation. The government of India announced its new forest policy in December 1988. The important features of this policy are:
• Role of tribal in forests recognized
The new policy enunciates that all agencies responsible for forest management, including forest development corporations should associate tribal people closely in the protection, regeneration and development of forests.
• Depletion of forest area and the target for green cover
The new policy reiterates that green cover should be extended to over two-thirds of that land area in the hills and mountains and that the total forest area in the country should be raised to 100 million hectares or 33 % of the total geographical area in the country.
• Discouragement to forest-based industries
The new forest policy states that no forest based enterprises except at the village or cottage level will be set up in the future, unless it is first cleared, after a careful study of the availability of raw materials.
• End the system of private forest contractors
The new forest policy advocates an end to the system of contractors working the forests. The contractors will be replaced by institutions such as tribal cooperatives, government corporations, etc.
• Forest land not to be diverted to non-forest uses
The forest department used to assign forestland to individuals or nongovernment agencies for the purpose of reforestation.
• Participatory Forest Management System
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This new strategy involves rural people, particularly women and tribal community who have intimate knowledge of plant species, their growth characteristics, utility and medicinal value, etc. They also know the specific requirements of fuel, fodder, timber and other non-food products. The adoption of the new strategy has led to several positive outcomes, such as:
• Change in the attitude and relationships of local communities and forest officials towards each other and the forests
• Improvement in the condition of forests
• Reduction in encroachments
• Increase in the income of local people and
• Involvement of non-governmental organizations (NGOs) in forest research, tree planting, promotion of productivity, etc.
WATER RESOURCES
India is one of the wettest countries of the world but it is not able to hold all the water it receivers. Because of deforestation and denudation, a large portion of the monsoon water disappears into the sea as surface run-off. Community resources such as ponds, tanks and rivers are misused and continuously neglected.
Rivers are increasingly getting polluted as urban and industrial wastes are dumped into them. India’s water policy has concentrated on gigantic river systems and reservoirs and despite huge investments on them, their productivity continues to be low. They have not helped in controlling or moderating floods.
Nor are they cost effective, or ecologically desirable. Ground water table has gone down dramatically in more intensely cropped areas,
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clearly indicating the need to increase recharges or to regulate pumping.
In some areas, there is serious pollution danger to ground water due to industrial wastes.
India continues to be highly flood-prone and drought–prone but neither the government nor the Planning Commission has shown sufficient imagination to appreciate the gravity of the situation and make necessary correction to India’s water policy.
FISHERIES
India is the sixth largest producer of fish in the world and perhaps, second largest in inland fish production. Fisheries sector plays important role in the socio-economic development of India, generating employment for a large coastal population- about one million fishermen draw their livelihood from fisheries, but they generally live on the verge of extreme poverty. It is not only an important source of direct employment but generates employment in downstream industries. It is estimated that about six million people are employed in the fisheries sector.
Fisheries help in raising nutritional levels, augmenting food supply and earning foreign exchange. The contribution of the fisheries sector to Gross Domestic Product (at current prices) has increased from
Rs. 1,230 crores to Rs. 32,060 crores between 1980-1981 and 2001-2002.
Fisheries contribute about 1.21 % of India’s GDP. Broadly, fishery resources of India are either inland or marine. The principal rivers and their tributaries, canals, ponds, lakes, reservoirs comprise the inland fisheries. The five-year plans assign high priority to the development of fisheries because of the necessity to raise the nutritional levels of protein deficient Indian diet and to earn much needed foreign exchange.
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The fisheries programmes have emphasized family- based Labour intensive inland and brackish water fisheries and improving the harvesting from seas by stimulating the growth of country boats, mechanized boats and deep sea trawlers.
MINERAL RESOUCES
The development and management resources play a major role in the industrial growth of a nation. Coal and iron, for instance, are the basic minerals needed for the growth of iron and steel industry, which in turn, is vitally necessary for the country’s development. Similarly, there are other minerals like mica and manganese, copper, lead and zinc, which are of economic importance.
Then we have mineral fuels like petroleum, coal, thorium and uranium, which are of national importance. Thorium and uranium the atomic energy minerals promise to be tremendous source of power.
Besides these, we have a number of minor minerals with varying degrees of utility to the country.
The reserves of India in respect of minerals essential for basic industries Viz., coal and iron are ample. But there is a fairly long list of vital minerals like copper, tin, lead, zinc, nickel, cobalt and sulphur and most of all petroleum, in which India is deficient.
The Government of India amended the Mines and Minerals
(regulated and Development) Act, 1957 in January 1994 and announced a new mineral policy:
• Throwing open the mining sector to the private sector including direct foreign investment,
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• Empowering the states to grant prospecting licenses/mines leases without prior approval of the central Government
(except in a few cases)
• Removing the restrictions on equity holding by foreign nationals in a mining company
The major objectives and the strategies of the new mineral policy are as follows:
• to explore for identification of mineral wealth on land and offshore
• to develop mineral resources taking into account the national and strategic considerations
• to minimize adverse effects of mineral development on the forests, environment and ecology through appropriate protective measures
• to promote foreign trade in minerals
• to promote research and development in minerals
ECONOMIC DEVELOPMENT AND ENVIRONMENTAL ISSUES
Ecologists and Environmentalists believe that one pf the principal reasons for the existence of the environmental problem stems from the emphasis on the growth by the industrialized nations. They point out that economic growth has been made possible only at the expense of the environment.
Ecologists postulate that growth rates were so high, because of the fantastic increase in population and demands of the society. Increased production and consumption had unscrupulously released wastes and pollutants into the environment without consideration of their effects.
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Fast growth has resulted in the destruction of the environment, the impairment in the quality of elemental environmental services, the deterioration of air quality and the contamination of seas, rivers, lakes, etc. These were not taken into account in economic calculations. The loss and deterioration of important environmental goods went relatively unnoticed. In short, the social costs of growth were not included in economic analyses.
Economists who analyze in a straight jacket always contend that sustained economic growth increases human welfare. These economists base their arguments on international companies in terms of the value of goods and services produced in the economy. To put in shortly, they compare Gross
National Product (GNP) in terms of dollar value to assess the economic growth of nations. Countries feel highly satisfied if their GNP graph shows an ascending tendency, year after year and they proclaim that they are forward.
But, the measurement of economic growth in terms of output of goods and services (GNP) is rather faulty. It takes into consideration the national product only. It does not consider the national disproduct in the process of production. Billions of dollars worth of cigarettes produced in he economy have been brought under the calculation of GNP per year. It does not take into consideration the external cost, the pollution it creates, the diseases it spreads in the society among smokers and silent smokers. Theses are the disproducts of the nation. Edward F. Denison considers that air and water pollution and also the solid wastes generated in the process of production, as the real costs of economic growth. He had suggested that value of the deterioration to environment by these real costs should be deducted from NNP to contain a better measure of output. In this context, Samuelson’s NEW (Net Economic
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Welfare) is worth considering as very appropriate, whereby the national disproducts are deducted from the national product.
The role of environment and the need for maintaining the quality of the environment have emerged recently as important issues and have assumed greater importance in the context of several ecological disasters in many parts of the globe in recent times.
Barry Commoner has analyzed the interaction of three major factors influencing environmental impact. They are:
• Population factor
• Per capita availability of goods
• Pollution per unit of economic good.
The Environmental impact (EI) is given as follows
Economic good pollutant
EI = Population * *
Population economic good
This enables us to estimate the contributions of the three factors to the environmental impact, viz., the size of the population, per capita production or consumption; and the pollutant generated per unit of production or consumption.
Thus, environmental impact represents the environmental cost of a given economic process. By the economic process, agencies external to the ecosystem are produced and which tend to degrade its capacity for self-adjustment.
According to Kenneth Boulding, “ the world is finite and the resources are scarce”. Man out of greed exploits this earth, as if its resources are limitless, to enrich himself in his pursuit of economic growth. If this is continued by man who is too much enterprising, soon “we will have a plundered plant”.
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QUESTIONS:
1. What is business? How does business of today differ from that of earlier?
2. What are business objectives?
3. Explain business environment.
4. “Firms which systematically analyze and diognise the environment are more effective than those which don’t”. Elucidate.
5. Sketch organizational arrangement for environment analysis. Give its limitations. 6. Define corporate governance. Why is it assuming greater relevance now a days?
7. Explain the factors influencing corporate governance.
8. Why is social responsibility important for business?
9. List out the arguments for and against social responsibility.
10. What are the practical problems that confront social action programmes?
How do you overcome them?
11. What do you understand by ethics? Why is ethics important for business? 12. State and explain the sources of business ethics.
13. How is ethics managed in a business unit?
14. State the difficulties involved in ethical decision-making. Bring out the guidelines, which help in ethical decision-making.
15. What is an economic system? What are the basic problems of an economic system?
16. What are the features of a mixed economic system?
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17. “The fundamental economic problem of an economy is the problem of choice”. Discuss.
18. Explain the role of government in solving problems arised out of different economic systems.
19. Define privatization and trace the history of privatization.
20. Explain the different routes of making privatization.
21. Give your arguments for and against privatization.
22. “There is a need for exercising caution and restraint while privatizing
PSU’s”. Comment.
23. Bring out the nature and causes for globalization of business.
24. Explain the stages involved in the economic transition of globalization.
25. Evaluate the impact of globalization on Indian economy.
26. List out the strategies used for globalising a business.
27. Natural resources are the wealth of a country’s economy. Discuss.
28. Explain the different kinds of natural wealth discovered and undiscovered in India.
29. Evaluate our government policies towards management of natural resources. 30. Appraise the impact of economic development on various kinds of environmental issues.
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UNIT I I
Lesson 1
INFRASTRUCTURE OF THE ECONOMY
INFRASTRUCTURE
Adequate quantity, quality and reliability of infrastructure are key to the growth of any economy. Infrastructure facilities – often referred to as economic and social overheads – consists of:
• Irrigation, including flood control and command area development
• Energy: coal, electricity, oil and non-conventional sources
• Transport: Railways, Roads, Shipping and Civil Aviation
• Communications:
Posts and Telegraphs, Telephones, Telecommunications, etc
• Banking, Finance, and Insurance
• Science and Technology
• Social overheads: health and hygiene and education.
ENERGY
Energy is the most important determinant of a country’s economic growth. In fact, per capita consumption of energy is taken as an indicator of a country’s prosperity. Energy is created through several sources. The sources are conventional and non-conventional. The first shall include commercial and non- commercial sources of energy.
Commercial energy is so-called as it commands a price and the user are expected to pay it for its use. Non-commercial energy commands no price and the user can take it as a free good gifted by
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mature. Non – conventional energy is a recent discovery and its use is confined to limited pockets in our country.
Confining to the commercial energy, it may be stated that Coal is the main source, accounting for 67 % of the total energy consumed in the country. The Government has initiated several steps to improve supply of coal. Private sector participation is allowed in coal mining. Imports of cooking coal under the Open General License (OGL) are being allowed and the import tariff has been slashed from 85% to 35 %.
Power has been a bugbear of our economy. Lack of sufficient power supply has checked the growth of industries all over the country.
The government has announced a package of incentives to attract private investments. The package includes the reduction of import duties on power equipment to 20%; a five-year tax holiday for new power projects; a guaranteed 16% rate of return on paid up and subscribed capital; and the provision of counter guarantee by the central government.
As part of the ongoing economic reforms, the government has allowed imports and distribution of certain petroleum products like domestic LPG and kerosene by the private sector at market prices to promote new investments and to improve operational efficiency. The
ONGC has already disinvested 2% of its equity and proposes to offload
18 % more in domestic and foreign markets.
Private and foreign companies are now allowed to invest in oil exploration and production in joint- venture with ONGC or OIL, (ONGC has already tied up with Reliance and Enron) and also in refining of petroleum products. The domestic market in lubricants has been opened up to foreign collaborations.
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STRENGTHS, WEAKNESS AND REMEDIES OF POWER
Strengths
• Elaborate organizational framework for the growth of electricity has been provided by the Electricity (supply) Act, 1948
• Power and responsibilities nearly divided between center and states. Former confines itself to planning, co-ordination and regulation. Latter looks after generation and distribution.
• Vast network of generation, transmission and distribution facilities spanning the length and breadth of the country.
• Joint venture among states in power generation
• Numerous amendments to permit private participation in power generation Weaknesses
• Very low plant load factors
• Declining share of hydro – power
• Too much subsidy burden on state electricity boards
• Incompetent and corrupt electricity boards
• Frequent and heavy load – shedding
• Capital intensive but starved of funds
• Heavy losses during transmission and distribution
Remedies
• Formulate unambiguous guidelines for private sector investment and ensure speedy clearance
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• Expedite formulation of guidelines for private participation in transmission and distribution
• Create autonomous regulatory authorities at the central and state levels. • Corporatise SEBs, with separate generation, transmission, and distribution segments
• Set cost-based pricing for each consumer group, building in perdetermined tariff increases
TRANSPORT
Transport sector includes railways, roads, shipping and civil aviation.
The Indian Railways have a long history. They consist of an extensive network spread over 62,462 kms- comprising board gauge (36,824 kms), meter gauge (20,653kms) and narrow gauge (3,985kms). Electrified networks with 11,793 kms account for 18.8 % of the total route kilometerage. The thrust areas identified for the eight-plan period include replacement and renewal of averaged assets; argumentation of terminal and rolling stock capacities, gauge conversion and electrification.
Railways can claim foe having connected most of the country with the conversion of gauges and creating more routes.
The last few years have been particularly good for railways because of the addition of more than 500 new trains, which include the deluxe trains like Rajdhanis and Shatabdis. A little known distinction of the railways is their achievements abroad. Among the PSUs of the railway ministry are the Rail India Technical and Economic Services Ltd
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(RITES) and the Indian Railway Construction Company Ltd (IRCON).
RITES consultancy expertise is internationally recognized.
It has completed important assignments in railway systems in
Africa, the Middle East, Vietnam and Nepal. IRCON too has undertaken construction projects in Turkey, Saudi Arabia, Malaysia, Indonesia and
Bangladesh. Another feather in the cap of the railways is the 760 km long Konkan railway.
STRENGTHS, WEAKNESS AND REMEDIES OF RAILWAYS
Strengths
• Historical advantage –85% of track being inherited from the
British
• Largest in Asia and fourth largest in the world
• Substantial Electrified tracks
• Competitive advantage in project consultancy and construction
• Agenda of national integration
Weakness
• Ever increasing traffic load
• Inadequate finance
• Low productivity
• Low speed of goods as well as passenger trains
• Poor service to the passengers
• Absence of suitable transportation policy
• Too many social objectives
Remedies
• Corporatise with detailed terms of reference approved by the parliament 55
• Unbundle disparate operations like transportation of freight and passengers and equipment-manufacture
• Corporatise all manufacturing units and privatize them gradually
• Commercialize passenger services by abolishing all free travel, and privatize ticket-checking
• Phase out cross –subsidization of passenger fares, through freight charge, so as to reflect real costs
• Make commercial use of railway property by selling or leasing it, to the private sector
ROAD TRANSPORT
In order to improve the road transport system, the government announced several measures. Private participation has been allowed in the construction and maintenance of roads. In addition, road transport has been declared as an industry, which enables it to borrow finance from financial institutions. National Highway Act is to be amended so as to enable the levy of a toll on road users.
MRTP Act is also to be amended to enable large firms to enter the road transport sector. The Road Development Plan for 1981 – 2001 envisages the construction of 2212000 kms of rural roads. But viewing against the backdrop of the resource crunch, this plan appeared to be unimplementable. STRENGTHS, WEAKNESS AND REMEDIES OF ROAD
TRANSPORT
Strength
• One of the worlds largest, stretching for almost 201 million across the country
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• Relatively low vehicle density per km.
• Ease the burden o railways
Problems
• Only 1.6% of road strength is occupied by national highways,
5.86% by state highways and 92.54%by district and village roads.
Except the national highways, the condition of other roads is pathetic. • Several missing links, unbridged river crossings, weak culverts and inadequate road pavement enroute.
• Remote parts of the country are still not connected
• Veritable death traps
• Lack of adequate finance
• Increasing pollution
Remedies
• Allocate additional resources for upgrading and widening existing national and state highways.
• Create a highway development fund as an extra-budgetary development fund for funding highways
• Set up a financing mechanism for funding road construction, using the toll system for cost recovery
• Encourage private sector participation in highways by institutionalizing build-operate –transfer schemes.
• Earmark a proportion of the state’s levies on vehicle and fuels for road maintenance.
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• Amend the loans to allow for Right of Way in land acquisition for laying roads.
SEA TRANSPORT
The government has recently approved a scheme, which envisages voluntary cargo support of the shippers to Indian shipping lines, up to
40% of the value of linear cargo transacted in the foreign trade in a phased manner. To reap the benefits of the scheme, SCI has beefed up its customer services cell to attend to the requirements of shippers on a priority basis.
Steps have been initiated by the government to frame guidelines for Indian shipping companies as per the International Safety
Management (ISM) code, which was adopted by the International
Maritime Organization (IMO) in November 1993. Under the ISM code, which will be applicable to passenger ships and tankers by July 1998 and for other vessels by July 2002, shipping companies are required to provide special training to on shore staff and the crew on board. There are eleven major ports and 139 operable minor ports located along the
5560 km long coastline of the country.
The phenomenal growth of our merchant navy from a modest base of 0.2m GRT in 1947 to 6.3 m GRT has placed our country 17th among the maritime nations of the world. Today, our shipping industry can boast of a modern versatile and technically superior fleet with an average of 13 years as against the world average of 17 years and is well equipped to compete in the international markets.
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STRENGTHS, WEAKNESS AND REMEDIES OF SHIPPING
Strengths
• Long coastline of over 5700 kms and almost the whole of foreign trade passing across the seas.
• Largest merchants shipping fleet among the developing countries and 14th in the world in shipping tonnage
• Skilled and competent managerial and ship board personnel
• Huge potential in the make of India becoming one of the signatories of the WTO. There will be considerable increase in sea-borne trade.
Weaknesses
• Limited cargo handling capacities of ports
• Challenge from containerization which is highly prevalent in advanced countries
• Fund starving
• Undue hardships to ship owners due to conversion of FOB items into CIF, which has been introduced because of decanalisation.
Remedies
• Amend the Major Port Trust Act, 1963, to allow private sector
BOT projects at the 11 major ports
• Raise the capital expenditure ceiling of the port trust boards from
Rs.5 crore to Rs.200Crore.
• Abolish the need for PIB approvals for private projects that do not need port trust investment
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• Unbundle activities like cargo handling and warehousing into profit centers.
• Allow port-based businesses to create captive facilities for themselves under the BOT system
• Initiate restraining programmes to reduce labour resistance to private sector participation.
CIVIL AVIATION
Civil Aviation has three functional sub sectors; operational, infrastructural and regulatory –cum- developmental. On the operational side, Indian Airlines
Limited, Vayudoot (which functions as a separate identifiable division of Indian
Airlines Limited) and private airlines (scheduled and non –scheduled) provide domestic air services. Air India limited and Indian Airlines Limited are domestic airlines, which provide international air services. Pawan Hans limited provides helicopter support services, primarily to the petroleum sector.
Infrastructural facilities are provided by the International Airports
Authority of India (IAAI) and the National Airports Authority (NAA). These two authorities are being merged to form a single authority viz. Airports
Authority of India as a result of the enactment of the Airports Authority of India
Act, 1994. The regulatory and developmental functions are looked after by the
Ministry of Civil Aviation and the offices of the Directorate General of Civil
Aviation. The Air Corporation Act, 1953, was repealed on March 1, 1994, ending the monopoly of Indian Airlines, Air India and Vayudoot over scheduled air transport services. Six private operators, who were hitherto operating as air taxis, have since been granted scheduled airlines status.
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Indian Airlines has also geared itself since June 1993 to the challenging task of adopting itself to a competitive environment. Several measures have been taken, mainly centred on making the organization adopt a marketing approach to decision-making and considerably improve the quality of its product. It has improved its passenger facilities both on board and on the ground, on time performance, flight safety measures and has also increased employee participation to provide better services.
COMMUNICATIONS
The communication system comprises posts and telegraphs, telecommunication systems, broadcasting, television and information services. By providing necessary information about the markets and also supplying necessary motivation, the communication system helps to bring buyers and sellers together effectively and helps to accelerate the growth of the economy. Accordingly, the modern communication system has become an integral part of the development process. Postal system in India
Since 1950-51, the postal network has been expanded throughout the country, and in recent years, wit special emphasis on the rural, hilly and remote tribal areas. The postal department has given a new thrust to its programme of modernization for providing new value added services to customers. This include: • A programme of computerized services of such postal operations as mail processing, savings bank and material management
• Introduction of Metro channel Service linking 6 metros
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• Introduction of Raidhani channel linking Delhi with most of the state
Capitals and
• A business channel with exclusive treatment to pin coded business mail
In recent years, there has been healthy growth in many lines of postal activity, such as speed post traffic, postal life insurance, extensive of postal life insurance and post office savings banks to rural areas, etc.
Indian telegraphs
Indian Telegraph is one of the oldest government –owned public utility organizations in the world. The number of telegraph offices has increased from
8,200 in 1951 to over 30,000 now. The phonogram service for sending and receiving telegram by telephone, telex service to send and receive printed message directly from one centre to another, the tremendous expansion of telephone facilities and direct trunk dialing – all these facilities are available to the general public.
Telecommunications
Telecommunication is a vital input for global competition and for India’s success in the international markets. It is important not only because of its role in bringing the benefits of communication to every corner of India but also in serving the new policy objectives of improving the global competitiveness of the
Indian economy and stimulating and attracting foreign direct investment. There has been phenomenal growth in the telecommunication sector after 1995.
There has been a shift in importance towards the private sector and towards wireless telephony with falling tariff rates for cellular phones, there has also been a phenomenal increase in the number of cellular subscribers. Cellular
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telephony has become the most preferred mode of communication among the
Indian public.
STRENGTHS, WEAKNESS AND REMEDIES OF
TELECOMMUNICATION
Strength
• Huge potential for expansion
• Rapid growth in the last couple of years with annual growth of 13 % between 1984 and 1994 and 20 % thereafter.
• Relatively high density with 7.97 phones per 100 towns people ahead of
China and Indonesia
• High technology – 66 % of exchanges are digital
Weaknesses
• Waiting period to get new connections
• Poor maintenance 218 faults for 100 lines every year
• Privatization efforts not successful
Remedies
• Accelerate the clearance process for private sector entry into basic telecom services
• Offer incentives to private telecom companies for meeting connection and low-fault targets
• Resolve disputes between private operators and the DOT over long distance connections immediately
• Convert the DoT into a holding corporation, with its subsidiaries operating services in different circles
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• Replace the Indian Telegraph Act, 1885 with a new act incorporating the impact of technology changes.
RECENT DEVELOPMENTS IN TELECOM SECTOR
• Large number of villages are now covered through Wireless in Local
Loop (WLL)
• The national internet backbone (NIB) was commissioned
• Since long distance (National and international) has been opened up to competition, long distance tariffs have come down.
• To enhance telecom services in rural and remote areas, the Telecom
Department has issued guidelines for implementing Universal Service
Obligation (USO)
• According to the new telecom policy every village in India is expected to be provided with one public telephone.
EDUCATION, SCIENCE AND TECHNOLOGY
Science and Technology are ideas and the means with which man seeks to change his environment. While Science represents “ accumulation of knowledge”, Technology represents “ refinement in tools”. Over last two hundred years or so, science and technology have helped to improve the quality of human life. For rapid economic progress, the application of science and technology (S and T) to agriculture, industry, transports and to all other economic and non-economic activities has become essential.
Jawaharlal Nehru believed in the spread of science of scientific temper.
He was responsible for the setting up of a chain of national laboratories devoted to basic and applied research, develop indigenous technology and processes and help industrial enterprises in solving their technological problems. The Council
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of Scientific and Industrial Research (CSIR) as well as the Department of
Atomic energy was set up. The Indian Council of Agricultural Research (ICAR) was strengthened. Then came the Department of Space technology, The Indian
Space Research Organization (ISRO) etc., in 1958 the science Policy Resolution was adopted to provide positive incentives for the development and utilization of S and T in nation building activities. The major aims of this policy were:
• To foster, promote and sustain by appropriate means the cultivation in science and scientific research in all its aspects –pure, applied and educational • To ensure an adequate supply within the country of research scientists of higher quality and recognize their work as an important component of the strength of the nation
• To encourage and initiate with all possible speed programmes for training of scientific and technical personnel on a scale adequate to fulfill the country’s needs in regard to scientific and education, agriculture, industry and defence
• To ensure for the people of the country all the benefits that can accrue from the acquisition and application of scientific knowledge.
The Indian government has been giving special support to S and T since
Independence and the large network of national laboratories and universities have been training a strong cadre of scientists, engineers, technologists, etc.
Public and private sector organizations have established over 600 inhouse
Research and Development (R&D) laboratories to meet their internal technological requirements. The rapid growth of engineering consultancy organizations to provide design and consultancy services and act, as the bridge between research institutions and industry is really commendable. India’s stock
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of technical manpower has been growing at the rate of about 9 percent per year for the last 20 years and is now estimated to be about 2.5 million. After USA,
India today ranks second in the world as regards qualified science and technology manpower.
Science and technology (S&T) has made a phenomenal impact the world over in shaping the lifestyle of the common man. If India has to really forge ahead in the coming decade, S&T must play a pivotal role in all the important tasks that lie ahead of us. Hence, the deployment of S&T as an effective instrument of growth and change becomes an imperative strategy. In order to derive maximum output from meager resources, S&T and the associated methodology must be brought into the main theme of economic planning in the agricultural, industrial and services sectors.
MEASURES TO PROMOTE S & T
Following are the measures necessary to promote S & T:
Education for the knowledge economy
Producing knowledge intensive, technologically sophisticated, higher value goods and services are not possible without a trained management cadre and labour force with the appropriate mix of technical and vocational skills. Among other things, this requires
• Scientists with the skills needed to conduct appropriate R&D
• Engineers and skilled craftsmen to evaluate technology and adopt it for use in the enterprise,
• Skilled technicians who will actually utilize the technology in the production process
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Vocational, secondary and tertiary education must all contribute to turning out graduates with the necessary skills. Moreover, since the skills required by today’s labour market may not be the same as those that will be required in the future, a process of life long learning must be built into the education system. And at all levels and life-cycle stages, the education system must work with the private sector to understand and respond to its needs.
Technology acquisition and diffusion (using existing knowledge to improve the competitiveness)
Most of the knowledge that developing countries need to boost productivity and value added, in both high tech and traditional sectors has already been invented.
The problem is that this existing knowledge is not always being employed in
World Bank client countries. Therefore, a third, related aspect of capacity building involves enhancing the private sector’s ability existing technology, improve and develop it for particular needs of local enterprises and incorporate it into local production processes. In other words, this aspect of capacity building would focus on helping the private sector absorb and utilize better technology that is already in use elsewhere in the world.
Science & Technology Policy Making Capacity
National policy makers need to have the capacity to understand the challenges and opportunities flowing from the global economy and to devise appropriate policies. Meeting these challenges will require concerted action by education institutions, R&D institutes, the private sector and the national government. It will also require close links and co-operation between each of these actors.
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SCIENCE AND TECHNOLOGY MANPOWER DEVELOPMENT
AND EMPLOYMENT
While a number of steps have been taken by the government to increase employment opportunities the number of scientists would fall far short of the rate at which S&T persons are needed in the country. Some of the strategies for the creation of jobs and for retaining S&T personnel are:
• Motivating S&T personnel to capture the full potential of selfemployment
• Creating awareness about entrepreneurship leading to selfemployment among the college and school students
• Introducing greater capital investment in the areas where the outlay per work place is minimal
• Restructuring government policies to minimize import of goods
• Creating entrepreneurship development cells in all Science
/Engineering/IITs and other academic institutions by the concerned central /state agencies
• Introducing automated techniques selectively from the viewpoint of safety, reduction of drudgery, improvements in productivity
/efficiency etc
• Examining export strategy to enable the country to pay for imports through exports and thereby simultaneously generating greater employment • Encouraging the establishment of sophisticated industries in the emerging areas of technology as also encouraging the service sectors requiring inputs from high technology so that highly trained S&T personnel could be retained and gainfully employed
• Maintaining centers of excellence in various branches of Science and
Technology to retain highly trained persons within the country
• Providing proper working atmosphere and adequate amenities (e.g. housing in urban areas) to S&T personnel
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Lesson 2
DEMOGRAPHIC ISSUES AND HUMAN DEVELOPMENT
STUDY OF HUMAN RESOURCE
The study of human resource is vital from the point of view of economic welfare. It is particularly important because human beings are not only instruments of production but also ends in themselves. It is necessary to know in quantitative terms the number of people living in a country at a particular time, the rate at which they are growing and the composition and distribution of population. THE THEORY OF DEMOGRAPHIC TRANSITION
The theory of “demographic transition” postulates a three-stage sequence of birth and death rate as typically associated with economic development.
First stage of Demographic transition: According to this theory death rates are high in the first stage of an agrarian economy an account of poor diets, primitive sanitation and absence of effective medical aid.
Second stage of Demographic Transition: Rise in income levels enables the people to improve their diet. Economic development also brings about all round improvement including the improvement in transport, which makes the supply of food regular. All these factor tend to reduce death rate. Thus in the second stage, birth rate remains high but death rate begins to decline rapidly. This accelerates the growth of population. High birth rate and falling death rate contribute to the growth of the average size of the family in the second stage.
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Third stage of Demographic Transition: With the growth of industrialization, population tends to shift away from rural areas towards industrial and commercial centers. One of the features of economic development is typically increasing urbanization, and children are usually more of a burden and less of an asset in an urban setting than in a rural.” The consciousness to maintain reasonable standard of living tends to reduce the size of family in an industrialized economy; since the death rate is already low, this is possible only if birth rate falls. Thus, the characteristics of the third stage are low birth rate, low death rate, small family size and low growth rate of population.
These three stages reveal the transformation of a primitive high birth and high death rate economy into a low birth and low death rate economy. When an economy shifts from the first stage to the second stage of demographic transition, an imbalance is created in the economy as a result of falling death rate but relatively stable birth rate. The second stage of demographic evolution has, therefore, been termed as the stage of population explosion. This stage is the most hazardous period for a developing economy. The decline in death rate in the second stage, therefore creates an imbalance, which requires a period of transition for adjustment. Thus, the theory is termed as the theory of demographic transition. During the period of transition the demographic factors get out of harmony. A new constellation of demographic forces is brought about which changes the character of society; birth and death rate becomes balanced at a lower level as a result of which growth rate of population also declines.
SIZE AND GROWTH RATE OF POPULATION IN INDIA
India today possesses about 2.4 percent of the total land area of the world but she has to support about 17 percent of the world population. At the beginning of
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this century India’s population was 236 million and according to 2001 census, the population of India is 1,027 million.
A study of growth rate of India’s population falls into four phases:
1891-1921: stagnant population
1921-1951: steady growth
1951-1981: rapid high growth
1981-2001: high growth with definite signs of slowing down
During the first phase of 30 years (1891-1921), the population of India grew from 236 million in 1891 to 251 million in 1921 i.e., just by 15 million.
GROWTH OF POPULATION IN INDIA (1901-2001)
Censes
period
Population
(in millions)
Compound annual growth rate
1891-1921 251 0.19
1921-1951 361 1.22
1951-1981 683 2.15
1984-1991 844 2.11
1991-2001 1027 1.93
Source: Census of India 2001, Series 1, Paper 1 of 2001, Provisional Population Totals.
During the second phase of 30 years (1921 to 1951) the population of India grew from 251 million in 1921 to 361 million in
1951 i.e. by 110 million. During the third phase of 30 years (1951-1981), the population of India grew from 361 million in 1951 to 683 million in
1981. In other words, there was a record growth of population by 332 million in a period of 30 years. During 1981to 2001, India entered the fourth phase of high population growth with definite signs of slowing down. Total population increased from 683 million in 1981 to 1,027 million in 2001 indicating an increase of 50.4 % during the 20 years period. 71
However, the second decade (1991-2001) of this phase registered a decline (1.93%) in the annual average rate of growth. This is a welcome trend, which should be strengthened.
HUMAN DEVELOPMENT IN INDIA
MEASURES OF HUMAN DEVELOPMENT
Economic growth contributes most to poverty reduction when it expands the employment, productivity and wages of poor people and when public resources are channeled to promoting human development. A virtuous cycle of economic growth and human development arises when growth is labour using and employment generating and when human skills and health improve rapidly.
Income clearly is only one option that people would like to have, though an important one. But it is not the sum total of their lives. Income is also a means, with human development the end. Ever since the publication of the Human Development Report 1990, efforts have been made to devise and further refine measures of human developments.
Three measures have been developed. They are Human Development
Index (HDI), Gender related Development Index (GDI) and Human
Poverty Index (HPI).
Comparison of Human Development Indices (2002) Some selected countries
Human Development (HDI) Gender related
Development
Index (GDI)
Human Poverty Index
(HPI)
Income Poverty line US $ I a day
1993 PPP 1990 – 2002
High Human Development
1 Norway 0.956 0.955 7.1 4.3*
4 Canada 0.943 0.941 12.2 7.4*
8 United states 0.939 0.936 15.8 13.6*
9 Japan 0.938 0.932 11.1 …
12 United
Kingdom
0.936 0.934 14.8 15.7*
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28 South Korea 0.888 0.882 …