Chapter I

Nature and Structure of the Economy

Aim
The aim of this chapter is to:

introduce the legal economic structure

classify economic structure

discuss different laws applicable to Indian economy

Objectives
The objectives of this chapter are to:

elucidate the nature and structure of economy

explain the functions and economic roles of the government

describe the overall demography and its features

Learning outcome
At the end of this chapter, you will be able to:

explain different company laws

analyse the economic structure

discuss the importance of population and its dynamics

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Business, Government & Society

1.1 Nature and Structure of the Economy

The main purpose of developing business is making wealth for all the representatives involved in the process of
business. The method of developing wealth and the level to what extent it should be developed depends upon the
nature and structure of the economy in which particular business is carried out. There are some economic policies
that affect the business fortunes and strategies.

For past 100 years or more, the world has been facing three kinds of economic structure.
Free Market System
Command System
Mixed Economy System

These three system structures further represents three different levels of governmental controls.

Free market system

The term Free Market means a system where the buyers and the sellers are responsible for the choices of goods
they make. In short free market has the power to determine price and also the distribution of goods according
to the pricing system
In case the demand of the products falls short with respect to the supply, then the price of those products will
also fall as opposed to a price rise as the supply of the demand is insufficient to meet the target of goods and
services

Concept of Laissez-Faire
The motive to supply is to make profit. The motive to demand is the utility or the satisfaction. This type of
market system is referred to as Laissez-Faire
In this there is no external interference required, because this advance state of profit or loss is dominated by
the owners of capital
In these systems, the term efficiency means to achieve the maximum satisfaction of effective demands with
limited resources in hand
Another meaning of this is producing all the goods at a very reasonable rate. Since this means the capacity to
pay, the free market economy will be as large as possible when it will be measured in terms of money. This will
reflect that the national income will definitely be huge

Command system
This is the system where the state directs the economy and the determination of needs priorities is usually
undertaken up by states
This type of economy is called as centrally planned economy or command economy. In centrally planned
economics there is no criterion for efficiency, and hence the economic activity will be dominated by political
choice.
In this as the market price is fixed and the supply of goods is regulated as per the states, one cannot measure
the efficiency in terms of maximized national income
It is very difficult to compare value of the national output in any ways to the value of the national income of
free market economics
As per the definition efficiency still means that the maximum output from limited input, but here we do not take
into consideration the market value of the particular output

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Mixed economy system
This system is a combination of both the systems, to get the best of these systems and to avoid the worst at a
certain extent. For example, social security is often provided as a command style safety net to avoid starvation
of the poor, ( this is the negative externality) and free education and health care, ( merit goods) are provided
because left to itself, the market would under produce these goods
In case of free market economy, the ownership is concentrated in the hands of a few and the state control is
under an oligopoly. If the economic goals are under the ownership of the state, the nature of social goals may
depend on the value system of the politburo, but because of this, the society benefits on a large scale

1.2 Functions of a State and Economic Role of the Government

The state refers to the set of institutions that possess the correct meaning for legitimate coercion, exercised over a
define territory and also its population that is referred to as society.

As per the rules of the Supreme Court of India, even semi autonomous bodies that are receiving grants from the
government will be categorized as state. On the other hand Government submits the process of governing. The
process of governing requires a set of structure, which exercises power. Because of this, the term state and government
are used interchangeably

There are three institutes of state, along with the three distinct sets of powers with their assigned roles. These are
as follows:
Legislature: This is a type of deliberative assembly that has the power to make, pass and repeal laws. This role
of a Legislature is formed by the parliament in democracies. In parliament system, the legislature is the most
supreme and has the authority to appoint a member from their house as the Prime Minster
Executive: This is responsible for implementing laws. There are parts of government which have the authority
and responsibility for day to day administration of the state
Judiciary: Judiciary is the system of the Supreme Court that interprets and applies the law in the name of the
state. They generally do not make the law or enforce it but rather apply it to facts of each case

These three institutions are bought into action in different ways to provide different forms of government. These
different governments decide the way economic matters are conducted and handled by the government.

In some autocratic state all these institutes are clubbed into one and all the powers are vested in the monarch. In
a theocratic state like Vatican City all these powers are vested to the church or any higher religious body of that
particular land. In any democratic city these powers are distributed according to the form of democracy. These can
be done in the following manner:
In a Presidential form, the president is elected by the direct vote of the electorates and then the elected candidate
chooses council of ministers. These ministers owe allegiance to the candidate. In this form, the Parliament
exercises control through the laws and enactments and by the budgetary allocations for different limbs of the
government after discussions on the floor of the house
In the parliamentary cabinet form, the party that has majority members elects their leader as the Prime Ministers.
Later the prime minister forms a council of Ministers.These ministers are mostly from the elected representatives
of his party. In such a system a president, is the whole and sole head of the party.

It seems that the Presidential form of government offers greater stability than that of the parliamentary cabinets
form.
Fiscal decisions: A fiscal decision is the term that is used by many organisations that are related to government
organisations in a state. The only problem regarding the presidential form is that it can drift into a dictatorship
in the absence of well conceived checks and controls.

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Business, Government & Society

Various functions of the State

These basic functions that are considered to be the most essential functions of the State ,are public goods such
as the provision of property rights, macroeconomic stability, control of infectious diseases , safe water, road
and protection for the destitute
Advance function relates to management of externalities, regulation of monopolies and also provisions of
insurances. These provisions of services would depend on the enhanced capability of the government to do so.
This function contributes for better business and market environment
Active functions are the functions that can be taken up by the states with strong capability. They provide support
for private activities in market research, information on macro level and on canalising activities
Accordingly, the economic role of the government can be under these four heads

The roles of the government are:

Regulatory Role Entrepreneurial Role Planning Role Promotional Role
The direct participation of This is a very important The state needs to assume direct
The government
government is very rare. function as all the responsibility to build up and
may regulate the
planning is carried out strengthen the necessary development
economy by direct
this function by the infrastructure such as power, transport,
or indirect control.
government finances, marketing and so on.

Table 1.1 Roles of government institutes

1.3 The Legal and Constitutional Environment

One of the major Reliance Oil projects in Gujarat faced a legal hurdle and incurred tremendous amount of extra
expenditure, as the person in charge was not aware of certain ecological laws.

It is very important to know some of the legal and constitutional environment. Some of these are listed below:
The constitution is a politico legal institution in itself. It is considered the super law and is a reference frame for
all the other laws that are made. Hence this is regarded as one of the most important parts of the non-economic
environment of business. It gives a proper structure to the legislative, executive and to the judiciary. All these
are related to each other and run through organizations and institution
To describe and analyse the legal environment of the business in India, there is a brief overview of some socio-
economic legislation
Company Laws
Laws relating to capital market
MRTP ( Monopolies and Restrictive Trade Practices Act)
FERA ( Foreign Exchange Regulation Act)
IDRA ( Industrial Development and regulation Act)
Trade Unions Act
Bonus Ordinance
Factory Legislation
Social Security Enactments
Laws for Consumer Protection

1.3.1 Company Laws

Company laws are laws governing companies and the other business organizations. This is also considered to be
the principal law that affects any organization and also the management of corporate business.

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Based on the recommendation of the Bhabha Committee (1950), this act was modified in the 1956. The modified
objectives of the company act 1956 are listed below.
Minimum standard of business integrity and conduct in the promotion and management of companies.
To obtain license, approvals and authorisation from Government, Statutory and Regulatory Authorities, as it
may be necessary to carry out and achieve the objectives of the Company.
There should be full and fair disclosure of all reasonable information that are related to the company's affair
There should be effective participation and control of the shareholder to protect their interest.
To act as an entrepreneur to identify new areas of energy generation, connected infrastructural activities for
development of power and to help the undertakings engaged in such activities to make investment therein.
The states power of investigation and intervention into the affairs of companies with regards of interest of
shareholders and public

Capital market
Every Stock Exchange must have rules that are approved by the Central Government or the SEBI. Fresh capital
issues were controlled through the Capital Issues Control Act.

Securities and Exchange Board of India Act, (SEBI) 1992

The purpose of this act was to provide the establishment of a board called Security and Exchange Board of India
(1992).

This was promulgated as an ordinance on 30th January 1995; this bill of SEBI was passed by Houses of Parliament
and was effectively implemented in the year 1992 on 12th April.
The main objectives of this act were to develop a market that is secure on the bases of health and ordinary lines
that adequate protection to investors. In this case it is necessary to promote a market, which ensures the following
objectives.
Fairness To promote fair dealing by the issuers of the securities and to ensure a market place where they can
raise funds at a relatively low cost
Efficiency To provide a degree of protection to the investors and safeguard their rights and interests so that
there is a steady flow of saving into the market
Confidence This market should be professionalised and well informed, offering high standard of services at
a very reasonable cost
Flexibility To regulate and develop a code of conduct and fair practices by intermediaries like merchant
bankers, brokers and so on, with a view to making them competitive and professional

Power and function of SEBI

There is an increasing participation by the investors. It is therefore important to sustain the confidence of the
investors by protecting their interests
It is the duty of the Broad to protect the rule rest of investors in security and to provide development of, and to
regulate the securities of the market
Notwithstanding anything contained in any other laws for the time being in force while exercising the power
under clause, the Board shall have the same power as are vested in a civil court
Direct and intermediary or with any persons that is associated with the securities market in any manner is not
to dispose of or alienate an asset forming part of any transaction which is under investigation

1.3.2 Foreign Exchange Regulation Act (FERA)

The Foreign Exchange Regulation Act (FERA) was enacted in 1973 by the Indian Parliament to consolidate and
amend the FERA Act of 1947, regulating certain payments, foreign exchange and securities transactions, and
transactions that affect India's currency trade. The main features of this act are as follows:

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Business, Government & Society

It states that the activities of any foreign company account for not less than 75 percent of its annual turnover,
then such a company will not be allowed to continue with its activities subjected to the conditions that it will
increases the Indian participation, within a specified period.
If the same account for less than 60 percent of its total annual turnover, it will be required to increase the India
participation to not less than 49 percent of the quality of the capital.
If the export of the company account for more than 40 percent of the total annual turnover. Such a company
will be allowed to continue its activities subjects to the conditions that it will increase, that is within a limited
period of about 49 percent of the equity of the company
In case if the company is coming with a proposals for the substantial exports that could be considered on the
bases of the merits for a higher level of quality participation provided such participation is in the overall interest
of the economy of the country
It states that the ceiling of 25 percent o f the ex-factory considered for the annual production that is permissible
the trading activities by the multi-activity companies that will be raised by 40 to 60 percent respectively, that
is mentioned in the point (2) and (3)

1.3.3 The Sick Industrial Companies (Special Provision) Act 1985 (SICA, 1985)
This act was introduced to highlight the problems that an industry was facing as Industrial Sickness.
The main objectives of this act are as follows:
To determine sickness and expedite the revival of potentially viable units or closure of unviable units (unit here
in refers to a Sick Industrial Company)
Security measures that have timely detection of sick and potentially sick companies owning industrial
undertakings.
The speedy determination by a body of experts of the preventive, ameliorative, remedial and other measure
which need to be taken with respect to such companies
The expeditious enforcement of the measures so determined
Providing for matters connected with or incidental to the above mentioned objectives.
It was expected that by revival, idle investments in sick units will become productive and by closure, the locked
up investments in unviable units would get released for productive use elsewhere

Board for Industrial and Financial Reconstruction (BIFR ) and its functions
Board for Industrial and Financial Reconstruction was established in the year 1987 on 12th of January.
This is regarded as judicial body vested with powers to institute the necessary enquiries to determine whether
a company is sick or not.
If BIFR comes to the conclusion that particular company is sick they either recommend suitable remedies or
provide reasonable time for the company to make it net worth positive.
BIFR also provides some suitable measures that are suggested for the company such as changes in management,
reduction in the share capital, sale or leasing out of a part or whole of the undertaking and merging with healthy
units.

1.3.4 The Monopolies and Restrictive Trade Practices (MRTP) Act 1969
The Monopolies and Restrictive Trade practices (MRTP) Act 1969 has its genesis in the Directive Principle of State
Policy embodied in the constitution of India. An Act to provide that the operation of the economic system does
not result in the concentration of economic power to the common detriment, for the control of monopolies, for the
prohibition of monopolistic and restrictive trade practices and for matters connected therewith or incidental there
to.

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 That the ownership and control of material resources of the community are so distributed as best to sub serve
the common good
The operation of the economic system does not result in the concentration of wealth and means of production
to the common detriments.

The main objectives of this act are as follows:

To prevent concentration of economic powers to the common detriment and the control of monopolies
To prohibit monopolies trade practices
To prohibit restrictive trade practices and unfair practices

1.3.5 The Consumer Protection Act, 1986

The Consumer Protection Act 1986 is a social welfare legislation which was enacted as a result of widespread
consumer protection movement. The main object of the legislature in the enactment of this act is to provide for the
better protection of the interests of the consumer and to make provisions for establishment of consumer councils
and other authorities for settlement of consumer disputes and matter therewith connected. This Act recognizes the
following six rights of the consumers.
Right to safety: A right that protects the consumers against the marketing of the goods and services which are
hazardous to life and property
Right to be informed: A right where the consumer is informed about the quality, quantity, potency, purity, standard
and price of goods or services. This is to protect the consumer against the unfair trade practices
Right to choose: A right where the consumer can access to a wide variety of goods and services at a competitive
price, that means the right to be assured to satisfactory quality and services at a fair price
Right to be heard: In this right the consumer who are interested will receive due consideration at appropriate
forums. This also includes the representation in various forums that are formed by the consumers welfare
Right to seek redressal: A right to seek redressal against unfair practices or even restrictive trade practices. This
also provides the right to a fair settlement of the genuine grievances of consumers
Right to consumer education: A right that will provide knowledge and skills to be an informed consumer

1.3.6 The Environment Protection Act, 1986

An act to provide for the protection and improvement of environment and for matters connected therewith the decisions
that were taken by the United Nations Conference on the Human Environment held on June 1927 at Stockholm
India also participated in this conference as to take appropriate steps for the protection and improvement of
human environment.
This act came into effect in the year November 1986 and in addition to this there were two more acts that were
implemented via, Water (Prevention and control of Pollution) Act, 1974 and Prevention and control of Pollution)
Act, 1981.

1.4 Demographic Factors

The demography of a region includes population size and composition, as well as key socio-economic attributes
such as literacy levels and wide or narrow disparities in a society's distribution of income. It states that, the larger the
population in a region, the larger the potential market that will exist. In addition, the composition of a population in
terms of age and sex will also influence the potential demand for specific products. The main demographic factors
that affect the business are the size of the population, population growth rate, age completion and so on.

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Business, Government & Society

One of the important objectives of the formation of the European Union was to bring about a single market that
compares, in terms of the number of consumers, to that of USA and Japan
A high population growth rate also implies an enormous increase in the labor supply. Thus cheap labor and
growing market have encouraged many multinationals to invest in developing countries
The falling birth rate and rising longevity will significantly alter age distribution within the population. However,
other developed countries will have a predominantly older population

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Summary
Free market system allocates resources according to the price system.
Command system priorities needs are usually undertaken by states. This is called planned system or command
system.
Mixed Economy system is the combination of both the above systems viz. free market system and command
system.
The state monopolies rule making within its territory through the medium of an organized government.
Legislature's role is to make laws and to be performed by the parliament in democracies.
Executive is responsible for implementing laws and are referred to as government.
Judiciary is responsible for implementing and applying laws.
Fiscal decision are practiced mostly in presidential form than in parliamentary form of government. The 4
function of this are basic function, advance function and activist function.
Company Laws are the laws that are in the field of law concerning companies and the other business organisation.
This is also considered the principal law that affects any organization and also the management of corporate
business.

References
Types of Market Systems in Economics [Online]. Available at: <http://www.ehow.com/list_6721441_types-
market-systems-economics.html>. [Accessed 26 April 2011].
Three Types of Economic Systems [Online]. Available at: <http://tutor2u.net/economics/gcse/revision_notes/
tools_economic_systems.htm>. [Accessed 26 April 2011].
Consumer Protection Act India [Online]. Available at: <http://www.legalhelpindia.com/consumer-protection-
act.html>. [Accessed 26 April 2011].

Recommended Reading
Westra, L., 2007. Environmental Justice and the Rights of Indigenous People: International and Domestic Legal
Perspective. Earthscan Publications Ltd.
Kubasek N., & Silverman, G. S., 2010. Environmental Law, 7th ed., Prentice Hall Publication.
Dignam A. & Lowry, J. 2010. Company Law: Core Text, 6th ed., Oxford University Press.

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Business, Government & Society

Chapter II
The Social Environment and its Influences on Business

Aim
The aim of this chapter is to:

introduce the concept of quality of life

discuss social environment on business

explain the index measuring physical quality of life

Objectives
The objectives of this chapter are to:

analyse the mechanism for developing human developed index

explain the socio-economic protective legislation

discuss the shortcomings of Consumer Protection Act, 1986

Learning outcome
At the end of this chapter, you will be able to:

elucidate the parameters of quality of life

calculate the human development index

explain the consumer protection overview

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2.1 Parameters of Quality of Life
Quality of life is defined as the degree to which a human begin enjoys the important possibilities of life. The main
parameters of quality of life are health, safety of the citizen, access to drinking water and environment.

In quality of life population is an important concern in economic and political science.

There are many components of quality of life, among them such as the amount of money and access to goods
and services that a person has
The other measures like freedom, happiness, art, environment health and innovation are more difficult to
measure

One method for measuring the quality of life is by subtracting the standards of living. An example of this would
be, people living in rural areas and small towns are reluctant to shift to developed cities, for a substantial increase
in their standard of living.

2.1.1 The Physical Quality of Life Index (PQLI)

The physical quality-of-life index (PQLI) is an effort to measure the quality of life or well-being of a country. It is
considered the value of a single number that is derived from basic literacy rate, infant mortality, and life expectancy
at age one
Rapid economic growth raised average living standards in many countries around the globe in the 1960s and
the early 1970s, but inequality it also emerged as an issue
This was actually developed for the Overseas Development Council in the year 1979 by Morris David Morris.
There were conditions in a country which assessed numbers from infant mortality, adult literacy rate and life
expectancy at the age of one
Although the PQLI was designed as a minimal measure of social performance and partly as an antidote to undue
emphasis on gross national product (GNP) per capita
PQLI may be considered to be an improvement but also shares some general problem that is measuring the
quality of life in a quantitative way. PQLI has been criticised because there is an overlap between infant
mortality and life expectancy

2.1.2 Introduction to the Human Development Index

The Human Development Index (HDI) is a summary measure of human development that is published by the United
Nations Development Programmer (UNDP). This provides an alternation to the common practice of evaluating a
countrys progress that is based on per capital Gross Domestic Products (GDP).

The three main basic dimensions of human development are:

Basic Dimensions of Human Development

A decent standard of
Longevity Knowledge
living
Long and healthy This is measured by a combination of adult Is measured by GDP per
life measured by life literacy rate and combined primary, secondary capital in PPP (Purchase
expectancy at birth and tertiary gross enrolment ratio. Power Parity in US$).

Table 2.1 Basic dimensions of human development

Before the calculation of the HDI it is necessary to create an index for each of these basic dimensions. To calculate
these indices the life expectancy, education and GDP indicesminimum and maximum values (goalposts) are
chosen for each underlying indicator.

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Business, Government & Society

To Calculate the HDI

The data for the calculation of HDI is used from Costa Rica.

Calculating life expectancy index (LEI)

The life expectancy measures the relative achievements of a country in life expectancy at birth.
Life expectancy index = 78-25/85-25 = 0.884.

Calculating education index (EI)

The education index measures a countrys relative achievement in both adult literacy and combined primary,
secondary and tertiary gross enrolment. Here first the adult literacy and then one of the combined gross enrolment
are calculated.

Later these two indices are combined to create the educational index, with 2/3 weight given to adult literacy and
1/3 weight to combined Gross Enrolment.

As per the Costa Rica adult literacy rate is 95.8 percent in 2002 and combined
Gross enrolment ration is 69 percent in the school in 2001/2002.
Educational index = 2/3(adult literacy index) + 1/3(gross enrolment index)
2/3(0.958) + 1/3(0.690)
Therefore educational index = 0.870

Calculating GDP Index (GDPI)

This is calculated by using adjusted GDP per capita (PPP US$). This measure a countrys overall output. In HDI
income serves as a surrogate for all the dimensions of human development not reflected in a long and healthy life and
also in knowledge. Income is achieved by respectable level of human development as it does not require unlimited
income. Accordingly the logarithm of income is used.
GDP index = log (8840)-log (100)/log (40000)-log (100)
= 0.748

Calculating HDI
Once the dimension indices have been calculated, calculation of HDI becomes easier. It is the simple average of
three dimension indices.
HDI= 1/3(life expectancy index) +1/3(educational index) +1/3(GDP index)
= 1/3(0.884) +1/3(0.869) +1/3(0.748)
= 0.833

2.2 Socio-Economic Protective Legislations

There are many economic protective and legislations that are passed for the consumers and for the public. Some of
these important legislations are as follows:
a. Prevention of Food Adulteration Act. 1954
b. The Drugs and Cosmetics Act, 1940
c. Standards of Weights and Measures Act, 1956
d. Public Liability Insurance Act, 1990

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 Prevention of Food Adulteration Act, 1954
This act was introduced to make provision for the prevention of adulteration of food. In this act, manu-
facture and sale of adulterated or misbranded or substandard food was prohibited. Here the food inspector
has the authority to take a sample of food for analysis. If a manufacture or the sale of adulterated is found
guilty, then there is a penalty of six years imprisonment and also a fine of not less than Rs 1000.
Socio-Economic Protective Legislations

The Drugs and Cosmetics Act, 1940

In this act there is a control over the manufacture, distributor and on sale of the drugs. It also covers the
import of drugs and provides uniformity in maintaining the standard. This is important as drugs are con-
tinually under research and development and there is a use of various organic substances. If the manufac-
ture or the distributor is found guilty, there is a maximum penalty of imprisonment for at least ten years
and confiscation of all property and so on.

Standards of Weights and Measures Act, 1956

This act was based on the metric system to maintain the standard of weight and measures. This act was
enacted by the parliament in the year 1956. The central government has set the standard specifications for
any weight and measures in accordance with the recommendation made by the International Organization
of Legal Metrology.

Public Liability Insurance Act, 1990

This act is for the public as the main purpose of this act is to provide immediate facilities and relief for
the person affected by an accident, while handling hazardous substances. This was enacted in December
1990. This was a first act of this kind that was passed in the world.

Fig 2.1 Socio-economic protective legislations

2.3 Consumer Protection Overview

Consumer protection means safeguarding the rights and interests of consumers. It includes all the measures aimed
at protecting the rights and interests of consumers. Consumers as buyers always lack in bargaining. Manufactures
and traders often follow unfair and unethical practices. Though various legislations that have been enacted, they
have failed to provide any effective protection to the consumers due to lack of effective implementation.

The legislations that are enacted for the consumers are as follows:
Sales of Goods Act, 1930
Essential Commodities Act, 1955
The Prevention of Food Adulteration Act, 1954
Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act, 1980
Standard of Weight and Measures Act, 1956
Agricultural Products Grading And Marketing Act, 1937
Indian Standard Institution Certification Act, 1952
MRTP Act, 1969

2.3.1 Shorting of the Consumer Protection Act, 1986

According to Consumer Protection Act, where a trader or the complainant fails to comply with an order made by
the relevant consumer forum, such person is liable to a punishment with imprisonment for a term which is not less
than one month but which may extend to three years or with fine of not less than two thousand rupees but which
may extend to ten thousand rupees or with both.

The Act needs an important change where negligence is proved on the part of the employees of the public utilities
and governmental organisations and the compensation given to the complainant.

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Business, Government & Society

2.3.2 Dimensions of Consumers Acts, 1986

Consumer protection by advertising bodies: - The Advertising Standard council of India (ASCI) has formulated a
code to ensure the truthfulness and honesty of the representations. They have claims made by the advertisements
to safeguard consumers against offensive and misleading advertisement
Pricing of Package Products: - There is a notification by the Ministry of Food and Civil supplies to indicate that
the price on the label tag on all the products should be inclusive of all taxes
Consumer Education and Research Society: - This body is doing an excellent work by providing education to
various local consumer bodies are also taking up public interest litigation based on various consumer issues
Doctors liable under the consumer Protection Act: - The Supreme Court has declared that there should be medical
practitioners like any other professionals this, was enacted in mid-nineties. The ruling keeps government hospitals
out of the purview of this act on the grounds so that these hospitals provide free services

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Summary
Quality of life is defined as the degree to which a human being enjoys the important possibilities of life. It
depends on a nations income that is capable of indicating obliquely the standard of living. The main parameters
of quality of life are health, safety of the citizen, access to drinking water and environment
The physical quality-of-life index (PQLI) is an effort to measure the quality of life or well-being of a country.
This was developed in the year 1979 by Morris David Morris
The three basic dimensions of human development Index are:
Longevity: A long and healthy life measured by life expectancy at birth
Knowledge: This is measured by a combination of adult literacy rate and combined primary, secondary and
tertiary gross enrolment ratio
A decent standard of living: is measured by GDP per capital in PPP (Purchase Power Parity in US$)
Socio-Economic Protective Legislations are Prevention of Food Adulteration Act. 1954, The Drugs and Cosmetics
Act, 1940, Standards of Weights and Measures Act, 1956 and Public Liability Insurance Act, 1990.
Consumer protection means safeguarding the rights and interests of the consumers

References
Singh, S. S. Consumer Protection in India: Some Reflections [Online]. Available at: <http://consumereducation.
in/cons_book1_final.pdf>. [Accessed 26 April 2011].
The Standards of Weights and Measures Act, 1956 [Online]. Available at: <http://legalapproach.net/legal.
php?nid=259>. [Accessed 26 April 2011].

Recommended Reading
Baron, D. P., 2009. Business and Its Environment, 6th ed., Prentice Hall Publications.
Taperell G. Q., 1974. Trade Protection and Consumer Protection: a commentary on the Trade Practices Act
1974, 3rd ed., Butterworth Publication.
Cunningham, J. P., 1978. The Fair Trading act 1973: Consumer Protection and competition law, Sweet and
Maxwell Publications.

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Business, Government & Society

Chapter III
Industry

Aim
The aim of this chapter is to:

define privatisation

classify the methods of privatisations

explain the concept of disinvestment

Objectives
The objectives of this chapter are to:

enlist the advantages and disadvantages of privatisation in India

describe the industrial reforms

explain the objectives of Monopolies and Restrictive Trade Practices Act, 1969

Learning outcome
At the end of this chapter, you will be able to:

enlist the unfair trade practices

discuss the stages of disinvestment

compare privatisation in India to that of the world

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3.1 Privatisation
Privatisation is the process of transferring ownership of a business, enterprise or public service from the state to the
private sector. This commonly involves complex contractual structure to be put in place and industries are usually
closely regulated
Privatisation is a narrow sense which indicates the transfer of ownership from a public sector that will be
undertaking by a private sector, either partially or wholly
The basic purpose of privatisation is to increase the area of private sector and to limit the area of public sector
operations including heavy industries and infrastructure

Privatisation is a process of involving private sectors in the ownership or the operation of state owned or public
sector undertaking. It can take three forms:
Ownership measures
Organisational measures
Operational measures

3.1.1 Ownership Measures

The degree of privatisation is judged by the extent of ownership transferred from public enterprises to the private
sector. Ownership may be transferred to an individual or co-operate sector. There are some important forms

Forms of Ownership Measures

In this there is 100 percent transfer of ownership from public sector to a
Total Decentralisation
private sector.
In this there is partial transfer of public sector to private. Some of the features
of this are:
Joint Venture
If 25 percent is transferred to private sector than it is clear that the majority
control remains with the public sector.
In this, the sale of assets to a person may use them for the same or some other
Liquidation
purpose. This totally depends on the preference of the buyer.
This is one of the special forms of decentralisation. In this form, ownership
of the enterprise is transferred to the workers who may form a co-operative
Workers co-operative to run the enterprise. The burden of running the enterprise totally depends
on the worker. The workers become entitled to ownership divided besides
earning wages for their services.

Table 3.1 Forms of ownership measure

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3.1.2 Organisational Measures

In this segment there are various measures to a limited state control, they are as follows:

Organisational Measures Forms

A holding It may be designed to take top-level major decisions with a sufficient degree of autonomy for
company operating companies in its hold in their as per their regular operation.
Leasing In this, the government agrees to transfer the use of resources of a public sector to a private sector
for a particular time period. Before making any lease, the bidder is required to give an assurance
of the quantum of profits that is made available for the state. The government reserves the right
to review the lease to the same organisation or to simply grant it to some other bidder
Restructuring In restructuring there are two sub categories
Financial Restructuring: Financial restructuring is the reorganisation of the financial assets and
liabilities of a corporation in order to create the most beneficial financial environment for the
company. The process of financial restructuring is often associated with corporate restructuring,
in that restructuring the general function and composition of the company is likely to impact the
financial health of the corporation
Basic Restructuring: This type of restructuring occurs when the public enterprise decides to shed
some of its activities to be taken up by ancillaries or by small-scale units

Table 3.2 Forms of organisational measures

3.1.3 Operational Measures

The efficiency of a public sector enterprise depends upon the organisational structure. Unless this structure grants a
sufficient degree of autonomy to the operators of the enterprise or develops system of incentive, it cannot raise its
efficiency and productivity. There are measures included as follows:
Grants of autonomy to the public enterprise are decision making. Provisions of this incentive for the workers
and executives remains consistent with the increases in efficiency and productivity
There is freedom to acquire certain inputs from the market with a view to reduce coasts, development of a
criterion for investment planning, and permission to the public enterprise to raise resources from the capital
market to execute plans for diversification.

The basic purpose of the operational measures is to infuse the spirit of private enterprise.

3.2 Disinvestment
Disinvestment is an important component of efforts towards the privatisation. It implies privatisation of public
sectors units.

3.2.1 The Rangarajan Committee on Disinvestment

It has been decided by the Government of India the scheme of disinvestment of quality in Public sector enterprise
which commenced under the Chairpersonship of C. Rangarajan, in the year 1993. There are some important
recommendations of this committee that are as follows:
The best method for disinvestment is offering shares to the general public at fixed price through a general
prospecting. However it is difficult to take decision of disclosing the fixed rate of shares to the public, before
this shares have been traded in the stock market. Once there is normal trading atmosphere created in the market,
then the discloser takes place
The targets of the disinvestments should be decided on the basis of the desirable level of the public ownership in
an activities or unit consistent with industrial policy. There are units that are reserved for the public sectors, the
percentage of the equality disinvested should that the government holds the majority shares and also retains control
over the management. In the other case, the percentage of quality to be divested should be of 74 percents
Instead of year wise target for disinvestment, there should be a clear action plane. To get the best price of
disinvestment there should be stages and sales should be in staggered form

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 If it is necessary disinvestment may include corporatisation of public enterprise, restructuring of finance with a
proper debt-equality gearing and one Independent Regulatory Commission for the sector concerned
A scheme of preferential offer of shares to the workers and employees may be devised. Ten percent of the
proceeds of privatisation may be set apart for lending to public enterprise on the concessional terms for meeting
their expansion and rationalisation needs

3.3 Privatisation in India and the World: Comparison of Political Dynamics

The difference are explained in the below mentioned table
India
Privatisation was implemented in interval
Gradual privatisation is the international norm
Did not satisfied the two conditions of rapid privatisation: Did satisfy at least one of the conditions of rapid
macroeconomic crisis and strong executive
Progress was slow as compared to other countries.
Indian privatisation was of gradual type.
Did not experienced high inflation in privatisation
World
Privatisation was implemented rapidly
Rapid privatisation is the exception
privatisation. Some countries satisfied both of them eg.
Africa and America.
Progress was fast as compared to India.
World privatisation was of rapid type
Experienced high inflation in privatisation.

Table 3.3 Comparison of objectives and disinvestment in India and World

3.3.1 Privatisation or Disinvestment

Principally this was done to raise resources and to overcome the budget deficit. Accordingly the program was labeled
disinvestment and privatisation assiduously avoided

Stages of Disinvestment
Stage 1: The governments privatisation program began as a divestment program. Their main aim was to merely
reduce the governments holding up to 20 percent.
Stage 2: In the next stage of escalation the amount to be divested was increased up to y 49 percentages. Since this
still leaves the government with majority ownership, the fundamental character of the enterprise was unchanged.
And on the other hand there were more resources that were mobilised to overcome the budget deficit
Stage 3: In the following stage, the government decided that it would sell 74 percent of quity and they will remain
with 36 percentages. This indicated that this level is high enough to give it a strong voice in the enterprise

Finally, outright divestment was accepted, for loss marking enterprise and for profitable enterprises. Later government
escalated its commitment from privatising ownership to privatising control.

3.3.2 Privatisation in India

Advantages of privatisation in India
Services: Quality of services is available for all the communities, these services depend upon various factors
such as historical services level, local taxation and possible changes in service requirement.
Operating philosophies: Privatisation states that private firms may be more likely to experiment with different
and creative approaches to service provision, whereas government tends to stick with the current approach since
changes often create political difficulties for elected officials.
Regulatory realities: In some cases, local, state, and federal regulations may determine whether a service can
even be handed over to a private provider.
Public personnel management: They note that governments need to take several important precautions before
handing out a contract in order to avoid litigation and legal liability.

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Competition: Supporters of privatisation often cite that the competitive environment that is nourished by the
practice is a key to its success. If private firms spend more money and employ more people to do the same
amount of work, competition will lead to lower margins, lost customers, and decreased profits.

Disadvantages of Privatisation in India

Reduced public accountability: There is less agency control of a function when performed by a private entity.
Problems can arise relating to public access to service and financial records maintained by the provider, as well
as variations in the quality of services provided to citizens.
Service quality problems: Contractors may reduce costs by cutting corners. This can include creaming clients
(serving only those who don't have many needs) and/or using lower quality materials.
Higher long-term costs: Contractors may not be able to provide services at a lower cost than the state. Firms
may low-ball their initial bid to get a contract, and then substantially increase the cost in subsequent years when
the agency no longer has the staff or authority to perform the service.
Political factors: Using private experts can lend credibility to certain tasks (such as studying a divisive issue)
and reduce the size of government.

3.4 Competition Policy and Law

The implementation of Competition policy and deregulation provides markets with a framework that encourages
market discipline, eliminates distortions and promotes economic efficiency.

There was a committee assigned on Competition Policy and Law on the recommendation that there should be a
new Competition Act and enacted on the advice of committee and the MRTP Acts report. This act was actually
implemented in the year 1969.This commission must be comprised multi-members, renowned and well-educated
persons. These members must be trust worthy and impartial, should have the proper knowledge of Judiciary,
Economics, Law, International trade and Public Affairs.

3.4.1 MRTP: A Redundant Act?

The Monopolies and Restrictive Trade Practices Act, 1969, aims to prevent concentration of economic power to the
common detriment, provide for control of monopolies and probation of monopolistic, restrictive and unfair trade
practice, and protect consumer interest. This act helped the market to protect their position by restricting competition
between the large houses. This provided adverse effects on the market such as; they have retorted competition,
declared growth in industries and also contributed to the foreign trade gap.

Following are some of the unfair trade practices.

False representation
False price and bargain price
Free gift offer and price schemes
Non-compliance of prescribed standards
Harding , destruction and so on.

3.4.2 The New Competition Law

Finding the ambit of MRTP Act inadequate for fostering competition in the market, the Government of India in
October 1999 appointed a high level committee on Competition Policy and Law to advise on the competition law
consonant with international developments, the Government enacted the new Competition Act, 2002 which has
replaced the earlier MRTP Act, 1969.

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The Competition Act has been designed as an omnibus code to deal with matters relating to the existence and
regulation of competition and monopolies. Its objects are lofty, and include the promotion and sustenance of
competition in markets, protection of consumer interests and ensuring freedom of trade of other participants in the
market, all against the backdrop of the economic development of the country. However, the new Competition Act
is surprisingly compact and composed.

3.5 Industrial Reforms

Industrial licensing was considered a major instrument control under the central governments permission which
was essential for both investment in new units and for substantial expansion of capacity in existing units. Hence,
providing license for some Indian industries causes infected diseases in India.

License for the following industries was allotted under the permission of government:
Alcoholic Beverages
Sugar
Cigars and cigarettes
Airplanes and defense products
Electronics
Hazardous chemical products
Pharmaceuticals

For investment in large houses there was a need of special permission under the MRTP Act, this was an additional
instrument to control over the large houses and most of the time their license were abolished. This provided much
greater freedom and flexibility for the Indian industries. Thus, increasing the pressure of competition.

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Business, Government & Society

Summary
Privatisation deals with the trance of business from the sate to private sectors. There are three forms of
privatisation
Ownership measures: In this the degree if privatisation is judged by the ownership transferred from public to
private sector
Organisational measures: the measures which are to regulate the various issues of an organisation
Operational measures: the efficiency of the sectors depends on the organisational structure and this grants degree
of autonomy to the operator
Disinvestment: it is the important component for privatisation and is implied on public sectors. This was set
by the C. Rangarajan
One of the dimensions on which a countries privatisation program can be compared, is speed with which it is
implemented
The main aim of privatisation and disinvestment is to reduce the government holding up to 20 percent
Advantages of privatisation are based on services, operating philosophies, regulatory realities, public personnel
management and competition
Disadvantages of privatisation are as follows; reduced public accountability, service quality problems, higher-
longer terms costs and political factors
Competition Policy and law: The implementation of Competition policy and deregulation provides markets with
a framework that encourages market discipline, eliminates distortions and promotes economic efficiency
The Monopolies and Restrictive Trade Practices Act, 1969, helped the market to protect their position by simply
restricting competitions between the large houses
The New Competition Law is an advance over the archaic MRTP, act and is based on the structure as a factor
Major instrument of the industrial reforms is industrial licensing, as it is under the control of the central
governments permission that required investment in new units and expansion of the existing units

References
The MRTP Act, 1969 [Online]. Available at: <http://www.tax4india.com/indian-laws/consumer-rights/mrtp/
mrtp.html>. [Accessed 26 April 2011].
Privatisation in India [Online]. Available at: <http://www.ilo.org/public/english/region/asro/Bangkok/paper/
privatise/chap3-1.pdf >. [Accessed 26 April 2011].
Competition Policy and Law [Online]. Available at: < http://www.apeccp.org.tw/>. [Accessed 26 April 2011].

Recommended Reading
Donahue, J. D., 1991. The Privatisation Decision: Public Ends, Private Means, Basic Books.
Savas, E. S., 1999. Privatisation and Public-Private Partnerships, 2nd ed., CQ Press Publications.
Vogel, S. K., 1998. Free Market, More Rules: Regulatory Reforms, Cornell University Press.

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