ignou mba ms-03 solved assignments 2010

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IGNOU MBA MS-03 Solved Assignments 2010

MS- 3: ECONOMIC AND SOCIAL ENVIRONMENT

ASSIGNMENT JULY 2010

Course Code : MS-3Course Title : Economic and Social

EnvironmentAssignment Code : 3/TMA/SEM-II/2010Coverage : All Blocks

Attempt All the Questions.

1. “The economic environment of business exercises a strong influence on

the non-economic environment.” Discuss this statement with the help

of examples.

Solution: A business unit is a macro/micro economic unit. The businessenvironment furnishes the macro-economic context within which the firmoperates.-external factors or forces which affect the operation of the businessunit.business firms must demonstrate adaptability as well as adoptability toenvironment. The economic environment of business is a complex one. The business unit has economic relation withGOVERNMENT-CAPITAL MARKET-HOUSEHOLD SECTOR -FOREIGN SECTOR

These different sectors together influence trends and the structure of theeconomy. The design and structure of the economic system is conditioned by the socio-political arrangement which affect the macro-micro economicdecisions. THE NON-ECONOMIC MACRO ENVIRONMENT OF

BUSINESS These non-economic environment is complex and dynamic.Political. Environmental regulations and protection

Tax policieswhat tax hinder the business and what taxes incentives are available]-International trade regulations and restrictions[ does the government encourage exports / with high tariffs on imports]

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-Contract enforcement law/Consumer protection[does the government enforce on consumer protection ]

-Employment laws][ is the government encouraging skilled immigrants with temp. permits]

-Government organization / attitude[ does the government have a very positive attitude towards this industry]-Competition regulation[ are there regulation for limiting competition]-Political Stability[ politically , does the government have a very stable government ]-Safety regulations[ has the government adopted some of the modern safety regulations]-Economic growth[ what is the economic growth rate / what are the reasons ]

-Interest rates & monetary policies[ are the interest rates under control / is there a sound monetary policies]-Government spending[is government spending is significant and is it under control ]-Unemployment policy[what is the employment / unemployment policies of the government ]-Taxation[ has the taxation encouraged the industry ]-Exchange rates[ is there well managed exchange controls and is it helping the industry]

-Inflation rates[ is the inflation well under control ]-Stage of the business cycle[ is your industry is on the growth pattern]-Consumer confidence[ is the consumer confidence is high/ strong and if not, why ]-Income distribution[is there balanced income distribution policy ]-Demographics, Population growth rates, Age distribution[ what is population growth and why ]-Labor / social mobility[ what are the labor policies and is there labor mobility]-Lifestyle changes[ are there significant lifestyle changes taking place--more modernization/why.-Work/career and leisure attitudes[ are the population career minded and are seeking better lifestyle]-Education

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[ what are the education policies / is it successful ]

The economic environment of business unit exercises a strong influence onthe non-economic environment of the business just as the non-economicenvironment can influence the economic environment.

THE ECONOMIC ENVIRONMENT IS BOTH-exogenous.-endogenous.

IT IS DETERMINED AS WELL AS DETERMINING.-social factors affect the economic environement and vice versa.-legal factors affect the econominc environment and vice versa.-educational factors affect the economic environment and vice versa.-political factors affect the economic environment and vice versa.-technological factors affect the economic environment and vice versa.

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Q2. Analyze the Growth and Structure of the Private Sector in India with

special reference to the informal sector.

Solution: The phenomenal growth of private sector of India can be attributed to political will, financial reforms, usage of more advanced technology, young andlarge English speaking working class. The 7-8 % of annual GDP growth rate Indiais the one of the highest growth rate in the world. The last 15 years witnessed a

phenomenal rise of the growth of private sector in India. The opening up of Indianeconomy has led to free inflow of foreign direct investment (FDI) along withmodern cutting edge technology, which propelled India's economic growth.

Previously, the Indian market were ruled by the government enterprises but thescene in Indian market changed as soon as the markets were opened for investments. This saw the rise of the Indian private companies which prioritizedcustomer's need and speedy service. This further fueled competition amongst sameindustry players and even in government organizations. Further, the government of India also divested some of its enterprises to ensure smooth operation of thesecompanies which was otherwise were loss making. It also went further and forged joint venture private Indian companies, especially in sectors like,telecommunication, petroleum, housing and infrastructure. This inculcated healthycompetition and benefited the end consumers, since the cost of service or productscome down substantially.

B grade private Indian companies are also offering lucrative and competitively priced products or service, whose quality is at par with A grade companies. Big

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players of Indian markets have been forced to lower their price bands to remainalive in the competition. Further, these big private Indian companies are offeringmouth watering benefits in the form of gifts, rebates and even holding lucky drawsto stay ahead in the race of 'market supremacy'. Gone are the days when 'brandloyalty, accounted for big customer base. Today, general Indian customers are

trendy, flexible and are extremely flexible with their choice. Steady growth of private sector has sent a sense of urgency and insecurity amongst main market players. Defensive methods of protection of Brands against competitors are becoming popular. Legal instruments like patents, trademarks, industrial designsand copyrights filing has increased many fold and so is counter claim andlitigation. Further, Mergers and Acquisitions, collaborations and licensing has become a popular amongst private Indian companies.

The best thing that has happened to the overall Indian market with the growth of private sector is that it has helped to shed bureaucracy and lengthy official process

and supplemented it by customer eccentric service, good work ethics, professionalism and transparency of accounts.

Some positive effect of the growth of private sector in India are as follows -

* Manufacturing registered 11.9% growth* The passenger vehicles sector grew by 11.61% during April-May 2007* Electricity, gas & water supply performed well and recorded an impressive

growth rate of 8.3%* Construction growth rate rose to 10.7%

* Trade, hotels, transport and communication registered a growth rate of 12%* Financing, insurance, real estate and business services recorded an impressivegrowth rate of at 11% during the 1st quarter of this fiscal

* Exports grew by 18.11% during the 1st quarter of 2007-2008 and the importsshoot up by 34.30% during the same period

* The food sector is estimated to be of US$ 200 billion and it is expected togrow to $310 billion by 2015

* Merchandise Exports recorded strong growth

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.Q3.Briefly discuss why the Industrial Policy of 1956 of 1956 is referred to as

the ‘Economic Constitution’ of the country?

Solution: The Industrial Policy of 1956 resolution makes following observationsin regard to industrial workers and industrial relations. It is necessary that proper amenities and incentives should be provided for all those engaged in industry. Theliving and working conditions of workers should be improved and their standard

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of efficiency raised. The maintenance of industrial peace is one of the primerequisites of industrial progress. In socialist democracy, labor is a partner in thecommon task of development and should participate in it with enthusiasm. Somelaws governing industrial relations have been enacted and a broad commonapproach has developed with the growing recognition of the obligation of both

management and labor. There should be joint consultation and workers andtechnicians should, wherever possible, be associated progressively inmanagement. Enterprises in the public sector has to be set an example in thisrespect.”

To accelerate the rate of economic growth and to speed up industrialisation and, in particular, to develop heavy industries and machine making industries, to expandthe public sector, and to build up a large and growing co-operative sector. To provide opportunities for gainful employment and improving living standards andworking conditions of the people To reduce disparities in income and wealth.To

prevent private monopolies and the concentration of economic power in differentfields in the hands of small numbers of individuals.

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Q4,.Briefly explain the latest trade policy measures for 2008-09 and 2009-10.

Refer to the recent Economic Survey.

Solution: It is a privilege for me to present before you the trade policy for the year 2008-09; the first by a democratic government after a period of nine years. This is

your government and it carries the hopes and aspirations of all of you who havegiven us a very important mandate. Even though your Government has been inoffice for less than 4 months, our endeavor has been to draw up a trade policy thathas a new direction and vision, and will have an impact on the lives of those whoare the most needy. In the recently announced Budget for 2008-09 and in thisTrade Policy, the Government’s focus is to take the benefits of development to thecommon man. Our aim is to encourage our businessmen, entrepreneurs,manufacturers and investors to continue striving to do more in their respectivefields; and we are also striving to ensure that the fruits of any development trickledown to the people at the grass roots level.

We have inherited a very difficult economic situation where the public is facingmore hardships than it has in recent history. This was due to external and internalfactors of the past year. On the external front the most difficult issues were;

• The doubling of international oil prices from around $ 68 per barrel to $145 per barrel during the year.

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• The increase in international prices of food items that Pakistan needed toimport during the year, especially wheat and edible oil.• The slow down in the US economy and turmoil in the internationalfinancial markets thereby reducing external demand for our exports.

On the internal front also we had more than our share of difficulties. This was ayear of constant political instability sparked off by the judicial crisis in March2007. The law and order situation also assumed dangerous proportions in the formof the Lal Masjid affair, the increase in frequency and lethality of terrorist bomb blasts and of course the state of militancy and insurgency in FATA and the NWFP. The saddest occurrence in this regard was the martyrdom of MohtarmaBenazir Bhutto on 27th December 2007 which cast a long and dark shadow on theeconomic and political health of the country. It is estimated that due todisturbances in the five days following this tragic event the loss of our exportrevenues was of the order of $200 million.

Other challenges on the internal front that made it difficult for exporters to fulfilltheir export orders on time and at a competitive price during the year included:-

• Power shortages and resultant load shedding of electricity and natural gas.• Impact of monetary and exchange rate policies, plus supply sideconstraints.• Rising costs of salary bills and raw material, particularly raw cotton.• Increasing competition in export markets,• Travel advisories of foreign governments discouraged importers to continue

sourcing from Pakistan.• Long term structural issues such as labour skills deficiency and poor infrastructure.

Not surprisingly and as a result of these multiple negative factors our economicgrowth rate dropped to 5.8% as compared to 6.8% last year. This slow down was particularly evident in the commodity producing sectors such as agriculture andmanufacturing with serious implications for exports. In fact agriculture overallgrew by only 1.5% as against 3.7% last year and in the two major crops i.e. cottonand wheat there was a negative growth of 9.3% and 6.6% respectively. Themanufacturing sector also saw the weakest growth in a decade, since overall itgrew by 5.4% as compared to 8.1% last year. Large scale manufacturing was evenmore dismal since it registered a growth of only 4.8% as compared to 8.6% lastyear.

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Q5.What are the functions of Development Banks? Describe its Quantitative

and Qualitative roles.

Solution: Development Banks or Development Finance Institutions (DFI’s) asthese are normally called in the financial world are a post World War II

phenomenon. Their establishment in Africa, Asia and other developing countriesin most cases coincided with the attainment of independence.Their mission being “to expedite the pace of development in accordance with thenational priorities and aspirations of the people”. DFI’s fall into two broadcategories viz. national DFI’s and regional DFI’s. Most of the national DFI’s inthe developing world have been in existence for two to three decades. They wereestablished to serve as handmaidens of their governments in the implementation of their development plans.

In places like India, a majority of the applicants for financial assistance from the

DFI’s in the initial stages were existing large industrial houses, or Managingagency firms. These institutions had resources of men, material and money andwere therefore, able to conceive, plan and implement new or expansion projectssuccessfully. Therefore, there was no problem of arrears. In the wake of socialist policies pursued by these newly independent states, further growth of largeindustrial houses and managing agency firms through DFI assistance wasconsidered monopolistic and exploitative of the majority by the minority. Thesewere conceived as institution reminiscent of the former British regime. Thisattitude led to a greater intervention of the state in the regulation and operation of DFI’s, which in almost all cases were state owned.

DEVELOPMENT BANK is vested with the responsibility of co-ordinating theworking of institutions engaged in financing, promoting and developing industries.It has evolved an appropriate mechanism for this purpose. IT alsoundertakes/supports wide-ranging promotional activities includingentrepreneurship development programmes for new entrepreneurs, provision of consultancy services for small and medium enterprises, upgradation of technologyand programmes for economic upliftment of the underprivileged.

DEVELOPMENT BANK 's role as a catalystDFI 's role as a catalyst to industrial development encompasses a wide spectrum of activities. DFI can finance all types of industrial concerns covered under the provisions of the DFI Act. With over three decades of service to the Indianindustry, DFI has grown substantially in terms of size of operations andPORTFOLIO.

Developmental Activities of DFI.Promotional activities

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In fulfilment of its developmental role, the Bank continues to perform a widerange of promotional activities relating to developmental programmes for newentrepreneurs, consultancy services for small and medium enterprises and programmes designed for accredited voluntary agencies for the economicupliftment of the underprivileged. These include entrepreneurship development,

self-employment and wage employment in the industrial sector for the weaker sections of society through voluntary agencies, support to Science and TechnologyEntrepreneurs' Parks, Energy Conservation, Common Quality Testing Centres for small industries.

Technical Consultancy OrganisationsWith a view to making available at a reasonable cost, consultancy and advisoryservices to entrepreneurs, particularly to new and small entrepreneurs, DFI , incollaboration with other All-India Financial Institutions, has set up a network of Technical Consultancy Organisations [ TCOs ] covering the entire country. TCOs

offer diversified services to small and medium enterprises in the selection,formulation and appraisal of projects, their implementation and review.

Entrepreneurship Development InstituteRealising that entrepreneurship development is the key to industrial development,FDI played a prime role in setting up of the Entrepreneurship DevelopmentInstitute of India for fostering entrepreneurship in the country. It has alsoestablished similar institutes in Bihar, Orissa, Madhya Pradesh and Uttar Pradesh.DFI also extends financial support to various organisations in conducting studiesor surveys of relevance to industrial development.

A Development Bank is a multilateral development finance institution dedicated toimproving the social and economic development of its member nations. Its primary emphasis is the welfare of the people. For example the AsianDevelopment Bank's overarching goal is to reduce poverty in Asia and the Pacific.It helps improve the quality of people's lives by providing loans and technicalassistance for a broad range of development activities.

Development bank's policies or programs center on the following priorities:Economic growthHuman developmentGender and developmentGood governanceEnvironmental protectionPrivate sector developmentRegional cooperationGiven below are the principal functions of a development bank:

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• Extend loans and equity investments to its developing member countries (DMCs)for their economic and social development.• Provides technical assistance for the planning and execution of development projects and programs and for advisory services.

• Promotes and facilitates investment of public and private capital for development, and• Responds to requests for assistance in coordinating development policies and plans of itsdeveloping member countries

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Q6. Write short notes on the following:-

a) Restructuring

Solution: a) Restructuring

A significant modification made to the debt, operations or structure of a company.This type of corporate action is usually made when there are significant problemsin a company, which are causing some form of financial harm and putting theoverall business in jeopardy. The hope is that through restructuring, a companycan eliminate financial harm and improve the business.

When a company is having trouble making payments on its debt, it will often

consolidate and adjust the terms of the debt in a debt restructuring. After a debtrestructuring, the payments on debt are more manageable for the company and thelikelihood of payment to bondholders increases. A company restructures itsoperations or structure by cutting costs, such as payroll, or reducing its sizethrough the sale of assets. This is often seen as necessary when the currentsituation at a company is one that may lead to its collapse.Restructuring is the corporate management term for the act of reorganizing thelegal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Alternatereasons for restructuring include a change of ownership or ownership structure,demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning , or buyout. Restructuring may also be described ascorporate restructuring, debt restructuring and financial restructuring.Executives involved in restructuring often hire financial and legal advisors toassist in the transaction details and negotiation. It may also be done by a new CEOhired specifically to make the difficult and controversial decisions required to saveor reposition the company. It generally involves financing debt, selling portions of the company to investors, and reorganizing or reducing operations.

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The basic nature of restructuring is a game. Strategic restructuring reducesfinancial losses, simultaneously reducing tensions between DEBT and EQUITYholders to facilitate a prompt resolution of a distressed situation.Steps:• ensure the company has enough liquidity to operate during implementation of a

complete restructuring• produce accurate working capital forecasts• provide open and clear lines of communication with creditors who mostlycontrol the company's ability to raise financing• update detailed business plan and considerations.Characteristics• Cash management and cash generation during crisis• Impaired Loan Advisory Services (ILAS)• Retention of corporate management sometimes "stay bonus" payments or equitygrants

• Sale of underutilized ASSETS , such as PATENTS or brands• OUTSOURCING of operations such as payroll and technical support to a moreefficient third party• Moving of operations such as manufacturing to lower-cost locations• Reorganization of functions such as sales, marketing, and distribution• Renegotiation of labor contracts to reduce OVERHEAD .• Refinancing of corporate DEBT to reduce interest payments• A major PUBLIC RELATIONS campaign to reposition the company withconsumers• Forfeiture of all or part of the ownership share by pre restructuring stock

holders (if the remainder represents only a fraction of the original firm, it is termeda STUB ).Symptoms indicating the need for organizational restructuring.-New skills and capabilities are needed to meet current or expected operationalrequirements.-Accountability for results are not clearly communicated and measurable resultingin subjective and biased performance appraisals.-Parts of the organization are significantly over or under staffed.-Organizational communications are inconsistent, fragmented, and inefficient.-Technology and/or innovation are creating changes in workflow and production processes.-Significant staffing increases or decreases are contemplated.-Personnel retention and turnover is a significant problem.-Workforce productivity is stagnant or deteriorating.-Morale is deteriorating.eight different types of restructuring:• Relocation: when the activity stays within the same company, but is relocated toanother location within the same country. This differs from outsourcing in so far

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as the activities which are transferred do not belong to an ‘integrated system’ of a broader production (i.e. supply chain).• OUTSOURCING : when the activity is subcontracted or contracted out toanother company within the same country. It is the act of transferring some of thecompany’s recurring internal activities and powers of decision to outside

providers.• Offshoring/delocalisation: when the activity is relocated or outsourced outsideof the country’s borders. The offshored activity may either continue to be owned by the company or may be offshore outsourced.• Bankruptcy/closure: when an industrial site is closed or a company goes bankrupt for economic reasons not directly connected to relocation or outsourcing.• Merger/Acquisition: when two or more companies decide to transfer their assetsinto a single company or during an acquisition which then involves an internalrestructuring programme aimed at rationalising the organisation by cutting personnel.

• Internal restructuring: when a company undertakes a job-cutting plan which isnot linked to another type of restructuring defined above.• Business expansion: when a company extends its business activities, hiring newworkforce.• Other: when a company undergoes a type of restructuring that is not one of theabove types.

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b)Current Account Convertibility

Convertibility of a currency implies that a currency can be transferred into another currency without any limitations or any control. A currency is said to be fullyconvertible, if it can be converted into some other currency at the market price of that currency. If currency has to be convertible, it shall not be subjected to theserestrictions.

Current account convertibility refers to currency convertibility required in the caseof transactions relating to exchange of goods and services, money transfers and allthose transactions that are classified in the current account.

Current account convertibility allows free inflows and outflows for all purposesother than for capital purposes such as investments and loans. In other words, itallows residents to make and receive trade-related payments — receive dollars (or any other foreign currency) for export of goods and services and pay dollars for import of goods and services, make sundry remittances, access foreign currencyfor travel, studies abroad, medical treatment and gifts etc. In India, current account

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convertibility was established with the acceptance of the obligations under ArticleVIII of the IMF’s Articles of Agreement in August 1994.

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c)Industrial Location

Why do firms locate where they do? There is no single answer—different firmschoose their locations for different reasons. Key determinates of a locationdecision are a firm's factors of production. For example, a firm that spends a large portion of total costs on unskilled labor will be drawn to locations where labor isrelatively inexpensive. A firm with large energy demands will give more weight tolocations where energy is relatively inexpensive. In general, firms chooselocations they believe will allow them to maximize net revenues: if demand for goods and services is held roughly constant, then revenue maximization is

approximated by cost minimization.

The typical categories that describe a firm's production function are:

• Labor. Labor is often and increasingly the most important factor of production.Other things equal, firms want productivity, in other words, labor output per dollar. Productivity can decrease if certain types of labor are in short supply,which increases the costs by requiring either more pay to acquire the labor that isavailable, the recruiting of labor from other areas, or the use of the less productivelabor that is available locally.

• Land. Demand for land depends on the type of firm. Manufacturing firms needmore space and tend to prefer suburban locations where land is relatively lessexpensive and less difficult to develop. Warehousing and distribution firms needto locate close to interstate highways.• Local Infrastructure. An important role of government is to increase economiccapacity by improving quality and efficiency of infrastructure and facilities, suchas roads, bridges, water and sewer systems, airport and cargo facilities, energysystems, and telecommunications.• Access to Markets. Though part of infrastructure, transportation merits specialattention. Firms need to move their product, either goods or services, to themarket, and they rely on access to different modes of transportation to do this.While transportation has become relatively inexpensive compared to other inputs,and transportation costs have become a less important location factor, access totransportation is still critical. That long-run trend, however, could shift because of decreasing funds to highway construction, increasing congestion, and increasingenergy prices.• Materials. Firms producing goods, and even firms producing services, needvarious materials to develop products that they can sell. Some firms need natural

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resources: a manufacturing sector like lumber needs trees. Or, farther down theline, firms may need intermediate materials: for example, dimensioned lumber.

• Entrepreneurship. This input to production may be thought of as goodmanagement, or even more broadly as a spirit of innovation, optimism, and

ambition that distinguishes one firm from another even though most of their other factor inputs may be quite similar.The supply, cost, and quality of any of these factors obviously depend on marketfactors: on conditions of supply and demand locally, nationally, and even globally.

But they also depend on public policy. In general, public policy can affect themthrough:• Regulation. Regulations protect the health and safety of acommunity, and help maintain the quality of life. However, simplified bureaucracies and straightforward regulations can help firms react quickly in a

competitive marketplace.• Taxes. Firms tend to seek locations where they can optimize their after-tax profits. But tax rates are not a primary location factor, they matter only after corporations have made decisions on labor, transportation, raw materials, andcapital costs. Within a region, production factors are likely to be similar, sodifferences in tax levels across communities are more important in the locationdecision than are differences in tax levels between regions.• Financial incentives. Governments offer firms incentives toencourage growth. Generally, economic research has shown that most types of incentives have had little significant effect on firm location between regions.

However, for manufacturing industries with significant equipment costs, propertyor investment tax credit or abatement incentives can play a significant role inlocation decisions. Incentives are more effective at redirecting growth within aregion than they are at providing a competitive advantage between regions.Firms locate in a city because of the presence of factors other than direct factors of production. These indirect factors include agglomerative economies, also knownindustry clusters, location amenities, and innovative capacity.• Industry Clusters. Firms tend to locate in areas where there is already aconcentration of firms like their own. The theory works in practice because firmsrealize operational savings and have access to a large pool of skilled labor whenthey congregate in a single location.

• Quality of Life. A region that features many quality amenities, such as goodweather, recreational opportunities, culture, low crime, good schools, and a cleanenvironment attracts people simply because it is a nice place to be. A region'squality of life attracts skilled workers, and if the amenities lure enough potentialworkers to the region, the excess labor supply pushes their wages down so thatfirms can find skilled labor for a relatively low cost.

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• Innovative capacity. Increasing evidence suggests that a culture promotinginnovation, creativity, flexibility, and adaptability will be essential to keepingMANY cities economically vital and internationally competitive. Innovation is particularly important in industries that require an educated workforce. High-techcompanies need to have access to new ideas typically associated with a university

or research institute. Government can be a key part of a community's innovativeculture, through the provision of services and regulation of development and business activities that are responsive to the changing needs of business.

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ignou mba ms-03 solved assignments 2010

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