Unit-I BUSINESS ENVIORNMENT-AN INTRODUCTION

[CONCEPT AND COMPONENTS]

1. Meaning of Business :-

The word business in its literal sense means the state of being Busy. It is associated with an activity that one can be busy about. But in economic sense the word business means human activities which are performed with the objectives of earning profit may be in the form of production, extraction or purchase of goods for sale. Business represents an organized effort by an individual or group of individual to earn profit. It therefore, includes all those activities which involve production or purchase of goods or rendering of certain services with the object of selling them at a profit.

2. CHANGING CONCEPT OF BUSINESS:- Business and society are closely related to each

other. Business influences the various aspects of society and the society is can affects business although business activity also affects social outlook, values, attitudes, customs, way of thinking etc. yet it is basically business and the society is can affects business although business activity also affects social outlook, values, attitudes, customs, way of thinking etc. yet it is basically business that has to adapt itself to change in the concept and objectives of business. The concept of business are as follows:

(1) Old Concept of Business (2) Modern Concept of Business

2.1 Old Concept of Business:- Business may be understood as the organized efforts

of enterprises to supply consumers with goods and services for profit. In earlier days, profit maximization was the main objective of business. Social responsibilities of the business towards customers, society and employees were totally ignored. It was possible only because there was less competition. Following are the views of some prominent scholars on the meaning of the old concept of the business. According to L.H. Haney, “Business may be defined as human activity directed towards producing or acquiring wealth through buying or selling goods.” According to Thomas, “Business is an occupation of which money gain is the principal object and money loss is the main risk.”

2.2 Modern Concept of Business:- In modern times, the goal of profit maximization

is achieved through customer satisfaction. In today’s competitive environment, survival of business unit is not possible without customer satisfaction. Economic function of business is to create market or finding out the favour of potential customers. Customer is regarded as foundation of business. According to F.C. Hooper, “Business means the whole of complex of commerce and industry-the basic industries and the network of ancillary industries, distribution, banking, insurance, transport and so on.” According to Peter F. Drucker, “Business means to create customers and to expand market shares.”

3. Characteristics of Business:-

The main characteristics of business are:

(1) Exchange of Goods and Services:- Business is an economic activity which is concerned with

exchanging goods and services to satisfy human wants. It means if an individual purchase a thing or service for his personal use, this activity will not be called business. For example, if a shopkeeper purchase some material for domestic use, this activity will not be called business, but if he purchase the some material for selling, it will be a business activity.

(2) Profit motive:- The prime consideration in any business is to earn profit which represents a fair

Return on capital employed and reasonable reward for risk taken.

(3) Continuity in Dealing:- One single transaction does not constitute business. The term business

refers to a series of dealing in regular sequence.

(4) Entrepreneurship and risk:- Business operates in a rapidly changing internal and external

environment. This makes managerial decision making a difficult task. The slightest error in correctly foreseeing these changes may expose it to risk. The society permits business to earn profit as a reward for bearing risk. Due to this risk, there is always uncertainty in earning profits.

(5) Creation of Utility:- In order to make things more useful for society, their utility is exchanged by

the efforts of businessman. From the economic point of view, the utility is created in various ways, like the utility of place, form, time. Place utility is created by carrying goods from the place of production to place of consumption. Form utility is created by changing their forms. Time utility is created by storing the goods in godowns and cold storages so that these goods can be used even at that time when there production is not possible e.g. in case of seasonal products, time utility is created by storing them.

(6) Customer Satisfaction:- The aim of business is profit earning but it is not possible without

Customer satisfaction. Hence businessman should make goods and service according to the taste of customers.

(7) Innovation and Research:- Businessman have to encourage innovations and research in their

respective fields of activities. They have to be alert and cautious about the activities of rival organizations. Business has to face the challenges of changing business environment.

(8) Human Activity:- Business is a human activity because human resources alone is able to utilize

available physical resources of a business like material, money, machinery. The success of business depends largely on optimum utilization of physical resources by its human resources.

4. Meaning of Business Environment:- Business Environment refers to those aspects of

surrounding of business enterprise which have influence on the functioning of business. An organization can survive and grow only when it continuously and quick adapts to changing environment. We are living in the dynamic world which is undergoing a rapid change, because of coming up of new ideas, economic changes, political changes, political changes and new technology. Keith Devis has observed that business environment is the aggregate of all conditions, event and influences that surround and affect the business. According to Arthur M. Weimer, “Business environment is the climate or set of conditions – economic, social, political, or institutional in which business operation are conducted.” According to Bayard O. Wheeler, “Business environment is the total of all things external to business firms and industries which affects their organization and operations.” Business environment has two components:

(1) Internal Environment (2) External Environment

4.1 Internal Environment:- Internal environment includes internal factors of the business which

can be controlled by business. It refers to environment within the organization. It include objectives of business, managerial policies, different department of the organization, management and employees of the organization, labour management relationship, brand image and corporate image, physical resources infrastructure available with the business, vision and thinking of top management, research and development activities of organization, working condition in the organization, morale and commitment of human resources etc. Internal environment includes 5 Ms, I.e. man, material, money, machinery, management available with business. The components of internal environment are usually within the control of business. Quality of human resources. A component of internal environment is largely responsible for success or failure of business unit. If employees of organization are skillful and committed towards the organization, then it can take the business to big heights. If workers are not satisfied, then their efficiency is go down, they may even go on strike and it may badly affects the organization. The responsibility of studying changes in external environment lies on managers, directors, top officials, (who are part of internal environment).

4.2 External Environment:- External Environment refers to external aspects of the surrounding

of business enterprise which have influence on the functioning of business. The external aspects of surrounding are by and large, beyond the control of the business. External environment includes factors outside the firm which can provide opportunities or pose threats to the firm. The success of a business enterprises depends to a great extent on its awareness about its surroundings, environment and adaptability to change in the environment. According to Reinche and Schoell, “The environment of business consists of all those external things to which it is exposed and by which it may be influenced directly and indirectly.” According to William Glueck and Jauck, “In environment, there are external factors, which constantly bring opportunities and threats to the business firm. It includes social, economic, technological and political conditions.” External Environment is of two types:

(1) Micro/Operating Environment (2) Macro/General Environment

5. Micro/Operating Environment:- The forces which are close to the company and affect its

ability to work constitute micro environment. It is known as operating environment of business. It consists of company’s immediate environment that affects the performance of company. It includes suppliers, customers, market intermediate, competitors, and public. These factors may affects different firms of the same industry in different ways. Some of the micro factors may be same for different firms of the same industry in different ways. Some of the micro factors may be same for different firms in an industry; while some of the micro factors may be particular to one firm only. According to Philip Kotler, “The micro environment consists of factor in the company’s immediate environment which affect the performance of the business unit. These include suppliers, market intermediaries, competitors, customers and the public.” According to Hill and Jones, “The micro environment of a company consists of element that directly affect the company such as competitors, customers and suppliers.” Micro business includes the following:

5.1 Supplies:- Every business enterprise requires a number of suppliers, who supply raw

material and components to the company. The following point kept in mind regarding suppliers:

(1) Reliability:- If our supplier is reliable our business will run smoothly. If our supplier is not reliable,

we may have to maintain high inventories which will increase our cost.

(2) Multiple Supplier:- It is very risky to depend on a single supplier because a strike, lockout or

Other problem with that supplier will seriously affect the business unit. Multiple sources of supply will reduce such risk.

5.2 Customers:- Customers is the central point of any business. Success of any business

organization depends upon identifying customers, their needs, tastes, liking etc. and enhancing the level of customer satisfaction. Because of increase in competition, attracting and satisfying the customer has become more challenging. For attracting new customers companies conduct consumer research design product as per needs and requirement of customers, spend heavily on advertisement, provide after- sale services etc. Customers may be different types:

(1) Wholesale customers (4) Government and other institutions (2) Retail customers (5) Foreign customers (3) Industrial customers For different types of customers, business unit will have to design different types of products. So that different classes of customers can be attracted towards company’s product. Different customers have different levels of income. Tastes and preferences. A person with higher level of income will buy costly product and person with low level of income will buy cheap product. So it is must that the business firm makes products according to the demands of customers. It should identify the differences in customers characteristics and segment the customers in the customers in different groups. Customers will same level of income, taste, preferences should be put in same segment. The business firm should make separate product for separate segment. Following can be the basis of segmentation of the customers: (a) Income level of customers (d) Age of customers (b) Quantity to be purchase by customers (e) Personality and lifestyle of customers (c) Tastes and preferences of customers (f) Geographical area of customers

5.3 Market Intermediaries:- Every business enterprises may be assisted by market intermediaries

which include agents, brokers who helps the company to find customers. It is a link between company and final customer. Market intermediaries help the company to promote, sell and distribute its goods to final buyers. Market intermediaries include the following:

(1) Middleman: It includes wholesalers, retailers, departmental stores etc.

(2) Market Agencies: It includes advertising agencies, consultancy firms, media firms, market

research firms, etc.

(3) Financial Intermediaries: It includes banks insurance companies, financial institutions,

money markets, capital markets, etc.

(4) Physical Intermediaries: It includes warehouses, transport agencies, etc.

5.4 Competitors:- Business has to adjust its various activities according to actions and reaction

of competitors. Competitor means other business units which are marketing or producing similar products or a very close substitute of our product. For example, a motor cycle manufacturer faces competition not only from other brands of motorcycle but also from other types of two wheeler, viz. scooters. He may attract customers from other manufacturers of motorcycle and also from scooter manufacturing companies. Nowadays, competition is increased to a great extent. At present no business unit enjoys monopoly in the market. Cut through competition is often found in consumer goods like soft drinks, detergents, shampoo, toothpaste, etc.

5.5 Public:- “Public is any group that has actual or potential interest in business. To achieve this

Interest, it has its impact on the business.” Public includes users or non users of this product. Example of public are:

(1) Media Public: It includes all newspapers, magazines, journal which may publish favourable

or adverse remarks about company. Both types of remarks in media have effect on the reputation of company.

(2) Local Public: local public refers to people living in the area where business unit is setup.

Environment pollution is an issue that is taken by local public. Action of local public on this issue have forced some companies to suspends operations or to install pollution control equipments.

Macro Environment/General Environment:- Macro Environment means general environment of

Business. Macro forces are uncontrollable in comparison to the micro forces of environment. The growth and survival of business depends upon its adaptability to macro environment factors which include economic environment, social environment, etc. According to Philip Kotler, “Macro environment include forces that create opportunities and pose threat to the business units. It includes economic, demographical, natural etc.” According to Hill and Jones, “The macro environment consists of the broader economic, political setting within which the industry and the business units are placed.” Macro business environment includes the following:

6.1 Economic environment:- Economic environment refers to those economic factors which

have impact on the working of business viz., economic system, economic policy etc. Economic environment of business is very complex in nature. It is very dynamic. It keeps on changing with change in government policy, change in political situations, etc. it mainly has three elements. These are economic conditions, economic policies and economic system.

6.2 Political Environment:- Political environment of the country affects different business units

Significantly. A stable and dynamic political environment is indispensable for business growth. Political environment mainly includes the following components:

(i) Political ideology of government (ii) Political stability in the country

(iii) Relational of our nation with other countries (iv) Defence and military policy (v) Welfare activities of government

(vi) Centre-state relationship

(vii) Approach of opposition parties toward business

6.3 Socio-cultural Environment:- Business is an integral part of society and both influence each other.

It is one of the important non-economic external components of business environment. Socio-culture environment refers to influence exercised by certain social and cultural factors which are beyond the control of business unit. Such factors include attitude of people to work family system, caste system, religion education, marriage, habits and preferences etc.

6.4 Technological Environment :- Technology is a systematic application of scientific or

other organized knowledge to practical tasks . During last fifty year, technology has developed substantially. technology has enabled man to save lives, generate and distribute energy, discover new material and substitutes ,introduce machines to work ,substitute mental work with computer , etc. Technology is the most dramatic force shaping the density of people all over the world. Some of the technological inventions are wonders . Some are horror and some have mixed reaction.

6.5 Natural Environment :- It includes geographical and ecological factors such as natural

resources , weather and climatic conditions , port facilities ,topographical factors such as soil , landform , sea ,rivers , rainfall, environmental pollution etc . Climatic and weather condition affect the location of certain industries like textile industry in Maharashtra and Gujarat . Fish industry is set up hear seas coasts . Export oriented industry tends to be to be located near ports, So that transportation cost can be minimized. Ecological factor have also become significant in the study of business environment. environment pollution in the form of air pollution ,water pollution , noise pollution have caused disturbence in ecological balance . Government has framed various acts for the control of environmental pollution and conserving non-replenishable resources . The business enterprises must keep in mind geographical factors , pollution factors and government enhacment in this regard . In brief its includes.

(i) Climatic and weather conditions (ii) Availability of natural resources

(iii) Topographical factors: physical features of a place

Unit – II Economic Trends National Income

Meaning:- National income refers to the market value of goods and services produced by an economy during the period of one year.

Meaning of per capita income:- Per capita income of a country refers to the income per head of

the population of that country, counted at current prices or at constant prices.

Per capita income = National Income/ Population Per capita income of a country depends upon the national income and total population.

Features of National Income in India (1) More Dependence on Agriculture:-

A significant percentage of national income i.e. 14.2 percent

Continues to be derived from agriculture, forestry, and logging, fishing, mining and quarrying of this

agriculture contributes a major portion.

(2) Poor Growth of Per Capita Income:- Rapidly growing population has constrained the growth of

per capita income. So the overall growth of national income fails to be reflected in the living standards

of the masses.

(3) Unequal distribution:- Unequal distribution is another principal feature of India’s national income.

According to human development report 2009, top 10 percent population hold 31.1 percent of national

income and bottom 10 percent population hold just 3.6 percent of national income.

(4) More Expenditure of Foods:- According to C50 estimates in 2006-07, nearly 50 percent of income

was spend on food. According to national sample survey, 52.3 percent of national income is spent on

food in the rural areas and 39.6 percent in the urban areas in the year 2007-08. This points to poor

standard of living of the masses in India.

(5) Low Standard of Living:- Rising national income has failed to be reflected in the living standard of

the masses, partly because of the rapidly rising population, rising prices and partly because of highly

unequal distribution of income.

(6) Low Growth Rate of National Income:- Compared to other nations, India records a much low growth

rate of national income. During 1951-2010 period national income recorded a growth rate of just 5

percent per annum.

(7) Unequal growth rate of different sectors:- Different sectors of the economy have not equally

grown overtime. In the year 2009-10 primary sector recorded growth rate of nearly 0.4 percent per

annum compared to 8 percent and 10.1 percent of the secondary and territory sectors.

(8) Different in Income Levels in urban and Rural Areas:- According to all India rural household survey

income level in urban areas in twice that of rural areas, pointing to slow progress of rural economy in

India.

(9) Regional Disparity:- Regional disparity is another important features of India’s national income.

Goa rank is Highest and Bihar is lowest. Haryana ranks second in order, Maharashtra and Punjab are 3rd

and4th respectively.

(10) More Income in Private Sector:- The bulk of India’s national income is generated in the private

sector. In the sector 2008-09, private sector contributed 79.2 percent, total national income while public

sector contributed only 20.8 percent to national income.

(11) Increase Significance of tertiary sector:- Tertiary sector has recorded a continuous increase in its

share in national income. In 1950-51, it was 24.5 percent while in 2010-11 it was 57.8 percent.

(12) Increasing Share of Organized Sector:-

Organized sector is growing in our economy. In 1980-81

the share of organized sector in India’s national income was 30 percent. In 2004-05, this share has

increased to 42 percent.

Causes of National Income in India We know as compared to other countries, national income and per capita income of India are very low

following are some of the main causes of national income in India

(1) Social Causes

(i) Social Institutions:- Caste system and joint family system continue to create hindrance in

the path of growth, resulting in low national income.

(ii) Fatalism:- Conservatism, pessimism and deep faith in fate along with high rate of illetracy

is a major social constraint in the path of progress. Many sections of society have deep faith in god. They

lake initiative and enthusiasm to work.

(iii) Illiteracy:- Almost all social evils stem from illiteracy which is badly inflicting the Indian

society. No wonder illiteracy is the mother cause of all social constrains that hinders the path to

progress.

(2) Political causes:- To a large extent, backwardness of the Indian economy may be attributed to the

colonial exploitation of the economy during the British region. National resources of the country were

fast exploited to the growing industrial requirement in Britain. India was used as a ready market for the

finished goods produced in Britain.

(3) Economic Causes:

i) Low Rate of Saving and Investment:- Desire to save and inducement to invest continue to

be low. In the year 2009-10 nearly 33.7 percent disposal income was saved and investment was 36.5 percent of GDP.

ii) Backward Technology:- The level of technology in India is backward. Because of poor technology,

optimum utilization of resources cannot take place. It results in low production, low productivity and thus low national income.

iii) Rapid Increase in Population:- Population in India is increasing at a tremendous rate. Because

of this, increasing in national income during the plan period has failed to improve standard of living of the people and per capita real income continuous to be very low.

iv) More Dependence on Agriculture:- Most of the population in India depends upon agriculture

is very backward and is uncertain because of its dependence on rainfall.

v) Inadequate Industrial Development:- Inadequate industrial development is a very important

reason for low per capita income in India. India lacks basic industries.

Suggestion to Raise National Income (1) Increase in rate of saving and investment:-

In order to increase national income of the country, it

is extremely important that saving and investment are stepped up and capital output ratio should be

brought down.

(2) Modern Technology:- Government should concerntrate on improvement of technology in the

economy. For this research and development facilities should be promoted moreover modern

technology can be imported from other countries.

(3) Check on Growth of Population:- Growth of population must be checked. Family planning programmers

Should be encouraged . unless population growth is checked per capita income is not likely to improve.

(4) Development of Agriculture:- Agriculture is the main source of our national income. To increase

national income, it is essential to develop agriculture. Wasteland should be cultivated and irrigation

facilities will be extended to large areas.

(5) Development of Industries:- Industrialization should be encouraged. In view of the serious problem

of unemployment small scale industries are more important then the large scale industries.

(6) Development of Transport and power:- There is need to further develop means of transport and

power in India. There are infact the basis of economic, growth, particularly trade and commerce.

(7) Balanced Growth of all sectors:- From the point of view economic growth, it is also important that

different sectors of economy grow simultaneously. Otherwise one act as a bottleneck in the growth

process of other sector.

(8) More Social Welfare Services:- More and more social welfare services need to be provided. Social

welfare and health services are particularly important. This would improve human capital which is very

important is the context of growth.

(9) Education:- Hundred percent literacy should be aimed at. An educated person is more efficient

and productive than an uneducated one. He can make a positive constribution to the national income.

(10) Development of Banking and Insurance:- In India banking and insurance areas must be encouraged

to increase trade and commerce. This would also increase saving and investment rates.

(11) Use of National Resources:- Natural resources of the country was fully exploited. Presently these

remains under exploited, causing slow growth of the economy.

(12) Growth of Foreign Trade:- India must increase its foreign trade. Greater exports would enable our

country to import latest technology and capital goods for growth of the economy.

Difficulties and Limitation Some of the major difficulties and limitation of national income estimates in India before independence

where as under:

i) There are no government agencies for the estimation of national income. Therefore no

estimates were prepared at the official level. All estimates of national income were prepared at the

personal level.

Limitation of National Income (1) First, national income is curve fingers are not accurate. People sometime fails to fill in

forms or they complete them in accurately.

(2) The ‘black economy’ distorts the fingers. This is the name given to work that is not

reported to the authorities.

(3) National Income often rises in time of war, or the threat of war, because money is spent

on weapons. This will push up GNP, but the people may be accurately short of goods to buy.

Unit – II Saving and Investment Meaning of Investment or Capital Formation:- Increase in the stock of capital is called capital formation or investment. Capital formation is also known

as increase in net investment. Capital formation simply means increase in real productive assets of the

economy, which leads to more productive.

Gross Capital Formation:-

Gross capital formation mainly includes two items:

(a) Gross Fixed Capital Formation

(b) Increase in Stocks

(A) Gross Fixed Capital Formation It includes investment on the following items:

1. Construction:- It comprises of such investment as:

(i) Residential Buildings

(ii) Non Residential Buildings

(iii) Land Improvement, plantation and orchard development

(iv) Other types of construction

2. Machinery and Equipment:- It include investment made item like:

(i) Transport Equipments

(ii) Machinery and Other equipments

3. Livestock:- Breeding stocks, draught animals, cattle and other livestock.

(B) Increase in stocks:- It comprises of the following stocks lying with the government,

trade sand producer

(i) Raw Material:- It includes unfinished goods with the producers.

(ii) Work in Progress:- It includes that raw material which is semi finished.

(iii) Finished Goods:- It includes those goods which are ready to sale.

(iv) Other Stock:- It includes stock of strategic material and other important commodom

with the government.

Net Capital Formation:-

Net Capital Formation is arrived by deduction depreciation and obsolescence from the gross capital

formation is the real increase in productive assets of the economy. It will increase if increase in growth

capital formation is more than the depreciation and obsolescence in the productive assets.

Improvement of capital formation:-

Economist have considered capital formation as the instrumental factor of economic development.

1. Rapid Increase in economic development:- Increase in the rate of capital formation is a pre condition

For rapid economic development.

2. Increase in employment:- Capital is needed for generating more employment opportunities.

population grows rapidly in undeveloped countries.

3. Formation of Human Capital:- Expenditure on health, education, social service and social welfare,

is an investment on human capital. Investment on education and heath increase the productivity of the

human capital.

4. Increase in Demand:- Certain economist are of the opinion that capital formation has dual affect

on economic development.

5. Technical Progress:- Backward technology is the principal constraint in growth progress of less

developed countries and technology remains backward going to the storage of capital.

6. Creation of Infrastructure:- Without adequate infrastructure i.e. roads means of transport, canals,

multipurpose projects, powerhouses etc. economic development is not possible.

7. Self Reliance:- Capital Formation promotes production in the country and as such, imports can

reduced and exports can be increased.

8. Economic Welfare:- Through capital formation output, income and employment are increased in

Underdeveloped countries.

9. Proper use of Natural Resources:- Capital formation facilities better use of natural resources,

particularly in less developed countries like India. Natural resources remain unexploited without

sufficient capital formation.

Gross Capital Formation in India Capital formation has substaintly increased in India during the period of planning.

Rate of Capital Formation

Rate of capital formation refers to the percent of investment made capital formation in each year out of

gross domestic product. It is worked out as under:

Rate of capital formation = Capital Formation of Investment/Gross Domestic Product*100

Rate of Capital Formation in Different Nation:- Rate of capital formation of some developed and some developing economies:

Incremental Capital-Output Ratio(ICOR) Incremental capital-Output ratio refers to number of units of capital required to produce one extra unit

of output.

1. Causes of High Incremental Capital-Output ratio in India:- i) We have failed to use the surplus labor in the economy.

ii) The choice of projects, locations, foreign collaborators and technique has been faculty.

iii) Higher cost of machines and plants and heavy indirect taxes on plant and machinery.

2. Suggestion to Reduce Incremental Capital-Output ratio in India:- i) Production should be increase by employing more labor rather than capital.

ii) Gestation lag or time lag between the installation of plants and actual production should

be reduced.

iii) Production capacity should be utilized fully.

Main Source of Capital Formation or Investment:

Two possible sources of capital formation or investment are domestic sources and foreign sources.

(a) Domestic/Internal Sources:- In India, domestic savings are classified as:

i) Household Sector Savings

ii) Private Corporate Sector Savings

iii) Government/Public Sector Savings

Country Rate of Capital Formation(2009)(% of GDP)

China 45

India 25

Pakistan 20

Japan 24

U.S.A 18

U.K 17

World 22

(b) Foreign/External Sources:- Foreign sources of investment are classified as under:

i) Net foreign liabilities

ii) Loans received by Indian government from Foreign government.

iii) Investment made by Foreigners in our country.

iv) Loans, deposits received by household and corporate sector from Foreign

countries.

Less:

v) Loans received by government, households and corporate sector to other

countries.

vi) Investment withdrawn by Foreigners.

3. Net Foreign Assets:- There are estimated as under:

i) Foreign exchange reserve in India.

ii) Loans given by our country to the rest of the world.

iii) Direct investment made by our country in the rest of the world.

Less:

iv) Loans paid back by the rest of the world.

v) Investment withdrawn by our country from the rest of the world.

Savings:- That part of national income which is not spent on consumption of goods id called savings.

According to Keynes, “excess of income over consumption is known as savings.” In other words

S=Y-C (Here, Y=Income, C=Consumption Expenditure and S=Savings)

Sources of Domestic Savings:

1. Household Sector Savings:- This sector includes the savings of:

i) Household

ii) Non-Profit Institutions like Collages, Hospitals etc.

2. Private Corporate Sector Savings:- This sector includes the savings of private sector companies.

this part of profit which is not distributed among the shareholder by the companies constitutes their

savings.

3. Government Public Sector Saving:-

The amount of government saving is determined by the income

and expenditure of the government. It includes the saving of government departments and

corporations, like railways, post and telegraphy etc.

Saving and Investment Rates During Plans:- In planning period saving and investment rates are increasing. The saving and investment rates in last

few plans are shown as:

Determinants of Saving and Investment or Factors Affecting Saving and Investment

1. Rate of Interest:- Interest rate is an important factor affecting an investment. Higher interest rate

promotes savings as people are ready to apart their cash so as to earn more interest. Investment has

negative relationship with rate of interest.

2. Government Policies:- If government adopts liberal policies, to promotes investment by offering

various incentives and concessions then it will promotes capital formation in the economy. Liberal fiscal,

monetary, industrial, licensing, foreign trade policies encourage investment.

3. Government Spending on Infrastructure:- Increased government spending on infrastructure has

positive affect on investment. Better infrastructure creates better investment climates.

4. Research and Technological Advancement:- New innovation and technological advancements

Promote capital formation in the economy. It benefits entrepreneurs and industrial units.

5. Banking Facilities:- Well spread network of banking facilities and both in rural and urban areas

promotes saving and investment.

6. Developed Capital Market:- If capital market in an economy is developed, then it promotes

investment. If there are frequent scars in capital market then investors hesitate to invest their funds.

7. Tax Incentives on Savings:- If government provides tax incentives on savings, then it motivates

Plan Saving Rate(%of GDP) Investment Rate(%of GDP)

Eighth Plan 23.1 24.4

Ninth Plan 23.6 24.3

Tenth Plan 31.9 32.1

11th Plan 34.8 36.7

tax plays to save more so as to reduce tax liabilities. For example in India, investment up to Rs 1,20,000

in specified securities, deposits and bonds is deductible from taxable income.

Causes of Low Rate of Capital Formation in India

1. Vicious Circle of Poverty:- As an underdeveloped economy, India is caught in the vicious circle of

poverty and, low rate of investment results in low rate of capital formation.

2. Low Per Capita Income:- Different production sectors, like agriculture, industry, transport etc are

backward in India and so total production and per capita income are low large part of income is spent on

consumption.

3. Large Population:- India has very large population because of rapid growth of population most of

the increase in production is consumed by ever increasing population. Accordingly, economic surplus

continues to remain low employing low rate of capital information.

4. Inflation:- Inflation means rise in price level in the economy. Inflation erodes the ability and

willingness to save. Due to rising prices people have to spend a large part of their given income. In this

way, their capacity to save is reduced.

5. Demonstration Effect:- In India consumption expenditure has gone up under the impact of

demonstration effect. This has resulted in less savings little is saved for capital formation.

6. Heavy Taxation:- Taxation system of the country also affects capital formation. In India, rate of

direct taxes, like income tax, is very high. Thus, large part of the additional income goes towards the

payment of taxes.

7. Less Facilities of Investment:- Is an underdeveloped country like India, facilities of investment

are very much limited consequently, the volume of investment is low and hence there is low rate of

capital formation.

particularly in rural areas, household savings are not adequately mobilized. It leads to less capital

formation.

8. Lack of Financial Institutions:- Due to lack of financial institutions and lack of banking facilities,

most Indians are poor. They have limited demand for goods limiting the size of the market. This is turn

to less production.

9. Lack of Able Entrepreneurs:-

India suffers from lack of able entrepreneurs. Mostly people are

engaged in trade, substance farming, cottage industries and services.

10.Lack of Infrastructure:- There is shortage of infrastructure like transport, electricity, banking,

social services etc.

Suggestion to Increase the Rate of Savings and Investment in India

1. Expansion of Banking Institutions:- In some states, banking facilities are few and far between.

To mobilize savings banking facilities should be expended.

2. Special Drive to Promote Rural Savings:- Most of the people live in the rural areas. A rich saving

potential exists in the rural areas.

3. More Taxes on Luxuries:- More taxes should be received on luxuries and such other goods as are

Consumed by the rich people.

4. Efficiency Management:- Government has set up large number of enterprises in public sector.

Efforts should be made to raise the efficiency of public sector units.

5. Control on Population:- People should be educated to have small family. It will help to reduce

their consumption expenditure which in turn will lead to higher household savings.

6. Technical and Professional Education:- By promoting technical and professional education,

entrepreneur ship skills can be developed. Entrepreneurial skills help to promote industrialization and

service sector.

7. Concessional Loans for Construction Work and Purchase of Capital Goods:-

Banks and financial

institutions should be directed to provide concessional loans for construction activities and purchases of

capital goods. It will promote construction work and setting up of more industries.

8. Strengthening Infrastructure:- Government should develop infrastructure like roads, railways,

Power generation etc. it will promote industrial and economic activities.

9. Reduction in Import Duty for Capital Goods:- Government should provide more concessions for

the import of capital goods and technology.

10.Control on Demonstration Tendencies:- Rich class has high propensity to love. But they spend a

large part of their savings on demonstration like social functions parties.

Unit – II Industrial Development 1. Explain the achievement Industrial Development?

(i) Growth Rate of Industrial Production:- In the 1st year of eleventh plan, i.e. in year 2007-08,

industrial production growth rate was 8.6 percent. In the 2nd year of 11th plan i.e. in 2008-09, industrial

production growth rate come down to 2.8 percent. In 2009-10 and 2010-11, industrial production

growth rate was 8 percent and 8.1 percent respectively.

(ii) Strong Industrial Base:- During the period of planning, industrial base of India has turned strong.

development of basic industries, during planning period, has brought about diversification in industrial

production.

(iii) Modernization:- Production technique has improved as a result of modernization of several

Industries. Production technique of new industries has been made as modern as possible.

(iv) Development Public Sector:- Heavy investment in diverse industries in the public sector has

helped to establish large number of such industries which were necessary to accelerate the rate of

economic growth but private sector was shy to established them.

(v) Building up Infrastructure:- Industrial development is very much dependent on infrastructure

viz., electricity, roads, railways, means of communication etc.

(vi) Increasing Share of Industries in National Income and exports:- Percentage contribution of

industries in the national income of India has been rising. Industries contribute about 63.6 percent to

the total exports of the country.

(vii) Balanced Economy:- Indian economy is unbalanced because most of its population is engaged in

agriculture. Uncertainly prevails in agriculture sector.

(viii) Increase in Foreign Collaboration:- Number of industries set up with foreign collaboration has

increased substentially during the plans. In 1957, number of industries established with foreign

collaboration was 81 only. It was 1216 in the year 2005-06.

(ix) National Defence:- Industrialization has made possible the establishment of many industries like

iron and steel, chemical, aircraft, ship buildings, arms and factories etc.

(x) Self Dependence:- Industrial development has enable the country to produce goods required

by it within its own boundaries. Dependence on foreign imports has been minimized.

(xi) Increase to Government Income:- Large scale industries contributed to government chequer

In several ways like corporate tax, excise duty, value added tax etc. In this way, government’s revenue

also give up.

2. What Causes of Weakness of Industrial Development?

i) Irregular Increase in Industrial Production:- Growth rate of industrial production during the

period of planning has been irregular.

ii) Underutilization of Installed Production Capacity:- Excessive capacity refers to underutilization

of installed capacity. Although during the plan period, industrial sector has generated sufficient

production capacity. But the installed capacity has not been fully utilized.

iii) Increase in Monopoly Power:- Although the policy of government has been to control monopolies,

yet during the period of planning, power of monopolistic elements has grown tremendously.

iv) Capital Investment in Low Priority Industries:- Another noticeable tendency in the industrial

sector is that the capitalist have been making heavy investment in several such industries as have been

placed in low priority list in the plans.

v) Poor Performance of Public Sector:- Public sector industries have been running into losses since

long. Even now, many public sector industries are incurring losses.

vi) Increase in Regional Imbalance:- Industrial development in the country has been mainly restricted

to five states of Maharashtra, Gujarat, Tamil Nadu, West Bengal and Andhra Pradesh.

vii) Less Development of Small Industries:- As a result of industrialization in India, large scale industries

have been developed more rapidly than the small scale industries. In a poor country like India, small

industries, which are labor intensive, deserve more important than large industries which are capital

intensive.

viii) Industries Sickness:- In India, industries sickness have been on the increase. In 1981, the number

of sick units was 81 thousand, in march 2008, it rose to 86,641.

ix) Poor Quality Production:- Due to poor technology, method of production of many industries in

out dated. It results in poor quality products with higher per unit cost of production. So such industrial

units face difficulty in marketing their products.

x) Poor Results and Development (R&D) in Indian Industries:- Through spending on research and

development has increased in India, yet the difference in spending on R&D between India and

development countries remains considerable high. Due to less spending on R&D, technology used in

Indian industries is backward.

xi) Industrial Disputes:- Industrial disputes are still very common in Indian industries. These disputes

results in strikes and lockouts. These disputes badly affect the efficiency of these industrial units and

results in wastage of resources.

Unit – III Problems of Growth

Unit - Poverty

Meaning of Poverty:- Poverty is the inability to get the minimum consumption requirements for life, health and efficiency.

Poverty is the inability to fulfill even the basic requirement of life. These minimum requirement includes

food, clothing, housing, education and basic heath requirement. The term poverty is used in two ways:

1. Absolute Poverty

2. Relative Poverty

1. Absolute Poverty:- Absolute poverty refers to the measure of poverty, keeping in view the

economic condition of a country.

(i) Calorie Criteria:- The energy that an individual gets from the food that he gets everyday is measured

in the terms of calories. This view was first of all presented by Lord Boyd Orr, the 1st director general of

world food and agricultural organization. According to him, an individual must get minimum 2,300

calories per day. In India, planning commission is of the opinion that an individual in rural areas must get

2,400 calories and urban areas get 2,100 calories per day.

(ii) Minimum Consumption Expenditure Criteria:- An expert committee appointed in 1962, by the

planning commission to determine poverty line, adopted minimum consumption expenditure criteria. As

per committee, these people will be treateted as being below the poverty line whose per capita

consumption expenditure at 2004 prices is below Rs368 per month in rural areas and below Rs559 in

urban areas.

2. Relative Poverty:- Relative poverty refers to the basis of comparison of per capita income of

different countries. The country whose per capita income is quite less in comparison of other countries

is treated as relatively poor nation.

Poverty Line:-

Poverty line is the line which indicates the level of purchasing power required to satisfy the minimum

needs of a person. In other words, it represents the capacity to satisfy the minimum level of human

needs. The purchasing power can be expressed in the form of average per capita monthly expenditure.

The former group is regarded as living “above the poverty line(APL).” These people are not regarded as

poor. The later group is considered as living “below poverty line(BPL).” These people are called poor.

Causes of Poverty:- In India, problem of poverty and its causes have been the subject of discussion since long. In 1870,

eminent economist Dr. Dadabhai Naoroji mentioned causes for poverty in India. Poverty is the major

economic problem of India since independence. Its main causes are as follows:

1. Heavy Pressure of Population:- Population in India has been increasing very rapidly. As per

census 2011, our population size was 121 crore and growth rate of population was 13%.

2. Increase in Prices:- In India prices show increasing tendency. In 2010-11, the average rise in prices

has been 9.4 percent. Rise in prices has worst effect on poor population. Poor persons are unable to

meet their basic needs. It expends poverty.

3. Less National Income and show Economic Growth:- As compared to population, growth of national

income of India is also very low. Hence per capita income is also very low.

4. Chronic Unemployment and Under Employment:- Problem of unemployment is a big cause of

poverty. In India, the problem of unemployment is very serious. In 2007-08, the number of

unemployment in India was around 3 crore. In December 2009, about 3.82 crore educated employed

persons were registered 969 employment exchanges.

5. Rural Economy:- Indian economy is predominantly rural economy. The main occupation in rural

areas in agriculture. About 50% of population of India is dependent on agriculture, whereas in other

countries, a very small proportion of population is engaged in agriculture.

6. Capital Deficiency:- Capital has a special role to play in the establishment of industry, transport,

irrigation and other means of development.

7. Lack of Able and Efficient Entrepreneurs:- In the early stages of industrial development of a

country there is need for such entrepreneurs as have qualities of initiative and imagination, who are

competent and proficient in their trade and who can take risk in a bold manner.

8. Lack of Proper Industrialization:- India has backward industrial structure. No doubt consumer’s

goods industries like soap, cloth, sugar, leather, oil etc. have developed to a large extent but capital and

producers goods industries have not yet developed properly.

9. Outdated Social Institutions:- The social base of our of our country’s economy lies units social

institutions and traditions. These institutions and traditions are caste system, joint family system and

laws of inheritance and succession etc.

10. Under Utilization of Natural Resources:- India is a rich country from the point of view of natural

resources. Valuable minerals like iron, coal, manganese, mica etc. are available in large

quantities. Rivers flowing all the year are rich sources of hydro-electricity.

11. Lack of well Developed means of Transport:- Keeping in view the large size of the country, development

of means of transport is not satisfactory. There availability specially in rural areas is much unsatisfactory.

12. Unequal Distribution of Income:- Another main cause of poverty in India is unequal distribution

of income. Attempts have been made in plans to remove inequality in distribution of income through

taxation and other measures.

Measure Undertaken by the Government to Remove Poverty In year 2009-10, government has regarded to reduce the proportion of people living below poverty line

is less than half from the current levels by year 2014. The measures undertaken by the government for

alleviation of poverty may be classified in the following three categories:

i) Employment Generations Program

ii) Programmes related to acquisition of productive assets

iii) Other programmes

Employment Generation Programmes:-

The employment generation programmes aimed at increasing the income of the poor by providing them

productive employment. The government has adopted following employment generation schemes for

eradicating poverty.

1. Swarnajayanti Gram Swarozzar Yojana:- To promote self employment and to remove poverty

from rural areas, a new programme has been launched in villages in April 1999.

2. Sampoorna Grameen Rozgar Yajana:- Sampoorna grameen rozgar yojana was launched on 1st

September, 2001. The main objectives of their yojana are:-

(a) To provide employment opportunity to rural areas

(b) Food security

(c) Development of the community, economic and social assets

(d) Development of the basic infrastructure

3. National Food for Work Programmme:- In November,2004 Government started national food for

work programme in 150 most

backward districts of the country.

4. Small and Cottage Industries:- Small scale industries are based of labor intensive technology. So

these have more employment potential.

5. Prime Minister Rozgar Yojana:- The scheme is meant for providing self employment to educated

unemployed. In 2008-09, this yojana was renamed as prime minister employment generation

programme.

6. Swarnajayanti Shahri Rojgar Yojana:- This plan begin on December 1,1997. It aims at providing

self employment or wage employment to urban unemployed and under employed persons. It comprises

of two programmes.

(a) Urban Self Employment Programme

(b) Urban Wage Employment Programme

7. Mahatma Gandhi National Rural Employment Guarantee Act:- Government enacted Mahatma

Gandhi national rural employment guarantee act in 2005 and in year 2006-07 this programme was

implemented in 200 districts of the nation.

Programmes Related to Acquisition of Productive Assets:-

These programmes are related with the schemes providing loans to the poor at the low rate of interest,

so that they can acquire productive assets. Government has started following schemes related to

acquisition of productive assets:

1. Different Rate of Interest Schemes:-

The different rate of interest scheme was launched in 1972

to advance loans to the poor at the very low rate of interest of 4% per annum.

2. Pradhan Mantri Gramvidya Yojana:- This program was introduced in 2001. Its main objective is

too improve the quality of life of people in the rural areas.

3. Concessional loans to start cottage and small industries:- Government provides concessional loans

to start small, village and cottage industries.

Other Programmes for Alleviating Poverty:

1. Minimum Needs Programme:- To raise the standard of living of the poor. Minimum needs

programme was launched during 5th plan. It has provced very beneficial to poor and weaker sections.

2. Twenty Point Programme:- Twenty point programme was launched in the year 1982, with a view

to bringing prosperity to masses and relieving them from the bonds of poverty.

3. Annapurna:- This scheme came into effect from April 1,2000. It aims providing food security to

meet the requirement of senior citizens.

4. Shiksha Sahyog Yojana:- The scheme has been finalized for providing education allowance of

Rs100 per month per child to the children of parents living below poverty line for their education from

9th to 12th standard.

5. Targeted Public Distribution System:- The BPL families which are not covered in Antodya Anna

Yojana are covered in targeted public distribution system.

6. Bharat Nirman:- In 2005-06, a new scheme bharat nirman has been launched. In this scheme

rural infrastructure is created to remove poverty in rural areas.

7. Rashtriya Swasthya Bima Yojana:- This Yojana is started from 1st april,2008. In this yojana a health

cover of Rs 30,000 is provided to workers of BPL category, engaged in unoraganised sector.

8. Indira Awas Yojana and Rajiv Awas Yojana:- The objective of IAY is to provide financial assistance

for construction / upgradation of houses to BPL rural households, windows and physically handicapped

person in rural areas.

Evaluation of Poverty Alleviation Programmes Evaluation of poverty alleviation programmes in India is discussed as under:

1. Employment Generation Programmes:- In India various employment generation programmes

are launched by the government to alleviate poverty. Initially these programmes should good results.

2. Programmes related acquisition of productive assert :- The programmes related to acquisition of

Productive assets have benefited very few persons. These suffer from the lack of concern and

3. Defective planning:- The selection of schemes under poverty alleviation programmes was not

done in a rational manner.

4. Ignorance of Neglected, Disabled and Sick Persons:- Special schemes were not framed to alleviate

Poverty among handicapped, neglected, disabled, and sick- persons etc.

5. Lack of coordination among various poverty alleviation programmes:- Various poverty alleviation programmes were not coordinated with each other. These programmes

were selected in an irrational manner

6. Leakage of fund:- Poverty alleviation programmes are implemented though local bodies, like municipal

committees, panchayats, block sammittes etc.

Suggestion of Removal of Poverty: 1. Increase in Economic Growth Rate:-

Slow rate of economic growth is one of the main causes of

poverty in India. Faster growth rate is essential for reduction in poverty.

2. Development of Agriculture:- To eradicate poverty, special efforts should be made to develop

agriculture. Rapid growth of agricultural production will have to remove rural poverty.

3. Increase in the Production of Goods for Mass Consumption:- If rural and urban poor are to be

benefitted by increase production then industries producing mass consumption goods like cloth,

vegetable, soap, oil, sugar etc.

4. Stability in Price Level:- To alleviate poverty in India, price level must be stabilized. If prices

continue to rise rapidly, the standard of living of the poor will further deteriorate.

5. Check on Increase in Population:-

In India population of poor people has been rising rapidly.

Growth rate of population is 1.3% per annum.

6. Increase in Employment:- With the view to removing poverty special efforts should be made to increase

employment opportunities. There are more opportunities of generating employment in rural areas.

7. Change in the Technique of Production:- Capital intensive technique of production as practiced

in western countries is ill suited for India. Government should favor labor intensive of production.

8. Equal Distribution of Income:- In India poverty cannot be removed simplify by increasing

production or checking growth of population. For this inequality in the distribution of income and

concentration of wealth should be checked.

9. More Concessions to Backward Areas:- In India, proportion of poor in some states like Odisha,

Bihar, Jharkhand, Madhya Pradesh etc. is greater than the other states.

10.Effective Public Distribution System:- In order to remove poverty, mass consumption goods and

food grain etc. should be distributed among the poor population at low prices.

11.Provisions for Meeting Needs of the Poor:- Government should make efforts to provide for the

minimum needs, like drinking water, primary medical care, food, etc. to the poor government should

make liberal expenditure in this regard.

12.Increase in the Productivity of the Poor:- To remove poverty, economic productivity of the poor

should be increased. Greater attention should be paid to the skill formation of the poorer sections and

attempts should be made to augment their productivity.

Unit -III Regional Imbalances

Unit -III Regional Imbalances

Unit -III Black Money

Meaning and definition of Parallel Economy:- Parallel economy refers to an unsactioned or unaccounted economy parallel to the planned economy.

This unsactioned economy run simultaneously with planned economy.

According to national institute of public finance and policy, “black money is aggregate of incomes which

are taxable, but are not reported to tax authorities.”

Causes or Factors Responsible for the Growth of Black Money 1. Shortages During Second World War:-

The beginning of the evil of black money can be traced to

the second world war. During this periods many persons in the Indian industries find the situation

suitable for black marketing.

2. System of Control Permits and Licenses:- System of control, permits, quotes and licenses for the

distribution of scare and resources created grounds for generation of black money.

3. Higher rates of taxes:- One of the most important reason of generation of black income is the high

rate of direct and indirect taxes.

(i) Direct taxes:- Till 1922, the maximum tax on income was as high as 50%. The corporate tax rate

was too very high. In this circumstances, the temptation for tax evasion was substantial.

(ii) Indirect taxes:- Indirect taxes includes excise duty, sales tax, customs duty. Even in the case of

Indirect taxes, the situation is no better. Revenue from indirect taxes has been 43% of the total tax

revenue.

4. Ineffective enforcement of tax laws:- The collection is very poor because of ineffective

enforcement of tax laws. The hard reality is that the collecting authorities themselves are corrupt and

they show the ways to evade tax to the business class.

5. Illegal Real Estate transaction:- Tor responsible Another factor responsible for widespread

growth of black money is illegal real estate transaction. These transaction take following forms:

i) Undervaluation of price at the time of buying and selling the real estate:-

The buyer wants to

evade stamp duty which is changed as a percentage of purchase price.

ii) In urban areas, government has made certain rules /procedures regarding

sanction of construction plan, grant of completion artificates of houses.

iii) For procuring commercial building on rent, huge amount has to be paid by the

tenant to the landlord because of scarcity or prime location of the building.

6. Manipulation in Public Expenditure:- A large size of investment is made in public sector or removal

of poverty, rural development, flood control, drought relief etc. These projects are mentioned by the

bureaucrats and ministers.

7. Political Factors

i) Banning of Donation to Political Parties:- In 1968, government banned the donation to political

Parties. This decision was taken to reduce the influence of business houses on the electric purpose.

ii) Influence of Big Business Houses:- By funding the political parties, big business houses have

been able influence the decision of political leaders. They can get the government policies framed and

according to their own interests.

iii) Political Instability:- The speed with which ministers are changed or dropped is another fact given

birth to black money.

iv) Manipulation in Government Tenders:- Tenders are invited for various projects and these tenders

are awarded by bureaucrats in consultation with politicians.

8. Other Factors i. Corruption in Appointment on Key Posts in Government Sector:-

Because of raise in unemployment,

people are ready to offer bribes for their selection on key posts in government sector.

ii. Paid Seats in Privately managed Professional Education Institutions:- Various privately managed

educational institutions have been offering paid seats. Privately managed institutions do not record

these capitation fees. It gives birth to black money.

Effects of black money:- The circulation of black money has adversely affected the economy in several ways. The main are as

follows:

1. Loss of revenue to Government:- Black money is not recorded or reported, so no paid on such income. The business class indulges

in under- reporting of output, sales, under registration of immovable property, so both direct

and indirect taxes are evaded which lead to huge loss of revenue to government.

2. Investment in unproductive assets:- Black money in the hands of businessman, bureaucrats,

Ministers place a large amount of founds at there disposal. It leads to:

(i) Investment in precious jewellery, bullions, stones etc.

(ii) Investment in luxury housing.

(iii) Wasteful expenditure on non- essential articles, luxurious cars foreign liquor,

parties etc.

3. Under Estimation of Gross Domestic Product(GDP):- GD refers to total value of goods and

services produced in an economy in a particular period of time.

4. Government Cannot Frame Correct Policies:- Existence of huge unaccounted money is a great

handicap in making correct analysis and formation of government policies.

5. Inequality in Distribution of National Income:- The business under report their income and

payless tax; but the salaried class has to pay on their whole salary, although their salary is much less

than income of a businessman.

6. Transfer of funds from India to Foreign Countries:- Black money resulted in transfer of funds

from India to Foreign countries through secret channels.

7. Erosion of Value System of Society:- The black money has eroded the very value system of the

society. The moral effect is very bad indeed such values as honesty are hard work are ignored.

8. Corruption in Political System:- Black money is corrupted our political system in a very bad manner.

At various levels, MLA’S, MP’S, ministers and party workers collect black money donations. At the state

and national levels, corrupt ministers tap big business houses.

9. Increase in the Prices of Real Estate:- Earlier black money deposited in banks but now because of

system of tax deduction at sources on bank interest, the black money is not deposited in banks, as there

is fear of being tapped by income tax authorities. Now black money is invested in real estate.

Measure Taken by Government to Check Black Money 1. Checking tax Evasion:-

Evasion of tax has been the root cause of generation of black money.

(a) Reduction in Tax Rates:- Till 1992, the tax of income was as high as 50%. The corporate tax rate

too very high. In this circumstances, the temptation for tax evasion was very high.

(b) Simplification of Tax Laws and Tax Procedures:- If tax provisions are complex, then these can be

interpreted by the tax evaders in their own interest. To avoid minister pretation of tax provisions

government has simplified tax laws and tax forms.

(c) A ploting permanent account number:- Income tax law has it mandatory for all the assesses to

obtain PAN from income tax office. This is good step taken by government to check tax evasion.

(d) Stregthening the Norms of Tax Deduction of Source(TDS):- To check tax evasions, government

has strengthened the system and scope of TDS. Under this system, tax is topped deducted at source by

the person who is making such payment and is to be debited to the government.

(e) Tax Rates:- Income tax authorities has been given wide powers to conduct raids on person

suspected to have black money.

(f) Tax on Bank Withdrawals:- In 2005-06, government imposed withdrawal tax named banking

cash transaction tax of 0.1% on withdrawals of Rs25,000 and above in a single day in case of individuals

and Rs 1 lakh and above for corporate from accounts other than savings accounts.

2. Demonstration:- In demonstration, existing currency notes are cancelled and these are replaced

with new series of notes. According to a survey, the black money the black money operators had

hoarded the black money in Rs1000, Rs5000 and Rs10,000 notes.

3. Special Boarer Bond Scheme:- Under special boarer bond scheme, any person holding black

money could purchase such bonds and the person purchasing the such bonds would not be questioned

about his sources of income and his identify would be secret.

4. Voluntary Discloser Scheme:- Under VD5, and person holding black money can declare his income

by paying tax as the highest slab notes, without paying any penalty.

5. Non Resident Investment Scheme:- This scheme was non resident Indian settled abroad. Under

this scheme, non residents could send their money to India.

6. Deposit in National Housing Bank:- In 1991-92 government launched national housing bank scheme

to unearth black money.

7. Controlling Election Expenses:- Election commission of India has put a celling on election expenses

to be incurred by candidate for canvassing.

8. Tax Information Exchange Agreements:- Various tax information exchange agreements are signed

with many nations. Such agreements will help the government to unearth the black money outside the

country.

Unit -IV International Trade

International Trade – Types, Importance, Advantages And Disadvantages International trade refers to the exchange of goods and services between the countries. In simple words, it means the export and import of goods and services. Export means selling goods and services out of the country, while import means goods and services flowing into the country.

International trade supports the world economy, where prices or demand and supply are affected by global events. For instance, the US changing visa policies for the software employees will impact the Indian software firms. Or, an increase in the cost of labor in exporting country like China could mean you end paying more for the Chinese goods in the US. Table of Contents

1 Types of International Trade

2 What’s the need for an International trade?

o 2.1 Price

o 2.2 Quality

o 2.3 Availability

o 2.4 Demand

3 Advantages of International Trade

o 3.1 Comparative Advantage

o 3.2 Economies of Scale

o 3.3 Competition

o 3.4 Transfer of Technology

o 3.5 More job creation

4 Disadvantages of International Trade

o 4.1 Over-dependence

o 4.2 Unfair to new companies

o 4.3 A threat to National Security

o 4.4 Pressure on natural resources

TYPES OF INTERNATIONAL TRADE There are three types of international trade: Export Trade, Import Trade and Entrepot Trade. Export and import trade we have already covered above. Entrepot Trade is a combination of export and import trade and is also known as Re-export. It means importing goods from one country and exporting it to another country after adding some value to it. For instance, India imports gold from China makes jewelry from it and then exports it to other countries.

WHAT’S THE NEED FOR AN

INTERNATIONAL TRADE? Countries go for trade internationally, when there are not enough resources or capacity to meet the domestic demand. So, by importing the needed goods, a country can use their domestic resources to produce what they are good at. Then, the country can export the surplus in the international market. Primarily, a nation imports goods and services for the following reasons:

PRICE If foreign companies can produce or offer goods and services more cheaply, then it may be beneficial to go for foreign trade.

QUALITY If the companies abroad can offer good and services of superior quality. For instance, Scotch Whiskey from Scotland is considered to be superior. Scotland exports around 37 bottles of Scotch per second.

AVAILABILITY If it is impossible to produce that product domestically, like a special variety of fruit or a mineral. For instance, Japan has no natural reserves of oil, and thus, it imports all its oil.

DEMAND If a demand for a product or services is more in a country than what it can domestically produce, then it goes for import.

ADVANTAGES OF INTERNATIONAL TRADE COMPARATIVE ADVANTAGE It allows countries to specialize in producing only those goods and services, which it is good at.

ECONOMIES OF SCALE If a country wants to sell its goods in the international market, it will have to produce more than what is needed to meet the domestic demand. So, producing higher volume leads to economies of scale, meaning the cost of producing each item is reduced.

COMPETITION Selling goods and services in the foreign market also boosts the competition in that market. In a way, it is good for local suppliers and consumers as well. Suppliers will have to ensure that their prices and quality is competitive enough to meet the foreign competition.

TRANSFER OF TECHNOLOGY International trade often leads to the transfer of technology from a developed nation to the developing nation. Govt. in the developing nation often lay terms for foreign companies that involve developing local manufacturing capacities.

MORE JOB CREATION Increase in international trade also creates job opportunities in both countries. That’s a major reason why big trading nations like the US, Japa, and South Korea have lower unemployment rates.

DISADVANTAGES OF INTERNATIONAL

TRADE OVER-DEPENDENCE Countries or companies involved in the foreign trade are vulnerable to global events. An unfavorable event may impact the demand of the product, and could even lead to job losses. For instance, the recent US-China trade war is adversely affecting the Chinese export industry.

UNFAIR TO NEW COMPANIES

New companies or start-ups who don’t have much resources and experience may find it difficult to compete against the big foreign firms.

A THREAT TO NATIONAL SECURITY If a country is over dependant on the imports for strategic industries, then exporters may force it to take a decision that may not be in the national interest.

PRESSURE ON NATURAL RESOURCES A country only has limited natural resources. But, if it opens its doors to the foreign companies, it could drain those natural resources much quicker.

Even though international trade has its own advantage and disadvantages, the advantages far outweigh the disadvantages. Nowadays, international trade has become a necessity, but a country must maintain a proper balance between imports and exports to ensure that the economy stays on the growth track.

Export Import procedures

Export, import procedure serve as important guide to international trade

operations and contains a sample of virtually every relevant document

used in foreign trade (Johnson, 2010).

Buy These Notes in PDF Format

Export

Export of goods take place when there is a change of proprietorship

from a resident to a non-resident; this does not essentially infer that the

goods in question physically crosses the border. However, in specific

cases national accounts credit changes of ownership even though in legal

terms no change of ownership takes place such as cross border financial

leasing, cross border deliveries between affiliates of the same enterprise,

goods crossing the border for significant processing to order or repair.

Also smuggled goods must be included in the export measurement.

Exporter has to submit ‘shipping bill’ for export by sea or air and ‘bill of

export’ for export by road. Relevant documents i.e. copies of packing

list, invoices, export contract, letter of credit are also to be succumbed.

For many companies, export begins in the sale or marketing department.

That department may develop leads or identity clients located in other

countries. Inquiries or orders may come from potential customers

through company website where the destination is not identified. When

such orders come in, sales person need to determine what steps are

different from its domestic sale in order to fill those export orders?

Export: Order processing quotation (Source: Johnson, 2010)

Because export orders require special procedures in manufacturing,

credit checking, ensuring, packing, shipping and collection, it is likely

that number of people within the company may have input on the

appropriate way to fill the order. As the export increases, the handling of

such orders should become more routine and the assignment of special

procedures related to an export sale should be given to specific

personnel (Johnson, 2010).

Export order processing: Order entry (Source: Johnson, 2010)

Export order processing: Shipment (Source: Johnson, 2010 )

Basic Export Procedures

1. Market Research and Setting Objectives of Distribution: Selecting

target markets, methods of exportation and channels, setting foreign

market objectives on pricing and terms

2. Trade Regulations:

o Export regulations and requirements

o Overseas import regulations and requirements

o Patent, trademark and copyright

3. Making Contacts:

o Investigations from interested overseas buyers

o Checking buyer's background from ECIC and / or banks

4. Quotation and Terms:

o Making offers and quotation for potential buyers

o Costs, quotations and pro forma invoices, and terms of sale

5. Sales Contract:

o Confirming the sales contract and terms of transaction such as

payment terms.

6. Contract Execution:

o Producing or sourcing goods

o Packing and labelling

o Arranging shipment

o Preparing exports documentation

o Arranging insurance, if necessary

7. Customs Clearance:

o Arranging export declaration and applying for export licence when

necessary.

8. Getting paid: - Subject to the payment terms specified in the sales

contract, the exporter should present the required documents to the

relevant parties for payment

Export order processing: Collection (Source: Johnson, 2010)

Import

Import is explained as bringing products into own country from a place

outside national border. It can be said that Import trade refers to the

purchase of goods from a foreign country. The procedure for import

trade varies from country to country depending upon the import policy,

statutory requirements and customs policies of different countries. In

almost all countries of the world import trade is controlled by the

government. The aims of these controls are appropriate use of foreign

exchange restrictions, protection of indigenous industries etc. The

imports of goods have to follow a procedure.

A manufacturer's import department often grows out of the purchase

department, whose personnel have been assigned the responsibility of

procuring raw material or components for the manufacturing process.

For importers or trading companies that deal in finished goods, the

import department may begin as a result of being appointed as the

distributor for a foreign manufacturer (Johnson, 2010).

In Indian context, the import and export of goods is ruled by the Foreign

Trade (Development & Regulation) Act, 1992 and India’s Export Import

(EXIM) Policy. India’s Directorate General of Foreign Trade (DGFT) is

the major governing body and responsible for all issues associated with

EXIM Policy. Importers are essential to register with the DGFT to

obtain an Importer Exporter Code Number (IEC) issued against their

Permanent Account Number (PAN), before engaging in EXIM

activities. After an IEC has been obtained, the source of items for import

must be identified and declared. The Indian Trade Classification –

Harmonized System (ITC-HS) allows for the free import of most goods

without a special import license.

Basic Import Procedures

1. Setting Market Objectives:

o Setting market objectives on pricing and terms

2. Sourcing Products:

o Identifying potential suppliers

o Sourcing channels of distribution

3. Trade Regulations:

o Import regulations and requirements, and checking whether

import licence is required

o Patent, trademark and copyright

4. Making Contacts:

o Sending enquiries to suitable suppliers

5. Settling Quotation and Terms:

o Analysing the supplier's quotation and offers

o Costs and terms of sale

6. Financing the Purchase:

o Preparing for working capital

o Types of bank financing and application, such as exporter credit or

other bank facilities

7. Sales Contract:

o Confirming the sales contract and terms of transaction such as

payment terms.

8. Preparing Payment and Insurance:

o Preparing payments and insurance specified in sales contract (eg.

when payment term is D/C, submit D/C application to the issuing

bank; when trade term is FOB, arrange cover note with an

insurance company).

o Preparing insurance, cover note, when necessary

9. Acquiring Goods:

o Receiving shipping advice and arrival notice

o Receiving export documents from the exporter

o Collecting goods from the specified shipping company or

forwarder

10. Customs Clearance: Arranging customs clearance and import

declaration

Import Procedure

All importers must have to follow detailed customs clearance formalities

when importing goods into India. A complete overview of EXIM

procedures can be found on the Indian Directorate of General

Valuation's website.

It is established in finance literature that smooth, efficient and

compliance oriented exporting, importing needs specialized knowledge

of personnel. In many companies some or all functions of export and

import department are combined in some way. In smaller companies,

where the volume of export and import does not justify more personnel

one or two person may have responsibility for both export and import

documentation and procedures. In giant companies, these functions tend

to be separated into export department and import department (Johnson,

2010).

It is beneficial for companies to have export and import manual of

procedures and documentation. These manuals serve as an effective tool

for smooth operations and as a training tool for new employees.

Exporters and importers must maintain record relating to their

international trade transaction. Many companies offer software program

for managing the export process such as order taking, generating of

export documentations compliance with export control regulation,

calculation of transportation charges and duties. On import side, many

companies offer supply chain management software.

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Notice Board

List of Documents Used in International Trade | Business Article shared by : <="" div="">

ADVERTISEMENTS:

In an international trade transaction, there is a time lag between the transfer of goods by the exporter to the importer, and transfer of payment by the importer to exporter. To protect both parties from counter-party risk, a number of documents are created and used.

These are listed below:

1. Bill of Exchange

ADVERTISEMENTS:

2. Bill of Lading

3. Letter of Credit

4. Certificate of origin of goods

5. Inspection certificate

ADVERTISEMENTS:

6. Packing weight list

7. Consular invoice

8. Insurance document

Each of these is discussed in the following section:

1. Bill of Exchange:

ADVERTISEMENTS:

It is an agreement signed by the buyer of the goods to pay the seller a certain sum of money on a specified future date. Each international trade transaction generates its own bill of exchange. The bill is drawn by the exporter and sent to the importer. Once the importer accepts the bill and returns it to the exporter, the

importer is legally bound to make payment, and the bill is legal evidence of a contractual obligation for payment. A bill of exchange is a negotiable instrument.

The exporter can hold the bill till its maturity, transfer it to another party through endorsement, or get the bill discounted with a bank. The advantage of discounting is that the exporter gets cash well ahead of the date on which he was due to get the payment from the importer. The holder therefore can be the exporter, another party (to whom it has been endorsed) or a bank (if it is discounted). There are different types of bills of exchange.

i. Banker’s Acceptance (Bank Bill):

It is a bill of exchange accepted by a bank. When an exporter draws a bill of exchange on an importer, and the bill is accepted by the importer’s bank, it is called a Banker’s Acceptance. A bank earns fee for a Banker’s Acceptance, since it takes on the credit risk.

ADVERTISEMENTS:

ii. Clean Bill:

When a bill of exchange is not accompanied by any documents that are generated in an international trade transaction, it is called a Clean bill.

iii. Documentary Bill:

When a bill of exchange is accompanied by documents that are generated in an international trade transaction it is called a Documentary bill. The documents include the commercial invoice, Bill of Lading, warranty of title, Letter of Credit, Certificate of origin of goods, Inspection certificate, Packing weight list, Export declaration, Consular invoice, and the insurance document. A warranty of title is given by the exporter to the importer, in which the exporter attests that the title to the goods is good and hence the transfer is legally rightful. Usually all bills in an international trade are documentary bills.

ADVERTISEMENTS:

iv. Sight Bill:

It is a bill of exchange that can be presented by the holder of the bill to the importer for payment on any day before the maturity date. It is also called a Demand bill.

v. Usance Bill:

It is a bill of exchange that can be presented by the holder of the bill to the importer for payment only on the maturity date. If the bill states that the importer has to pay the holder only after a specified period (such as 30 days), the importer will make payment only on the due date. A usance bill is also called a Time bill, or a Tenor bill.

ADVERTISEMENTS:

There are two dates from which this specified period is calculated:

a. If the specified period is calculated from the date appearing on the bill, it is called an after-date usance bill.

b. If the specified period is calculated from the date on which the bill was accepted by the importer, the bill is called an after-sight usance bill.

vi. Documents against Acceptance (D/A) Bill:

ADVERTISEMENTS:

It is a bill of exchange in which all documents are released on acceptance of the bill. D/A stands for ‘documents against acceptance’. If the bill of exchange specifies that all documents pertaining to the shipment of goods will be handed over to the importer when he accepts the bill, it is called a D/A bill.

As soon as the importer accepts the bill and sends it to the importer’s bank, the bank releases all documents pertaining to the shipment of goods to the importer (such as the Bill of Lading, Certificate of origin of goods, Inspection certificate, Packing weight list, Export declaration, Consular invoice, and Insurance document). Once the importer is in possession of these documents, he has the right of ownership over the goods. The holder of a D/A bill faces the risk of non-payment, since the importer has possession and ownership of the goods before making payment for the goods.

vii. Documents against Payment (DIP) Bill:

If the bill of exchange specifies that all documents pertaining to the goods will be handed over to the importer only when he pays the amount mentioned in the bill, it is called a D/P bill. D/P stands for documents against payment. The holder of a D/P bill does not face the risk of non-payment.

Illustration 1:

A usance bill of exchange dated April 10 was accepted by the importer on April 15, and is payable after 30 days. When can it be presented for payment if it is (a) an after-date usance bill (b) an after-sight usance bill (c) If the bill has been discounted with a bank, who becomes the holder and who can present it for payment on the due date?

Solution:

a. The due date for an after-date usance bill is May 10 (April 10 + 30 days).

b. The due date for an after-sight usance bill is May 15 (April 15 + 30 days).

c. The bank becomes the holder of the bill.

2. Bill of Lading:

Also known as BOL or B/L, a Bill of Lading is evidence of a contract between the carrier (transporter) and the

exporter to deliver the goods to a designated party (the importer, called the named consignee) at a specified destination in the importer’s country.

It is an extremely important document in international trade, and has the following features:

a. It is a document to title of the goods being transported.

b. It is a receipt for the goods.

c. It is an acknowledgement that the carrier (shipping company) has received the goods to be delivered to the importer.

d. It describes the goods received for transportation, the name of the port where they were loaded and the name of the port where they will be unloaded.

e. The holder of a Bill of Lading has the title to the goods. The exporter gives the Bill of Lading (through his bank) to the importer who can take possession of the goods from the carrier when the goods reach his country only by submitting it.

The different types of Bill of Lading are discussed below:

i. Clean Bill:

If the goods received by the carrier (shipping company), are undamaged and in good condition, the carrier does not note the Bill of Lading. This is known as a Clean B/L.

ii. Foul Bill:

If the goods were received in a damaged condition, the carrier (shipping company) notes this on the bill. This is known as a Foul or Dirty or Claused Bill of Lading. The exporter’s bank or the importer’s bank (or both) can reject such a B/L.

iii. On Board Bill:

When the carrier (shipping company) issues a Bill of Lading after the goods have been loaded onto the ship, it is called an ‘On Board’ B/L.

iv. Received for Shipment Bill:

When the carrier (shipping company) issues a Bill of Lading on receipt of the goods but before loading has commenced, it is called a Received for Shipment’ B/L. Once the goods have been loaded, it is stamped as On Board.

v. Straight Bill:

It is also called a consignment bill. It is a Bill of Lading that mentions a specific party (the importer) to whom the goods will be delivered by the carrier. The bill is non-negotiable, and is not transferable by endorsement and delivery. Therefore, mere possession of the bill by any

party other than the importer does not confer title to the goods. The Straight bill states that the carrier has undertaken to hand over the goods to the importer when the latter presents identification to that effect.

vi. Order Bill:

The exporter may not want title of the goods to pass to the importer when he holds the document. Therefore, the Bill of Lading states that the goods are made deliverable to the exporter himself, or the shipping company or ‘order’ (this may be the importer’s bank).

As a result title to the goods does not pass on to the importer unless the bill is endorsed by the holder (who is the exporter himself, or the shipping company, or the importer’s bank, as the case may be). This is known as an Order B/L. Here, the shipping company has to notify the importer that the goods have arrived in the importer’s country. The importer has to present the endorsed Bill of Lading, and only then will he be permitted to take possession.

vii. Port-to-Port Bill:

If the goods have to be transported by more than one carrier (multi-modal transport) until the goods reach the importer’s country, then all the carriers are responsible for the safe delivery of the goods to the destination. The Bill of Lading given by the first carrier to the exporter, is enough to fix the responsibility for transportation by

subsequent transporters. This is known as a Port-to-Port B/L.

viii. Airway Bill:

It is a non-negotiable bill for transport of goods by air. It does not transfer title to the goods to the holder.

There are a few differences between a Bill of Exchange and a Bill of Lading. The Bill of Exchange originates from the exporter. It is drawn by the exporter on the importer. When the importer accepts the bill, he is legally obligated to make payment in accordance with the terms of the bill. On the other hand, a Bill of Lading originates from the transporter. It is a document evidencing receipt of goods by the transporter. It imposes a legal obligation on the transporter to transport the goods to the destination specified.

3. Letter of Credit (L/C):

An L/C is an undertaking given by the importer’s bank (called issuing bank) acting upon the request of the importer, that it will make payment to a beneficiary (the exporter). An L/C involves a minimum of four parties – the importer, importer’s bank(issuing bank), exporter and the exporter’s bank (advising bank).

An L/C imposes the superior creditworthiness of the importer’s bank over that of the importer, and protects the exporter from credit risk and risk of non-payment.

There are different types of L/Cs and they are described below:

i. Clean L/C:

If the issuing bank agrees to make payment to the exporter under the terms of the L/C without any documents relating to the international trade transaction being presented to it, the L/C is called a clean L/C.

ii. Documentary L/C:

If the issuing bank will release payments only when the exporter submits all relevant documents, it is called a documentary L/C.

iii. Fixed L/C:

The L/C limit gets reduced as and when Bills of Exchange are presented by the exporter for payment. It is also called non-revolving L/C. If the L/C was opened for Rs. 1 million, and a bill of exchange for the Rs. 400,000 was presented by the bank to the exporter, then the L/C gets reduced to Rs. 600,000.

iv. Revolving L/C:

The L/C limit gets renewed after payment is released by the issuing bank. Taking the above example of an L/C opened for Rs. 1 million, if a bill of exchange for Rs. 400,000 was presented by the bank to the exporter, then the L/C gets restored to the original amount of Rs. 1 million. This is called restoration of utilized amount. A

new L/C does need to be opened even when the entire Rs. 1 million is used up. The number of utilizations and the time period is specified in the L/C. The bank’s advantage from a revolving L/C is that it will not have to incur costs (and therefore has cost savings) on making changes (called ‘amendments’) in a non-revolving L/C.

v. Confirmed L/C:

Though the issuing bank guarantees payment to the exporter under an L/C, the exporter might want his bank to offer further guarantee that he will receive the payment. A confirmed L/C is one in which the advising bank (exporter’s bank) gives an additional undertaking to make the payment.

vi. Unconfirmed L/C:

It is an L/C that does not carry the additional guarantee by the advising bank.

vii. Transferable L/C:

The exporter informs his bank that the payment should be made by the issuing bank to a specified third party (the new beneficiary), and this is noted on the L/C. Such an L/C is called a transferable L/C or a transferred credit.

viii. Non-Transferable L/C:

The exporter cannot transfer the beneficiary status to someone else. If nothing is mentioned in the L/C, it is

deemed to be non-transferable. Countervailing credit is the term used when the exporter’s bank issues a separate L/C in favour of the new beneficiary.

ix. Revocable L/C:

If the issuing bank has the right to cancel or amend the L/C any time after its issue without informing the exporter of the cancellation, it is called a revocable L/C or a revocable credit. For the exporter, a revocable L/C carries the risk of cancellation, and offers him no safety. So it is rarely used in international trade.

x. Irrevocable L/C:

If the issuing bank cannot cancel or change the L/C after it has been issued unless the exporter agrees to the cancellation or the changes as the case maybe, it is called an irrevocable L/C.

The International Chamber of Commerce published Uniform Customs and Practices (UCP) for an L/C in 1933. The UCP rules are used all over the world and have led to standardization of practices. They were amended in 1951, 1962, 1974, 1983, 1993, and 2006. The latest rules, called UCP 600 came into effect in July 2007. Since an L/C is standardized and can be structured to be irrevocable, transferable, and confirmed, it is a very popular method of short-term finance in international trade.

Illustration 2:

The importer’s bank has opened an L/C for Rs. 10 million. The importer has accepted two Bills of Exchange drawn by the exporter, one for Rs. 3 million and the other for Rs. 7 million. Show what the limits would be as and when the bills are presented in (a) non-revolving L/C (b) revolving L/C.

Solution:

(a) Non-Revolving L/C:

When the exporter presents the bill of exchange for Rs. 3 million and the issuing bank releases payment, the L/C limit is reduced to Rs. 7 million. When the second bill of exchange is presented and paid, the limit is reduced to zero.

(b) Revolving L/C:

When the exporter presents the bill of exchange for Rs. 3 million, the issuing bank makes the payment, and the limit is reinstated to Rs. 10 million.

4. Certificate of Origin of Goods (COO):

The certificate of origin is an instrument that establishes the origin of goods imported into a country. The rules of ‘origin’ were framed by the WTO. Sometimes the importer’s country may ban the import of goods from specific countries. If the country of origin is not on the ‘banned’ list of countries, the certificate of origin enables the importer to bring the goods into his country. Similarly, if the importer’s country gives tariff

concessions to goods imported from specified countries, the COO is proof that the goods are eligible for this tariff reduction, since they have been imported from one of the specified countries.

There are two categories of COO:

i. A preferential COO extends tariff concessions. Developed countries use it to give tariff concessions to developing countries. For example, India’s trade agreement with Singapore requires a COO to claim tariff concessions.

ii. A non-preferential COO does not give any tariff concessions, but merely provides evidence of origin.

So important is the COO in Free Trade Agreements (FTAs), that several paragraphs in an FTA contain details about the COO issue process, the validity of a COO, and the care that a country should take in issuing COOs. MERCUSOR was a treaty signed in 1991 by four countries—Argentina, Brazil, Paraguay and Uruguay—to improve their inter country trade. It now has ten Latin American signatory countries—Argentina, Brazil, Bolivia, Chile, Columbia, Ecuador, Paraguay, Peru, Uruguay, and Venezuela.

India’s free trade agreement with MERCUSOR contains the following provisions with respect to the COO:

i. The COO is valid for only one importing operation concerning one or more goods.

ii. The original COO should be included in the documentation to be presented at the customs authorities of the importing signatory party.

iii. The issue and control of COO is the responsibility of a government office in each signatory party.

iv. The Origin Certificate shall be issued not later than five working days after the request presentation. It is valid for a period of 180 days from the date of its issue.

5. Inspection Certificate:

This is issued by an independent third party (such as an independent inspection agency, or the supplier of the goods) stating that the goods have been inspected and conform to the quality/specification/other contractual terms.

6. Packing List:

When the goods are in packages, the packing list gives details of the goods in each package.

7. Consular Invoice:

It is an invoice that describes the goods being transported. The exporter authenticates the accuracy of the invoice by appearing before the Importer country’s Consul who is stationed in the exporter’s country.

8. Insurance Document:

To protect goods in transit from loss or damage from the time they leave the exporter’s warehouse and until they reach the importer’s warehouse, the goods are insured by the importer. The insurance cover must specify the value insured (such as CIF), the risks covered, the date from which the insurance cover is effective, and the currency in which the insurance document is expressed. All details regarding the goods in the insurance document must conform to those given in other documents such as the bill of Lading, or the consular invoice.

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by Taboola

TOP 10 PROBLEMS IN INTERNATIONAL TRADE The most common issues you can face doing international trade:

1. Distance: Due to long distance between different countries, it is difficult to establish quick and close trade contacts

between traders. Buyers and sellers rarely meet one another and personal contact is rarely possible.

There is a great time lag between placement of order and receipt of goods from foreign countries. Distance creates higher costs of transportation and greater risks.

2. Different languages:

Different languages are spoken and written in different countries. Price lists and catalogs are prepared in

foreign languages. Advertisements and correspondence also are to be done in foreign languages. A trader wishing to buy or sell goods abroad must know the foreign language or employ somebody who

knows that language.

3. Difficulty in transportation and communication: Dispatch and receipt of goods takes a longer time and involves considerable expenses. During the war and

natural calamities, transportation of goods becomes even more difficult. Similarly, the costs of sending or

receiving information are very high.

4. Risk in transit:

Foreign trade involves much greater risk than home trade. Goods have to be transported over long

distances and they are exposed to perils of the sea. Many of these risks can be covered through marine

insurance but increases the cost of goods.

5. Lack of information about foreign businessmen:

In the absence of direct and close relationship between buyers and sellers, special steps are necessary to

verify the creditworthiness of foreign buyers. It is difficult to obtain reliable information concerning the financial position and business standing of the foreign traders. Therefore, credit risk is high.

6. Import and export restrictions:

Every country charges customs duties on imports to protect its home industries. Similarly, tariff rates are

put on exports of raw materials. Importers and exporters have to face tariff restrictions. They are required to fulfill several customs formalities and rules. Foreign trade policy, procedures, rules

and regulations differ from country to country and keep on changing from time to time.

7. Documentation:

Both exporters and importers have to prepare several documents which involve expenditure of time and

money.

8. Study of foreign markets:

Every foreign market has its own characteristics. It has requirements, customs, weights and measures,

marketing methods, etc., of its own. An extensive study of foreign markets is essential for success in

foreign trade. It is very difficult to collect accurate and up to date information about foreign markets.

9. Problems in payments:

Every country has its own currency and the rate at which one currency can be exchanged for another

(called exchange rate) keeps on fluctuating change in exchange rate create additional risk. Remittance of money for payments in foreign trade involves much time and expense. Due to wide time

gap between dispatch of goods and receipt of payment, there is greater risk of bad debts.

10. Frequent market changes: It is difficult to anticipate changes in demand and supply conditions abroad. Prices in international

markets may change frequently. Such changes are due to entry of new competitors, changes in buyers’

preferences, changes in import duties and freight rates, fluctuations in exchange rates, etc

Unit -III Inflation

Unit – V Logistics

Logistics is generally the detailed organization and implementation of a

complex operation. In a general business sense, logistics is the management of the flow of things between the point of origin and the point of

consumption to meet the requirements of customers or corporations. The

resources managed in logistics may include tangible goods such as materials,

equipment, and supplies, as well as food and other consumable items. The

logistics of physical items usually involves the integration of information

flow, materials

handling, production, packaging, inventory, transportation, warehousing, and

often security. In military science, logistics is concerned with maintaining army supply lines

while disrupting those of the enemy, since an armed force without resources

and transportation is defenseless. Military logistics was already practiced in

the ancient world and as the modern military has a significant need for

logistics solutions, advanced implementations have been developed. In

military logistics, logistics officers manage how and when to move resources

to the places they are needed. Logistics management is the part of supply chain management and supply

chain engineering that plans, implements, and controls the efficient, effective

forward, and reverse flow and storage of goods, services, and related

information between the point of origin and point of consumption to meet

customer's requirements. The complexity of logistics can be modeled,

analyzed, visualized, and optimized by dedicated simulation software. The

minimization of the use of resources is a common motivation in all logistics

fields. A professional working in the field of logistics management is called a

logistician.

Configuring and managing warehouses is a central concern for both business logistics and military

logistics.

Logistics Specialist inventories supplies in a storeroom aboard the aircraft carrier USS George H.W.

Bush, where inventorying means making a report on stock availability. Every stock keeping unit has an

individual code and a corresponding to a specific subclass from a given drawer.

Contents

NomenclatureEdit

The term logistics is attested in English from 1846, and is from

French: logistique, where it was either coined or popularized by military

officer and writer Antoine-Henri Jomini, who defined it in his Summary of

the Art of War (Précis de l'Art de la Guerre). The term appears in the 1830

edition, then titled Analytic Table (Tableau Analytique),[1] and Jomini

explains that it is derived from French: logis, lit. 'lodgings' (cognate to

English lodge), in the terms French: maréchal des logis, lit. 'marshall of

lodgings' and French: major-général des logis, lit. 'major-general of lodging':

Autrefois les officiers de l’état-major se nommaient: maréchal des

logis, major-général des logis; de là est venu le terme de logistique,

qu’on emploie pour désigner ce qui se rapporte aux marches d’une

armée. Formerly the officers of the general staff were named: marshall

of lodgings, major-general of lodgings; from there came the term of

logistics [logistique], which we employ to designate those who are in

charge of the functioning of an army. The term is credited to Jomini, and the term and its etymology criticized

by Georges de Chambray in 1832, writing:[2]

Logistique: Ce mot me paraît être tout-à-fait nouveau, car je ne l'avais

encore vu nulle part dans la littérature militaire. … il paraît le faire

dériver du mot logis, étymologie singulière … Logistic: This word

appears to me to be completely new, as I have not yet seen it

anywhere in military literature. … he appears to derive it from the

word lodgings [logis], a peculiar etymology … Chambray also notes that the term logistique was present in the Dictionnaire

de l'Académie française as a synonym for algebra.

The French word: logistique is a homonym of the existing mathematical

term, from Ancient Greek: λογῐστῐκός, romanized: logistikós, a traditional division of Greek mathematics; the mathematical term is presumably the

origin of the term logistic in logistic growth and related terms. Some sources

give this instead as the source of logistics,[3] either ignorant of Jomini's

statement that it was derived from logis, or dubious and instead believing it

was in fact of Greek origin, or influenced by the existing term of Greek

origin.

DefinitionEdit

Jomini originally defined logistics as:[1]

... l'art de bien ordonner les marches d'une armée, de bien combiner

l'ordre des troupes dans les colonnes, les tems [temps] de leur départ,

leur itinéraire, les moyens de communications nécessaires pour assurer

leur arrivée à point nommé ...

... the art of well-ordering the functionings of an army, of well

combining the order of troops in columns, the times of their departure,

their itinerary, the means of communication necessary to assure their

arrival at a named point ...

The Oxford English Dictionary defines logistics as "the branch of military

science relating to procuring, maintaining and transporting material,

personnel and facilities". However, the New Oxford American

Dictionary defines logistics as "the detailed coordination of a complex

operation involving many people, facilities, or supplies", and the Oxford

Dictionary on-line defines it as "the detailed organization and implementation of a complex operation".[4] As such, logistics is commonly seen as a branch

of engineering that creates "people systems" rather than "machine systems".

According to the Council of Supply Chain Management Professionals

(previously the Council of Logistics Management),[5] logistics is the process

of planning, implementing and controlling procedures for the efficient and

effective transportation and storage of goods including services and related

information from the point of origin to the point of consumption for the purpose of conforming to customer requirements and includes inbound,

outbound, internal and external movements.[6]

Academics and practitioners traditionally refer to the

terms operations or production management when referring to physical

transformations taking place in a single business location (factory, restaurant

or even bank clerking) and reserve the term logistics for activities related to

distribution, that is, moving products on the territory. Managing a distribution

center is seen, therefore, as pertaining to the realm of logistics since, while in

theory, the products made by a factory are ready for consumption they still

need to be moved along the distribution network according to some logic, and

the distribution center aggregates and processes orders coming from different

areas of the territory. That being said, from a modeling perspective, there are similarities between operations management and logistics, and companies

sometimes use hybrid professionals, with for example a "Director of

Operations" or a "Logistics Officer" working on similar problems.

Furthermore, the term supply chain management originally refers to, among

other issues, having an integrated vision of both production and logistics

from point of origin to point of production.[7] All these terms may suffer

from semantic change as a side effect of advertising.

Logistics activities and fieldsEdit

Learn more This section possibly contains original research.

Inbound logistics is one of the primary processes of logistics

concentrating on purchasing and arranging the inbound movement of

materials, parts, or unfinished inventory from suppliers to

manufacturing or assembly plants, warehouses, or retail stores.

Outbound logistics is the process related to the storage and movement

of the final product and the related information flows from the end of

the production line to the end-user.

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These most common five modes of transport are:

railways, roadways, airways, waterways and pipelines.

Following is the brief account of each mode with

reference to Indian conditions with relative merits and

demerits.

I. Railways:

Indian railway system has grown into Asia’s largest and

the world’s fourth largest. It has route length of 72,000

kilo meters by the end of 1990. The daily run is 15,000

kilo meters with running of 12,000 trains carrying 7 lakh

tons of goods. The average cost per ton kilo meter is 27

paise.

Evaluation:

Merits:

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1. Large carrying capacity:

Compared to other means of transport, railways are

known for bulk carriage of goods over long distances.

2. It is economical:

As the freight rates are telescopic and referential, it

works cheaper particularly in case of heavy goods over

long distances.

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3. It is all weather modes:

Railways provide all season protection to the products

moved on uninterrupted basis.

4. It has containerisation:

Indian railways have done a good job by containerising

on major routes facilitating safe, uninterrupted and

speedier movement of goods.

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5. It links international markets:

Railways are the main sources of connections with the

markets outside the country moving goods from interior

parts to the points of overseas supply and shipping.

Demerits:

1. Costlier over short distances:

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Railway transport works costlier over short distances

because of tapering and differential tariff rates.

2. Slower movement:

As compared to road and air transport, the speed of

movement is slower.

3. Inordinate delays:

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In India we have three types of lines as broad, meter and

narrow gauge resulting in frequent transhipments; again

shortage of wagons and, therefore, space forces the

business community to tolerate inordinate delays.

II. Roadways:

Indian road network is one of the largest in the world. It

has a total road length of 18 lakh kilo meters of which 50

percent is surfaced. Of this, national highways account

for 35,000 kilometers account for the 50 percent of total

traffic. On this road length, 9 lakh vehicles ply carrying

goods.

Evaluation:

Merits:

1. Economical over short distances:

As compared railways, it is more economical. The studies

have proved that it is cheaper by 25 percent.

2. Speedier movement:

Road transport is speedier than the railways giving point

to point service resulting in price stabilisation and

consumer satisfaction. The business community needs

not wait because of wagon shortage, transhipment

because a truck has a smaller capacity and is flexible

available 24 hours.

3. Touching for-flung markets:

Much beyond the capacity of railways, the roadways are

known for reaching impregnable market particularly

hilly regions where railways cannot reach.

4. Lesser conditions of service:

The roadways do not insist on strict packaging

requirements because of least transhipments shocks to

goods carried. Again, damage claims are settled faster.

Demerits:

1. Uneconomical over long distances:

Long haulages work out much costlier because

disproportionate rise in fuel and spare-parts expenses.

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2. It is fair weather friend:

Roadways are closed during monsoons and winters

resulting in handicapped movement of goods.

3. Not suitable for bulk transport:

Bulky and heavy goods to be moved particularly over

longer distances need railway services than roadways as

it has a major limitation of carrying capacity.

III. Airways:

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We cannot boast of airways in India as we do in case of

railways and roadways because, it is underdeveloped and

underutilised. It acts as a feeder or supporting transport

means. Domestic capacity available is 115 lakh ton kilo

meters but utilised only to the extent of 12 lakh ton

kilometres in 1990.

International capacity corresponds to 218 lakh ton-kilo

meters of which 175 lakh ton-kilo meters are used. India

has 4 international airports, 92 aerodromes with 50

intermediate and 40 minor aerodromes.

Evaluation:

Merits:

1. Fastest means of transport:

Air transport provides the speediest movement of cargo

over the distant places by eliminating practically spatial

barriers.

2. All weather friend:

It is known for its dependable service during the times of

floods, wars, earth-quakes. It is all weather means, of

transport though flights are cancelled due to bad weather

conditions.

3. Consumer satisfaction:

The level of consumer service and, hence satisfaction is

of high order as it is known for immediacy, speed and

least damage to cargo.

4. Reduced inventory holdings:

As it provides fastest and uninterrupted service, capital

investments in the form of stocks of goods is less. This is

of particular importance in case of highly perishable

items.

Demerits:

1. It is costlier means of transport:

The cost of air transport is very high and there is limit of

weight of cargo. Hence, it is suitable for light weight,

high grade and costly items only.

2. Limited coverage:

The planes cannot land at all the places of our choice. It

connects metropolis and some important cities only.

3. Limited cargo capacity:

The cargo capacity of a plane is much smaller because of

its size as it works against the force of gravity.

IV. Waterways:

Waterways of the nation provide other alternative means

of transport. Unfortunately, in India, waterways are not

fully developed though she has a great potentiality.

Though India has 7,000 kilo meters of navigable river

waterways, only 2,500 kilometrers are used. Again, we

have 4,800 kilo metres of canals of only 600 kilo metres

are navigable but hardly 400 kilo meters are actually

used.

Evaluation:

Merits:

It is cheaper means of transport:

Inland waterways tariffs are much lower and, therefore it

works cheaper for both short and long distances.

Most suitable for heavy and fragile products:

The items which are bulky and heavy and which are

fragile can be moved with ease.

Loading and unloading facilities:

The sender of cargo has the facilities of loading and

unloading from boats and wharves on and from steamers

and barges. Even the receiver has the similar facilities.

No problem of congestion:

Waterways provide an independent movement unlike

road system where road is meant for all kinds of vehicles

creating the problem of congestion.

Demerits:

1. Slow speed:

The speed of the boats and steamers is badly limited in

case of canals and rivers. Goods needing quick

movement as perishable can be hardly transported.

2. Unreliable:

Changing seasons create problems. Winter may freeze

the rivers and canals and summer eats the depth of rivers

and canals. Again, the rivers are known for changing

their course of flow.

3. Limited service:

The inland waterways are connecting the given places.

Again, the cargo capacity is quite limited.

V. Pipe-Lines:

Pipe-lines are the specialized means of transportation

designed to move the items like crude-oil, petroleum,

chemicals, coal, lime-stone, iron-ore, copper

concentrates and gas. India has made a late beginning in

this regard unlike U.S.A., U.S.S.R. and Middle-East, and

the development is undertaken only in case of oil

refineries to move petrol and gas from sources to

markets.

The total pipe length in India, at present is of the order of

8,000 kilo metres owned by private and public

undertakings such as Oil India Limited, Indian Oil

Corporation and Oil and Natural Gas Commission.

Biggest Pipeline is planned between Iran and India.

Evaluation:

Merits:

1. Economical:

Crude oil or coal and gas transported through the pipe-

lines works out almost 1/4 of railways and roadways.

2. Uninterrupted service:

Pipe-line transportation presents all weather system to

move the products. Absolutely there is no any wastage of

time as it works round the clock.

3. No danger of wastage:

As there are no occasions of loading and unloading, there

is no scope for spilling, evaporation, pilferage and so on.

4. Underground:

The pipe-line usually underground and, hence, takes no

additional space. What is more important is that it

traverses through difficult terrain.

Demerits:

1. Initial heavy investment:

Though operational and maintenance costs are minimal,

the capital cost of pipe-line is rather much higher and

that is why a county like India has minimum length.

2. Danger of enemy attacks:

In the periods of war and political hegemony, pipe-lines

are more prone to enemy attacks thus jeopardizing the

veins of supply to the entire nation. The production

activities are grinded to halt.

Unit – VI Storage and Ware

Housing