Business Environment

NCERT Solution

Part 2 Long Answer Type

Question 3: Explain, with examples, the various dimensions of business environment.

Answer: Business environment consists of five important dimensions including economic, social, technological, political and legal. These dimensions can be written as follows:

PESTLE (Political, Economic, Social, Technological, Legal)

Political Environment

Political environment means political stability and overall peace in the country. Given an option, any company would prefer India over Afghanistan for doing business because of lack of political stability in Afghanistan. On the other hand, India is politically stable and relatively peaceful country.

Economic Environment

Economic environment includes such factors as interest rates, inflation rates, changes in disposable income of people, stock market indices and the value of currency. A very high inflation rate may not be good for the business. During the last two decades, disposable income of people has increased significantly, and has resulted in growing sales of cars across the country.

Social Environment

Social environment includes social forces like traditions, values, social trends, society’s expectations of business, and so on. Mc Donald’s sells beef burgers all over the world. But India is not a country of beef eaters because of religious sentiments. So, Mc Donald’s sells chicken burgers in India.

Technological Environment

Technological environment includes forces relating to scientific improvements and innovations which provide new ways of producing goods and services and new methods and techniques of operating a business. Let us look at the mobile handset market to understand this. Before smartphones came on the scene, majority of people may not have tried their hands on online shopping. Now, with smartphones in almost every urban households, even small towns have become good markets for e-commerce providers.

Legal Environment

Legal environment includes various legislations passed by the government, administrative orders issued by government authorities, court judgments as well as decisions rendered by various commissions and agencies at every level of the government— center, state or local. Some states are dry states. This means it is illegal to sell liquor in those states. Companies which sell liquor do not need to focus on such states.

Question 4: The government of India announced Demonetization of Rs. 500 and Rs. 1,000 currency notes with effect from the midnight of November 8, 2016. As a result, the existing Rs. 500 and Rs. 1,000 currency notes ceased to be legal tender from that date. New currency notes of the denomination of Rs. 500 and Rs. 2,000 were issued by Reserve Bank of India after the announcement.

This step resulted in a substantial increase in the awareness about and use of Point of Sale machines, e-wallets, digital cash and other modes of cashless transactions. Also, increased transparency in monetary transactions and disclosure led to a rise in government revenue in the form of tax collection.

Enumerate the dimensions of business environment highlighted above.

Answer: Various dimensions of business environment are at play here. Let us discuss them one by one.

Political: The government needs to be strong to take such a strong and drastic decision. It was possible because of the brute majority commanded by the government at the centre.

Social: Affection with currency is a social trait. Many people still love to hoard cash for bad times. Cash transaction is a proven method to evade the tax net. The government was making efforts to change this mindset.

Economic: Too much cash in circulation is not good for economy. Moreover, black money plays havoc with prices of various products and services. Black money is akin to parallel economy which is bad for the overall health of the economy.

Technological: Switchover to e-transaction could be possible because technology to do so was already in place. Many people had already adapted to making payment through cards and e-wallets. Even for the non-starters the term e-transaction was not alien.

Legal: All the stakeholders were duly consulted before making such a tough decision. The Ministry of Finance and the RBI was involved in the decision making process. It can be said that the decision was duly backed by the legal provisions of the country.

State the features of Demonetization.

Answer: Following are the features of demonetization:

Tax Administration Measure: Cash holding out of declared income was easily deposited in banks and exchanged for new currency notes. Those with black money were forced to declare their income and pay adequate penalty for withholding taxes.

Tough Stance by Government: The government gave the indication that it is no longer going to tolerate tax evasion. It also showed that it could go to any length to make tax evaders fall in line.

Channelising Cash into Banking System: Cash lying in lockers of private individuals are of no use to the economy because it is lying unutilized. Once the cash was channelized into the formal banking system, it could be used for the economy.

Towards Cash-less Economy: Demonetisation helped in progress towards less cash in the economy. Now, even roadside vendors keep QR codes so that they can be paid through e-wallet. It helped in bringing them within the formal economy and tax net.

Question 5: What economic changes were initiated by the Government under the Industrial Policy, 1991? What impact have these changes made on business and industry?

Answer: Following changes were initiated by the Government under the Industrial Policy 1991:

Change: Abolition of industrial licensing for all industrial projects except 18 industries of high strategic and environmental importance and with high import content. About 80 per cent of the industries were delicensed.

Impact: It helped in many business enterprises entering various uncharted market segments. Many companies diversified into new product segments in order to increase business.

Change: Amendment of the MRTP Act to eliminate the need for prior approval of the Central Government by large companies for capacity expansion, diversification and merger and amalgamation.

Impact: Earlier, a company was never in a position to cater to increase in demand for a particular product. It often resulted in black-marketing of many items, like scooters and cars. Thanks to new policy, companies could flood the markets with plethora of products to give endless choice to customers.

Change: Nine areas in basic and core industries earlier reserved for the public sector were opened to the private sector.

Impact: Public Sector was becoming living examples of inefficiency and underperformance. Private sector, being market-oriented in nature, brought better efficiency and better productivity. It also helped in improving product quality.

Change: Limit of foreign equity holding raised from 40 per cent to 51 per cent in a wide range of priority industries.

Impact: This step helped in attracting foreign investment in India. Many MNCs could bring more money and focus for the Indian market.

Change: Import licensing in most capital goods, raw materials, intermediates and components eliminated.

Impact: Import not only brings products but also brings competition. Competition helps local industry to learn and to improve.

A good example to understand this would be Kellog’s Cornflakes. It is only after Kellog’s created a market for cornflakes that Indian players jumped in the fray.

Question 6: What are the essential features of following?

(a) Liberalisation

Answer: Following are the essential features of liberalization:

Simplified rules to do business
No more licensing requirement for manufacturing new product, for capacity expansion, etc.
It is the market and not the government which decides the price of a product.
No more fear of unnecessary raids by inspectors of various departments.

(b) Privatization

Answer: Following are the features of privatization:

Government should focus on governance instead of on making and selling a product.
Private players should be at their will to enter any business of their choice.
Private players bring better efficiency to run a business organization.

Answer: Following are the features of globalization:

The whole world functions as a single market.
All the markets in the world are related to and influenced by each other.
Different parts of business operation can be done at different places in the world.
Any customer in the world can be served by any business entity in the world.