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CU-MBA-SEM-I-Business, Society and Law

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CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &TourismManagement) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease EdtechLimited CONTACT NO:01133002345 For: CHANDIGARH UNIVERSITY Institute of Distance and Online Learning 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit 1: Environment Basics................................................................................................... 5 Unit 2: Economic Environment-I......................................................................................... 28 Unit 3: Economic Environment-Ii ....................................................................................... 41 Unit 4: Global Business Trends ........................................................................................... 78 Unit 5: Policies And Business Laws .................................................................................. 108 Unit 6: Legal Environment-I ............................................................................................. 131 Unit-7 Legal Environment-Ii ............................................................................................. 168 Unit 8: Financial Environment-I........................................................................................ 183 Unit 9: Financial Environment-Ii....................................................................................... 217 Unit 10: Indian In World Economy ................................................................................... 240 Unit 11: Natural Environment-I......................................................................................... 264 Unit 12: Natural Environment-Ii........................................................................................ 283 Unit 13: Business New Trends .......................................................................................... 310 Unit 14: Technical Environment........................................................................................ 334 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1: ENVIRONMENT BASICS 5 Structure 1.0 Learning Objective 1.1 Introduction 1.2 Business Environment 1.2.1 Concept 1.2.2 Characteristics 1.3 Components of Business Environment 1.3.1 Internal Environment 1.3.2 Elements of Internal Environment 1.3.3 External Environment 1.3.4 Micro Environment 1.3.5 Macro-Environment 1.4 Environment Analysis 1.4.1 Concept 1.4.2 The process of environmental analysis 1.5 Summary 1.6 Keywords 1.7 Learning Activity 1.8 Unit End Questions 1.9 Suggested Readings 1.0 LEARNING OBJECTIVE After studying this unit, you will be able to  Highlight the nature and features of Business Environment  Differentiate between Internal and External Business Environment  Outline the implications of elements of Internal Environment  Highlight the implications of elements of External Environment  Illustrate the process of Environmental Scanning CU IDOL SELF LEARNING MATERIAL (SLM)

1.1 INTRODUCTION Business is surrounded by environment where it takes birth, progresses or operates and decline. Business shares a strong interaction with environment as it receives input in the form of material, machine, method, money and manpower, etc., processes this input by adding value to it and delivers the finished product in the form of goods and services to the consumers in the environment. The factors, circumstances and events which occurs and influence the way a business operates, either in a positive or a negative way and are called as an 'environmental factors.' The environmental factors are categorized as: internal environmental factors and external environmental factors. The occurrence of activities or events which are easily manageable are categorized under Internal environmental factors. The occurrence of activities or events outside the organization which are not easy to manage and anticipate will be categorized as external environmental factors. Environment Analysis and scanning becomes crucial method for any competitive business to identify, appraise and respond to various opportunities and threats in business environment. The need of an hour is that the businesses need to be proactive and agile to cope up with the rapid changes, improve the performances, tap useful resources, evolve as a strong competitor and ensure sustainable development. 1.2 BUSINESS ENVIRONMENT 1.2.1 Concept and Meaning: To survive and succeed in any type of industry and in any region, business needs to anticipate and adapt to the changes in the environment. The different dimension of business-like type of business, business location, products pricing, supply chain and logistics or the organizational policies is affected by the elements of environment. The capability of any business to modify and reshape itself to the changes in the environment ensures its successful existence. For instance, when new government is elected in central or there is amendment in any economic policies, then businesses need to analyze and adapt to such changes. Whenever there is change in preference or lifestyle of customers that reflects clearly in shift of demand. Like increase demand for jeans can reduced the sale of other traditional wear because the customers feel more comfortable in jeans than any other attire. Business need to implement essential modification as per advancements or development in the existing technology in similar way as Flat screen TV has replaced old CRT TV’s and laptop has replaced heavy bulky personal computer configurations. Such factors are not in the control of any business and they are left with the option of building agility in their operations which is possible when business can establish proper relation with the different elements of business environment. 6 CU IDOL SELF LEARNING MATERIAL (SLM)

The term ‘business environment’ connotes all those factors, external forces and institutions like customers, competitors, suppliers, government, social factors, technological factors, political factors and legal factors, etc. which acts on business operations and which are not manageable by business. Such elements exert direct or indirect influence over the business firm. Thus, business environment may be termed as the set of elements in the surroundings that has a direct or indirect bearing on the performance of the business. It may also be defined as collective action of the external factors, such as economic factors, social factors, political and legal factors, demographic factors, and technical factors etc., that affects the decision-making process of an environment. 1.2.2 Characteristics of A Business Environment: Aggregati Specific Interrela Dynamic Unpredic Entangle Multi- Far- Relativity on of and faceted Reaching External General tedness Nature tability: ment: Impact Factors Forces Fig: 1.1 Characteristics of Business Environment The characteristics of business environment are as follows: (1) Aggregation of External Factors: The external factors do not act upon business in isolation to each other nor they exist mutually exclusive in the environment. That why we have to consider them as an elements of one set i.e., Business Environment and they are not manageable by business, even though businesses always try to influence these factors. So, collective action of many such elements is important feature of Business Environment. (2) Specific and General Forces: The external elements to the business can be categorized as – specific and general. (i) Specific: These are those elements which are industry -specific like customers, investors, suppliers, competitive firms, etc. (ii) General: These are those elements which have general impact on all industries like social, political, legal and technical. (3) Interrelatedness: There exists inter-relation between the different factors of business environment. For instance, a new Government got elected in the center and they approved new amendments in Import-Export Policy. The new central government in power is an important political change 7 CU IDOL SELF LEARNING MATERIAL (SLM)

and amendments in Import-Export Policy is economical change. Thus, changes in one element of business environment either introduce changes or influences another factor. (4) Dynamic Nature: Change is only constant. So, it’s obvious that different elements in the environment are not stable one, they keep on changing and as they are inter-related so they create domino effect on another factor. (5) Unpredictability: There are so many techniques utilized for environmental scanning and forecasting but still there is a scope of unexpected changes that can influence business environment factor. As these factors are dynamic in nature, so the changes introduced in them are quick. For instance, a specific technology that is mostly utilized by organization like SAP module got outdated or new application got introduced with more features. Then within a day or within few hours SAP technology got outdated and if businesses do not respond to this change then they can suffer losses. Even after studying trends and anticipating future status of business environment, unpredictability exists. (6) Entanglement: Business Environment is like a web of factors that not only affect businesses but also each other as well. That’s why their dynamic nature, unpredictability and inter- relation make them very complex for businesses to deal with them smoothly. (7) Multi-faceted: Different kind of environmental changes and development is being perceived differently by different organization based on their existing resources, competitive advantage and capability to withstand the future challenges. For example, Ayurveda is an opportunity for Indian herbal companies while it is a threat for foreign cosmetic brands. (8) Far-reaching impact: There is dependency between business and its environment, so any change in an environment has a direct impact on organization in different ways. (9) Relativity: Business experience more influence from local condition and that’s why there are different elements of Business environment need to be considered in different places or countries. For example, technological factor is very important for business related to IT sector but there will 8 CU IDOL SELF LEARNING MATERIAL (SLM)

be difference in considering technological aspect for small business operating in small town and small business operating in metro city. 1.3 COMPONENTS OF BUSINESS ENVIRONMENT: There are two main components of Business Environment viz., internal and external environment as follows: Business Environment Internal External Environment Environment Micro- Environment Macro- Environment Fig 1.2: Components of Business Environment 1.3.1 Internal Environment: It is defined as all the forces or conditions that are available within internal environment of an organization that affects its functions and performance. It is also known as controllable factors because business can control them. The conditions, entities, events, and factors within an organization that influences its operational activities and choices, particularly the behaviour of the employees is known as the internal environment. It is defined as all the forces or conditions that are available within an environment that affects an organization and business. It is also known as controllable factors because business can control them. Internal capability of an organization is termed as the internal environment. Funds are allocated as per budget from time to time to ensure smooth operations of an organization, physical assets like machinery, raw material, building, etc. are used for transforming inputs to outputs and workforce represents skilled and unskilled employees, managers and top management executives who are responsible for decision- making and technological know- how are important aspect of Internal Environment 9 CU IDOL SELF LEARNING MATERIAL (SLM)

1.3.2 Elements of Internal Environment: The following figure describes the elements that make up the internal environment. Internal Environment Value Management Human Organizational System Structure & Resources Climate Nature Vision, Internal Company Other Mission and Power Image& Factors Objectives Relationship Brand Equity Fig 1.3:Elements of Internal Business Environment VALUE SYSTEM (Organizational Culture) The value system of an organization is like an organization’s personality. Every organization is different from other organization even though it can be from same industry like traits of persons are different which defines distinct personality, of an individual. so does each organization. The value system of an organization distinguishes it from others and shapes the actions of its members. There are four important components that of a Value system or Organizational Culture:  Values  Heroes  Ceremonials  Social network Values are the fundamental faith that define employees' accomplishments in an organization. For instance, many organizations give importance to their employees who are engaged in some sports activities or cultural events. Even such organizations organize sports or cultural events among different branches to motivate and respect the hobbies of employees. In return, these organization enjoys employee’s loyalty and increased productivity. So, arranging extra- curricular events reflects organizational values. The next component is heroes. A hero is an idealistic person who echo the organization’s attitudes, image or values and serves as an epitome to other employees. A hero is sometimes 10 CU IDOL SELF LEARNING MATERIAL (SLM)

the initiator of the organization (think Steve Job of Apple and JRD of Tata). However, the hero of a company can be daily wage worker and not the founder; like as hard‐working paralegal Erin Brockovich, who had a tremendous impact on the organization. Ceremonials, another component, are programmes or ceremonies that is used as important recognizing and rewarding method for outstanding performance of the employees. Awards banquets, company gatherings, and quarterly meetings can acknowledge excellent employees for outstanding service. The honourees are treated as heroes who sets an example and motivate all employees of the company. The final and informal component is the social networkthat acts as very important channel of communication. It is also referred as company grapevine that simultaneously shares the stories of success and failure. Social network shoulder’s the responsibility of integrating employees into organization's culture and values. Hence concerted behaviour of human capital of an organization is termed as organization’s value or culture. The extent to which the culture of the organization is shared by all, leads to an important factor contributing to success. For example when the Murugappa group has taken over the EID parry group, one of the most profitable business of Parry group i.e. of liquor was sold off as it was against the value system of Murugappa group. So, value system is an important factor evaluated by many companies while selecting the suppliers, distributors and collaborators etc. VISION, MISSION AND OBJECTIVES: Vision means the ability to think about the future with imagination and wisdom. It is an important factor in achieving the objectives of the organization. An organization's mission statement reflects the core purpose of its existence and what is their operations meant for. It highlights the core competency of an organization and differentiate it from other organizations of its type. The mission is the medium through which the objectives are achieved. A mission statement is not only text or content on the paper but communicates organization’s beliefs and objectives. This declaration should be a habit which provides guidance and motivation to the employees of an organization. A mission statement is like an answer for, “What are our beliefs?’, “What is our purpose?” This statement directs the strategies of an organization by re-grouping its employees to work collaboratively for common objectives. The effectual mission statements will lead to constructive efforts. Business Environment is very dynamic and consumer are conscious more about quality products, so in such scenario efficacious mission statement's that is meant for catering the expectation of consumers effectively is must. A good mission statement is precise in identifying the following intents of a company: Customers — who are end-users Products/services — types and features of products or services. 11 CU IDOL SELF LEARNING MATERIAL (SLM)

Location — where the production will take place Philosophy — what will be underlying principles Organization’s Vision, mission and objectives guides its priorities, philosophies, policies etc. e.g., Ranbaxy’s mission is to be recognized as world class pharmaceutical company that thrust upon R&D which influences its growth strategy. TOP MANAGEMENT STRUCTURE: The official structure of an organization is the hierarchical ordering of people and tasks. This structure ensures dissipation of information within the organization, what tasks will be carried out by different departments and the power level of decision‐making power rests. Top management structure is the configuration of the board of directors, the organizational structure, and the quality of the board. Board Members are the highest decision-making authority of an organization so its quality is considered as a critical factor. Extent of professionalism, stand of nominee of financial institutions and the shareholding pattern could have important managerial implications. All these factors are of great importance from the point of view of the company’s internal environment. Organization chart is referred by some companies to simplify the breakdown of its formal structure. This organizational chart helps to visualize the formal lines of authority and communication within an organization. In some organization promoters owns majority of share like Wipro, Tata group company and such promoter’s stance is at risk. INTERNAL POWER RELATIONSHIP: The internal power relationship between the board of directors and senior executive officers highly affect the decision making process of the organisation. The quality of human resources of a company depends largely on competence, commitment, attitude and motivation which plays an important role in the success of an organisation. The top management enjoys the support from different level of employees and shareholders have an important impact over the decision and their implementation. HUMAN RESOURCES: The characteristics of human resource like quality, skills, attitude, morale, commitment, involvement and initiative influences organizational culture, strength and weakness and environment of the organization. Western countries treat their few employees as process 12 CU IDOL SELF LEARNING MATERIAL (SLM)

improvers and others as workers, while Japanese companies treat their all employees as process improvers. COMPANY IMAGE AND BRAND EQUITY: The image and brand equity of the company helps in raising finance, choosing dealers and suppliers, new product introduction, form alliances with marketing intermediaries, opting for joint ventures and other alliance and entering a sale or purchase contract, etc. ORGANIZATIONAL CLIMATE: One of the important outputs of the company's culture is the organizational climate. The whole theme of the organization and the self-esteem of its employees are components of daily climate. The optimistic or pessimistic outlook of employees affects “climate” of the organization. The day-to-day co-relation and inter-activity of employees are emblematic of an organization's climate. OTHER FACTORS: Belief system of management is the manager's set of personal notions and values about people and work and as such, is something that the manager can dominate. According to McGregor, who emphasized that a manager's ideology creates a self‐fulfilling prediction, which leads to two types of managers. The Theory X managers assumes employees as one who are not interested in their work naturally and need proper command for execution of task, while Theory Y managers assumes employees are responsible and self – motivated for their work so participative style of management is adopted. These managerial beliefs then have a succeeding result on employee behaviour, leading to more precise anticipation. As a result there is always modulation need to be maintained between organizational philosophies and managerial philosophies. Empowerment means assigning the authority of decision‐making to subordinates, that inculcates responsibility and confidence. Most of organizations and managers are adopting participative style of management that encourages engagement and team work. Additionally, element of guidance helps to increase the efficacy of the employees and thus contributing in cost reduction, quality improvement, better customer service and strong employee’s commitment. Also, there will be considerable upgradation in response time as proper information is shared among different levels of management efficiently. Empowerment helps to resolve issue immediately as employees close to situation like machine breakdown in floor shop can immediately respond and resolve the issue than the manager who might be not present in that vicinity. Competency of an organization is also influenced by the production capability, technology, R & D work, supply chain and logistics etc. 1.3.3 External Environment External environment refers to external aspects or forces of the surroundings of business enterprise, which have both facilitating and inhibiting influences on the functioning of the 13 CU IDOL SELF LEARNING MATERIAL (SLM)

business. The key dimension of an external environment consists of a micro environment and a macro environment. The classification of External environment is as follows: Constituent of External Environment Micro Macro Environment Environment Fig 1.4:Sub-categories of External Business Environment 1.3.4 Micro Environment: Micro environment of business enterprise refers to analysis of small area or immediate periphery which comprises of those forces of the business organization that influence it’s functioning. The micro environmental factors are intimately linked. Some of the micro factors may be specific to a firm and it is not necessary that the impact of micro forces will be same in a particular industry. Micro Environment analyses the following important factors: • Human resource (Employees) of the firm, their characteristics and how they are organized in the firm. • It analyses the way fund is raised from the market. • It analyses the suppliers of raw materials and the supply chain network between the supplier and firm being developed. • It analyses the customer base of firm who are major and minor clients of business. • It analyses the local communities of firm where it’s operating. • It analyses the direct competition from the competitors and how they perform in business. The most important performers in the micro environment are as follows: 14 CU IDOL SELF LEARNING MATERIAL (SLM)

Suppliers Public Customers Financers Micro Environment Market Intermediarie s Competitors 1.5: Elements of Micro-Environment  Suppliers: Business enterprises require a number of suppliers, who supply raw materials and components to the company. Unpredictability regarding the supply, dependence on a single supplier and supplier’s terms and conditions has an adverse effect on the cost and production. Because of this, vertical integration, supply management, outsourcing, partnering and relationship marketing has geared popularity in the recent times. Company like Nirma has opted for backward integration because they believe that the captive production plants for the raw materials are the best way to keep a check on the production cost.  Customers: In today’s scenario, Customer is a King and central point for any business as they influence business survival and success. All customers expect high quality products, speedy deliveries, comfortable return and exchange policies, offers and after sales service, proper 24 × 7 customer support which has drastically changed the business environment. Success of business largely depends on identifying the needs, desires, tastes liking etc. of a customer. Now days, online shopping portal has gained popularity in the Indian market which has opened new market for the Indian companies. It has not only created an opportunity for new companies but threat to existing shopping malls and retailers. Portals like Flipkart, Snapdeal, 15 CU IDOL SELF LEARNING MATERIAL (SLM)

Myntra, etc. are taking advantage of this new shift in the customer’s lifestyle of purchasing goods from home i.e., through online websites.  Market Intermediaries: The firms which help the companies in promotions, sales and distribution of the goods to the final buyer are known as market intermediaries. It includes agents, brokers or merchants who associates company and the final consumer. The firms which are in the business of warehouses and transportation, they assist the manufacturing companies to stock and move the goods from their origin to destination. Advertising, market research and media firms help their client companies to promote their product and target the market effectively. Any wrong choice or misunderstanding regarding market intermediaries can result in heavy losses. HUL has confronted issue like collective boycott in Kerala on the issue of trade margin.  Competitor: An opponent is a simple synonym for the competitor. Any business activities that produce same kind of products and services are in direct competition and other firms which are in production of other products and services are in indirect competition. Example a laptop manufacturing firm faces direct competition from other laptop manufacturing firms and indirect competition from mobile manufacturers, tablet manufacturers, smart TV’s manufacturers, etc. A firm also faces desire competition i.e. when customer has many choices for investing his income. Simply, when there is rivalry among such alternatives which meet a particular category of desire and it is very high in the countries with limited disposable incomes and many unsatisfied desires. A firm can face such competition from all those firms who are interested in the discretionary income of the consumers. For example, the direct rivalry for a laptop manufacturer would not be limited to the other laptop manufacturers but also can involve substitute for laptop as two-wheelers, refrigerators, cooking ranges, firms offering saving and investment schemes like deposits and issuing shares or debentures, etc. If the consumer decides to go in for a laptop, the next query is which type of laptop like with long batteries, advanced graphics and flexible laptop cum tablet and such competition is known as product form competition. Brand Competition is the competition between the different brands of the same product form. Thus, activities of a business adjust according to the actions and reactions of competitors.  Financers: 16 CU IDOL SELF LEARNING MATERIAL (SLM)

The capability of the financiers is very important for any business organization but beside this, their policies and strategies, attitude (including attitude towards risks), ability to provide non-financial assistance, etc. are also of utmost important.  Public: Any group that has actual or potential interest in or impact on the organization’s ability to achieve its interests is called as a public. Some media public can seriously has an adverse or good impact on company’s brand image, market shares and profit. Like McDonald in India is facing a media’s adverse impact on their image currently as one of the McDonald’s outlet has treated the poor kid badly when he asked for food. Such exposures or campaigns by the media might even influence the government decisions affecting the company. Many companies have undergone drastic change in their operation because of the local public awareness about the environmental pollution, child labour, cruelty against animals, etc. Like many cosmetic companies have stopped testing their products on animals because awareness has been spread by NGO’s regarding the same among local public. Public is not only being assumed to be threat for businesses but also regarded as an opportunity as well. Like some companies use media public to disseminate useful information. 1.3.5 Macro Environment: Macro environment includes major external and uncontrollable factors that influence an organization’s decision-making and affects its performance and strategies. So, to survive and succeed, the company needs to develop its adaptability towards external environment. It principally consists of economic, technological, and political legal and socio-cultural factors. Macro Environment analyzes the following important factors: • It helps to detect the threats by analyzing the competitors. • It helps to analyses the opportunities and threats linked with the technological changes in the market. • It helps to analyze the bargaining power of suppliers and customers. 17 CU IDOL SELF LEARNING MATERIAL (SLM)

Elements of Macro Economical Environment Political Legal Socio-cultural Technological Financial Demography Natural Global Fig 1.6: Elements of Macro Environment It includes the following factors: Economic Environment: The economic environment of the country influences any business enterprise because it conducts its activities in the country’s market system with the objective of profit maximization and treated as economic entity. The economic environment consists of factors like structure and nature of economy, economic policies, economic conditions, global linkages, etc. The developed economies are generally service economies as the service sector generates huge employment opportunities and income. In the developing economies the inequality in the distribution of income is very high and as a result poverty is high. For example, a percentage point reduction in Cash Reserve Ratio or Statutory Reserve Ratio will significantly increase the loan funds with the commercial banking system. Political Environment: The economic and political systems of a country are mutually dependent, as one reflects the ideologies of the other. It comprises of the political stability and the policies of the government. Political environment consists of ideological inclination of political parties, personal interest of politicians, influence of party forums etc. For example, Mamata Banerjee the Chief Minister of Bengal had stopped the Tata’s Nano car production plant in Bengal 18 CU IDOL SELF LEARNING MATERIAL (SLM)

because of which Tata and its employees suffered a huge loss. Similarly, Narendra Modi had welcomed Tata’s Nano Car production in Gujarat when he was the Chief Minister. The Government control over the Indian economy grew enormously in the first four decades since Independence. After 1991, since liberalization has been introduced, there has been a global trend towards decentralization of power and responsibility. Now the State is playing active role in the industrial development by creating conducive environment. Social and Cultural Environment: Socio-cultural environment includes value attitudes, beliefs and customs of people in a given group or society and its dimension like the literacy rate, lifestyle, demographic features and mobility of population influences an organizational performance. It is important for managers to notice the direction in which the society is moving and formulate progressive policies according to the changing social scenario. Technological Environment: It is one of the important key determinants for the success of any firm as well as the economic and social development of a nation. The progress of business depends on the level of technology available in a country which gives a massive impetus to the economic revival. It also indicates the pace of research and development, progress rate of utilizing modern technology in production. Technology is treated as capital intensive and cost-effective alternative to traditional labour-intensive method. According to the Porter, technology helps the organization to gain the competitive advantage and also improves overall industry structure. Technology policy of the government plays a crucial role in the Technological environment. Like the absence of product patent in India has an adverse effect on pharmaceutical companies. When the new patent regime stipulated under the WTO, Indian Pharma companies like Ranbaxy and Dr. Reddy’s laboratories started encouraging R & D. Legal Environment: Legal environment deals with establishment of codes and procedures for various types and aspects of business and deals with deviations or infringement law like bribery, product counterfeiting, grey markets, black markets, consumer deception and tax evasions that affects the functioning of an organization. The coverage, efficiency and efficacy of the legal system determine adequacy, cost and speed of economic justice and these factors are of great importance for the growth of business. In every country there exist business legislation that guides, controls and regulate business activity, such as The New Industrial Policy, 1991, MRTP Act, 1969, The Factory Act, 1950, India Trade Mark Act 1969, Essential Commodities Act 1955 and so on. Similarly, there are certain boards and councils came into existence to regulate the specific area of concern for 19 CU IDOL SELF LEARNING MATERIAL (SLM)

various business categories like The Securities and Exchange board of India (SEBI) which regulates the capital market. Reserve Bank of India deals with the commercial banking sector was brought under its effective control with the help of the Banking Companies Act, 1949 and the amendments of the Act in 1956 and 1962 and the Banking Laws (Miscellaneous Provision) Act,1963, etc. Natural Environment: Business cannot get exception from nature. Business has broadly two relationships with natural environment. First, the environment is the source of resource as raw material required for production and secondly, the natural calamities like floods, earthquakes can cause damages to the process of production. Financial Environment: Finance is the backbone of any business and it is concerned with decisions about the investments in the business. Companies can raise the required funds from bond markets, forex markets, stock markets, commodity markets, OTC markets, Real estate markets and cash or spot markets that constitutes financial environment. Demographic Environment: Demography refers to study of the population. Demographic factors are as below:  The population growth  Expansion rate of population  Age composition of the population  Family size  Economic classification of the population  Education levels  Language  Caste  Religion  Race  Age  Income  Educational attainment  Asset ownership  Home ownership  Employment status and location Demographic factors also affect the demand for goods and service. The increase of population and income results in increases demand for goods and services. For instance, developing countries like India, China, etc.; with high population growth rate indicates an 20 CU IDOL SELF LEARNING MATERIAL (SLM)

enormous increase in labour supply. The occupational and spatial nobilities of population have implications for business. As labour being an important resource for business can opt for migration easily so it will affect the labour supply in the industry and also the existing wage rate of the industry. The heterogeneous population with its varied tastes, preferences, beliefs, temperaments, etc. gives rise to different demand patterns and generates need for different marketing strategies. Diversity in workforce also complicates the Personal Management function in an organization. Like Holidays need to be given to employees on Diwali, Id, Christmas, Parsi New Year, etc. These factors are relevant to the business for formulating and implementing the strategies for controlling and accomplishment of the objectives of an organization. Global Environment: It comprises of rules and regulation across the borders of various countries that allows and participate in international trade and foreign investments. It also includes rules and regulations of WTO, IMF, WB, SAARC, G20 and other international conventions /treaties/agreements/declarations/ protocols, etc. which duly affect the business organization operating in any particular country. Like recession, economic conditions, war or political tensions or uncertainties in other countries have direct impact on import export market and also the global business and business in our country. Product patents play an important role in Indian Pharmaceutical Industry. Advent of Technological development in Information and Communication sector has created a huge opportunity for Indian IT industry. 1.4 ENVIRONMENTANALYSIS 1.4.1 Concept It is a continuous process wherein the role of manager is to examine the factors of external environment for achieving optimum performance of business. Interchangeably, environment monitoring is used for scanning. It is the process of accumulating or assembling the relevant information of business, examining it and anticipating the impact of all uncertain trends in business environmental. Successful marketing strategies are always dependent on such environmental scanning and marketing programmes always depends on its environmental changes. At the same time, environment scanning points towards interaction among various environmental factors. According to Stephen Robbins, “Environment analysis entails scrutinizing the environment to identify action by competitors, government, union and the like that might impinge on the organization’s operations.” Environment analysis is a step towards corporate planning which fall in the domain of strategic management. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

Chandler describes strategic management as “The determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and allocation of resources necessary to carry out these goals.” Strategic management or business policy is treated as a means to achieve the organizational purpose. The process of strategic management involves determining the mission and objectives, recognizing the opportunities and threats and evaluating the strength and weaknesses of the enterprise to the opportunities or to combat the threat. It also involves formulation of strategies to achieve the objectives of an organization. Thus, environment analysis leads to a formulation of sound and effective organizational and managerial strategies to meet the demands of an environment and also contribute significantly to reduce uncertainty. 1.4.2 The Process of Environmental Analysis: The process of environmental scanning / analysis is split into four stages: Scanning the 1.Monitoring 1.Forecasting Assessing the environment the specific the future current and environmental environmental future trends changes implications Fig 1.5: Stages of Environmental Analysis SCANNING: The method to analyze the environment and recognize the impact of direct or indirect elements of environment on the business. Such factors can appear suddenly or has evolved periodically. The important purpose of the scanning is to recognize the emerging trends in the market. Its main purpose is making organization aware of potentially significant external jolt before it is completely crystallized. It allows organization to take proper strategic action by highlighting possible changes well before its occurrence. 22 CU IDOL SELF LEARNING MATERIAL (SLM)

MONITORING It is more focused and systematic step which includes aggressive follow-ups and extensively examining the relevant trends recognized in the above step. Its main purpose is to pooled the required data to study the emerging patterns of the environmental factors. However, the resultant patterns are complex as the scanning process output includes vast data which is vague. There are threefold outputs of monitoring stage: - A distinct elaboration of environmental patterns is accessible for anticipation. - Recognizing trends for continuous monitoring - Recognizing trends for more scanning FORECASTING It is concerned with the direction, speed, scope and intensity of environmental change. Anticipation is required for recognizing the opportunities and threats. It helps to formulate the strategic plan accordingly. The nature of environmental factors and variables or their trend may undergo change, new factor or variable is identified and the relevance of certain factors may decline. For certain situation when the factors are constantly changing or sudden events like recession or terrorist attack may lead to re-forecasting. ASSESSMENT It involves highlighting possible implications or impacts i.e. conclusion. Here the efforts are channelized on identifying the results important for an organization rather than considering the reference frame to understand the environment. 1.5 SUMMARY  There are so many reasons that emphasized the need to monitor, analysed and understand the business Environment. Business needs to be proactive and well prepared to respond as per the circumstances as well. Business is a continuous economic activity and for ensuring its regularity the system of input and converting it into useful outputs need to be maintained. It becomes very vital for business to always administer the factors like availability of raw materials, negotiation with suppliers, consumer demand, role of distribution and supply. Surroundings are full of opportunities and threats, so business need to be proactive in terms of planning, scanning and appropriately taking strategic decisions.  The internal environment helps to examine the resources and capabilities that allow firms to achieve a sustainable competitive advantage. It focuses only on strategic resources, which are sources of competitive advantage. The analysis of External Environment helps business to identified different opportunities and channelize the efforts to grab it. In such situation, companies generally opt for aligning their 23 CU IDOL SELF LEARNING MATERIAL (SLM)

strengths with market opportunities and introduce new product and services or add value to existing products and services.  Environmental analysis is a continuous process wherein the role of manager is to examine the factors of external environment for achieving optimum performance of business.  The process of environmental scanning / analysis is split into four stages- Scanning, Monitoring, Forecasting and Assessment.  Overall preparedness, agility and maintaining competitive advantage in the global market is achieved by the awareness, alertness and efficiently monitoring capability of the business. 1.6 KEYWORDS  Business structure refers to the legal structure of an organization that is recognized in a given jurisdiction  Environmental factors - The factors, circumstances and events which occurs and influence the way a business operates, either in a positive or a negative way.  Developed Economies -Countries with relatively high levels of economic growth and security are considered to have developed economies.  Assessment: the action of assessing someone or something.  Environmental Forecasting - anticipating the future performance of an organization, 1.7 LEARNING ACTIVITY 1. Highlight the relation of Supplier and its impact on Organizational Performance. ___________________________________________________________________________ ___________________________________________________________________________ 2. Why Assessment is important for Environmental Analysis process? ___________________________________________________________________________ ___________________________________________________________________________ 1.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is the meaning of Business Environment? 2. Map the significance of business environment. 3. Why market intermediaries are important micro-environment element? 24 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Discuss the statement - Belief system of management is the manager's set of personal notions and values about people and work and as such, is something that the manager can dominate. 5. Why Environment Analysis should be included as an important Business tool? Long Questions 1. Discuss the characteristics of Business Environment. 2. Why business should consider different factors of business environment? 3. Explain the implications of Socio-Cultural Environment on different functions of an Organization. 4. Outline the types of threats associated with Financial Environment. Discuss the various strategies to combat it. 5. How different stages of Environment Analysis is useful for designing organizational strategy when the political environment is turbulent? B. Multiple Choice Questions 1. Which elements exert direct or indirect influence over the business firm? a. Nature of machines used b. Business Environment c. News releases d. PR activities 2. As these factors are dynamic in nature, so the changes introduced in them are quick indicates ________________ characteristics of Business Environment a. Mmultifaceted; b. Totality c. Unpredictability d. Interrelatedness 3. In which type of competition, customer has many choices for investing his income? 25 a. Direct Competition b. Desire Competition c. Indirect Competition d. Brand Competition CU IDOL SELF LEARNING MATERIAL (SLM)

4. The coverage, efficiency and efficacy of the ___________determine adequacy, cost and speed of economic justice and these factors are of great importance for the growth of business. a. Legal System b. Political System c. Technological factors d. Socio-Cultural system 5. What is concerned with the direction, speed, scope and intensity of environmental change? a. Assessment b. Scanning c. Monitoring d. Forecasting Answers 1 – b; 2 – c; 3 – b;4 – a; 5 – d; 1.9 SUGGESTED READINGS Textbooks:  Francis Cherunilam , Business and Environment, Text and Cases, [Himalaya Publishing House],  C. Fernando, Business Environment Kindle Edition, Pearson  K.Aswathappa, Essentials of Business Environment, Himalaya Publishing House  SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson  Ian Worthington, Chris Britton, The Business Environment, Financial Times/ Prentice Hall. Reference Books:  Morrison J, The International Business Environment, Palgrave  MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi  Business Environment Raj Aggarwal Excel Books, Delhi  Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi 26 CU IDOL SELF LEARNING MATERIAL (SLM)

 Business and society – Lokanathan and Lakshmi Rajan, Emerald Publishers.  Economic Environment of Business – M. Adhikari, Sultan Chand & Sons. Open Text Source:   27 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2: ECONOMIC ENVIRONMENT-I Structure 2.0 Learning Objective 2.1 Introduction 2.2 Economic Environment 2.3 Economic System 2.4 Types of Economic System 2.4.1 Capitalist Economy 2.4.2 Socialist Economy 2.4.3 Mixed Economy 2.5 Summary 2.6 Keywords 2.7 Learning Activity 2.8 Unit End Questions 2.9 Suggested Readings 2.0 LEARNING OBJECTIVES After studying this Unit, you will be able to  Explain the significance of Economy and Economic System  Highlight the features of Capitalist, Socialist and Mixed Economy  Analyze the basis of classification of economic system  Co-relate the economic development with the type of economic system adopted by different countries 2.1 INTRODUCTION The function of economy is dependent on the correlation and existence of socio-cultural and political factors. All business activities are conducted according to the prevailing economic system of the country. Economic activity is part of our daily life like a simple activity of buying food pack from the grocery shop that involves transaction of money to exporting a big consignment of medicines to foreign land that involves lots of formalities and procedure. 28 CU IDOL SELF LEARNING MATERIAL (SLM)

Economic activities differ from region to region within the country and from country to country. Presence of natural resources, skilled and unskilled labour and government policy all are the deciding factor for different types of business undertakings. India is an agricultural land, because since long time Indian were primarily engaged in agricultural activities for their livelihood and then slowly different allied industries came into existence like poultry, pesticide and fertilizers, etc. The development and growth of different industries is possible when economic system is inclined for the same. Economic system organizes all essential economic institutions, economic resources and economic initiatives together for production of goods and services that will satisfy the needs and wants of the people of country and sets interchange of money for availing different form of utility. 2.2 ECONOMIC ENVIRONMENT Economic Environment is characterized by the nature of economy that effect the different functions, operation efficiency and competitive environment of the business. There are different elements of Economic Environment, viz., economic system of the country, the objectives of economic planning, the objectives of economic planning, available like man, money, etc. which are necessary for business to operate. The functions, operations and strategies confront various challenges because of the economic environment and also the market conditions like market size and structure, customer’s purchasing power, availability of the credit, etc. are influenced to an extent by economic environment. Factors affecting the Economic Environment: Different factors of Economic Environment which is very important for any business to succeed and survive effectively are as follows: 1] Economic Systems: The activities concerned with the production of goods and services and distribution of the same among masses in the society or specific geographical area are termed as economic activity as there is an involvement of resources, transactions and exchange of money for the same. Decision Making structure like Government and Institutions that influence the economic activity of the government makes up the Economic System. Economic System Capitalist Socialist Mixed 29 Economy CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 2.1: Types of Economic System The most three popular economic system are as follows: Capitalist Economy: The main characteristics of capitalist economy is privatization and free market.Private firms control the factors of production, prices, demand and supply in the market. Wealth accumulation is an important economic objective. Government acts a supporting system to the market force that regulates social justice. Socialist Economy: All the elements of economic activity and production is under the complete control of government. Nature of Supply,quantity of distribution and prices are all under the control of state. All the functions of business are decided by central planning. Important industries will be under the complete control of state and private enterprises exists but all the production decision will be under the control of state. Example France and Sweden. Mixed Economy: The advantageous features of both capitalist and socialist economy is together applied in this system. Government undertakes economic planning and influences various market force through Acts and its provisions, while private enterprises undertake economic activity freely but maintain social objective as an important aspect with profit motive. 2] Economic Conditions: Factors like GDP of the economy, per capita income, availability of capital, utilization of resources, state of the capital market, interest rates, unemployment levels, etc. are the subsets of economic condition. Firms are always interested to monitor the GDP and unemployment rate. Economic categories can be divided into leading, coincident or lagging. Business expects more investment as economic conditions are optimistic or else negative. 3] Economic Policies: Government is the main administrator of the economy. With the aid of economic planning, the government apply different economic policies and control various factors to ensure stability of the Economic Environment. Industrial Policy: The rules, regulations, Acts, Initiatives, industrial programs, Special Economic Zones are the different ways to encourage and administer the industries of the country. This ensures the proper direction to the growth of Industrial sector. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

Fiscal Policy: Government expenditure and spending are based on the fiscal policy instruments. Fiscal policy includes the taxation slabs, division of public expenditure by government and public debt. Fiscal policy influences strategic decisions of business as well. Monetary Policy: Monetary Policy is the main identity of Central Bank of the country that ensures proper supply of money in the market. Monetary policy provides framework for the savings and investments. Also, monitors the credit supply in the economy. Foreign Investment Policy: Foreign investments provides ease in technology transfer and presents many opportunities for domestic business, educational institutions and employment opportunities. Import Export Policy: Import and export is the main source of foreign exchange and it is very important for country to stand strong in the global market. Also, Balance of Payment helps to build country’s brand image in International Market. Import and Export improves the industrial structure, economic development and lifestyle. 2.3 ECONOMIC SYSTEM Important features of Economy are as follows:  Economy is man-made.  Economic institutions are designed, terminated, modified and restructured. After Independence, Zamindari system got eliminated from our land and now we have more comprehensive laws and acts related to land matters. USSR has adopted communism in 1917 over capitalism and then finally adopted mixed structure in 1989.  The structure and pattern of economic activities keeps on changing.  Manufacturing and utilization are the main activities of an economy and money acts as channel for interchange.  Manufacturer and customer adopt dual role i.e., they are same individual. As manufacturer they manufacture goods and services and consumes the same as well.  Privatization is gaining more popularity now-a -days as an intervention of government is not much required. 2.4 TYPES OF ECONOMIES There are different types of Economic System which are adopted across the World. This classification is based on inclination of power and authority, administration of an economic activity, emphasis placed on different objectives and means to achieve all. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

The dominance on the means of production or resources or ownership either to Government or to private business owners or joint form between Government and Private Player forms the basis of classification of the economic system. Economies are described on the basis of autonomy, profit motives and social welfare. Economic system is classified as follows: Capitalist Economic Mixed System Economy Socialist Fig 2.2: Types of Economic System 2.4.1 Capitalist Economy: Adam Smith, the father of modern economy has given the supporting theory and framework for Capitalist Economic System. The main feature of this system are principle of laissez faire is followed, autonomy is in the hands of private entrepreneurs or business owners, market forces are the deciding factor justifies the uncontrollable nature of the economic system will help the economy to utilize its full capacity for growth and there will be sky high development. So, as per this system, government has no role or no involvement in economic activities. Highlights of Capitalist Economy are as follows: (i) Privately owned property: Right to own, buy, sell, transfer any property which an individual has earn or inherited. The property can be used for production of goods and services and thus profit earned will be enjoyed by the person and his family. There are no legal bindings involved in it. It also has been proved that when Individual has complete charge of its property then they put more hard work and dedication to make it fruitful and gain good returns for the same. Alternatively, if property is owned by the state then the efficiency of individual contribution gets reduced and benefits are not completely enjoyed. The popularity of capitalism is because of this important feature where individual enjoys the property and after death that is passed to legal heirs. 32 CU IDOL SELF LEARNING MATERIAL (SLM)

(ii) Liberty of enterprise: A very important aspect of Capitalist is Liberty. Entrepreneurs, group of owners are free to choose any business or industry and decide upon various factors of production. They can select any market for selling their goods and services. Owner and group of investors bear all the risk of uncertainty, liability for profit and loss. Employees and workers are free to select any industry or occupation for their livelihood. There are no formalities involved for business and employees for entry and exit from specific industry. Liberty is allowed till no harm is made to any society, group or state. Such economic system has very distinct industries from consumer and capital goods, services of different types, untapped and unfamiliar sectors, Technology oriented business, etc. Such factors are responsible for accelerated economic development and wide variety of industries. (iii) Consumer’s Predominance: Consumer wish is the command for business. Consumer dominates the quality and quantity of goods produced. Consumer enjoys freedom of choice, saving or spending money. Even the prices of goods and services are dependent on the interactivity of consumer. Market system also influence the choice and selection of consumer, but consumer is the decision maker. Consumer predominance is based on following factors like level of earning, availability of choices for goods and services, limits placed on consumption but still consumer enjoys his dominance. (iv) Profit Motive: Profit is the driving force in any economic system. The emergence of the economic activity is concentrated on earning profits. That will validate the interest and risk taken up by the entrepreneurs or investors. The profit motive enhances the passion of business, efforts are more dedicated and production system is more efficient and technology is incorporated at various stages to ensure competitiveness in the market. Hunger and ambition to grow provides great platform for wide variety of product lines and spur in quality. To gain and enjoy more profit drives the economic development of the country. (v) Competition: Malpractices, unfair trade norms, unethical procedure can easily get submerged in Capitalist Industry structure. There is no government interference, no guideline to follow, no restriction to adhere to, no accountability for the society as it is opposite of what Capitalist structure is all about. It can also lead to emergence of monopoly and consolidation of power in hands of few. Still competition exist between large organizations. Competition is an important characteristic of the Capitalist, so government impose certain restriction to protect market from monopolies. For example, in US- The well-known capitalist economy of the World has file case against Microsoft to prevent market from its monopoly in software industry. (vi) Price Mechanism: The demand and supply in the market determines the price of goods and services. If demand is more than supply, then price will increase and vice a versa. Enterprises that adapt to this system of market they make up normal profit while who do not 33 CU IDOL SELF LEARNING MATERIAL (SLM)

adjust are wiped off the market. Market forces also decides the specific industry to develop more as compare to others, as small players will enter in sector that gives more profit. (vii) Limited government interference: Government is assumed to collect taxes and not to interfere in the working of industries and markets. The Government should extend support to the enterprises. But now this view point is getting faded as there is increase in awareness that industrial growth should aid in society welfare. Now-a-days Government plays a role of savior that helps economic system in times of Depression, Recession, wars, etc. Countries like USA, UK, France, Netherland, Spain, Portugal, Australia etc. are known as capitalistic countries where government plays important contribution in economic development. 4.3.2 SOCIALIST ECONOMY: In the socialist or centrally planned economies, all the productive resources are owned and controlled by the government in the overall interest of the society. A central planning authority takes the decisions. The socialist economy has the following main features. (i) Collective Ownership of means of Production:All the factors of production are under the control of Government and it is meant to serve the objective of people welfare. The institution of private property is abolished and no individual is allowed to own any production unit and accumulate wealth and transfer it to their heirs. People have all the right to maintain consumer durable goods for their personal consumption. (ii) Social Welfare Objective:The main purpose of Government practicing such control over industry is to achieve social welfare and ensure equitable distribution of the profit earned by the economic activities. Demand and supply equation is not of much use in such approach. (iii) Central Planning: Resource allocation is based on the national priorities and proximity of resources. A central Planning authority is appointed to administer and implement the Economic planning. Government takes all economic decisions regarding production, consumption and investment keeping in mind the present and future needs. The planning authorities fix targets for various sectors and ensure efficient utilization of resources. (iv) Reduction in Inequalities:One of the important objectives of Socialist economy is to minimize the inequalities by eliminating the control of economic activities by group of 34 CU IDOL SELF LEARNING MATERIAL (SLM)

wealthy people. It is important to note that perfect equality in income and wealth is neither desirable nor practicable. (v) No class conflict:As the Power and control of economic activities lies with the Government, there is no race or class-conflict arises because everyone has to follow the guidelines of the Government. All are co-workers. Socialism in today’s world Countries such as Russia, China and many eastern European countries are said to be socialist countries. As the global trade is the demand of an hour, many socialist countries are changing now and encouraging liberalization in their countries for their economic development. 4.3.3 Mixed Economy:Mixed Economy offers the advantages of both capitalism and socialism. The Government provides guidelines for economic activity and market forces are allowed to operate in the framework decided. The public and private sectors co-exist in mixed economies. The main characteristics of a mixed economy are as follows: (i) Co-existence of public and private sectors:The industrial sectors are divided among public and private categories. Entrepreneurs, business families and large group of investors undertakes the production units of private sector and profit is their main objective. The public sector consists of production units owned by the government and works on the basis of social welfare. The areas of economic activities of each sector are generally demarcated. Government uses its various policies e.g., licensing policy, taxation policy, price policy, monetary policy and fiscal policy to control and regulate the private sector. (ii) Individual Freedom:Entrepreneurs or aspiring professional have all the right to select their type of business and earn good profit but at the same time they need to strategize the operation as per the Government guidelines. Government has enacted various Acts and laws to prevent the exploitation of labors, consumers, natural resource and market. For instance, government may put restrictions on the production and consumption of harmful goods. But within rules, regulations and restrictions imposed by the government, for the welfare of the society the private sector enjoys complete freedom. (iii) Economic Planning:Economic planning provides direction to the efforts of public as well as private sector. The production strategies, incentives, investment, availability of credit 35 CU IDOL SELF LEARNING MATERIAL (SLM)

and so on factors provides support system to both public and private sector. Economic and National priorities especially that is overall concern with the welfare of society is the main motivation which highlights different priority is Planning. (iv) Price Mechanism:Price decides the profit margin as profit margin will ensure the survival of public and private sector. Prices are decided by considering the profit margins on one side and social objectives on the other. Prices play a significant role in the allocation of resources. But for some important commodities prices are maintained by the Government by offering subsidies. Thus, in a mixed economy people at large enjoy individual freedom and government support to protect the interests of weaker sections of the society. Indian economy is considered a mixed economy as it has well defined areas for functioning of public and private sectors and economic planning. Even countries such as USA, UK, etc. which were known as capitalistic countries are also called mixed economies now because of active role of their government in economic development. 2.5 SUMMARY  An economic system is the socio-economic and political framework within which an economy functions.  A free-enterprise economy also known also as capitalism, market-driven economy, Laissez-Faire and free-market economy, postulates that free and unfettered trade help economies grow to their fullest potential.  Private property is the most important feature of capitalism. Other characteristics include consumer sovereignty, freedom of enterprise, free play of enlightened self- interest of individuals and profit motive being the mainspring of economic activity and the engine of progress.  A socialistic economy is one where conscious and deliberate choice of economic priorities is made by some public authorities. Some features of a planned economy are: a central planning authority, pre-determined and well-defined objectives, fixation of targets, administration of controls and growing role of the public sector.  Socialism is founded on the principle that resources belong to the entire society and they should be owned by all members of the society represented by the State. In such an economy, all the means of production including landed property are vested in the hands of the State. Economic development is carried out through centralized planning. It is a public sector oriented economic system. 36 CU IDOL SELF LEARNING MATERIAL (SLM)

 A mixed economy incorporates the merits of both socialism and capitalism while eliminating the pitfalls found in both of them. In such an economy, both public and private sectors coexist  Balance between the private and the public sectors has been achieved by adopting certain policies that permitted both the sectors to play their role in a well-planned manner; formulation of the Industrial Policy Resolution of 1948 and 1956, and also the Industries (Development and Regulations) Act. 2.6 KEYWORDS  Price mechanism refers to the system where the forces of demand and supply determine the prices of commodities and the changes therein  Economic system: is the socio-economic and political framework within which an economy functions.  Laissez-faire system: The driving principle behind laissez-faire, a French term that translates to \"leave alone\" (literally, \"let you do\"), is that the less the government is involved in the economy, the better off business will be, and by extension, society as a whole.  A socialistic economy is one where conscious and deliberate choice of economic priorities is made by some public authorities.  Co-exist - exist at the same time or in the same place. 2.7 LEARNING ACTIVITY 1. Why Class Conflict is included as a feature of Capitalist Economy? ___________________________________________________________________________ _______________________________________________________________ 2. Equality of opportunity is an important feature of Socialist Economy. Discuss your views. ___________________________________________________________________________ ____________________________________________________________________ 2.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. State the salient features of an economy. 37 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Explain the concept of Economic system. 3. Enlist the demerits associated with Capitalist Economy. 4. Define Socialist Economy. 5. Why Government Control and Regulation of the Private Sector is necessary in Mixed Economy? Long Questions 1. State and explain the advantages of Capitalist Economy 2. Explain on the basis of level of development how economies are classified? 3. Why Public Sector is emphasized in Socialist Economy? 4. Explain the Economic Environment. 5. Brief about the features of Indian Mixed Economy. B. Multiple Choice Questions 1. The ______________plays an important role of coordinating agent in Capitalist Economy. a. price system b. legal system c. judicial system d. Joint FDI 2. The prices of products and services are also determined by the interaction of consumers through market forces. This feature is known as ______________ a. Private Property b. Consumer Sovereignty c. Enlightened Self -interest d. Profit Motive 3. Identify the feature of Socialist Economy a. Private Property b. Co-existence of public and private sectors c. Public ownership of property d. Absence of government interference 4. What believes in a secular State? a. Capitalist Economy b. Mixed Economy c. Market Economy d. Socialism 5. In Mixed economy both public and private sectors ___________ 38 CU IDOL SELF LEARNING MATERIAL (SLM)

a. coexist b. does not exist together c. are parallel in nature d. are joint Answers 1 -a; 2 -b; 3 - c; 4 -d; 5 – a; 2.9 SUGGESTED READINGS Text Books:  Francis Cherunilam , Business and Environment, Text and Cases, [Himalaya Publishing House],  C. Fernando, Business Environment Kindle Edition, Pearson  K. Aswathappa, Essentials of Business Environment, Himalaya Publishing House  SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson  Ian Worthington, Chris Britton, The Business Environment, Financial Times/ Prentice Hall.  Paul, J. Business Environment: Text and Cases, 4thEdition, Tata McGraw Hill, India.  Reference Books:  Engineering Economic-Dr. Rajan Mishra by University Science Press  The Gazette of India, Ministry of Law and Justice, New Delhi. No.311, June’16, 2006.  Morrison J, The International Business Environment, Palgrave  MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi  Business Environment Raj Aggarwal Excel Books, Delhi  Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi  Dahl Modern political analysis. Englewood Cliffs, N.J: Prentice-Hall. Open Text Source:  Dhamija, Dr. Ashok (2009). Prevention of Corruption Act. LexisNexis India. p. 2049. ISBN 9788180385926.  Subrata K. Mitra and V.B. Singh. 1999. Democracy and Social Change in India: A Cross-Sectional Analysis of the National Electorate. New Delhi: Sage Publications. ISBN 81-7036-809-X (India HB) ISBN 0-7619-9344-4 (U.S. HB). 39 CU IDOL SELF LEARNING MATERIAL (SLM)

 Bakshi; P M (2010). Constitution of India, 10/e. Universal Law Publishing Company Limited. pp. 48–.ISBN 978-81-7534-840-0.  International Journal of Scientific and Research Publications, Volume 2, Issue 12, December 2012   40 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3: ECONOMIC ENVIRONMENT-II 41 Structure 3.0 Learning Objectives 3.1 Introduction 3.2 Monetary Policy 3.2.1Concept and Meaning 3.2.2 Objectives of Monetary Policy 3.2.3 Measures of Money 3.3 Monetary Policy and Money Supply 3.4 Instruments of Monetary Policy 3.4.1 General Methods 3.4.2 Selective Methods 3.5 Impact of Monetary Policy 3.6 Fiscal Policy 3.6.1 Concept and meaning 3.6.2 Objectives of Fiscal Policy 3.6.3 Role of Fiscal Policy 3.7Difference between Monetary and Fiscal Policy 3.8 Techniques of Fiscal Policy 3.8.1 Taxation Policy (Tax Structure of Government of India) 3.8.2 Public Expenditure Policy 3.8.3 Public Debt Policy 3.8.4 Deficit Financing Policy 3.9 Fiscal Policy Reforms Introduced by the Government of India 3.10 Summary 3.11 Keywords 3.12 Learning Activity 3.13 Unit End Questions 3.14 Suggested Readings 3.0 LEARNING OBJECTIVES: After studying this Unit, you will be able to  Explain the Objectives of Monetary Policy.  Illustrate the relationship between Monetary and Money Supply  Analyze the General and Selective instruments of Monetary Policy  Outline the impact of Monetary Policy  Explain the Objectives and Role of Fiscal Policy. CU IDOL SELF LEARNING MATERIAL (SLM)

 Compare the features of Monetary and Fiscal Policy  Analyze the Techniques of Fiscal Policy  Describe the importance of Reforms in Fiscal Policy 3.1 INTRODUCTION: Economic system needs system to monitors its functioning. Such control mechanism is implemented with the help of fiscal and monetary policy. Fiscal policy is defined on the basis of revenue generated by the government while RBI in India (Central Bank) administer the monetary policy. The main objective of these policies is to either increase the GDP (gross domestic product) and economic development which is termed as expansionary initiatives, or in case they are meant to deal with inflation then they are termed as contractionary initiatives. Government extends all support to revive the down fall of the economy. Steps like government can opt for increase in spending to increase the demand when demand is low. Government can decrease the tax amount to increase the spending’s. To achieve economic development, price stability and full employment, Government always deceive the level of aggregate demand. RBI approve the implementation of quantitative or qualitative measures to monitor the money supply in the country. Generally, such control is executed by changing CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) that administer the operations and disposable funds of financial institutions to influence the economic growth, unemployment, inflation and rates of exchange of currency. Economic development and balance in the economy is achieved by executing the measures of monetary and fiscal policy together. 3.2 MONETARY POLICY: The main purpose of implementing Monetary policy is to accelerate the economic development and stabilize price and wages by modifying the money supply and credit by changing the interest rates. Monetary policy is one of the important dimensions of the country’s national bank. The trends of inflation traced during after World War II has emphasized the importance of monetary policy. If money supply is modified, then inflation can be controlled. RBI acts as the monetary supremacy of India and thus handles monetary policy. Every year, in April, Reserve Bank of India declares Monetary Policy which is followed by quarterly reviews in July, October and January. But RBI has power to declare any modifications any time. There are two contributing aspects of monetary policy as: PART A: development concerned with macroeconomic and monetary aspect PART B: Records of all measures implemented earlier with new measures initiated. The important elements of monetary policy are financial markets stability, interest rates, credit delivery, etc. 42 CU IDOL SELF LEARNING MATERIAL (SLM)

Monetary policy also manages the availability of financial resources for regulating economic and financial growth. Monetary policy has widened its scope and covers various aspects like availability of credit to efficient sector, encouragement of investment and trade and price stability. 3.2.1 Concept and Meaning: Monetary policy is all about money supply, economic stability and building trust in the currency. To deal the unemployment issues in recession, measures of expansionary Monetary policy are implemented to reduce the interest rate for providing growth opportunity to the business. Contractionary Monetary policy is meant for decreasing the growth of money supply or even narrow it for avoiding deterioration of asset values during inflation. Monetary policy monitors controls (i) the supply of money, (ii) availability of money, and (iii) cost of money. It is concerned with the correlation of total supply of money and the interest rate of borrowing the money, i.e., Credit. When Monopoly of issuance comes into play and currency of the country falls under its purview or issuance of currency’s are with banks which have alliances with Central bank, the RBI has the power to influence the interest rates and modify the money supply in order to maintain economic stability. Well-known definitions of Monetary Policy are as follows: According to Prof. Harry Johnson, “A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy.” G.K. Shaw defines it as “any conscious action undertaken by the monetary authorities to change the quantity, availability or cost of money.” General Definitions are: Broader economic objectives termed as Macro-economic objective of the country like development and liquidity; inflation control is possible by implementing various measures of monetary policy which is govern by central bank. Interest rate is directly proportional to the money supply growth and size in the economy of the country. Three important instruments of monetary policy that are applied through RBI is i. Selling and buying of national debt ii. Change introduced in credit restrictions iii. Reserves are modified to introduce alteration of interest rates. Money supply is the core of monetary policy which includes credit, cash, checks, and money market and mutual funds. Out of these, the most significant is credit, that includes loans, bonds, mortgages, and other agreements to repay. Monetary policy defines the administrative framework of the central bank of the country. It plays very essential part in controlling aggregate demand and inflation. 43 CU IDOL SELF LEARNING MATERIAL (SLM)

In India, monetary policy of the Reserve Bank of India is a critical measure to achieve balanced development of different sectors of the economy. 3.2.2 Objectives of Monetary Policy: The important objectives of monetary policy are as follows: 1. Accelerated Economic Growth: It is the most important objective of a monetary policy. Administrating real interest rate and its resultant impact on the investment, the monetary policy can influence economic growth by controlling. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability. 2. Regulation, Supervision and Development of Financial Stability: Financial stability means the ability of the economy to absorb shocks and maintain confidence in financial system. Threats to financial stability can come from internal and external shocks. Such shocks can destabilize the country’s financial system. Thus, greater importance is being given to RBI’s role in maintaining confidence in financial system through proper regulation and controls, without sacrificing the objective of growth. Therefore, RBI is focusing on regulation, supervision and development of financial system. 3. Price Stability: All the economics suffer from inflation and deflation. It can also be called as Price Instability. Both are harmful to the economy. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable. It helps in reducing the income and wealth inequalities. When the economy suffers from recession the monetary policy should be an 'easy money policy' but when there is inflationary situation there should be a 'dear money policy'. 4. Exchange Rate Stability: Exchange rate is the price of a home currency expressed in terms of any foreign currency. If this exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate. The RBI by altering the foreign exchange reserves tries to influence the demand for foreign exchange and tries to maintain the exchange rate stability. 5. Balance of Payment: Many developing countries like India suffer from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the domestic 44 CU IDOL SELF LEARNING MATERIAL (SLM)

economy, while the later stands for stringency of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved. 6. Full Employment:The concept of full employment was much discussed after Keynes's publication of the \"General Theory\" in 1936. It refers to absence of involuntary unemployment. In simple words 'Full Employment' stands for a situation in which everybody who wants jobs get jobs. However, it does not mean that there is a Zero unemployment. In that senses the full employment is never full. Monetary policy can be used for achieving full employment. If the monetary policy is expansionary then credit supply can be encouraged. It could help in creating more jobs in different sector of the economy. 7. Promoting Priority Sector: Priority sector includes agriculture, export and small scale enterprises and weaker section of population. RBI with the help of bank provides timely and adequately credit at affordable cost of weaker sections and low income groups. RBI, along with NABARD, is focusing on microfinance through the promotion of Self Help groups and other institutions. 8. Encouraging Savings and Investments:RBI by offering attractive interest rates encourages savings in the economy. A high rate of saving promotes investment. Thus the monetary management by influencing rates of interest can influence saving mobilization in the country. 9. Regulation of NBFIs:Non – Banking Financial Institutions (NBFIs), like UTI, IDBI and IFCI plays an important role in deployment of credit and mobilization of savings. RBI does not have any direct control on the functioning of such institutions. However it can indirectly affects the policies and functions of NBFIs through its monetary policy 10. Neutrality of Money: Economist such as Wicksted, Robertson has always considered money as a passive factor. According to them, money should play only a role of medium of exchange and not more than that. Therefore, the monetary policy should regulate the supply of money. The change in money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion. However this objective of a monetary policy is always criticized on the ground that if money supply is kept constant then it would be difficult to attain price stability 11. Equal Income Distribution: Many economists used to justify the role of the fiscal policy is maintaining economic equality. However in recent years economists have given the opinion that the monetary policy can help and play a supplementary role in attainting an economic equality. Monetary policy can make special provisions for the neglect supply such as agriculture, small-scale industries, village industries, etc. and provide them with cheaper 45 CU IDOL SELF LEARNING MATERIAL (SLM)

credit for longer term. This can prove fruitful for these sectors to come up. Thus in recent period, monetary policy can help in reducing economic inequalities among different sections of society. 12. Improvement in Standard of Living: It is also the major objective of the monetary policy that it should improve the quality of life in the country. 3.2.3 Measures of Money: Money Supply: The supply of money means the total stock of money (paper notes, coins and demand deposits of bank) in circulation which is held by the public at any particular point of time. Briefly, money supply is the stock of money in circulation on a specific day. Thus two components of money supply are: i. Currency (Paper notes and coins) ii. Demand deposits of commercial banks Supply of money is only that part of total stock of money which is held by the public at a particular point of time. In other words, money held by its users (and not producers) in spendable form at a point of time is termed as money supply. The stock of money held by government and the banking system are not included because they are suppliers or producers of money and cash balances held by them are not in actual circulation. In short, money supply includes currency held by public and net demand deposits in banks. Sources of Money Supply: 1. Government (which issues one-rupee notes and all other coins) 2. RBI (which issues paper currency) 3. Commercial banks (which create credit on the basis of demand deposits) Measures of Money Supply: There are four measures of money supply in India which are denoted by M1, M2, M3 and M4. This classification was introduced by the Reserve Bank of India (RBI) in April 1977. Prior to this till March 1968, the RBI published only one measure of the money supply, M or defined as currency and demand deposits with the public. This was in keeping with the traditional and Keynesian views of the narrow measure of the money supply. From April 1968, the RBI also started publishing another measure of the money supply which it called Aggregate Monetary Resources (AMR). This included M1 plus time deposits of banks held by the public. This was a broad measure of money supply which was in line with Friedman’s view. But since April 1977, the RBI has been publishing data on four measures of the money supply which are discussed as under. Out of four alternative measures of money supply i.e. M1, M2, M3 and M4, M1 is the most commonly used measure of money supply because components are regarded most liquid assets. Each measure is briefly explained below: 46 CU IDOL SELF LEARNING MATERIAL (SLM)

M1. The first measure of money supply, M1 consists of: M1 = C + DD + OD (i) C- Currency with the public which includes notes and coins of all denominations in circulation excluding cash on hand with banks: (ii) DD-Demand deposits are deposits which can be withdrawn at any time by the account holders. Current account deposits are included in demand deposits. But savings account deposits are not included in DD because certain conditions are imposed on the amount of withdrawals and number of withdrawals. Demand deposits with commercial and cooperative banks, excluding inter-bank deposits; and (iii) OD-‘Other deposits’ with RBI which include current deposits of foreign central banks, financial institutions and quasi-financial institutions such as IDBI, IFCI, etc., other than of banks, IMF, IBRD, etc. The RBI characterizes as narrow money. M2. The second measure of money supply is M2 which consists of M1plus post office savings bank deposits. Since savings bank deposits of commercial and cooperative banks are included in the money supply, it is essential to include post office savings bank deposits. The majority of people in rural and urban India have preference for post office deposits from the safety viewpoint than bank deposits. M2 = M1 + saving deposits with Post Office Saving Banks M3. The third measure of money supply in India is M3, which consists of M1, plus time deposits with commercial and cooperative banks, excluding interbank time deposits. The RBI calls M3 as broad money. M3= M1 + Net Time-deposits of Banks M4. The fourth measure of money supply is M4 which consists of M3plus total post office deposits comprising time deposits and demand deposits as well. This is the broadest measure of money supply. M4 = M3 + Total deposits with Post Office Saving Organization (excluding NSC) In fact, a great deal of debate is still going on as to what constitutes money supply. Savings deposits of post offices are not a part of money supply because they do not serve as medium of exchange due to lack of cheque facility. Similarly, fixed deposits in commercial banks are not counted as money. Therefore, M1 and M2 may be treated as measures of narrow money whereas M3and M4 as measures of broad money. Of the four inter-related measures of money supply for which the RBI publishes data, it is M3 which is of special significance. It is M3 which is taken into account in formulating macroeconomic objectives of the economy every year. Since M1 is narrow money and includes only demand deposits of banks along-with currency held by the public, it overlooks the importance of time deposits in policy making. That is why, the RBI prefers M3 which includes total deposits of banks and currency with the public in credit budgeting for its credit policy. It is on the estimates of increase in M3 that the effects of money supply on prices and 47 CU IDOL SELF LEARNING MATERIAL (SLM)

growth of national income are estimated. In fact is an empirical measure of money supply in India, as is the practice in developed countries. The Chakravarty Committee also recommended the use of M3for monetary targeting without any reason. In practice, M1 is widely used as measure of money supply which is also called aggregate monetary resources of the society. All the above four measures represent different degrees of liquidity, with M4 being the most liquid and M4 is being the least liquid. It may be noted that liquidity means ability to convert an asset into money quickly and without loss of value. Liquidity and Ranking: Name Type Liquidity M1 Narrow Money Highest M2 Narrow Money Less than M1 M3 Broad Money Less than M2 M4 Broad Money Lowest Liquidity [Reference:] 3.3 MONETARY POLICY AND MONEY SUPPLY: In the context of developing economies like India, monetary policy acquires a wider role and it has to be designed to meet the particular requirements of the economy. It stimulates or discourages spending on goods and services and, thus, influences economic activities and prices by regulating the supply of money, and the cost and availability of credit to producers and consumers in the economy. Households and business units make spending and investment decisions based upon current and expected future monetary policy actions. The various sectors of the economy respond in different ways, depending on the extent to which they are borrowers or lenders and the importance and relative availability of credit to the sector. By affecting the demand side of the economy, monetary policy tries to damp or perhaps even eliminate business. Fluctuations - economy-wide recessions and booms arising from fluctuations in aggregate demand. In India, the three major objectives of economic policy are growth, social justice (equitable distribution of income and wealth) and price stability. Of these, price stability is perhaps the one that can be pursued most effectively by the monetary authorities of the country. The monetary policy of an economy operates through three important instruments, viz., and the regulation of money supply, control over aggregate credit and the interest rate policy. In pre- 48 CU IDOL SELF LEARNING MATERIAL (SLM)

reform period, given the largely underdeveloped state of financial system, regulated nature of financial markets and plan priorities, the RBI often resorted to the direct instruments of monetary policy like CRR, SLR and interest rate for allocating credit and regulating money supply in the economy. Gradual liberalization and globalization of the economy, strengthening and development of the financial system, restrictions on the automatic monetization of fiscal deficit and various other changes in the economy had made it possible for the RBI to operate with the indirect instruments of monetary policy such as bank rate, repo rate and OMOs (open market operations). Accordingly, there has been a distinct shift in the monetary policy framework and operating procedures from direct instruments of monetary control to market based indirect instruments in the recent years. The thrust has been to provide the market mechanism a greater role in the economy, to provide the banks more operational flexibility and to bring the allocative efficiency in the economy. In the recent years, the thrust of the monetary policy was to reduce the annual inflation rate. Since the year 2009 the inflation in India has crossed historical records and reached to unprecedented levels, and lying in the range of 9 - 14 %. The monetary authorities are striving hard to curb the inflation by adopting several monetary policy measures, the important amongst which are changes in CRR, repo and reverse repo rate, which directly influence the money supply in the market with immediate effect without creating any distortions in the economy. That is the reason, they are perceived to be the most appropriate by the monetary authorities to curb the existing inflation, and hence changed 16 times during the year 2009 to 2011. Monetary policy which aims at changing the money supply in order to achieve the national economic goals requires the following conditions to be satisfied. 1. A close correspondence must exist between the theoretical definition of money and the empirical (measurable) definition of money. 2. The monetary authority must be able to control the empirically defined money supply and to meet the intermediate monetary targets (such as monetary growth rate, interest rate etc) with the help of the instruments such as bank rate, open market operations etc. 3. The empirical definition of money must be closely and predictably related to ultimate national goals. Achievement of monetary growth rate or interest rate targets is not enough. Such achievement must also change economic variables in the desired manner. Monetary policy requires a meaningful and practical definition of money. Since changes in the supply of money affect important economic variables, they can also influence the attainment of ultimate national economic goals. The goals of internal price stability, international balance of payments equilibrium, economic growth, high employment are all directly or indirectly affected by the changes in money supply. Variations in currency are not possible except over comparatively long period. Thus, changes in currency do not play an important role in the formulation of monetary policy. 49 CU IDOL SELF LEARNING MATERIAL (SLM)

3.4 INSTRUMENTS OF MONETARY POLICY: The various credit policy or monetary instruments used by a Central Bank of Country can be divided as follows: Monetary Instruments/ Methods of Credit Control General Methods /Quantitative Selective Methods /Qualitative Methods Methods  Bank Rate Policy  Marginal Requirements  Open Market Operations  Consumer Credit  Variable Reserves Ratios Regulation o Cash Reserves Ratio (CRR)  Publicity o Statutory Reserve Ratio  Credit Rationing (SLR)  Moral Suasion  Control through Directives Fig 3.1: Instruments of Monetary Policy Direct Actions The general methods affect the total quantity of credit or economy in general. The selective methods on the other hand, affect certain selected sectors or certain qualitative distinctions are made between different sectors and segments of the economy; and selectivity is applied in regulating the flow of credit. The Reserve Bank of India (RBI), Act confers on the Banks the usual powers available to central banks generally and the Banking Regulation Act provides special powers of regulation for the operations of commercial and co-operative banks, which formed the statutory basis for the credit regulation in India. 3.4.1 GENERAL CREDIT CONTROLS/ QUANTITATIVE METHODS: In this method, it is important that the three instruments namely Bank rate policy, Open market operations and Variable reserves ratios are inter-related and operates in co- ordination. All the three instruments affect the bank reserves. Open Market Operation and 50 CU IDOL SELF LEARNING MATERIAL (SLM)

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