MMPC-003 Solved Question Paper

Question 1: Types of Business Environment and the Difference Between Internal and External Environment

Understanding business environment in simple terms

Think of a business as a person standing in the middle of a busy city. Whatever is inside the person (skills, habits, health) is the “internal environment”. Whatever is happening outside (traffic rules, weather, people’s mood, government laws, technology) is the “external environment”. Both together form the business environment.

Main types of business environment

• Internal environment – Factors within the organisation and broadly under management control:
  • Mission, objectives and values of the firm
  • Organisational structure and systems
  • Leadership style and corporate culture
  • Employees, their skills, attitudes and unions
  • Physical and financial resources
• External environment – Factors outside the firm and largely beyond its direct control:
  • Micro/operating environment – customers, suppliers, competitors, intermediaries, local community, creditors, regulators for that industry
  • Macro environment – economy-wide forces like economic conditions, socio-cultural trends, political–legal framework, technology, demographic changes and global forces.

Internal vs external environment – key differences with examples

• Control:
  • Internal factors can usually be shaped by management – for example, a company can redesign its structure, introduce training or change its performance appraisal system.
  • External factors must be monitored and responded to, not controlled – for instance, a sudden change in RBI policy or a new tax law.
• Source:
  • Internal factors originate inside the organisation (policies, leadership style, internal processes).
  • External factors arise from society, government, economy, competitors and global events.
• Scope:
  • Internal environment is firm-specific.
  • External environment affects many or all firms in an industry or economy (for example, COVID-19 disruptions affected almost every business).
• Examples from practice:
  • A retail chain that improves its inventory management system (internal) often sees better product availability and lower costs.
  • The same retail chain must respond to rising e-commerce competition and changing customer preferences for home delivery (external).

Managerial takeaway

Good managers keep improving the internal environment (people, processes, culture) while constantly scanning the external environment to spot threats and opportunities early. This is why environmental analysis is a core part of strategic planning.

Question 2: Key Elements of the Social Environment and the Two-Way Relationship Between Business and Society

What is the social environment?

The social environment is the “people side” of the macro environment. It includes how people live, work, behave and interact in a country or region – their customs, values, beliefs, lifestyles and social institutions. Businesses operate inside this social fabric and cannot ignore it.

Critical elements of the social environment

• Attitudes and beliefs – What people think about work, money, risk, status, consumption and brands. For example, growing health awareness has boosted demand for organic food, fitness apps and low-sugar drinks.
• Demographic profile – Population size, age structure, gender ratio, urban–rural mix, family size, migration patterns. A young population like India’s creates huge markets for education, smartphones and entry-level jobs.
• Education and skill levels – Literacy, professional education, digital skills. Higher education levels support knowledge-based industries like IT, consulting and financial services.
• Culture and lifestyle – Traditions, festivals, food habits, language and lifestyle aspirations. Businesses design products and marketing campaigns around these (for example, festive-season promotions or region-specific flavours).
• Role of women and social inclusion – Participation of women and marginalized groups in the workforce and consumption decisions influences labour markets and demand patterns.
• Social institutions and media – Family, community organisations, religious bodies and increasingly social media shape opinions and consumer behaviour.

How business depends on society

• Society provides human resources – employees, managers, entrepreneurs.
• It also provides customers, suppliers and investors.
• Social norms affect what products are acceptable (for example, sensitivity around tobacco or alcohol advertising).
• Public opinion and social movements can quickly influence regulations and brand image (for instance, campaigns against plastic packaging or unfair labour practices).

How business influences society

• Businesses create employment and income, which improves living standards and shapes aspirations.
• Advertising and branding subtly influence lifestyles and consumption patterns.
• Through CSR initiatives and community projects, firms contribute to education, health, environment and local infrastructure.
• Large businesses often set examples for workplace diversity, ethics and corporate governance, which can gradually change social expectations.

A practical illustration

Suppose a food delivery platform operates in a city where most households are nuclear families with working couples. Social trends such as long commutes, less time to cook and comfort with online payments create a strong demand for food delivery. In response, the company offers late-night delivery, app-based ordering and wallet discounts. Over time, as more people start using the app, eating out and ordering in become part of the local lifestyle – an example of society shaping business, and business in turn reshaping lifestyles.

Question 3: Structure of the Money Market and Its Main Instruments

What is the money market?

The money market is the part of the financial system where short-term funds (usually up to one year) are borrowed and lent. The instruments traded here are highly liquid and close substitutes for cash. Its main participants include scheduled commercial banks, cooperative banks (except land development banks), primary dealers, large companies and sometimes mutual funds.

Overall structure

• Central bank at the core – In India, the RBI uses the money market to manage liquidity and short-term interest rates.
• Inter-bank segment – Banks lend and borrow among themselves, mainly in the call/notice money market.
• Submarkets based on instruments – Call money, treasury bills, commercial paper, commercial bills, certificates of deposit and money market mutual funds. Each submarket focuses on a particular instrument and set of users.

Main instruments and submarkets (with simple explanations)

• Call money / notice money market
  • Overnight (call) or up to 14-day (notice) funds between banks and primary dealers.
  • No collateral required; the interest rate is called the call rate.
  • Practical use: A bank facing temporary cash shortage borrows overnight funds from another bank instead of selling long-term assets.
• Treasury bills (T-bills) market
  • Short-term government securities (91, 182 and 364 days) issued at a discount and redeemed at face value.
  • Very safe and highly liquid because they are backed by the Government of India.
  • Practical use: A company with surplus cash for three months can park it in T-bills to earn a return with very low risk.
• Commercial paper (CP) market
  • Unsecured, short-term promissory notes issued by highly rated companies, financial institutions and primary dealers.
  • Tenure ranges from 7 days to one year; issued at a discount.
  • Practical use: A large manufacturing firm needing funds for seasonal inventory may issue CP instead of taking a bank loan, often at a lower cost.
• Commercial bills market
  • Trade bills drawn by sellers on buyers of goods, which can be discounted with banks.
  • These bills finance short-term trade transactions.
  • Practical use: A wholesaler selling goods on credit can get immediate cash by discounting the bill with a bank.
• Certificates of deposit (CDs) market
  • Negotiable, interest-bearing time deposits issued by banks and financial institutions.
  • They help banks raise large, short-term funds from corporates and institutions.
• Money market mutual funds (MMMFs)
  • Mutual funds that invest mainly in money market instruments.
  • They allow small investors to indirectly participate in the money market with low risk and high liquidity.

Why the money market matters for managers

For finance managers, the money market is like a flexible toolbox: you can park short-term surpluses, raise working capital at competitive rates, and manage liquidity without disturbing long-term investments. Understanding these instruments helps in lowering the cost of funds and reducing the risk of cash shortages.

Question 4: Evolution of Farm Policies in India with Focus on Domestic Agricultural Policies

Big picture

India’s farm policies have evolved from a focus on basic food security to a broader agenda that now includes farmer incomes, competitiveness, exports and sustainability. The MMPC-003 material on the agri-business environment explains how these policies have changed over time.

1. Early post-independence phase (1950s–mid-1960s)

• Priority was self-sufficiency in food grains after frequent shortages and the Bengal famine experience.
• Policies included land reforms (ceiling on holdings, abolition of zamindari), community development programmes, creation of cooperatives and public investment in irrigation and dams.
• Agricultural research institutes and extension services were built to support farmers, but productivity growth was modest and India depended on food imports and PL-480 aid.

2. Green Revolution and food security (mid-1960s–1980s)

• Chronic food shortages led to the Green Revolution in wheat and rice using high-yielding varieties, fertilisers, pesticides and irrigation.
• The government introduced minimum support prices (MSP), public procurement and buffer stocks through FCI to encourage production and stabilise prices.
• Institutional credit was expanded via nationalised banks and cooperatives.
• This phase raised yields and turned India from a food-deficit to near self-sufficient country, but benefits were concentrated in certain regions and crops.

3. Diversification and subsidy-driven policies (1980s–early 1990s)

• Policy began to support diversification into oilseeds, milk (Operation Flood), horticulture and poultry.
• Input subsidies on fertilisers, electricity and irrigation were expanded to reduce production costs.
• While this helped farmers in the short run, it also led to fiscal pressure and sometimes overuse of groundwater and chemicals.

4. Post-1991 reforms and market orientation

• Economic liberalisation and WTO commitments pushed agriculture towards a more market-linked framework.
• Key domestic policies included reforms in agricultural marketing (APMC reforms, contract farming provisions), easier movement of agricultural goods across states and gradual opening to exports of several commodities.
• At the same time, MSP and public distribution system (PDS) continued to play a big role in food security.

5. Recent policy focus (2010s onwards)

• Shift from just “producing more” to “doubling farmers’ income”, improving resilience and reducing distress.
• Major initiatives include:
  • PM-KISAN – direct income support to small farmers.
  • Pradhan Mantri Fasal Bima Yojana (PMFBY) – crop insurance scheme.
  • e-NAM – electronic National Agriculture Market to integrate mandis across states and improve price discovery.
  • Policies allowing higher FDI and private investment in food processing, warehousing and cold chain.
  • Farm reforms in 2020 aimed at contract farming and freer trade outside mandis (though politically controversial, they reflected the push towards more competitive markets).

Real-world managerial angle

If you work in an agribusiness firm (for example, a seed company, a food processing unit or an agri-tech start-up), understanding farm policy evolution is critical. For instance, e-NAM and improved logistics have created opportunities for digital platforms that link farmers directly with buyers. On the other hand, any change in MSP or export policy can quickly impact your procurement cost and inventory decisions, so keeping a close eye on domestic agricultural policies becomes part of everyday risk management.

Question 5: Major Reforms to Strengthen and Stabilise the Financial Sector

Why reforms were needed

Before the 1990s, India’s financial sector was heavily regulated, with administered interest rates, high statutory pre-emptions (SLR/CRR), low competition and weak prudential norms. This led to inefficiencies, low profitability and rising non-performing assets (NPAs). The New Economic Policy of 1991 initiated deep reforms to make the system stronger, more competitive and more stable.

1. Banking sector reforms based on Narasimham Committees

• Deregulation of interest rates – Moving from administered rates to market-determined rates to allocate credit more efficiently.
• Reduction in SLR and CRR – Gradual reduction of statutory liquidity ratio from about 38.5% to 25% and lowering of CRR to free more funds for productive lending.
• New prudential norms – Clear guidelines on what constitutes a non-performing asset, classification of assets into standard, sub-standard, doubtful and loss, and mandatory provisioning for bad loans.
• Capital adequacy norms – Introduction of capital adequacy ratio (CAR) in line with international (Basel) norms to ensure banks have enough capital to absorb losses.
• Restructuring of banking system – Proposal for a 4-tier structure (few large international banks, 8–10 national banks, local banks and regional rural banks) and greater autonomy in management appointments.
• Entry of private and foreign banks – To increase competition, technology adoption and customer service quality.

2. Broader financial sector reforms

• Financial Stability and Development Council (FSDC) – Set up as an apex body in 2010 to coordinate among regulators (RBI, SEBI, IRDAI, PFRDA) and monitor systemic risks.
• Merger of Forward Markets Commission (FMC) with SEBI – Unified regulation of commodity derivatives and securities markets to improve oversight and efficiency.
• Insurance sector reforms – Gradual opening to private and foreign players, stronger regulation and higher capital requirements, leading to more innovation and better risk spreading.
• Tax and fiscal reforms (including GST) – A more unified indirect tax regime improves transparency and formalisation, which indirectly supports the financial system by expanding the tax base and improving documentation.

3. Impact in practice

• Banks now follow stricter norms for recognising and provisioning NPAs, which makes their balance sheets more transparent and credible.
• Competition from private and foreign banks has pushed public sector banks to upgrade technology, introduce digital channels and focus more on customer service.
• From a corporate manager’s perspective, these reforms have broadened the choice of funding sources – syndicated loans, bonds, commercial paper, equity markets – and improved access to finance, though due diligence requirements have also become stricter.

Question 6: Importance of Balance of Payments and Its Main Components

What is the Balance of Payments (BoP)?

The Balance of Payments is a systematic record of all economic transactions between residents of a country and the rest of the world during a specific period (usually a year). It covers trade in goods and services, income flows, transfers and capital movements.

Why BoP is important

• Indicator of external sector health – Persistent BoP deficits may signal competitiveness problems or excessive external borrowing, while sustainable surpluses indicate strength.
• Exchange rate management – BoP trends help the central bank judge whether the currency is under pressure to appreciate or depreciate and decide on interventions in the forex market.
• Policy formulation – Governments use BoP data to design trade, industrial and fiscal policies (for example, export promotion, import duties, or restrictions on external borrowing).
• Creditworthiness and investor confidence – International agencies and foreign investors look at BoP and foreign exchange reserves to assess a country’s ability to meet external obligations.
• Business planning – Firms involved in exports, imports or global sourcing use BoP trends to anticipate changes in trade policy, exchange rates and demand from key markets.

Main components of BoP

• 1. Current Account – Records transactions in goods, services, income and current transfers:
  • Merchandise trade – Exports and imports of goods (for example, machinery, textiles, crude oil).Trade in services – IT services, tourism, transport, financial services, etc.Income – Interest, dividends and profits earned from or paid to the rest of the world.Current transfers – Remittances from Indians working abroad, gifts, grants and foreign aid of a current nature.
  A current account surplus means the country earns more from exports and transfers than it pays for imports and income; a deficit means the opposite.
• 2. Capital Account – Records transactions that change ownership of foreign assets and liabilities:
  • Foreign Direct Investment (FDI) – Long-term investments giving control or significant influence over a foreign enterprise.
  • Foreign Portfolio Investment (FPI) – Investments in shares, bonds and other financial assets without control intent.
  • External commercial borrowings – Medium and long-term loans from foreign lenders.
  • Banking capital and NRI deposits – Changes in foreign currency assets and liabilities of banks.
  • Changes in foreign exchange reserves – Purchases or sales of foreign currency by the central bank.

Managerial perspective

For a firm that imports raw materials or exports finished products, BoP trends are not just textbook concepts. A widening current account deficit and falling reserves may lead to rupee depreciation, making imports costlier but exports more competitive. Finance and strategy teams often track such indicators while deciding on hedging policies, pricing and market diversification.

Question 7: Short Notes on Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)

(a) Foreign Direct Investment (FDI)

FDI refers to investment made by an individual or firm of one country into business interests located in another country, typically with the intention of long-term involvement and control. It often takes the form of setting up a subsidiary, acquiring a significant equity stake, or establishing joint ventures and production facilities.

Key features of FDI

• Long-term, stable capital flows.
• Usually accompanied by transfer of technology, management know-how and access to global markets.
• Investors take higher risk but also expect higher, long-term returns and some control over operations.

Benefits for host country and firms

• Creates jobs and builds local supply chains (for example, automotive or smartphone manufacturing plants).
• Upgrades skills and introduces better management practices.
• Can boost exports when multinational firms use the country as a production base.

Practical example

When a global automobile company sets up a manufacturing unit in India, invests in land, plant and equipment, and manages the operations directly, that is FDI. Local component suppliers often grow rapidly around such plants, and engineering graduates in the region find better job opportunities.

(b) Foreign Portfolio Investment (FPI)

FPI consists of investments by foreign investors in financial assets like shares, bonds, mutual fund units and other securities of another country, without seeking control over the companies. These investments are mainly for financial returns (capital gains, dividends or interest) and can be withdrawn relatively quickly.

Key features of FPI

• Short to medium-term horizon; funds can flow in and out quickly.
• Does not involve management control or technology transfer.
• Highly sensitive to interest rate movements, exchange rates and global risk appetite.

Implications for the economy and firms

• FPI helps deepen capital markets, improves liquidity and can lower the cost of capital for listed companies.
• However, sudden reversals of FPI (“hot money”) can create volatility in stock markets and exchange rates.
• From a corporate viewpoint, being attractive to foreign portfolio investors can support share price and make it easier to raise equity, but it also increases scrutiny and demands for transparency.

Comparing FDI and FPI in one line

If you think of FDI as a long-term partner who moves in, shares your house and helps renovate it, FPI is more like a frequent guest who comes when the house looks attractive, enjoys the stay and may quickly move out if the neighbourhood feels risky.