B.A L.L.B. 2nd Year ECONOMICS – II Unit – I (Economics Notes)


(Economic Problems and Polities in India)


  1. Introduction

(a). Structural Changes in Indian Economy in Post 1991 period.

(b). New Economic policy, Liberalizations and Privatization


  1. Agriculture Sector

(a). Features and problems in Indian Agriculture.

(b). Land Reforms in India, Consolidation of Holdings and its impact on poverty elevation in India.


  1. Industrial Sector

(a). Industrial Policy in India since 1948 and recent Changes in with reference to economic Problems.

(b). Industrial Sickness, Causes and its remedies.

(c). Industrial relations and Trade unionism.


  1. Economic Institutions in India

(a). Single Proprietorship, Partnership.

(b). Trust and Cooperative Societies.

(c). Multinational Corporations


  1. Foreign Trade & Investment

(a). Foreign Trade Policy, major problems of Indian Export Sector.

(b). Foreign Investment; FDI.

(c). Globalization and New International Economic Order




Aggarwal A.N., Indian Economy, Vikas Publication, New Delhi. Hanumanta Rao C.H. & Joshi F.C., Reflections of Economic Development and Social Changes. Rudder Dutt& KPM Sundaram, Indian Economy, S. Chand & Co.







In this chapter you will study the growth of and structural change in the Indian economy in the last fifty years since 1950 − 51 for which data on most of the macro aggregates are available on an annual basis. We shall concentrate on the growth of gross domestic product at factor cost valued at 1993 − 94 prices. We shall consider the growth of per capita national income, also valued at 1993 − 94 prices, which can be taken as the simplest indicator of the level of living or development. In an earlier chapter, one of the notions of development was posed in terms of structural change along with growth. What do we mean by structure? Most people mean by it production structure, that is, composition of output produced by the economy. Some would like to find out how and where our labour is absorbed. Other factors such as land and capital are not given equal importance. Some would also like to find out how the production of output is divided between rural and urban areas of the country or between public and private sectors of the economy or between organized and unorganized sectors. We shall discuss all of them. But we can appreciate developments since Independence better once we have a little hint about the scene on the eve of Independence.


We had inherited an economy, which was basically geared to the interest of our colonial masters. The rate of growth of per capita income during the hundred year period before Independence, from whatever scanty information is available, was just 0.5 per cent per annum. It has further been noted that there were long spells when the economy actually stagnated or declined. In the past, we were known for producing fine cotton fabric, handicrafts and other merchandise. Even during the early British Raj, that is, before the onset of industrial revolution in Britain, our economy was an industrial economy by the standards of those days whereas the European economies had yet to usher in modern civilization. Yet, by the time we got Independence, our economy was primarily reduced to an agricultural economy and we used to export mainly raw materials and minerals for the British industries and even food grains while we might have been hungry ourselves. In 1950 − 51, our per capita income was no more than Rs. 3, 700 at 1993 − 94 prices (while in 1999 − 2000, it is a little more than Rs. 10, 000). The contribution of agriculture sector (including animal husbandry and livestock) to the GDP was around 54 per cent by current prices and 50 per cent by constant prices of 1993 − 94. If we include forestry and logging and fishing in this sector, then the contribution turns out to be 57 − 58 per cent. And, if we add mining and quarrying and call the combined sector as primary sector, the contribution of primary sector is found to be about 60 per cent. Manufacturing contributed only around 10 per cent. Contribution of the service sector was thus around 30 per cent. Most of the people were engaged in agriculture as cultivators on their own tiny holdings or as wage labourers on others ‘fields.


Growth of an economy is reckoned with growth in its GDP at constant prices. We have now a complete series of gross domestic product at 1993 − 94 prices from 1950 − 51 onwards but we give here the GDP series at five yearly interval (see above table). However, in order to give you a feel about the general tendency of rise and occasional decline in a few years in comparison to their respective preceding years, we give her a graphical presentation of the whole series. We notice from the graph that there were occasional drops in the GDP which we do not notice in the abridged Table presented here. But, generally it has been rising. Over the period of last fifty years, it has increased more than eight times. But we are and should be more interested to know whether growth rate itself has risen over time. We can also calculate rates of growth for different plan-periods or different decades or for periods divided by significant events. All such breakups have been used by scholars. We shall calculate growth rate per annum by decades only. We shall use two popular methods of calculation of annual rate of growth for long periods, viz. Average annual growth and compound annual growth rate.


Per capita income is the ratio of net national product to the (mid-year) size of population. Net national product is likely to follow the pattern of gross domestic product, as the component of net factor income from abroad is small in comparison to the total. Population has been secularly rising in the last fifty years though, of late, the rate of growth of population has started declining. We can remember that, in the case of population, we have only decennial figures and, therefore, can calculate only a single rate of growth of population. Using this technique, population size for each mid-year is interpolated. Dividing net national product by the size of population, per capita income is calculated. Annual per capita income has risen a little less than three times from a little less than Rs. 3, 700 in 1950 − 51 to over Rs10, 000 in 2000 − 01, at constant prices of 1993 − 94. In none of the years shown here, there is a decline over the year in the previous row. But, one can notice that there is hardly any rise in 1965 − 66 over 1960 − 61, that is, after a gap of five years. Generally, there is some rise in normal years. It means that 1965 − 66 was a particularly bad year. In fact, 1965 − 66 and 1966 − 67 were years of severe drought, though they gave us green revolution. However, with a view to giving you an idea about the wider fluctuations in case of per capita income, we give here the graphical presentation.


In 1990s the govt. of India in order to come out of the economic crisis decided to devite from its previous economic policies and learns towards Privatization. In July 1991 when the devaluation of Indian currency took place the govt. started announcing its new economic polices one after another. Though these polices pertained to different aspects of the economic field they had one thing in common. The economic element was to orient the Indian system towards the world market it is in this context the govt. launched its new economic policy which consisted of among other things three important features. Liberalization, Privatization and Globalization .Liberalization of the economy means to free if from direct or physical control imposed by the Govt. Economic reforms were based on the assumption that marten forces could guide the economy in a more effective manner Than Government.

The main objectives behind the launching of the new –economic policy (NEP) in 1991 by the union finance minister Dr. Manmohan Singh, could be stated as follows:

  • The main objective was to plunge Indian economy in to the arena of ‘Globalization and to give it a new thrust on market orientation.
  • The NEP intended to bring down the rate of inflation and to remove imbalances in payment.
  • It intended to move towards higher economic growth rate and to build sufficient foreign exchange reserves.
  • It wanted to achieve economic stabilization and to convert the economic in to a market economy by removing all kinds of unnecessary restrictions.
  • It wanted to permit the international flow of goods, services, capital, human resources and technology, without many restrictions.

Beginning with mid-1991, the govt. has made some radical changes in its policies bearing on trade, foreign investment exchange rate, industry, fiscal of fairs etc…The various elements, when put together, constitute an economic policy which marks a big departure from what has gone before.


The term “liberalization” in this context implies economic liberalization. “Economic liberalization” constitutes one of the basic elements of the new Economic policy (NEP) which the Indian Government launched in the middle of the year 1991. The other important aspects of the policy are –Privatization of the public sector, Globalization and market friendly state.

The main trust of the new economic policy is “liberalization”. The essence of this policy is that greater freedom is to be given to the entrepreneur of any industry, trade or business and that governmental control on the same is reduced to the minimum.

Main features of the Policy of Liberalisation:

Lessened Government control and freelance to private Enterprises.

  • Capital Markets opened for private Entrepreneurs
  • Simplification of Licensing policy
  • Opportunity to purchase foreign exchange at market prices
  • Right To Take Independent Decisions Regarding The Market
  • Better opportunity for completion
  • Widened Liberty in the Realm of Business and Trade


Privatization is a managerial approach that has attracted the interest of many categories of people academicians, politicians, government employee players of the private sector and public on the whole. Privatization has an adverse impact on the employee morale and generates fear of dislocation or termination more likely it also adds on to the apprehension pertaining to accountability and quality. Experts both advocate and criticize Privatization making it more or less provocative decision that calls for diligent scurrying by the decision makers in assessment of process and cons attached to the concerned policy.

In India Privatization has been accepted with a lot of resistance and has been dormant initially during the inception period of economic Liberalization in the country. The article intends to analyze the present status of Privatization in India and summarize its advantages and disadvantages in context with the Indian economy. Privatization is also one of the aspects other new economic policy which came to take shape in the decade 1990. The term “Privatization” can notes wide range of ideas. But the broad meaning of Privatization is that in the economic field much broader role is to be agencies and the role of the public sector activities is to be limited.

Privatisation refers to giving greater role to private sector and reducing the role of public sector. To execute policy of privatisation government took the following steps:

(a)     Disinvestment of public sector, i.e., transfer of public sector enterprise to private sector

(b)     Setting up of Board of Industrial and Financial Reconstruction (BIFR). This board was set up to revive sick units in public sector enterprises suffering loss.

(c)      Dilution of Stake of the Government. If in the process of disinvestments private sector acquires more than 51% shares then it results in transfer of ownership and management to the private sector.

Main objective of Privatization 

The process of Privatization has been triggered with the main intention of improving industrial efficiency and to facilitate the inflow of foreign investments.

  1. It also wants to make the public sector undertakings strong able efficient companies. It recommends a change in the role of the government from that of the “owner manager” to that of a mere “controller” or “regular”.
  2. It also intends to ensure efficient utilization of all types of resources including human resources.
  3. Privatization insists on the government to concentrate on the area such as education administration and infrastructure and to give up the responsibility of looking after business and running industries. It is expected to strengthen the capital market by following appropriate trade policies.



Globalizations represent one of the aspects of the new economic policy lunched in the decades of 1980 and 1990s. The new economic policy has also made the economy out wardly oriented such that its activities are now to be governed both by domestic market and the world market.

Interaction and interdependence among countries

  • Integration of world economy
  • Deterritorisation

The tem Globalization was first coined in 1980s . But even before this there were interaction among nations. But in the modern days Globalization has launched all spheres of lifesuch as economy, education, technology , cultural phenomenon , social aspects etc……the termglobal village is also frequently used to high light the significance of the Globalization . “ Globalization of production refers to the integration of economic activities by units of private capital on awaked scale .”S.K Misra and V.K Pury “stated that in simple terms Globalization means integrating economy of a country with the world economy.”

In simple words” Globalization is refers to a process of increasing economic integration and growing economic interdependence between countries in the world economy”

The word Globalization is now used to sum contemporary world order. But the influence of the Globalization of directly visible in the economic field and hence the term is very often takento me economic Globalization of market. The Globalization defined as the process whereby there are social, cultural, technological, exchange across the border.





Unit -3

Meaning of Industrial Sickness:

The strength of the industrial sector, by and large, determines the soundness of the economy.  A developing economy like India cannot afford the growing sickness in industries as it results in a colossal wastage of physical, financial and human resources. In the presence of the resource crunch, the industrial sickness becomes all the more an alarming problem. Industrial sickness usually refers to a situation when an industrial firm performs poorly, incurs losses for several years and often defaults in its debt repayment obligations.

The Reserve Bank of India has defined a sick unit as one “which has incurred a cash loss for one year and is likely to continue incurring losses for the current year as well as in the following year and the unit has an imbalance in its financial structure, such as, current ratio is less than 1: 1 and there is worsening trend in debt-equity ratio.” The State Bank of India has defined a sick unit as one “which fails to generate an internal surplus on a continuous basis and depends for its survival upon frequent infusion of funds.”

Nature and Causes of Industrial Sickness:

Competition breeds efficiency but adversely affects weak industrial units and makes them sick. The clear directional changes since 1982-83 towards liberalization of industrial licensing policies, foreign collaboration approvals, the concept of minimum-size plants are welcome from consumers’ point of view. But the weaker units have to pay the price. The inevitable cost of achieving competitive efficiency is that the weak must be allowed to fade. But the country cannot allow this to happen.

The Sick Industrial Companies (Special Provisions) Act, 1985, was enacted to help and revive the sick units. The substantive portions of the Act came into force from May 15, 1987. The Act provided for setting up of a quasi-judicial body designated as the Board for Industrial and Financial Reconstruction (BIFR) to deal effectively with the problem of sick industrial companies. The Reserve Bank of India has issued guidelines to banks to strengthen the monitoring system and to arrest industrial sickness at the incipient stage

Nature of Sickness:

Sickness in industry can be classified into:

(a)     Genuine sickness which is beyond the control of the promoters of the concern despite the sincere efforts by them,

(b)     Incipient sickness due to basic non-viability of the project, and

(c)      Induced sickness which is due to the managerial incompetence and wrong policies pursued deliberately for want of genuine stake.

This is a man-made sickness in which some unscrupulous promoters adopt fraudulent practices to start a concern and to get away with the money obtained by fraud and deceit.

The FICCI study entitled ‘Industrial Sickness — Dimensions and Perspectives’ says that the causes of sickness are both internal and external, often operating in combination. External factors are government policies on pricing, duties, taxes, high interest rates, taxes on profit, slackness in demand, sluggishness in export markets, high labour cost, inadequate availability of inputs, lack of infrastructure and the like.

The internal factors which contribute to sickness are wrong planning in relation to location, technology, capital cost, technological obsolescence, management deficiencies and industrial unrest. We explain below these external and internal factors in some detail.

External Factors:

(i) General Recessionary Trend:

Sometimes a general depression hits industrial units. This is reflected in lack of demand for industrial products in general. An overall slowdown in economic activities affects the performance of individual projects. Improper demand estimation for the products to project lands the industrial units in difficulties.

(ii) High Prices of Inputs:

When the costs of manufacture are high and sales realisation low, the industrial unit cannot stand in the market. This happens when the prices of inputs such as price of fuel such as petroleum during energy crisis goes up whereas the competitive forces keep down the prices of the products.

(iii) Non-Availability of Raw Materials:

When the supplies of raw materials are not available regularly or in good quality, the industrial units are bound to be in trouble. This often occurs in case of supply of imported raw materials.

(iv) Changes in Government Policies:

The industrial sickness is also caused by certain changes in policy designs of the government. These frequent changes affect the long-term production, financial and marketing planning of an industrial unit. Changes in Government policies regarding imports, industrial licensing, and taxation can make viable units sick. For example, liberal import policy since 1991 has rendered many small-scale industrial units sick.

(v) Infrastructure Bottlenecks

Often the infrastructure difficulty is responsible for industrial sickness. No industrial unit can survive prolonged transport and power bottlenecks.

Internal Factors:

 (i) Project Appraisal Deficiencies:

The industrial unit becomes sick when the unit has been launched without a comprehensive appraisal of economic, financial and technical viabilities of the project.

(ii) Industrial Unrest and Lack of Employee Motivation:

When there is labour discontent, no industrial unit can function smoothly and efficiently. When labour lacks motivation no good results can be expected and this results in sickness and non-viability of several industrial units.

(iii) Wrong Choice of Technology:

If the promoters use wrong technology, results are bound to be unsatisfactory. Many industrial units, especially in the small-scale sector, do not seek professional guidance in installing the correct machinery and plant. If the machinery and plant installed turn out to be defective and unsuitable, they are bound to suffer losses and become sick and non-viable.

(iv) Marketing Problems:

The industrial unit becomes sick due to product obsolescence and market saturation. The industrial unit becomes sick when its product-mix is not attuned to the consumers’ demand.

(v) Wrong Location:

If the location of an industrial unit happens to be defective either from the point of the market or the supply of inputs, it is bound to experience insurmountable difficulties.

(vi) Lack of Finance:

Inadequate financial arrangements or in the absence of timely financial aid an industrial unit is bound to come to grief. It will not be able to withstand operational losses.

(vii) Improper Capital Structure:

If capital structure proves to be unsound or unsuitable especially on account of delayed construction or operation, it will result in cost overruns or unduly large borrowing and create financial trouble for the unit concerned.

(viii) Management Deficiencies:

The biggest cause of industrial sickness is the managerial inefficiency. Lack of professional management or experienced management and the existence of hereditary management is an important cause of industrial sickness. Inefficient management results in inability to perceive things in proper perspective devoid of routine considerations. Inefficient management is also unable to build up good team and inspire confidence for an organized collective effort and takes autocratic and high-handed decisions.

(ix) Voluntary Sickness:

There is some sickness which is voluntarily invited by the entrepreneurs for various motives like getting government concession or aid from financial institutions. Thus industrial sickness cannot be attributed to any single or simple cause but may be the result of a combination of number of allied causes.

An analysis of 637 large-scale units identified that deficiency in management was responsible for 52 per cent cases of sickness. While labour troubles caused sickness only in 2 per cent of the industries, market recession and environmental factors came second with 23 per cent.

The other causes were technical factors and faulty initial planning (14 per cent) and infrastructural factors such as power cuts and shortage of critical inputs (9 per cent). Of the 637 large units, 350 could be put back on the track. Of these, 221 units, with the outstanding credit of Rs. 1,125.06 crores were put under the nursing programme.

Suggestions for Rehabilitation of Sick Units:

The rehabilitation of sick units or restoring them to normal health is a matter of great urgency in view of the serious social, economic and political consequences of industrial illness.

The following measures may be suggested:

(i) Cooperation between Term-Lending Institutions and Commercial Banks:

Since commercial banks provide working capital, they are in a position to know about the working of industrial concern. But assistance from term-lending institutions is also essential for rescue operations.

(ii) Coordination between Various Government Agencies:

All government agencies, both regulatory and promotional, must join hands to restore sick units to health.

(iii) Full cooperation from various suppliers,’ unsecured creditors and other stakeholders, particularly from the employees, is also essential to take the concern out of the difficulties in which it is involved.

(iv) Willing Cooperation and Clear Understanding with the Project Promoters:

Generally there is a lack of trust and confidence among the various interests concerned. It is found that government agencies and dealing institutions are more worried about their money and are anxious to recover them instead of curing of the health of the sick units.

(v) Checking Over-Valuationof Inventories:

The banks should verify on a regular basis the valuation of inventories both in terms of quantity and price. This would prevent over-borrowing on the hypothecation of inventories.

(vi) Marketing:

There should be well organized and scientific marketing by the project promoters otherwise launching of a project will be a leap in the dark. Good marketing arrangements will prevent industrial sickness.

(vii) Recovery of Outstanding:

Every effort should be made to realize outstanding advances so that the concern is able to gather funds to avoid sickness.

(viii) Modernisation of Machinery:

If the sick unit is to be restored to health, old and obsolete machinery and outdated technology should be discarded at the earliest.

(ix) Improving Labour Relations:

Restrictive labour and unreasonable trade unions are great obstacles. Improving labour relations will go a long way in curing industrial sickness.

(x) Efficient Management:

If necessary inefficient management should be replaced. The key to industrial health lies in alert and efficient management. The management should show a calm approach, patience and perseverance, courage and ability to steer in bad weather.

(xi) Performance Incentives:

It is necessary to offer performance incentives to the executives and the workers to induce them to put in their best efforts. This will be quite helpful in curing industrial sickness.

(xii) Sympathetic Government Attitude:

During periods of industrial illness the government agencies should adopt a sympathetic and understanding attitude so that the problem is not aggravated but moves towards a solution instead.

(xiii) Austerity and Economy:

Austerity and disciplines should be enforced at all levels. Every effort should be made in raising funds internally through the sale of excess assets, surplus machinery, etc. Uncalled for tours, lavish entertainments, unnecessary personal expenses should be ruthlessly cut down.


In view of the large-scale industrial sickness it would be necessary to organize a task force consisting of competent and experienced executives in various branches of business to go into the case and monitor recovery. Rehabilitation of sick units is not an easy and simple affair. An all-round effort is necessary to root out the disease, first necessary step is the identification of sick units which can be made viable through renovation, expansion, and diversification. Units beyond recovery should be wound up.

The second step is the reconstitution of management. Where the management is unwilling or unable to play its proper role, the financial institutions and the government agencies should intervene to fulfill their large social responsibility of ensuring efficient use of national resources. Since industrial sickness is due both to external causes, e.g., general recession, and internal causes like dishonest and inefficient management, the remedy must also lie in both directions.

With a view to meeting the situation, the early warning system is strengthened. Viability studies should be undertaken to identify the sick units including creeping sickness which could be eventually restored to health with additional financial aid on liberal and easy terms. To an extent increase in industrial sickness is inevitable result of the very process of modernisation or technological development industry. It is natural that the units which cannot keep pace with the ongoing technological change will become sick, they should be allowed to wind up.

support aid and lift sick in­dustrial units from the situations that befall them. It is also the level of service and support in terms of financial advice, assistance in related matters of insurance, release of hypothecated assets and timely finance.

The Sick Industrial Companies (Special Pro­visions) Bill, 1997, passed by LokSabha, intro­duced encouraging changes. It suggested that a time-bound procedure was to be adopted within which the scheme has to be sanctioned and BIFR would play the role of a mediator and not a court.

Technical obsolescence and financial mis­management are also important factors that lead to industrial sickness. As per the new provisions, an opportunity will be given to get an unanimous consent to a scheme from all concerned, failing which secured creditors will attempt to form a scheme and, if all this fails, the undertaking would be sold off. Only if it is not possible to do that, the BIFR may order winding up of the company.

Meaning and Definition of Industrial Relation

The relationship between Employer and employee or trade unions is called Industrial Relation. Harmonious relationship is necessary for both employers and employees to safeguard the interests of the both the parties of the production. In order to maintain good relationship with the employees, the main functions of every organization should avoid any dispute with them or settle it as early as possible so as to ensure industrial peace and higher productivity. Personnel management is mainly concerned with the human relation in industry because the main theme of personnel management is to get the work done by the human power and it fails in its objectives if good industrial relation is maintained. In other words good Industrial Relation means industrial peace which is necessary for better and higher productions.

Definition:-i. Industrial Relation is that part of management which is concerned with the manpower of the enterprise – whether machine operator, skilled worker or manager-(Bethel, Smith & Group)

  1. Industrial Relation is a relation between employer and employees, employees and employees and employees and trade unions. – (Industrial dispute Act 1947)

iii. While moving from jungle of the definitions, here, Industrial Relation is viewed as the “Process by which people and their organizations interact at the place of work to establish the terms and conditions of employment.” The Industrial relations are also called as labour – management, employee-employers relations.

Features of Industrial Relations

  1. Industrial Relation do not emerge in vacuum they are born of employment relationship in an industrial setting. Without the existence of the two parties, i.e. labour and management, this relationship cannot exist. It is the industry, which provides the environment for industrial relations.
  2. Industrial Relation are characterised by both conflict and co-operations. This is the basis of adverse relationship. So the focus of Industrial Relation is on the study of the attitudes, relationships, practices and procedure developed by the contending parties to resolve or at least minimize conflicts.
  3. As the labour and management do not operate in isolations but are parts of large system, so the study of Industrial Relation also includes vital environment issues like technology of the workplace, country’s socio-economic and political environment, nation’s labour policy, attitude of trade unions workers and employers.
  4. Industrial Relation also involve the study of conditions conductive to the labour, managements co-operations as well as the practices and procedures required to elicit the desired co-operation from both the parties.
  5. Industrial Relations also study the laws, rules regulations agreements, awards of courts, customs and traditions, as well as policy framework laid down by the governments for eliciting co-operations between labour and management. Besides this, it makes an in- depth analysis of the interference patterns of the executive and judiciary in the regulations of labour–managements relations. In fact the concepts of Industrial Relations are very broad-based, drawing heavily from a variety of discipline like social sciences, humanities, behavioral sciences, laws etc.

Objectives of Industrial Relation

Following are the important objectives of industrial relation

1)      To safeguard the interest of labour and management by securing the highest level of mutual understanding and good-will among all those sections in the industry which participate in the process of production.

2)     To avoid industrial conflict or strife and develop harmonious relations, which are an essential factor in the productivity of workers and the industrial progress of a country.

3)      To enhance productivity to a higher level in an era of full employment by lessening the tendency to high turnover and frequency absenteeism.

4)      To establish and nurse the growth of an Industrial Democracy based on labour partnership in the sharing of profits and of managerial decisions, so that ban individuals personality may grow its full stature for the benefit of the industry and of the country as well.

5)      To eliminate, as far as is possible and practicable, strikes, lockouts and gheraos by providing reasonable wages, improved living and working conditions, said fringe benefits.

6)      To establish government control of such plants and units as are running at a loss or in which productions has to be regulated in the public interest.

7)      Improvements in the economic conditions of workers in the existing state of industrial managements and political government.

8)     Control exercised by the state over industrial undertaking with a view to regulating production and promoting harmonious industrial relations.

9)      Socialisations or rationalization of industries by making the state itself a major employer.

10)   Vesting of a proprietary interest of the workers in the industries in which they are employed. The main aspect of Industrial Relations









Unit -4


We go to the market to buy items of our daily needs. In the market we find a variety of shops- some of them small and some of them big. We may find some persons selling vegetables, peanuts, newspapers etc. on the roadside. We may also find cobbler repairing shoes on the footpath. Every day you come across such types of shops in your locality. But have you ever tried to know how these businesses are run? Who are the owners of these businesses? What exactly does an owner do for any business? You may say, the owner invests capital to start the business, takes all decisions relating to business, looks after the day to day functioning of the business and finally, is responsible for the profit or loss. Yes, you are right. The owner does exactly all these things. If you go a bit further, you will find that in some businesses a single individual and in some businesses a group of individuals perform all these activities. In this lesson let us find out more about the business in which a single individual takes all initiatives to start and run the business.

In Single proprietorship business organization entrepreneur (individual) introduces his own capital, uses his own skills to manage and responsible for the results profit or loss. Unlike Limited Liability Company LLC or Corporation it does not need to be registered with the state. If you are starting a new business as a single proprietorship, registration is not necessary however there might be some complication for startup business like business license, registration with local authorities or any permit laws if needed. Owner should also have consider income tax and business debt issues because he is the one paying all his debts.

It is the easiest  way to set up a Single proprietorship business which is also known as individual entrepreneurship. The individual invests and manages the entire affairs of the enterprise. He takes all the decisions whether managerial, financial or operative and all other. Be owns and controls. He is responsible solely for the entire operating results. A sole proprietorship name might be the name of owner or under any fictions name for example “Mano Saloon”. It is just a trade name and there is no issue of separate business entity.


“It is a business unit whose ownership and management are vested in one person. The individual assumes all risks of loos or failure of the enterprise and receives all profit from its successful business operations” Paterson and Plowman


  1. Individual ownership.
  2. Individual control.
  3. Individual management—the monarch.
  4. Undivided sole responsibility of business obligations and operating results.
  5. To a larger extent no government regulation While setting business on the basis of sole proprietorship


Advantages and Disadvantages of Single Proprietorship


  1. Ease in formationWhen starting sole proprietorship, no legal formalities are required to be gone through. Because of this it is easy to form such a business organization. J. L Lundy has said that “becoming a proprietor is as simple as buying newspapers for 3 cents and selling them on a street corner for a nickel (five cents), thus, by investing 3 cent a newspaper, the purchaser (in this case the sole proprietor), earns two cents.

Any person who decides to start a business enterprise of any kind and enjoying the capacity to run it skillfully enters into business contact, sets up the organization and goes ahead with the operation. However, in some type of businesses license may be required to be obtained under the law of the land. That formality can also be easily completed.

  1. Personal Care. Solo proprietor is the monarch of his business enterprise. He,looks after his business himself. He can easily take care of all wastages; losses etc. and take corrective measures. He can take care of his customers personally and serves his customers with all care catering according to their taste and temperaments, likings and disliking.
  • Motivation. He is a motivated proprietor. He knows for all profits and losses. He is solely responsible, therefore, he does his utmost to avoid all lapses and works hard to earn as much as his capacity persists him.
  1. Coordination is Facilitated. Certainly a sole owner can easily and effectively coordinate his efforts with success. He is the sole decision maker. He can, therefore, co-ordinate not only his own efforts but the efforts of his employees also which, thus, ensures a better team work.
  2. Prompt Decision Making. It is another advantage of form of organization. Since the sole-proprietor need not consult anyone in decision making he can be prompt enough in whatever he has to decide. This helps him in taking advantage of the opportunities which come in his way.
  3. Flexibility of the Organization. Whenever any change is required in the business in the form of organisation the sole proprie­tor can easily effect the required change without any hue and cry. Policies and situations can promptly be changed in such a form of business organization.
  • Secrecy of Business Affairs. Since the entrepreneur is the master, he takes full advantage of any idea coming in his way. He implements the ideas and plans with risking the chances of their leakage to his competitors. He has no obligation to publish his accounts.He can thus, maintain top secrecy.
  • Social Usefulness. A sole business can be organized on a small scale. It is because of this it provides an opportunity to all for self-employment and at the same for wider distribution of the gains of industrial development. It prevents monopoly. It reduces economic concentration. It helps in proper and satis­factory distribution of goods and services as well as wealth and income.
  1. Preferential treatment by the Government. In the form of subsidies, concessions, loan, interest, tax rebate etc and other facili­ties the government usually accords preferential treatment to the entrepreneur.


We should not keep in mind only the merit but sole proprietorship can also suffer from different types of problems.

  1. Limitation of Management. Management requires many skill.An individual naturally suffers from such an important skill. He may be knowledgeable. He may be well-trained and have suffi­cient ability. But despite all these he may compare with two or more than two persons. Surely on the count sole proprietor may lack one thing or the other. Since he is not an expert in all matters, therefore, it is not necessary that all his decision are balanced. This can lead to a high rate of failure. Divided supervision give rise to limited span of supervision. It is rather impossible to keep one’s eyes wide open, ears well within all listening limits, rose within all smelling bounds and sufficiently, alert mind. This limits his span of supervision which mars his managing ability to a larger extent. After all an individual is only at individual with his limitations, prejudices, likings and disliking. Due to all this surely the management of the business enterprise suffers.
  2. Unlimited liability of Business Owner. The liability of the sole proprietor is unlimited. His business assets are liable to pay his business liabilities. But even after such a payment the entrepreneur cannot escape the responsibility of making payment of his debt (if it is not satisfied even after all its business assets have been realized) from his personal assets. His private property is also committed to his business liabilities. This discourages the ex­pansion of business. This certainly is a serious drawback which is inherent in this form of business ownership and management.
  • Lack of Business Continuity. One man show is good, but it does not work Always. Since the sole proprietorship depends solely on one man for its entire operations its continuity is always in danger. The entrepreneur may be seriously ill. He may go in severe condition or become insolvent. In all these case the business enterprise ceases to operate. This cause instability to the business. This instability causes social loss.
  1. Limitation of Size. Usually the sole proprietor suffers from uneconomic size. He can face lack of Finances or Managerial ability when the business becoming larger in size. Opportunities are everywhere but could not be availed off because of lack of initiative, drive, ability finances etc. Because of these reasons the sole proprietorship business may not be able to achieve what in facts it wants to achieve.


Limitations of Single Proprietorship

One-man business is the best form of business organization because of the above-discussed advantages. Still there are certain disadvantages too. Let us learn those limitations.

  1. Limited Capital: In Single proprietorship business, it is the owner who arranges the required capital of the business. It is often difficult for a single individual to raise a huge amount of capital. The owner’s own funds as well as borrowed funds sometimes become insufficient to meet the requirement of the business for its growth and expansion.
  2. Unlimited Liability: In case the Single proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or expand the business activities.
  • Lack of Continuity: The existence of Single proprietorship business is linked to the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is therefore uncertain.
  1. Limited Size: In Single proprietorship form of business organization there is a limit beyond which it becomes difficult to expand its activities. It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.
  2. Lack of Managerial Expertise: A Single proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but may be poor in marketing. Again, because of limited financial resources it is also not possible to employ a professional manager. Thus, the business lacks benefits of professional management.

Suitability of Sole Proprietorship Form of Business

Let us consider the type of businesses where sole proprietorship form is most suitable. Single proprietorship form of business organisation is suitable:

  • Where the market for the product is small and local. For example, selling grocery items, books, stationery, vegetables, etc.
  • Where customers are given personal attention, according to their personal tastes and preferences. For example, making special type of furniture, designing garments, etc.
  • Where the nature of business is simple. For example, grocery, garments business, telephone booth, etc.
  • Where capital requirement is small and risk involvement is not heavy. For example, vegetables and fruits business, tea stall, etc.
  • Where manual skill is required. For example, making jewellery, haircutting or tailoring, cycle or motorcycle repair shop, etc









You have studied that single proprietorship form of business organization has certain limitations. Its financial and managerial resources are limited. It is also not possible to expand the business activities beyond a certain limit. In order to overcome these drawbacks, another form, i.e., partnership form of business has come into existence. Let us first find out what is ‘partnership’. It is basically a relation between two or more persons who join hands to form a business organization with the objective of earning profit. The persons who join hands are individually known as ‘Partner’ and collectivelya ‘Firm’. The name under which the business is carried on is called ‘firm name’. Sultan Chand & Co, Ram Lal& Co,Gupta & Co is the names of some partnership firms. The partners provide the necessary capital, run the business jointly and share the responsibility. You must be thinking how much capital each partner contributes? Do all the partners jointly manage the business or can any of them manage the business on behalf of others? Who will take the profits? If there is any loss then who will suffer the loss? Yes, these are the few questions that might be coming to your mind. Actually, when you invite your friends to start such a business, it should be the duty of all of you to decide

  • the amount of capital to be contributed by each one of you;
  • who will manage;
  • How will the profits and losses be shared.

Thus, there must be some agreement between the partners before they actually start the business. This agreement is termed as ‘Partnership Deed’, which lays down certain terms and conditions for starting and running the partnership firm. This agreement may be oral or written. Actually, it is always better to insist on a written agreement among partners in order to avoid future controversies.

A partnership firm is governed by the provisions of the Indian Partnership Act, 1932. Section 4 of the Indian Partnership Act, 1932, defines partnership as “a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”

Features of Partnership form of business organization

After having a brief idea about partnership, let us identify the various features of this form of business organization.

  1. Two or more Members – You know that the members of the partnership firm are called partners. But do you know how many persons are required to form a partnership firm? At least two members are required to start a partnership business. But the number of members should not exceed 10 in case of banking business and 20 in case of other business. If the number of members exceeds this maximum limit then that business cannot be termed as partnership business. A new form of business will be formed, the details of which you will learn in your next lesson.
  2. Agreement: Whenever you think of joining hands with others to start a partnership business, first of all, there must be an agreement between all of you. This agreement containso the amount of capital contributed by each partner; o profit or loss sharing ratio; o salary or commission payable to the partner, if any; o duration of business, if any ; o name and address of the partners and the firm; o duties and powers of each partner; o nature and place of business; and o any other terms and conditions to run the business.
  • Lawful Business – The partners should always join hands to carry on any kind of lawful business. To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of the law. Again, doing social or philanthropic work is not termed as partnership business.
  1. Competence of Partners – Since individuals join hands to become the partners, it is necessary that they must be competent to enter into a partnership contract. Thus, minors, lunatics and insolvent persons are not eligible to become the partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only
  2. Sharing of Profit – The main objective of every partnership firm is sharing of profits of the business amongst the partners in the agreed proportion. In the absence of any agreement for the profit sharing, it should be shared equally among the partners. Suppose, there are two partners in the business and they earn a profit of Rs. 20,000. They may share the profits equally i.e., Rs. 10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs 5,000/- and Rs. 15000/-.
  3. Unlimited Liability – Just like the sole proprietor the liability of partners is also unlimited. That means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can also be utilised to meet the business liabilities. Suppose, the firm has to make payment of Rs. 25,000/- to the suppliers of goods. The partners are able to arrange only Rs. 19,000/- from the business. The balance amount of Rs. 6,000/- will have to be arranged from the personal properties of the partners.
  • Voluntary Registration – It is not compulsory that you register your partnership firm. However, if you don’t get your firm registered, you will be deprived of certain benefits, therefore it is desirable. The effects of non-registration are: o Your firm cannot take any action in a court of law against any other parties for settlement of claims. o In case there is any dispute among partners, it is not possible to settle the disputes through a court of law. o Your firm cannot claim adjustments for amount payable to or receivable from any other parties.
  • No Separate Legal Existence– Just like sole proprietorship, partnership firm also has no separate legal existence from that of it owners. Partnership firm is just a name for the business as a whole. The firm means the partners and the partners collectively mean the firm.
  1. Principal Agent Relationship – All the partners of the firm are the joint owners of the business. They all have an equal right to actively participate in its management. Every partner has a right to act on behalf of the firm. When a partner deals with other parties in business transactions, he/she acts as an agent of the others and at the same time the others become the principal. So there always exists a principal agent relationship in every partnership firm.
  2. Restriction on Transfer of Interest – No partner can sell or transfer his interest to any one without the constent of other partners. For example – A, B, and C are three partners. A wants to sell his share to D as his health does not permit him to work any more. He can not do so until B and C both agree.
  3. Continuity of Business – A partnership firm comes to an end in the event of death, lunacy or bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the partners. At any time, they may take a decision to end their relationship.

Advantages of partnership form of business organisation

Partnership form of business organisation has certain advantages, which are as follows –

  1. Easy to form: Like sole proprietorship, the partnership business can be formed easily without any legal formalities. It is not necessary to get the firm registered. A simple agreement, either oral or in writing, is sufficient to create a partnership firm.
  2. Availability of large resources – Since two or more partners join hand to start partnership business it may be possible to pool more resources as compared to sole proprietorship. The partners can contribute more capital, more effort and also more time for the business.
  • Better decisions – The partners are the owners of the business. Each of them has equal right to participate in the management of the business. In case of any conflict they can sit together to solve the problems. Since all partners participate in decision-making, there is less scope for reckless and hasty decisions.
  1. Flexibility in operations – The partnership firm is a flexible organisation. At any time the partners can decide to change the size or nature of business or area of its operation. There is no need to follow any legal procedure. Only the consent of all the partners is required.
  2. Sharing risks – In a partnership firm all the partners share the business risks. For example, if there are three partners and the firm suffers a loss of Rs. 12,000 in a particular period, then all partners may share it and the individual burden will be Rs. 4,000 only.
  3. Protection of interest of each partner – In a partnership firm every partner has an equal say in decision making. If any decision goes against the interest of any partner he can prevent the decision from being taken. In extreme cases a dissenting partner may withdraw himself from the business and can dissolve it.
  • Benefits of specialization – Since all the partners are owners of the business they can actively participate in every aspect of business as per their specialisation and knowledge. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, another in labour cases and so on as per their specialization. Similarly two or more doctors of different specialization may start a clinic in partnership.

Limitations of Partnership form of Business Organisation

Inspite of all these advantages as discussed above, a partnership firm also suffers from certain limitations. Let us discuss all these limitations.

  1. Unlimited Liability: All the partners are jointly as well as separately liable for the debt of the firm to an unlimited extent. Thus, they can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties.
  2. Uncertain Life: The partnership firm has no legal entity separate from its partners. It comes to an end with the death, insolvency, incapacity or the retirement of any partner. Further, any dissenting member can also give notice at any time for dissolution of partnership.
  • Lack of Harmony: You know that in partnership firm every partner has an equal right to participate in the management. Also every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this sometimes there is a possibility of friction and quarrel among the partners. Difference of opinion may lead to closure of the business on many occasions.
  1. Limited Capital: Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form.
  2. No transferability of share: If you are a partner in any firm you cannot transfer your share of interest to outsiders without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.

Types of Partners

In a partnership firm you can find different types of partners. Some may actively participate in the business while others prefer not to keep themselves engaged actively in the business activities after contributing the required capital. Also there are certain kinds of partners who neither contribute capital nor actively participate in the day-to-day business operations. Let us learn more about them.

  1. Active partners – The partners who actively participate in the day-to-day operations of the business are known as active or working partners. They contribute capital and are also entitled to share the profits of the business. They are also liable for the debts of the firm.
  2. Dormant partners – Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or sleeping partners. They only contribute capital and share the profits or bear the losses, if any.
  • Nominal partners – These partners only allow the firm to use their name as a partner. They do not have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the conduct of the business of the firm. However, they remain liable to third parties for the acts of the firm.
  1. Minor as a partner -You learnt that a minor i.e., a person under 18 years of age is not eligible to become a partner. However in special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.
  2. Partner by estoppel – If a person falsely represents himself as a partner of any firm or behaves in a way that somebody can have an impression that such person is a partner and on the basis of this impression transacts with that firm then that person is held liable to the third party. The person who falsely represents himself as a partner is known as partner by estoppel. Take an example. Suppose in Ram Hari& Co firm there are two partners. One is Ram, the other is Hari. If Giri- an outsider represents himself as a partner of Ram Hari& Co and transacts with Madhu then Giri will be held liable for any loss arising to Madhu. Here Giri is partner by estoppel.
  3. Partner by holding out – In the above example, if either Ram or Hari declares that Gopal is a partner of their firm and knowing this declaration Gopal remains silent then Gopal will be liable to those parties who suffer losses by transacting with Ram Hari& Co with a belief that Gopal is a partner of that firm. Here Gopal is liable to those parties who suffer losses and Gopal will be known as partner by holding out.

Difference between Partnership and Single  Proprietorship for of business

The difference between a partnership and sole proprietorship form of business may be follows. This helps the entrepreneur in selecting form of business of his choice.

  1. Membership: Partnership is owned by two or more persons subject to the limit ten in banking business and twenty in case of other business. Single proprietorship is owned by one and only one person.
  2. Formation: It is formed through an agreement which may be oral or in writing, is formed quite easily as it is the outcome of a single person’s decision without any legal administrative approval.
  • Registration: The registration is not compulsory. It needs no registration excepting some compliance. Regulating law: It is governed by the rules contained under the Indian Partnership Act, 1932. There is no specific statutory law to govern the functioning of sole/single proprietors business.
  1. Capital: There is more scope for raising a larger amount of capital as there < more than one person. It has a limited financial capability. Hence, the scope for rising capital is naturally least.
  2. Management: Every partner has the right to take active part in the management the affairs of the business. Each partner also enjoys the authority to bind the firm and other partners for his acts in the ordinary course of business. The sole/ single proprietorship is self-managed one and few employees may support him. However, the decision of the proprietor is final and binding.
  3. Risk: The risk connected with the business is comparatively less as it is shared all ,the partners. The risk of the sole/single proprietor is greater than that of partnership form business.
  • Duration: It continues as long as the partners desire. Even though legally it co to an end on the death, insolvency or retirement of any of the partners, the business i continue with the remaining partners. It comes to an end with the death, insolvency incapacity of the proprietor. Thus, there is uncertainty of duration of sole proprietorship
  • Quickness in decision-making: Decision-making in partnership is corporately delayed as the partners arrive at decision after the consultation with one another. The decision of the sole proprietor is prompt as he need not consult anyone.
  1. Maintenance of secrecy: Maintenance of absolute secrecy is not possible in of partnership as business secrets are accessible to more than one partner. The single proprietor need not share his business secrets with anybody.

The Similarities and Difference between Sole/Single Proprietorship and Partnership

  1. Full Liability: both sole proprietorships and partnerships place full debt and legal liability onto the shoulders of the operators. This means that if creditors need to recover bad debts incurred by the business, the operators’ personal assets may be at risk. In the event of a lawsuit against the business, the operators assume full responsibility for any financial obligations that may be a part of a judgment. The business and the operator(s) are the same entity in the eyes of the law.
  2. Taxation The government requires that business owners report profits from sole proprietorships and partnerships on their personal income tax forms. Both sole proprietorships and partnerships do not pay corporate income tax. The owners pay taxes on earnings from the business or receive a deduction for any losses. In a general partnership, the percentage of business income or loss reported on individual tax returns may differ according to the partnership agreement. For example, one partner may receive and report 60 percent of the company’s profit or loss, while the other partner receives and reports 40 percent.
  • Reporting The federal government does not require that sole proprietorships file any type of annual report. In contrast, general partnerships must file an annual return with the Internal Revenue Service (IRS). The return indicates the company’s annual income, tax deductions, gains and losses from operations. This is merely part of a check and balance system which ensures that each partner accurately reports the correct amount on his individual tax return. According to the IRS, partnerships may need to file forms 1065, 940, 941, and 8109-B.
  1. Ownership and Responsibility One owner and operator forms a sole proprietorship. A single individual makes all of the strategic decisions related to the business. In a sole proprietorship, one person receives the profits. Sole proprietors may operate out of their homes. General partnerships involve two or more owners. Partners may have a written or implied verbal agreement with each other. One owner may only handle certain aspects of the business, such as sales. Partners may equally contribute to start-up costs or one owner may finance a larger portion of the company’s operations

Meaning of Co-operative Society

Let us take one example. Suppose a poor villager has two cows and gets ten litres of milk. After consumption by his family everyday he finds a surplus of five liters of milk. What can he do with the surplus? He may want to sell the milk but may not find a customer in the village. Somebody may tell him to sell the milk in the nearby town or city. Again he finds it difficult, as he does not have money to go to the town to sell milk. What should he do? He is faced with a problem. Do you have any solution for him? One day that poor villager met a learner of NIOS who had earlier read this lesson. The learner told him, you see, you are not the only person facing this problem. There are many others in your village and also in the nearby village who face a similar problem. Why don’t you all sit together and find a solution to your common problem? In the morning you can collect the surplus milk at a common place and send somebody to the nearby town to sell it. Again in the evening, you can sit together and distribute the money according to your contribution of milk. Of course first you have to deduct all the expenses from the sale proceeds. That villager agreed to what the learner said. He told everybody about this new idea and formed a group of milk producers in his village. By selling the milk in the nearby town they were all able to earn money. After that they did not face any problem of finding a market for the surplus milk. This process continued for a long time. One day somebody suggested that instead of selling only milk why not produce other milk products like ghee, butter, cheese, milk powder etc. and sell them in the market at a better price? All of them agreed and did the same. They produced quality milk products and found a very good market for their products not only in the nearby town but in the entire country. Just think it over. A poor villager, who was not able to sell five litres of milk in his village, is now selling milk and milk products throughout the nation. He is now enjoying a good life. How did it happen? Who made it possible? This is the reward of a joint effort or co– operation. The term co-operation is derived from the Latin word co-operari, where the word co means ‘with’ and operari means ‘to work’. Thus, co-operation means working together. So those who want to work together with some common economic objective can form a society which is termed as “co-operative society”. It is a voluntary association of persons who work together to promote their economic interest. It works on the principle of self-help as well as mutual help. The main objective is to provide support to the members. Nobody joins a cooperative society to earn profit. People come forward as a group, pool their individual resources, utilise them in the best possible manner, and derive some common benefit out of it. In the above example, all producers of milk of a village joined hands, collected the surplus milk at a common place and sold milk and milk products in the market. This was possible because of their joint effort. Individually it would not have been possible either to sell or produce any milk product in that village. They had formed a co-operative society for this purpose. In a similar way, the consumers of a particular locality can join hands to provide goods of their daily need and thus, form a co-operative society. Now they can buy goods directly from the producers and sell those to members at a cheaper price. Why is the price cheaper? Because they buy goods directly from the producer and thereby the middlemen’s profit is eliminated. Do you think it would have been possible on the part of a single consumer to buy goods directly from the producers? Of course, not. In the same way people can form other types of co-operative societies as well. Let us know about them.

Types of Co-operative Societies

Although all types of cooperative societies work on the same principle, they differ with regard to the nature of activities they perform. Followings are different types of co-operative societies that exist in our country.

  1. Consumers’ Co-operative Society: These societies are formed to protect the interest of general consumers by making consumer goods available at a reasonable price. They buy goods directly from the producers or manufacturers and thereby eliminate the middlemen in the process of distribution. KendriyaBhandar, Apna Bazar and SahkariBhandar are examples of consumers’ co-operative society.
  2. Producers’ Co-operative Society: These societies are formed to protect the interest of small producers by making available items of their need for production like raw materials, tools and equipments, machinery, etc. Handloom societies like APPCO, Bayanika, Haryana Handloom, etc., are examples of producers’ co-operative society.
  • Co-operative Marketing Society: These societies are formed by small producers and manufacturers who find it difficult to sell their products individually. The society collects the products from the individual members and takes the responsibility of selling those products in the market. Gujarat Co-operative Milk Marketing Federation that sells AMUL milk products is an example of marketing co-operative society.
  1. Co-operative Credit Society: These societies are formed to provide financial support to the members. The society accepts deposits from members and grants them loans at reasonable rates of interest in times of need. Village Service Co-operative Society and Urban Cooperative Banks are examples of co-operative credit society.
  2. Co-operative Farming Society: These societies are formed by small farmers to work jointly and thereby enjoy the benefits of large-scale farming. Lift-irrigation cooperative societies and pani-panchayats are some of the examples of co-operative farming society.
  3. Housing Co-operative Society: These societies are formed to provide residential houses to members. They purchase land, develop it and construct houses or flats and allot the same to members. Some societies also provide loans at low rate of interest to members to construct their own houses. The Employees’ Housing Societies and Metropolitan Housing Co-operative Society are examples of housing co-operative society



Characteristics of Co-operative Society

A co-operative society is a special type of business organisation different from other forms of organsation you have learnt earlier. Let us discuss its characteristics. .

  1. Open membership: The membership of a Co-operative Society is open to all those who have a common interest. A minimum of ten members are required to form a cooperative society. The Co–operative society Act does not specify the maximum number of members for any co-operative society. However, after the formation of the society, the member may specify the maximum number of members..
  2. Voluntary Association: Members join the co-operative society voluntarily, that is, by choice. A member can join the society as and when he likes, continue for as long as he likes, and leave the society at will..
  • State control: To protect the interest of members, co-operative societies are placed under state control through registration. While getting registered, a society has to submit details about the members and the business it is to undertake. It has to maintain books of accounts, which are to be audited by government auditors.
  1. Sources of Finance: In a co-operative society capital is contributed by all the members. However, it can easily raise loans and secure grants from government after its registration.
  2. Democratic Management: Co-operative societies are managed on democratic lines. The society is managed by a group known as “Board of Directors”. The members of the board of directors are the elected representatives of the society. Each member has a single vote, irrespective of the number of shares held. For example, in a village credit society the small farmer having one share has equal voting right as that of a landlord having 20 shares.
  3. Service motive: Co-operatives are not formed to maximise profit like other forms of business organisation. The main purpose of a Co-operative Society is to provide service to its members. For example, in a Consumer Co-operative Store, goods are sold to its members at a reasonable price by retaining a small margin of profit. It also provides better quality goods to its members and the general public.
  • Separate Legal Entity: A Co-operative Society is registered under the Co-operative Societies Act. After registration a society becomes a separate legal entity, with limited liability of its members. Death, insolvency or lunacy of a member does not affect the existence of a society. It can enter into agreements with others and can purchase or sell properties in its own name.

Advantages of Co-operative Society

A Co-operative form of business organisation has the following advantages:

  1. Easy Formation: Formation of a co-operative society is very easy compared to a joint stock company. Any ten adults can voluntarily form an association and get it registered with the Registrar of Co-operative Societies.
  2. Open Membership: Persons having common interest can form a co-operative society. Any competent person can become a member at any time he/she likes and can leave the society at will.
  • Democratic Control: A co-operative society is controlled in a democratic manner. The members cast their vote to elect their representatives to form a committee that looks after the day-to-day administration. This committee is accountable to all the members of the society.
  1. LimitedLiability: The liability of members of a co-operative society is limited to the extent of capital contributed by them. Unlike sole proprietors and partners the personal properties of members of the co-operative societies are free from any kind of risk because of business liabilities.
  2. Elimination of Middlemen’s Profit: Through co-operatives the members or consumers control their own supplies and thus, middlemen’s profit is eliminated.
  3. StateAssistance: Both Central and State governments provide all kinds of help to the societies. Such help may be provided in the form of capital contribution, loans at low rates of interest, exemption in tax, subsidies in repayment of loans, etc.
  • Stable Life: A co-operative society has a fairly stable life and it continues to exist for a long period of time. Its existence is not affected by the death, insolvency, lunacy or resignation of any of its members

Limitations of Co–operative Society

Besides the above advantages, the co-operative form of business organisation also suffers from various limitations. Let us learn these limitations.

  1. Limited Capital: The amount of capital that a cooperative society can raise from its member is very limited because the membership is generally confined to a particular section of the society. Again due to low rate of return the members do not invest more capital. Government’s assistance is often inadequate for most of the co-operative societies.
  2. Problems in Management: Generally it is seen that co-operative societies do not function efficiently due to lack of managerial talent. The members or their elected representatives are not experienced enough to manage the society. Again, because of limited capital they are not able to get the benefits of professional management.
  • Lack of Motivation: Every co-operative society is formed to render service to its members rather than to earn profit. This does not provide enough motivation to the members to put in their best effort and manage the society efficiently.
  1. Lack of Co-operation: The co-operative societies are formed with the idea of mutual co-operation. But it is often seen that there is a lot of friction between the members because of personality differences, ego clash, etc. The selfish attitude of members may sometimes bring an end to the society.
  2. Dependence on Government: The inadequacy of capital and various other limitations make cooperative societies dependant on the government for support and patronage in terms of grants, loans subsidies, etc. Due to this, the governments sometimes directly interfere in the management of the society and also audit their annual accounts.

    Multinational corporations (MNCs)

These are the corporations that has its head quarters in one state and operates in other countries; these corporation are called subsidiary MNCs, works independently and do not alloy the participation of host country.

  • The combination of companies of different nationalities connected by means for share holding”.
  • “To a remarkable extent, the ownership and control of both productions and distributions outside the communist countries.” (C.S BURCHILL)
  • “MNCs are those companies that control facilities in two or more countries” (MENIS).
  • “These are transnational corporation takes the advantage of the policy making of another country” (SERANTH)


     Advantages of Multinational Corporations (MNCs)

  1. Globalization
  2. Increase world dependency
  3. No war
  4. Integration of world mind
  5. Mixture of whole world culture
  6. Transfer of technology
  7. Economic growth
  8. Job opportunities
  9. Multinational Corporations MNCs produce more and better products
  10. World modernization
  11. Multinational Corporations MNCs brings foreign exchange
  12. Multinational Corporations MNCs take economic risk


Disadvantages of Multinational Corporations (MNCs)

  1. Threat to host-state interests
  2. Integration is impossible
  3. Exploit host countries
  4. Changed necessities into luxuries
  5. Destruction of cultural values and social values
  6. Participation in host country politics
  7. Changed People Minds
  8. Population
  9. Destroyed natural resources
  10. Effected local business
  11. Creating Gap
  12. To demolished the culture and traditions of the host countries
  13. Transfer of over price technology


Role ofMultinational corporations (MNCs)

Multinational corporations (MNCs) are huge industrial organizations having a wide network of branches and subsidiaries spread over a number of countries. The two main characteristics of MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies. Such a company may enter into joint venture with a company in another country. There may be agreement among companies of different countries in respect of division of production, market, etc. These companies are to be found in almost all the advanced countries, with the USA perhaps the biggest amongst them. Their operations extend beyond their own countries, and cover not only the advanced countries but also the LDCs.

Many MNCs have annual sales volume in excess of the entire GNPs of the developing countries in which they operate. MNCs have great impact on the development process of the Underdeveloped countries.

Let us discuss the arguments for and against the operation of MNCs in underdeveloped countries.

Arguments for MNCs(The positive role): The MNCs play an important role in the economic development of underdeveloped countries.

  1. Filling Savings Gap:The first important contribution of MNCs is its role in filling the resource gap between targeted or desired investment and domestically mobilized savings. For example, to achieve a 7% growth rate of national output if the required rate of saving is 21% but if the savings that can be domestically mobilized is only 16% then there is a ‘saving gap’ of 5%. If the country can fill this gap with foreign direct investments from the MNCs, it will be in a better position to achieve its target rate of economic growth.
  2. Filling Trade Gap: The second contribution relates to filling the foreign exchange or trade gap. An inflow of foreign capital can reduce or even remove the deficit in the balance of payments if the MNCs can generate a net positive flow of export earnings.
  3. Filling Revenue Gap: The third important role of MNCs is filling the gap between targeted governmental tax revenues and locally raised taxes. By taxing MNC profits, LDC governments are able to mobilize public financial resources for development projects.
  4. Filling Management/Technological Gap:Fourthly, Multinationals not only provide financial resources but they also supply a “package” of needed resources including management experience, entrepreneurial abilities, and technological skills. These can be transferred to their local counterparts by means of training programs and the process of ‘learning by doing’.

Moreover, MNCs bring with them the most sophisticated technological knowledge about production processes while transferring modern machinery and equipment to capital poor LDCs. Such transfers of knowledge, skills, and technology are assumed to be both desirable and productive for the recipient country.



  1. Other Beneficial Roles:The MNCs also bring several other benefits to the host country.

(a)     The domestic labour may benefit in the form of higher real wages.

(b)     The consumers benefits by way of lower prices and better quality products.

(c)      Investments by MNCs will also induce more domestic investment. For example, ancillary units can be set up to ‘feed’ the main industries of the MNCs

(d)     MNCs expenditures on research and development(R&D), although limited is bound to benefit the host country.

Apart from these there are indirect gains through the realization of external economies.

Arguments Against MNCs(The negative role): There are several arguments against MNCs which are discuss below.

  1. Although MNCs provide capital, they may lower domestic savings and investment rates by stifling competition through exclusive production agreements with the host governments. MNCs often fail to reinvest much of their profits and also they may inhibit the expansion of indigenous firms.
  2. Although the initial impact of MNC investment is to improve the foreign exchange position of the recipient nation, its long-run impact may reduce foreign exchange earnings on both current and capital accounts. The current account may deteriorate as a result of substantial importation of intermediate and capital goods while the capital account may worsen because of the overseas repatriation of profits, interest, royalties, etc.
  3. While MNCs do contribute to public revenue in the form of corporate taxes, their contribution is considerably less than it should be as a result of liberal tax concessions, excessive investment allowances, subsidies and tariff protection provided by the host government.
  4. The management, entrepreneurial skills, technology, and overseas contacts provided by the MNCs may have little impact on developing local skills and resources. In fact, the development of these local skills may be inhibited by the MNCs by stifling the growth of indigenous entrepreneurship as a result of the MNCs dominance of local markets.
  5. MNCs’ impact on development is very uneven. In many situations MNC activities reinforce dualistic economic structures and widens income inequalities. They tend to promote the interests of some few modern-sector workers only. They also divert resources away from the production of consumer goods by producing luxurious goods demanded by the local elites.
  6. MNCs typically produce inappropriate products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country.
  7. The behaviour pattern of MNCs reveals that they do not engage in R & D activities in underdeveloped countries. However, these LDCs have to bear the bulk of their costs.
  8. MNCs often use their economic power to influence government policies in directions unfavorable to development. The host government has to provide them special economic and political concessions in the form of excessive protection, lower tax, subsidized inputs, cheap provision of factory sites. As a result, the private profits of MNCs may exceed social benefits.
  9. Multinationals may damage the host countries by suppressing domestic entrepreneurship through their superior knowledge, worldwide contacts, and advertising skills. They drive out local competitors and inhibit the emergence of small-s.











Unit -5


On 1st April 2015, the new Foreign Trade Policy (FTP) for the period 2015-20 was announced which replaces the 2009-14 FTP which expired on 31st March 2014. With the announcement of new policy, exporters’ one-year wait for new FTP has come to end.

India’s Foreign Trade Policy also known as Export Import Policy (EXIM) in general, aims at developing export potential, improving export performance, encouraging foreign trade and creating favorable balance of payments position. Foreign Trade Policy is prepared and announced by the Central Government (Ministry of Commerce). Foreign Trade Policy or EXIM Policy is a set of guidelines and instructions established by the DGFT (Directorate General of Foreign Trade) in matters related to the import and export of goods in India.

The foreign trade policy, has offered more incentives to exporters to help them tide over the effects of a likely demand slump in their major markets such as the US and Europe.

Foreign trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries.

The Foreign Trade Policy of India is guided by the Export Import in known as in short EXIM Policy of the Indian Government and is regulated by the Foreign Trade Development and Regulation Act, 1992.

DGFT (Directorate General of Foreign Trade) is the main governing body in matters related to EXIM Policy. The main objective of the Foreign Trade (Development and Regulation) Act is to provide the development and regulation of foreign trade by facilitating imports into, and augmenting exports from India. Foreign Trade Act has replaced the earlier law known as the imports and Exports (Control) Act 1947.

Indian EXIM Policy contains various policy related decisions taken by the government in the sphere of Foreign Trade, i.e., with respect to imports and exports from the country and more especially export promotion measures, policies and procedures related thereto.

Objectives Of The FTP (EXIM) Policy: –
The main objectives are:
a. To accelerate the economy from low level of economic activities to high level of economic activities by making it a globally oriented vibrant economy and to derive maximum benefits from expanding global market opportunities.
b. To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components,’ consumables and capital goods required for augmenting production.
c. To enhance the techno local strength and efficiency of Indian agriculture, industry and services, thereby, improving their competitiveness.
d. To generate employment. Opportunities and encourage the attainment of internationally accepted standards of quality.
e. To provide quality consumer products at reasonable prices.

Governing Policy – Institutions 

The Government of India notifies the foreign trade Policy for a period of five years (for example 2015 -20) under Section 5 of the Foreign Trade (Development and Regulation Act), 1992. The current Export Import Policy covers the period 2015-2020. The FTP is updated every year on the 31st of March and the modifications, improvements and new schemes become effective from 1st April of every year.

All types of changes or modifications related to the EXIM Policy is normally announced by the Union Minister of Commerce and Industry who co-ordinates with the Ministry of Finance, the Directorate General of Foreign Trade and network of DGFT Regional Offices.

FTP 2015-2020

Some highlights of the present  Foreign Trade Policy 2015-2020


  • India to be made a significant participant in world trade by 2020
  • Commerce Minister announced two new schemes in Foreign Trade Policy 2015-2020Two New Schemes announced in FTP Are MEIS & SEIS. FTP 2015-20 introduces two new schemes, namely “Merchandise Exports from India Scheme (MEIS)” and “Services Exports from India Scheme (SEIS)”. These schemes (MEIS and SEIS) replace multiple schemes earlier in place, each with different conditions for eligibility and usage.
  • Merchandize exports from India (MEIS) to promote specific services for specific Markets Foreign Trade Policy
  • For services, all schemes have been replaced by a ‘Services Export from India Scheme'(SEIS), which will benefit all services exporters in India.
  • FTP would reduce export obligations by 25% and give boost to domestic manufacturing
  • Incentives (MEIS & SEIS) to be available for SEZs also. FTP benefits from both MEIS & SEIS will be extended to units located in SEZs. – Both MEIS and SEIS firms and service providers can now get subsidized office spaces in SEZ (Special Economic Zones), along with other benefits. With a view to boost the Special Economic Zones, Government has decided to extend both the incentive schemes for export of goods and services to units in SEZs.
  • e-Commerce of handicrafts, handlooms, books etc., eligible for benefits of MEIS. e-Commerce exports up to Rs.25000 per consignment will get SFIS benefits.
  • e-Commerce Exports Eligible For Services Exports From India Scheme. – As part of Digital India vision, mobile apps would be created to ease filing of taxes and stamp duty, automatic money transfer using Internet Banking have been proposed. > Online procedure to upload digitally signed document by Chartered Accountant/Company Secretary/Cost Accountant to be developed.
  • Agricultural and village industry products to be supported across the globe at rates of 3% and 5% under MEIS. Higher level of support to be provided to processed and packaged agricultural and food items under MEIS.
  • Industrial products to be supported in major markets at rates ranging from 2% to 3%.
  • Branding campaigns planned to promote exports in sectors where India has traditional Strength.
  • Business services, hotel and restaurants to get rewards scrips under SEIS at 3% and other specified services at 5%.
  • Duty credit scrips to be freely transferable and usable for payment of customs duty, excise duty and service tax.
  • Debits against scrips would be eligible for CENVAT credit or drawback also.
  • Nomenclature of Export House, Star Export House, Trading House, Premier Trading House certificate changed to 1,2,3,4,5 Star Export House. – Some major overhauling of nomenclature and naming have been done. For instance, Export House, Star Export House, Trading House, Star Trading House, Premier Trading House certificate has been changed to One, Two, Three, Four, Five Star Export House. The allocation of the status will now be based on US dollars, instead of Indian Rupees
  • The criteria for export performance for recognition of status holder have been changed from Rupees to US dollar earnings. – A new position called ‘Status Holder’ have been formulated, which will recognize and reward those entrepreneurs who have helped India to become a major export player. All IT and ITeS firms, Outsourcing companies and KPOs can rejoice.
  • Manufacturers who are also status holders will be enabled to self-certify their manufactured goods as originating from India. – Tax and duty on Indian manufacturers have been reduced, to boost Make in India vision
  • Reduced Export Obligation (EO) (75%) for domestic procurement under EPCG scheme.
  • Inter-ministerial consultations to be held online for issue of various licences.
  • No need to repeatedly submit physical copies of documents available on Exporter Importer Profile.
  • Validity period of SCOMET export authorisation extended from present 12 months to 24 months.



Impact on the Economy:

According to some experts the focus in this FTP has been “Simplicity And Stability”. Accordingly, the policy on the one hand seeks to realign the multiple schemes with the objective of reducing complexities. On the other had it want to promote the increased use of technology to reduce the transaction cost and manual compliances.

Supporters have given their verdict for this new FTP, stating it as ‘progressive’, ‘path breaking’ and ‘development friendly’ as exports of books, handicraft, handlooms, toys, textiles, defence and ecommerce platforms would be easier and faster.According to them, a big step is cleaning up the plethora of export promotion schemes and clubbing them under two schemes, one for goods (Merchandise Exports from India Scheme) and one for services (Services Exports from India Scheme).The duty scrips under these schemes come without conditions and can be freely transferred.

One significant announcement in the policy is that it will move away from relying largely on subsidies and sops. Critics however point out that, this is prompted by World Trade Organisation (WTO) requirements that export promotion subsidies should be phased out, but according to some experts there are ways of getting around it and other countries are doing it all the time.

There has been talk of boosting services exports for quite a few years now, but information technology and information technology-enabled services (IT/ITES) dominated the basket. The share of this segment in the overall export basket is 50 percent and 90 percent in the services export basket.

More importantly, this sector was overly dependent on western markets and, consequently, extremely vulnerable to even the smallest of developments there. The policy, fortunately, turns its attention to other sectors where India has inherent advantages – healthcare, education, R&D, logistics, professional services, entertainment, as well as services incidental to manufacturing.

By extending benefits under EPCG on domestic procurements and offering them more products under MEIS, the policy further seeks to incentives the exports. Right direction.

According to the Commerce Minister NirmalaSitaraman, It’s a focused policy, one in which exports through Make in India is underlined by looking at sectors that give greater employment and have high-tech value addition. That is because the intention is to join the global value chain and above all, the environment part, where you are looking at eco-friendly systems and producing wealth out of waste. So, the priority areas are technology-driven, labour-intensive-driven and environment-driven. You are also looking at traditional markets, emerging markets and diversifying into new markets.


Limitations Of Foreign Trade

Rapid Depletion of Exhaustible Natural Resources:

It could lead to a more rapid depletion of exhaustible natural resources.

As countries begin to up their production levels, natural resources tend to get depleted with the time and it could pose a dangerous threat to the future generation.

Import of Harmful Goods:

Foreign trade may lead to import of harmful goods like cigarettes, drugs, etc., which may harm the health of the residents of the country. For example, the people of China suffered greatly through opium imports.

It may Exhaust Resources:

International trade leads to intensive cultivation of land. Thus, it has the operations of law of diminishing returns in agricultural countries. It also makes a nation poor by giving too much burden over the resources

Over Specialization:

Over specialization may be disastrous for a country. A substitute may appear and ruin the economic lives of millions

Danger of Starvation:

A country might depend for its food mainly on foreign countries. In times of war, there is a serious danger of starvation for such countries.

One Country Gains at the Expense of Other:

One of the serious drawbacks of foreign trade is that one country may gain at the expense of other due to certain accidental advantages. For example, the Industrial revolution is Great Britain ruined Indian handicrafts during the nineteenth century.

May Lead to War:

Foreign trade may lead to war different countries compete with each other in finding out new markets and sources of raw material for their industries and frequently come into clash. This was one of the causes of first and Second World War.

Language Diversity:

Each country has its own language. As foreign trade involves trade between two or more countries, there is diversity of languages. This difference in language creates problem in foreign trade.

Problems of Indian Export Sector.

 Primary Exporting:

Most of the developing countries, in its initial stage of development are exporting mostly primary products and thus cannot fetch a good price of its product in the foreign market. In the absence of diversification of its export, the developing countries have failed to raise its export earnings.


Un-Favourable Terms of Trade:

Another problem of trade faced by these developing countries is that the terms of trade are always going against it. In the absence of proper infrastructure and the quality enhancement initiative, the terms of trade of these countries gradually worsened and ultimately went against the interest of the country in general.

Mounting Developmental and Maintenance Imports:

The developing countries are facing the problem of mounting growth of its developmental imports which include various types of machineries and equipment’s for the development of various types of industries as well as a huge growth of maintenance imports for collecting intermediate goods and raw materials required for these industries. Such mounting volume of imports has been creating a serious problem towards round management of international trade.

Higher Import Intensity:

Another peculiar problem faced by the developing countries is the higher import intensity in the industries development resulting from import intensive industrialisation process followed in these countries for meeting the requirements of elitist consumption (viz., colour TVs, VCR, Refrigerators, Motor cycle, cars etc.). Such increasing trend towards elitist consumption has been resulting a huge burden of burgeoning imports in these developing countries, resulting serious balance of payment of crisis.

Lack of Co-ordination:

The developing countries are not maintaining a good co-ordination among themselves through promotion of integration economies grouping, formation of union etc. Thus in the absence of such co-ordination, the developing countries could not realize those benefits of foreign trade which they could have realised as a result of such economic grouping.

Steep Depreciation:

Steep depreciation of the currency with dollar and other currencies in respect of developing countries has been resulting in a considerable increase in the value of its imports which ultimately leads to huge deficit in its balance of trade

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) from the viewpoint of the Balance of Payments and the International Investment Position (IIP) share a same conceptual framework given by the International Monetary Fund (IMF). The Balance of Payments is a statistical statement that systematically summarises, for a specific time span, the economic transactions of an economy with the rest of the world (transactions between residents and non-residents) and the IIP compiles for a specific date, such as the end of a year, the value of the stock of each financial asset and liability as defined in the standard components of the Balance of Payments. We will not deal in this note with other relevant statistical concepts for operations overseas, particularly for financial institutions, such as exposure (foreign claims, international claims, etc.), which belong to the realm of the BIS statistics.3 Sections 2, 3 and 4 give an overview of FDI definitions, concepts and recommendations adopted by the IMF’s Balance of Payments Manual (5th Edition, 1993) and by the OECD’s Benchmark Definition of Foreign Direct Investment (3rd Edition, 1996). Both provide operational guidance and detailed international standards for recording flows and stocks related to FDI. Section 5 gives a quick overview of trends in FDI inward flows and stocks for the period 1980-2001. Section 6 reports on onward FDI flows for Spain, with particular attention to the financial sector. Finally a brief description of the main available sources of FDI is found in an annex.

According to the IMF and OECD definitions, direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise). The “lasting interest” implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the latter. Direct investment involves both the initial transaction establishing the relationship between the investor and the enterprise and all subsequent capital transactions between them and among affiliated enterprises4 , both incorporated and unincorporated. It should be noted that capital transactions which do not give rise to any settlement, e.g. an interchange of shares.

Advantages of Foreign Direct Investment

  1. Economic Development Stimulation. 
    Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry.
  2. Easy International Trade.
    Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier.
  3. Employment and Economic Boost. 
    Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost.
  4. Development of Human Capital Resources. 
    One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce. The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while maintaining ownership.
  5. Tax Incentives. 
    Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business.
  6. Resource Transfer. 
    Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.
  7. Reduced Disparity Between Revenues and Costs. 
    Foreign direct investment can reduce the disparity between revenues and costs. With such, countries will be able to make sure that production costs will be the same and can be sold easily.
  8. Increased Productivity. 
    The facilities and equipment provided by foreign investors can increase a workforce’s productivity in the target country.


  1. Hindrance to Domestic Investment. 
    As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment.
  2. Risk from Political Changes. 
    Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high.
  3. Negative Influence on Exchange Rates. 
    Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another.
  4. Higher Costs. 
    If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations.
  5. Economic Non-Viability. 
    Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.
  6. Expropriation. 
    Remember that political changes can also lead to expropriation, which is a scenario where the government will have control over your property and assets.
  7. Negative Impact on the Country’s Investment. 
    The rules that govern foreign exchange rates and direct investments might negatively have an impact on the investing country. Investment may be banned in some foreign markets, which means that it is impossible to pursue an inviting opportunity.
  8. Modern-Day Economic Colonialism.
    Many third-world countries, or at least those with history of colonialism, worry that foreign direct investment would result in some kind of modern day economic colonialism, which exposes host countries and leave them vulnerable to foreign companies’ exploitations.


New International Economic Order (NIEO)

At the Sixth Special Session of the United Nations General Assembly in 1975, a declaration was made for the establishment of a New International Economic Order (NIEO). It is regarded as “a turning-point in the evolution of the international community.”

NIEO is to be based on “equity, sovereign equality, common interest and co-operation among all States, irrespective of their social and economic systems, which shall correct inequalities and redress existing injustices, make it possible to eliminate the widening gap between the developed and the developing countries and ensure steadily accelerating economic and social development and peace and justice for present and future generations.”

Though the declaration on the NIEO by the General Assembly (GA) is of recent origin, the idea is not altogether a new one. In fact, a similar resolution was adopted by the GA itself long back in 1952. Again, similar demands were raised from time to time by the UNCTAD since its inception in 1964. A.K. Das Gupta, however, says that what is spectacular about the NIEO Declaration is its timing.

The NIEO aims at a development of the global economy as a whole, with the set up of interrelated policies and performance targets of the international community at large.

Origin of NIEO:

The movement for the establishment of the NIEO is caused by the existing deficiencies in the current international economic order and the gross failures of the GATT and the UNCTAD in fulfillment of their vowed objectives.

The present international economic order is found to be a symmetrical in its working. It is biased. It is favouring the rich-advanced countries. There has been over dependence of the South on the North. Rich countries tend to have major control over vital decision making in the matter of international trade, terms of trade, international finance, aids, and technological flows.

As a matter of fact, the basis for the NIEO is constituted by the U.N. Resolution in 1971, in the seventh special session on “Development and International Economic Co-operation” with various reforms in the area of international monetary system transfer of technology and foreign investment, world agriculture and cooperation among the Third World Countries.

The Resolution categorically mentions that “Concessional financial resources to developing countries need to be increased substantially and their flow made predictable, continuous and increasingly assured so as to facilitate the implementation by developing countries of long-term programmes for economic and social development.” It emphasises global interdependence. It seeks radical changes in allied social, economic, political and institutional aspects of international relations.

New developing sovereign countries of the South have insisted on the NIEO. It has been further supported by the non-aligned nations which vehemently criticized the politicalisation of development and trade issues by the developed nations. The developing nations are now asserting their right to participate in the decision making processes of the international institutions like the IMF, World Bank, GATT, UNCTAD, etc.

The origin of North-South dialogue for a new economic order may be traced back to over 30 years ago, at the Afro-Asian Conference at Bandung held in 1955.

However, the formal idea of the NIEO was put forward in the Algiers Conference of non-aligned countries in 1973. In 1975, a declaration for the establishment of NIEO was adopted along with a programme of action in the Sixth Special Session of the UNCTAD.

The North-South Dialogue:

In 1977, there was a negotiation between the North and South at the Paris talks. The developed countries agreed to provide an additional U.S. 1 billion towards the Aid Fund for the development of the poor nations.

In December 1977 the Willy Brandt Commission was set up with a view to review the issues of international economic development. The WB Commission’s Report (1980) stresses the need for North-South co-operation.

Beside establishment of a common development fund, its recommendations include strengthening the structure of development lending a code of conduct for the multi­national co-operation as well as the need for inter­governmental co-operation in monetary and fiscal areas along with the trade policies. It also proposed for the increasing participation of developing nations in the decision-making processes at international level.

The present international economic order is found to be a symmetrical in its working. It is biased. It is favouring the rich-advanced countries. There has been over dependence of the South on the North. Rich countries tend to have major control over vital decision making in the matter of international trade, terms of trade, international finance, aids, and technological flows.

As a matter of fact, the basis for the NIEO is constituted by the U.N. Resolution in 1971, in the seventh special session on “Development and International Economic Co-operation” with various reforms in the area of international monetary system transfer of technology and foreign investment, world agriculture and cooperation among the Third World Countries.

The Resolution categorically mentions that “Concessional financial resources to developing countries need to be increased substantially and their flow made predictable, continuous and increasingly assured so as to facilitate the implementation by developing countries of long-term programmes for economic and social development.” It emphasises global interdependence. It seeks radical changes in allied social, economic, political and institutional aspects of international relations.

New developing sovereign countries of the South have insisted on the NIEO. It has been further supported by the non-aligned nations which vehemently criticised the politicalisation of development and trade issues by the developed nations. The developing nations are now asserting their right to participate in the decision making processes of the international institutions like the IMF, World Bank, GATT, UNCTAD, etc.

The origin of North-South dialogue for a new economic order may be traced back to over 30 years ago, at the Afro-Asian Conference at Bandung held in 1955.

However, the formal idea of the NIEO was put forward in the Algiers Conference of non-aligned countries in 1973. In 1975, a declaration for the establishment of NIEO was adopted along with a programme of action in the Sixth Special Session of the UNCTAD.

The North-South Dialogue:

In 1977, there was a negotiation between the North and South at the Paris talks. The developed countries agreed to provide an additional U.S. 1 billion towards the Aid Fund for the development of the poor nations.

In December 1977 the Willy Brandt Commission was set up with a view to review the issues of international economic development. The WB Commission’s Report (1980) stresses the need for North-South co-operation.

Beside establishment of a common development fund, its recommendations include strengthening the structure of development lending a code of conduct for the multi­national co-operation as well as the need for inter­governmental co-operation in monetary and fiscal areas along with the trade policies. It also proposed for the increasing participation of developing nations in the decision-making processes at international level.

As Mehboob-ul-Haque observes, the demand for NIEO is to be viewed as a part of historical process rather than a set of specific proposals. Its important facets are the emergence of non-aligned movement, the politicisation of the development issue and the increased assertiveness of the Third World countries.

The NIEO led to a serious thinking on the part of the developed countries (DC) to solve the problems of trade of LDCs. There has been a move towards programmed actions in two directions:

  • Commodity Agreements, with a view to stabilise prices of exportable of LDCs; and
  • (ii) Compensatory Financing through IMF’s liberal loans to LDCs having deficits due to fluctuations in prices

Objectives of the NIEO:

In essence, the NIEO aims at social justice among the trading countries of the world. It seeks restructuring of existing institutions and forming new organisations to regulate the flow of trade, technology, capital funds in the common interest of the world’s global economy and due benefits in favour of the LDCs. It has the spirit of a ‘world without borders..

It suggests more equitable allocation of world’s resources through increased flow of aid from the rich nations to the poor countries.

It seeks to overcome world mass misery and alarming disparities between the living conditions of the rich and poor in the world as large.

Its aim is to provide poor nations increased participation and have their say in the decision-making processes in international affairs.

Among to other objectives, the NIEO envisages the establishment of a new international currency the implementation of SDR aid linkage, the increased stabilisation of international floating exchange system and the use of IMF funds as interest subsidy on loans to the poorest developing countries.

The crucial aim of the NIEO is to promote economic development among the poor countries through self- help and South-South co-operation.

The NIEO intends to deal with the major problems of the South, such as balance of payments disequilibrium, debt crisis, exchange scarcity etc.






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