Elective Course in Commerce
ECO – 13: Business Environment
For July 2019 and January 2020 admission cycle

Dear Students,
As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course. Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.
This assignment is valid for two admission cycles (July 2019 and January 2020). The validity is given below:
1. Those who are enrolled in July 2019, it is valid up to June 2020.
2. Those who are enrolled in January 2020, it is valid up to December 2020.
You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September.
Course Code : ECO-13
Course Title : Business Environment
Assignment Code : ECO-13/TMA/2019-20
Coverage : All Blocks
Maximum Marks: 100
Attempt all the questions
1. What is meant by business environment? What is its significance? Describe briefly economic and non economic components of business environment. (2+3+15)

Ans: Business is any activity undertaken for the purpose of producing or selling a particular commodity r service and earns a profit. The business has several dimensions such as purchasing the inputs, converting the inputs into the output, selling that output at a profitable price. Every dimension of a business depends upon several factors. Hence a business is influenced by several factors, all them put together are described as Business Environment. A business can grow and prosper in a particular environment just as a plant can grow in a particular soil, climate, water supply etc.  Hence the entrepreneur has to pay attention to the environment in which he has to conduct his business activities. If he is able to adapt his business to the environment effectively and efficiently the business can make higher profits. This makes the study of business environment important.
According to Keith Davis, ”Business environment is the aggregate of all conditions, events and influences that surrounds and affect the business.”
According to wheeler, ”Business environment is the total of all things external to business firms and industries which affect their organisation and operations.”
Following are the Importance of Business Environment:
(a)    Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully.
(b)   Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers of growth for the business firms. It enables the business to identify the areas for growth and expansion of their activities.
(c)    Continuous Learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business.
(d)   Image Building: Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working.
(e)   Meeting Competition: It helps the firms to analyse the competitors’ strategies and formulate their own strategies accordingly.
(f)     Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments.
The business environment can be classified into two major categories:
1.       Economic environment
2.       Non economic environment
ECONOMIC ENVIRONMENT: Economic environment consist of Grosse national product, corporate profits, inflation rate productivity, employment rates, interest rates, debt and spending economic environment has stronger influence over organization policies and action. The survival and success of each and every business enterprise depend fully on its economic environment. The three main factors/components that affect the economic environment are:
(a)    Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital etc.
(b)   Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are: Industrial policy, Fiscal policy, Monetary policy, Foreign investment policy, Export –Import policy (Exim policy)
(c)    Economic System: The world economy is primarily governed by three types of economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. India has adopted the mixed economy system which implies co-existence of public sector and private sector.
(d)   Economic Planning: The management of national economy must begin with national level economic planning within the framework provided by the general economic policy of the government. An economic planning is a mechanism for allocation of available resources and encourages efficient decision making process in an economy to achieve pre determined objectives of plans like increasing growth rate, reducing inflation, creating employment , obtaining self sufficiency etc. A government plays an important role as it has the authority of drafting and implementing financial plans keeping in mind the interest of various business industries and social welfare.
(e)   Regional economic groups: They promote cooperation and free trade among members by removing tariff and other restrictions. They provide opportunities to member countries and threats to non-member counties. Examples are: SA ARC: South Asian Association for Regional Cooperation. ASIAN: Association of South East Asian Nations. EU: European Union.
NON-ECONOMIC ENVIRONMENT: Non-economic environment refers to social, cultural, political, legal, technological factor etc. that have a significant effect on the business activities of our country. The various elements of non-economic environment are as follow:
(a) Social Environment: The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The businessman cannot overlook the components of social environment of social environment as these components may not have immediate impact on the business but in the long run the social environment has great impact on the business.
(b) Political Environment:  This includes the political system, the government policies and attitude towards the business community and the unionism. The political environment has immediate and great impact on the business transactions so businessman must scan this environment very carefully. All these aspects have a bearing on the strategies adopted by the business firms.
(c) Legal Environment: This refers to set of laws, regulations, which influence the business organisations and their operations.  Every business organisation has to obey, and work within the framework of the law. The important legislations that concern the business enterprises include Companies Act, 1956; Foreign Exchange Management Act, 1999; The Factories Act, 1948 etc. Besides the above legislations, Provisions of the Constitution and Judicial Decisions are also form part of the legal environment of business.
Recent changes in India legal environment:
Ø  Deregulation of capital market.
Ø  Removal of control from the foreign exchange market
Ø  Delicencing policy of industries.
(d) Technological Environment: Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. In the modern competitive age, the pace of technological changes is very fast. Hence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time. The recent technological changes of the Indian market are:
Ø  Shift from steam locomotives to electric engines.
Ø  Shift from typewriter to word processors.
Ø  Shift from demand of vacuum tubes to transistors.
(e) Demographic Environment: This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services.
(f) Natural Environment:  The natural environment includes geographical and ecological factors that influence the business operations. These factors include the availability of natural resources, weather and climatic condition, location aspect, topographical factors, etc. Business is greatly influenced by the nature of natural environment.
2. Explain the meaning of economic development. Discuss important goals of economic development.  (5+15)
Ans:  There is no specific definition of economic development. Hy Meier defines economic development as “Growth plus change”. Here Economic Growth means economic growth means rise in full employment real Output  or, national income at constant prices. It is a measure of the nation's capacity to produce, Economic growth in this sense represents growth of resources in a country. The word "change" here refers to the qualitative changes in the economy. All definitions would agree that economic  development means change. Some of the definitions of economic development are stated below: According to Micheal P. Todaro: “Development must be conceived (considered) for as a multi-dimensional process involving major change in social structures, popular attitudes and national institutions as well as the acceleration of eco-growth, the eradication (end) of poverty and reduction of inequality of wealth.”
According to Kindle Berger: “Economic development relies both on more output and changes in technical and institutional arrangements by which it is produced and distributed.”
Objectives of Economic Development
1. To Reduce Poverty: The most of the developing countries are facing the problem of general as well as absolute poverty. Poverty is not only itself bad but it produces a lot of economic and social crimes. Reduction in poverty is one of the main goals of economic development.
2. To Increase the Per Capita Income: Per capita income of developing countries is very low. Economic development leads to increase in per capita income. Increase in PCI leads to more saving and more investment. High per capita income is a symbol of progress and prosperity.
3. Development of Agricultural Sector: Agricultural sector is the largest sector of the economy of India. Here due to use of traditional means of production productive quality and quantity is very low. Economic development is required to develop the backward agricultural sector that is essential for a country.
4. Development of Industrial Sector: Industrial sector is the second largest sector of our economy. Since partition, development of industrial sector is not satisfactory. Economic development also helps to develop the industrial sector. Without industrial development progress and prosperity is impossible.
5. To Reduce Unemployment: One more objective of economic development is to reduce the unemployment. Unemployed population is a burden on our economy. Economic development creates new employment opportunities. Rapidly raising population creates a problem of unemployment that can be solved through economic development.
6. To Enhance the Productivity Level: Productivity level in agricultural and industrial sector is very low in India. Another objective of economic development is to increase the productivity level with the help of using modern technologies.
7. To Remove the Deficiency of Capital: Economic development will increase the income of people and overall nation. It will lead to more saving and more investment. So, economic development is helpful to remove the deficiency of capital. Economic development will increase the rate of capital formation.
8. To Use Resources Optimally: Economic development enables a nation to utilize the existing resources optimally. Developing counties have a lot of natural resources that remains un-utilized, under-utilized or mis-utilized due to poor state of technology.
9. To Control Inflation: High rate of inflation in developing counties is also creating a lot of problems. Economic development is required to control the increasing inflation.
10. To Improve the Living Standard: Population is rapidly increasing in developing countries. On the other hand already existing population has non-availability of basic needs. Living standard of population is very low in India. Economic development also contains the objective to improve the living standard of population.
11. To Remove Pollution: Due to industrialization in poor countries, the air pollution and water pollution is common. Economic development will lead to installation of treatment plants which will reduce pollution. Pollution is creating a lot of diseases and causing the efficiency of labour. 
12. To Achieve Better Health: Developing countries have less health facilities. Economic development causes, the production of more and better instrument for treatment. Reduction in death rate and improvement in life expectancy is possible due to economic development.
13. To Control Un-productive Expenditure: Our government has to allocate a huge amount for un-productive expenditures. Objective of economic development is to control the un-productive expenditure.
14. To Improve Skill: Economic development improves the skill and training of worker. It increases the efficiency of labour that causes more and better output.
3. Outline the main objectives of the new industrial policy, 1991. Discuss various measures taken for achieving these objectives. (5+15)
Ans: Objectives of the New Industrial Policy, 1991:
The New Industrial Policy,1991 seeks to liberate the industry from the shackles of licensing system Drastically reduce the role of public sector and encourage foreign participation in India’s industrial development. The broad objectives of New Industrial Policy are as follows:
1.       Liberalizing the industry from the regulatory devices such as licenses and controls.
2.       Enhancing support to the small scale sector.
3.       Increasing competitiveness of industries for the benefit of the common man.
4.       Ensuring running of public enterprises on business lines and thus cutting their losses.
5.       Providing more incentives for industrialisation of the backward areas, and
6.       Ensuring rapid industrial development in a competitive environment.
7.       Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty;
8.       Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries;
9.       Reduce inequalities of income and wealth;
10.   Adopt a socialist pattern of development based on equality and prevent exploitation of man by man.
Steps taken to initiate these objectives
The government announced a New Industrial Policy on July 24, 1991. This new policy deregulates the industrial economy in a substantial manner. The major objectives of the new policy are to build on the gains already made, correct the distortions or weaknesses that might have crept in, maintain a sustained growth in productivity and gainful employment, and attain international competitiveness. In pursuit of these objectives, the government announced a series of initiatives in the new industrial policy as outlined below:
1. Abolition of Industrial Licensing: In a major move to liberalise the economy, the new industrial policy abolished all industrial licensing irrespective of the level of in vestment except for certain industries related to security and strategic concerns, and social reasons. Now there are only 6 industries for which licensing is compulsory as amended in February 1999. These are alcohol, cigarettes, hazardous chemicals, drugs and pharmaceuticals, electronics, aerospace and defense equipments, and industrial explosives.
2. Public Sector’s Role Diluted: The number of industries reserved for the public sector since 1956 was seventeen. This number has now been reduced to three. They are arms and ammunition and allied items of defense equipment, atomic energy and rail transport.
3. Abolition of Phased Manufacturing Programmes: Devaluation of currency and increasing FDI led government to liberalise local content requirement for indigenous firms.
4. MRTP Act: MRTP Act has been amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings. The new industrial policy also states that the government will undertake review of the existing public enterprises in low technology, small-scale and non-strategic areas. Sick units will be referred to the Board for Industrial and Financial Reconstruction for advice about rehabilitation and reconstruction. For enterprises remaining in the public sector it is stated that they will be provided a much greater degree of management autonomy through the system of Memorandum of Understanding (MOU).
5. Free Entry to Foreign Investment and Technology: The Government is committed to promote increased flow of Foreign Direct Investment (FDI) for better technology, modernisation, exports and for providing products and services of international standards.
6. Industrial Location Policy Liberalised: The new industrial policy provides that in locations other than cities of more than 1 million populations, there will be no requirement of obtaining industrial approvals from the centre, except for industries subject to compulsory licensing.
7. Removal of Mandatory Convertibility Clause: A large part of industrial investment in India is financed by loans from banks and financial institutions. These institutions have followed a mandatory practice of including a convertibility clause in their lending operations for new projects.
4. Explain the role of foreign capital in the industrialization of any country. What are its shortcomings? (10+10)
Ans: We all know that capital is like a life blood for any business. Since India is a developing country and there is shortage of domestic funds, foreign capital is the main source which is playing significant role in industrialisation of our country. In the early stages of industrialisation in any country foreign capital plays an important role. Their role can he better understood under the following heads:
1) Increase in Resources: Foreign capital not only provides an addition to the domestic savings and resources, but also an addition to the productive assets of the country. The country gets foreign exchange through FDI. It helps to increase the investment level and thereby income and employment in the recipient country.
2) Risk Taking: Foreign capital undertakes the initial risk of developing new lines of production. It has with it experience, initiative, resources to explore new lines. If a concern fails, losses are borne by the foreign investor.
3) Technical Know-how: Foreign investor brings with him the technical and managerial know how. This helps the recipient country to organise its resources in most efficient ways i.e. the least costs of production methods are adopted. They provide training facilities to the local personnel they employ.
4) High Standards: Foreign capital brings with it the tradition of keeping high standards in respect of quality of goods, higher real wages to labour and business practices. Such things not only serve the interest of investors, but they act as an important factor in raising the quality of product of other native concerns.
5) Marketing Facilities: Foreign capital provides marketing outlets. It helps exports and imports among the units located in different countries financed by the FDI.
6) Reduces Trade Deficit: Foreign capital by helping the host country to increase exports reduces trade deficit. The exports are increased by raising the quality and quantity of products and by lower prices.
7) Increases Competition: Foreign capital may help to increase competition and break domestic monopoly. Foreign capital is a good barometer of world's perception of a country's potential. It is rightly said that a satisfied foreign investor is the best commercial ambassador of a country can have. To sum up, foreign capital helps three important areas that are necessary for the economic development of a country. These three areas are savings, trade and foreign exchange and technology. Foreign capital performs three gaps filling function i.e, i) savings gap ii) trade gap iii) and technological gap in the recipient country's economy. It encourages development of technology, managerial expertise, integration with other economies of the world, export of goods and services leads to higher growth of country's economy.
Short comings of foreign capital
Following criticisms are labelled against foreign capital:
1) Focus on high profit area only: Foreign financer mainly focuses on profit area rather than the priority sector.
2) Political interference: The activities of foreign investors may be harmful to the national interest. They may interfere in the national politics or may engage in unfair trade practices or may impose restrictive conditions.
3) Foreign dependence: It increases dependence on foreign resources. First in the use of foreign technology and second the foreign technology used requires import of goods for replacement and maintenance that are costly. There may be intensity of foreign capital.
4) Short term in nature: Often the profits earned in early stages are high involving big remittances. Foreign investor may recover his amount in a relatively short time. Yet the payment on account of such things as technological services, royalty payment etc; continues.
5) Adverse effects: There may be adverse effects on income distribution in the country, transfer pricing and balance of payments.
Though there are arguments for and against foreign capital and statistics are available to support both points of view, yet the role of foreign capital can not be ignored.
5. Write short notes on the following: (4x5)
(a) Social responsibilities of business
Ans: Social responsibility is the duty of businessman to help the society to solve its major problems. Every enterprise is fully connected with society. He takes many things from society in the form of raw material, work from employees and also pollute environment of society. After this, many social problems rise due to pollution. So businessman's prime duty is to support in the form of plantation near the area of factory providing free health facilities to employees and also donate some part of profit for welfare of poor community to uplift them. These days trends shows that almost all companies are taken steps for becoming responsible toward society.
Arguments in favour of social responsibility:
1)      Business is a creation of society and it uses society’s resources. So business is responsible to the society.
2)      It is in the long-term self-interest of the business to assume social responsibilities.
3)      Scope for government interference in business will get reduced if the business follows socially responsible policies.
4)      Public image of the business would improve if it fulfills its social obligations.
Arguments against the social responsibility
1)      Primary aim of business is to earn profit which is necessary for its long term existence.
2)      Increase in cost for charitable expenses creates burden on the consumer.
3)      Lack of social skills of businessman because they are not fully aware with social problems.
4)      People’s resistance due to interference from businesses in their problems.
(b) Objectives of fiscal policy
Ans: Fiscal Policy : It is defined as the process of shaping government taxation and expenditure to achieve desired economic and social objectives. The objectives of fiscal policy are not specified these change with the level of economic development. The objectives of fiscal policy may differ from country to country. Following are the main objectives of fiscal policy in the development countries.
Objectives and Role of Fiscal Policy
1. Increase in Savings : This policy is also used to increase the rate of savings in the country. In the developing countries rich class spends a lot of money on luxuries. The government can impose taxes on them and can provide the basic necessities of life to the poor class on low rate. In this way by providing incentives, savings can be increased.
2. To Encourage Investment : The government can encourage the investment by providing various incentives like the tax holiday in the various sectors of the economy. The capital can be shifted from less productrive sectors to more productive sectors. So the resources of the country can be utilized maximum.
3. To Achieve Equal Distribution of Wealth : Fiscal policy is very useful for the achievement of equal distribution of wealth. When the wealth is equally distributed among the various classes then their purchasing power increases which ensures the high level of employment and production.
4. To Control Inflation : Fiscal policy is very useful weapon for controlling the rate of inflation. When the expenditure on non productive projects is reduced or the rate of taxes are increased then the purchasing power of the people reduces.
5. To Reduce the Regional Disparity : In the less developing countries the regional disparity is found. Some areas are more developed while the others are less developed. Government provides the infrastructure facilities in less developed areas. The tax holiday incentive is also provided in these areas which is very useful in increasing the per capita income.
(c) Reforms in public sector
Ans: Public Sector was started to achieve the following objectives:
a)      To speed up the economic growth of the country
b)      To achieve a more equitable distribution of income
c)       To create infrastructure facilities
d)      To develop all parts the country equally
Performance of the Public Sector was poor due to unorganized plants, out dated technology, underutilization of capacity, over staffing, trade unionism, political interference etc., So the government, introduced the following reforms in the public sector:
a)      The number of industries reserved for the public sector was reduced from 17 to 3 industries namely atomic energy, arms and rail transport.
b)      The Memorandum of Understanding signed between a public sector and its administrative ministry defines its autonomy and the targets to be achieved.
c)       Equity shares of public sector units are sold to private sector and the public which is known as disinvestment.
d)      Loss making public sectors which are potentially viable will be restructured and revived through the Board of Industrial and Financial Reconstruction (BIFR). Public sector units which cannot be revived will be closed down.
e)      A National Renewal Fund was created to retrain and redeploy retrenched labor and to compensate employees seeking voluntary retirement.
(d) Balance of payments
Ans: The balance of payments of a country is a systematic record of all its economic transactions with the outside world in a given year. It records transactions relating to both goods and services. Balance of payment gives a full picture of the international transactions of a country. It has two components – capital account and current account.
Current Account: Current account is that account of BOP which records imports and exports of goods and services and unilateral transfers. It thus, records the following three items: Visible items of trade, Invisible items and Unilateral transfers. Current account deals with currently produced goods and services. Current account transactions are called account of actual transaction, because all the items included in it are actually transacted. 
1.       Items of Current Account
2.       Exports and Import of Visible Items or Goods.
3.       Invisible Items (or Non-Material Goods or Services).
4.       Unilateral Transfers.
Capital Account: Capital account is that account of BOP which records all such transactions between the residents of a country and rest of the world which cause a change in the asset or liability of the country. It concerns with capital transactions – all kinds of short term and long term international capital transfers, gold and sale/purchase of assets. It also deals with the payments of debts and claims. Main items of capital account are listed below:
a)      Direct Investment.
b)      Portfolio Investment.
c)       Loans.
d)      Banking Capital Transactions.


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