INDIAN ECONOMIC ENVIRONMENT…

BASIC PROPOSITIONS…
 Business is an economic activity.

Economic activity is the task of adjusting means to ends & vice

versa. Economic activities may assume different forms such as
consumption, production, distribution and exchange. Each
business has a target to achieve with some available resources.
Sometimes the level of target has to be matched with given
resources and vice versa. The task of business is to optimize the
outcome of economic activities.
CONTD…
 Business firm is an economic unit.

It transforms a set of inputs into a flow of output-either goods or services or

a combination of both and the nature of inputs and outputs are determined
by the size,structure,location and effiency of the firm under consideration.
The business firm undertakes this transformation process to generate
surplus (profit)Activities may be of different types such as manufacturing,
transporting, trading, farming etc. The basic aim is to maximize the profit
in the long run and with this surplus the firm can grow if it is productively
invested. The firm hence carefully plans the optimum allocation of
resources and optimum production mix. So creation , mobilization,
utilization of surplus forms the economic activity of the firm.
CONTD…
 Business decision making is an economic process.

The business firm thinks of optimum allocation of resources because

resources are limited in supply and same resources has alternative
uses. The firm therefore intends to get the best out of given
resources or to minimize the use of resources for achieving a
given goal. Whatever may be the decision variable , procurement
or production, distribution or sale, input or output, the decision
making itself is the process of selecting the best available
alternative. So business decision making is an economic process.
ENVIRONMENT OF BUSINESS:
 The business firm is a micro economic unit. On the other
hand business environment furnishes the macro
economic context within which the firm operates. By
‘environment’ the reference is to the set of external
factors which affect the operation of the business firm.
The internal dynamics of the firm is meant to adjust
itself to the external environment.
Business environment may be classified on the basis of
time, space, forces and factors. Based on the relevance
of economic & non-economic ‘factors’ we may specify
economic & non economic environment of business.
Non economic environment will encompass the
country’s history, culture, sociology, geography, polities
& the govt..
ECONOMIC ENVIRONMENT…
 Economic environment of business has reference to the broad
characteristics of the economic system in which the business
operates.
 Present day economic environment of business is a complex
one. The business sector has economic relation with the
Govt.,Capital market, household sector & abroad sector.
 The design & structure of any economic system is
conditioned by the socio-political arrangements. Such
arrangements have relevance from the standpoint of the
macroeconomic decision making.
 All civilized economies , whether capitalist, socialist,
communist or mixed have certain fundamental economic
problems to solve. Hard fact is that in each & every economy
the resources are scarce.
CONTD…
 From the standpoint of resources the basic economic problem of
every economy is that allocation of resources & subsequent
production. This problem has got many facets: What to produce?
How to produce? For whom to produce? When to produce?
 Every economy has to decide the qualities & quantities of goods
& services to be produced. The process of decision making
differs depending on how the problems are solved in different
economies. This is what constitutes the functioning of the
economy- the nature of economic environment.
 In most of the economies, both free market pricing & centralized
planning exist in different degrees. By free market mechanism
or price mechanism we mean the free play of the forces of
market demand & market supply to determine the equilibrium
solution of the allocation problem.
CONTD…
 In most of the economies positive
intervention by the Govt. in day-today
economic affairs is on the increase.
 Modern economies are not ‘closed’ but
‘open’; they are actively engaged in
international trade & cooperation.
 These facts define the environment & set
the constraints within which the modern
business firm must operate.
NON ECONOMIC ENVIRONMENT
OF BUSINESS…
 Non economic environment is particularly
essential in view of the fact that it
influences and gets influenced by the
economic environment.
 Typical factors of the non economic
environment are sociological, educational-
cultural, historical, physical etc.
CRITICAL ELEMENTS OF ECONOMIC
ENVIRONMENT…
 The nature of the economic system obtained within a country is a
critical element of the economic environment of business of that
country.
 The nature of the economy can be described in terms of the
system of the consumption, production, distribution & exchange
transaction.
 The role of factors like price, markets, planning, policy
guidelines (trade policies, monetary policies, fiscal policies etc.),
regulations, control & other forms of governmental interventions
provides further insight into the nature of the economic system.
 Economic system can be broadly classified as either feudalist or
capitalist or socialist or mixed.
CONTD…
 Classification may be between:

1. Simple & Complex Economies.

2. Subsistence & Commercialized economies.
3. Barter & Monetized economies
4. Developed & Underdeveloped economies.
5. Dynamic & Static Economies.
6. Singular & Dual Economies.
7. Closed & Open economies.
CONTD…
 Indian economic system is modern, highly
complex, monetized, dynamic, underdeveloped,
dual & open.
 Indian economy contains the elements of a mixed
system. The pure economic system everywhere is
a mixed system: either mixed capitalism or mixed
socialism.
INDIAN ECONOMIC
ENVIRONMENT:
 The economic environment of business in India has been
changing at a fast rate mainly due
to the changes in the economic policies of the government. At
the time of independence,
the Indian economy was basically agrarian with a weak industrial
base. To speed up the
industrial growth and solve various economic problems, the
government took several steps
like state ownership on certain categories of industries, economic
planning, reduced role
of private sector, etc. The Government adopted several control
measures on the functioning
of private sector enterprises. All these efforts resulted a mixed
response.
CONTD…
 There was growth in net national product, per capita
income and development of capital goods sector and
infrastructure. But rate of industrial growth was slow,
inflation increased and government faced a serious foreign
exchange crisis during eighties. As a result, the
government of India introduced a radical change in
economic policies in 1991. This policy abolished industrial
licensing in most of the cases, allowed private participation
in most industries, disinvestment was carried out in many
public sector industrial enterprises and opened up the
economy considerably. Foreign Investment Promotion
Board was set up to channelize foreign capital investment
in India. Let us discuss the developments under three
heads, viz., (a) Liberalization, (b) Privatisation, and (c)
Globalisation.
LIBERALISATION :

 Liberalisation refers to the process of

eliminating unnecessary controls and
restrictions on
 the smooth functioning of business enterprises.
It includes:
 (i) abolishing industrial licensing requirement
in most of the industries;
 (ii) freedom in deciding the scale of business
activities;.
CONTD…
 freedom in fixing prices of goods and services;
 (iv) simplifying the procedure for imports and
exports;
 (v) reduction in tax rates; and
 (vi) simplified policies to attract foreign capital
and technology to India
 PRIVATIZATION :
Privatisation refers to reducing the role of public sector
by involving the private sectors in
most activities. Due to the policy reforms announced in
1991, the expansion of public sector has literally come
to a halt and the private sector registered fast growth in
the postliberalised period. The issues of privatisation
include:
1.reduction in the number of industries reserved for the
public sector from 17 to 8 (reduced further to 3 later
on) and the introduction of selective competition in the
reserved area;
2.disinvestment of shares of selected public sector
industrial enterprises in order to raise
CONTD…
 resources and to encourage wider participation of
general public and workers in the ownership in
business;
improvement in performance through an MOU
system by which managements are to be granted
greater autonomy but held accountable for
specified results.
GLOBALISATION :

Globalisation means ‘integrating’ the economy of a

country with the world economy. This implies free
flow of goods and services, capital, technology and
labour across national boundaries. To achieve these
objectives of globalisation, the government has
adopted various measures such as reduction in
custom duties, removal of quantitative restrictions or
quotas on exports and imports, facilitating foreign
investment and encouragement of foreign
technology. These measures are expected to achieve
a higher rate of growth, enlargement of employment
potential, and reduction of regional disparities.
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