Economic Environment and Policy:
The economic environment and the policies
are of vital importance for any business
activities.
Part of macro and Indian Economic concepts.
The economic and business environment can
be classified on the basis of time, space, forces
and factors.
Time: Discussion about past, present and
future environment of business.
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Space: It may be local, regional, national and
international environment.
Forces: Forces of market such as supply,
demand, price etc. or non-market institutions
like government.
Factors: Economic and non-economic factors.
In real world situation, the environmental
variables interact with each other. Such
interaction can be conceptualized through the
formal presentation of INTERACTION MATRIX.
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Interaction MATRIX
Interaction matrix is basically a tool to understand the
economic and non-economic environmental relation and
reactions.
Elements of Economic Environment: along the columns
Elements of non-economic environment: along with rows
When a given element of economic environment influences a
given element of non-economic environment, we draw a short
line vertically.
When an element of non-economic environment influences a
given element of economic environment, we draw a short line
horizontally.
Hence, in case of interdependence among the environmental
elements, we end up with a “plus sign” which suggests that
there is two way interaction between economic and non-
economic environmental factors. 3
What is most important is that to compare the
economic and non-economic environment for
the business.
The non-economic environment includes
country’s history, culture, sociology, geography,
polity and the government.
Economic environment and policies to
business:
Economic environment: Indian economy is
classified into three major headings, such as:
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(a) India as an underdeveloped economy.
(b) India as a developing economy.
(c) India as mixed economy.
India as an Underdeveloped Economy
Low Per Capita Income: The per capita income of
the people of India is very low in comparison with
that of the USA, the UK, Canada, Australia and
Japan.
Which leads to the low standard of leaving and
poverty.
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Inequitable Distribution of Wealth and Income:
the distribution of income and wealth in India is
inequitable. The gap between the haves and have-
nots over the years has widened and there have
been concentration of wealth and economic power
in the hand s of a few to the detriment of common
people.
Which leads to the mass poverty in the country.
Pre-Dominance of Agriculture: in an
underdeveloped country two-thirds of the people
live in rural areas and their main occupation is
agriculture. A developed country is generally highly
industrialized where agriculture occupies
comparatively less important place.
Unproductive agriculture leads to mass poverty.
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Deficiency of Capital:
• Low ratio of capital availability per head of population.
• Because of shortage of capital, there is a tendency to invest
the available capital in farming and labor intensive consumer
goods industries rather than in heavier capital intensive or
capital goods industries.
• Three reasons: (a) Shortage of saving, (b) major incomes
goes to the consumptions and ( c) Speculative investment
rather than productive investment.
High Rate of Population Growth: Population in India is
increasing at an alarming rate and exceeded 115 crores in
2010 compared to 85 crores in 1991 and 68 crores in 1980
and 35 crores in 1947 and the second largest populated
country next to china.
Low life expectancy – 60-61 years in India compared to more
than 70 years in USA, that shows more children to support
and few adults to provide them which restricts the overall
economic growth.
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Unemployment and underemployment.
A Dualistic Economy:
• Urban areas vs. Rural areas
• Developed economy vs. underdeveloped economy
• Organized economy vs. unorganized economy
All leads to the unbalanced economy which again
restricts the overall economic growth of the country.
Technical Backwardness:
Though our India has the largest number of
technically qualified personnel among all the third
world countries, due to heavy brain drain India still
uses the outdated primitive methods of technology
in the process of production and thus unable to
compete with the developed and other developing
countries. 8
India – A Developing Economy
Thanks to the economic planning in the early fifties, a number
of significant changes have taken place in the structure of
Indian economy. Due to these changes, Indian economy is no
more an underdeveloped economy rather a developing
economy. The following points describe the changing
conditions of Indian economy:
Income Trends: the rise in per capita income is considered a
better index of economic growth of the country. In 1950-51, India’s
per capita income was only Rs.466.00 and compared to that in
2009-10 the per capita income has increased to Rs.44,345 a year.
This shows that the Per capita income rose by 5.6 per cent Per
capita income (at 2004-05 prices) stood at Rs 33,588 in FY10
against Rs 31,821 in the previous year, according to estimates of
national income released released by Central Statistical
Organization.
Even though the economic growth is not that satisfactory, the per
capita money income has shown a continuous uptrend, which
leads the increasing trend of savings and investment in the
country. 9
Structural Change: there has been a drastic
change in the occupational distribution of population.
Over the past two/three decades the working
population in agriculture has been steady and not
fallen below 65 percent. But there is a change in the
working population the secondary and tertiary
sector.
There is a significant development in the industrial
segment in the country. Both private and public
sector enterprises gives enough space for the
development of country’s economy.
Govt. has also upgraded some suitable industrial
policies for the competitiveness of Indian industries.
As a result of this the industrial production is at
increasing trend.
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Improvement in Social Capital: Social Capital:
Fundamental social and economic services such as
educational and health facilities, communication
system, electricity generation plant etc.
Development of these services creates favorable
conditions for growth and better human living.
Since last two decades these services has been
rising showing the better improvement in the
standard of living and economic growth of the
country.
Changing Pattern of Foreign Trade: Since India’s
independence, the nature and quantum of foreign
trade have increased significantly. The value of
trade increased significantly from 1950-51 to 2008-
09 due to the opening up of the economy through
globalization and liberalization policies. 11
Improvement in Institutional Framework: there
have been a significant change in the banking and financial
structure of the country. The growth of commercial banking
has been spectacular.
Currently, India has 88 scheduled commercial banks (SCBs)
- 27 public sector banks (that is with the Government of India
holding a stake), 31 private banks and 38 foreign banks.
They have a combined network of over 53,000 branches and
more than 17,000 ATMs.
According to the Sources, the public sector banks hold over
75 percent of total assets of the banking industry, with the
private and foreign banks holding 18.2% and 6.5%
respectively.
To sum up all these points, Indian economy though
economically backward, is a developing country, with output
and income level showing uptrend. 12
India – A Mixed Economy
Originator of mixed Economy: Keynes
It is also called the “dual economy” or
“controlled economy” which operates through a
combination of economic planning and pricing.
Both the public and private enterprises would work
side by side. It is a compromise between private
capitalism and state socialism.
Private enterprise is actuated by profit motive which
may be looked upon as an index of efficiency while
public enterprise serves a social end.
Hence, the mixed economy is a combination of
economic efficiency with social obligations.
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In a mixed economy, the entire economic system is
divided into three major parts such as:
Private Sector: Sectors which are exclusively
controlled and managed by the private enterprise
subject to the general control and regulation by the
state.
Public Sector: Sectors which are exclusively
controlled and managed by the State, and
Mixed or Planned Economy: Economy which are
jointly managed and controlled by the State and
private enterprise.
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