Ref: Business Environment, Suresh Bedi

India is the second largest country in the world in terms of population and having roughly 12% of the worlds land It is also the worlds 4th largest economy in terms of GDP India has changed from a public sector domination in industries to an increasingly liberalised system, with both private and public players. Agricultural activity contributes only 23% to the GDP but employs 65% of the workforce

 Diversified economy ranging from technology

to Agriculture.

16% of world population and 12% of world

land area.

India is a mixed economy.

Gross Domestic Product dipped from 9 per cent to 6.7 per cent during 2008-09. Services sector contributing to 50 % of GDP. Industry has grown at the rate of 8.5% The growth in agriculture and allied activities decelerated 1.6 per cent in 2008-09.

The manufacturing, electricity and construction sectors decelerated to 2.4, 3.4 and 7.2 per cent respectively during 2008-09. Service sector growth fall by 7.8 %

Features

1) Agrarian Economy 2) High Population growth. 3) Low Per capita income

4)Unemployment
5) Capital scarcity 6) Large pool of skilled manpower.

It is considered as a developing economy The salient features of Indian economy can be specified as 1. predominance of agriculture 2. Rapid population growth 3. Low per capita income 4. Unemployment 5. Capital scarce economy

I. A socialistic system

The Govt has a constitutional obligation to prepare state policies on socialistic principles. Parliament accepted the socialistic pattern of society as far back as in December 1954. in 1976 the constitution was amended (42nd amendment) to declare India is socialistic state.

Minimisation of inequalities in income and opportunities Ownership and control of material resources for common good Prevention of concentration of wealth and means of production Equal pay for equal work for men and women

The phenomenal expansion of the public sector by itself is a testimony to the socialist philosophy of the state The gradual disinvestment in the public sector taking place during the process of economic reforms initiated in 1991 should not be misconstrued as the reversal of socialist philosophy It was exercise to manage the gigantic public sector and unleash some more competitive forces in the economic system.

A welfare state is continuously engaged in improving the average quality of life of the people and takes particular care of the weaker, marginal or vulnerable sections of the society, which are prone to exploitation
Right against exploitation is a fundamental right given in the constitution

Promotion of the welfare of the people by securing a social order Adequate means of livelihood Health and strength of workers Security, right to work, education and social security subject to limitation of resources Just and humane condition of work Participation of workers in the management of undertakings Raising the level of nutrition, standard living, public health and prohibition of intoxicated drinks and drugs injurious to health

Conforming to the obligation the Govt undertakes a no of welfare programs for the broader enhancement of human well-being and general quality of life of people. In 2001-02 total budgetary allocation on social services, employment scheme and rural development was about INR 40000 crore ( 2% GDP)

Education, sports and youth affairs Health and family welfare Water supply, sanitation, housing and urban development Information and broadcasting Welfare of sc/st and other backward classes Labour, employment and labour welfare Social welfare and nutrition Rural development Basic minimum services and slum development Prime ministers gramodya yojna Prime ministers Gram sadak yojna NREGA

The underlying premise of the mixed economy is that the means of production are mainly under private ownership; that markets remain the dominant form of economic coordination; and that profit-seeking enterprises and the accumulation of capital would remain the fundamental driving force behind economic activity.
Additionally, the government would wield considerable influence over the economy through fiscal and monetary policies designed to counteract economic downturns and capitalism's tendency toward financial crises and unemployment, along with playing a role in social welfare interventions. Subsequently, some mixed economies have expanded to include indicative economic planning or large public enterprise sectors

There are comparable roles of the private enterprise and market mechanism on the one hand and that of the Govt and the public sector on the other.
Under the present industrial policy, a number of areas which were earlier preserve of the public sector have been opened to the private enterprise but the public sector will continue to have dominant presence perpetuating the mixed character of the economy

There is co-existence of an ultra modern sector using sophisticated technology and a private sector using traditional and obsolete method of production The sectors which use modern technology include Petro chemicals, iron and steel, information technology, telecommunication, mineral exploration, automobiles, civil construction, civil aviation and shipping.

Sectors use traditional, outmoded technology are agriculture, trade, local transportation, and small scale industries. The technology transfer from form modern sector is very slow. Modern sector is capital intensive, it fails to create jobs at the rate at which it grows. The burden of employment thus falls on the traditional sector that leads to un-employment Capital formation in the traditional sector is so slow and depends heavily on state support

The development and growth of the Indian economy takes place under a full fledged system of economic planning by the Govt. Five year plans were started in the year 1951 and The planning commission is charged with the responsibility of framing them.

A five year plan lay downs the overall development strategy, assesses resource requirements and lays down resource mobilisation patterns.

The main and common objectives of planning have been high growth, reduction in income and wealth inequalities, development of infrastructure, poverty reduction, price stability, employment generation, and balanced economic development

In 90s Indian economy was going through a financial crisis due to :-

1. 2.

Large and Persistent Fiscal deficit. Foreign exchange crisis.

3.
4. 5. 6.

Huge deficit in the balance of Payments.

Economic slowdown. Gulf war and Recession. High Tariffs

Liberalization Privatisation Globalisation

Process of liberating economy from the various regulatory and control mechanisms of the state and of giving greater freedom to private enterprise.

Liberalisation has taken place in almost all the major sectors of economy including industry and services, infrastructure, banking, capital market, taxation and external sector covering foreign trade and investments in international financial transactions

De-licensing Freedom from locational requirement and government clearance Freedom to PSUs to access capital market Freedom to banks to enter the insurance sectors Tax exemptions, holidays and concession

Privatisation is not merely the transfer of ownership of government or publicly owned assets into private hands, it also refers to a process in which major economic decisions concerning production, exchange , distribution and compensation are entrusted to the market forces and decisions are taken by a large number of individual and private economic units.

Divestiture the sale of equity in full or part , of public sector units to private companies and individuals Franchising of public sector services to designated private sector units Licensing of technology of public sector units to private enterprises on annual royalty linked to output Government withdrawal from a particular field of production or service to be occupied by private enterprises. Withdrawal may be by way of voluntary closure of PSUs

Privatisation of management in which the govt retains the ownership but management is entrusted to private hands through lease or management contracts.

Its a process of global integration of products, technology, labour, investment, information and even cultures. It tends to narrow down international differences in prices, wage rates and interest rates. Globalisation happens through international trade, foreign investment, joint ventures, international licensing, franchising and sub-contracting, horizontal and vertical integration of industries, strategic alliances, international market sharing arrangements, advertisement and information exchange.

Restrictive trade practice are repealed Increase FDI in no of areas Creation of foreign investment promotion board as a separate body to study and clear FDI proposals. Reduction in the custom duty rates on a number of import items replacement of restrictive FERA act with more liberal FEMA

1. 2. 3.

Reduction in Government expenditure. Cutting down subsidies on agriculture, industry etc. Promotion of private investment and liberalisation of trade

a)
b)

It was initiated as a part of economic reforms.

Trade liberalisation and removal of protective entry barriers.

c)
d) e)

Financial liberisation and reducing the public sector financial institutions.

Reviving monetary policies, rate of interest to be determined by market forces. Gradual privatisation of all Public sector institutions and limited privatisation in core sectors like defence.

d)
e)

Reduction in social sector spending.

Tax reforms.

f)
g)

Poverty alleviation through social development fund.

Liberal policy for FDI and FII.

Infrastructure

Promotion of private investments in development of

ports, highways and public transport system.

Separation of Regulatory functions from policy and

operational functions.

Simplification of guidelines, procedures and equity

participation made easier.

Industry
Disinvestment of Public sector enterprises. Promotion of private and foreign players. FDI cap increased
industry Ex 100 % FDI in refining

Promotion of foreign collaboration, tie ups in automobile

Jewellery & Textiles

Removal of trade restrictions on the import of gold.

Promotion of more private players and limited restrictions for
imports.

100 percent FDI is allowed in textile sectors.

Steel Industry
Automation and New technology acquisitions. More FDI was allowed with liberalisation.

Strengths
1. 2. 3.
Large pool of skilled and unskilled manpower. Diversified nature of economy. Huge English speaking population. Large base of technocrats Ex- 3rd largest in terms no of engineers. High growth rate of Economy Abundant Natural resources.

4.
5. 6.

Weakness
1. 2. 3.
Majority of work force engaged in Agriculture. High rate of poverty.(42 % of population). Low productivity. Poor Infrastructure. Red tapism , corrupt political system and Bureaucracy. Rural- Urban divide and Unequal distribution of wealth.

4.
5. 6.

Opportunities
1. 2. 3.
Inflow of FDI more. Cost of Production is low Large percent of young population. (41.05%). Huge Natural gas deposits, agricultural resources etc.

4.

Threats
1. 2. 3.
High Fiscal deficit. Population explosion. Seasonal nature of Agriculture. Volatility of crude oil prices. Unwanted political interventions and growing corruption in the system.

4.
5.