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Environment of Business
Economic Environment

Chapter

Economic Environment
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Environment of Business
Economic Environment

Economic Environment
Business is an economic activity that has and will continue to influence mankind the most. Almost every citizen of the world obtain his/her bread and butter from some sort of business. Either he is himself engaged in business or is earning because somebody else is engaged in business. A deeper analysis reveals that the basis of international relations is also business. The impact of business is so pervasive that besides judicial and administrative the third important work any government has to perform, is to regulate business in the national interest. Whether political interests precede or follow economic interest is a debatable issue. A change in the government or change in the system can change the fate of an organization. Behind every political decision there may be economics and

behind every economic decision, politics may be factor.

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Environment of Business
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Types of Government: Political System

A knowledge of the form of government can give a useful insight in appraising the political climate. The Governments can be classified as Parliamentary or Absolutist. Parliamentary government consult with their citizens from time to time to learn about their opinion and preferences. Most industrialised nations and all democratic nations can be classified as parliamentary. The absolutist system includes monarchies and dictatorships. In an absolutist system the ruling regime dictates government policy without considering citizens' needs or opinion. Libya, Saudi Arab, Brunei, Bhutan are instances of absolutist regime. The United Kingdom and Japan are good examples of constitutional hereditary monarchy where despite the monarch the government functions accounting to parliamentary democratic model. Governments can also be classified on the basis of the number of political parties. It can be two-party, multiparty, single party and or dominated by one party. In a two-party system only two parties dominate national politics as one rules and the other sits in opposition, although other parties are allowed.
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Type of Government: Economic System

The economic systems of a country provide another basis for classification of the type of government. These systems serve to explain whether businesses are privately owned or government owned, or if there is a combination of private and government ownership. Basically three systems can be identified: Communism/Socialism, Capitalism, and Mixed Economy. Capitalism Features of Capitalism i. Right to Private Property

ii.
iii. iv. v. vi.
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Freedom of Enterprise
Freedom of Choice by Consumer Profit Motive Competition Importance of Price System
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Socialism

Environment of Business
Economic Environment

General Features of Socialism i. ii. iii. iv. v. i. ii. Social Ownership of Means of Production No Private Enterprise Economic Planning Classless Society Consumer is not sovereign Co- Existence of Public and Private Property Price System and Government Directives

Mixed Economy

iii.
iv. v.
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Government Regulates and Controls the Private Sector

Consumers' sovereignty is protected Government Protects Labour Interest
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Environment of Business
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Types of Economy on the basis of Income

Economies can also be categorised on the basis of their levels of income, especially per capita income. There are countries which have a very high per capita income such as Singapore, Switzerland, Sweden, etc. On the other hand, there are countries where people are dying of hunger. Even with in one country there is alarming disparity in terms of development, usually termed dualism. Dualism refers to coexistence of the developed and underdeveloped in a country's economy. On the basis of per capita income, countries are classified as low income, middle income and high income economies.
Country /Region GNP $ Billion USA Japan Germany U.K. China Brazil Mexico India 9,646 4,337 2,058 1,464 1,065 607 498 471 GNP (PPP) $ Billion 9646 3,354 2,054 1,407 4,966 1,245 864 2,432 GNP Per Capita Dollars 34,260 34,210 25,050 24,500 840 3,570 5,080 460 GNP (PPP) Per Capita Dollars 34,260 26,460 25,010 23,550 3,940 7,320 8,810 2,390

World Bank, World Development Report, 2002

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Types of Economies on the Basis of Development

Low and middle income countries are usually regarded as developing or underdeveloped countries, and high income countries as developed countries. But this is not always true. Countries like Kuwait, Iran, UAE, etc., fall in highincome countries but are considered as developing countries. Measuring of Economic Development GNP: According to this, economic development is measured as an increase in the economy's real national income over a long period of time. GNP per capita: Meier defines economic development as, "the process whereby the real per capita income of a country increases over a long period of time. Welfare: According to Okun and Richardson, economic development is a "sustained, secular improvement in material well being, which may be considered to be reflected in an increasing flow of goods and services. Social Indicators: Social indicators include health, food and nutrition, education, literacy and skills, employment, working conditions, consumption of basic necessities, transportation, housing, social security, etc. All these indicators emphasise the quality of the process of development. Copyright 2007, Vivek Mittal
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Nature of the Indian Economy

From the late 1940s, many countries started a new beginning towards growth and development, but almost all of them followed different paths to achieve the goal of welfare of their people. These countries include erstwhile rich countries, Britain, France, West Germany, Japan, Switzerland, Australia, etc., which were ravaged in the Second World War and fell under a debt trap. Their industries were wiped out and a whole generation of human resources was ruined. If we go by the parameters of development-per capita income, standard of living, rate of unemployment, availability of basic amenities, etc., we will find that these capitalist mixed economies have outstripped all the socialist economies and even the mixed socialist economies, including India, in every sector. The chief characteristics of the Indian economy: Low Per Capita Income Inequitable Distribution of Income and Poverty Dominance of Agriculture Cont. Rapid Growth of Population Copyright 2007, Vivek Mittal
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Environment of Business
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Complex Mixed Economy The Indian economy is a complex mixed economic system. It has multiple sectors: Private, Public, Joint Co-Operative, Workers' sectors, etc. Economic factors like prices, inflation, interest rate, etc., are influenced and controlled by both central planning and as well as market forces. India has a multiple mechanism of dual prices, ceiling prices, floor prices, subsidised prices, statutory prices, retention prices, procurement prices, levy prices, and free market prices. In India, there is a complex system of liberal rules, strict regulations, control mechanism, planning, and a host of price regulations. The new economic policy was announced in July 1991, which is of far reaching importance. The Industrial Policy has five important features: 1. Industrial Licensing 2. Foreign Investment 3. MRTP 4. Public Sector Cont. 5. Foreign Technology Agreement Copyright 2007, Vivek Mittal
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Environment of Business
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IndiaA Mixed Economy In a mixed economy, the government has a positive role to play in the field of economic activity. Some industries may be completely state-owned, some may be privately owned and some may be jointly owned by the state and the private sector. India is regarded as a good example of a mixed economy. Because of the presence of public sector and economic planning in India, some economists prefer to characterise the Indian economy as state capitalism. But state capitalism is the same thing as a mixed economy. The following features (prior to 1991) explain why the Indian economy should be considered a mixed economy: Private Ownership of the Means of Production and Profit-Induced Commodity Production Significant role of market mechanism Big Business Houses Public Sector Cont. Economic Planning Copyright 2007, Vivek Mittal Government as a Regulator
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Changing Face of the Indian Economy Some of the key factors of India's new economy are as follows: 1. India is the fourth largest economy of the world in terms of PPP today. 2. It is an attractive destination for global FDI. Almost all the major MNCs of the world, from GM and GE of USA to Sony and Samsung see their future in India. 3. India is emerging as a global manufacturing hub. More and more companies are establishing their manufacturing unit in India. These include Nokia, Samsung, GM, Hyundai, Posco, Ispat, Lafarge, Holcim, Toyota etc. 4. India is today labelled as the back office of the world. As India is becoming the major outsourcing theater of the world. India commands more than 30% of the worlds outsourcing business. Indian companies are working for almost all the major companies of the world like GM, GE, Microsoft, Oracle, etc. 5. India is also regarded as the customised software factory of the world. Almost all the major software companies of the world have their operations in India. The list includes players like Microsoft, Oracle, HP, IBM, etc. Cont.
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India at a Glance

Population ( 2004)
GDP (2003 - 04 estimates) Per capita GDP GDP growth rate (2004-05) Estimated Foreign Exchange Reserves ( As of June 24, 2005) Food Grains Production ( 20 04) Exports ( April -March 2004 - 05) Imports (April - March 2004 - 05) Foreign Debt Foreign Debt as %age of GDP

1.073 billion
US$ 650 billion (approx.) US$ 543 6.9% US$ 138.89 billion 206.4 million tons US$ 79.59 billion

US$ 106.12 billion US$ 112 billion 17.8%

Unemployment rate

9.1%
Sovereign credit ratings

Moodys Standard and Poor Fitch IBCA Average literacy rate FII investment Apr - March (2004 - 2005 ) Apr - March (2003 - 2004 )

Baa3 BB+ BB+ 65.4%

Cont.
US$ 11.37 billion US$ 8.90 billion Copyright 2007, Vivek Mittal

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Environment of Business
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Economic Policies Economic policies formulated and implemented by the government impart

business in different ways. Almost every business is influenced by some or the

other economic policy. Important economic policies are: Fiscal Policy Monetary Policy Industrial Policy Foreign Trade Policy Foreign Exchange Policy Foreign Investment and Technology Policy

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