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Unit VI, VII and IX
POLICY OF LIBERALISATION OF INDIAN ECONOMY

The policy of liberalisation forms an important part of economic reforms

characterising the new economic policy.
MEANING OF LIBERALISATION
Economic liberalisation is the policy of deregulation of different segments of
the economy. It is the policy of doing away or reducing the government controls
over industry, investment, imports, foreign exchange and other activities, which
existed before 1991. The objective of introducing the liberalisation policy in 1991
was to move away from a regulated system towards a new system where
regulations were to be reduced and ultimately minimised.
FEATURES OF LIBERALISATION POLICY
The main features of the policy of liberalisation are as follows:
1. Delicensing:
Before 1991, there existed a regulatory system of licensing and controls
Industries covered under this system were required to be registered and were
granted licences by the government. The regulatory system of licensing and
controls became a hurdle in the industrial growth. It caused delays and was
breeding corrupt practices. The industrial licensing policy led to unnecessary
government interference, delays in investment decisions, bureaucratic red-
tapism, etc. The regulatory measures also created an inefficient, high-cost and
weak industrial sector. Thus, the license permit raj meant a slow industrial and
economic development. Therefore, there was the need to review these measures.
The thrust of the policy of liberalisation was on abolishing the requirement of
licensing of industries. In most cases, the industrial policy of 1991 made the
licensing policy very liberal. The requirement of licensing was abolished for most
of the industries except five (alcohol, cigarettes, hazardous chemicals, defence
equipments, and industrial explosives for security, strategic, social, and
environmental reasons). Entrepreneurs are now free to enter any industry, trade,
or business. In many cases, licences are no longer needed to start business as was
the case earlier. The approval for any new venture, including any change in the
existing venture, is almost automatic now. The licensing procedures in other cases
(where they are still needed) have been streamlined so as to remove various
irritants in the operation of the licensing system. The removal of licensing system
has given a greater role to the market forces.

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2. Relaxation in Controlling Monopolies:

Under the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, all the
firms with assets above a certain amount (Rs. 100 crore since 1985) were
permitted to enter selected industries only, and they were required to take
approval of the government for any investment proposals. This Act has been
abolished as part of liberalisation policy. In order to make deregulation more
effective, restrictions on functioning of monopolies have been relaxed. Monopoly
houses are no longer required to seek prior government approval for expansion
and establishment of new industries. The emphasis has shifted now to controlling
and regulating the monopolistic and restrictive unfair trade practices by taking
action against the offenders so as to safeguard the interest of the consumers.
3. Industrial Location Policy Liberalised:
In a departure from the earlier industrial location policy, freedom has been given
to industries to start their operation at all locations other than the cities with more
than one million population. There is no need for obtaining the approval of the
government, except for industries subject to compulsory licensing.
4. Removal of Restrictions on Mergers:
Restrictions on mergers, takeovers, separation of industrial units, etc., are all
removed.
5. Liberalisation of Capital Market:
Capital market has been made free. A new company can be floated now with the
issuance of new shares and debentures without seeking the permission of the
government. However, Securities and Exchange Board of India (SEBI) has been
set up as a watchdog for regulating the functioning of the capital market.
6. Foreign Exchange Market Reforms:
These reforms have been introduced in the foreign exchange market. Flexible
exchange rate has been introduced under which exchange rate is determined by
the market forces. The Reserve Bank of India (RBI) helps only to ensure that
there are no extreme fluctuations in the exchange rate. In 1993-94, the rupee was
made fully convertible into foreign currency on trade account. Exporters can now
convert the foreign currency earned by them into Indian rupees at the prevailing
market exchange rate. Similarly, importers can now buy the foreign currency
from the foreign exchange market at the market rate.

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7. Foreign Trade Reforms:
Foreign trade policy underwent a substantial change in the wake of liberalisation.
Tariff restrictions have been considerably relaxed. Import controls have been
abolished thereby moving to market based method of allocating imports. The
policy of liberalisation has led to freedom to import capital goods and technology.
Imports quotas of manufactured goods and agricultural products were removed
in 2001.
8. Development of Infrastructure:
Private sector has been allowed to enter and develop the infrastructure such as
power, roadways, communications, shipping, civil aviation, banking, etc.
9. Ease of Doing Business:
The NDA government has taken a series of measures during the last four years to
improve doing business in India. As part of this policy, existing rules regarding
various licenses and permissions needed for doing business in the country have
been simplified. This has created an investment- friendly environment in the
country.
10. Other Changes:
Several other changes such as liberalising the control of RBI on commercial
banks and price decontrols (for example, that of sugar and petroleum) have been
adopted as part of the policy of liberalisation. Banking reforms has led to a shift
of the role of RBI from a 'regulator' to a 'facilitator' of the financial sector.

SIGNIFICANCE OF LIBERALISATION POLICY

1. Policy of liberalisation has tried to overcome the problems of ‘control raj’,
such as problems of uncalled delays, corruption, etc. It liberalised trade and
industrial policies and freed up capital market and the financial sector.
2. Liberalisation policy has provided freedom to the entrepreneurs. The business
entry has been liberalised now.
3. Liberalisation policy has injected a spirit of competition in the economic
system and has encouraged the entrepreneurs to undertake investment. This has
increased efficiency in the economy.

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POLICY OF PRIVATISATION
The public sector enterprises were established in many countries primarily for
pragmatic reasons but partly for ideological reasons. In recent years, however,
with the emergence of a new philosophy of economic liberalisation, the private
sector and the market forces have acquired prominence once again. At this
juncture, the faith in the public sector is shaken. This is the case particularly in
the developing countries like India. In the past, the policy-makers in these
countries traditionally held the view that the public sector was the prime mover
for economic development. The Industrial Policy Resolution of 1956 assigned a
strategic role to the public sector in India. Accordingly, massive investment was
undertaken during the Five-Year Plans to build the public sector. There is no
denying the fact that public sector in India was able to establish the industrial base
in the country by developing heavy and basic industries and by providing
requisite infrastructure. But developing countries all over the world today are
witnessing a change in their perception about the role of public sector in the
process of economic development. In this scenario, the role of the public sector
enterprises is being reappraised. In fact, the public sector enterprises are losing
their importance. In India also, the role of public sector is undergoing a change in
the wake of the new economic policy. An important factor responsible for decline
in the popularity of public sector enterprises in many countries is the process of
privatisation.

MEANING AND RATIONALE OF PRIVATISATION

Privatisation basically implies the process which leads to transfer of ownership
of public sector enterprises from the government to the private sector. However,
taken in a wider sense, privatisation also implies the process of granting
autonomy to the public sector enterprises in decision-making and infusing the
spirit of commercialisation in them.
The supporters of privatisation have put forward the following arguments in
support of such privatisation:
1. Ideological Grounds:
Privatisation in the advanced countries is favoured on ideological grounds. The
central idea of this argument is that public sector enterprises should be confined
to essential activities, which the private sector cannot or will not perform. All
other activities should be performed by the private sector enterprises as they are
more efficient.

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2. Improvement in Managerial Efficiency:
Privatisation is supported as a means of improving managerial efficiency.
Privatisation through disinvestment (i.e., the policy of sale of equities held by the
government to private investors) will establish a direct relationship between the
shareholders and the management. The private shareholders would have direct
interest in increasing the efficiency of these enterprises. The management would
not be subjected to uncalled political pressure and interference. This would
remove the managerial inefficiency of public sector enterprises that arises due to
political intervention. Management would be guided by economic and
commercial considerations. It will help in improving the quality of decision-
making.
3. Creation of Competitive Environment:
Transfer of the ownership of the public sector enterprises to the private sector
would abolish their monopoly position. These enterprises will have to compete
with other similar enterprises. Therefore, a competitive environment can be
created. Such an environment would help in improving the competitive strength
and efficiency of these enterprises. It would infuse commercial spirit in the
enterprises. These enterprises would be under pressure to increase production
efficiency by using modern and improved technologies.
4. Profit-oriented Decisions:
Privatisation policy will help in infusing the commercial spirit in the functioning
of the enterprises. The private sector will introduce 'profit-oriented' decision-
making process in the working of enterprises. This will lead to an improvement
in the efficiency and performance of these enterprises.
5. Greater Flexibility in Decision-making:
Public sector enterprises normally do not enjoy sufficient functional autonomy.
This often leads to delay in decision-making. In fact, delayed decision-making is
often equivalent to making no decision at all. The policy of privatisation will be
helpful in imparting greater flexibility in the decision-making process.
Management would be free from any government intervention. It would not have
to consult others for any decision. It would be possible to take quick and timely
decisions, which is the hallmark of efficiency. Timely and prudent decisions will
improve the efficiency of business operation.
6. Reduction in Burden on Public Exchequer:
Operation of the public sector enterprises has been putting a large burden on
public exchequer because of huge losses incurred by a number of enterprises and

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growing amount of subsidy payments. Privatisation would be helpful in reducing
this financial burden on the government. Government would not be under the
obligation of providing subsidy and making up for the losses.
7. Greater Attention to Consumers' Satisfaction:
It is often argued that many a time the public sector enterprises do not get
personally involved with the needs of the consumers. However, the very survival
of the private enterprises depends on the satisfaction of the consumers. Private
enterprises have to give attention to the interest of the consumers for creating and
sustaining their market. Quality of service will improve thereby.
8. Greater Investment and Employment Opportunities:
Privatisation will lead to opening up of new areas to the private sector
enterprises, hitherto reserved for the public sector. This will lead to increase in
investment by the private sector. Higher investment would mean creation of larger
employment and income-earning opportunities in the economy.
9. Revival of Sick Units:
A number of public sector enterprises have been incurring losses for a long time.
They have become, more or less, sick units. Privatisation may help in reviving
such sick units, which have become a liability on the government.
10. Increase in Accountability:
Personnel in the public sector enterprises are not accountable for any lapse. There
is always the scope of responsibility being shifted to others. However, the areas
of responsibility in the private sector are clearly defined. Thus, privatisation will
lead to an increase in accountability of the personnel managing these enterprises.
11. Increase in Financial Discipline:
The public sector enterprises can get budgetary support from the government
irrespective of their performance. But the private sector enterprises will be able
to raise funds in the capital market only if they are performing well. Therefore,
privatisation will put pressure on the enterprises to perform well in order to raise
funds in the capital market. This will improve their financial discipline.

ARGUMENTS AGAINST PRIVATISATION

A number of arguments have been advanced against the policy of privatisation:
1. Privatisation Not Always Desirable:

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In many cases, public sector enterprises have been set up because the private
sector either does not possess the requisite resources or simply is not interested
because of long gestation period and low profitability. Many public sector
enterprises are set up to achieve social welfare. Privatisation of such public sector
enterprises may not be possible because private sector may not be forthcoming to
acquire such public sector units.
2. Social Welfare Neglected:
Privatisation policy may sometimes neglect the consumers' interest. Private sector
enterprises operate mainly with the objective of profit maximisation. Private
operators would not like to provide goods at subsidised prices to the poor
consumers to promote social welfare. The private sector may not uphold the
principles of social justice and public welfare. They may be interested in
maximising their profit only. Thus, social welfare may be ignored under the
policy of privatisation.
3. Possibility of Unemployment:
One of the genuine fears is that privatisation will lead to unemployment. There
is always the fear of retrenchment and consequent unemployment when the public
enterprises are taken over by the private sector. The experience of privatisation in
many countries, including India, is testimony to the fact that this indeed has
happened.
4. Growth of Private Monopoly:
Another genuine apprehension is that the sale of a public sector undertaking to a
private company may only result in the substitution of a public monopoly by a
private monopoly. This may lead to monopolistic exploitation by efficient private
owners replacing the inefficient public ownership. Privatisation of electricity in
Delhi has seen how consumers are exploited through frequent hikes in electricity
rates.

5. Possibility of Corrupt Practices:

The implementation of the policy of privatisation may open the door to welfare
corruption. There is the possibility of undervaluation of assets of the public sector
units to favour the private sector. There may be complicity between politicians,
bureaucrats, and particular business groups. In India, the sale of Bharat
Aluminium Company (BALCO), a cash-rich public sector company, to Sterlite
group in 2001 was very much in news for being heavily undervalued. In many
cases, privatisation is identified with ‘briberisation’.

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6. Lopsided Industrial Development:
Privatisation may result in lopsided development of industries in the country.
Private enterprises will not be interested in projects which are risky and have long
gestation period with lower profitability. It may retard the growth of basic and
heavy industries and infrastructure in the country.
FEATURES OF THE POLICY OF PRIVATISATION IN INDIA
Privatisation basically implies contracting the role of the public sector and
encouraging the expansion of the private sector. The New Economic Policy
centres around six major measures to reform the public sector enterprises. These
reforms are:
1. Policy of Dereservation:
The Industrial Policy Resolution of 1956 had reserved 18 industries for the public
sector. These 18 public sector industrial undertakings were gradually liberalised.
The Industrial Policy of 1991 reduced the number of such industries to eight.
Subsequently, the number of industries reserved exclusively for the public sector
was reduced to three, namely atomic energy, specified minerals and railways.
However, the public sector will be allowed to enter in areas not reserved for it for
healthy competition as and when the need arises. Similarly, there will be no bar
for areas exclusively opened up to the private sector.
2. Policy Towards Sick Public Sector Undertakings:
Sick enterprises are those enterprises which have been incurring heavy losses year
after year. The Board for Industrial and Financial Reconstruction (BIFR) was set
up in 1987 to look into the revival of sick industrial units within private
companies. In pursuance of the new industrial policy, sick public sector
enterprises were brought within the jurisdiction BIFR for their revival/
rehabilitation with effect from 1992. Prior to 1992, this scheme was used only in
the case of sick private sector enterprises. Chronically sick public enterprises
were referred to BIFR for their revival/rehabilitation. 65 cases of central public
sector enterprises (CPSEs) were referred to the BIFR at different times. Out of
these 65 cases, BIFR sanctioned 13 cases for revival/rehabilitation schemes. This
means that the government assisted these 13 public sector units to make them
viable units. Subsequently, the government established the Board for
Reconstruction of Public Sector Enterprises (BRPSE) in December, 2004 to
advise the government on moderation/revival/reconstruction of sick and loss-
making public sector enterprises. However, the government wound up BRPSE in
November, 2015 to streamline the mechanism of the revival of sick CPSEs. Now,

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the concerned, administrative ministers/departments are responsible to monitor
sickness of CPSES functioning under them and take timely redressal measures
with the approved of the competent authority. The NDA government is giving
priority to the closure of chronically sick CPSEs. It has decided to close down 25
such state- owned enterprises at the earliest. The condition of the sick CPSEs has
improved over the years. The number of sick CPSES came down from 105 in
2003 to 40 in March, 2016.
3. Policy for Navaratnas and Miniratnas:
The government introduced the Navratna scheme in 1997 to identify CPSEs that
had comparative advantages and to support them in their drive to become global
giants. The government has made attempts to improve the efficiency of CPSEs
by giving them autonomy in making managerial decision. CPSEs have been
grouped as Maharatna, Navaratna and Miniratna companies according to their
financial performance and growth. The government has granted enhanced powers
to the Board of Directors of various profit-making CPSEs, known as Maharatna,
Navaratna, and Miniratna. The Navaratnas originated as part of the programme
of the government in 1997 to identify high-performing and profit-making public
sector enterprises. These enterprises were provided financial, managerial and
operational autonomy to enable them to become global giants. This was done in
order to improve efficiency, infuse professionalism and to enable CPSEs to
compete more effectively in the liberalised global environment. Initially, nine
such enterprises (and hence nicknamed as Navaratnas) were identified, and 12
more were added to the list later, raising the number to 21. In February 2010, the
government introduced the Maharatnas scheme under which mega Navaratna
public sector enterprises have been empowered to expand their operations, both
in the domestic as well as foreign market so as to emerge as global giants. As on
31 March, 2020, there were 10 Maharatnas and 14 Navaratnas. The Miniratna
companies followed suit to grant enhanced autonomy and delegation of financial
enterprises to some other profit making companies. These were consistently
profit-making companies. Their number was 39 in 2001, which increased to 73
by 31 March, 2020. These Maharatnal Navaratna/Miniratna companies have
been given additional power and freedom to incur capital expenditure, raise debt,
enter into joint ventures, restructure their board of directors, and work out their
own manpower and resources management policies.
4. Memorandum of Understanding (MOU):
The government has entered into MOU with the public sector enterprises with the
purpose of improving their performance. The main objective of MOU is to grant
autonomy to the public sector enterprises by reducing the quantity of control and

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increasing the quality of accountability of management. It aims at bringing a
balance between autonomy and accountability. This is sought to be done by
specifying in clear-cut terms the measurable goals through setting targets-both in
financed and non-financed areas---and giving each enterprise greater autonomy
to achieve these targets in a competitive environment. The purpose of MOU is to
ensure a level playing field for the public sector vis-a-vis the private corporate
sector. The government evaluates the performance of the public sector enterprises
through performance evaluation based on the comparison between the actual
achievements and the annual targets set by the government. The public sector
enterprises entering into MOU with the government are given rating as per their
performance. Ratings on a 5 point scale- excellent, very good, good, fair and poor
- are given to the public sector enterprises as an incentive to improve their
efficiency. The number of public sector enterprises entering into MOU with the
government has increased over the years. The scope of MOU system has been
extended to cover nearby all CPSEs. Out of these 144 public sector enterprises
which signed MOU during 2018-19, 42 were rated excellent, 38 very good, 30
good, 16 fair, and 18 poor.
5. Voluntary Retirement Scheme (VRS):
Many of the public sector undertakings have been facing the problem of
overstaffing. Government has initiated a voluntary retirement scheme in the
public sector enterprises to reduce the number of excess workers. Under this
scheme, workers seeking voluntary retirement are given financial compensation.
As a result of this scheme, the government has succeeded in reducing the excess
number of employees working with the public sector enterprises. About 6.28 lakh
employees had opted for voluntary retirement scheme from 1988 till March,
2019.

6. Disinvestment Policy:
The major plank of the privatisation programme under the Industrial Policy of
1991 is the disinvestment policy. Disinvestment means selling off investment. In
the context of public enterprises, the policy of disinvestment refers to selling off
government's equity in the public sector units in the market. Under this policy,
a part of the government shareholding in the selected public sector undertakings
is offered to private investors, financial institutions, mutual funds, workers, and
the public at large. Disinvestment of shares of a select number of profit-making
public sector enterprises is being done in order to raise resources with the
objective of reducing public debt burden, to provide funds for giving assistance
to public sector undertakings for their modernisation and to encourage wider

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participation of general public and workers in the ownership of the public sector
enterprises. However, the main objective of disinvestment policy seems to raise
financial resources for the budget so as to reduce fiscal deficit of the government.
A department of disinvestment was set up in 1999 to identify the public sector
enterprises for equity disinvestment and to work out the modalities of
disinvestment. Many methods of disinvestment have been formulated and
implemented. Initially, equity was offered to retail investors through domestic
public issues.
Subsequently, funds were raised in the overseas market through Global
Depository Receipts (GDRs). Equity shares have also been sold to government's
own financial institutions. Of late, the government is pursuing the strategic sale
method. Under this method, the government sells a major part of its stake to
strategic buyers at the market price and also hands over the management to them.
In the Budget of 2021, the government has made absolutely clear that it may
reduce the number of public sector enterprises to two dozens, following the new
policy that focuses on privatisation in non-core sector while shutting down loss-
making CPSEs. The government has made it clear that there will be only four key
strategic sectors for the CPSEs. The remaining CPSEs in the strategic sector will
be privatised or merged with other CPSEs or closed.
The government has raised about Rs.5,77,200 crore over a period of two and- a-
half decades from 1991-92 to 2019-20 through the policy of disinvestment. The
present government has divested the minority and majority stake of some of the
most profitable CPSEs like ONGC, HPCL, coal India and BHEL.
POLICY OF GLOBALISATION
A third feature of the new economic policy is globalisation. It is the policy of
opening up the Indian economy to the world economy.
MEANING OF GLOBALISATION
Globalisation is a process of integrating the economy of a country with other
economies of the world through trade, capital flow, and technology. It means
opening up an economy to the other economies of the world. The main channels
through which globalisation takes place are as follows:
1. The first channel of globalisation is opening up of the world trade.
Globalisation implies removal of the barriers to international trade so as to allow
free flow of goods and services between countries. This requires liberalisation in
trade of goods and services. In order to expand the world trade, there is the need

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for introducing import liberalisation programmes and removal of quantitative
restrictions like reducing the import duties.
2. Globalisation also requires the removal of barriers to international investment.
Liberalisation of foreign investment would lead to a large increase in international
investment. It is particularly important to open up the economy to the foreign
direct investment (FDI). Foreign companies, including multinational
corporations (MNCs), need to be encouraged to undertake investment in other
countries. Facilities should be provided to the foreign companies and restrictions
on the entry of MNCs should be removed in order to encourage international
investment.
3. Globalisation can effectively take place through free flow of technology
between countries. Transfer of technology from advanced countries is needed to
promote economic development of developing countries like as India.

EFFECTS OF GLOBALISATION
Globalisation has several advantages on economic, technological and other
fronts:
1. Expansion of World Trade:
Globalisation has led to increase in free flow of goods between countries. As a
result, world trade has increased in recent years.
2. Increased Flow of International Capital:
Globalisation has increased international flow of capital. Investment
opportunities in the developed countries have increased. MNCs from the
developed countries have started undertaking investment in the developing
countries. This has led to the emergence of worldwide financial market.
3. Increased Interdependence between Countries:
Globalisation has increased interdependence between different countries of the
world. This is reflected in the increasing interdependence in the field of trading
in goods and services and in the movement of capital.
4. Transfer of Technology:
Globalisation has brought in new opportunities for the developing countries.
These countries have now got greater access to the advanced technologies. The

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technology transfer from the developed countries has led to increased
productivity and higher living standard in the developing countries.
5. Emergence of World Market:
There has emerged a worldwide product market. This has increased the range of
goods available to producers and consumers.
6. Increased Information Flow:
The communication between people of different countries has increased as a
result of revolution in the global mass media. Information flow between different
countries has increased. This has made the world appear smaller.
7. Economic Prosperity:
Globalisation has increased economic prosperity and growth opportunity in the
developing world due to the availability of advanced technologies and increase
in FDI.

8. Increase in Cross-cultural Contacts:

Globalisation has brought people of different cultures together. It has reduced the
cultural barriers. Increase in the cross- cultural contacts has made the dream of
global village more realistic.

FEATURES OF THE GLOBALISATION POLICY

As part of implementation of the agenda of globalisation, the Government of
India has undertaken the following policy measures since 1991:
1. Exchange Rate Reforms:
The most important measure for integrating Indian economy with the global
economy was to change over from the fixed exchange rate system to market-
determined flexible exchange rate system. This policy of allowing the exchange
rate to be determined in the international market without official intervention is
known as convertibility of the currency. The convertibility of Indian rupee on
trade account was achieved in August 1994. This policy is called partial
convertibility because it covers current account transactions only and not capital
account transactions. Along with this, various types of exchange control measures
were lifted in a phased manner. As a result, restrictions on the transfer of foreign
exchange have been considerably relaxed over the years.

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2. Import Liberalisation:
India is committed to reducing restrictions on its foreign trade as a member of
the World Trade Organization (WTO). The government has taken a number of
steps in the direction of import liberalisation.
(a) The system of import licensing has been dismantled.
(b) Quantitative restrictions on imports have been almost totally abolished under
agreement with the WTO.
(c) Duties on imports and exports have been reduced to make the trade between
nations freer than before. The tariff rates (import duties) have been reduced
sharply from an average of 57 per cent in 1991-92 to 31 per cent in 1996-97 and
reduced further to an average of 17 per cent in 2011-12 and 5 per cent in 2018.
Thus, average tariffs is now less than one-tenth of 1991.

3. Foreign Direct Investment (FDI):

FDI is an important driver of economic growth. It leads to increase in
productivity and employment. FDI is expected to add to the domestic investment,
and thereby, contribute to industrial and economic development of the country. It
leads to higher efficiency and productivity by increasing competition and by
bringing new technology into the country. In the changing global scenario of
industrial and economic cooperation, promotion of FDI is important. The
government is playing a proactive role in promoting investment through a liberal
FDI policy. A favourable policy regime has facilitated increase in FDI in the
country. In a bid to attract foreign capital and to integrate Indian economy with
the global economy, the Government of India has thrown open its doors to foreign
investors. The government is committed to encouraging flow of FDI for acquiring
better technology, for modernisation, and for providing goods and services of
international standard. In order to invite foreign investment in high priority
industries requiring large investments and advanced technology, the government
decided in 1991 to grant approval for FDI up to 51 per cent of foreign equity. This
limit was raised from 51 per cent to 74 per cent and

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subsequently to 100 per cent for many of these industries. FDI has been permitted
up to 100 per cent for most of the manufacturing activities in the Special
Economic Zones (SEZs). Several industrial sectors have been opened up to the
MNCs. The policy of the government is also aimed at encouraging foreign
investment in the core infrastructure sectors like road development, airports,
airlines, real estate, banks, power generation, oil exploration, etc. Moreover,
foreign institutional investors have been allowed to invest in the Indian capital
market subject to certain regulations.
In November, 2015, the government increased the foreign investment limit in the
insurance sector from 20 per cent to 49 per cent. The revised policy also opened
up FDI in defence, railways and construction. FDI norms have been relaxed in 15
sectors including defence, real estate, aviation, plantation, single brand retail,
broadcasting and domestic manufacturing. In January, 2018, the government
allowed 100 per cent FDI in single brand retail and real estate broking services as
well as FDI up to 49 per cent in Air India. These FDI policy reforms have brought
most of the sectors under automatic approval route. With these changes, India is
now one of the most open economy of the world for FDI.
The NDA government launched 'Make in India' programme in 2014 with the
objective of making India a global hub of manufacturing new processes and
innovation, new infrastructure and new mindset. This has generated awareness
among the foreign investors about the investment opportunities available in India
so as to make India as a preferred investment destination and to increase India's
share of global FDI.
4. Foreign Technology:
With a view to encourage technological development in Indian industries, free
flow of technology is allowed by the government. Government provides
automatic approval for technological agreements in case of high priority
industries. Similar facilities are provided for other industries as well, provided
such agreements do not require foreign exchange. Foreign technology induction
is facilitated both through FDI and through foreign technology agreements.
EFFECTS OF GLOBALISATION ON INDIAN INDUSTRY
Globalisation has generated a lot of many positive effects on Indian industries:
1. Inflow of Multinational Corporations (MNCs):
Globalisation has attracted a number of MNCs to Indian industries. These MNCs
have brought in huge amount of foreign investment into the Indian industries,
especially in pharmaceutical, petroleum, chemical, textile, and cement

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manufacturing industries. A huge amount of FDI coming to the Indian industries
has boosted Indian economy.
2. Emergence of IT and BPO Sectors:
One of the major benefits of globalisation has been the emergence of information
technology (IT) sector and business process outsourcing (BPO) sector. The IT
and BPO sectors of India are providing outsourcing to the customers in other
countries, particularly the USA and Europe.
3. Availability of Advanced Technology:
Another benefit of globalisation for the Indian industries is that the MNCs have
brought in highly advanced technology with them. This has helped to make Indian
industry technologically advanced.
4. Providing Employment to Skilled Manpower:
Setting up of industries by the foreign companies has helped to provide
employment to many people in the country. The opening of the call centres,
outsourcing of IT and BPO services, and operation of MNCs in the country have
created tremendous job opportunities in the country. The last few years have seen
an increase in the number of Indian skilled professionals employed in these
sectors. A new middle class has emerged around the wealth that the IT and BPO
industries has generated.
5. Setting up of Special Economic Zones (SEZs):
SEZs have been set up to attract foreign companies. Creation of SEZs has
enhanced the growth of industrialisation. They have helped in generating
employment opportunities, creating world class infrastructure and in promoting
investment, including foreign investment.
6. Indian Corporate Sector Emerging as Global Player:
The policy of globalisation has helped produce some world class companies.
India has emerged as global power in many sectors. Some of the leading Indian
industries such as the Tatas, Reliance, United Brewery, Essars, etc., have gone
global by undertaking investment abroad and by acquiring some of the leading
foreign companies. From steel to textiles, from cars to IT, Indian companies have
emerged as the new major players in globalisation.
However, the process of globalisation in India has generated some negative
effects as well.
1. Competition from Foreign Companies:

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One of the adverse effects of globalisation on Indian industry is that it has
increased competition in the Indian market between the foreign companies and
the domestic companies. In many cases, it has led to unequal competition between
the giant MNCs and Indian industries. Indian industries have lost to MNCs
because of better quality of the foreign goods and higher cost of production of
Indian goods. Consumers in the country prefer to buy foreign goods in view of
their better quality. This has reduced the profit levels of the Indian companies.
2. Loss of Jobs in Some Areas:
Another negative effect of globalisation on Indian industry is that with the
coming of advanced foreign technology, the labour requirement has decreased.
This has resulted in many people losing their jobs. A number of small
manufacturers producing plastic toys, electronic goods, batteries, capacitors,
tyres, dairy products, vegetable oils have lost to MNCs. Similarly, Indian steel
industry has been facing problems for the last two-to-three years because many
finished steel products imported from China are very low priced.
3. Takeovers of Domestic Companies:
Much of FDI has gone into takeovers of the existing enterprises and towards
speculative investment in Indian stock market. Foreign shareholders have
increased their holdings of the Indian companies.
Thus, despite positive effects of globalisation on Indian economy, there have been
some negative effects as well. Therefore, there is the need for evolving an
appropriate policy to minimise the harmful effects of globalisation.

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FISCAL & MONETARY POLICY

Fiscal Policy:
COMPONENTS OF FISCAL POLICY
Structure of the budget refers to the components of budget. Two broad
components of the government budget are:
(i) Budget Receipts (including revenue receipts and capital receipts), and
(ii) Budget Expenditure (including revenue expenditure and capital
expenditure).
Details of both these components are discussed as under:
Budget Receipts
Budget receipts refer to estimated money receipts of the government from all
sources during the fiscal year.
Broadly, the budget receipts are classified as:
(1) Revenue Receipts, and
(2) Capital Receipts.
Following are the details:
(1) Revenue Receipts
Revenue receipts are those money receipts of the government which show the
following two characteristics:
(i) These receipts do not create any corresponding liability for the government.
Example: Tax receipts. Tax is a revenue receipt because it does not involve any
corresponding liability for the government. Tax is a unilateral (or one-sided)
compulsory payment to the government.
(ii) These receipts do not cause any reduction in assets of the government.
Example: Tax receipts do not lead to any reduction in assets of the government.
In contrast, if government receives money by selling its share of some company
(say Air India), it causes reduction in assets of the government. These are
therefore, not to be treated as revenue receipts.

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In short, revenue receipts of the government are those money receipts which do
not create a liability for the government and as well do not lead to reduction in
assets of the government.
HOTS
Q. Is borrowing by the government a revenue receipt?
Ans. No, because it creates a liability (for the government) of repayment.
Revenue receipts are broadly classified as tax receipts and non-tax receipts.
Tax Receipts
A tax is a compulsory payment to the government by the households, firms or
other institutional units. The taxpayer cannot expect any service or benefit from
the government, in return.
A tax is a compulsory payment made by an Individual, household or a firm to
the government without reference to anything In return.
Types of Taxes
Taxes are broadly classified as:
(i) Progressive and Regressive Taxes,
(ii) Value Added and Specific Taxes, and
(iii) Direct and Indirect Taxes.
(i) Progressive and Regressive Taxes
Taxes are classified as 'progressive' and 'regressive' depending on the real
burden of taxation. Details are as under:
(a) Progressive Tax: A tax is said to be progressive when the rate of tax
increases with an increase in income. So that, the real burden of the tax is more
on the rich and less on the poor. Example: Tax rate is 10% for income between
Rs. 2 to Rs. 5 lakh. It is 15% for income between Rs. 5 to Rs. 10 lakh, and so
on. Thus, tax rate increases as the level of income increases.
(b) Regressive Tax: A tax is said to be regressive when it causes a greater real
burden on the poor than the rich. If a person with Rs. 1,00,000 as his monthly
income pays 10% income tax (or pays Rs. 10,000), he still has a balance of Rs.
90,000 per month. But if a person with Rs. 5,000 as his monthly income has to
pay 10% income tax (or pays Rs. 500), it might mean a cut in his essential
consumption leading to poor diet and therefore, poor health. Thus, a constant

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rate of taxation on the rich and the poor is a regressive tax, as it causes a greater
real burden on the poor than the rich.
(ii) Value Added Tax or VAT and Specific Taxes
Depending upon tax base, taxes can be classified as:
(a) Value Added Tax or VAT: Value added tax is an indirect tax which is
imposed on 'Value Added' at the various stages of production. Value added
refers to the difference between value of output and value of intermediate
consumption. It is imposed at each stage of production. GST is an important
form of value added tax.
(b) Specific Tax: When a tax is levied on a commodity on the basis of its units,
size or weight, it is called the specific tax.
(iii) Direct and Indirect Taxes
Taxes are classified as direct and indirect depending on their final burden.
(a) Direct Tax: A direct tax is the one the final burden of which is borne by the
person on whom it is imposed. For example, income tax is imposed on the
income of a person and he himself bears its burden. The burden of tax cannot be
shifted to any other person. Income tax, corporation tax, gift tax, wealth tax, are
examples of direct tax.
According to Prof. Dalton, "A direct tax is really paid by the person on whom it
is legally imposed”.
Did You Know it ?
Certain taxes are called 'paper taxes'. These refer to the taxes like gift tax in
India which carry their significance only on paper. These taxes are of little or no
significance in terms of their revenue yield.
(b) indirect Tax: An indirect tax is the one whose initial burden or impact is on
one person but he succeeds in shifting the burden to another persons. GST is an
important example. It is levied on the producers. They are to pay this tax to the
government. But they charge this tax from the buyers by adding it to the price of
the goods sold.
According to Prof. Dalton, "An indirect tax is imposed on one person but paid
partly or wholly by another.”
Direct Tax and Indirect Tax—The Difference
Direct Tax Indirect Tax

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(i) It is the tax which is finally paid by the person on whom it is legally
imposed. (i) It is the tax which is imposed on one person but is paid by
another.
(ii) The burden of direct taxes cannot be shifted to other person. (ii)
The burden of indirect taxes can be shifted to others.
(iii) Direct taxes are generally progressive in nature. (iii) Indirect taxes
are generally regressive in nature.
Examples: Income tax, corporate profit tax. Examples: GST,
customs duty.
HOTS
Q. Explain through an example, how the burden of an indirect tax is shifted.
Ans. GST is an indirect tax. A shopkeeper pays GST to the government. But, the
shopkeeper recovers this tax from the customers as a part of price of the
commodity sold. So, impact of GST (an indirect tax) is ultimately shifted to the
consumers.
Non-tax Receipts
Non-tax receipts are those receipts which arise from sources other than taxes.
Some of the non-tax receipts are as follows:
(i) Fees: A fee is a payment to the government for the services that it renders to
the people.
Examples: Land registration fees, birth and death registration fees, passport
fees, court fees, etc.
It is to be noted that fee is not a payment (price) for commercial service. It is a
payment for administrative and judicial services provided to the people.
(ii) Fines: Fines are those payments which are made by the law breakers to the
government. These are economic punishments for breaking laws. The aim is not
to earn revenue, but to make people respectful to the laws.
(iii) Escheat: Escheat refers to that income of the state which arises out of the
property left by the people without a legal heir. There are no claimants of such
property. The government makes revenue out of it.
(iv) Special Assessment: Special assessment is that payment which is made by
the owners of those properties whose value has appreciated due to
developmental activities of the government. Example: When as a result of
construction of roads or provision of sewerage system or construction of drains,

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etc., value of the neighbouring property or its rental value appreciates, then a
part of the developmental expenditure is recovered from the owners of such
property by way of special assessment.
(v) Income from Public Enterprises: Several enterprises are owned by the
government. Examples: Indian Railways, Nangal Fertilizer Factory, Indian Oil,
Bhilai Steel Plant, etc. Profit of these enterprises are a source of revenue for the
government.
(vi) Income from the Sale of Spectrum like 2G and 3G: Income from the sale of
spectrum has emerged as a significant source of nontax receipts of the
government.
(vii) Grants/Donations: Grants are also a ^source of government revenue. It is
very common for the people to offer donations and grants to the government
when there are natural calamities like earthquake, floods and famines.
(2) Capital Receipts
Capital receipts are those money receipts of the government which show the
following two characteristics:
(i) These receipts create a liability for the government. For example, loans by
the government are a liability. These are to be paid back. These are, therefore,
the capital receipts of the government.
(ii) These receipts cause reduction in assets of the government. As stated earlier,
money received by the government by selling its shares (say of Air India) would
cause reduction in assets of the government. These are, therefore, to be treated
as capital receipts.
In short, capital receipts are those money receipts of the government which
either create a liability for the government or cause a reduction in its assets.
In India, capital receipts of the government budget are often classified as under:

Capital Receipts
(i) Recovery of Loans (ii) Borrowing and Other Liabilities
(iii) Other Receipts

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(i) Recovery of Loans: The central government offers loans to the state
governments to cope with financial crises. When these loans are recovered,
assets of the government are reduced. Accordingly, these are classified as capital
receipts.
(ii) Borrowings and Other Liabilities: While lending creates assets, borrowing
creates liability. Accordingly, borrowings are to be treated as capital receipts. It
may be noted that the government borrows money from:
(a) the general public. [Borrowings from the general public are called market
borrowings.]
(b) the Reserve Bank of India.
(c) the rest of the world.
(iii) Other Receipts: These include items like 'disinvestment'. It is the opposite
of investment. Disinvestment occurs when the government sells off its shares of
public sector enterprises to private sector. It involves transfer of ownership of
public sector enterprises to the private entrepreneurs, leading to privatisation.
Money received through disinvestment is treated as capital receipt because it
causes reduction in assets of the government.
HOTS
Q. 1. What is disinvestment? Does it refer to revenue receipt or capital receipt
of the government? Give an example.
Ans. Disinvestment refers to withdrawal of existing investment.
Example: The Government of India is making disinvestment by selling its
shares in the Maruti Udyog. It is a capital receipt of the government, as it
reduces assets of the government.
Q. 2. How are revenue receipts different from capital receipts in terms of their
meaning and significance?
Ans. Following observations highlight the difference between revenue receipts
and capital receipts:
Revenue Receipts Capital Receipts
(i) Difference in Meaning:
Revenue receipts do not impact asset- liability status of the government.
Assets and liabilities are not increased or decreased. Capital receipts
impact asset-liability status of the government.

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Assets are lowered.
Or
Liabilities are raised.
(ii) Difference in Significance:
(a) Revenue receipts do not leave any burden on future generations. (a)
Capital receipts often leave burden on future generations.
Example: Borrowings leave the burden on future generations for the repayment
of loans.
(b) High revenue receipts (as tax receipts) point to sound financial health of the
economy. (b) High capital receipts (borrowings and disinvestment) point to
poor financial health of the economy.
Budget Expenditure
Budget expenditure refers to estimated expenditure of the government during
the fiscal year.
Like budget receipts, budget expenditure of the government is broadly classified
as:
(1) Revenue Expenditure, and
(2) Capital Expenditure.
(1) Revenue Expenditure
Revenue expenditure of the government is that expenditure which shows the
following two characteristics:
(i) It does not create any asset for the government. For example, expenditure by
the government on old-age pensions, salaries and scholarships are to be treated
as revenue expenditure. Because this does not lead to any type of asset
formation.
(ii) It does not cause any reduction in liability of the government. Expenditure
by way of grants to the state government to cope with natural calamities (like
floods and earthquakes) does not reduce financial liability of the central
government in any manner. Accordingly, this is to be treated as revenue
expenditure.
In short, revenue expenditure refers to estimated expenditure of the government
in a fiscal year which does not create assets or causes a reduction in liabilities.

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Important Items of Revenue Expenditure In the Indian Government Budget
These are:
(i) Wage bill of the government.
(ii) Interest payments.
(iii) Expenditure on subsidies.
(iv) Defence purchases.
MONETARY POLICY
Monetary policy refers to the actions undertaken by a country's central bank or
monetary authority to control and regulate the money supply and interest rates in
the economy to achieve specific economic goals. The primary objectives of
monetary policy typically include:
1. Price Stability: Maintaining stable prices and controlling inflation within
a target range is often the primary objective of monetary policy. Central
banks aim to keep inflation low and stable to promote economic stability
and confidence in the currency.
2. Full Employment: Monetary policy also seeks to promote maximum
sustainable employment by influencing economic growth and aggregate
demand. By adjusting interest rates and the money supply, central banks
can stimulate or restrain economic activity to help achieve full
employment.
3. Economic Growth: Central banks may also use monetary policy to
support long-term economic growth by fostering favorable conditions for
investment, consumption, and productivity growth. Lower interest rates
can encourage borrowing and investment, stimulating economic activity
and growth.
Monetary policy is implemented through various tools and mechanisms,
including:
1. Interest Rate Targeting: Central banks adjust short-term interest rates,
such as the federal funds rate in the United States or the repo rate in other
countries, to influence borrowing costs for businesses and consumers.
Lower interest rates stimulate borrowing and spending, while higher rates
discourage borrowing and investment.
2. Open Market Operations: Central banks buy or sell government
securities in the open market to control the money supply and interest rates.

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Purchasing securities injects money into the economy, while selling
securities withdraws money from circulation.
3. Reserve Requirements: Central banks set reserve requirements, which
specify the amount of funds banks must hold in reserve against their
deposits. By adjusting these requirements, central banks can influence the
amount of money banks can lend and the overall money supply in the
economy.
4. Forward Guidance: Central banks communicate their policy intentions
and outlook for the economy to provide guidance to financial markets and
households. Clear communication about future policy actions can
influence expectations and shape economic behavior.
5. Quantitative Easing (QE): In times of economic crisis or recession,
central banks may engage in QE programs to stimulate economic activity.
QE involves purchasing large quantities of financial assets, such as
government bonds or mortgage-backed securities, to lower long-term
interest rates and boost asset prices.
Overall, monetary policy plays a crucial role in shaping the overall economic
environment and promoting macroeconomic stability. However, it's essential to
coordinate monetary policy with other policy tools, such as fiscal policy, to
achieve balanced and sustainable economic growth.

Controlling inflation through monetary policy in India involves the Reserve Bank
of India (RBI) using various tools and strategies to manage the money supply,
interest rates, and overall economic activity. Here's how the RBI typically
implements monetary policy to address inflationary pressures in India:
1. Repo Rate Adjustments: The RBI's primary monetary policy tool is the
repo rate, which is the rate at which it lends short-term funds to commercial
banks. By raising the repo rate, the RBI makes borrowing more expensive
for banks, leading to higher lending rates for businesses and consumers.
This reduces borrowing and spending, dampening inflationary pressures.
Conversely, lowering the repo rate stimulates borrowing and spending,
supporting economic growth but potentially fueling inflation.
2. Reverse Repo Rate: The reverse repo rate is the rate at which the RBI
borrows funds from commercial banks. By adjusting the reverse repo rate,
the RBI influences the interest rate banks earn on their excess reserves.
Increasing the reverse repo rate encourages banks to lend more to the RBI,
reducing the liquidity available for lending and curbing inflation.

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3. Open Market Operations (OMO): The RBI conducts OMO to buy or sell
government securities in the open market. Selling securities absorbs
liquidity from the banking system, reducing the money supply and curbing
inflation. Conversely, buying securities injects liquidity, stimulating
economic activity but potentially exacerbating inflationary pressures.
4. Cash Reserve Ratio (CRR): The RBI sets the CRR, which is the
percentage of deposits that banks must hold as reserves in cash. Increasing
the CRR reduces the amount of funds banks can lend, limiting credit
expansion and inflation. Conversely, decreasing the CRR frees up funds
for lending, stimulating economic activity but potentially fueling inflation.
5. Statutory Liquidity Ratio (SLR): The SLR is the percentage of deposits
that banks must maintain in liquid assets such as government securities.
Adjusting the SLR affects the amount of funds available for lending by
banks, influencing credit growth and inflation.
6. Forward Guidance: The RBI communicates its monetary policy stance
and inflation outlook through various channels, including policy
statements, speeches, and press conferences. Clear communication helps
shape expectations and guide economic behavior, supporting inflation
management efforts.
7. Inflation Targeting Framework: In recent years, the RBI has adopted a
formal inflation targeting framework, with the target set for consumer price
inflation (CPI). By explicitly targeting inflation, the RBI aims to anchor
inflation expectations and guide monetary policy decisions to achieve price
stability over the medium term.
8. Macroprudential Measures: In addition to traditional monetary policy
tools, the RBI may also deploy macroprudential measures to address
specific risks to financial stability and inflation, such as imposing sector-
specific lending caps or tightening credit norms.
Effective inflation control in India requires a combination of these monetary
policy tools, calibrated to the prevailing economic conditions and inflationary
pressures. The RBI closely monitors various indicators, including inflation data,
economic growth, and external factors, to formulate and adjust its monetary
policy stance as needed.

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UNIT IX
The socio-cultural and demographic environment encompasses a wide range of
factors that influence society and business interactions. Here's a breakdown of
some key elements:
Education plays a significant role in shaping the socio-cultural environment in
several ways:
Transmission of Cultural Values: Education institutions serve as primary agents
for transmitting cultural values, beliefs, and norms to successive generations.
Through formal and informal curriculum content, schools impart knowledge
about cultural heritage, traditions, and social norms, contributing to the
preservation and continuity of cultural identities.
Socialization and Identity Formation: Education facilitates the socialization
process by providing individuals with opportunities to interact with peers from
diverse backgrounds, fostering understanding, empathy, and respect for cultural
differences. Schools also play a crucial role in shaping individual identities, self-
concept, and sense of belonging within cultural and social contexts.
Promotion of Social Cohesion: Education promotes social cohesion by fostering
shared understanding, common values, and a sense of citizenship among
members of society. By providing inclusive learning environments that celebrate
diversity and promote social justice, education can help reduce social divisions,
prejudice, and discrimination.
Empowerment and Social Mobility: Education is a key driver of social
mobility, enabling individuals to acquire knowledge, skills, and credentials that
enhance their socio-economic opportunities and status. Access to quality
education can empower marginalized groups, such as women, minorities, and
low-income individuals, by providing pathways for upward mobility and
participation in social and economic life.
Cultural Innovation and Adaptation: Education fosters critical thinking,
creativity, and innovation, which are essential for cultural adaptation and
evolution. Through exposure to diverse ideas, perspectives, and worldviews,
education encourages individuals to question existing norms, challenge
stereotypes, and contribute to cultural innovation and change.
Promotion of Cultural Exchange and Understanding: Education facilitates
cross-cultural communication and understanding by exposing individuals to
diverse cultural perspectives, languages, and traditions. International education
programs, exchange initiatives, and multicultural curricula promote intercultural

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dialogue, collaboration, and global citizenship, fostering mutual respect and
appreciation for cultural diversity.
Preservation of Cultural Heritage: Education plays a vital role in preserving
and revitalizing cultural heritage, language, and traditions, particularly among
indigenous communities and minority groups. By integrating cultural education
into formal curricula and supporting community-based initiatives, education
institutions contribute to the preservation of cultural identity and heritage.
Overall, education serves as a powerful catalyst for promoting socio-cultural
development, fostering inclusive societies, and advancing cultural diversity,
equity, and social justice. By investing in quality education and inclusive learning
environments, societies can harness the transformative potential of education to
create more resilient, cohesive, and culturally vibrant communities.

Religion exerts a profound influence on the socio-cultural environment in various

ways:
1. Values and Beliefs: Religion shapes individuals' values, beliefs, and moral
frameworks, influencing their attitudes, behaviors, and interactions within
society. Religious teachings often provide guidelines for ethical conduct,
social norms, and interpersonal relationships, contributing to the formation
of cultural identity and collective values.
2. Social Cohesion and Identity: Religion fosters social cohesion by
providing a sense of community, belonging, and shared identity among
adherents. Religious rituals, ceremonies, and gatherings serve as
opportunities for collective worship, solidarity, and social bonding,
strengthening social ties and fostering a sense of belonging within cultural
and religious communities.
3. Social Institutions and Governance: Religion often plays a central role
in shaping social institutions, governance structures, and legal systems,
particularly in societies where religion holds significant influence.
Religious authorities and institutions may wield power over moral and
social issues, shaping public policies, laws, and social norms in accordance
with religious teachings and values.
4. Cultural Practices and Traditions: Religion influences cultural practices,
customs, and traditions, including rituals, festivals, ceremonies, and dietary
habits. These cultural expressions serve as important markers of identity,
heritage, and cultural continuity, contributing to the richness and diversity
of socio-cultural landscapes.

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5. Social Hierarchies and Inequality: Religion can reinforce social
hierarchies, divisions, and inequalities based on factors such as gender,
caste, or ethnicity. Religious doctrines and interpretations may perpetuate
discriminatory practices or restrict access to resources, opportunities, and
social privileges, exacerbating social disparities and tensions within
society.
6. Conflict and Cooperation: Religion can be a source of both conflict and
cooperation within societies. Religious differences and sectarian tensions
may fuel social unrest, violence, and conflict, particularly in multi-faith or
ethnically diverse contexts. However, religion can also serve as a catalyst
for interfaith dialogue, peacebuilding, and collaboration, fostering mutual
understanding, tolerance, and reconciliation among diverse religious
communities.
7. Education and Socialization: Religious education and institutions play a
crucial role in socializing individuals and transmitting cultural values,
beliefs, and traditions across generations. Religious schools, scriptures, and
teachings provide opportunities for spiritual development, moral
education, and cultural literacy, shaping individuals' worldview and
identity within the socio-cultural context.
Overall, religion profoundly shapes the socio-cultural environment by
influencing values, identity, social cohesion, governance, and cultural practices.
Understanding the multifaceted role of religion is essential for promoting
intercultural dialogue, social inclusion, and respectful coexistence in diverse
societies.

The socio-cultural and demographic environment greatly influences the

interaction between society and businesses. Here's a breakdown of how these
factors impact the relationship between society and business:
1. Consumer Behavior and Preferences: Socio-cultural factors such as
cultural values, norms, and lifestyles influence consumer behavior and
preferences. Businesses need to understand societal values and cultural
norms to effectively market products and services that align with consumer
preferences.
2. Corporate Social Responsibility (CSR): Societal expectations regarding
ethical business practices, environmental sustainability, and community
engagement influence businesses' CSR initiatives. Companies often
implement CSR programs to address social and environmental concerns
and enhance their reputation in society.

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3. Social Class and Economic Inequality: Socio-economic disparities and
social class structures impact purchasing power, market segmentation, and
consumption patterns. Businesses may tailor their marketing strategies and
product offerings to target specific socio-economic groups or address the
needs of underserved communities.
4. Social Media and Communication: The rise of social media and digital
technology has transformed communication between businesses and
society. Social media platforms provide opportunities for businesses to
engage with customers, gather feedback, and build brand loyalty, but they
also require companies to navigate public scrutiny and manage online
reputation effectively.
5. Workforce Diversity and Inclusion: Demographic diversity within
society influences workforce composition and organizational culture.
Businesses that embrace diversity and inclusion initiatives can benefit from
a more innovative and productive workforce, as well as improved relations
with customers and stakeholders.
6. Cultural Sensitivity and Adaptation: Businesses operating in diverse
cultural contexts must demonstrate cultural sensitivity and adaptability in
their products, services, and business practices. Understanding cultural
nuances, language preferences, and social customs is essential for building
trust and credibility with local communities.
7. Regulatory Environment and Compliance: Societal values and public
opinion often shape government regulations and policies affecting
businesses. Companies must comply with legal requirements related to
labor practices, environmental standards, consumer protection, and
corporate governance to maintain their social license to operate.
8. Community Engagement and Stakeholder Relations: Businesses have
a vested interest in maintaining positive relationships with local
communities and stakeholders. Engaging in community development
projects, philanthropy, and stakeholder dialogue can enhance businesses'
social license to operate and contribute to long-term sustainability.
9. Public Perception and Brand Reputation: Societal attitudes,
perceptions, and media coverage can significantly impact businesses' brand
reputation and public image. Companies must proactively manage their
reputation, address stakeholder concerns transparently, and demonstrate
commitment to social responsibility to safeguard their brand equity.
10.Crisis Management and Social Issues: Businesses may face reputational
risks and public backlash in response to social controversies, ethical
dilemmas, or corporate scandals. Effective crisis management strategies

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involve acknowledging responsibility, taking corrective action, and
rebuilding trust with affected stakeholders.
Overall, the socio-cultural and demographic environment shapes the
expectations, behaviors, and interactions between society and businesses.
Businesses that prioritize social responsibility, cultural sensitivity, and
stakeholder engagement are better positioned to navigate complex socio-cultural
dynamics and build sustainable relationships with diverse communities.

CS GOVIND DEWAN EIILM