Business Environment Important Questions for CBSE Class 12 Business Studies Impact of Changes in Government Policy on Business and Industry

1. New Economic Policy, 1991 For achieving the objectives of development plans, the government resorted to an inward looking trade policy. Due to this, in 1991, the economy faced a serious foreign exchange crisis, high government deficit and rising trend of prices. As a result, the government decided to announce the New Industrial Policy, aiming at liberalisation, privatisation and globalisation of the Indian economy.

2. Privatisation It means giving greater role to the private sector in the national building process and at the same time drastically reducing the role of public sector. To achieve this, as per the New Industrial Policy, 1991, it adopted ‘disinvestment’, which means transfer of public sector enterprises to the private sector by way of dilution of government stake in public sector beyond 51%.

3. Liberalisation It refers to an end of licence, quota and many more restrictions and controls which were put on industries before 1991. The reforms aimed at deregulations and reduction of government controls, greater autonomy of private investment and less dependence on public sector.

4. Globalisation It refers to integrating our economy with the world’s economy. It is the system of interaction among countries of the world in order to develop the global economy. Physical geographical gap or political boundaries no longer remain barriers for a business enterprise to serve in a distant geographical market.

5. Impacts of Government Policy The New Industrial Policy, 1991 brought reforms in terms of Liberalisation, Globalisation and Privatisation. These had a major impact on the working of enterprises in business and industry. These have posed several challenges to the Indian corporate sector. They are:

  • Increasing competition
  • More demanding customers
  • Rapidly changing technological environment
  • Need for developing human resources
  • Market orientation
  • Necessity for change
  • Loss of budgetary support to public sector

Previous Years  Examination Questions

1 Mark Questions
1. Define privatisation as a process of economic reforms in one sentence.
(Delhi 2011C; All India 2010)
Ans. Privatisation refers to giving greater role to private sector and reducing the role of public sector in the nation-building process.

2. Define liberalisation as a process of economic reforms.
(All India 2011; Delhi 2010c)
Ans. Liberalisation refers to an end of licence, quotas and many more restrictions and controls which were put on industries before 1991.

3 Marks Question
3. Explain any two impacts of government policy changes on business and industry.    (All India 2011; Delhi 2011)
Ans.  Impacts of government policy in India are:

  • Increasing competition As a result of changes in the rules of industrial licensing, entry of foreign firms creates competition for Indian firms, especially in service industries like telecommunication, airlines, banking, insurance, etc which were earlier placed in the public sector.
  • More demanding customers Customers today have become more demanding because they are  well informed. Cut-throat competition in the market gives the customers wider choice in purchasing better quality of products and services.

4/5 Marks Questions

4. Giving any four points, explain the impact of government policy changes of  business and industry (Foreign 2014)
The Indian corporate sector has come face-to-face with several challenges due to government policy changes in business and industry. Explain any four such changes.  (Compartment 2014)
The Indian corporate sector has come face-to-face with several challenges due to government policy change. Explain any four such challenges.
(Delhi 2010c)
Ans. Following challenges were faced by the business enterprises:
(i) Technological environment Increased competition force the firms to develop new ways to survive and grow in the market. Thus, there is a need to adopt the new technologies in order to survive in the long run.
(ii) Need for developing human resources The new market conditions require people with higher competence and greater commitment. Hence, there is a need of developing human resources.
(iii) Market-orientation The business enterprises start focusing on market-oriented techniques rather than production-oriented techniques.
(iv) Necessity for change After 1991, the market forces have become turbulent. As a result, business enterprises have to continuously modify their operations.

5. When government policy changed, it laid some positive and negative impact on  the business. Discuss some of them.  
(Delhi 2012,2010; All India 2011)
Ans. Positive impacts of government policy changes are:
(i) Market orientation Earlier, production was done and whatever was produced was sold. But with the New Industrial Policy leading to increased competition, there is a shift towards customer orientation, where study and analysis of market is done before anything is produced, so that the products are according to the needs and demands of customers.
(ii) Development of human resource The new market conditions require people with higher competence and greater committment. This has necessitated development of human resource.
Negative impacts of government policy changes are:
(i) Rapidly changing technological environment Due to increased competition, technological advancement are taking very fast. This is specifically a disadvantage to small firms who are not able to cope up with these changes and sometimes are even forced to shut down their business.
(ii) Increasing competition With the opening of the economy, globalisation, entry of foreign firms in the country, it has increased competition for domestic players, as they have to compete with them. MNCs are at an advantage due to large financial resources, technological advancement and branded goods, thus posing a serious challenge and threat to domestic players.

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