FYBCAF – Business Environment – I Semester – I-munotes

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1 1
BUSINESS OBJECTIVES
Unit Structure:
1.0 Objective s
1.1 Introduction
1.2 Business Objectives
1.3 Dynamics of Business and its Environment
1.4 Types of Business Environment
1.5 Summary
1.6 Exercise
1.0 OBJECTIVE S:
After studying this unit the student wi ll be able to –
 Understand the concept of Business and its Functions and
Characteristics
 Know the dynamics of business and its environment
 Explain the concept of Business Environment
 Discuss the Types of Business Environment
1.1 INTRODUCTION:
About Busine ss:
Meaning
The term business refers to an organization or an enterprise engaged in
any commercial, industrial, or professional activity. Some businesses are
profit oriented, whereas some are non -profit that operate for a charitable
mission or to serve so ciety. In terms of capital formation and management
- businesses can range from sole proprietorship to partnership firms, to
multinational companies at large (private or public limited).
Traditionally business included activities aimed at making profit th rough
production and marketing. What the organizations produced, was sold to
the customers without much of a choice. But now, in the present day
context, it has become more of customer oriented and service oriented
than the traditional method.
For example, Uber and Ola started with the concept of aggregating taxi
drivers and providing transportation services to the customers under their
brand name. munotes.in

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Business Environment - I
2 Business is a generic term which comprises of all primary and ancillary
activities which are involved in the p roduction and distribution of goods
and services.
1.1.1 Definitions of business
1. According to Keith Davis, “Business may be defined as any form of
commercial activity to satisfy the economic wants of people at a
profit.”
2. According to Lewis H. Haney, “ Business is a human activity directed
towards producing or acquiring wealth through buying and selling
activities”.
3. According to James Steph enson , “business is the sum total of all the
processes that are engaged inthe removal of hindrances of persons
(trade), place (transport and insurance, and time (warehousing) in the
exchange (banking) of commodities .
4. According to Merriam -Webster Dictionary, “business is the activity of
making, buying, or selling goods or providing services in exchange for
money .”
1.1.2 FUNCTIONS / NEED of BUSINESS:
1. The prime function of business is meeting and satisfying the needs of
customers through regular supply of goods and services.
2. Business plays a key role in generating employment opportunities. It
can be self -employment ( entrepreneurship) or in different areas such
as production, marketing, logistics and supply chain management,
banking, finance, insurance, etc.
3. Business contributes to government revenue through various taxes,
duties and fees.
4. Business touches all aspects of personal and social life of people due
to its reach of varied goods and/or services.
5. In order to make a country rich, strong and self sufficient, business
facilitates industrial and service development which leads to increased
foreign exchange by export ing goods and/or services. This also caters
to capital formation in the economy.
1.1.3 CHARACTERISTICS OF BUSINESS:
1. Economic Activity: Business is primarily an economic activity as it
undertakes production and distribution of goods and/or services for
satisfying customer wants.
2. Risk and uncertainty: Businesses are subject to risks and
uncertainties. This may be due to a number of possible reasons like munotes.in

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Business Objectives

3 loss due to fire or theft, change in consumer demand, taste and
preferences, socio -economic changes and stif f market competition.
3. Regularity in Dealings: Business transactions must be regular in
nature. It involves frequent exchange of goods and services.
4. Profit Motive: The primary objective of business is profit
maximization. Earning of profits is important fo r growth, expansion
and survival of business.
5. Legal Activity: All businesses are governed under various applicable
laws for example The Indian Partnership Act, 1932, Indian Contract
Act, 1872, Indian Companies Act, 2013. Hence it should conduct
legal and l awful activities.
1.2 BUSINESS OBJECTIVES
A Business objective is the result that the enterprise aims to achieve
during the course of time. It includes the strategies that owners or
managers adopt to achieve its goals. Business objectives are the future
destinations of an organization.
Business objectives are the specific and measurable results organisations
hope to maintain as theygrows.Business objectives act as a parameter for
the company, showcasing the organization al strengths, weaknesses and
opport unities that may be available. Objectives are generally constant, but
may change as the situations may demand.
1.2.1 Definitions of Business Objective:
1. According to D.E. McFarland , “Objectives are the goals, aims or
purposes that organizations wish to a chieve over varying period of time.”
2. According to Koontz and O’Donell , “Objectives are the ends towards
which activities of any enterprise or department or project within it, are
aimed.”
1.2.2 SMARTObjectives:
Objectives are set in all key areas of bus iness/operations – production,
marketing, finance, H.R., etc . Business Objectives need to be SMART.
 S – Specific – Provide a clear description of what needs to be
achieved.
o Example: Increase the number of monthly users of Netflix
mobile app by optimizing the app -store listing and creating
targeted social media campaigns.
 M – Measurable – Include a metric with a target that indicates
success. munotes.in

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Business Environment - I
4 o Example: Increase the number of monthly users of Netflix
mobile app by 1,00,00,000 by optimizing the app-store listi ng
and creating targeted social media campaigns for four social
media platforms : Facebook, Twitter, Instagram, and LinkedIn.
 A – Achievable – Set a challenging target, but keep it realistic.
o Example: Increase the number of monthly users of Netflix
mobile app by 1,00,000 by optimizing the app-store listing and
creating targeted social media campaigns for three social media
platforms : Facebook, Twitter, and Instagram.
 R – Relevant – Keep your goal consistent with higher -level goals.
o Example: Increase the num ber of monthly users of Netflix
mobile app by 1,00,000 by optimizing the app-store listing and
creating targeted social media campaigns for three social media
platforms: Facebook, Twitter, and Instagram. Because mobile
users tend to use our product longer, growing our app usage
will ultimately increase profitability .
 T – Time Bound – Set a date (time -frame) when your goal needs
to be achieved.
o Example: Increase the number of monthly users of Netflix
mobile app by 1,00,000 by optimizing the app-storelisting and
creating targeted social media campaigns, which will begin
running in February 2022 , on three social media platforms:
Facebook, Twitter, and Instagram. Since mobile is our primary
point of conversion for paid -customer signups, growing our app
usage wil l ultimately increase sales.
1.2.3 Types of Business Objectives
Business objectives can be classified into five broad categories. They
include:
1. Economic : refers to earning profits, wealth creation and
appreciation, customer acquisition, innovation, optimum utilization
of resources.
2. Social : includes –sustainability in production activities, regular
supply, adoption of fair trade practices, fair wages, and contribution
to general societal welfare.
3. Organic : places attention on – survival, growth and corporate image
of the business.
4. Human : deals with considering the needs of employees by providing
competitive wages/salaries, good working conditions, labor
participation in management munotes.in

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Business Objectives

5 5. National / Global : specifically relate to the national/global economy
and includ es – increasing national income, promoting exports,
national self -sufficiency, global presence and leadership.
The following table gives an overview of types of business objectives:
Economic Social Organic Human National/Global
Profit
Maximization,
Wealth
creation,
Creation of
Customers,
Innovation,
etc. Customer
Satisfaction,
Steady supply
of
goods/services,
Fair trade
practices,
Fair wages,
Fair Dividend,
etc. Survival,
Growth ,
Recognition
/Image Fair
Treatment of
employees,
Proper
working
conditions,
Workers
participation,
Appraisal &
Job
Satisfaction,
etc. Industrial Growth &
Expansion,
Self-Sufficiency,
Employment
Generation,
Global Presence &
Competitiveness,
Social Justice, etc.

1.3 BUSINESS ENVIRONMENT:
Business Environment is the most importan t aspect of any business
organization. A Business Environment is the sum or collection of all
internal and external factors such as employees, organizations products/
services, customers, management, suppliers, shareholders/ owners,
investors, government, economic conditions, competitors, etc. These
factors affect the functioning of the organization directly or indirectly.
Even after a business is created, its entrepreneurs and managers must
continuously monitor the environment so that they can forecast cu stomers
demands and make product/service changes accordingly. Business
Environment helps organizations to identify business opportunities,
determine growth, profitability and plan strategies accordingly.
Definitions:
According to Keith Davis, “Business Env ironment is the aggregate of all
conditions, events and influences that surround and affect the business.”
According to Prof. Weimer ,“Business Environment encompasses the
climate or set of conditions -economic, social, political orinstitutional in
which bus iness oper ations are conducted.”
1.3.1 Dynamics of Business and its Environment
Business and its prevailing environment are closely related. There is a
significant interdependence or interrelation between business and
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Business Environment - I
6 Growth and Profitability of businesses depend on the environment under
which the business operates. Following points suggest the interdependence
between business and its environment:
1. Business management is always within the framework of
environmental variables. The environmental v ariables provide
opportunities and threats to businesses. Neglecting the environmental
forces may lead to the danger of survival of business.
2. Business has limited capacity to influence the external environment
3. Businesses need to maintain constant link with the environmental
forces and need to adjust its activities in line with the developments
taking place in the business environment
4. Business enterprises have to consider the total business environment
and not any particular component in isolation inorder to survive and
progress.
1.4 TYPES OF BUSINESS ENVIRONMENT
Business environment can be classified into two major types i.e. Internal
Environment and External Environment.
Internal Environment refers to the factors within the organization eg.
Mission and Vis ion, policies and programmes, organizational structure,
employees, financial and physical resources. These factors can be altered
hence known as controllable factors. Internal environment helps the
business enterprise to identify its Strengths and Weakness .
External Environment refers to the factors outside the organization. These
factors are mostly uncontrollable and are further classified into two
segments – micro and macro environment.
1.4.1 . Internal Environment:
The major factors affecting business dec ision are:
i) Value system: The success of any organization depends upon the
sharing of value system by all members. The values of the business
owner/founder seep down to the entire organization and have a
significant effect on the organization.Organisations with a strong
culture of ethical standards and value system are highly preferred by
external associates like suppliers, distributors or financial
institutions.
ii) Vision & Mission: Vision states the future orientation of a business
organization, where the organization wants to be in the future.
Mission reflects the vision statement, as it reflects the basic purpose
and philosophy of the organization and gives a clear idea of its long
run commitment. Eg. The mission statement of Himalaya is to munotes.in

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Business Objectives

7 establish Himalaya as a science -based, problem -solving, head -to-
heel brand, harnessed from nature's wealth and characterized by
trust and healthy lives.
iii) Organisational Structure and functioning :The type of
organizational structure – tall or flat and the style of f unction of the
management, the level of professionalism of management and
composition of the board of directors are various factors that
affects organizational decision making
iv) Human Resources: The success of an enterprise is solely
dependent on its manp ower. Therefore the quality, skill
competency, right attitude and commitment of its human resources
is essential for the success of an organisation.
v) Policies & Procedures:
Policies are statements that guide decision making. It defines the
boundaries w ithin which decisions can be made. Eg. Credit Policy
for Creditors/Debtors, dealing with customers, sales policy etc.
Procedures are plans that establish a required method of handling
future activities.
vi) Other Factors:
 Research and development
 Marketi ng and distribution network
 Physical resources - plant, building , machinery
 Technology advancement
1.4.2. External Environment:
All those factors outside the organization which provide opportunities or
pose a threat to the organization make up the external environment.
It can be further divided into two major components - Micro and Macro.
a) Micro Environment : Micro environment or task environment refers to
those individuals, groups and agencies with which the organisationscomes
into direct and frequent con tact in the course of its functioning.According
to Philip Kotler , “The micro environment consists of factors in the
company’s immediate environment which affect the performance of the
business unit. These include suppliers, marketing intermediaries ,
competitors, customers and the public.”
Micro environment consists of the following elements:
1. Customers : The people that buy an organizations goods or services
are its customers. In order to be successful the organization must
understand and meet the ne eds and expectations of the customers. munotes.in

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Business Environment - I
8 There may be different types of customers like individuals,
households, Government departments, commercial establishments, etc.
For example, the customers of a paper company may include students,
teachers, educational institutions, business firms and other users of
stationery.
2. Competitors : All organizations face competition at local, national and
global levels. They may have both direct and indirect competitors.
Direct competitors are the other firms which offer the same or similar
products and services. For example, Sony TV faces direct competition
from other brands like LG, Samsung, MI, One Plus , etc. Indirect
competition comes from firms vying for discretionary income. For
example, a cinema house faces indirect comp etition from Casino, and
other firms marketing entertainment.
3. Suppliers: Suppliers are those who supply the inputs like raw material ,
labour and components to the company. Organizations should ensure
that their suppliers are reliable, offer uninterrupted supply and if
possible, they should keep multiple suppliers. There should be a
strong, positive, and healthy relationship between the organization and
its suppliers.
4. Marketing Intermediaries: Marketing intermediaries help and
support the organization to pr omote, sell and distribute its
products/services. Middlemen like wholesalers, agents, and retailers
serve as a link between the organization and its consumers. Dabur
India, Maruti Suzuki, Xaomi, Patanjali are some companies that have
exhibited a successful countrywide retail distribution network
5. Financers: The Shareholders, Investors, financial institutions, banks
and debenture holders provide finance to business organizations. The
firms financial capacity, policies and attitudes of investors/financers
are very important factors.
6. Publics: Publics include all those groups who have an actual or
potential, interest in the company or who influence the company’s
ability to achieve its objectives. Media groups, environmentalists, non -
government organizations (NGOs ), consumer associations and local
community are examples of publics.
b) Macro Environment: The external macro environment determines the
opportunities for a firm to exploit for promoting its business . It also
presents threats in the sense that it can put restrictions on the expansion of
business activities.The macro environment forces are less controllable
than the micro forces.
According to Philip Kotler , “Macro environment includes forces that
create opportunities and pose threat to the business unit. It includes
economic, demographic, natural, technological, political and cultural
environments.” munotes.in

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Business Objectives

9 Macro Environment consists of the following components:
i. Demographic Environment
ii. Political and Legal Environment
iii. Social and Cultural Environment
iv. Economic Environm ent
v. Technological Environment
vi. Natural/Ecological Environment
vii. Global Environment
i. Demographic Environment: It refers to various dimensions of the
country’s population like size of population, growth rate, gender
ratio, age composition, income level, education level, family size,
family structure etc. The demographic environmentdiffers from one
country to another and from one region to another within a country .
Business firms use the demographic factors as a basis for market
segmentation.
Availability of skill labor in certain areas motivates the firms to set
up their units in such area.For example, the business units from
America, Canada, Australia, Germany, UK, are coming to India due
to easy availability of skilled manpower

ii. Political and Legal Environment: Political environment comprises
the elements relating toGovernment affairs. It serves as the
regulatory framework of business. A stable and dynamic political
environment is essential for business growth. Whenever there is a
change in the Government in a de mocratic country, it is a sign of
change in economic policies. The Political environment of business
depends on:
1. Ideology of the Government
2. Political Establishment
3. Political Stability in the country
4. Relations with other countries
5. Defense and Military Policy
6. Centre State Relationship
7. Approach of Opposition parties towards business

Legal environment constitutes the laws framed by the Government
and various legislations passed in the parliament . These legislations
cannot be overlooked by the businessman.

Some of the main legislations regulating the business are as follows:
1. Industries (Development and Regulation) Act, 1951
2. The Factories Act, 1948
3. Consumer Protection Act, 1986 munotes.in

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Business Environment - I
10 4. Companies Act, 2013
5. The Indian Partnership Act, 1932
6. Foreign Exchange Management Act , 1999
7. Securities and Exchange Board of India Guidelines, 2000

iii. Social and Cultural Environment : Since business is an integral
part of society , both influence each other. These socio -cultural
factors include: att itude of people, family system, caste system,
religion, education, marriage, habits and preferences, languages,
urbanization, customs and traditions, ethics etc. Socio -cultural
environment determines the code of conduct the business should
follow.
In Delhi, the polluting industries (of F category) have been closed by
the orders of the Supreme Court . Also certain food products (meat),
alcoholic liquor for human consumption, etc are banned in certain
states and regions in India.

The culture prescribes and tea ches what an individual learns and
accepts . All language, customs, habits, values, and attitudes are
culturally derived. In some ways, the culture overwhelms the
individual . Every society depends on its culture to instill normative
behaviour into the popul ace so that it can be maintained and survive.

iv. Economic Environment : Economic environment includes the type
of economic system that exists in the economy, the nature and
structure of the economy, the phase of the business cycle (for
example, boom or recess ion), the fiscal, monetary and financial
policies of the Government, foreign trade and foreign investment
policies of the government , gross domestic product, per capita
income, markets for goods and services, availability of capital,
foreign exchange reser ve, growth of foreign trade, strength of capital
market, etc.
Favorable economic environment brings rapid expansion of business
activites.

v. Technological Environment : It comprises the knowledge of latest
technological advancements and scientific innovation s to
improve the quality and relevance of goods and services.
Business organisations need to keep track of the technological
environment to avoid obsolescence, satisfy customers needs and
face stiff competition.
For example, watch companies have started ma nufacturing smart
watches along with traditional watches. Nokia, a renewed
smartphone brand lost its market share due to the launch of
Android systems.
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Business Objectives

11 vi. Natural/Ecological Environment : Natural environment is the
ultimate source of many inputs such as raw m aterials, energy which
business firms use in their productive activity . These factors include
the availability of natural resources, weather and climatic condition,
location aspect, topographical factors, etc .
Government policies to maintain ecological bal ance and
conservation of natural resources put additional responsibility on the
business organisations.

Some significant laws relating to ecological environment in India
are:
 Environment Protection Act 1986,
 Forest (Conservation) Act 1980,
 Wildlife Protec tion Act 1972
 The Air (Prevention and Control of Pollution) Act 1981,
 The Water (Prevention and Control of Pollution) Act, 1974
vii. Global Environment :It is important for industries directly
depending on import and export. The global environment consists of
all those factors that operate at the transnational, cross -cultural and
cross -border levels which have an impact on the business of the
organization.
Some of the important factors that influence the global environment
are:
 Globalisation and Liberalisation
 International agreements and declarations
 International terrorism
 Global market and competitiveness
 Global human resources, availability and quality of skills and
expertise, mobility of labourers and other skilled personnel
1.5 SUMMARY
In this unit you stu died the concept of business in detail. Business refers to
buying and selling of goods and services for profit. .
Businesses play a key role in generating employment opportunities,
contribute to government revenue in the form of taxes and making a
country s elf reliant .
Business objectives are the specific and measurable results organisations
hope to maintain and they are classified under five broad categories
namely – Economic, Social, Organic, Human, National/Global. munotes.in

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Business Environment - I
12 Business environment is the sum of inter nal and external factors of an
organization. Its two major types are – Internal and External .
Internal Environment consists of - Value system, Vision & Mission,
Organisational Structure and functioning, Human Resources, Policies &
Procedures
External Envir onment Consists of –Micro and Macro Environment
Micro Environment Macro Environment
Customers, Competitors,
Suppliers, Marketing
Intermediaries, Financers,
Publics Demographic, Political and Legal,
Social and Cultural,
Economic,Technological,
Natural/Eco logical, Global

1.6 EXERCISE
FILL IN THE BLANKS
1. The main objective of society and business is ______________
(economic and social objective , technological objective , cultural
objective )
2. A company is affected by two broad set of factors that are _______
(Local and regional , Internal and external , Financial and non -
financial )
3. ________ is a statement which derives the role that an organization
plays in a society (Mission , Objective , Goals )
4. ________ environment is beyond the control of the business (Internal ,
External , Micro )
5. Study of human population is called as _______ environment
(Demographic , Economic , Social )
6. Consumer protection Act was enacted in the year ______ ( 1989 , 1981 ,
1986 )
7. Liberalization means _______
(a) Reducing number of reserved industries from 17 to 8 (b) Liberating the industry, trade and economy from unwanted
restrictions (c) Opening up of economy to the world by attaining
international competitiveness

8. _______ environment constitutes the laws framed by the Government
and various legislations passed in the parliament (Legal ,
Technological, Global) munotes.in

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Business Objectives

13 9. Micro environment is also called as _______ environment (Global,
operating , economic)
TRUE OR FALSE
1. The element of risk and uncertainty is very high in business – TRUE
2. A single transaction of buying and selling also constitutes business –
FALSE
3. Business objectives need not be multiple – FALSE
4. Survival, growth and recognition are organic objectives of business –
FALSE
5. Business Environment is the aggregate of all cond itions, events and
influences that surround and affect it – TRUE
6. Unfavorable changes in the environment bring opportunities to the
business - FALSE
MATCH THE PAIRS
Group A Group B
a) Economic Objective of
Business i) Basic Philosophy
b) Fair trade practices ii) Socia l Objective
c) Fair wages, good working
conditions and motivation iii) Organic Objectives
d) Mission iv) Profit
e) Survival, growth and Prestige v) Human Objectives

Answers: (a – iv), (b - ii), (c –v), (d - i), (e – iii)
ANSWER IN BRIEF
1. What is business? Explain its char acteristics.
2. Explain the internal components of Business Environment
3. Explain the external components of Business Environment
4. Discuss the dynamics of business and its environment.

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14 
2
ENVIRONMENTAL ANALYSIS
Unit Structure:
2.0 Objective s
2.1 Introduction
2.2 Importance
2.3 Factors
2.4 PESTLE Analysis
2.5 SWOT Analysis
2.6 Summary
2.7 Exercise
2.0 OBJECTIVES:
After studying this unit the student will be able to –
 Understand the co ncept of Environmental Analysis and its
importance.
 Know the factors affecting Environmental Analysis
 Explain PESTLE Analysis Model.
 Elaborate SWOT Analysis and get an overview of its factors
2.1 INTRODUCTION:
Environmental analysis is a process to id entify the internal and external
elements which can impact organizational performance. Environmental
analysis is a strategic tool.It helps in assessing the level of opportunities or
threats which the organisations might encounter. It aids to align
organiza tional strategies with the business environment.
Environmental analysis requires information inputs which can be gathered
from:
 Forecasting
 Management information systems munotes.in

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Environmental Analysis
15  Reports, journals, newspapers
 Human resources / sales personnel’s
 Competitors and gov ernment policies
Environmental Analysis is also called environmental scanning.Some
typical external environment issues include:
 Economic environment
 Socio -cultural environment
 Legal -Political environment
 Technological environment
 Natural environment
 Global environment
2.2 IMPORTANCE OF ENVIRONMENTAL ANALYSIS:
1. SWOT Analysis: The systematic study of the internal and external
environment of an organization will reveal some significant
information i.e. strengths, weakness, opportunities and threats
(SWOT). Base d on the organizational SWOT analysis, they can make
necessary changes in the organizational structure, mode of operation,
customer segmentation and product planning and management.
2. Optimum use of resources: With effective environmental analysis, we
can ens ure optimum use of resources. The business organizations can
forecast demand and prepare future projections and alternative plans.
Arrangement of required resources can be made, employees can be
trained accordingly and hence it can help in reducing wastage s
3. Accomplishment of Goals/Objectives : The top level management,
middle level management and lower level management need to devise
organizational goals/objectives. Environmental analysis helps in
identification and formulation of organizational goals. This will ensure
effective management of resources, development of plans and policies
to accomplish short term, medium term and long term
goals/objectives.
4. Monitor & Control: Environmental analysis equips organizations to
monitor and control its operations bas ed on the prevailing market
trends. Based on the formulated plans, the managers can set standards
and monitor the resources. In case of any differences or deviations,
they can implement various control measures to avoid losses. munotes.in

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Business Environment - I
16 5. Face Competition: Business or ganizations face cut -throat competition
at all times. There are price wars, quality and technology up
gradations, encroachment in new markets, new product developments
that have an adverse impact on business operations. Environmental
analysis leads the bus iness organizations to conduct market research
and formulate effective strategies.
6. Market Knowledge: The Macro and Micro External Environment are
dynamic in nature.The needs and wants of customers, growing
demand, competitors, are ever present and keep chan ging.
Environmental analysis makes the organizations aware of ongoing
changes in the market. It helps the organization to incorporate
strategic changes in its plans and policies in order to achieve the set
objectives.
7. Social Acceptance: Environmental anal ysis orients the business to be
customer focused. Business organizations should appeal to diversified
social groups. A wide social acceptance builds a win -win situation for
businesses and brings them success.
2.3 FACTORS AFFECTING ENVIRONMENTAL
ANALYSIS:
1. The availability and services of skilled and qualified workforce are
required to conducted impartial environmental analysis. This can be
achieved by scientific recruitment and selection, performance appraisal
and timely training and development programmes
2. Political stability within the national boundaries facilitates a fair
environmental analysis which in turns affects the growth and
expansion of businesses.
3. Economic reforms, globalization, liberalization of norms help in
creating favorable industrial climat e in the nation. This facilitates
advancement of business activities
4. Foreign direct investment (FDI) in various sectors has given support
and a positive breakthrough to the economy - 100% FDI for insurance
intermediaries and increased FDI limit in the insu rance sector to 74%
from 49%.
5. Information Technology and technological upgradation is
enhancing business practices around the world. This has promoted
exports and facilitated economic growth.
6. Government initiatives like Digital India, Cashless Economy, Ma ke
in India, etc. have encouraged business inclusion and rendered a
positive change for the Indian Economy. This has brought a significant
change in environmental analysis munotes.in

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Environmental Analysis
17 7. Population growth and shift in the demographics from rural to urban
areas create new opportunities before business community
2.4 PESTLE ANALYSIS
PESTLE Analysis gives a birds eye view of the external business
environment to facilitate planning and achieve organizational success. A
PESTEL analysis is used to identify threats and weaknes ses which are
used in a SWOT analysis.
PESTLE stands for:
 P – Political
 E – Economic
 S – Socio -cultural
 T – Technological
 L – Legal
 E – Environmental
PESTLE was coined by Hayward Professor Francis Aguilar in 1967 and
can work alone or in combination wi th other tools like SWOT analysis or
Porter’s Five Force’s, inorder to determine the organizations overall
outlook.
It is a tool used by marketers to analyze and monitor external factors that
impact the organization.
There are few questions that have to be kept in mind while conducting
PESTLE analysis. They are:
 What is the political situation of the country and how can it affect the
industry?
 What are the prevalent economic factors?
 How much importance does culture have in the market and what are its
determinants?
 What technological innovations are likely to pop up and affect the
market structure?
 Are there any current legislations that regulate the industry or can
there be any change in the legislations for the industry?
 What are the environmental conce rns for the industry?
Each of the above mentioned factors – Political, Economic, Social,
Technological, Legal to Environmental have a significant impact on the
organizations but these may differ from one industry to another. munotes.in

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Business Environment - I
18 PESTLE Analysis can be further elaborated as follows:
1. Political : Political factors extend to the degree of intervention f the
government in the economy. The government introduces and at times
revises the legislations to run the economy efficiently such as – tariff
and trade restrictions , taxation policies, consumer protection laws. Etc.
For Example, the introduction of GST on 1st July, 2017 had a
significant impact on various sectors of the economy
2. Economic : Economic performance of the country influence economic
environment. These facto rs include – economic growth rates, interest
rates, exchange rates , inflation, unemployment rates, infrastructure
development, etc. The economic environment may affect how a
company prices their products or influence the supply and demand
model.
3. Socio -cultural: Business organizations have responsibility towards the
society. Social factors, such as demographics and culture can impact
the industry environment by influencing peak buying periods,
purchasing habits, and lifestyle choices. Social factors can i nclude -
Religion and ethics, Consumer buying patterns, Demographics,
Health, Opinions and attitudes, Media, Brand preferences, Education,
etc.
4. Technological : Technological advancements is one of the most
important factors influencing business environment . Technological
factors are linked to innovation in the industry, as well as innovation in
the overall economy. Not being up to date with the latest trends of a
particular industry can be extremely harmful to operations.
Technological factors include the f ollowing - · Automation,
Technological development, Patents, Licensing, Communication,
Information technology, Research and Development, Technological
awareness, etc.
5. Legal : Legal factors affect both the internal as well as external
environment. Generally legal factors include – laws relating to
company formation, factory administration, foreign exchange
regulations, industrial licensing, payment of wages, etc. The legal and
regulatory environment can affect the policies and procedures of an
industry, and c an control employment, safety and regulations. Some of
the main legislations regulating the business are as follows:
1. Industries (Development and Regulation) Act, 1951
2. The Factories Act, 1948
3. Consumer Protection Act, 1986
4. Companies Act, 2013
5. The Indian Partnership Act, 193

6. Environmental : Environmental factors include all those relating to the
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Environmental Analysis
19 requirements. Environmental factors concern the ecological impacts on
business. Key environ mental factors include the following: Weather
Conditions, Temperature, Climate Change, Pollution, Natural disasters
(tsunami, tornadoes, etc.)
2.5 SWOT ANALYSIS
SWOT is the Acronym for STRENGTHS, WEAKNESS,
OPPORTUNITIES and THREATS.
SWOT analysis is an imp ortant tool which can help you to analyse what
your organization does best at the present moment, and to frame
successful strategies for the future. It is used at regular intervals and
enables managers to achieve its performance with ease.
A SWOT analysis examines the organisations internal strengths and
weaknesses, and external opportunities and threats.
SWOT method was originally developed for business organisations and
industries; nowadays it is equally used in the work of community health
and developm ent, education, and even for individual growth.
Definition:
SWOT Analysis is “a simple but powerful tool for sizing up a companys
resource capability and deficiencies, its market opportunities and the
external threats to its future well -being.”
- Thompson and Strickland
SWOT Analysis Matrix
This Matrix will help us to understand how SWOT looks like in a 2 x 2
Grid:
STRENGTHS
 What is our competitive
advantage?
 What products/services are
performing well?
 What assets do you have in your
teams? (ie. knowledge, education,
network, skills, and reputation) WEAKNESS
 What products are
underperforming?
 Are there gaps on your team?
 Where do you have fewer
resources than others?
 What could you improve?
OPPORTUNITIES
 What technology can we use to
improve operations?
 Wha t new market segments can we
explore?
 Are there upcoming changes to
regulations that might impact your
company positively? THREATS
 What new regulations threaten
operations?
 What consumer trends threaten
business?
 What is your competition doing?
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20 An overvi ew of the Four Factors of SWOT is explained below:
1. Strengths : Strengths describe what the organization is best at and
improves is ability to compete. Strengths are internal to a business
organization and are controllable. Strengths enable the organisations to
achieve its Vision, Mission and Goals. It is the basis on which
continued success can be made and continued/sustained.
Examples : strong brand image, broad product line, loyal customer
base, strong financial standing/record, unique technology/process,
significant market share, focused human resources, research and
development, etc.

2. Weakness : Weaknesses are the areas where the organizations need to
improve to maintain competitive advantage and survive in the market.
They are limitations which create st rategic disadvantages as it relates
to incompetency and inability of the organization to perform certain
activities as compared to its competitors.
Examples : high product/service pricing, ineffective marketing
channels, untrained and unexperienced staff, poor public image, poor
financial record – high levels of debt, obsolete technology, inadequate
supply chain, lack of capital, high employee turnover, low
productivity, etc.

3. Opportunities : Opportunities refer to external favorable factors that
give compet itive advantage to the organization. Opportunities arise
when an organization can take benefit of conditions in its environment
to plan and execute strategies that increase their profitability. If a
business does not take advantage of it, the competitors w ill take away
the same
Examples : Tax Holidays / Rebate, limited competition, technological
innovations and advancements, easy availability of bank credit,
market boom, favourable government policies, etc.

4. Threats : Threats are an unfavourable and uncontrol lable condition in
the organisations environment. The manager can visualize that a threat
exists but there is very little one can do for survival of he business.
Examples : poor labor -management relations, fluctuations in foreign
exchange rates, entry of g lobal MNCs, aggressive trade unions,
unethical competition, changes in consumer tastes and preferences,
etc.
2.6 SUMMARY
In this unit you studied the concept of environmental analysis and
scanning in detail. Environmental analysis is a process to identif y internal
and external elements which impact organizational performance. munotes.in

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Environmental Analysis
21 Environmental analysis is important as it aids in SWOT analysis, achieves
goals and objectives, helps in effective monitoring and control, face
competition. The Quality of workforce , political stability, economic
reforms and government initiatives are some driving factors affecting
environmental analysis.
PESTLE analysis - coined by Hayward Professor Francis Aguilar is the
acronym for P – Political, E – Economic, S – Socio -cultural, T –
Technological, L – Legal, E – Environmental. It’s a tool to monitor the
external factors impacting the business enterprises
SWOT is the Acronym for STRENGTHS, WEAKNESS,
OPPORTUNITIES and THREATS and helps business organisations to
effectively devise s trategies.
2.7 EXERCISE
FILL IN THE BLANKS
1. _____ of the following is NOT an example of a political risk?
(Government regulations, Cost of production , War)
2. An analysis of the external environment enables a firm to identify
_____ (Strengths and opportunities , Weaknesses and threats,
Opportunities and threats )
3. PESTLE is an analytical tool which helps to undertake _______ (An
internal analysis, A strategic analysis, An external analysis.)
4. The six elements of PESTLE are __________
a. Power, Environment, Science, T eaching, Legal, and Education
b. Political, Economic, Social, Technological, Legal, and
Environmental
c. Political, Ecological, Social, Technical, Limited, and Entreprenurial.
5. The S in PESTLE Analysis stands for _______ ( Sociological ,
Scientific, Strategic)
6. PEST LE Analysis is created by _______ (Peter Drucker, Lawrence
Harvey, Francis Aguilar )
TRUE OR FALSE
1. PESTLE Analysis identifies factors that occur within the organisation
– FALSE
2. Strengths and weaknesses are often external to an organization –
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22 3. Globaliz ation is not necessary for developing country – FALSE
4. Environmental analysis foretells the future – TRUE
5. PESTLE Analysis and SWOT analysis can work together - TRUE
MATCH THE PAIRS
Group A Group B
a) SWOT analysis i) 1986
b) Consumer Protection Act ii) Strengths, Weak ness,
Opportunities, Threats
c) Goals of the organisation iii) 2013
d) Environmental Analysis iv) Internal Environment
e) Indian Companies Act v) External environmental
factors

Answers: (a – ii), (b - i), (c – iv), (d - v), (e – iii)
ANSWER IN BRIEF
1. Discuss meaning and im portance of Environmental Analysis
2. What is SWOT analysis? Discuss its internal and external
environment.
3. Define SWOT. Present a typical SWOT analysis matrix.
4. What is PESTLE analysis? Explain the following Factors –
a. Political
b. Economic
c. Social
d. Technological
e. Legal
f. Environmental



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23 3
BUSINESS ETHICS
Unit Structure:
3.0 Objective
3.1 Meaning of Business Ethics
3.2 Nature of Ethics
3.3 Scope or Importance of Ethics
3.4 Need for Ethics in Business
3.5 Ethical Dilemmas
3.6 Corporate Culture and Ethical Climate
3.7 Cases of Business Ethics
3.8 Summary
3.9 Exercise
3.0 OBJECTIVES
After studying this unit, the student will be able to -
 Understand the concept of Business Ethics along with its Nature in
current times
 Know the Scope and Need of ethics in business
 Understand the various types of Ethical Dilemmas faced by businesses
 Expl ain the Corporate Culture by considering the Ethical Climate of a
business
 Describe the Importance of Ethics in a business
3.1 MEANING OF BUSINESS ETHICS
Ethics are the basic moral ground rules by which we live our lives. Ethics
is about right and wrong b ehavior with the preference to choose right over
wrong. The word ethics is derived from the Greek word “Ethos” which
means custom or character. Ethics in humans comes either from Nature,
Nurture, or both. It is a combination of our surrounding environment and
upbringing which helps understand the true meaning of ethics. We all have
a conscience and self -awareness that helps us know the difference right
from wrong. One cannot be devoid of it.
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24 According to Peter Drucker, “Ethics deals with right actions of
individuals”
Business ethics is a branch of ethics which refers to the standards and
practices in the workplace setting. Business ethics includes - Societal
standards of right and wrong, Business ethical standards and
circumstances and Legal standards. It consists of the standards of behavior
our society accepts. Ethics is more complex in personal areas of business.
For e.g., an employee may be extra friendly in his/her personal life but at
work it may be considered as harassment if no line is drawn. At wor k, one
can’t decide which rules are worthy of following. You can show up late
for personal appointments but not for work. You cannot just borrow things
from a colleague at work, any borrowing may be considered as stealing.
Accepting a gift may be considere d as accepting a bribe. Ethics in the
workplace is not subjective but it is clearly defined by your
employer/company.
According to Rogene. A. Buchholz, “Business ethics refers to right or
wrong behavior in business decisions”
According to Andrew Crane, “B usiness ethics is the study of business
situations, activities and decisions where issues of right and wrong are
addressed”
According to Raymond Baumhart, “The ethics in business is the ethics of
responsibility. The businessman must promise that he will no t harm
knowingly”
Ethics at the workplace includes the following:
1. Playing by the rules
2. Abiding by the law
3. Being knowledgeable of right and wrong
4. Giving your best effort to the company
5. Working cooperatively and honestly with customers and coworkers
6. Looking out for company’s interest over your own
7. Showing respect for people and property
At times, these many be difficult to follow but it is expected to be done
automatically and organically without training. To help understand this
topic easily, it is importan t to change our thinking of ethics as applied in
personal life to ethics in our professional lives. Business ethics requires an
employee to behave in a professional manner, being always fair and
unbiased, listening to others and showing respect and maintai ning
professionalism no matter the situation and circumstance at workplace.
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25 3.2 NATURE OF ETHICS
Ethics is a set of principles which helps differentiate between right and
wrong actions. Few aspects which define the nature of ethics is as follows:
It is a normative science . Ethics is something which deals with human
behavior, so it puts some norms, ideals, principles, rules, and regulations
into practice for human beings. Since it is dealing with human behavior, it
is a social science. Social science is a b ranch of science which deals with
human beings and society at large.
It is self -imposed. Being ethical or conducting business in an ethical
manner is completely dependent on the company and the
people/individuals running the company. Since there is no leg al structure
in place to punish or penalize people who are unethical, some may choose
to practice unethical business practices. Hence, ethics is said to be self -
imposed. The price, however, one may have to pay for conducting
unethical business ethically ma y be the losing the trust and confidence of
its clients, investors, suppliers, etc. in the long run.
It is a Discipline. Since ethics is a normative science, i.e., dealing with
norms, ideals, principles, rules, and regulations, it helps inculcate the
value of discipline in an individual. Discipline is a by -product of applying
normative science in business ethics. A disciplined person following ethics
leads a life of integrity and respect. He/she enjoys goodwill in the market
and has a network of trusted acq uaintances.
It is not a religion. Ethics is an individual motive that has to be
self-imposed. It is not a culture that is needed to be accepted compulsorily.
It is a choice of an individual whether to conduct business ethically or not.
So, it cannot be s aid to be a religion. A person is not born into it but must
learn to apply it in all aspects of life.
It is not culturally accepted norms. Although ethics is based on culture of
practices to be followed but it is not completely what culture says it should
be. There may be certain things which may have a cultural existence but
may be ethically wrong to follow. For e.g., it has been seen over decades
that females with the same job profile / job role doing the same type of
work are paid lesser as compared to males. Such a scenario has a cultural
existence; however, it is ethically wrong to practice. Remuneration should
be paid for the work done irrespective of other factors like gender, status,
etc. Hence, it can be said that ethics should be absolute whether accepted
culturally as norms or not.
It is not a science. Ethics is a normative science and a branch of social
science. It is not an exact science which is universally accepted. Ethics
may be complex and subjective. Something which may be right for one
may be ethically wrong for another. So, it cannot be termed as an exact
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26 Business ethics decisions is concerned mainly with the effect of decisions
inside as well as outside the business, with groups who keep inte rest in the
business activities, such as shareholders, suppliers, government, public,
etc. Some areas of ethical business practices are charging fair prices from
customers, using fair weights for measurement of commodities, giving fair
treatment to workers , and earning reasonable profits. Business ethics is
said to begin where the law ends since law is compulsory to practice,
however following ethics in business is a choice.
3.3 SCOPE OR IMPORTANCE OF ETHICS

The principles through which a business function s i.e., honesty, integrity,
trustworthiness, fairness, morale, and accountability help judge the
decisions and actions of the company which has social consequences.
Therefore, it is imperative that a business conducts its affairs with utmost
prudence. The main factors which emphasize the importance of ethics in
business is customer and stakeholder satisfaction, sustainability, and social
development. Business ethics helps in developing socially responsible
businesses which in turn leads to the development o f the society. Business
and society go together, so if the society is satisfied, the business will
grow and if the business is flourishing, the standard of living of the people
in the society increases too.
Business ethics helps in reconciling conflicting interests of various
sections of the society such as workers, distributors, consumers,
shareholders, etc. It helps gauge conflicts and thereby overcome obstacles
quicker if ethical decisions are taken in the interest of everyone. Business
ethics helps the firm to fulfil social obligations towards the various
members of the society. It puts society’s interest on par with firm’s
objectives. This ensures growth and sustenance of the business.
Business ethics leads to more effective and efficient practices e. g.,
undertaking activities which reduce wastage of resources, recycling and
reusing materials, effective use of manpower and sustainable means of
trade. This also helps to improve the standard of behavior. Conducting
business with a pre -determined set of s tandards help navigate through
ethical decisions in a simple manner.
Business ethics leads to a long -term gain of business. A business can
prosper more on the basis of good ethical standards and sustain in the
market for a long time. A company doing well by following ethical
practices will motivate, encourage and require other competitors to follow
suit. This regulates ethical behavior of the industry as a whole. It helps to
protect confidentiality and safeguards the interest of the people.

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27 3.4 NEED FOR ETHICS IN BUSINESS

Ethics is important to businesses for several reasons as stated below:
1. Stops malpractices:
Some unethical and unscrupulous businessmen resort to business activities
and unfair trade practices like black -marketing, artificial price hikin g,
selling duplicate products, illegal stocking, adulteration, etc. These
practices are not only harmful to the consumers purchasing them but also
to the safety of the society at large. Following ethics in business help to
put an end to these malpractices and safeguard society. It creates a healthy
and conducive environment for everyone.
2. Long -term survival of Business
A company not following ethics may not be able to survive in the
long run. A businessman may have short term success but will definitely
fail in the long run if ethical practices are not followed. This is because,
one can cheat a customer only once. After realizing that he has been
cheated, the consumer will not want to purchase goods or services from
that company again. This also results in b ad publicity of the company
since the customer may make others aware about it. It leads to the
downfall of the company in the long run.
3. Improves customer confidence
If customers are aware of the ethical practices followed by businesses,
they have more trus t and confidence in them. It helps retain existing
customers and builds new customer network. Business ethics are needed
to improve the customers’ confidence about the quality, reliability, quality,
price, performance, etc. of the product. It leads to high customer
satisfaction and long -term relationship with the customers.
4. Protecting employees and shareholders
Business ethics are required to protect the interest of employees,
shareholders, suppliers, government, etc. It protects them from exploiting
each o ther through unfair practices like cheating or frauds. Ethics compels
each entity participating in the business activity to properly execute its
function by adhering to the code of conduct.
5. Develops good business relations
Business ethics are necessary to cultivate a good and healthy relation
between business and the society. This will help in increasing the supply
of good quality products at a reasonable price. It will also lead to good
profits in business thereby leading to growth of the economy. If the
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28 6. Smooth functioning of business
If the business follows all business practices ethically, then the employees,
shareholders, suppliers, customers will be satisfied. This will turn will
help receive their full cooperation and support which results in smooth
functioning of business activities. It would help the business to make good
profits and expand and diversify in the market. If even one entity is not
fully satisfied due to unethical prac tices followed by business, then the
activities will not function smoothly.
7. Consumer movement
Nowadays, business ethics are getting more light because of the growth of
consumer movements in the world. There is more consumer awareness in
the market today t han there was ever before. Consumers do not hesitate to
voice their dissatisfaction about a company or product
if they have been cheated. Over the years, many consumer redressal
agencies have been structured and utilized to help provide solace to
aggrieve d consumers. Therefore, the only way to survive in business is to
be honest, fair, and loyal to the consumers.
8. Healthy competition
Today, there is heavy competition in the market in every field and
industry. Competition is necessary as it inculcates creati vity, innovation,
and customer responsibility in the market. A business must consider its
competitors as fellows and not rival enemies. The business must use
business ethics while dealing with its competitors in a healthy and just
manner.
9. Creates good ima ge in society
If the businessmen follow all ethical rules, then the society and public will
accept them fully. The society will extend its support to the business who
follow the necessary code of conduct and avoid engaging in unscrupulous
practices. If the business succeeds in creating and maintaining its goodwill
in the society, it will flourish even in the most competitive markets
10. Safeguarding Consumers’ Rights
The rights and authority of the consumers cannot be avoided or dismissed.
Consumers are the pil lars of a business, without which a business cannot
exist. It is the duty of each business to not just protect but also to promote
the rights of consumers such as right to choose, right to safety, right to
education, right to redressal, right to be heard, right to be informed.
Safeguarding consumers rights is the primal stage of business ethics

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29
11. Labour Welfare
Employees are the backbone of any business. They play a very important
role in the functioning and success of the business. They should be paid
fair remuneration i.e., wages and salaries, other monetary and non -
monetary benefits, good working conditions shall be provided,
recreational facilities and opportunities for growth and personal
development should be present. This helps to cultivate team spir it and a
healthy work atmosphere in the company. A business must use ethics with
dealing with its employees.
12. Consumer Satisfaction
Consumers are the king of the market. Consumer satisfaction should be
the main aim of every business. Only if the consumers a re satisfied, a
business can do more sales, make more profits, and expand its functions.
Customer satisfaction is more if business follows ethical practices. A
company not following ethical practices will eventually lose its consumers
confidence and trust.
3.5 ETHICAL DILEMMAS
An ethical dilemma can be referred to as a situation of conflict among
various principles of an individual, creating a difficulty in decision
making. It arises when one has to choose between values and rules in
order to determine the right thing to -do. Dilemmas lead to difficulty in
decision making and requires conscience to resolve. An individual cannot
escape dilemmas, it is bound to arise in some aspect of one’s life. Hence,
there needs to be a system in place to deal with such dile mmas effectively.
The three sources of ethical dilemmas are:
 Face -to-face ethics: These are the dilemmas which may arise due to
the human element in the business. It is the most common and frequent
type of dilemma occurring in the workplace.
It is likely that a superior may rate the performance of a subordinate better
than the others due to his/her personal equation with them. It is also
possible that a colleague may take credit over the work done by you.
Face -to-face ethics is a matter of conscience and will. It may include
misusing company property for personal gain, peer pressure, lying to
colleagues and supervisions, conflict of interest with the team or
interpersonal conflicts. These dilemmas need to be resolved keeping in
mind the influence or effec t your decision has on the company.
 Corporate Policy ethics: These dilemmas are the ones that affect
the operation and working of all divisions and departments of a company.
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30 decisions th ey make has an overall impact on the working of the company.
It is therefore necessary that policy decisions are taken by maintaining an
ethical code of conduct.
It is possible that the company you work with is manufacturing products
which has harmful eff ects on the consumer. The company’s policy
requires its employees to sign a non -disclosure agreement regarding the
harmful effects. Would you sign it for the sake of keeping your job?
Another instance is the practice that your company follows to acquire ne w
clients, by applying for loans on their behalf and selling the product to
them at overinflated prices. What would you do in such scenarios?
 Functional area ethics: Functional areas of a business are bound to
have some ethical issues. The ethical dilemmas in finance department may
arise in case of fake reimbursements by employees, window dressing or
misleading financial analysis and reporting.
Ethical dilemmas in marketing department can arise in case of price
discrimination strategy in different markers, manipulation of supply,
misleading advertisements, etc.
Ethical dilemmas in production can arise in case of product testing,
environment polluting ethics, clarity on carbon emission, etc.
3.6 CORPORATE CULTURE AND ETHICAL
CLIMATE
Corporate culture is a set of values, norms, traditions, and practices
followed in an organization that sets the behavior in the organization. It
defines the code of conduct of operations and affairs in the company. A
healthy corporate culture encourages ethical behavioral patte rns. It keeps
the employees motivated and productive. There is a sense of
belongingness to the company which develops if the corporate culture is
healthy and conducive.
In many firms a good corporate culture is measured in the following ways:
 The top mana gement showcase their commitment to strong controls
through their communication and actions
 Employees are encouraged and required to have hands -on
involvement in the affairs of the company
 Employees are motivated to be in the communication loop through
corrective action plans
 Employees have the capacity to report reservations and grievances
anonymously to the top -level management
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Business Ethics

31 Corporate culture is often expressed informally through direct and indirect
comments and messages from the management. Many com panies also
express their shared values through informal dress code, participating in
extracurricular activities. Corporate culture is also expressed through
gestures, looks, labels.
The ethical component of corporate culture is an important factor in
making ethical decisions. If the firm’s culture encourages or rewards
unethical behavior, its employees may well act unethically. If the culture
dictates employing people who have similar values which may be seen as
unethical by society, the society may even judge the organization and its
members unethical.
For instance, salespeople may be seen as unethical because they
sometimes use aggressive selling strategies which may be questionable in
nature, in order to get customers to buy things they do not need or want. If
a company’s main goal is to make profit, through whatever means, its
culture may foster behavior that conflicts with the ethical values of the
society. Therefore, it is necessary that the culture of the company goes in
unison with the ethical prac tices followed.
3.7 CASES OF BUSINESS ETHICS

Ethical Practices
I. Intel
 Intel, through the Intel Foundation, hosts the Intel Science Talent
Search and the International Science and Engineering Fair to
encourage the youth to take up STEM (science, technology ,
engineering, and mathematics) education.
 The company has many donation funds and programs to help girls
and underprivileged minorities study in these fields.
 In addition, Intel employees are promoted or reassigned to different
domains within the company every 16 to 24 months, which reflects
the company’s dedication to education. This move also ensures that
workers do not get frustrated with the same roles and encourages
them to explore new areas
II. Wipro Limited
 Wipro Limited has been recognized as one of th e world’s most
ethical companies by Ethisphere Institute in 2021.
 The recognition came as a testimony to the company’s unwavering
commitment to integrity, fairness and transparency backed by strong
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32  Wipro Ltd has been instrumental in earning the trust of its
stakeholders through commitment and resilience to ethics and
integrity. It demonstrated an unwavering commitment to the highest
values and positively impacting the communities they serve.
Unethical Practic es
I. Vijay Mallya – Kingfisher Airlines
 Vijay Mallya’s Kingfisher Airlines shut down operations in 2012 due
to a cash and credit crunch. The Airline company has an outstanding
debt of around Rs. 7,500 crores to approx. 17 banks led by the State
Bank of India . More than 1,000 employees were left jobless and with
unpaid salary arrears of over Rs. 100 crores
II. B. Ramalinga Raju – Satyam Computer Services
 In 2009, Ramalinga Raju, the founder of Satyam Computer Services,
admitted to overstating the company’s assets by around USD 1 billion
and under -reporting its liabilities. The company misrepresented its
accounts to its board, stock exchanges, regulators, investors, and all
other stakeholders. Figures such as revenue, profit, and cash balances
were grossly inflated to falsely portray the company in good health.
III. KFC
 World’s second largest fast food restaurant chain, KFC, is known to
be most unethical with regards animal cruelty of the live chicken in
sheds.
 Overcrowded sheds with no space for the chicken to move arou nd
freely. The injured chickens receive no treatment and are fed
genetically modified feed in order to accelerate their growth rate.
 Apart from this, due to poor wages and working conditions, the
employees of the company used the chickens as a means to ven t their
frustration and alleviate boredom
3.8 SUMMARY
In this unit you studied the concept of business ethics and its application
and importance in today’s corporate structure. Ethics is the preference to
choose between right or wrong while conducting busi ness operations.
To ensure business survival and growth, it is necessary that it follows
ethical practices. Everyone is personally responsible to act ethically in the
workplace. They are responsible for their behavior and must support
others by creating a positive atmosphere at the workplace. Companies
need to know, understand, and comply with the practices which are ethical
and thereby beneficial for the companies. munotes.in

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33 We also studied the types of dilemmas faced by firms on a day -to-day
basis i.e., face -to-face ethics, corporate policy ethics and Functional area
ethics. Dilemmas makes it difficult to make effective and appropriate
decisions so it’s necessary to carefully navigate through it. Along with
this, we understood the role of corporate culture for an e thical workplace
environment. If the firm’s culture encourages or rewards ethical behavior,
its employees will be motivated to act ethically.
3.9 SUMMARY
FILL IN THE BLANKS
1) Moral principals of right conduct are _______ ( Ethics , Morality,
Etiquette, Social Responsibility)
2) Successful business ethics implementation begins with ______
management commitment. (Lower, top, middle, bottom)
3) Business ethics is a ______ (Law, Psychology, normative science ,
life science)
4) ___________ is a set of values, norms, tradition s, and practices
followed in an organization (Ethics, principals, corporate
responsibility, corporate culture )
5) Business ethics are required to protect the interest of ______
(directors, stakeholders , management, owner)
6) _______ has been recognized as one of the world’s most ethical
companies by Ethisphere Institute in 2021. ( Wipro Ltd , Intel,
Reliance Ltd, Tata Group)
7) Business ethics creates a _____ image for the business. (Bad,
negative, good , adverse)
8) Ethics is concerned with _______ (the wider community, business,
global economy, right and wrong )
9) A(n) _____ is a concern, situation or opportunity which requires an
individual or organization to choose between right or wrong (Crisis,
Fraud, Ethical issue , Indictment)
10) Business ethics are needed to ______ the customers’ confidence
about the quality, reliability, quality, price, performance, etc. of the
product. ( Improve , maintain, sustain, deplete)
TRUE OR FALSE
1) Ethics and social responsibility mean the same thing. FALSE
2) Corporations do not have to worry about ethical scandals and social
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34 3) Functional area ethics is on of the ethical dilemmas. TRUE
4) Business ethics is a branch of social science. TRUE
5) Ethics in business does not assure long -term survival of the
organization. FALSE
6) Ethics at workplace includes looking out for company’s interest over
your own. TRUE
7) Business ethics does not help to protect the rights of consumer.
FALSE
8) Face -to-face ethics are the dilemmas which may arise due to the
human element in the business. TRUE
9) Good co rporate culture encourages employees to have
hands -on involvement in the affairs of the company. TRUE
10) Ethics is a religion which must be followed by everyone. FALSE
ANSWER IN BRIEF
1) Write a note on the nature of Business Ethics
2) Explain the need of ethics in Business
3) Why is it important for a business to follow ethics?
4) Describe the face -to-face ethical dilemmas in business?
5) Explain the role of corporate culture in ethics
6) Describe the normative nature of business ethics
7) Write 3 unethical practices done by b usinesses
8) Write a note on the significance of dilemmas faced in workplace

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35 4

DEVELOPMENT OF BUSINESS
ENTREPRENEURSHIP
Unit Structure:
4.0 Objective
4.1 Meaning of Entrepreneur
4.2 Characteristics of an Entrepreneur
4.3 Meaning of Entrepreneurship
4.4 Features of Entrepreneurship
4.5 Need for Entrepreneurship
4.6 Factors Influencing Entrepreneurship
4.7 Role of Entrepreneurship in Economic Development
4.8 Entrepreneurship as a Career Option
4.9 Micro, Small and Medium Enterprises Development Act, 2006
(MSMED)
4.10 Case Studies
4.11 Summary
4.12 Exercise
4.0 OBJECTIVES
After studying this unit, the student will be able to -
 Understand t he meaning of an entrepreneur along with its
characteristics
 Understand the concept of Entrepreneurship along with its features
and need
 Know the factors influencing entrepreneurship
 Describe the importance of considering Entrepreneurship as a Career
optio n
 Explain the role of entrepreneurship in the economic development of
the country
 Describe the features of the MSMED Act i.e., Micro, Small, Medium
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36 4.1 MEANING OF ENTREPRENEUR
An entrepreneur is a person who starts a new busi ness. The word
‘entrepreneur’ is derived from a French word ‘entreprendre’ which means
‘to undertake’ He/She is a person who is willing to take risk in a new
business and enjoy the returns from it as well. An entrepreneur can be
summed up in 4 words i.e.,
ATTITUDE + CREATIVITY + RELATIONSHIPS + ORGANISATION
Attitude : Having a positive attitude will get an entrepreneur a long way
especially when things may sometimes not be going as planned. Being
confident in their ideas, believing in themselves and persev erance will
help see things through and make things happen
Creativity: It is the problem -solving nature in an entrepreneur. Ability to
see things with a clear perspective and using a new approach to overcome
conflicts helps entrepreneurs build a business.
Relationships: Running a business is a people thing. Having a good
relationship with your customers, employees, suppliers, partners, and other
businesses is essential for success. Networking plays an important role in
upscaling your business. The more peo ple you know, the easier it will be
for you to use your powers of persuasion and get things done. An
entrepreneur must be willing to talk to everyone and listen to what they
have to say
Organization: To get to grips with the day -to-day running of a busines s,
good organizational skills are essential. An entrepreneur needs to
understand how to raise finance, manage funds, deal with tax, etc. From IT
systems, to planning and record keeping, all essentials of running a
business must be covered.
Starting a busin ess is an exciting adventure full of new experiences, with
some highs, some lows, some tough decisions and a lot of hard work. But
as an entrepreneur the power is in your hands to decide the course of
action to pursue.
According to Peter Drucker, “an entr epreneur searches for change,
responds to it, and exploits opportunities. Innovation is a specific tool of
an entrepreneur and hence an effective entrepreneur converts a source into
a resource”
According to Albert Shapero, “Entrepreneurs take initiative, a ccept risk of
failure and have an internal locus of control”
According to Jean Baptise Say, “Entrepreneur combines the land of one,
labour of another and the capital of yet another and thus produces a
product”
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37 4.2 CHARACTERISTICS OF AN ENTREPRENEUR
An entrep reneur should have the following characteristics/ qualities in
order to be successful:
1. Innovation : Innovation is the generation of a new idea or model of
working due to which you can start an enterprise and earn profits. An
entrepreneur having an innovativ e mindset is more likely to succeed
than someone who is restrictive in their practices. Innovation can be
in the product or process i.e., offering a product which nobody is
selling or doing a similar type of work in a more efficient and
productive manner t han others.
E.g., product innovation could be launching of touch screen cell
phones and laptops when the world was still dependent on keypad
2. Futuristic : An entrepreneur should have foresight about future
market conditions. He should not only have interna l business
knowledge but also external business environment. Without a vision
for the future for his company, he/she would just be putting in the
work without actually reaching a point of success.
3. Hard work: There is no substitute for hard work in an entr epreneur’s
lifecycle. An entrepreneur should be willing to work hard and give it
his all. Especially at the time of setting up the venture, it may be more
necessary to work longer hours since many times he/she may have to
handle the main areas of business independently.
4. Technical knowledge: This is the basic characteristic for an
entrepreneur. He/she should have sufficient technical knowledge
about the product being offered and the plan to produce it. He should
also be updated with the latest technology to be in line with the
market conditions.
5. Inter -personal skills: An entrepreneur needs to communicate with
different people like his customers, suppliers, creditors, employees,
etc. He must be able to express his thoughts and plans and processes
effectively. Both the parties should be able to comprehend each other
and work simultaneously.
6. Positive outlook: An entrepreneur should think positively. He/she
should always be confident and hopeful about market situations even
in times of failure. They must use thei r positive attitude to support
their thinking.
7. Risk -taker: Starting a business involves a considerable amount of
risk of failure. A person who is unable to cope with such a situation
may not be a suitable entrepreneur. Therefore, the capacity and
courage to take the said risk are essential for an entrepreneur.
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38 8. Self-confident: An entrepreneur should have self -confidence. He
should have positive attitude to achieve his goals. Such self -
confidence helps him stay strong and motivated to face obstacles. It
also boosts others’ confidence who work with him.
9. Leadership: A single person cannot perform all the tasks and
therefore it is important to bring some people to do it. This makes
leadership very important as a leader provides the required direction
to the ef forts of the employees. Without proper leadership, everyone
would be working independently without a common vision and not
making any significant impact in the process.
10. Open Minded: A good entrepreneur realizes that every situation can
be an opportunity to grow and develop. This can be utilized for the
benefit of the organization. While dealing with roadblocks, an
entrepreneur must modify his plans according to the situation. This
helps to achieve goals within the given environmental conditions.
4.3 MEANING OF ENTREPRENEURSHIP
Entrepreneurship has traditionally been defined as the process of
designing, launching, and running a new business which typically begins
as a small business i.e., a start -up offering a product, process or service for
sale or hire. It is concerned with the performance and co -ordination of the
entrepreneurial function. It is concerned with organizing and managing a
business in order to make long -term profits. However, a significant
number of businesses have to close down due to lack of fund ing, bad
business decisions, economic crisis or due to lack of market demand.
Entrepreneurship is the process by which an entrepreneur identifies a
business opportunity, employees the necessary resources required for its
exploitation for his benefit. The exploitation of entrepreneurial
opportunities includes making a plan of action for business, employing
workforce, acquiring resources that are material and financial in nature,
and being responsible for the enterprises success or failure while providing
leadership
Entrepreneurship typically operates within the ecosystem which includes
government programmes and services which promotes entrepreneurship
and supports entrepreneurs and start -ups.
Entrepreneurship and entrepreneur go together. An entrepreneur ca nnot
exist without an enterprise and vice -versa. Entrepreneurship is a process
done by an entrepreneur to augment his business interests.
According to Robert Hisrich, “Entrepreneurship is the process of creating
something new and assuming the risks and rew ards”
According to Peter Drucker, “Entrepreneurship is a systematic process of
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39 changes, and it is the systematic analysis of the opportunities such changes
might offer for economic and s ocial innovation”
4.4 FEATURES OF ENTREPRENEURSHIP
The following are the characteristics of entrepreneurship:
1. Building an organization: Entrepreneurship is a process that refers
to formation of a new enterprise by an entrepreneur. It is an activity
under whic h an entrepreneur starts a new venture with a new idea.
2. Economic activity: Entrepreneurship is an economic activity as it
involves creating and running a new business through optimum
utilization of all types of resources. It ensures that all resources whic h
are scarce in nature be used productively so as to provide returns by
way of profit and also be available for future use.
3. Innovative function: It is the process of discovering new concepts
and ideas and implementing them in business ventures.
Entrepreneu rship involves bringing innovation in the market by
introducing new products that delivers better service.
4. Risk bearing: It is an activity which involves huge risk which every
entrepreneur needs to undertake while starting a business. New ideas
which are d eveloped by an entrepreneur may not always be certain
and there is always a possibility of loss. It is with this uncertainty and
positive outlook that an entrepreneur decides to set up an enterprise.
5. Gap filling: Entrepreneurship is the process of recogniz ing and filling
the gap between customer needs and available products or services. It
focuses on removing the deficiencies from the available products to
fulfil the needs of customers.
6. Organizing Function: It is this function that brings out different
factors of production like land, labor, and capital. He ensures that all
factors are effectively utilized, and resources are not being wasted. All
the activities are coordinated and controlled by an entrepreneur.
7. Growth Function: Entrepreneurship is about grow ing a business and
grabbing opportunities as and when they arise. It’s not about standing
still or staying in one market with one product.
8. Goal -oriented: Entrepreneurship is a goal -oriented activity. They
start a new venture with the purpose of earning pr ofits by satisfying
the needs of customers. Goals can be varied such as to earn profit, to
expand business, to create corporate image, etc.
9. Flexible: Entrepreneurs should be flexible and should adapt to change
as per the market conditions. Businessmen sho uld consider and bring
out all required changes in their products or services as and when
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40 4.5 NEED FOR ENTREPRENEURSHIP
Entrepreneurship plays an important role in instigating a social change in
society and provides enormous opportunities for growth. The following
are the factors that highlight the need for entrepreneurship in today’s
world:
1. Lifeline of a nation: Entrepreneurship contributes to the gross
domestic product of a nation. A country’s progress can be determined
with how entrepreneurship is developing. The growth of
entrepreneurship is directly linked to the growth of the economy. It is
considered as the yardstick of a country
2. Encourages Innovation: An entrepreneur is an innovator who
introduces new products, new technology and new processes in the
market. They solve major challenges in society through their
innovations.
3. Creates jobs : Entrepreneurship helps in creating employment
opportunities. Every new business that is set up, requires people who
can look after the operations of the busines s. Hence, large number of
people are employed in business on a yearly basis. The growth and
expansion of business leads to a further increase in employment
opportunities.
4. Improves standard of living of people: With increase in
employment due to entreprene urship, income levels of people also
increase, this leads to an improvement in the standard of living of the
people. This income gets circulated in the economy. All the
expenditure and salaries generate incremental wealth in the economy,
which there improv es standard of living of the people
5. Contributes to research and development: In order to build their
niche in the market, entrepreneurs are expected to invest their funds
into effective research and development. Even after business is set up,
entrepreneurs need to continue with R&D to keep up with the
changing trends.
6. Social benefits : A business contributing to society’s benefits is
helpful for the business as well. It provides quality products and
services at lowest cost possible. It makes optimum use of resources
and promotes peace and prosperity in the society.



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41 4.6 FACTORS INFLUENCING ENTREPRENEURSHIP

ECONOMIC FACTORS
1. Capital: Capital is the most important requisite to set up a business. It
is funds owned by a person or organization at the time of sta rting the
venture. Capital is required to purchase land, machines, raw materials,
and other resources.
2. Labor: Labor is the services of human resources i.e., employees,
workers, laborers, etc., in an enterprise. The quality as well as
quantity of labor pla ys an important role in the running of the
business. A mobile and flexible labor force is encouraged for
entrepreneurship. Low -cost labor is more advantageous if there is
mobility in the workforce.
3. Raw materials: Entrepreneurship is encouraged only if ther e is
adequate supply of raw materials and know -how. Easy availability of
raw materials attracts more individuals to set up business. The quality
of production is severely affected by the quality of the raw materials.
4. Market: The potential of a market in wh ich the entrepreneur is doing
business is a deciding factor while setting up an enterprise. A highly
volatile market may be risky for new entrepreneurs. The size and
composition of market influences entrepreneurs to a great extent. A
monopoly market is mor e favorable for an entrepreneur than a
competitive market
5. Infrastructure : Entrepreneurship development requires basic
infrastructure like transportation, power, communication, etc. Land
and factory sheds at low -cost rate, water, coal, and other facilities
should be available.
PSYCHOLOGICAL FACTORS
1. Desire to achieve: It is the need to obtain excellent results by setting
high standards and striving to accomplish them. It is the consistent
practice of doing things better. If the average level of desire to
achieve is high, one would expect a relatively high amount of
entrepreneurial development in the country.
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42 2. Withdrawal of status, respect: When members of a social group
perceive that they are not being respected by the dominant groups in
society, it triggers a personality change that encourages
entrepreneurial behaviors.
3. Motive : Some psychological theories stress the importance of motive
or goals for an entrepreneur. Besides wealth and profit, entrepreneurs
seek power, security, prestige, and service to societ y. Non -monetary
aspects such as independence, self -esteem, etc., also triggers
entrepreneurship.
4. Skills and mindset: The mindset of an entrepreneur is most essential
while running a venture. It is half the battle won there. The success of
an enterprise dep ends largely on the hard work, leadership,
perseverance, and approach of the entrepreneur
SOCIAL FACTORS
1. Religion and caste factor: Religion and caste play a vital role in
entrepreneurial development. The cultural practices followed by and
in society have an impact on the actions of individuals. These
practices and values have evolved over hundreds of years and still
play a huge role in societal actions.
2. Family Background : This factor includes size of family, type of
family and economic status of the famil y. Background of a family in a
business provides a source of industrial entrepreneurship. Families
with properties like land and house and having sound financial
resources may support entrepreneurship among family members.
3. Education : Education helps a per son to understand the realities of the
world and also inculcates knowledge of the ways to deal with day -to-
day problems of the world. Education plays a significant role in
entrepreneurial values.
4. Attitude of the society: Attitude of the society plays a cr ucial role in
entrepreneurship. Some sections of the society may have a narrow
mindset and may not tolerate major changes in society. This makes it
difficult for entrepreneurship to take place. Whereas certain sections
boost innovation and creativity, and entrepreneur may be given a
chance to set up business and earn rewards.
GOVERNMENT FACTORS
1. The Government by its actions does influence the development of
entrepreneurship. Any interested government would promote
entrepreneurship by enacting sound policies and strategies.
2. By creating basic facilities, utilities and services, the government can
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43 3. Development of industrial estates, export promotion zones, special
economic zones, etc. aims at promotion of entre preneurial activities.
4. Government of India has taken certain steps to promote growth of
entrepreneurship:
a. Marketing Assistance
b. Promotional schemes
c. Concession on excise duty
d. Government incentives, subsidies, and grants
e. Credit facility
4.7 ROLE OF ENTREPRENEURS HIP IN ECONOMIC
DEVELOPMENT
Economic development is the situation wherein a low -income economy is
transformed into a high -income economy. It is an upward change in the
per-capital income of the country. When entrepreneurship leads to a
development in the e conomy it increases the wealth, quality of life and
standard of living of the people.
The following are the ways in which entrepreneurship can play a role in
developing the economy:
1. Increase in National Income
National income consists of the goods and ser vices produced in the
country in a given year. An increasing number of entrepreneurs are
required to meet the increasing demand for goods and services in the
market. Thus, entrepreneurship increases national income.
2. Community development
When entrepreneur s contribute not only to developing industries but also
the society by improving infrastructure, healthcare, education, etc., it leads
to community development. For example, Azim Premji, Chairman of
Wipro Limited, donated Rs. 27,000 crores for promoting ed ucation
through his Foundation.
3. Regional development
Entrepreneurs who set up new business are encouraged to conduct their
operations from less developed or backward areas. This is done as
businesses can avail many concessions and subsidies from the govern ment
by setting business in these areas. Manpower, rent, and supplies are also
comparatively cheaper in these areas. On the other hand, it leads to
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44 4. Employment generation
Growing unemployment mainly educated population be ing unemployed is
a major cause of concern for the nation. This problem can be tackled with
the increase in entrepreneurship as entrepreneurs employ people in their
business. Entrepreneurs are referred to as job creators. The Government of
India has launch ed various initiatives such as Start -up India, Make in
India, etc., to boost entrepreneurship in India.
5. Dispersal of economic power
Industrial development leads to economic power concentrated in the hands
of a few. This leads to monopolies in the market wh ich results in market
domination and exploitation. Developing large number of entrepreneurs
helps in diluting the economic power amongst the population and removes
monopoly from the market.
6. Capital formation
In order to set up a business, entrepreneurs in vest their own resources and
if not sufficient, attract investments from others in the form of equity,
debt, deposits, etc. This moves the idle wealth of the public into
productive use and benefits entrepreneurs. This leads to capital formation
and wealth creation in the nation.
7. Backward and forward linkages
Entrepreneurship will give opportunities to people to get involved at
various stages starting from production to ultimate consumption. This
backward and forward linkages stimulate the process of economi c
development in the country.
8. Export promotion
A business which has moved past the initial stages of growth will look at
expansion by promoting exports to foreign markets. It leads to bigger
returns and currency inflows. It also provides access to cutting edge
technologies which are used in international markets. It also provides a
stable source of revenue during economic downfalls in the domestic
market.
4.8 ENTREPRENEURSHIP AS A CAREER OPTION
Every individual in their late teen and early twenties has a choice to make
as to what to pursue in their career. Essentially, the 2 choices are wage
employment or entrepreneurship.
An entrepreneur is a person who chooses to start his/her own business by
providing a product or service for sale. However, there are no rule s and
regulations in place for one to be an entrepreneur. A brilliant idea and
skills to execute it is what is required. A good educational background can
boost the probability of success.
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45 Entrepreneurs need to constantly research and recognize business
opportunities in the market and develop innovate strategies to solve issues
that may come up due to these changing situations. They are in constant
liaison with investors, customers, employees, and other stakeholders.
Entrepreneurs develop the value of the business by streamlining processes
and procedures.
To provide a better understanding of choosing entrepreneurship as a career
option let us compare it with wage employment alternative.
 The first and most important aspect is that an entrepreneur is their
own boss, whereas a wage employer will work for others.
 This provides flexibility and freedom to an entrepreneur in choosing
when and how they want to do the work which is not an option in
wage employment
 However, an entrepreneur is completely responsible of the business
and in case of any lapse, the onus falls on them fully.
 Wage employers enjoy fixed and certain earning, whereas
entrepreneurs do not. They maynot make profits for months if the
business is not doing well
 Entrepreneurship may be risky for those who find it difficult to cope
with stress and crumble under pressure. It is a creative activity which
has tremendous scope for growth.
 The working hours for an entrepreneur is not fixed. They may work
more than twelve hours a day depending on the nee d. Whereas, wage
employers, may have fixed working hours.
 An entrepreneur enjoys the liberty to decide their own rules at the
workplace like dress code, growth opportunities, etc., which an
employee cannot decide
 One of the downsides of being an entrepren eur is that it can be quite
lonely. Since all important decisions are taken by them alone, they
may sometimes be blamed for it, if it leads to failure. This is avoided
in case of wage employment
 The motivation level of an entrepreneur must be higher as com pared
to his employees as he/she is the driving force in the organization.
 Entrepreneurship helps in developing the overall character of an
individual. It inculcates skills which may be very helpful in leading a
self-sufficient life.
 Entrepreneurs genera te income for themselves as well as for others. It
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46 4.9 MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006 (MSMED)
The Micro, Small and Medium Enterprises Development Act (MSMED)
was enacted in the Parliament in 2006 with an aim to promote and develop
the small and medium scale enterprises. The Act became operational from
2 October 2006.
DEFINITION
The provisions of the MSMED Act, 2006 classifies the enterprises into
two categories, namely:
a. Manuf acturing Enterprises
An enterprise which is engaged in the production and manufacturing of
goods of any industry as specified in the first schedule of the Industries
Development and Regulation Act, 1951. Investment in Plant and
Machinery determines the sca le of a Manufacturing enterprise Manufacturing Sector Enterprise Investment in Plant &
Machinery
Micro Enterprises Does not exceed Rs. 25 Lakhs
Small Enterprises More than Rs. 25 Lakhs but does
not exceed Rs. 5 crore
Medium Enterprises More than Rs. 5 crore bu t does not
exceed Rs. 10 crores
b. Service Enterprises
An enterprise which is engaged in providing or rendering of services is
termed as a Service Enterprise. Investment in Equipment determines the
scale of a Service enterprise. Service Sector Enterprise Invest ment in Equipment
Micro Enterprises Does not exceed Rs. 10 Lakhs
Small Enterprises More than Rs. 10 Lakhs but does
not exceed Rs. 2 crore
Medium Enterprises More than Rs. 2 crore but does not
exceed Rs. 5 crores

In July 2018, an amendment to the MSMED act was introduced
which provides a uniform mechanism for cl assifying all MSMEs.
Under this amendment, all MSMEs whether manufacturing or service
sector are classified basis their annual turnover
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47 2018 Amendment Enterprise Annual turnover
Micro Enterprises Does not exceed Rs. 5 crore
Small Enterprises More than Rs. 5 crores but does
not exceed Rs. 75 crores
Medium Enterprises More than Rs. 75 crore but does
not exceed Rs. 250 crores

FEATURES OF MSMED ACT
1. It’s aims at providing welfare to the people. It helps in creation of job
opportunities
2. It provides a legal framewo rk for recognizing enterprises in 3 types
i.e., micro, small and medium
3. It helps in formulating policies to enhance competitiveness in these
industries
4. The Act establishes an advisory committee that looks after the
development of these enterprises.
5. To ensu re timely, smooth, and appropriate funds are provided to
industries
6. To ensure dispute resolution systems are in place to settle grievances
7. To make provisions for registration and notify regarding exit routes to
the enterprises
8. It provides adequate flow of credit from banks and financial
institutions
9. It provides the required support for technology upgradation and
modernization
10. It provides access to modern management practices and testing and
infrastructural facilities
IMPORTANCE OF MSMED ACT
1. Large scale pr oduction and supply of goods and services is possible
due to MSME industries
2. It supplies goods not only in domestic markets but internationally as
well.
3. Various industries such as khadi, coir, etc., received some boost due
to this Act. It helped promote a nd develop backward industries
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48 5. They help in industrialization of these areas and provide employment
opportunities at low cost of capital
6. MSMEs contrib ute to the country’s development and growth in areas
like import, export, investment, mobility, etc.
PROCESS OF REGISTRATION
1. Registration under MSMED Act, 2006 is not yet mandatory by the
Government. However, it is beneficial to register, as an enterpris e can
avail many facilities like credit, loan, tax benefits, etc.
2. The process of registration as an MSME is done online through the
government portal udyamregistration.gov.in.
3. An Aadhar card and PAN card are the only documents required for
MSME registrati on.
4. In case of new enterprises, Micro, small manufacturing enterprises
registration and medium scale service enterprises is not compulsory.
However, medium scale manufacturing enterprises registration is
compulsory.
5. There are no fees charged for filling and submitting MSME
registration form.
6. In order to register as an MSME, one has to fill the Entrepreneurs
Memoranda (EM) on the registration portal.
7. For new companies, Part I of the Memorandum shall be filed for
registration of the enterprise and Part II shall be filed after
commencement of business.
8. For already existing companies, only Part II shall be filed.
9. The EM shall be submitted to District Industries Center/Joint Director
so a certificate of registration can be issued by them.
10. The following are the details to be provided in the EM
 Name and address of the Applicant
 Address of the enterprise
 Nature of activity
 Proposed Investment in Plant & Machinery
 Type of organization
 NIC code of activity
 Proposed Investment in Fixed assets
 Installed capacity
 Expected Employment
 Entrepreneur’s profile, etc.

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49 BENEFITS OF REGISTRATION UNDER MSMED
1. Eligible for collateral free loans from banks
2. Eligible for Industrial promotion subsidy enterprises
3. Patent registration subsidy
4. 1% exemption on interest rate on overdraf t
5. Protection against delayed payments
6. Concession in electricity bills
7. Market assistance from the government and export promotion
4.10 CASE STUDIES
CASE 1
Bhavish Aggarwal, co -founded the brand Ola cabs in India. He combined
the idea of cab -hailing by making us e of technology. It leveraged
smartphones and the GPS technology in the Indian markets to provide a
smooth cab experience to the public. He earlier used to work in Microsoft
but left it to pursue his idea.
CASE 2
Binny and Sachin Bansal, co -founded Flipka rt, the e -commerce giant
providing timely delivery of products with the use of internet. They both
were working in Amazon before starting Flipkart in 2007. Over the years,
flipkart has acquired many other companies like Myntra, WeRead,
Mime360, etc.
CASE 3
Deepinder Goyal, co -founder of Zomato was initially at Bain & Co, when
the idea of Zomato came to him. In order to pursue this, he quit his job and
in 2008, went public with his website called FoodieBay which later in
2010 became Zomato. Today Zomato has expanded to more than 23
countries and acquired various other companies too.
4.11 SUMMARY
In this unit, we studied the concept of ‘entrepreneurship’. It is the process
of designing, launching, and running a new business which typically
begins as a small busine ss i.e., a start -up offering a product, process or
service for sale or hire.
The growth of entrepreneurship is beneficial to the country’s development.
It helps in providing employment, increases national income of the
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50 psychological and government factors which impact the setting up of
enterprises.
The Government of India introduced the MSMED Act to promote and
develop small scale enterprises. Entrepreneurs are the job creators in the
econ omy. Boosting entrepreneurs will in turn boost the economy.
4.12 EXERCISES
FILL IN THE BLANKS
1) An individual who initiates, creates, manages a new business can be
called _____ (a leader, an entrepreneur , a manager, a professional)
2) _______ should be involved i n preparing a firm’s business plan
(Accountant, Engineer, Entrepreneur , Shareholder)
3) The process of creating something new is called ______ (flexibility,
management, business, innovation )
4) To provide financial assistance to entrepreneurs, the government has
set up a number of ________ ( financial institutions , financial
advisors, financial intermediaries, Industrial estates)
5) Investment limit of a micro enterprise under manufacturing sector
does not exceed ____ lakhs (10, 20, 25, 50)
6) The service industries are defined in terms of investment in ______
(Furniture, equipment , stock, plant & machinery)
7) MSME Act was passed in the year _____ (2012, 2018, 2005, 2006 )
8) As per the MSME Amendment bill, ______ is the new basis to define
MSMEs (Investment limit, balance she et, annual turnover , number
of employees)
9) ______ has allowed small companies to act like they are big ones
(technology , customers, competition, economic development)
10) ______ does not affect a person for being an entrepreneur (education,
values, family backg round, gender )
TRUE OR FALSE
1) An entrepreneur usually doesn’t have to work hard to make large
profits FALSE
2) The cost to start a new business is called start -up costs – TRUE
3) Business involves many risks, which an entrepreneur must hesitate to
take. FALSE
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Entrepreneurship
51 4) Service sector industry tends to naturally promote small -scale
business and has low barriers to entry. TRUE
5) Entrepreneurs are job seekers in the economy. FALSE
6) It is compulsory for all companies to register under MSMED act.
FALSE
7) The annual turnover for medium size enterprises under MSMED act is
between 75 crores to 250 crores. TRUE
8) Manufacturing enterprises are defined by their investment in plant &
machinery. TRUE
9) The fees for registration under MSME act are nominal. FALSE
10) MSMED act was introduced to promote and develop large scale
industries. FALSE
ANSWER IN BRIEF
1) Explain the characteristics of an entrepreneur
2) Write a note on the meaning of entrepreneurship
3) Describe the features of entrepreneurship
4) Highlight the need of entrepren eurship
5) Explain the factors influencing entrepreneurship
6) Describe the role of entrepreneurship in economic development
7) Write a note on the importance of MSMED Act, 2006
8) Highlight the features of MSMED Act, 2006
9) Elaborate on the steps for registration under MSMED Act, 2006


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52 5
CONSUMERISM AND CONSUMER
PROTECTION
Unit Structure:
5.0 Objectives
5.1 Evolution and meaning of Consumerism
5.2 Importance of Consumerism
5.3 Need for Consumerism
5.4 Effects/Impact of Consumerism
5.5 Overcoming Barriers to consumerism
5.6 Consumer Right s
5.7 Consumer Protection Act, 1986
5.8 Consumer Redressal Agencies
5.9 Measures for Consumer Protection
5.10 Consumer Protection Cases
5.11 Summary
5.12 Exercise
5.0 OBJECTIVES
After studying this unit, the student will be able to -
 Understand the concept of Consumerism in India
 Know the Importance of consumerism along with its need.
 Understand the effects of consumerism by knowing about the
obstacles faced by consumers
 Explain the rights of the consumers in India
 Understand the Consumer Protection Act, 1986 along with its
objectives and features
 Elaborate on the agencies existing for the redressal of consumer
grievances and the measures taken to protect consumers
5.1 EVOLUTION AND MEANING OF CONSUMERISM
In this modern age, all nations whether developed or develo ping have
access to products that have changed society. From a smart phone,
television, to necessities like refrigerator, it is now about what to purchase
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53 circulates everywhere and everyone. Thi s idea is known as
‘Consumerism”. The person making the purchase of the said product or
service is a “Consumer”. The norm that buying commodities fulfils a
purpose rather than understanding just what is needed. This concept of
consumerism is not recently d eveloped. Even in ancient times, some
groups would have more possessions than others. As society developed,
the wealthy began to flaunt their wealth with possessions like fancy
clothes, hiring servants, purchasing new items and so on. This was initially
reserved to the top tier of society, till just few centuries ago, when the
concepts of mass production allowed even unskilled workers to produce
high quality products in bulk. The price of these goods became cheap
enough that even a lower middle -class indivi dual could now purchase such
items which were earlier well out of reach.
These new items developed a mindset amongst the middle -class and
upper -class alike, to always acquire more. Before this expansion of
consumerism, goods were purchased for some specifi c intent and purpose,
whether it was to make work easier or a necessity to live, goods were
purchased with needs and nothing more. As consumerism hit the
mainstream market, people desired more goods constantly. The acquisition
of expensive goods created th e perception of wealth and success. As
demand for more goods began to rise, business started to market more of
their products. They could now open up their markets to not just the
upper -class but also the middle -class and lower -class as the demand to
consume began to increase rapidly. The line between need and want began
to get blurry. As time went on, media and arts became more
commercialized using advertisements. For instance, an average tv show
consists of 9 mins of advertisement for every 30 mins of a programme.
This increases recognition of brands among the society and the idea of
owning that product became more appealing. Over time, marketing
budgets began to surpass Research & Development budgets of companies,
which eventually led to the current scen ario of Consumerism.
As businesses began to exploit this desire of the consumers to consume,
many malpractices began in the marketplace. More and more products
seeped into the markets which made it difficult to recognize the true nature
of product. Consume rism is the outcome of suffering and exploitation of
consumers due to business’s aim to make abnormal profits, at the cost of
consumer’s safety and health. It became necessary to protect consumers
against such unfair practices which gave rise to the moveme nt of
consumerism.
Consumerism is a social force designed to protect consumers interest in
the market against the malpractices of the business.
Definition of Consumerism
“A social movement seeking to augment the right and powers of the
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54 “All environment forces intended to aid and protect consumers through the
exertion of legal, moral and economic pressure on business”
Examples of Consumerism
 Buying a car for each of your kid which is bigger and more luxurious
than an econo mical one
 Going to private schools/institutions which state institutions can do as
well
 Buying a bigger house with extra rooms when you can live comfortably
in a smaller house
5.2 IMPORTANCE OF CONSUMERISM
Importance of consumerism lies in:
1. Discouraging unfair trade practices
Consumerism aims to remove injustices done on consumers through
illegal and unfair trade practices like hoarding, black marketing,
misleading advertisements, deceptive packaging, etc. It works to create an
environment where business can co nduct its affairs ethically and sustain in
the market
2. Awakening and uniting consumers
Consumerism helps make consumers aware of their rights and educates
them about the right and wrong doings of businesses. This makes them
realize if/when they are being mi sled or misused at the time of purchase. It
leads to a collective consciousness on the part of all the consumers which
makes it difficult for business to use unfair tactics to make profit.
3. Protecting against exploitation
Exploitation of consumers can happe n through various means, such as,
deliberate hiding of facts, selling damaged/spoilt goods, improper
weightage assigned to a product, etc. To protect themselves against such
exploitation consumerism movement gained momentum. Consumers must
gain proper educ ation before buying a product, purchase standardized
goods with are ISI, AGMARK marked, verify the contents of the product,
etc.
4. Effective Implementation of consumer protection laws
To prevent misuse of consumers, government enacted the Consumer
Protectio n Act in 1986. This Act was introduced with the aim of
protecting the interests of all consumers irrespe ctive of the background,
class, caste, etc. Although, the legal framework is a time- consuming
process, effective remedies are provided to consumers wh o have faced the
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55 5. Awakening the government
Some of the regulations introduced by the government through various
laws and policies to safeguard the interest of consumers are:
 Sale of Goods Act, 1930
 Essential Commoditie s Act, 1955
 The Prevention of food adulteration act, 1954
 The Standard of weights and measures Act, 1976
 The Consumer Protection Act, 1986
These laws put restrictions by keeping a check and control on the
functioning of business.
6. Providing complete and la test information
An informed consumer is an aware consumer. It is an important
component of consumer protection. Most consumers are ignorant about
their rights, market conditions, price levels and product details. Keeping
the consumers informed through the various means and channels of
communication leads to transparency on the part of the business. It helps
consumers decide on the product they wish to purchase based on the
reliability, affordability, and other ethical considerations of business
7. Discouragi ng anti -social activities
Consumerism helps discourage anti -social activities which have a negative
impact on society and environment. Increasing need and desire to
consume puts a strain on the limited natural resources and pollutes the
environment. It mak es it difficult to concentrate on sustainable
development as the focus is on present consumption rather than future
need.
5.3 NEED FOR CONSUMERISM

Consumers are the backbone of a business. A business cannot dare to
ignore its consumers if it wishes to grow. H owever, there have yet been
instances of the numerous problems faced by consumers all over the
country which created a need for consumerism. Few of the problems faced
by consumers are:
1) No fair returns or satisfaction from the product purchased even after
paying the required price for it.
2) Irregular supply of goods due to artificial scarcity created in the
market to hike the prices
3) Fraud on consumers which leads to deceit by firms through
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56 4) The packed goods supplied in t he market, are not up to the mark.
The packing is very attractive, and it grabs the attention of
consumers. The packets may contain inferior goods thereby fooling
consumers.
Most consumers tend to get influenced by attractive advertising which use
skilled tactics of persuasion. It positions the product as a need in the minds
of the consumers which leads to an increase in demand. Consumers may
not be aware whether the product being sold to them meets the qualified
standards of safety, efficacy, and quality. Due to this, he may fall prey to
malpractices done by firms. This creates a need for consumerism in the
Indian markets.
 Physical protection of consumers is required against products that
are unsafe. It may endanger the welfare, health, or life of the
consu mers.
 Consumers need to have adequate knowledge about their rights and
measures against frauds and other malpractices.
 Encouraging competitions in the market provides an advantage to
consumers as it protects them against monopoly being created.
Competitio n also helps to provide better services at good prices and
improves quality and performance of companies.
 Environmental effects of products need to be considered as they can
pollute water, air, and endanger human life.
The need of consumerism is to shift focus from buyer beware to seller
beware. This would help create a balance in the demand and supply forces
of the market.
5.4 IMPACT OF CONSUMERISM
There are certain positive and negative effects of consumerism, such as:
I. Positive Effects
 Boosts innovation an d creativity
As the main aim of business is to make profits and grow in the market,
they continue to offer goods and services with new and improved features
to boost sales. E.g., every year a new model of a smart phone is launched
with better features and facilities. The only way to do so, to is focus and
invest on research and development of the product. It helps to provide
better products to the consumers and leads to economic growth in the
country

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57  Drives out poor performance
Consumers being the king of the market decide which products they wish
to purchase. So, they have the final say in whether a business is accepted
or rejected in the market. Companies not abiding by consumers rights or
not providing products as per standards will be unable to survive . The only
way to be competitive is to stay innovative through consumerism
 Consumerism leads to economic growth of the country
If goods are accepted and demanded by consumers, it creates a need on
business to provide adequate supply of the same. It creates a cycle of
buying and selling which leads to more revenue. If production is increased
due to increase in demand, employment increases which improves the
standard and quality of life of the people. This leads to overall economic
growth in the country
 Safe goods for consumers
If consumerism is the driving force in society, the buyers hold companies
to higher standards of performance. If those standards are not met, they
may look for alternate options of products from companies following fair
practices of con sumerism. This gives an edge to those businesses who
safeguard their consumers.
 Consumers are given more choices
Over time, each industry has been flooded with companies providing all
kinds of goods and services. It may become almost impossible to identi fy
a market which enjoys complete monopoly. This gives an advantage to
consumers, as they are provided with multiples options for any product.
Right from beverage, cosmetics, to equipment and real estate, there is no
industry existing where consumers do no t have a wide range of choices at
their disposal.
II. Negative Effects
 Focus on economy over environment
When the focus of the society is the provide the best products, it puts
pressure on the natural resources of the country. In order to provide best
price, s ome harmful substances may be used to fit within the price range.
It helps improve the economy but does more harm than good to the
environment
 Encourages debt
People tend to rely more on short term loans, credit cards, EMIs, etc. to
meet the needs of con sumerism to satisfy their demand. They ultimately
become a slave to their expenditure and may sometimes emergencies or
situations may make it difficult for them to pay up their debt. For instance, munotes.in

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58 purchasing luxurious items like a car, branded bags, proper ty, etc. on the
salary of the sole earning member of the house is a dangerous situation if
he/she loses their job suddenly.
 Leads to heath related problems
When people are unable to pay up their debt, it may lead to high stress
levels for them. Constant ex posure to stress may lead to mental and
physical health issues such as depression, high blood pressure, heart
problem, etc. They tend to focus less on themselves, their hobbies, their
relationships and more on buying the next new thing and paying their
debt.
 Change in the conscience of the society
Consumerism focuses on the best possible product under any
circumstances. There is no ethics involved in how you acquired it. It leads
to an addiction which makes one feel the need to purchase the goods and
servic es no matter what circumstances or situations.
 Increases Gap between the rich and not so rich
Society tends to judge or demoralize individuals who are unable to keep
up with the trends of consumerism. If one does not have enough means to
choose a product, they may be categorized as low category and
cut-off from society. It puts an undesirable pressure to fit in the circle
which creates a cycle that is difficult to break. It tends to further increase
the gap between the rich and not so rich.
5.5 OVERCOMING BARR IERS TO CONSUMERISM
The journey of consumerism from consumer exploitation to sustainable
consumption is fraught with many challenges and barriers. Major barriers
to consumer behavioral change can be categorized into cognitive,
structural, economic, and soc ial barriers.
Cognitive barriers begin with an individual’s mindset and knowledge
about sustainable and environment friendly products.
Structural and economics barriers have more to do with availability of
product in the market and accessibility to those p roducts. It also considers
the economic resources required to acquire these products on a recurring
basis
Social barriers are mainly concerned with the society’s norms and
expectations that decide how one may behave. It consists of attitudes,
perceptions, practices followed by majority.

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59 The following are the barriers and steps to overcome them
 Lack of Knowledge and Awareness
Majority of today’s youth may intend to make a difference/change in
consumption patterns but may simply not know how to. A lack of
knowledge of sustainable and long -term options regarding which products
to purchase may bind us into making repeated traditional purchases.
To overcome this barrier, one can start gaining as much information as
possible on a daily basis through informatio nal podcasts, reading on your
preferred brands manufacturing processes to see if they meet with your
values, watching informative documentaries, etc.
 Perception about Eco -friendly products
There has been a perception which have surrounded around the use of eco-
friendly products. For e.g., ecofriendly cleaning products being not too
effective for dirt on durable products, electric cars lacking power, etc.,
sometimes these perceptions result in a negative association about the
quality of these brands
Due to t hese perceptions, one may opt for less sustainable options in order
to not compromise on quality and utility. However, over time, these
brands have adapted and broken these perceptions to provide better
services for their product as they had to compete wit h traditional markets.
If this is yet a barrier to consuming eco -friendly products, one must be
encouraged to read reviews about such brands to understand if they meet
with your standards, as it helps protect the environment
 Limited retail availability
One of the most common structural barriers to conscious consumerism is
limited access to sustainable products in traditional retail stores in the
country. These products may be slightly more costly as compared to other
products due to which many shopkeepers m ay not keep them. This makes
it difficult to easily acquire earth conscious products and traditional
consumers may then opt for other alternatives having detrimental effects
on environment.
To overcome this barrier, many online shopping portals and websi tes can
increase availability of eco -friendly products. With increase in demand
and positive response to these products, retail stores may also stock them
for good margins.
 Scarce Economic Resources
It should be considered an extreme privilege to have the knowledge, time,
and financial resources to practice eco -friendly shopping patterns. While
increasing number of consumers are willing to shell out more money for
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60 bandwidth. Even if the product s may not be of premium price, for people
with limited financial resources, it may be difficult to refuse alternate
products which are sold at discount and bargains,
Therefore, many fast food and fast fashion brands have had enormous
growth as they sell g oods at unbelievably low prices encouraging
recurring purchases. However, an extra price associated with good quality
and ethically made products can pay off in the long run
To overcome this barrier, a conscious consumer on a budget may have to
think of ea ch purchase as a long -term investment than a mere traditional
buy. Buying a reusable bottle or eco -friendly pair of jeans may seem to be
more expensive now but be more sustainable in the long -term because of
better quality.
 Social norms and comparisons
The biggest barrier to consumerism is the social norms and community
standards enforced on individuals. If your family, friends, or colleagues
are not concerned with the effect of one’s purchase of commodities on the
environment, it may become difficult to st ick to your individual goals.
On the other hand, having a surrounding that keeps you accountable is
equally important. Seeking out like -minded people having the same vision
may help remove this barrier.
5.6 CONSUMER RIGHTS
Ever since consumerism became a known phenomenon, certain rights
have been recognized and accepted as basic consumer rights
1) Right to safety – This right is said to be protected against the
marketing of products which are harmful to the life and property of
consumers. This right is mainly appl icable to consumers on the basis of
low-standard healthcare and pharmaceuticals, commodities made of low -
quality materials, impure and adulterated food items, and harmful and
unsafe appliances which may have an adverse effect on a consumer’s
health and wel l-being.
2) Right to be informed - The is the right to be informed about the
quantity, standard, purity, quality, potency and price of goods or services,
to protect the consumer against unfair trade practices. Advertisement,
social media, and word -of-mouth a re the biggest sources through which a
consumer may be informed about a product. However, a consumer hardly
gets precise information about the product through these sources. It is
therefore expected that all relevant information such as, date of
manufactur ing and expiry, ingredients, use of product, precautions, etc., be
provided along with the product.
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61 3) Right to be heard – It states the right to be heard and to be assured
about consumer’s interests receiving due consideration at appropriate
forums. It is t he right of a consumer to file an official complaint if/when
his rights are violated. This right helps in giving the consumer community
a chance to raise their voice against a seller or a product if they are
exploited by it.
4) Right to choose – This is the right to be assured, wherever possible,
and have access to a variety of goods and services at reasonable prices. A
perfectly competitive market with many buyers and sellers is an ideal
scenario for this right to be exercised as it gives multiple options fo r a
particular type of commodity.
5) Right to redress – This right seeks redressal against unfair trade
practices or restrictive trade practices or unscrupulous exploitation of
consumers. Consumer courts like District forum, State commission and
National com mission have been set up to address this right. A consumer
has a right to get his complaints and claims against the sellers.
5.7 CONSUMER PROTECTION ACT, 1986
The Consumer Protection Act was passed in 1986 and it came became
enforced on 1 July 1987. It was introduced with the aim of protecting
consumers against exploitation and unfair practices of business.
The main objectives of the Act are:
 To set -up a forum to encourage fair trade practices
 To forbit conduct of business which prevents consumers from enjo ying
their basic rights
 To create a framework for consumers to seek redressal
 To protect the rights of consumers
 To provide access and opportunities for consumer education, research,
and training

Features of Consumer Protection Act, 1986
1. The term ‘goods’ c overs all kinds of movable and tangible property
except money and includes stocks, shares, crops, etc. The term
‘services’ includes services of all kinds including banking, insurance,
entertainment, transport, etc. The services provided by doctors,
enginee rs, lawyers, etc. are also included.
2. It covers all supplies of goods and services provided in and by private,
public, and co -operative sectors of society.
3. It entails establishing consumer protection councils in the form of
District forum at district lev el, State commission at State level and
National commission at National level to deal with consumer
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62 4. A complaint under the Act can be filed by any consumer, consumer
association, State or Central government, g roup of consumers having
similar interest and legal heir or representative in case of death of a
consumer
5. The consumer can file the complaint within 2 years from the date on
which the issue arose. However, it may even be filed after the expiry of
2 years i f sufficient reason for delay is shown
6. A complaint can be filed in person or by an agent/lawyer or by post. It
must be a written complaint with proper documentary evidence to
support the claim. The complaint must also state the relief that the
consumer wis hes to receive. It should contain other details such as,
nature, description, and address of the complainant as well as details of
the party complaining against.
7. Depending on the relief sought and the nature of the complaint, the
court may order one or mo re of the following reliefs:
a) Removing the defect in goods or deficiencies in services as the case
maybe.
b) Replacing defective goods with new goods
c) Providing refund of the price paid for the purchase of goods
d) Compensation for the loss or injury suffered
e) Discontinuance of unfair or restrictive trade practices done prior
f) Removing harmful goods from being offered for sale
g) Compensation for any cost which may have been incurred by
complainant
5.8 CONSUMER REDRESSAL AGENCIES
The Consumer Protection Act, 1986 set up a judicial machinery consisting
of Consumer courts at each level. They are known as District Forum, State
Consumer Disputes Redressal Commission (State Commission) and
National Consumer Disputes Redressal Commission (National
Commission). Let us look at eac h of them in detail:
1. District forum
 The District forum is the first court at the bottom of the hierarchy of
consumer courts. Each district must have at least 1 district forum.
 The composition of the district forum consists of:
 A President with the qualifi cation of a District judge
 Two other members, one of whom shall be a woman
 The members must be at least 35 years of age having a degree from
a recognized university and must have at least 10 years of
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63  A person c annot be appointed as a member if he/she has been a
convict sentenced to imprisonment, is insolvent, of unsound mind,
removed from a government job, etc.
 In the absence of the President, the Chief Justice of the High Court
can nominate a sitting judge of the High Court to be President
 The District forum has the authority to entertain complaints up to
Rs. 20 Lakhs of the value of goods, services and compensation
 If a complainant is not satisfied with the decision of the District
forum, they can file an appeal within 30 days to the State
Commission.
2. State Consumer Disputes Redressal Commission (State
Commi ssion)
 The State Consumer Disputes Redressal Commission, also known as
State Commission is the second level of courts from the bottom of the
hierarchy.
 Each State must have 1 State Commission established by the
Government of the State.
 The composition of the State Commission consists of:
 A President who is or was a judge of the High Court, appointed by
the State Government
 Two other members, one of whom shall be a woman
 There should at least be 2 members in the State Commission at all
times, it cannot be l ess than 2.
 The members must be at least 35 years of age having a bachelor’s
degree from a recognized university and must have at least 10 years of
experience in law, commerce, economics, etc.
 A person cannot be appointed as a member if he/she has been a convict
sentenced to imprisonment, is insolvent, of unsound mind, removed
from a government job, etc.
 In the absence of the President, the Chief Justice of the High Court can
nominate a sitting judge of the High Court to be President
 The State Commission has the authority to entertain complaints of
more than Rs. 20 Lakhs and up to Rs. 1 crore of the value of goods,
services and compensation
 It also deals with all the appeals of the District forum. Also, if the
District forum has acted beyond its power or failed in its duties, then
the State Commission can call for its records.
 If a complainant is not satisfied with the decision of the State
Commission, they can file an appeal within 30 days to the National
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64 3. National Consumer Disputes Redressal Commis sion (National
Commission)
 The National Consumer Disputes Redressal Commission, also
known as National Commission is the third level of courts in the
hierarchy, subordinate to the Supreme Court.
 The composition of the National Commission consists of:
 A Pre sident who is or was a judge of the Supreme Court,
appointed by the Central Government
 Four other members, one of whom shall be a woman
 The members must be at least 35 years of age having a bachelor’s
degree from a recognized university and must have at le ast 10 years
of experience in law, commerce, economics, etc.
 The remuneration of the members is decided by the Central
Government
 A person cannot be appointed as a member if he/she has been a
convict sentenced to imprisonment, is insolvent, of unsound min d as
declared by Central court, removed from a government job, etc.
 The National Commission has the authority to entertain complaints
of more than 1 crore of the value of goods, services, and
compensation
 It also deals with all the appeals of the State Commission. Also, if
the State Commission has acted beyond its power or failed in its
duties, the National Commission can call for its records.
 If a complainant is not satisfied with the decision of the National
Commission, they can file an appeal within 3 0 days to the Supreme
Court.
5.9 MEASURES TAKEN FOR CONSUMER
PROTECTION
1. By Government
Consumer Protection Councils : In 2002, the Consumer Protection Act,
1986 was amended to provide for setting up of Consumer Protection
Councils at district, state, and natio nal level. This was introduced for
promotion and protection of the rights of the consumers i.e., right to be
informed, right to be assured, right to be heard, etc. The councils are
required to give publicity to these rights, procedures for filing complaint s
and providing inputs to consumer movements.
Public Interest Litigation (PIL) : It is a system under which a person can
move the court of law in the interest of the society. It is usually done to
provide legal remedy to unrepresented groups such as consum ers,
minorities, LGBTQ community, etc. Any person, whether or not an
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65 Consumer Welfare Fund : The Government has created a fund for
Consumer welfare which provides financial assistance to the consumer s in
the country. This fund is used for activities like consumer education and
awareness training, complaint handling, counselling, and guidance
mechanism, etc.
2. By Business
Self-Regulation : Firms who are socially responsible must follow ethical
practices while dealing with their consumers. Almost all firms now -a-
days, have set up customer care services and grievance cells to reduce or
remove the issues faced by their consumers
Business Associations : There are many trade, commerce, and business
associations such as Chamber of commerce, Indian industries conference,
etc. who lay down the code of conduct to be followed by its members. It
provides guidelines in customer dealings.
3. By Consumers
Inspection before selection of goods : It is the responsibility of the
consumers to inspect the goods/services before making the purchase. They
must not rely on advertisements and must gather all information such as
durability, contents, quality, etc. This would help them in making the best
choice within their available reso urces
Collect proof of transaction : It is the duty of every consumer to obtain
receipts/invoice/guarantee/warrantee cards at the time of purchase of
goods/services. This can be shown as documentary evidence if filing a
complaint in the court of law. The co nsumer must preserve them till the
warrantee/guarantee expires.
Quality consciousness : It is the basic responsibility of every consumer to
be aware of the quality of the product they are buying. This will help put a
stop to unfair practices of businesses. ISI, AGMARK, Hallmark, FPO,
etc., are quality certifications that are present on the products. The
consumers must look for them before making any purchase.
5.10 CONSUMER PROTECTION CASES
Case 1
National Insurance Company Ltd. VS Hindustan Safety Glass Works
Ltd. &Anr.
The aggrieved party had claimed compensation because of damage caused
due to rain during a mentioned period while under insurance contract.
However, the insurance company refused to admit claim and denied relied
on the grounds that one of the co nditions of the policy stated that the
National Insurance would not be liable to pay for any loss or damage
caused to the insured if it has taken place 12 months after the event of loss
or damage. The complaint was filed with the National Commission under
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66 The National Commission stated that the claim made by the aggrieved
party is actionable. It also held that the goods were insured at the time of
incident, and that he asked for the claim next day. It rejected all the
arguments made by the Insurance company and ordered them to provide
relief to an amount of Rs. 21 Lakhs with interest at 9% per annum.
Case 2
Sehgal School of Competition Vs. Dalbir Singh:
A student deposited fees of Rs. 18,000 in two installments for coaching of
medical entrance examination for 2 years. However, when the student
realized the coaching was not up to the mark, asked for refund from the
coaching institute for the remaining period. The case was filed in the
National Commission. The Coaching Institute i.e., Sehgal School of
Competition provided records that showed good results of the Institute to
prove that the services provided by them are not substandard
The National Commission stated that fees once paid cann ot be refunded is
an example of unfair trade practice. It quoted guidelines provided by the
UGC that if the student has not attended a single lecture, an amount of Rs.
1,000 can get deducted but the balance amount should be refunded. The
State Commission further stated that the aggrieved party be provided with
extra compensation beyond the balance amount of fee, for the legal costs
and the pain that the student may have had to bear.
5.11 SUMMARY

In this unit, you studied the concept of ‘consumerism’ in detail. It is the
action taken by the consumers to protect their own interest if not protected
by business and government. The onus of responsibility lies on 3 groups
namely: the business, the government, and the consumers themselves.
It describes the need for protecting consumer rights. The Consumer
Protection Act, 1986 was enacted with this intention. Consumer redressal
agencies at district, state and national level were set up to not only settle
disputes but also award compensation. Various other measures were
undertaken by government and business to safeguard consumers.
5.12 EXERCISE

FILL IN THE BLANKS
1) ______ is not a problem faced by consumer (Adulteration, Sale of
spurious p roducts, Black marketing, only one quality of products )
2) Some consumers prefer to pay high price for goods as they believe that
it indicates ______ (the shopkeeper charges fair price, they are rich, the
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67 3) The right of consumers is protected under ______ ( Consumer
protection act 1986 , Consumer protection act 1990, Consumer
protection act 1984, Consumer protection act 1991)
4) The district forum has the jurisdiction to deal with all complaints where
the value of goods or services or t he compensation claimed does not
exceed ______( Rs. 10 Lakh, Rs. 20 Lakh , Rs. 1 Lakh, Rs. 1 Crore)
5) Consumer welfare fund is a measure taken by ______ for consumer
protection (Business, consumers, government , NGOs)
6) _______ is not a right of the consumers (right to safety, right to
constitutional remedies , right t o choose, right to be informed)
7) An appeal against the order of State Commissions can be filed before
the _______ (Supreme Court, High Court, National Commission,
District forum)
8) The minimum age of forum member of a district forum should be
(30, 35, 40, 65 )
9) ______ is the main duty of the producer (to avail low prices, to produce
high-quality goods, to follow the required safety rules and
regulation , to not charge taxes)
10) ________ is not a function of Consumer Protection Councils (To
create awareness of consumer rights among consumers, to represent
consumers in consumer courts at times, to guide consumers on how to
file cases in consumer courts, to provide compensation to c onsumers
when they are cheated by shopkeepers )
TRUE OR FALSE
1) A consumer’s complaint can be filed only by the consumer
himself/herself. FALSE
2) Consumer Protection Councils have been established at the centre and
states under the Consumer Protection Act, 1986 TRUE
3) The Government is indifferent towards safeguarding consumer
interest FALSE
4) Consumers should attend any training programme arranged by the
local consumer association. TRUE
5) A false representation about the quality of a product in an
advertisement is a misleading advertisement. TRUE
6) Consumer protection is a movement to safeguard interest of business.
FALSE
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68 7) A consumer has the right to get compensation depending on the
degree of the damage. TRUE
8) There are no effective redressal agencies at National level t o protect
consumer interest. FALSE
9) People tend to rely more on short term loans, credit cards, EMIs, etc.
to meet the needs of consumerism to satisfy their demand. TRUE
10) If a complainant is not satisfied with the decision of the State
Commission, they can file an appeal within 30 days to the Supreme
Court. FALSE
ANSWER IN BRIEF
1) Write a note on the meaning and evolution of Consumerism
2) Explain the need of Consumerism
3) Why is Consumerism an important phenomenon?
4) Describe the positive and negative impact of Cons umerism
5) Explain the barriers to consumerism and the ways of overcoming it
6) Explain the features of Consumer Protection Act, 1986
7) Name the parties involved in consumer protection. Explain the
measures taken by them to protect the consumers
8) Highlight the righ ts of Consumers
9) Describe in detail the consumer redressal agencies set up for
protection of consumers



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69 6
CORPORATE SOCIAL RESPONSIBILITY
AND CORPORATE GOVERNANCE
Unit Structure
6.0 Objectives
6.1 CORPORATE SOCIAL RESPONSIBILITY
6.1.1 Introduction
6.1.2 Definition
6.1.3 Scope
6.1.4 Importance
6.1.5 Arguments for and against CSR
6.1.6 Challenges
6.1.7 Conclusion
6.2 Corporate Governance
6.2.1 Introduction
6.2.2 Definition
6.2.3 Features
6.2.4 Importance
6.2.5 Principles
6.2.6 Conclusion
6.3 Social Responsibility of business
6.3.1 Introduction
6.3.2 Definition
6.3.3 Responsibility towards stakeholde rs
6.3.4 Arguments for and against social responsibility
6.3.5 Conclusion
6.4 Ecology and Business
6.4.1 Meaning of ecology, ecological balance and environment
6.4.2 Relationship between industry and ecology
6.4.3 Suggestions for ecology consciousness at the business level
6.4.4 Government policy on environment protection
6.4.5 Carbon credit
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70 6.4.7 Emissions Market
6.5 Lets Sum Up
6.6 Unit End Exercises
6.0 OBJECTIVES
After going through thi s unit, you will be able to ­
● Understand the scope and importance of corporate social
responsibility.
● Explain the relevance of corporate governance.
● Describe the social responsibilities of a business concern its
stakeholders.
● Understand the relation betw een industry and ecology
6.1 CORPORATE SOCIAL RESPONSIBILITY (CSR)
6.1.1 Introduction
Business and society are interrelated and interdependent. Society depends
on business for meeting its needs and welfare and on the other hand
business depends on societ y for its existence and growth. Business
organisations have to look after their economic interests and which
facilitate their survival, stability and growth. Along with this, it has to
satisfy the needs and expectations of its stakeholders. Adjusting busin ess
as per the expectations of all stakeholders constitutes corporate social
responsibility. It suggests that business is not merely for profit ­making but
also for social welfare.
6.1.2 Definition of Corporate Social Responsibility (CSR)
The World Busines s Council for Sustainable Development states that
“Corporate Social Responsibility (CSR) is the continuing commitment by
business to behave ethically and contribute to economic development
while improving the quality of life of the workforce and their fami lies as
well as of the local community and society at large.”
“Corporate Social Responsibility (CSR) encompasses the economic, legal,
ethical and philanthropic expectations placed on organisations by society
at a given point of time.”, according to Carrol l and Buchholtz .
CSR is a part of corporate governance and encompasses areas of concern
about how a company serves the interests of the society, locality,
environment and the well ­being of people at large. CSR is seen as
voluntary actions and responses of the company, over and above its legal
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71 society, locality and the environment. In the context of modern business, it
indicates good corporate citizenship.
This approach to business means that business can no longer be treated
only as an institution to make profits for its owners and stakeholders; but,
it has to shoulder responsibility for the society and communities as well.
Going beyond the conventional concept of charity and donations, C SR
requires the company to take full responsibility for the impact of its
policies and actions on society, community and the environment. For
example, a one ­time donation made to the victims of a natural disaster is
not a measure of CSR. Ideally, a company or a business could adopt
several natural calamity ­affected villages and take the responsibility of
rehabilitation of communities.
CSR, being a voluntary measure, has no rules, regulations or procedures to
comply with. Any work or activity falling under CSR is recognised as a
means to demonstrate to society at large that the company believes in
ethical responsibility. These activities add to the goodwill and brand
image of businesses and institutions. Many companies in India make
provisions for their CSR commitments in the annual plan itself and get
their compliance externally audited and reported in their Annual Reports.
Some companies appoint an Ethics Officer ­ a senior member of the
management team, who establishes ethical standards and oversees the
company's compliance to its CSR policy. The objectives of a company's
CSR governance must be clearly defined with respect to its different
stakeholders and business environment, as changes that take place are also
influenced by socio ­economic and political c hanges in the locality or
country. Hence, strategic and ethical means of CSR compliance often need
to be charted and communicated within the organisation and to society at
large to support and motivate people. Thus, the CSR activity program of a
company an d related resource allocations would most significantly require
the commitment and intervention of the top management.
Traditionally CSR in India was seen as a philanthropic activity. It was
believed that every company should play an active role in discha rging the
social obligations, subject to the financial health of the company. In the
early 1990s, the concept of trusteeship was introduced by Mahatma
Gandhi to aid socio ­economic growth. Family values, traditions, culture
and religion have influenced CSR.
The Corporate Social Responsibility concept is partially compulsory and
partly voluntary. In India, laws are made for control of pollution,
environmental safety, security of employees, protection of consumers and
investors and protection of local communit ies. To honour such laws is as
good as honouring corporate social responsibility. Here companies have to
abide by the laws thus making corporate social responsibility compulsory.
In addition to responsibilities imposed by laws, companies have to take
initiative in avoiding pollution, and in the protection and fair treatment of
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72 As per the Companies Act, 2013, there is a mandatory provision on
spending towards corporate social responsibility. Companie s with a net
worth of more than 500 crores or revenue of more than 1000 crores or
net profit of more than 5 crores will have to mandatorily spend 2% of
their average net profit over the three preceding years on corporate social
responsibility activities .
This provision of the Companies Act is a very significant step taken by the
government regarding corporate social responsibility. As a result of this
provision, funds are diverted towards socially useful activities for the
benefit of several social class es.
6.1.3 SCOPE OF CORPORATE SOCIAL RESPONSIBILITY
1. Energy
This area of CSR is concerned with the conservation of energy while
conducting business operations and enhancing the energy efficiency of the
products of the company.
2. Environment
This area of CSR is involved with the environmental aspect of
manufactured products and covers pollution control while conducting any
business operations, repair or prevention of damage to the environment
that results from the processing of the natural resources and the
conservation of the natural resources.
3. Human Resources
This area of CSR is associated with the impact of the organisational
activities on the people who constitute the human resources of the
organisation. These activities include training programs, recru itment
practices, job enhancement, job rotation, fringe benefit plans, wage, salary
levels, etc. for employees.
4. Fair Business Practices:
CSR for fair business practices is concerned with the relationship of the
company to special interest groups and it fo cuses on advancement and
employment of minorities, support for minority businesses, employment
of women, employment of other special interest groups, and socially
responsible practices abroad.
5. Community Development
With respect to CSR, the area of communi ty development revolves around
health and wellbeing, promotion of art and education within the
communities and community activities.
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73 6.1.4 IMPORTANCE OF CSR
Corporate Social Responsibility is gaining importance because of the
following reasons ­
1. Public Ex pectations from the Enterprise
It refers to the anticipations of the people that are either directly or
indirectly associated with an enterprise or organization. The enterprise can
exist peacefully, if it fulfils the needs, wants, and demands of society.
However, if an enterprise fails to live up to society’s expectations, its
existence would become difficult. Therefore, an enterprise should respond
to society’s needs if it wishes to remain in the business in the long run.
2. Better Environment for Business
It refers to providing a feasible environment for the business operations of
an enterprise. If the society is satisfied with the business activities of the
enterprise, it creates a favourable environment for the enterprise.
3. Good Public Image
Building and maintaining a public image helps in improving the
performance of the enterprise as it helps the enterprise to gain more
customers and better employees.
4. Responsibility with Power
CSR is an important area that should be balanced properly because when
an en terprise enjoys social power, its decisions make an impact on the
environment, consumers, employees and several areas of society. Any
imbalance in decisions of the enterprise may lead to a negative effect on
societal welfare.
6.1.5 ARGUMENTS FOR AND AGAINS T CSR
CSR has become a subject of debate with views for and against corporate
social responsibility because of the practices followed by several
companies and institutions. Many questions if charitable work should get
precedence over the interests of dire ct stakeholders. It is argued that
charities strain the company's limited resources and hamper the welfare
measures undertaken for its employees, investors, suppliers, etc. Others
argue that adherence to laws, caring for the society and environment make
good business sense for long term benefits which lead to image building,
enhanced business goodwill and inspire a greater customer base. But,
doing what is necessary for sustainable profit and growth in a competitive
business environment by considering the o pinions of customers, people
and society are important. Additionally, resolving arising conflicts through
employee education about the company's social responsibility is equally
significant. People argue that there could be a conflict of interest between
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74 is conducted with transparency, and the moral reasoning behind all such
activities is clearly communicated, then most conflicts would resolve
easily. Industry can benefit the neighb ouring society and its people
through increased local employment opportunities, along with the better
quality of community life and education and environment management. If
ethical elements and social responsibility can be factored into a business
philosop hy, it could deliver better results and benefit the business in
general. Therefore, CSR programs are not voluntary, but a necessity for
modern ­day industry, business and organisations.
The concept of CSR is not modern and was in vogue even in the past. Fo r
example, the various 'trusts' run by Tata and Birla, two leading Indian
business houses, were designed and operated with the purpose of social
service and to help the poor and needy in the community. These pioneers
of Indian industry recognised their res ponsibility to society at the very
early ages of their business. They realised that by neglecting the
responsibility to society, a business cannot serve its true purpose of
sustainable growth. Mr R. C. Bhargava, the former long ­time CEO of
Maruti Udyog Li mited (MUL), New Delhi, observed that a mix of ethical
ingredients along with a focus on Japanese style man ­management
wherein workers feel involved in the company's goals and systems, not
exploited or deprived of a better quality of life and livelihood, a nd are
treated respectfully and ethically explain MUL's resounding success,
despite the fact that it had to operate from within the constraints of 'public
sector' in India.
Then there are those who argue that corporate social responsibility is a
scheme by which a company takes care of its external business forces such
as politics, society, the government and other factors that are not
necessarily beneficial to a company’s business goals. They also believe
that traditional business ethics are based on broad principles of integrity,
justice and fairness, and should focus on the issues of internal stakeholders
such as product quality, customer satisfaction, employee wages and
benefits, etc. External focus may, at best, integrate local community and
environment al responsibilities with the company's business philosophy.
The influence of such actions on a company's business is limited and,
beyond that scope, it will adversely affect the business itself. It is also
argued that the CSR movement will elevate a social and political agenda
and draw on the notions of liberal propriety and correctness. Arguably, the
latter direction of social responsibility is more of an outwardly ­focused
social vision to satisfy the political and social critics; it is not directed
toward s any real business purpose, such as: offering a quality product at a
reasonable price; treating employees, vendors, franchisees and investors
fairly; acting responsibly toward the local environment and community;
and, most of all, embracing transparency i n operations and accountability
to even the critics. Yet, none can deny that an organisation has a social
responsibility not only to its employees, customers and other stakeholders
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75 should be noted that social responsibility must be meaningful for the
overall purpose and progress of the business and society.
A business cannot grow by isolating the people and society it serves. A
large part of it may lie external to the conventional bu siness system and
judgement. Incorporating these outwardly ­focused responsibilities into
business management systems and processes is the task of CSR policy.
Commitment to the identified areas of CSR and honestly working towards
the discharge of related re sponsibilities make good sense for the long term
success of the business and the benefit of stakeholders.
However, CSR must not end up as mere lip service, the company must be
committed to behaving ethically towards the external social environment
where i t operates, to contribute to the economic development, quality of
life of the community and the society at large. This is not in conflict with
the interest of the workforce, other direct stakeholders, or from the
standpoint of long ­term benefit and sustain ed growth, nor in conflict with
the purpose of business and tenants of business ethics. It is, indeed, an
opportunity to create a win ­win situation for all internal and external
stakeholders.
6.1.6 CHALLENGES OF CSR
An enterprise faces numerous challenges while practising CSR activities.
These challenges may pose a hindrance in the process of strategic
management in an enterprise.
1. Lack of Transparency
It is a major hindrance in the implementation of CSR programs when
enterprises do not disclose the informa tion about their CSR programs and
the funds allocated to implement these programs. The lack of transparency
can negatively affect the trust among enterprises and communities.
2. Lack of Community Participation
It hinders the prospect of CSR activities. Many c ountries have less
knowledge about CSR; thus, it leads to a lack of interest by communities
to participate with enterprises in CSR activities. For example, in India,
enterprises do not have an adequate understanding of CSR activities
because they lack the tools, resources, and commitment to carry these
activities. This in turn results in a lack of initiatives by Indian enterprises
to undertake CSR activities at an extensive level.
3. Lack of Non -Governmental Organisations (NGOs)
The presence of NGOs is importa nt to advance the pace of implementing
CSR activities in a country because NGOs guide and work with the
enterprises to attain the objectives of CSR activities. But, the non ­
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76 4. Lack of CSR Guidelines
Many countries do not have clear guidelines related to CSR initiatives. As
a result, enterprises lack direction and guidelines to follow CSR practices.
Enterprises do not measure and evaluate CSR activities if n o proper
guidelines are defined.
5. Narrow View towards CSR Initiatives
A Narrow View of CSR Initiatives is found due to the limited perception
of an enterprise towards CSR activities. However, a wider view or
perception of CSR, that includes the willingness of the enterprises to take
responsibility and be accountable for impacts created by their activities
aids in broadening an organisation's view towards CSR.
6. Importance to Visibility Factor
Several times NGOs involve themselves in CSR programs to gain media
attention and coverage but fail to achieve the goals at the grassroots levels.
7. Lack of Budget
Budget is a major constraint for enterprises that wish to practice CSR
activities and at times, several Small and Medium Enterprises (SMEs) that
have a willingnes s to participate in CSR activities have to hold back due to
lack of financial support.
6.1.7 Conclusion
Socially responsible means not only fulfilling legal obligations but also
going beyond compliance and investing more into human capital, the
environmen t and relations with stakeholders. This suggests that the
corporate social responsibility concept needs to be adjusted as per the
challenges of the situation. Tighter accountability standards are important
and essential. In addition, business enterprises h ave to accept their social
obligations/responsibilities voluntarily. They have to honour the growing
and changing expectations of different social groups.
6.2 CORPORATE GOVERNANCE
6.2.1 INTRODUCTION
Corporate governance broadly refers to the rules, proce sses or laws by
which businesses are operated, regulated and controlled. Corporate
Governance can also refer to the internal factors defined by the
management along with external forces such as consumer groups, clients,
society, environment and government regulations.
Corporate governance provides a structure that works for the benefit of
everyone concerned by ensuring that the enterprise adheres to accepted
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77 theme of corporate govern ance is to ensure accountability of certain key
individuals in the organisation through a mechanism of ‘code of practice’
and by ­laws. Simultaneously, corporate governance places a strong
emphasis on both, economic efficiency and safeguarding the welfare o f
shareholders.
The ‘agency theory’, propounded by Eugene Fama and Michael Jensen in
1983, aids in understanding the purpose and process of corporate
governance. According to the theory, a firm is seen as a series of contracts
and the responsibility of the firm is governed by the ‘principal ­agent’
relationship. This is the beginning of the modern corporate governance
approach where shareholders are recognised as the ‘owner’ (principal) of
the company and the board is the ‘agent’ responsible to serve the rig htful
purpose of the business including economic efficiency and protecting the
interests of the shareholders.
Corporate governance largely remains an ambiguous and often
misunderstood term. Many tend to equate it with administrative technique,
but corporat e governance is a much broader concept. It includes fair,
ethical, efficient and transparent management that strives to achieve
certain well ­defined objectives. Thus, corporate governance suggests a
system of corporate management that will satisfy sharehol ders, creditors,
employees, customers and suppliers and comply with the legal and
regulatory framework apart from meeting environmental and local
community needs.
The concept of corporate governance did not receive much attention till
the 1990s. However, i ts need and importance increased considerably
thereafter. This was due to mismanagement and failure of many
corporations and widespread dissatisfaction with the functioning of the
corporate sector at the global level. A series of business scandals took
place in the UK in the late 1980s. Public criticism of the corporate sector
resulted in the appointment of a committee under the chairmanship of Sir
Adrian Cadbury in 1991 in the UK. The Cadbury Committee was
appointed to define a code of good corporate gover nance and suggest
ways and means to implement it.
Corporate governance is concerned with the problem that arises with the
separation of ownership and control. It is related to arrangements made by
financiers i.e. shareholders and lenders to induce managers to care for
their interests. Thus corporate governance refers to the overall control of
activities in a corporation. It refers to how a corporation is administered or
controlled.
6.2.2 Definitions.
1. The Confederation of Indian Industry has defined corporat e
governance as, “laws, procedures, practices and implicit rules that
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78 claimants, in particular, its shareholders, creditors, the State and the
employees.”
2. The Cadbury Committee (UK) defines corporate governance as, “the
system by which companies are directed and controlled.”
3. According to the SEBI Committee , “Corporate Governance is the
system by which the companies are directed and controlled by the
management in the best interest of t he stakeholders and others ensuring
greater transparency and better timely financial reporting.”
6.2.3 FEATURES OF CORPORATE GOVERNANCE
1. It ensures that an adequate and appropriate system of control operates
within a company.
2. It prevents any single individ ual from exercising undue power.
3. It is concerned with the relationship between a company’s
management, the board of directors, shareholders and other
stakeholders.
4. It seeks to ensure that the company is managed in the best interest of
the stakeholders.
5. It tries to encourage both transparency and accountability in
organisational functioning.
6.2.4 IMPORTANCE OF CORPORATE GOVERNANCE
1. In recent times, many scams, frauds and corrupt practices have taken
place. Misuse and misappropriation of public money happen e very day
in India and across the globe. It happens in the stock market, banks,
financial institutions, companies and government offices. Many
companies have started corporate governance to avoid these scams and
financial irregularities.
2. Today most companie s are selling their goods in the global market. So,
they have to attract foreign investors and foreign customers. They also
have to adhere to foreign rules and regulations. All this requires
corporate governance. Entering, survival and success in the globa l
market is impossible without corporate governance.
3. It also enhances an organisation’s image. It reflects that the
organisation is responsible towards shareholders and creditors.
4. The presence of strong governance standards provides better access to
capital markets.
5. Foreign institutional investors are increasingly depending on corporate
governance, one of the criteria for deciding which companies to invest
in.
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79 6.2.5 PRINCIPLES OF CORPORA TE GOVERNANCE
Corporate governance principles have the purpose of developing an
understanding of what needs to be done, how and why for the ensuring
success of a business. As for the principles, the corporate governance
process has to have the three built ­in elements, namely: (i) ‘what to act’
pertaining to the corporate mission, objectives and goals; (ii) ‘how to act’
pertaining to the systems and processes of corporate governance; and (iii)
‘by whom to act’ pertaining to people i.e. corporate participants .
Following are the principles of corporate governance.
1. Rights and Equitable Treatment of Shareholders
Organisations should respect the rights of shareholders and help them to
exercise these rights by effectively communicating information that is
understan dable and accessible and encouraging shareholders to participate
in general meetings.
2. Interests of Other Stakeholders
Organisations should recognise that they have legal and moral obligations
to all legitimate stakeholders including society and the environ ment.
Organisations should, therefore, act to enhance. or at least protect the
interests of all such stakeholders including employees, customers and
clients, society, locality, government, and environment.
3. Role and Responsibilities of the Board
The board n eeds a range of skills and understanding to be able to deal with
various business issues and the ability to review, control and challenge
management performance. The Board needs to be of adequate and
sufficient size and should have an appropriate level of commitment to
fulfil its responsibilities and duties.
4. Integrity and Ethical Behaviour
Ethical and responsible decision ­making should be an important aspect of
corporate work culture. It is not an ornamental aspect of public relations; it
should be the core requirement for all decision ­making processes
including risk management, avoiding lawsuits, environment management,
and social services. Codes of conduct must be developed by organisations
for their directors and executives to promote ethical and responsi ble
decision ­making. Compliance and ethics programmes should be
established by organisations to minimise the risks of ethical failure and to
promote ethical decisions.
5. Disclosure and Transparency
Organisations must clarify and make publicly known the role s and
responsibilities of the board and management in order to provide
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80 Procedures should be implemented for independent and truthful audits, for
verification and for safeguarding t he integrity of the company's financial
reporting. Matters that concern the organisation should be disclosed timely
and should be balanced to ensure that all investors have access to clear and
factual information.
6.2.6 CONCLUSION
Corporate governance i s often perceived as a means to control and
regulate within the provisions of laws and regulations, but, at times, it may
have to go beyond the legal boundaries in order to discharge moral
responsibility. This is more so in developing economies where the
business has definite social or environmental responsibility. Corporate
governance has to evolve as per the necessity due to the interplay of
various factors, especially the external ones. It cannot display the 'one key
fits all' syndrome in a business worl d that is fast ­changing and being
increasingly influenced by many external factors on which companies will
have, theoretically, little control. The task of corporate governance is not
to avoid risks and uncertain situations of business that will always pre vail
in any business but to creatively and intelligently (strategically) work
within the ethical and legal framework to bring about positive differences
in the results and, results are the visible measure of success of governance.
the means (to achieve the se results) must be legal, ethical and morally
acceptable to the government and society at large. However, the principles
of corporate governance are continuously evolving along with the needs,
experiences and changes in the world order.
6.3 SOCIAL RESPON SIBILITY OF BUSINESS
1.3.1 INTRODUCTION
Social responsibility of business is understood as the obligations of the
management of a business organization towards protecting the interests of
society.
According to the concept of social responsibility, the obje ctive of
managers for taking business decisions is not merely to maximize profits
or shareholder’s value but also to serve and protect the interests of other
members, such as workers, consumers and the community as a whole.
6.3.2 Definitions
According to Howard R. Bowen , social responsibility means, “obligation
of business to pursue those policies, to make those decisions, or to follow
those lines of action which are desirable in terms of the objectives and
values of our society.”
According to the Internati onal Seminar on Social Responsibility (held
in 1956 at New Delhi), social responsibility means, “Responsibility to
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81 the task of management to reconcile these separate and sometimes
conflicting responsibilities.”
Some Indian sociologists and economists connect the idea of social
responsibility of business to the concept of trusteeship propounded by
Mahatma Gandhi. According to the concept of trusteeship, Wealth or
capital is owned by the capitalist class as trustees of the society. Hence,
the resources and capital used for the production of goods and services
should be used not to maximize profits for them but for the larger benefit
of society.
But, to expect that business enterprises will be purely guided by the
benefits they confer on society by their activities is truly unrealistic.
According to management science, the concept of social responsibility is
that businesses should maximise their profits subject to their working in a
socially responsible manner to promote the interests of society. Working
in harmony with the community and environment around us and not
cheating our customers and workers we might not gain anything in the
short run but in the long term it means greater profit s and shareholders’
value’
6.3.3 RESPONSIBILITIES OF BUSINESS TOWARDS
STAKEHOLDERS
All the stakehold­ers including the society in general are affected by the
business activities of a corporate enterprise and it is important that the
organization acknowled ges its responsibility to them. Social responsibility
of business means that the interests of all the stakeholders must be
promoted, and not merely any one class of stakeholders.
1. Responsibility to Shareholders:
An organization must recognise the rights of shareholders and protect their
interests. Shareholders of an organization have certain inherent rights like,
the right to information, the right to submit proposals, the right to vote and
to ask questions at the annual general body meeting, etc; and the same
must be upheld.
An organization must while dealing with the shareholders, observe the
best code of conduct. However, while pursuing the said objectives, the
organization must ensure that they protect the interests of employees,
consumers and other st akeholders.
2. Responsibility to Employees:
The employees of an organization play a major role in its success by
making valuable contributions to the activities of the organisation. An
organization must incorporate fair employment practices and establish
good industrial relations to enhance the productivity of its workforce. It
should recognise the rights of workers and employees to freedom of
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82 The most important responsibility of an organization towards employees is
the payment of fair wages to them and providing healthy and safe working
conditions. The organization should recognise the need for providing
essential labour welfare activities to their employees, especially they
should take care of women workers. Besides, the organization should
make arrange­ments for adequate training and education of the workers in
order to upgrade their skills.
3. Responsibility to Consumers:
It is often quoted that the consumer is a king and it is th e obligation of the
business enterprises to satisfy their needs and expectations by way of
goods or services. Therefore, business organizations must acknowledge
their responsibilities towards the consumers and protect their interests. The
following are som e of the responsibilities of organizations towards the
consumers ­
1. To make products easily and regularly available in the market.
2. To provide after ­sale services
3. To design products/services by understanding consumer needs.
4. To avoid misleading the consumers b y exaggerated claims through
advertisements and sales promotion measures.
5. To provide necessary information to the consumers about the
products/services. etc
4. Obligation towards the Environment:
An organization depends on the natural environment for its s urvival and
hence it is the foremost responsibility of the organization to protect the
environment. For environmental protection, a business organization must
try and reduce as much as possible air and water pollution caused as a
result of their productive activities. Pollution must be kept in check
otherwise it may cause health hazards. Waste management must also be a
priority of the business concerns.
Pollution is considered a social cost of commercial progress and efforts
must be made by business organiz ations to minimize the same. Business
organizations must adopt high standards of environmental protection and
ensure that they are implemented sincerely.
5. Responsibility to Society in General:
In today’s time, there is a change in public expectations fro m the business.
Business can exist and function smoothly only when it satisfies the needs
of society. Society gives the business its charter to exist, to grow and earn
profits. Naturally, a business must operate as per the expectations of
society. Followin g are some of the responsibilities of the business towards
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83 1. To generate employment opportunities and to provide a better life and
welfare to all the members of the society.
2. To ensure that the amenities of the local community are not damaged.
3. Protect the natural environment and try to maintain ecological
balance.
4. Must contribute towards economic growth, economic stability and
national security.
5. To provide financial support to social and cultural causes.
6. To improve the quality of produ cts and to look after the welfare of the
local community. Etc
6.3.4 ARGUMENTS FOR AND AGAINST SOCIAL
RESPONSIBILITY
Social Responsibility as a concept has been a concern for many thinkers,
from academicians to managers. Following are the arguments and cou nter­
arguments in favour of and against the social responsibilities of business.
Arguments for Social Responsibility
The social responsibility of business has several core ideas. The classical
economic view of business is that a business organization’s ma in objective
is profit maximization but over a period of time, this concept has evolved
and a different perspective has come to light. It is said that along with
looking after its economic interests, a business has to satisfy the needs and
expectations of the different social groups of the society and look after
their well ­being. Based on this, the following are the points of argument in
favour of the social responsibility of a business.
1. Business is a part of society
Business is a creation of society and he nce business must be held
legally for the benefit of the people whom the business wants to serve.
Business depends on society for its needed inputs. Being dependent,
the business has definite responsibility towards the different social
groups of the societ y.
2. Creating a favourable environment for business
It is argued that by responding positively to social responsibilities, the
business can create a favourable environment for its progress and
prosperity. The society offers facilities and concessions to b usiness units
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84 3. Business is a means and not the end in itself
Business is not the end in itself. It is only a means for the satisfaction of
human wants. The end is the man himself. Natur ally, the business has to
contribute to man’s welfare, happiness and moral and spiritual growth.
4. Creating Better Public Image
Businesses that fulfil the aspirations of society create a better public
image. For business operators, this image creation is a s ource of
satisfaction. This helps the businesses to scale up in volumes (inputs
and outputs.)
5. Avoidance of Government Regulations
The government always aims at maintaining equilibrium in the
society for the long term and it tries to make sure that every se ction of
the society meets social requirements. If any section fails to do so, the
government has the power to take action against it. Since businesses
are a section of society, the government may take actions against such
business organisations that get i nvolved in activities and do not meet
social requirements. It is preferable to adopt social responsibility to
avoid such actions having a long -term negative impact.
6. Maintenance of Society
As social factors change continuously, legal provisions for maintain ing
society cannot be comprehensive. Moreover, businesses have to be
socially responsible to avoid anti -social activities and maintain society
on a continuous basis.
Arguments against Social Responsibility
The arguments against social responsibility are ba sed on economics. These
arguments are as follows:
1. Contrary to Basic Function of Business
The basic function of a business is to provide a product to its
customers at a price that is lower than the level of satisfaction
provided by the use of the product or , at equal to that. The product
becomes meaningless if this price and satisfaction relationship is
reversed. Generally, the cost of production is a significant factor in
determining the product price. Social responsibility adds to the cost of
the products, this may reverse the above equation and business may
not stay viable in the long term.
2. Conflict with Profit Motive
Social responsibility is opposite to the profit motive of business.
Conducting business involves risk -taking. Profits are the reward for
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85 business objective, reduces profit margins. This is against the concept
of optimum profit even if not maximum profit. Thus, social
responsibility and profit motive do not proceed in the same direction.
3. Distortion in Resource Allocation
Social responsibility leads to distortion of resource allocation. In
economic systems, resources are allocated on the principle that every
resource will have optimum utilisation. Resource utilisation is bes t
possible without social responsibility and not along with it. Thus,
social resources are sometimes wasted if the concept of social
responsibility is added to business operations.
4. Imposition of Business Values
Conducting social responsibility involves a lot of influence of the
business on society. Therefore, by undertaking social responsibility, a
business is likely to impose its own values on society, thereby
replacing the social values with business values. Imposing business
values on society is highly undesirable from a social point of view.
5. Inefficiency in the System
Social responsibility brings inefficiency to the system and only the
power of self -interest gets the people to act and replacement of self -
interest will is fatal to the efficiency of the s ystem. Social responsibility
replaces the self -interest of business from profit motive to a great
extent and makes the business an inefficient system.
6. Operational Problems
Businesses come across several operational problems while
implementing social respon sibility. Operationally, social responsibility
is a confusing term and managers that are involved in managing
business affairs do not have a clear idea about what is expected to be
done under social responsibility. Thus, actions ranging from showing
lip sy mpathy to multi -crore programmes are included in social
responsibility.
6.3.5 CONCLUSION
Social responsibility is related to ethics and ethics is the discipline that
deals with moral duties and obligations. Social responsibility implies
corporate enterpri ses should follow business ethics and work not only to
maximise their profits or shareholders’ value but also to promote the
interests of other stakeholders and the society as a whole.

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86 6.4 ECOLOGY AND BUSINESS
6.4.1 Meaning of Ecology, ecological balance and Environment
1. Ecology
Ecology is the study of the relationships between living organisms,
including humans and their physical environment. Ecology shares details
about the benefits of ecosystems and how Earth’s resources can be used in
such a way that a healthy environment is maintained for future
generations.
2. Ecological balance
The term Ecological balance is used to describe an ecosystem where
species coexist with other natural species and develop a sustainable
environment. Ecological balance can be ach ieved when there are no
negative effects. Ecological balance also means that every organism has
enough resources available for its survival and reproduction.
3. Environment
The environment is equal to the sum total of all the living and non ­living
elements an d their effects on human life. The environment consists of all
living or biotic elements like animals, plants, forests, fisheries, and birds.
Additionally, non ­living or abiotic elements like water, land, sunlight,
rocks and air are also a part of the envi ronment.
6.4.2 Relationship between business/industry and ecology
Industrialisation can help achieve a variety of social objectives like
employment, alleviation of poverty, reducing gender gaps, uniform labour
standards, and access to education and health care for all. Similarly, these
industrial processes can also have negative impacts on the environment,
contribute to climate change, destroy natural resources, contribute further
to air and water pollution and lead to the extinction of species and threaten
the global environment as well as economic and social welfare.
Industries and the use of industrial products causes environmental
damages. But, can the environmental damage be minimised to gain
optimum ecological balance? If the sole purpose of Industrie s and their
existence is to serve mankind, then people behind the industry are
responsible for stopping or slowing down environmental damage. Society
expects the industries to be responsible and avoid doing activities that
harm the interest and well ­being of its people.
Industry is essential for material prosperity. The world and the global
economy cannot sustain without industries. The solution to environmental
degradation does not lie in discontinuing industrial growth but in pursuing
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87 reduction of damage to the earth and living beings due to the
environmental exploitation caused by industrial practices.
In today’s world, balancing the actions of industrial development with
those of contro lling and minimising environmental degradation is
essential.
6.4.3 Suggestions for Ecology Consciousness at the Business Level
1. Measures for effective pollution control: At the business level, special
efforts should be made to reduce industrial pollution to the extent that
is socially and technically reasonable. For this, various measures such
as recycling of solid waste, purifying wastewater before sending it to
rivers, installing pollution abatement devices, location of plants at
suitable places, and pro per training to employees can be taken at the
business level. Voluntary measures at the business level are effective
and useful for pollution control. The business has to share major
responsibility for environmental protection. Business enterprises have
to spend money for the protection of ecology. The business has to
understand that business growth must be accompanied by ecological
balance. Good business means business without disturbing the
environment or ecology.
2. Use of 'Green Technology': It is desirab le to use technology, which will
not lead to pollution. Such technology may be called "green
technology". It will not lead to air, water or sound pollution. As a
result, the adverse effects of industrial growth on the environment will
be considerably limit ed. Business enterprises have to introduce
technology that will give the benefits of industrialisation but with
limited adverse effects.
3. Respect legal provisions: Business enterprises should honour all legal
provisions (in good spirit) made for pollution control, environment
protection and ecological balance. Effective supervision and control of
business enterprises are equally important and essential. Here, prompt
and strict legal action is also necessary.
4. Prevent soil erosion: Business enterprises should prevent soil erosion
and keep rivers and other water reservoirs clean and away from water
pollution. For this, they have to introduce suitable measures as regards
disposal of waste material including water used in the production
process.
5. Prevent leakage: Efforts should be made to prevent leakage of toxic
gases, explosions and fires from the plants and factories.
6. Develop wasteland: Industrial enterprises should increase the pace of
afforestation and wasteland development.
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88 8. Ecological harmony: At the business level, suitable measures for
maintaining ecological harmony should be taken.
9. Protect natural resources: Business enterprises should protect natural
resources and use them properly and economically and thereby
avoiding their wastage.
10. New energy sources: Businesses should find new energy sources in
place of coal and oil.
11. Eco­friendly products: Business enterprises should develop
environment ­friendly technologies and products.
12. Introduction of Eco Mark La bels: An “Eco ­Mark” label has been
introduced by the government to label consumer products that are
environmentally friendly.
13. Financial assistance: Government should provide financial assistance
for schemes relating to the conservation of natural resource s and
reforestation of denuded areas. In addition, business enterprises have
to spend money on pollution control.
14. In­built pollution control system: Efforts should be made to have in ­
built pollution control mechanisms in the case of plants, factories and
other production units.
15. Awareness among businessmen: Efforts should be made to provide
suitable education and training to businessmen so as to make them
conscious of their obligations in the field of pollution control.
Associations of businessmen have to p lay an important role in this
regard. Awareness needs to be created among businessmen that
environment protection is not an imposed liability but one integral
aspect of business management itself.
16. Prompt actions by government agencies: Strict as well as p rompt
action should be taken in the case of enterprises that do not honour
their duties and responsibilities as regards pollution control. This step
is useful for making business enterprises alert as regards legal
provisions and their responsibilities in r egard to pollution control.
Intervention from the government is one powerful tool available in
India for the protection of ecology and pollution control.
6.4.4 GOVERNMENT POLICY ON ENVIRONMENT
PROTECTION
Since 1955, the Government of India has taken a nu mber of policy
decisions for pollution control and environmental protection. The
participation and contribution of the government in environmental
protection is increasing in recent years. The Ministry of Environment and
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89 structure of the Government for planning, promotion and coordination of
environmental and forestry programmes.
Important measures are taken by the government for environmental
protection areas are noted below:
1. Environment (Protection) Act, 1986. It is a comprehensive
legislation and has given wide powers to the Central Government for
the control of pollution.
2. Introduction of the concept of Environmental Audit.
3. Introduction of Eco Mark Labels.
4. Pollution Control B oard: The Central Pollution Control Board
(CPCB) is the national body for assessment, monitoring and control
of water and air pollution in India.
5. Special attention to heavily Polluting Industries and Grossly
Polluted Rivers
6. Promotion of Pollution Control I ndustry.
7. Tax Incentives for Pollution Control.
8. Supply of Unleaded Petrol.
9. Environmental Education, Awareness and Training Programmes
10. Co­operation with Global Agencies in regard to environmental
protection.
11. Introduction of Environment Information System.
12. The Companies Act, 2013 identifies "ensuring environmental
sustainability" as one of the corporate social responsibilities (CSR)
13. Celebration of World Environmental Day: 5th June is observed as
the World Environment Day every year to make the anniversary o f
the 1972 Stockholm Conference on the human environment. This
day is being observed throughout India. They stress the need to save
the earth from environmental degradation. In addition, 22nd April is
celebrated in India and also in over 193 countries acro ss the world as
"World Earth Day". The purpose is to create awareness about
climate change for protecting the earth and preserving natural
resources for a better tomorrow.
14. In India, we have a new environment policy called the "National
Environment Policy, 2006". In short, India has prepared a
comprehensive policy on environment protection and pollution
control. We have a large number of legislation for environmental
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90 enforcement mechanisms . India is a "Soft State", a state
characterized by weak institutions, a high degree of corruption and
the absence of well ­developed social norms. This situation makes
our environmental protection policies ineffective. The present socio ­
political situation is favourably made for environmental protection.
Pollution control laws are strict with heavy punishments. A large
number of projects are being executed for a clean atmosphere.
People are also alert, united and conscious as regards pollution and
ecology b alance. This puts pressure on the government for pollution
control and a clean atmosphere. Even the present judicial system is
active in regard to pollution control and ecological degradation.
6.4.5 CARBON CREDIT
Carbon credits and carbon markets are a co mponent of national and
international attempts to lessen the growth in concentrations of greenhouse
gases (GHGs). A carbon credit is a generic term for any tradable
certificate or permits representing the right to emit one tonne of carbon
dioxide or the ma ss of another greenhouse gas with a carbon dioxide
equivalent to one tonne of carbon dioxide. One carbon credit is equal to
one metric tonne of carbon dioxide, or carbon dioxide equivalent gases.
Carbon trading is an application of an emissions trading app roach.
Greenhouse gas emissions are capped and then markets are used to
allocate the emissions among the group of regulated sources. The
objective is to allow market mechanisms to drive industrial and
commercial processes in the direction of low emissions or less carbon ­
intensive approaches than those used when there is no cost to emitting
carbon dioxide and other GHGs into the atmosphere. Since GHG
mitigation projects generate credits, this approach can be used to finance
carbon reduction schemes between t rading partners and around the world.
There are also many companies that sell carbon credits to commercial and
individual customers who are interested in lowering their carbon footprint
on a voluntary basis. These carbons off setters purchase the credits f rom
an investment fund or a carbon development company that has aggregated
the credits from individual projects. Buyers and sellers can also use an
exchange platform to trade, such as the Carbon Trade Exchange, which is
like a stock exchange for carbon cre dits. The quality of the credits is based
in part on the validation process and sophistication of the fund or
development company that acted as the sponsor of the carbon project. This
is reflected in their price; voluntary units typically have less value t han the
units sold through the rigorously validated Clean Development
Mechanism.
Definitions
The Collins English Dictionary defines a carbon credit as "a certificate
showing that a government or company has paid to have a certain amount
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91 The Environment Protection Authority of Victoria defines a carbon
credit as a "generic term to assign a value to a reduction or offset on of
greenhouse gas emissions usually equivalent to one tonne of carb dioxide
equival ent (CO2 ­e)".
Impact of Carbon Credits on Global Emissions
Carbon credits are an immediate answer to reducing the amount of Green
House Gas (GHGs) emissions in the atmosphere. The generation and sale
of carbon credits fund carbon projects which would not have gone ahead
i.e. additional to business as usual. Carbon credits also help lower the
costs of renewable and low carbon technologies as well as assist in the
technology transfer to developing countries. The burning of fossil fuels is
a major source of greenhouse gas emissions, especially for power, cement,
steel, textile, chemicals, fertilizer and many other industries which rely on
fossil fuels (coal, electricity derived from coal, natural gas and oil). The
major greenhouse gases emitted by these indus tries are carbon dioxide,
methane, nitrous oxide, hydrofluorocarbons etc., all of which increase the
atmosphere's ability to trap infrared energy and thus affect the climate.
The concept of carbon credits came into existence as a result of increasing
awar eness of the need for controlling emissions. The Intergovernmental
Panel on Climate Change (IPCC) has observed that:
Policies that provide a real or implicit price of carbon could create
incentives for producers and consumers to significantly invest in lo w­
GHG products, technologies and processes. Such policies could include
economic instruments, government funding and regulation, while noting
that a tradable permit system is one of the policy instruments that has been
shown to be environmentally effective in the industrial sector, as long as
there are reasonable levels of predictability over the initial allocation
mechanism and long ­term price.
The mechanism was formalized in the Kyoto Protocol, an international
agreement between more than 170 countries, and the market mechanisms
were agreed through the subsequent Marrakesh Accords. The mechanism
adopted was similar to the successful US Acid Rain Program to reduce
some industrial pollutants.
6.4.6 KYOTO PROTOCOL
Under the Kyoto Protocol, the quotas for g reenhouse gases for the
developed Annex 1 countries are known as Assigned Amounts and are
listed in Annex B. The quantity of the initial assigned amount is
denominated in individual units, called Assigned amount units (AAUs),
each of which represents an al lowance to emit one metric tonne of carbon
dioxide equivalent, and these are entered into the country's national
registry. In turn, these countries set quotas on the emissions of
installations run by local businesses and other organizations, generically
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92 which are required to be validated and monitored for compliance by the
UNFCCC.
Each operator has an allowance of credits, where each unit gives the
owner the right to emit one metr ic tonne of carbon dioxide or other
equivalent greenhouse gas. Operators that have not used up their quotas
can sell their unused allowances as carbon credits, while businesses that
are about to exceed their quotas can buy the extra allowances as credits,
privately or on the open market. As demand for energy grows over time,
the total emissions must still stay within the cap, but it allows the industry
some flexibility and predictability in its planning to accommodate this. By
permitting allowances to be bought and sold, an operator can seek out the
most cost ­effective of reducing its emissions, either by investing in
'cleaner' machinery and practices or by purchasing emissions from another
operator who already has excess 'capacity'.
Since 2005, the Kyoto mechanism has been adopted for CO2 trading by
all the countries within. the European Union under its European Trading
Scheme (EU ETS) with the European Commission as its validating
authority. From 2008, EU participants must link with the other developed
countries ems. who ratified Annex I of the protocol, and trade the six most
significant anthropogenic greenhouse gases. In the United States, not
ratified Kyoto, and Australia, whose ratification came into force in March
2008, similar schemes are being cons idered.
Kyoto's Flexible Mechanisms
A tradable credit can be an emissions allowance or an assigned amount
unit that was originally allocated or auctioned by the: national
administrators of a Kyoto ­compliant cap ­and­trade scheme or it can be an
offset of e missions. Such offsetting and mitigating activities can occur in
any developing country which has ratified the Kyoto Protocol and has a
national agreement in place to validate its carbon project through one of
the UNFCCC’s approved mechanisms. Once approve d, these units are
termed Certified Emission Reductions (CERs). The Protocol allows these
projects to be constructed and credited in advance of the Kyoto trading
period.
The Kyoto Protocol provides for three mechanisms that enable countries
or operators i n developed countries to acquire greenhouse gas reduction
credits.
1. Under Joint Implementation (JI) a developed country with relatively
high costs of domestic greenhouse reduction would set up a project
in another developed country.
2. Under the Clean Developm ent Mechanism (CDM) a developed
country can 'sponsor' a greenhouse gas reduction project in a
developing country where the cost of greenhouse gas reduction
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93 globally equivalent. The dev eloped country would be given credits
for meeting its emission reduction targets, while the developing
country would receive the capital investment and clean technology
or beneficial change in land use.
3. Under International Emissions Trading (IET) countries can cover
their trade in the international carbon credit market to cover their
shortfall in assigned amount units. Countries with surplus units can
sell them to countries that are exceeding their emission targets under
Annex B of the Kyoto
These carbon p rojects can be created by a national government or by an
operator within the country.
6.4.7 EMISSION MARKETS
For trading purposes, one allowance or CER is considered equivalent to
one metric ton of CO2 emissions. These allowances can be sold privately
or in the international market at the prevailing market price. These trade
and settle internationally and hence allow allowances to be transferred
between countries. Each international transfer is validated by the
UNFCCC. Each transfer of ownership within the European Union is
additionally validated by the European Commission.
Climate exchanges have been established to provide a spot market in
allowances, as well as futures and options market to help discover a
market price and maintain liquidity. Carbon pric es are normally quoted in
Euros per tonne of carbon dioxide or its equivalent. Other greenhouse
gasses can also be traded, but are quoted as standard multiples of carbon
dioxide with respect to their global warming potential. These features
reduce the quot a's financial impact on the business while ensuring that the
quotas are met at a national and international level.
Currently, there are five exchanges trading in carbon allowances: the
European Climate Exchange, NASDAQ OMX Commodities Europe,
Powernext, C ommodity Exchange Bratislava and the European Energy
Exchange. NASDAQ OMX Commodities Europe listed a contract to trade
offsets generated by a CDM carbon project called Certified Emission
Reductions (CERs). Many companies now engage in emissions abatement,
offsetting, and sequestration programs to generate credits that can be sold
on one of the exchanges.
6.5 LET’S SUM UP
Corporate social responsibility is voluntary actions and responses of the
company, over and above its legal requirements, to meet the e thical needs
of its customers (consumers), society, locality and the environment.
Adjusting business as per the expectations of all stakeholders constitutes
corporate social responsibility. It suggests that business is not merely for
profit ­making but also for social welfare. munotes.in

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94 Corporate governance broadly refers to the rules, processes or laws by
which businesses are operated, regulated and controlled. Corporate
Governance can also refer to the internal factors defined by the
management along with external forces such as consumer groups, clients,
society, environment and government regulations.
Social responsibility of business is understood as the obligations of the
management of a business organization towards protecting the interests of
society. Accordin g to the concept of social responsibility, the objective of
managers for taking business decisions is not merely to maximize profits
or shareholder’s value but also to serve and protect the interests of other
members, such as workers, consumers and the com munity as a whole.
Industrial processes can also have negative impacts on the environment,
contribute to climate change, destroy natural resources, contribute further
to air and water pollution and lead to the extinction of species and threaten
the global environment as well as economic and social welfare. Industry is
essential for material prosperity. The world and the global economy
cannot sustain without industries. The solution to environmental
degradation does not lie in discontinuing industrial growth but in pursuing
disciplined and innovative methods and systems to ensure a drastic
reduction of damage to the earth and living beings due to the
environmental exploitation caused by industrial practices.
6.6 UNIT END EXERCISE
Q. 1 Choose the correct alternative
1. Carbon credit is a ____ term.
a) Financial
b) Monetary
c) Generic

2. Social responsibility concept is ________
a) Accepted in India only
b) Anti­social
c) Universally accepted

3. Socially responsib le business practices and financial performance
are ______
a) Closely related
b) Exactly opposite
c) Different

4. Corporate governance is for creating ______ among the company’s
management.
a) Self­interest
b) Social consciousness
c) Responsibility munotes.in

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Responsibility and
Corporate Governance
95 5. To create massive employment opportunities is the responsibility of
the business towards ______
a) Consumers
b) Shareholders
c) Employees

6. Charging a fair price for goods and services is the responsibility of
the business towards ______
a) Consumers
b) Share holders
c) Employees

7. ________ is a certificate showing that a government or company has
paid to have a certain amount of carbon dioxide removed from the
environment.
a) Oxygen credit
b) Carbon credit
c) Hydrogen credit

8. The mechanism for carbon credit was formalized in the _______
a) Kyoto Protocol
b) Stockholm conference
c) United Nations Charter

9. Protection of the environment is the responsibility of the ________
a) Business
b) Everyone
c) Municipalities

10. To improve the prestige of the company th rough growth and expansion
is the responsibility of the business towards ________
a) Consumers
b) Shareholders
c) Society

Answers
(1­c); (2 ­c); (3 ­a); (4 ­b); (5 ­c); (6 ­a); (7 ­b); (8 ­a); (9 ­b); (10 ­b)

Q. 2 Fill in the blanks
1. Corporate social responsibi lity is often referred to as __________
2. ______ monitors and regulates corporate governance of listed
companies in India
3. ______ is observed as World Environment Day.
4. Avoiding misleading advertisements and sales promotion measures
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96 5. ________ is a system by which businesses are directed and
controlled.
Answers
(1­Corporate citizenship); (2 ­SEBI); (3 ­5th June); (4 ­consumers); (5 ­
Corporate governance)
Q. 3 Match the following
GROUP A GROUP B
1. Fair business practices a) Responsibility of everyone
2. Trusteeship concept b) Compulsory for listed companies
3. Suppliers c) Within the scope of CSR
4. Corporate Governance Report d) Stakeholders of an organization
5. Environment protection e) Mahatma Ga ndhi

Answers
(1­c); (2 ­e); (3 ­d); (4 ­b); (5 ­a)

Q.4 True or False
1. Corporate Social Responsibility creates a favourable public image.
2. Adhering to laws, rules and regulations is not a part of corporate
social responsibility.
3. Corporate governance m akes the decision ­making process
transparent.
4. Globalization is one of the reasons for corporate governance.
5. The concept of social responsibility is against profit ­making.
6. Social responsibility needs to be accepted on a compulsory basis.
7. Busines s needs the support of all social groups for its growth.
8. Carbon Credits have no capacity to reduce emissions.
9. Ecological environment refers to all living things.
10. Eco­friendly technology is also called green technology.
Answers
(1­True); (2 ­False); (3 ­True); (4 ­True); (5 ­False); (6 ­False); (7 ­True); (8 ­
True); (9 ­False); (10 ­True)
Q.5 Answer in brief
1. Define Corporate Social Responsibility and explain its advantages.
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Corporate Social
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Corporate Governance
97 3. What is corporate governance? Elaborate on the principles of
corporate governance.
4. Justify the need for corporate governance.
5. “Discharging social responsibilities is beneficial to business
enterprises.” Explain the statement.
6. Explain the social respo nsibility of business towards different sections
of society.
7. “Ecology and business are closely related.” Explain the statement in
the light of the relationship between business and ecology.
8. What is a carbon credit? Explain the working of the carbon c redit
system.
Q.6 Short notes
1. Challenges of corporate social responsibility
2. Features of corporate governance
3. Arguments for social responsibility of business
4. Social responsibility towards consumers.
5. Importance of ecology consciousness
6. Carbon credit
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98 7
SOCIAL AUDIT
Unit Structure
7.0 Objectives
7.1 Social Audit
7.1.1 Introduction
7.1.2 Definition
7.1.3 Areas of social audit
7.1.4 Features of social audit
7.1.5 Benefits/Importance of social audit
7.1.6 History of social audit
7.1.7 Types of Soci al Audit
7.1.8 Difference between social audit and commercial audit
7.1.9 Conclusion
7.2 Lets Sum Up
7.3 Unit End Exercise
7.0 OBJECTIVES
After going through this unit, you will be able to:
● Understand the concept of social audit and its benefits for business
organizations.
● Classify different types of social audits.
● Explain the scope and areas of social audit.
● Describe the difference between social audit and commercial audit
7.1 SOCIAL AUDIT
7.1.1 INTRODUCTION
Social audit is a technique used for judging the social responsiveness of
companies. Social audit determines what an organization is doing in social
areas. It helps in finding out how far an organization has met its social
responsibility. It evaluates the pe rformance of an enterprise in relation to
ecological balance, the welfare of employees, consumer protection,
community services and so on. munotes.in

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Social Audit

99 The purpose of a social audit is to review or evaluate the social
performance of a company and to make the top -level management
conscious as regards their social responsibilities. Social audit improves the
social performance of an organisation by offering suitable guidance to its
top-level management. Social audit is also undertaken in order to create
goodwill and a good image of a company by improving its social
performance.
7.1.2 DEFINITIONS
1. According to K.M.Mittal , a social audit is, “a commitment to
systematic assessment of and reporting on the same meaningful
definable domain of the company’s activities that have soc ial impact.”
2. Dr C.B.Mamoria and Dr Satish Mamoria define social audit as, “a
systematic study and evaluation of an organisation’s social
performance, as distinguished from its economic performance.”
Social audit is a mechanism used for the purpose of under standing,
measuring, reporting and enhancing the overall ethical performance of an
organization and for this purpose, the involvement of its stakeholders such
as its clients, employees, customers, creditors, suppliers, vendors,
shareholders, and society is very important. In other words, social audit is
a performance appraisal technique in regard to social responsibilities of
business enterprises
Often, amongst all the stakeholders of an organization, the shareholders
are given priority. Organizations work towards enriching the economic
wealth so as to satisfy the needs of the shareholders, but this is done at the
cost of social and environmental disorders. And these social and
environmental costs are not reflected in the prices of the business.
However if one has to preserve the larger interests of the society, there has
to be some consideration for social good. It is expected from the business
organizations that it behaves and functions as socially responsible member
of society like any other individual. M oral values cannot be shunned and
neither can actual compulsions be ignored. Some form of accountability
on part of management must exist which is not limited/restricted to
shareholders alone.
According to the modern approach, earning profits is not the on ly purpose
of a business; proper utilization of resources in a way that’ll benefit all the
stakeholders must be the basic objective of its existence. It is expected
from a business organization that it is socially responsible and works for
the larger benef it of the community. The fruits of the businesses progress
and growth must be shared with the society at large.
Social audit by a business enterprise indicates that it is conscious of its
social obligations and desires to know its social performance for
evaluation and remedial measures, if necessary. Such social awareness
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100 7.1.3 AREAS OF SOCIAL AUDIT
Social audit primarily tries to cover the following areas:
1. Ethical Issues
Ethics aids in determining what is right and what is wrong in terms of a
given situation. Social audit keeps a tab on business enterprises and keeps
unethical conduct like price discrimination, unfair trade practices, cheating
customers, pirating employees’ ideas, leaving the job withou t observing
job contract in check.
2. Equal opportunity
The second issue that comes under social audit is equal treatment in
employment and a fair justice system in the organization. It must be noted
that decisions pertaining to employment should be on the b asis of merit
only.
3. Quality of WorkLife
Some of the primary needs of the employees include a safe, healthy and
human work environment. But, along with the primary requirements,
employees are seeking greater meaning in their lives. A fair reward
system, fre edom, flexibility, opportunities for growth are some of the
things employees have a preference for. An organisation must ensure that
they are able to satisfy the needs of the employees and social audit is that
tool that helps them achieve the same.
4. Consum erism
Business exists to serve and satisfy the needs of the consumers and hence
it has a special obligation towards the consumer as the business. It is
therefore the principal duty of business to ensure that the consumers'
requirements are taken care of. S ocial audit aids the organization to ensure
that the organization does not fail in upholding the rights and privileges of
the consumers.
5. Environmental Protection
Business organizations depend on the natural environment for the required
inputs. But business processes have negative impacts on the environment
and contribute to climate change, destroy natural resources, contribute
further to air and water pollution and lead to the extinction of species and
threaten the global environment as well as economic and social welfare. It
is important to keep the business operations in check so that it does not
harm the natural environment and social audit as a tool comes in handy in
the said case.

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101 7.1.4 FEATURES OF SOCIAL AUDIT
1. Systematic evaluation
Social audit is a s ystematic or critical evaluation and reporting on the
performance of an enterprise as regards social responsibilities and
obligations. It studies the impact of business activities and policies on
society which includes different social groups.
2. Measures so cial performance
Social audit acts as .a tool for measuring the social performance of an
enterprise. Such performance means a contribution of an enterprise in
relation to environmental protection, ecological balance, safety welfare of
employees, consumer p rotection, community service and so on.
3. Conducted frequently
A social audit can be conducted frequently (after a gap of two or three
years) by an internal auditor or by an outside consultant with proper
qualifications, skills and experience. It is a social balance sheet of a
company.
4. Wide coverage
A social audit has a wide coverage. It covers various business activities
having a direct social impact. It covers ecological and environmental
protection, relations with employees, shareholders and consumers, sup port
to the community needs, welfare activities and financial support to
education, rural development, etc. Social audit has a universal application.
It can be introduced in private as well as public sector organizations.
5. Supplements social responsibility
Social responsibility and social audit are closely related concepts. In fact,
social audit is a tool for judging the social performance of an enterprise. It
indicates the extent to which social obligations are honouree by a business
enterprise. A business organisation can improve its social performance
through the periodical social audit.
6. Guides top management
Social audit guides the top -level management so as to make the activities
of the enterprise fair to all social groups and the national economy.
7. Voluntary in character
Social audit is not legally binding to companies (not compulsory). It is
voluntary but is certainly useful to all companies in the long run for social
recognition and also for measuring and improving social performance.
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102 8. Difficult t o conduct
Social performance is difficult to evaluate. A company finds it difficult to
get reliable and sufficient data on the results of its social activities. In
addition, there is no uniform and universally accepted method for the
conduct of social audi t.
9. Subjective element
Social audit is subjective by nature and relates to people within and
outside the organisation. It cannot be conducted accurately like a
commercial audit.
10. Different from commercial audit
Social audit is concerned with the social per formance of an enterprise
while a commercial audit evaluates the commercial performance of an
enterprise. Social audit gives details about social performance and
reference is not made to profits, sales, turnover and so on. It is basically
different from co mmercial audit which relates to the accounting aspect of
a business.
7.1.5 BENEFITS/IMPORTANCE OF SOCIAL AUDIT
(A) Benefits to Sponsoring Organisation
1. Supply data on social performance
Social audit facilitates the study of the social performance of an en terprise.
It enables the company to take a close look at itself and understand how
the company has lived up to its social objectives. Social performance can
be measured through a social audit.
2. Guidance to top management on social performance
Social audit encourages top management to give more attention to the
social performance of an enterprise and thereby improve the quality of
social performance. It facilitates self -evaluation about social performance
by the management for suitable remedial measures if r equired.
Management can even compare social objectives and social performance
and take appropriate remedial measures. Social audit encourages
democratic management of companies.
3. Feedback on community programmes
Social audit provides feedback regarding s ocial benefit programmes
undertaken by the company. Their effectiveness and limitations are
studied in social audit. This is useful for suitable modifications in the
existing programmes and the introduction of new programmes for
improving social performanc e.
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103 4. Publicity to social performance
Social audit enables an enterprise to inform the public of the extent of
social awareness on the part of an enterprise. It can give publicity to social
performance in the company's annual report.
5. Creates favourable imag e and reputation
Social audit by a business enterprise indicates that it is conscious of its
social obligations and desires to know its social performance for
evaluation and remedial measures, if necessary. Such social awareness
creates a favourable image for a business enterprise. It is treated as a
socially responsible organisation.
6. Concentration on utility -oriented programmes
Comparison of different types of social service programmes is possible
through social audits. It is also possible to concentrate on certain social
service programmes which are utility -oriented.
7. Improves corporate image
By establishing sound relations with the people and press, a business firm
can improve its social image. Social audit helps to improve corporate
image.
(B) Benefits to Society/Social Groups
1. Supply information to shareholders and others
Social audit enables an enterprise to appraise its shareholders, customers,
employees, etc. of its social activities and the results of such activities
undertaken. Social audit promote s collective decision -making and sharing
of responsibilities.
2. Prevents unfair practices
Social audit points out the drawbacks of policies and programmes of the
company. It points out unfair and undesirable activities and avoids their
repetition in future. It avoids the use of resources of the firm for
profitability at the cost of social welfare. Indirectly unethical business
practices are checked.
3. Protection to different social groups
Social audit makes top management's alert and conscious as regards soc ial
obligations towards consumers, employees, shareholders and the society at
large. This gives protection and fair treatment to all social groups and
avoids their exploitation.

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104 4. Provides social benefits
Social audit makes companies/ management socially co nscious. They are
encouraged to undertake programmes that are socially useful. This gives
benefits to the entire society, particularly those who are poor -economically
and socially.
5. Makes the enterprise conscious of its social responsibilities
Social audit speaks about the alertness of an enterprise as regards its
obligations to consumers, employees, local people etc. It acts as a
watchdog and makes the management alert about social performance and
how to improve the same.
The advantages of social audit su ggest the importance /role of social audit
to the concerned companies as well as to the corporate sector. Social audit
has wider social importance. Social audit evaluates the social performance
of an enterprise and guides the enterprise in improving its so cial
performance. This gives social orientation to the activities of an enterprise
and raises its market standing and public image. In short, social audit is
important as it raises the image of the corporate sector and gives social
orientation to its opera tions and activities. Social audit indicates the
position of corporate governance of a company. It suggests the extent to
which the company is conscious of its social responsibilities. Companies
can improve their social performance /contribution through a periodical
social audit.
7.1.6 EVOLUTION OF SOCIAL AUDIT
The social audit concept is closely related to the concept of social
responsibilities of business. Business is expected to discharge certain
obligations towards different social groups such as custo mers,
shareholders, employees and so on. Social audit is related to social
responsibilities as the purpose of social audit is to assess the social
performance of an enterprise.
Kreps Theodore J. is regarded as the founding father of the social audit
concep t.
Social audit dates back to the 1970s, when private organizations
throughout the British Commonwealth, European countries and the United
States responded to the demands from consumers and environmental
movements by implementing several approaches to acti vely involve
stakeholders in the decision -making process. Organizations concluded that
if they reached out to the key stakeholders, they could better understand
the impact and needs, improve products and services, produce healthier
and more productive corp orate culture and in turn strengthen their
productivity and profits.
Charles Medawar pioneered the concept of social audit in 1972 with the
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105 matters of corporate, governmental and profess ional accountability.
According to Mr Charles Medawar, the concept of social audit starts with
the principle that in a democracy, the decision -makers should account for
the use of their powers, which should be used as far as possible with the
consent and u nderstanding of all concerned.
In India, the first social audit was conducted by the Tata Group in 1979.
Tata group is the first Indian business group to spend substantial resources
on education, public health, sports, rural development, family planning,
industrial and social research, medical and many more. Tata group has set
an example for many corporate houses as regards social responsibilities
and social audits.
7.1.7 TYPES OF SOCIAL AUDIT
1. Social Process Audit
Social Process Audit measures the effectiveness of the activities of the
organisation which are largely taken up to meet certain social objectives.
In this case, corporate executives examine what they are doing and how
they are doing.
The method involves four steps:
i) Identify instances that lead to the starting of the social audit programme
ii) List down the goals of the social programme
iii) State how the organisation is going to meet such goals
iv) Evaluation of what is delivered as against what has been planned
2. Financial Statement s Format Social Audit
Financial statements must show conventional financial information and all
the information related to social activities. About associates, a
management consultancy firm proposed that the balance sheet should
show a list of social asse ts on one side and social commitments, liabilities
and equity on the other side. The income statement should disclose all the
social benefits, social costs and the net social income that is given by the
company operators to the staff, general public and it s clients. This
approach has been criticised as many feel that it may create confusion of
complicating issues further and defying easy understanding.
3. Macro -Micro Social Indicator Audit
This audit evaluates an organizations performance in terms of social
measures (micro indicators) against macro social measures. The macro
social factors include the social goals in terms of health, safety, education,
housing, accidents, pollution control measures, etc. The micro social
indicators focus on the performance of the company in those areas
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106 social audit approach is the non -availability of reliable macro social
indicators. Additionally, it is not easy to specify whether the actions
initiated by a company have actually enhanced the quality of life of a
community, and such individual actions may ultimately be marked as
irrelevant, insignificant and sometimes, even unnecessary. In conclusion,
this approach helps all organisations to evaluate their con tributions in
improving social life on a rational basis.
4. Social Performance Audit
In developed countries, several interest groups including church groups,
universities, mutual funds, consumer activists regularly measure, evaluate
and rank socially respons ive companies on the basis of their social
performance. Opinion polls are carried out in a timely manner to discover
companies that conduct social efforts in a proactive way and earn the
goodwill of the general public and consumers.
5. Partial Social Audit
The organisation focuses on the measurement of a specific aspect of its
social performance namely; environment, energy or human resources as it
identifies these aspects to be very important or because their social efforts
for the time being are confined to the area:
● Environmental Audit: In several countries across the globe, people
stage protests if any company tries to pollute the environment. Such
protests lead the companies to not only comply with regulations but
also proactively explore opportunities to recycle their waste products
into useful products. An internal committee set up by the business
prepares a report about the present environmental issues and how they
are being taken care of. This report is re -examined by an external
auditor to check whe ther air/ water pollution measures, toxic waste
disposal, and safety regulations have been complied with.
● Energy Audit: Energy audits are useful to investigate how energy is
obtained, consumed and preserved by the organization. Further, they
help in conse rving energy sources to a great extent.
● Human Resource Accounting (HRA): The basic ideology of HRA is
that human resources are assets of the organisation and the investment
in acquiring, training, and developing these resources should be
accounted for as a n asset. Traditional accounting methods write off
investments in human capabilities and values as operating expenses.
The current value of a company’s human resource assets is not
considered while computing expenses/revenues and, thus, the balance
sheet do es not portray the true and fair picture of the company’s state
of affairs.

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107 6. Comprehensive Audit
Comprehensive audit measures, verifies and evaluates the total
performance of the organisation and the activities that are related to its
social responsibility . Comprehensive audit focuses on management
systems rather than on the actions or events which are not important. It
evaluates the quality of processes and the information on which
organisational decisions are taken. Difficulties in Comprehensive Audit
present numerous problems and its scope cannot be determined precisely.
If we attempt to list all activities undertaken by an organisation, in an
accounting year it may be difficult to find out which activities come under
the umbrella of comprehensive audit a nd which do not.
7.1.8 DISTINGUISH BETWEEN SOCIAL AUDIT AND
COMMERCIAL AUDIT
SOCIAL AUDIT COMMERCIAL AUDIT
Meaning
A social audit is the evaluation of
the social performance of a
company by a knowledgeable
person with suitable academic
background an d experience. A commercial audit is the inspection
of accounts and balance sheets of a
company as per the provisions of the
Indian Companies Act, 2013.
Information supplied
A social audit provides an
assessment of the impact of non -
financial objectives through
systematic monitoring on the
basis of the views of its
stakeholders. A commercial audit is directed
towards recording, processing,
summarizing and reporting financial
data.
Conducted by
Internal auditors or consultants
can conduct a social audit as per
the directions of the management. A commercial audit is conducted by
the auditor appointed by the
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108
Purpose
The purpose is to evaluate the
social performance/contribution
of an enterprise. The purpose is to evaluate the
commercial performance of an
enterprise.
Scope
The scope of social audit is wide.
Any socially important matter can
be taken up under social audit. The scope of a commercial audit is
restricted to financial/accounting
matters.
Legal position
Social audi t is not mandatory. A commercial audit is mandatory
Procedure
Standard rules and procedures are
not laid down for social audit. Well -defined rules, regulations and
procedures are laid down for the
conduct of the commercial audit.
Submission
A social audit report is basically
for the consideration of the top
management. A commercial audit report is sent to
all the shareholders for consideration
and approval.
When conducted?
It may be conducted every year or
once in two or three years. It is conducted every year after the
completion of the financial year
Reporting format
A standard format is not available
for social audit report Commercial audit reports are
prepared in the prescribed standard
format.

7.1.9 CONCLUSION
The concept of social audit is universally recognized as a useful practice
for all organizations - public, private, and government organizations. Such
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109 management, shareholders, consumers and other social groups.
Governments in many countries have supported this concept of social
audit and have made legal provisions for its introduction as a normal
social as well as legal practice. In India, the concept of social audit is
gaining social support. The concept is now sup ported by professionally
managed and socially alert companies.
7.2 LET’S SUM IT UP
Social audit is a technique used for judging the social responsiveness of
companies. Social audit determines what an organization is doing in social
areas. It helps in find ing out how far an organization has met its social
responsibility. It evaluates the performance of an enterprise in relation to
ecological balance, the welfare of employees, consumer protection,
community services and so on.
Kreps Theodore J. is regarded a s the founding father of the social audit
concept
Social Process Audit, Financial Statements Format Social Audit, Macro -
Micro Social Indicator Audit, Social Performance Audit, Partial Social
Audit, Comprehensive Audit are some types of social audit.
The concept of social audit is universally recognized as a useful practice
for all organizations - public, private, and government organizations.
7.3 UNIT END EXERCISE
Q.1 Fill in the blanks
1. _______ helps in evaluating business activities in terms of social
benefits.
2. _______ is regarded as the founding father of the social audit
concept.
3. Social audit is ______ in India.
4. _____ is the first to introduce social audit in India.
5. _____ audit is a report of economic performance
Answers
(1-Social audit) (2 -Kreps Theodore) (3 -voluntary) (4 -TISCO) (5 -
commercial)
Q. 2 True or False
1. Social audit analyses the financial performance of a company in terms
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110 2. Social audit is n ot compulsory in India.
3. Commercial audit is an evaluation of the social performance of the
business.
4. Commercial audit and social audit are not the same.
5. The idea of social audit originated in England.
6. Social audit is conducted on a yearly basis .
7. Social audit may be conducted by an external consultant or by an
internal auditor.
8. Social audit measures the social performance of a business unit.
9. Social audit is compulsory as per the Indian Companies Act, 2013.
10. Dr Swaminathan is regarded as the founding father of the social audit
concept.
Answers
(1-False); (2 -True); (3 -False); (4 -True); (5 -False); (6 -False); (7 -True); (8 -
True); (9 -False); (10 -False)

Q. 3 Match the following
GROUP A GROUP B
1. First social audit in India a) Founding fath er of social audit
2. Kreps Theodore b) Concerned with social
performance
3. Social audit c) Investigate how energy is
obtained, consumed and
preserved
4. Issue audit d) TISCO
5. Energy audit e) Deals with the fulfilment of
social obligations

Answ ers
(1-d); (2 -a); (3 -b); (4 -e); (5 -c)
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111 Q. 4 Answer in brief
1. Define social audit and explain its features.
2. Define social audit. What is the importance of social audit?
3. “Social audit is as important as commercial audit in the case of large
companies managed professionally.” Explain
4. Distinguish between social audit and commercial audit.
5. Explain briefly the different areas of social audit
Q. 5 Shot notes
1. Importance of social audit
2. Types of social audit
3. Social audit v. commercial audit
4. Features of social audit
5. Areas of social audit
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112 8
STRATEGIES FOR GOING GLOBAL
Unit Structure :
8.0 Objectives
8.1 Introduction
8.2 Strategies for Going Global
8.3 Multinationals (MNC) -Meaning,Features, Advantages, Disadvantages
8.4 Transnational (TNC) -Meaning, Features
8.5 World Trade Organisation (WTO ) –
Formation of WTO, Functions, Achievements
WTO Negotiations,Future of WTO
8.6 Summary
8.7 Exercise Questions
8.0 OBJECTIVES
After studying this unit students will be able to –
 Understand the concepts of MNC, TNC, WTO & their importance
 Know t he advantages, challenges, impact
 Describe the Future of WTO
8.1 INTRODUCTION
Expansion & Growth are universal tendencies among business enterprises,
especially financially sound firms. Firms interact with one another for the
purpose of ’Going Global’, t hereby achieving economies of large -scale
production &selling. Growth& expansion are the natural tendencies of
business enterprises. These are in the form of Survival, Loyalty on part of
customers, Increased market share etc. Growth is essential for raisin g
profitability. Sometimes, growth is also necessary for survival & customer
satisfaction. Business growth is possible by using different alternatives
also called growth strategies. These strategies may also be called ‘Going
Global’ as they are useful for expanding business & thereby leading to a
global Organisation like Multinational.
8.2 STRATEGIES FOR GOING GLOBAL
Strategy is anaction plan prepared for achieving well defined
objectives. It acts as a tool for achieving the goals. Global
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113 other activities) so as to cover the entire world through business
operations. Internationalization of Business –The Key to Growth
is a unique slogan used in business world. Integrating the limits of
business & co vering the entire World within single Circle is
Globalisation of Business. As compared to other strategies, going
global is the last stage in growth process. Induced &attracted by
multiple benefits of Globalisation, firms prefer going global,in
order to be come a Multinational or Global Corporation.
International environment is very beneficial to business growth.
Those firms that have good reputation, establishment in domestic
markets, can extend their operations to global boundaries from
time to time. Moder n business philosophy is also favourable to
business growth, as it offers new & better avenues to build
contacts & enhance sales. Small Companies become bigger &
even MNC’s due to growth of business activities through suitable
growth strategies.
Multiple p opular Companies like TATA’S, Birla, other groups in India.
Similarly, Larsen & Turbo (L & T) was founded in 1938, as partnership
firm between 2 engineers Larsen & Toubro. It became private limited
Company in 1946 & Public limited Company in 1950.At presen t it is one
of the 5 largest private sector Companies in India. Companies like Nestle,
Starbucks, Burger King are all examples of firms / brands going global
with their constant innovation & Research & development.
WHY COMPANIES GO GLOBAL/INTERNATIONAL
The basic reasons for going global are:
a) To achieve large scale profits
b) To have inflow of foreign technology, information, techniques, knowledge
c) To achieve diversified customer preferences
d) To accelerate economic growth, thereby improve nation’s wealth
e) To incr ease returns on investments
f) To contribute to export promotion policy of government & to secure
benefits of export incentives.
g) To develop & enhance corporate image
h) To build effective trade relations with trading partners
i) To provide assistance in times of emergence like natural or government
policy changes etc.
Strategies for Going Global c an be classified in 2 major categories:
a) Internal Going Global/ Growth Strategies
b) External Going Global/ Growth Strategies
a) Internal Growth Strategies : Internal growth stra tegies bring
growth from within the enterprise & also by using available internal
resources. They are called Intensification or Intensive Growth strategy &
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114 earned profits are reinves ted to achieve expansion in size of business,
increase in scale of operation.

Internal growth strategies are generally defensive & involve orderly
progress towards stability & expansion.

b) External Growth Strategies : Growth can also be achieved by
taking o ver or merging with other firms manufacturing same or different
products. Foreign Collaboration is one of the examples of external growth
strategy. Also, takeovers may be horizontal or vertical. If there’s
integration of 2 or more similar units,it’s called horizontal. Whereas if
there are different products coming together, it’s called vertical
integration.

Extensive Growth Strategies are Offensive in nature, useful for achieving
growth targets in terms of production, market share, reputation whereas
Internal growth strategies are defensive in nature. They offer growth only
when factors are favourable.

TYPES OF GOING GLOBAL STRATEGY:



(A) INTERNAL GROWTH STRATEGY :
Consists of increasing sales revenue, profits & market share of existing
product line or servi ces. This type of strategy is applicable when product
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115 small market share. There are several ways of introducing intensive
growth strategy:
i) Raising the volume of sales of existin g products in unexploited
market sectors -This type of strategy boosts the trade of Companies
who look forward in introducing their products to unfamiliar markets,
targeting new customers, preferences

ii) Increasing Sales volume by encouraging new uses of exis ting
product : Many Companies offer additional services, benefits in their
existing products/ service, thereby attracting sales & customer loyalty.
Companies with brands like Fair & Lovely, LUX, American Tourister
etc involve such trends ways

iii) Increasing Sa les Volume by introducing minor modifications in
popular brands -These include Minor changes in products like
Mobile Phones, TV sets, Washing Machines etc.

iv) Increasing sales in new geographic areas within the country or in
export markets -Due to globalizatio n, many companies with high
competitiveness export their products abroad & raise the volume of
sales.

v) Increasing the volume of sales through new pricing policy -Sales
volume can be raised on basis of new pricing policy. Example
offering Discounts, combo pa cks,etc sales can be boosted in urban &
rural areas.

(B) Diversification Strategy -Is considered as an important growth
strategy useful for expanding business & also for going global. It is a
strategy of adding new products/services to the existing product/
service line. Itis a horizontal expansion of firm through expansion of
its product line. Examples Now -aa –days banks are diversifying their
role from not only banking functions, but also involving insurance,
Customer relationship Management & so on.

Methods for Diversification
i) Diversification through internal research & development -The
Company may conduct extensive research & development activities in
order to develop new products, which may be more promising & long
lasting.

ii) Diversification through Patents & license -Some Companies bring
diversification by procuring patents & manufacturing license of new
products developed by other country. E.g., In India, Pharmaceuticals
Companies have obtained license from MNC’s to produce drugs in
India.

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116
iii) Diversification t hrough exports/ joint ventures:
Companies can diversify its activities by exporting its products along
with domestic marketing. It may either manufacture new products or
may execute via joint ventures

(C) EXTERNAL GROWTH STRATEGIES
External Growth Strategie s include the following:
(A) Foreign Collaborations
(B) Mergers/Amalgamation
(C) Takeover/Acquisition

(A) Foreign Collaboration: May be defined as “An agreement between 2
Companies from 2 different countries for mutual help, co -operation &
also sharing the benefits in co mmon.

Collaborations mean co -operation for specific purpose. Collaborations
is useful ton firms operating in less developed nations, as they face
many financial, marketing & managerial problems. They remove
technological gaps in developing countries & h elp improve their
economic & industrial growth

TYPES OF FOREIGN COLLABORATION:
i) Technical Collaboration - Takes place when there’s an import of
advanced technology from developed country to developing country.
The firms agree to provide technical knowledge, sophisticated
machinery etc

ii) Financial Collaboration - Relates to supply of capital/ foreign
exchange. The foreign enterprises agree to participate in equity capital
or provides long term loan to firms in host country.

iii) Marketing Collaboration -Relates to m arketing activities. Under this,
marketing collaborators agree to provide marketing facilities in his
own country or agrees to help in marketing goods abroad.

iv) Consultancy Collaboration -Provides consultancy services for
efficient management of an enterpris e in the host country. Here,
foreign collaborator offers essential managerial expertise.

(B) Mergers & Amalgamations -
i) In Mergers, 2 Companies come together, but only one company
survives & other goes out of existence. In merger, survival of both
Companies is not possible. It is a technique of business growth. In
merger, acquiring Company takes over the shares of another company
called acquiredcompany. They may be horizontal, vertical or
conglomerate. In horizontal merger, both companies are engaged in
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117 Company. In vertical merger, the combining companies are engaged
in successive stages of production/ marketing. In case of
conglomerate merger, the combining Companies are engaged in
different busin ess activities, which are unrelated Reliance merging
itself with FMCG & many other brands

ii) Amalgamation -
Under these 2 or more companies are mixed & a new company with
new name is formed. In amalgamation, Companies lose their separate
existence &identity. The new company is duly registered & gets a
separate legal entity. The outcome of such amalgamation is the
formation of new, stable & large company. Amalgamations are
possible in the business World, but they need lengthy procedure.

iii) Takeover/Acquisition -
In takeover/acquisition, one company gets control over other
company. Such acquisition may be for cost saving, revival, expansion
or for going global.

Acquisition is possible by different methods like
a) Purchase of assets without purchasing the compan y as whole
b) Acquiring controlling interest etc.
There is minor difference between acquisition &takeover. In
acquisition, both the partners are willing to merge. In takeover the
willingness is absent in the selling firm’s management.

8.3 MULTINATIONAL’S (MNC’s )

MNC’s are large business enterprise / industrial organisations with huge
capital & conducting business operations in the country of its origin &
also m any other countries. They are registered in one country but have
their operations spread over the entire global area. They are also called
Global Corporations, International Companies, & earn huge profits &
dominate global marketing activities. These are a lso regarded as holding
Companies with head office in one country & business operations spread
in many countries including country of their origin.

Some of the well -known MNC’s are Coco -Cola, HUL, Johnson &
Johnson, McDonald’s, KFC, etc.

Definition of MN C:
According to David E. Lilien MNC ‘s mean “Corporations which have
their home in one country but operate & live under laws & customs of
other countries as well (host countries)
According to Prof Raymond Vernon , a MNC means “A Company that
attempts to car ry out its activities on an international scale as though there
are no national boundaries on the basis of common strategy directed from
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118 Features of MNC

1) Large Size -MNC’s are large sized capital firms which employ huge
capital but operat e business operations in many poor & developing
nations. The turnover of such companies is quite huge even more
than the Gross National Product of several nations put together. The
conduct variety of activities & are controlled by parent company

2) Different Types -MNC’s are available in several types. Some of
these are a) Public Utility Companies b) Manufacturing Companies
c) Service Institutions d) MNC providing turnkey projects e) MNC’s
providing licensing facility to domestic Companies etc.

3) Multinational Management -MNC represent their owners from
diversified countries &cultures, with wide spread knowledge,
technical know -how which helps run business with ease & expertise

4) Invest funds in poor & developing countries -MNC’S operate their
operations in poor & developing nations to stimulate growth in such
areas & offer employment opportunities to improve standard of
living

5) Dominate Global economy -MNC’s dominate global economy &
play an important role in expansion of World Trade. They have wide
spread contacts & conduct business operations economically

6) Expand activities through different channels - MNC’s expand
their activities by different methods like investment of funds,
foreigncollaboration, establishment of subsidiaries etc. Such
functions offer huge profit s

7) Efficient Management –MNC’s conduct their business efficiently.
They are cost as well as quality conscious. They are managed by
highly qualified & experienced professionals.

8) Support to developing countries -MNC’s have helped developing
countries in diff erent ways. Example MNC’s provide employment
opportunities, Infrastructure, Technology facilities to developing
nations.

HOW MNC’s /TNC’s EXPAND BUSINESS ACTIVITIES
(GROWTH STRATEGIES OF MNC & TNC)
Strategies used by MNC’s for the expansion of their bus iness activities are
explained below:
1) Direct Foreign Investment - MNC’s possess large financial
resources at their disposal, which can be invested in different nations
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119 companies. The subsidiaries of MNC’s or branches of MNC ‘s make
profit which is reinvested in industrial sector of concerned country.
2) Transfer of technical Know - how - MNC’s supply modern
technology to enterprises in developing nations. Technical
consultancy services are also offered . Such operations help them
expand their activities & role
3) Licensing - MNC’s allow domestic Company to use their trade
mark, brand name, technical know -how for manufacturing &
marketing purpose. License is provided against payment of fees
called ‘Royalty’
4) Turnkey Projects -MNC’s undertake to complete developmental
projects for developing countries. Such projects are done either on
basis of tender or on cost plus fee for service basis. InIndia, Bhilai&
Bokaro steel plants were installed as Turnkey projects.
5) Opening Foreign Offices & Subsidiaries - MNC’s expand business
by opening offices in foreign countries where market potential is
high.
6) Marketing Products globally - MNC’s manufacture goods in
different countries by using local labour & raw materials. Such
production of subsidiaries is sold in the host country & exported to
other countries.
7) Mergers & Acquisitions -Mergers & Acquisitions are 2 more
techniques used by MNC’s for expansion of their business.
ADVANTAGES OF MNC’s
(A) Advantage of Multinationals to Host Countries:
1) Promote Foreign investments -MNC’s help raise level of
investments in host countries, resulting in rapid industrial growth
along with employment opportunity in allied sectors
2) Facilitate transfer of technology - MNC’s act as agents in transfer
of technology to developing nations. They remove technological
gaps by providing techno -managerial skills
3) Accelerate industrial growth -MNC’s accelerate industrial growth
in host countries through collaborations, Joint Ventures,
Subsidiaries. They control econo mic growth through financial,
marketing, technological services
4) Promote exports & reduce imports -MNC’s help host countries in
promoting exports & reducing imports by raising production.
5) Provides services of professionals -MNC’s provide services of
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120 they are involved. They bring managerial revolution in host
countries
6) Provide benefits of R & D activities : Huge capital availability
enables MNC firms to conduct R & D activities thereby produci ng
innovative & competitive products/ services
7) Promotes global trade & Co -operation -MNC’s facilitate expansion
of international trade & promote co -operation in between developed
& developing countries.
(B) Advantages of MNC to Countries of their Origin :
1) Facili tate inflow of foreign exchange –MNC’s collect funds from
enterprises of other countries in form of fees, royalty service
charges. This brings inflow of foreign exchange without much
efforts.
2) Ensures optimum use of resources -
MNC’s ensure optimum use of n atural & other resources available
in their home countries. This is possible due to worldwide business
contacts.
3) Promotes bilateral trade relations -MNC’s promote bilateral
relations between their home & other countries with which they
have business relatio ns
4) MNC’s create massive employment opportunities within the
country of their origin
DANGERS /LIMITATIONS OF MNC’s & TNC’s
1) Provides outdated technologies - MNC’s / TNC’s design
technologies which can be used in different countries. The
technology is designe d for profit maximisation along with meeting
the needs of developing nations.
2) Harmful to local industries - MNC’s create harmful effects on local
industries &small -scaleunits. Their marketing in domestic countries
is harmful to local industries, as they fac e competition from MNC’s.
3) Charge Heavy Fees - MNC’s/ TNC’s charge heavy fees & service
charges from enterprises in host countries. They retrieve profits of
their subsidiaries to their home countries.
4) Use natural resources recklessly - MNC’s / TNC’s use the
resources in host countries in reckless manner which results in
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121 5) Interfere in economic & political systems -MNC’s take undue
advantage in economic & political systems of host countries. They
put pressure for forma tion of policies which are favourable to them.
6) Investment mainly in profitable sectors -MNC’s / TNC’s are
interested in investing their funds in areas where the risk involved is
less but profitability is high. They are not interested in the national
priorit ies of host countries.
MNC’s & INTERNATIONAL TRADE /ROLE OF MNC IN
INTERNATIONAL TRADE
MNC’s not only participate international trade but also dominate global
marketing activities. The business operations of MNC’s are spread in
many countries. They conduc t trading operations on a large scale & this
makes their operations highly competitive. They undertake different
activities including manufacturing, marketing, research, transfer of
technology & so on.
Major portion of World Trade is handled by MNC & TNC. They dominate
Global Trade.MNC’s play a positive role in promoting international trade.
They participate in international trade through licensing, opening foreign
offices, marketing products globally.
8.4 TRANSNATIONAL’s (TNC )
Meaning: TNC is big global e nterprise which conducts business
operations (E.g.,Research in one country, production in another country,
assembling in 3rd country & marketing in many countries) in large number
of countries & is more suitable to present global economy. It represents
superior type of MNC & is global corporation in real sense with high
degree of integration of operations & activities.
Incase of TNC confederation, the relationship between the member
companies is different. The integration among units is closer. The entire
group acts as one viable integrated group.
FEATURES OF TNC
1) Large Company with global operations - TNC confederation is a
large business company operating at global level. The owners & top
management come from varied borders across countries.
2) Operates beyond national boundaries -Transnational means
extending beyond national boundaries. Examples are Unilever,
Mercedes -Benz, Glaxo. General Motors (USA) are the examples of
TNC.
3) Brings integration in World economy -TNC’s operate at global
level & conducts production & marketing activities using local
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122 4) Decentralisation of production activities -TNC’s integrate factors
of production available in different countries. They may have
production plant in many countries & manufacturing the e ntire
product line in a decentralized manner.
5) Benefits in Production & Marketing -TNC’s take benefit of
availability of plenty of raw material in one country, cheap labour
available in other country, ease finance in 3rdcountry, conduct
production & marketin g activities in an orderly manner.
8.5 WORLD TRADE ORGANISATION (WTO)
FORMATION OF WTO
The conversion of GATT in WTO in 1995 is a significant event in the
field of global trade. The World Trade Organisation started functioning
from 1st January 1995.The formation of WTO is the result of Uruguay
Round of negotiations. Since 1995, World Trade is governed by rules &
regulations framed by WTO.
WTO has larger membership (In 2002, its membership was 144 countries)
than GATT.India is one of the founder members of GATT & WTO.There
are many other agreements under WTO which are rectified by India.WTO
is based in Geneva, Switzerland.
WTO is an organisation to direct & regulate global trade whereas GATT
was only a legal arrangement.WTO is a new international organisa tion set
up as permanent body & designed to play the role of a watch dog in the
spheres of trade in goods, trade in services, foreign investment, intellectual
property rights etc.WTO is based on the noble idea that all trade needs to
be freed.Government ha s to first reduce & then eliminate all tariffs,
quotas, customs on trade.
At present, WTO acts as the governing body of World trade. It aims at
promoting free & fair trade at global level which will be beneficial to all
participating countries.
OBJECTIVES OF WTO
WTO desires to achieve the following objectives:
1) Free Trade i.e., trade without discrimination
2) Growth of less developed countries (LDC’s)
3) Protection & Preservation of Environment
4) Ensure optimal utilisation of available world’s resources, expanding
production & trade
5) Raising Living Standard of citizens of member nations & ensure full
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123 6) Settlement of trade disputes among member countries through
consultation & dispute settlement procedures.
WTO operates on basis of following 5 principles:
1) Non –Discrimination among member nations
2) Reciprocity
3) Binding & enforceable commitments
4) Transparency &
5) Safety Values
FUNCTIONS OF WTO
1) To promote international trade without discrimination of any type
2) To administer & implement the trade agreements signed unde r
Uruguay Round Negotiations - It administers 29 agreements
contained in 1st act of Uruguay Round. The main function of WTO is
to implement multilateral trade agreement signed at various rounds of
WTO negotiations.
3) To act as a forum for multilateral trade n egotiations -WTO
arranges meetings of member countries for negotiations from time to
time. Such negotiations are mainly for reduction of tariff &non -tariff
trade barriers.
4) To resolve trade disputes that cannot be solved through bilateral
talks -It provides m echanism for resolution of trade dispute between
member nations when bilateral talks fail to resolve trade dispute
between nations.
5) To implement tariff cuts & reduction of non -tariff barriers by member
countries -WTO is removing tariffs & non tariffs barrie rs, after
negotiation with member countries
6) To co -operate with other international institutions (IMF & World
Bank) involved in global economic policy making
7) To act as a watch dog of international trade & to regularly examine
trade policies & regimes of in dividual member nations
8) To assist developing countries in implementing Uruguay agreements
through Development Division
9) To provide consultancy services to member countries.

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124 ACHIEVEMENTS OF WTO
WTO is operating as a global trade forum since 1995.Negotiatio ns are
going on among member countries for agreements & also for achieving
the basic objectives of WTO.The following achievements are as under:
1) In December 1996, WTO arrived at an Information Technology
Agreement (ITA). The agreement was for eliminating ta riffs to zero
level in rapidly growing world market in computer related products
by 2000
2) In December 1997, WTO members signed an agreement on financial
services. The aim was to remove barriers relating to expansion of
banking, insurance& security sector at global level.
3) Many member countries of WTO (including India) have liberalised
their foreign trade Policy. Various quantitative restrictions on
imports &exports are removed
WTO & TRADE LIBERALISATION
It has already been noted that WTO is basically for fre e & fair trade at
global level. It is not favourable to the policy of protection by member
countries as protection policy has harmful effects on economic growth &
consumer protection.WTO is free tradei.e., without restriction. It is also
for protection & p reservation of environment & growth of less developed
countries (LDC)
WTO has arranged many multilateral conferences for negotiations on
issues relating to trade barriers. As a result of this, tariff rates &non -
tariffrates are brought down to some extent. Developed& developing
nations have failed to introduce time bound programme for removal of
trade restrictions. This is the position even when negotiation is made over
years. As a result, free trade remains a dream for all nations.
Developed countries put p ressure on developing countries (through WTO)
for favours at the cost of poor & developing countries. Such efforts are
now opposed collectively by developing countries. However, the attitude
of developed nations is slowly changing & is becoming favourable
towards developing nations. This may result in agreements on trade
barriers to be finalised in near future.
Even globalization process will lead to trade liberalization at global level.
WTO NEGOTIATIONS
WTO negotiations are still not going smoothly. The D oha Round
Negotiation which started in 2001 needs to be concluded quickly & in fair
manner. They have to take liberal measures for success of ongoing
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125 The US approach to Doha negotiations is highly unfair.US wants countries
like China, India, Brazil, South Africa to give more concessions.
Moreover, US is not in mood to offer anything more to others.
Many developed countries like USA are introducing protectionism in their
trade policies. However, such measures across globe will affect World
econ omy & welfare of people. India has expressed concerns over the
rising trend of developed countries like USA, Australia & New Zealand
putting curbs on movement of goods, services, skilled professionals
&consultants. The global recovery will slow down & free trade will be
difficult if developed countries introduce new tariff &non -tariff trade
restrictions. In the absence of friendly trade policies of developed
countries, free & fair trade will be difficult.
FUTURE OF WTO
The Mini -Ministerial meeting was hel d in New Delhi on 19th& 20th March
2018.52 nations (including USA & China) participated in it.According to
India’s Commerce Secretary ‘The meeting would be more of an ice
breaker as it being held after collapse of talks at the Buenos Aires WTO
Ministerial Meet in December, 2017.India took initiative & hosted the
meet to break impasse.It will be useful for global trade body (WTO) to
progress on issues like earlier Doha round of Negotiations & WTO’s
Dispute Settlement systems. The inputs of the meeting will b e useful for
next WTO meeting in Geneva, to take negotiations forward on different
issues.
While inaugurating the meet Prime Minister Narendra Modi said that India
is strong supporter of multilateral trading system. The purpose of the
meeting was to facili tate an exchange of views on various challenges
facing multilateral trading system with the hope that it will lead to political
guidance on some major issues.
India wants permanent solutions to the food stockholding issue. However,
negotiations took place as the US reneged on its commitment along with
other nations, to find permanent solution to issue on public food stocking
by WTO member countries.
The current global trade environment is very unstable &risky. There are
clear signals that current trading s ystem represented by WTO has lost its
utility for US & EU.
WTO is facing most difficult & challenging global trade environment.
Meaningful negotiations for survival &transformation of WTO are
urgently required.
WTO & INDIA
India is one of the founder members of WTO & is fully committed to
multilateralism. India takes keen interest in functioning & negotiations in
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126 Delhi to discuss important problems before WT. Currently WTO,
negotiat ions are ongoing on Doha Development Agenda, adopted in
2001which aims to address the concerns of developing countries. The
agenda was so designed so as to ensure integration of these countries into
global trading system. India is making efforts to protect interests of
developing countries in WTO negotiations.
Present protectionism policies of developed nations & tariffs are harmful
to the growth of multilateralism. Support of developed nations is a must
for fair completion of current WTO negotiations. The future of global
trade is closely linked with the success of current WTO negotiations.
8.6 SUMMARY
In this Unit you studied’ Strategies for going Global, MNC, TNC, WTO in
detail.
In order to achieve global strategies, there are 2 methods:
Internal & Extern al Growth Strategies.
MNC’s are big global enterprises that are set up to promote trade & help
in development of developing nations.
TNC’s are more Superior version of MNC, wherein production takes place
in one nation, research in other, marketing in 3rdcountry.
WTO was introduced in 1995 replacing GATT,in order to remove tariff
&non -tariff barriers that were imposed earlier on movement of goods from
one nation to another.
8.7 EXERCISE
(1) State True or False
i) Growth Strategies are for achieving growth o bjectives
ii) Foreign Collaboration is a part of external growth strategy
iii) Diversification is horizontal expansion of a firm
iv) MNC’s is like a holding Company with head office in one country &
business operations in many others
v) MNC’s & TNC’s are differen t from global corporations
vi) MNC’s create brain drain in host countries
vii) WTO is successful in making global trade free & fair to all countries
viii) MNC’s are profit oriented rather than social oriented
ix) WTO degrades the standard of living of the people
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127 xi) GATT was an arrangement & not an institution
xii) MNC’s are different from global corporations
xiii) Merger is a type of business combination
Answer:True: i, ii, iii, iv, vi, viii, x, xi
False: v, vii, ix, xii, xiii
(2) Fill in the Blanks :
a) In case of TNC’s there is --------- of production activities
(Centralisation, Decentralization, Concentration)
b) TNC’s are ------- to MNC’s
(Inferior, Superior, Equal)
c) The term MNC is ------- in origin
(Indian, German, Ameri can)
d) MNC’s facilitate -------- in developing nations
(FDI, Loans, Bank Finance)
e) India is ------- of WTO
(Not member, One member, Founder member)
Answer (a -ii), (b -ii), (c -iii), (d -i), (e -iii)
(3) Match the Following:
A B
a) TNC i) Operates at Global level
b) Global corporation ii) Mixed Blessing to poor nations
c) MNC iii) Progressive concept like MNC
d) Going Global iv) Business Growth & Diversification
e) WTO v) External Growth Strategy
f) Mergers vi) Wider in scope compared to GATT
g) Intensification Growth
Strategy vii) Internal Growth Strategy
h) GATT viii) International Business
i) Diversification ix) WTO
j) TRIP’s x) Intellectual property
xi) Opportunity to Business
Answer : (a-iii, b-i, c-ii, d-iv, e-vi, f-v, g-vii, i-ix, j-x)

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128 (4) ANSWER IN BRIEF :
1) What are the strategies for going global? Explain any one such strategy
2) Explain the meaning & types of foreign collaboration
3) Explain external Growth Strategies
4) What is diver sification. Explain the methods of diversification.
5) Explain the benefits of MNC’s & TNC’s to developing nations.
6) Define MNC. Explain advantages.
7) Discuss the objectives & functions of WTO.
8) Discuss the contribution of WTO in international trade l iberalization.
9) What are the functions of WTO.
10) Discuss the implications of WTO.
11) Discuss the growth strategies of MNC
12) ‘WTO negotiations are not effective’. Discuss the statement.
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129 9

FOREIGN TRADE IN INDIA

Unit Structure :
9.0 Objectives of Study
9.1 Introduction
9.2 India’s foreign Trade
9.3 Directions of India’s exports
9.4 Composition of India’s exports
9.5 Export of services from India
9.6 India’s import trade - Balance of Trade
9.7 Foreign Direct Investment (FDI) - Importance
9.8 Advantages of FDI Inflows
9.9 Implications of FDI Investment flows for Indian industries
9.10 Summary
9.11 Exercise Questions
9.0 OBJECTIVES
After studying this unit students will be able to –
 Understand the concepts of foreign trade, exports, foreign direct
investment of India & their importance
 Know the advantages, challenges , impact
 Describe the balance of Trade scenario& Impact of FDI on industries
9.1 INTRODUCTION
Foreign Trade plays an important role in India’s growth. India bags a long
history of foreign trade. India’s trade dates back to British period, wherein
number of changes took place in composition & directions of foreign
trade. However, it has undergone several changes after lib eralisation
period, which began in early 1990’s. India exports goods as well as
different services such as financial & software
India has trade relations with number of countries. India’s exports cover
over 7500 commodities to about 200 countries. India ex ports superior munotes.in

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130 quality rice, fruits,flowers, textiles, jewellery & so on. India also exports
different services abroad & the export of out IT & other services is fast
expanding.
International trade plays catalyst role in economic development of a nation
in variety of ways. Greater integration with the global economy results in
higher competitiveness, transfer of technology, increase in national
income facilitates rise in employment, rising stature at global forums like
WTO, IMF, SAARC & so on.
However, for India, foreign trade growth in last 4 years has remained on
negative side with slight improvement in 2014, showing growth of 0.7%.
As per latest number fromWTO, the prospects for global trade are healthy.
For 2017, trade growth is expected within range fro m 3.2% to 3.9 %,
accompanied by global GDP growth at 2.8 %.
9.2 INDIA’S FOREIGN TRADE
Trade includes domestic /internal & external/ foreign trade. External /
Foreign trade, means trade with other countries of the World. It includes
exports &imports. At pre sent, India’s foreign trade policy ( FTP 2015 -
2020 ) is announced for longer period of 5 years & periodical notification
are introduced in FTP.The basic purpose is to promote exports to develop
industries, to create mas sive employment opportunities within the
country& to make India strong partner in global trade. It seeks to provide
stable policy & also supports other initiatives like ‘Make in India, Digital
India, Skill India, & so on.to promote the diversification of I ndia’s exports
basket by helping various sectors of Indian economy.
9.3 DIRECTIONS OF INDIA’S EXPORTS
By directions of India’s exports, we mean the countries to whom we
export goods &services. India has trading relations with large number of
countries. Th e process of trade liberalisation & world trade dynamics has
bought out major shifts in directional pattern of India’s foreign trade.USA
has been trading partner. China is trading as well as competitor partner in
global trade. India also exports & imports to member countries of trading
blocs like NAFTA, SAARC, ASEAN & so on.
Conclusions relating to directions of India’s export trade:
1) Region wise & sub region wise spread of India’s export trade during
2013 -14 & 14 -15 are given in above chart. During 14 -15, the share
of Asia region accounted for 49.56 % of India’s total exports. Both
North & Latin America stood 2nd with share of 19.03 % of India’s
total exports.
2) The share of developing countries in our exports is increasing.
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131 3) India’s export trade has become much more diversified in recent
years. Excessive dependence on OECD countries have declined.
9.4 COMPOSITION OF INDIA’S EXPORT TRADE
Under this, we mean the commodities that are exported from India to other
nations. These include agricultural items, machinery,ores, minerals,
chemicals, jewellery & so on.
Conclusions Relating to composition of India’s export trade:
1) Commodities exported from India are classified into 4 categories:
a) Agricultural & allied
b) Ores & Minerals
c) Manufactured Goods
d) Mineral fuels & lubricants
2) India’s exports during 2015 -16, were driven by Petroleum products,
Gems, Jewellery& related products, agriculture & allied products.
3) During 2015 -16, top five commodities of India’s expor ts include the
following:
COMMODITY % SHARE

Gems & Jewellery 14.6
Textiles & Allied Products 13.64
Chemicals & Related Products 12.17
Petroleum & Crude products 12.2
Optical, Medical, Surgical
instruments 10.61
These 5 commodities constitute more th an 60% of our exports & help earn
huge foreign revenue.
4) Gems &Jewellery, leather, jute, carpets, handicrafts are identified as
traditional items of India’s exports.
5) Base metals, machinery, transport equipment, rubber articles, leather
are some important co mmodities exported from India.
MAJOR COMMODITIES EXPORTED FROM INDIA
1) Engineering Goods - The export of these items include iron, steel,
electronic goods, computer software, along with machinery of
different types. The export of such goods is increasing in r ecent
years. These are exported to countries like South Africa, Egypt,
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132 during 2014 -15constituted 6.36 %of total exports as compared to
transport equipments contributing to 8.59 %
2) Handicrafts - Exp orts of handicrafts is increasing since 1970’s.
Single largest item of export is Gems & Jewellery.
3) Readymade Garments - Exports of such goods has shown significant
improvement in recent years. During 2011 -12, it reached to 65,600
crores.
4) Petroleum Products - Export of petroleum products haveincreased. In
2010 -11, it was 16.80% of total export earnings. Petroleum products
occupy 1st position in India’s export earnings.
5) Gems & Jewellery - India is one of the largest exporters of gems &
jewellery. This sector is one of the fastest growing sectors & export
oriented & labour intensive. In 2010 -11 the exports rose upto 36,840
$mn, which was 14.70% of our total export earnings. During 2013 -
14, Gems & Jewellery occupied 5th position in India’s export
earnings.
6) In addit ion to main export items, India also exports items such as
agriculture products (Grains, pulses, basmati, rice, fruits,
vegetables),minerals, marine’s products on large scale.
9.5 EXPORT OF SERVICES FROM INDIA
Services are growing frontier of global trade. In terms of contribution
towards GDP &employment, services are a driving force towards
economic growth. India’s service sector covers a wide variety of activities
like travel, hotel, transport, storage, communication, insurance, & so on.
Service exports h ave been dynamic element of India’s trade &
globalisation in recent years. Services Exports from India scheme (SEIS)
was introduced in the FTP (2015 -20) & offered reward of 3 to 5% of net
foreign exchange earned. India’s service exports declined by 2.4 % i n
2015 -16 as result of slowdown in global output & trade.
WTO data shows that India’s service exports grew from US $16.8 billion
in 2001to US $ 155.6 Billion which constitutes 7.5 % of GDP in 2014,
making the country 8th largest service exporter in the Wor ld.
Service sector is fastest growing sector & regarded as engine of growth.
Among different services, contribution of computer & information
services is the highest. India is one of the leading Asian service exporters.
The others include China, South Kore a, Singapore, Malaysia, Hong Kong.
9.6 INDIA’S IMPORT TRADE (CURRENT TRENDS)
Import trade is one component of India’s foreign trade. India exports on
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133 imports.Imports include materials, m achinery, edible oils, petroleum
product, fertilizers, precious stones & so on. Our imports are increasing at
faster rate as compared to exports. As a result, balance of payments is
negative since long.India also needs large imports for promoting
exports.B alance of trade can be made favourable by promoting exports &
reducing imports.
Top 5 commodities imported to India during April -December 2015 -16 are:
a) Petroleum Crude
b) Gold
c) Pearls, Precious , Semi precious stones
d) Petroleum products
e) Telecom instruments
Impo rt of these commoditiesregistered a share of 41.15 % of total imports
during 2015 -16.Import of top5 commodities during period Apr -Sept
registered a share of 42.48 % mainly due to imports of petroleum crude,
pearls,precious stones,gold, telecom,coke & briqu ettes etc.
Conclusions about India’s imports are:
1) India’s imports are increasing since 2001 -02.As a result there is a
wide gap between exports & imports leading to long term deficit in
balance of trade
2) Our imports are more due to following reasons:
i) Imports of raw material are allowed in liberal way in order to
promote exports of manufactured goods, which raises the volume of
imports.
ii) Large scale imports are necessary due to various development
projects like construction, infrastructure & so on
iii) Import of oil s at higher prices are necessary as India is not self -
sufficient in this sector. Nearly ¼thof our total import expenditure is
on POL (Petroleum, Oil& Lubricants)
iv) Huge import of gold & silver from abroad due to rising domestic
demand.
3) India’s imports are cl assified into 4 broad groups:
a) Food & Live animals especially for food ( cereal & cereal
preparations)
b) Raw materials & Intermediate manufacturers(Edible oils, Petroleum,
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134 c) Capital Goods (Electrical machinery, non -electrical mac hinery,
transport equipment)
4) India imports goods from large number of countries -For identifying
directions of imports ,India’s trading partners have been divided into
5 major groups:
i) OECD
ii) OPEC
iii) Eastern Europe
iv) Developing Nations
v) Others
INDIA’S BALANCE OF TRA DE
Balance of trade & Balance of Payments are 2 terms frequently used in
relation to foreign trade. Balance of Trade is expressed as difference
between imports & exports within a specified period such as 1 year. It may
be favourable or unfavourable. They a re favourable, when value of exports
is more than that of imports & vice versa.
The following conclusions about India’s balance of trade are as follows:
1) India’s balance of trade shows negative position since 2000 -01. It
was Rs ( -) 27,302crore in 2000 -01& r ose to Rs.8,40,738 crore in
2014 -15.
2) India has long history in balance of trade from year to year
3) India’s effort to promote exports & to reduce imports are not
effective as exports are increasing slowly, but imports are increasing
with speed.
4) Foreign Trade data reveals that trade balance was positive in only 2
years during periods of 1949 -50 to 2014 -15.These were the years of
1972 -73 & 1976 -77when country recorded small trade surplus of Rs
104 crore & Rs.68 crore
9.7 FOREIGN DIRECT INVESTMENT
Foreign Dir ect Investment (FDI) is one of the most extensively used forms
of foreign capital. In FDI, Companies from foreign countries acquire
assets in host countries in different sectors like retail, insurance, pension,
infrastructure, banking & so on. It is consid ered more useful to home
country as compared to investments in other forms, since it is more
durable & reliable type of foreign investment.FDI inflows are useful for
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135 In India, Governm ent policy on FDI inflows is fair, liberal, favourable
for large scale direct foreign investment in industrial & other sectors
including banking, insurance, retail, defence & so on.
MEANING OF FOREIGN DIRECT INVESTMENT
Generally, there are 2 forms in whic h private foreign capital may flow to
India. These are Foreign Direct Investment (FDI)& Portfolio Investment.
Under FDI, foreign investor establishes & does business in a home
country i.e., India. In case of portfolio investments, the foreign funds flow
in terms of subscription to securities or direct lending to Indian
Companies. In India, portfolio investment is made through Euro issues,
external commercial borrowings, Stock Market Transactions
In order to encourage FDI in India, The Foreign Investment Pr omotion
Board (FIPB) was constituted in 1996.It operates as a single window
agency for all matters relating to FDI.It also helps in negotiations with
foreigninvestors. It reviews policies relating to FDI in India.FDI inflows
are now made liberal&easy, as a result 90 %of foreign investment comes
through automatic route.FIPB is no more required in India & is abolished
in May 2017.
Reasons for requirement of FDI in India:
i) Rapid economic, industrial, infrastructure development
ii) Making Indian industries globally competitive through technology
transfer
iii) Creating massive employment opportunities & export promotion
iv) Integration of Indian economy with global economy & so on.
IMPORTANCE OF FOREIGN DIRECT INVESTMENT (FDI)
Foreign capital enters India in the form of foreig n investments. Such
foreign capital is one type of international sourcing of funds from
developed countries to developing countries. Indian companies issue
securities in foreign countries. Such issues are called Euro Issues. Inflow
of foreign capital takes place by this route also. Telecom, banking,
Insurance are the new sectors which are recently opened up for FDI’s.
Retail sector is also attracting foreigners for direct investment.FDI inflows
in the form of equity inflows are more stable & bring in new ma nagement
practices & technology together with investment.
9.8 ADVANTAGES OF FOREIGN DIRECT
INVESTMENT FLOWS :
1) FDI facilitates industrial & economic development - FDI is useful for
modernization of Indian industries & for growth of industrial/
production acti vities in India. This will lead to growth in national
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136 2) FDI Facilitates employment generation -FDI brings massive
employment opportunities .Direct & indirect employment generation
takes place in supporting sectors.
3) Import of foreign technolo gy & professional skills -Along with FDI,
there will be inflow of technology & professional skills from
developed countries to India, resulting in overall development of
Indian Companies.
4) Promotion of exports -FDI is likely to make favourable contribution
in promoting India’s exports. This is through development of export -
oriented industries & also technology upgradation of such industries.
5) Other Benefits:
i) Reduction in balance of trade & balance of payments deficit
ii) Optimum use of human & other resources avail able within the
country
9.9 GOVERNMENT POLICY ON FOREIGN DIRECT
INVESTMENT
The government policy on the inflow of foreign capital is favourable since
the introduction of New Industrial Policy in 1991.The Government
accepted the fact that foreign investment is essential for modernisation,
technology upgradation & industrial growth. The Government has
liberalized its policy towards FDI in 1991. To permit automatic approval
for foreign investment upto 51 %equity in 34 industries. The Foreign
Investment Promoti on Board (FIPB) was set up to process applications in
cases not covered by automatic approval route.
The FDI policy is made more liberal since 2012.This change in
government policy has created favourable environment for large scale
inflow of FDI.The Gover nment regularly provides information on
investment climate, policies, procedures, investment opportunities in India
for benefits of foreign investors. In many sectors like tea plantation, retail
trading, defence, chemicals etc, sectorial caps have been rai sed or changed
from Government to automatic & both.
9.10 IMPLICATIONS OF FDI INFLOWS ON INDIAN
INDUSTRIES
FDI is useful for industrial & economic growth & also for making Indian
industries globally competitive through cost reduction & quality
improvements. The implications of FDI flows on Indian industries are
positive & negative
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137 A) Positive Implications of FDI Inflows on Indian Industries
1) FDI Inflows in the Industrial sector: Manufacturing sectors were the
1st to open up for FDI inflows. Infrastructure& ser vices sector have
gradually opened up. Industrial sectors like mining, manufacturing,
power accounted nearly 50 % of total equity inflows
2) FDI Investment is highest in some industrial sectors like :
i) Service Sector( Finance, Banking, Insurance etc)This secto r
collected highest % of equity inflows during 2016 -17 amounting to
19.97% of total FDI equity inflows
ii) Telecommunications: Total FDI since 2009 -10 to 2015 -16 comes to
US $11,070.60 million. During 2016 -17, 12.80 % of inflow of FDI
in telecommunication sect or.
iii) Computer software &hardware: Total FDI since 2009 -10 to 2015 -16
was US $8533.57 million. During 2016 -17, 8.40% of totalFDI
inflow was in software & hardware sector.
iv) Automobile industry: Total FDI since 2009 -10 to 2015 -16 was US
$10, 090.60 million
v) Drug s & Pharmaceuticals -Total FDI since 2009 -10 to 2015 -16
comes to US $8659.34 million.
3) Coverage of industrial sector: Services, hotels, tourism, automobile
industry, construction, pharmaceuticals are the sectors that attract
maximum FDI inflows. Textiles, pa per, leather, chemicals etc are
some more industries where FDI inflows are noticed.
4) Benefits to industrial sector -FDI is useful for industrial growth along
with economic growth. It is useful for modernization& for growth of
industrial production. Technolog y upgradation of industries will
improve quality of production & cost reduction.
5) Benefits of inflow of foreign technology & professional skills:
Along with FDI inflows, updated industrial technology & new
professional skills from developed countries will c ome to India.FDI
inflows will reduce technological gaps in industrial sector.Such
benefits are possible through foreign collaborations & joint ventures.
6) Optimum use of resources: India has huge unutilised human &
material resources which are not fully used by Indian industrial
sector. FDI accelerates quality & quantity of industrial production.
7) Expansion of automobile sector: Major portion of FDI within
industrial sector is bagged by automobile sector. Foreign investors
are interested in manufacturing luxur y automobiles in India. This
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138 B) Negative Implications of FDI Inflows on Indian Industries:
1) Sectoral Composition of FDI in Industrial sector is limited -
Considering sectoral composition of FDI over period of Jan 2000 to
April 2008, the largest recipient of such investment was service
sector & not industrial sector. Its share over the period was 20.2 %
Service sector was followed by computer hardware &software
(11.1%), telecommunication (6.0%), housing (4.6%), auto mobile
industry (4.1%), construction (5.1%). These 6 sectors accounted for
51.0 % of total FDI received over period of 2000 -08.
2) Not beneficial to industrial expansion -Nearly 40 %of inflows seem
to have been used for acquiring existing industrial assets& th eir
managerial control. Many MNC’s are taking advantage of liberal
rules to increase their share in existing affiliates in the country. Such
activities do not promote industrial expansion.
3) No contribution to removal of regional disparities -States like Delh i,
Maharashtra, Dadra& Nagar Haveli, Daman & Diu, Haryana &
selected parts of UP & Karnataka have received more than half of
FDI inflows. Large parts of the country have received only small
portion of such inflows
4) FDI benefit to large projects -It is estim ated that 2/3rd of the total
value of FDI approvals has gone to projects of size greater than Rs.
100 crores. This means relatively smaller projects received very
small portion of FDI approvals.
5) FDI not available to priority sectors - Deployment of FDI is l argely
in ‘White goods’ sector like automobiles& luxury items, fulfilling
the needs of rich & upper middle class. Share of FDI investment in
high tech sectors & in consumer goods catering to needs of poor are
not considered.
6) Limited contribution in exports -FDI aims at promoting efficiency in
production & increasing exports.However, the foreign investors
stake holdings in Companies may not increase exports, as their
interest would aim at only earning profits from Indian markets
India needs large scale inflow of FDI for various purposes’ just
liberalising FDI inflows is not adequate. FDI needs to be permitted
as per our needs &priorities. Hence, FDI needs to be encouraged in
industrial sector for updating technology, promotion of new
industries, industrial res earch, quality improvements & so on
9.11 QUESTIONS
State whether True or False :
i) India’s balance of trade is favourable
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139 iii) India’s ranking in global exports is higher compared to China
iv) Primary products include tea & coffee
v) India’s share in world of exports is significant
vi) FDI is popular method for outflow of foreign capital
vii) Export promotion is possible through FDI
viii) FDI helps in technology diffusion
ix) FDI needs to be permitted as per our needs & priorities
x) FDI is fr eely allowed in India’s defence sector
Answer(i -False,ii -False,iii -False,iv -True,v -False,vi -False,vii -True,viii -
True, ix -True,x -False
(2) Match the Following :
A B
a) India’s exports i) 1.7% of worlds exports in 2011
b) Balance of Trade ii) Are increasing faster than exports
c) FTP iii) Foreign Trade Policy
d) India’s exports iv) Unfavourable to India
e) Trade Balance v) Difference between total exports
and imports
Ans (a -ii), (b -v), (c -iii), (d -i), (e -iv)
3) Answer in Brief:
i) Write an essay on India’s foreign trade.
ii) What is balance of trade? Explain b riefly position of India’s balance of
trade.
iii) Write a note on India’s foreign Trade?
iv) India’s share in world export trade is insignificant? Explain
v) Explain the commodities exported from India.
vi) What is FDI? Explain advantages of FDI Inflows.
vii) Explain the posit ive & negative implications of FDI in India?
viii) Explain the Government policy on FDI?
ix) Explain the meaning & importance of FDI Inflows?

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