Maximum Marks: 100

Attempt all the questions:

1. Outline the long term goals of planning laid down by the Planning Commission in the first five year plan. Explain the main features of the Nehru Mahalanobis strategy of development and its achievements. (5+15)

Ans: Long term goals of first five year plan:

1.    Growth: It refers to increase in the country’s capacity to produce the output of goods and services within the country. It implies either a larger stock of productive capital, or a larger size of supporting services like transport and banking, or an increase in the efficiency of productive capital and services. A good indicator of economic growth, in the language of economics, is steady increase in the Gross Domestic Product (GDP). The GDP is the market value of all the goods and services produced in the country during a year. You can think of the GDP as a cake and growth is increase in the size of the cake. If the cake is larger, more people can enjoy it. It is necessary to produce more goods and services if the people of India are to enjoy (in the words of the First Five Year Plan) a more rich and varied life.

The main achievements of the strategy followed during 1956-90 were as under:

1. There has been a vast expansion of the capital goods sector via the heavy industry Strategy. Sixth Draft Plan of the Janta Party Government accepted this achievement in the following words: "lt is a cause of legitimate national pride that over this period a stagnant and dependent economy has been modernised and made more self-reliant."

2. There was a vast expansion in economic infrastructure in the form of irrigation, energy, transport and communications, etc.

3. There was an expansion of the social infrastructure in the form of health and educational facilities - schools, colleges, universities, primary health centres, dispensaries and hospitals.

4. A significant rise in saving and investment rates was witnessed 'in the country.

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2. Discuss regulatory role of the government in business. (20)

Ans: Role of Government in Business:

We can all agree on the important role governments play in our societies. Fundamental to the way we all interact, they provide order via laws, they facilitate economic activity by building infrastructure, and they are the administrators of force via policing departments and military, which protect us and ensure safety. Still, there is a widely-adopted social mythology that the role of government has nothing to do with business, because mixing for-profit motives with not-for-profit interests is like mixing oil with water. Should this “black or white” idea be brought in to question? Considering the facts, the reality is that policy regimes create the conditions under which businesses either thrive or perish. So, policy plays a critical role in business. For example, a government’s policy regime creates or diminishes efficiency in capital markets. Also, sometimes lingering legislation from times past can have enormous consequences today, though circumstances change.

Direct role of Government:

Governments control the business activities is many ways both direct and indirect. However, government can control business activities in a more direct way. These are as follows:

1.       Prescribes the rules of the game for business

2.       Is a major purchaser of business' products and services

3.       Uses its contracting power to get business to do things it wants

4.       Is a major promoter and subsidizer of business

5.       Is the owner of vast quantities of productive equipment and wealth

6.       Is the architect of economic growth

7.       Is a financer of business

8.       Is the protector of various interests in society against business exploitation

9.       Directly manages large areas of private business

10.   Is the repository of the social conscience and redistributes resources to meet social objectives.

With the growth and expansion of towns and cities the local government and state governments have generated a proliferation of new rules, laws, and regulations of their own. All of this must be taken into consideration when choosing a plant or business location.

Indirect role of Government in Business:

1.       Government can affect business activities in various indirect ways. These are as follows:

2.       Providing a safe, reliable, stable, environment for the pursuit of economic activities. 

3.       Government ministers can play a critical role in fostering enterprise and innovation. Their role is to direct the government departments and agencies to focus on the problem and develop effective policies.

4.       Encourage growth across all industry sectors including low, mid and high-tech firms.

3. What is meant by fiscal policy? Describe main instruments of fiscal policy in India. (5+15)

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.

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 productive 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 rates of taxes are increased then the purchasing power of the people reduces.

5. Stabilization of Price Level: Fiscal policy is also used to achieve desirable level of prices in the country. It means the cost and price should be at such level that production and employment may increase.

Instruments of Fiscal Policy: The government has two primary fiscal tools to influence the economy. They are revenue tools and spending tools. Let’s look at each of these tools.

1. Revenue tools: Revenue tools refer to the revenues collected by the government in various forms. Revenues can be tax revenue, non tax revenue and capital receipts.

a) Tax revenue is the principal source of revenues of the government. Taxes are levied on income as well as goods & services. Tax revenues are further divided into two parts:

i. Direct taxes are taxes levied on the income of individuals and firms. This includes income tax, corporate tax, capital gains tax, social security tax, etc.

ii. Indirect taxes are taxes levied on goods and services. This includes goods and services tax, excise duty, custom duty etc.

(b) Non Tax Revenue: The revenue obtained by the government from sources other than tax is called Non-Tax Revenue. The sources of non-tax revenue are:

1. Fees: Fees are another important source of revenue for the government. A fee is charged by public authorities for rendering a service to the citizens. The government provides certain services and charges certain fees for them. For example, fees are charged for issuing of passports, driving licenses, etc.

2. Fines or Penalties: Fines or penalties are imposed as a form of punishment for breach of law or non fulfillment or certain conditions or for failure to observe some regulations. Like taxes, fines are compulsory payments without quid pro quo. But while taxes are generally imposed to collect revenue. Fines are imposed as a form of punishment or to prevent people from breaking the law.

3. Surplus from Public Enterprises: The Government also gets revenue by way of surplus from public enterprises. In India, the Government has set up several public sector enterprises to provide public goods and services. Some of the public sector enterprises do make a good amount of profits. The profits or dividends which the government gets can be utilized for public expenditure.

4. Special assessment of betterment levy: It is a kind of special charge levied on certain members of the community who are beneficiaries of certain government activities or public projects. For example, due to a public park in a locality or due to the construction of a road, people in that locality may experience an appreciation in the value of their property or land. Thus, due to public expenditure, some people may experience 'unearned increments' in their asset holding.

5. Grants and Gifts: Gifts are Voluntary contributions by individuals or institutions to the government. Gifts are significant source of revenue during war and emergency. A grant from one government to another is an important source of revenue in the modern days. The government at the Centre provides grants to State governments and the State governments provide grants to the local government to carry out their functions.

6. Deficit Financing: Deficit means an excess of public expenditure over public revenue. This excess may be met by borrowings from the market, borrowings from abroad, by the central bank creating currency. In case of borrowing from abroad, there cannot be compulsion for the lenders, but in case of internal borrowings there may be compulsion.

2. Spending Tools: This is the second aspect of fiscal policy. Spending tools refer to increasing or decreasing government spending/ expenditure to influence the economy. Government spending can be in the form of:

(a) Plan expenditure

(b) Non-plan expenditure.

Each in turn is sub-divided into (i) revenue and (ii) capital expenditures.

Plan expenditure includes provision of expenditure on various projects, programmes and schemes included in the Central plan for the five year.

Non-plan expenditure covers all expenditures of government not included in the plan. It includes:

(a) Expenditure obligatory in nature for example, interest payments, expenditure on defense and internal security, etc;

(b) Expenditure on maintaining the assets created in the previous plans and

(c) Expenditure on continuing services and activities at levels already reached in plan period. Thus as more plans are completed the non-plan expenditure increases.

Revenue expenditure is the expenditure which does not result in creation of assets. It is the normal running of government departments and various services, interest charge in debt incurred by government, subsidies, grants to state governments and other parties.

Capital expenditure consists of expenditure on acquisition of assets like land, building, machinery, equipments, shares, etc.

4. What are the indications of industrial sickness? Discuss its main causes. (10+10)

Ans: Industrial Sickness: Industrial sickness is a universal phenomenon. It is a major problem of all industries in the world whether it is developed or developing countries. It is a serious matter of the countries. Definition of a sick unit is given by Sick Industrial companies act, 1985. According to the act “ The sick industrial company is a company which has at the end of any financial year accumulated losses equal to or excluding its entire net worth and has also suffered cash losses in that financial year and in the financial year immediately preceding it.”

Indicators of Industrial sickness 

Industrial units may become sick at different stages and due to different reasons. Indeed, “some industries are born sick, some achieve Sickness and some have sickness thrust upon them”. 

a) Born Sick: Industries born sick are those which are destined, (or disaster right from their conception due to various causes. A study conducted by the Institute of Economics Hyderabad, found that 50 per cent of the dead units closed within three years of opening. This proves that these industries never had any reasonable survival prospect right from birth. 

Any one or more of the following factors may indicate the birth of sick units: 

1. Lack of experience of the promoters, wrong Selection of the project, faulty Project etc., may give birth to sick units. The mushroom growth of the so-call consonance firms has been regarded as a factor contributing to these sorts of problems because the primary interest of such Consultancy fans is to make money by selling some ideas or project reports to the aspirants who may thus be misguided or made overenthusiastic We must also think that the rosy hopes generate by the high promises and schemes including the self-employment schemes of the financial institutions and other promotion agencies of the Governments also contribute to this Unfortunate Situation. 

2. Paucity of fun and faulty financial management may also cause the birth of sick units. Many new units have been found to be under utilised and the strains of undercapitalization become evident when the unit becomes operational. In case of some companies, the heavy investment in non-productive capital assets likes laugh housing projects even before they commence production distorts the liquidity and causes a lot of problems. Problems also crop up due to inadequate provide for contingencies, faulty fund flow and cash flow estimate, etc. 

3. Time and cost over-runs sometimes prove to be very disastrous. Particularly in case of large projects, delays in project commissioning due to delay in supply of equipment, both indigenous and imported, slippage in the schedule of civil works, creation of equipment, etc., are not uncommon. Such delays cause cost escalations leading to capital shortage, liquidity problems, hike in the production costs and break-even point etc. 

4. Sickness may arise from lavational problems also. It has been observed that “high technology based units are established in areas without skilled labour or supporting infrastructure; industries based on imported raw materials are founded in regions without adequate transport and communicate ion system”. 

5. Technological factors like selection of obsolete or improper technology or the technology becoming outdated due to innovations while the project is being executed, sub-standard machinery, wrong collaboration, etc., also cause sickness.  According to the Tiwari Committee, 14 per cent of the large sick units suffered from technical factors and faulty initial planning. 

6. Wrong assessment of the market potential or faulty demand forecasting, change in the market conditions, including the change in the consumer tastes and preferences and competitive situation, etc. can also cause birth of sick units. 

b) Achieved Sickness: Industries which achieve sickness are those which fail after becoming operational due to internal causes. Such internal indicators which are common are the following: 

1. Bad management, which “covers a wide range from inexperience, inefficiency, lack of professional expertise, neglect and internal squabbles to delinquency and dishonesty” is an important cause of industrial sickness. According to the Tiwari Committee Report, 1984, “the factor most often responsible for industrial sickness can be identified as ‘management’. This may take the form of poor production management, poor labour management, poor resources management, lack of professionalism, dissensions within the management, or even dishonest management”. The Committee found that 65 per cent of the large sick units were affected by this problem. 

2. Unwarranted expansion and diversion of resources may also result in sickness. Some concerns tend to expand beyond the resources including managerial capability. Diversions of resources to start new units or to acquire interest in other concerns without due regard to the capability of the unit to provide such funds sometimes lands the unit in trouble. Extravagances and acquisition of unproductive fixed like company guest houses or corporate luxuries like air cars, etc., also may contribute to sickness. 

3. Poor inventory management in respect of finished goods as well as inputs may land a unit in trouble. 

4. Failure to modernize, the productive apparatus, changes the product mix and other elements of the marketing mix to suit the changing environment are a very important cause of industrial sickness. 

5. Poor labour-management relationship and the associated poor worker morale and low productivity, strikes, lockouts, etc., also may ruin the health of a unit to survive), 

c) External Causes: Sickness may be caused also due to factors beyond the control of an industrial unit. Some of these common external indicators are the following: 

1. Energy crisis arising out of power cuts or shortage of coal, and oil have almost become a constant problem for many industrial units in India. 

2. In a number of cases the units are not able to achieve optimum capacity due to shortage of raw materials due to production set-backs in the supply industries, poor agricultural output clue to natural reasons, changes in the import conditions etc. 

3. Infrastructural problems like transport bottlenecks also sometimes cause serious problems. 

4. It is a general complaint of the industrial circles that the credit squeeze very adversely affects the industrial sector. According to the Tiwari Committee, 24 per cent of the large sick units were affected by shortage of working capital/liquidity constraints. 

5. Artificial economic constraints also make their contribution to the growing industrial sickness. Government controls on the product mix and prices are said to be causing serious problems for certain industries. Sometimes, it is not possible to automate or rationalize due to unfavorable government policy about attitude. 

Causes of Industrial Sickness

1) Internal Cause for sickness: Internal causes are those which are within the control of management.  This sickness arises due to internal disorder in the areas justified as following:

a) Lack of Finance:  This including weak equity base, poor utilization of assets, inefficient working capital management, absence of costing & pricing, absence of planning and budgeting and inappropriate utilization or diversion of funds.

b) Bad Production Policies :  The another very important reason for sickness is wrong selection of site which is related to production, inappropriate plant & machinery, bad maintenance of Plant & Machinery, lack of quality control, lack of standard research & development and so on.

c) Marketing and Sickness: This is another part which always affects the health of any sector as well as SSI.  This including wrong demand forecasting, selection of inappropriate product mix, absence of product planning, wrong market research methods, and bad sales promotions. 

d) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs is inappropriate personnel management policies which includes bad wages and salary administration, bad labour relations, lack of behavioural approach causes dissatisfaction among the employees and workers.

e) Ineffective Corporate Management:  Another reason for the sickness of SSIs is ineffective or bad corporate management which includes improper corporate planning, lack of integrity in top management, lack of coordination and control etc.

2) External causes for sickness:

a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non availability of skilled labour or manpower wages disparity in similar industry and general labour invested in the area.

b) Marketing Constraints: The second cause for the sickness is related to marketing.  The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and market recession.

c) Production Constraints:  This is another reason for the sickness which comes under external cause of sickness.  This arises due to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions.

d)  Finance Constraints:  The external cause for the sickness of SSIs is lack of finance.  This arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable investments, fear of nationalization.

5. Write short notes on the following:        4x5=20

(a) Collective bargaining

Ans: It was Adam Smith in the 18th Century who made the first reference to collective bargaining in the labour market. The Bargaining Theory Proponents have argued that short-run wages have always been determined by the process of bargaining. Collective bargaining is possible because there exist today the bilateral monopoly situation in the labour market. That is to say that labour market is neither perfectly competitive nor is it marked by monopoly conditions only. Both the employers and employees have now equal strength to negotiate on problems of wage settlement. This situation is called bilateral monopoly situation. Collective bargaining is conducted under bilateral monopoly.

Under bilateral monopoly conditions wages rate and volume of employment will depend on the relative bargaining strength of the Employer’s associations and Worker’s unions. If the Employer’s Association is stronger than Trade Union, it will push the wage below the competitive equilibrium level or very near to the subsistence level. On the contrary if the Trade Union is stronger than the Employers Association the wage rate will be pushed up above competitive equilibrium rate or to marginal productivity or at least to the level of the capacity to pay of the employers. Thus, there is no definiteness about the levels of wage under collective bargaining. In other words wages under bilateral monopoly situation are indeterminate. We can only indicate the broad limits within which the wages rate and the volume of employment would come to be settled according to relative bargaining power of the parties.

Many mathematical models have been built by economists to determine the bargaining power of the parties. Of these Chamberlain’s explanation is more acceptable. He has tried to determine the bargaining power of the two parties of the two parties in terms of cost of agreement relative to the cost of disagreement to each party in collective bargaining process. Greater the cost for the employers of disagreeing (facing a strike) as opposed to the cost of agreeing (granting unions demand) greater will be bargaining power of union and vice versa.

(b) Role of small scale sector

Ans: In a developing country like India, the role and importance of small-scale industries is very significant towards poverty eradication, employment generation, rural development and creating regional balance in promotion and growth of various development activities.

It is estimated that this sector has been contributing about 40% of the gross value of output produced in the manufacturing sector and the generation of employment by the small-scale sector is more than five times to that of the large-scale sector.

This clearly shows the importance of small-scale industries in the economic development of the country. The small-scale industries have been playing an important role in the growth process of Indian economy since independence in spite of stiff competition from the large sector and not very encouraging support from the government.

(c) Foreign Direct Investment (FDI)

Ans: FDI- Foreign Direct Investment refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment.

FDI is calculated to include all kinds of capital contributions, such as the purchases of stocks, as well as the reinvestment of earnings by a wholly owned company incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or branch. The reinvestment of earnings and transfer of assets between a parent company and its subsidiary often constitutes a significant part of FDI calculations. FDI is more difficult to pull out or sell off. Consequently, direct investors may be more committed to managing their international investments, and less likely to pull out at the first sign of trouble.

(d) Functions of WTO

Ans: Functions of WTO: The following are the functions of the WTO:

a)    It facilitates the implementation, administration and operation of the objectives of the Agreement and of the Multilateral Trade Agreements.

b)   It provides the framework for the implementation, administration and operation of the multilateral Trade Agreements relating to trade in civil aircraft, government procurement, trade in dairy products and bovine meat.

c)    It provides the forum for negotiations among its members.

d)   It administers the Understanding on Rules and Procedures governing the Settlement of Disputes of the Agreement.

e)    It cooperates with the IMF and the World Bank and its affiliated agencies with a view to achieving greater coherence in global economic policy-making.


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