The economic environment is an amalgamation of various economic factors, such as

total employment, productivity, income, wealth, inflation and interest rates. These factors
influence the spending patterns of individuals and firms. The economic environment is
also influenced by various political, social and technological factors. These include a
change in government and the development of new technology and business tools.

Environment in general, means the sum total of all physical and social conditions that
influence individuals or community. The environment, within which a business is to
operate, is called the business environment. The environment may be both economic and
non-economic. The business management must make full and deep study of the overall
total environment which is affected by so many heterogeneous factors or variables. so far
as the economic environment is concerned., it is affected by the total or overall economic
system of the economy, i.e., whether capitalist or social system. Country's system of
economic planning and control, such as Government's fiscal or monetary systems,
commercial and industrial policies of the Government, commercial and industrial laws, of
the country are all important elements of the economic environment. Every such element
affects the functioning of the business.

So the whole economic system prevailing in the country acts as a major determinant of
the economic environment. the economic system furthers, comprises the various sub-
systems within which the business enterprise work.

Components of the Economic Environment

The economic environment comprises of:

Income and Wealth:-: Income in an economy is measured by GDP, GNP and per
capita income. High values of these factors show a progressive economic environment.

 Employment levels:- High employment represents a positive picture of the economy.

However, there are many forms of unemployment, including partial employment and
disguised unemployment.

 Productivity:- This is the output generated from a given amount of inputs. High
levels of productivity support the economic environment.

Classifications of the Economic Environment

The economic environment can be classified into:

1) Micro environment
2) Micro environment

• Microeconomic environment:- It includes the economic environment of a

particular industry, firm or household and is primarily concerned with price
 determination of individual factors. The main consideration from a
microeconomic perspective is the efficient allocation of resources. This is
necessary to maximize total output.

• Macroeconomic environment:- It includes all the economic factors in totality.

The main consideration here is the determination of the levels of income and
employment in the economy.

Factors Affecting the Economic Environment

The economic environment of a nation as well as the world is impacted by:

• Inflation and Deflation: - Inflationary and deflationary pressures alter the

purchasing power of money. This has a direct impact on consumer spending,
business investment, employment rates, government programs and tax policies.

• Interest rates: Interest rates determine the cost of borrowing and the flow of
money towards businesses.

• Exchange Rates:-This impacts the price of imports, the profits made by exporters
and investors and employment levels (also through the impact on the tourism
industry).

• Monetary and fiscal policy:- This helps in attaining full employment, price
stability and economic growth.

Economic System

The economic system of a country may be capitalist, socialist or a mixed one. In a

capitalist country a system of capital or free enterprise gets developed and the decisions
regarding capital or free enterprise gets developed and the decisions regarding various
matters involving production, distribution and even consumption are based on the free
play of market forces of just demand and supply without much inference by the
government. Even the various functions of business management are all governed by free
play of market forces.

However, in a socialist economy, almost all business decisions are taken by the
Government. So business system does not depend on private enterprise. Business is
largely done by the public sector. Even the functional areas of business management are
largely looked after by the government officials. But in modern times, even such
government controlled economic systems have given way to free forces of market in
countries like China and Russia, what to say of our country. So free trade and
liberalization are now almost world-wide phenomenon. Mixed economy is a combination
of free capitalist and socialist or communist economy. In it the private enterprises co-
exist with the public enterprises. Thus the features of both capitalism as well as socialism
exist. Te social responsibilities of a business even under private sector assume more
importance than the other objectives of business.

Capitalism is an economic system in which the means of production are privately

owned; supply, demand and price are mostly set by market forces rather than economic
planning; and profit is distributed to owners who invest in businesses. Capitalism also
refers to the process of capital accumulation.

There is however no consensus on the definition of capitalism, nor how it should be used
as an analytical category.[1] There are a variety of historical cases over which it is applied,
varying in time, geography, politics and culture.[2] Economists, political economists and
historians have taken different perspectives on the analysis of capitalism. Scholars in the
social sciences, including historians, economic sociologists, economists, anthropologists
and philosophers have debated over how to define capitalism, however there is little
controversy that private ownership of the means of production, creation of goods or
services for profit in a market, and prices and wages are elements of capitalism[3];
although these fundamental elements, such as private property, often have various
different meanings in different disciplines and in different theories.

Economists usually put emphasis on the degree that government does not have control
over markets (laissez faire), and on property rights,[4][5] while most political economists
emphasize private property, power relations, wage labor and class.[6] There is a general
agreement that capitalism encourages economic growth.[7] The extent to which different
markets are "free", as well as the rules determining what may and may not be private
property, is a matter of politics and policy and many states have what are termed "mixed
economies."[6]

Capitalism as a system developed incrementally from the 16th century in Europe,[8]

although capitalist-like organizations existed in the ancient world, and early aspects of
merchant capitalism flourished during the Late Middle Ages.[9][10][11] Capitalism became
dominant in the Western world following the demise of feudalism.[11] Capitalism
gradually spread throughout Europe, and in the 19th and 20th centuries, it provided the
main means of industrialization throughout much of the world.[2]
Variants on capitalism may include, depending on the theorist, such concepts as anarcho-
capitalism, corporate capitalism, crony capitalism, finance capitalism, laissez-faire
capitalism, technocapitalism, Neo-Capitalism, late capitalism, post-capitalism, state
capitalism and state monopoly capitalism. There are also anti-capitalist movements and
ideologies including Anti-capitalism and negative associations with the system such as
tragedy of the commons, corporatism and wage slavery.

Socialist economics are the workings, flow, and distribution of funds, of socialism.
According to many proponents, socialist economic theories and arrangements are united
by the desire to: produce for use rather than profit (maximize use-value as opposed to
exchange-value), achieve greater equality, give workers greater control of the means of
production, utilize rational economic planning to create a more effective mechanism for
coordinating production and distribution of goods and services, and to direct the economy
towards social and societal economic goals. The term socialist economics may also be
applied to analyses of the economics of existing socialist systems, such as the works of
Hungarian economist János Kornai.[1]

Within the broad scope of socialist economics are various economic theories, sometimes
in opposition to one another. Some of these are: Marxian economics, the Lange Model,
participatory economics, cooperative economics and mixed economies (as championed
by social democrats and some democratic socialists).

Mixed economy

One containing features of both capitalism and socialism. Australia is a mixed economy,
with major state-owned enterprises in communications, transport, banking, energy
generation and health services, as well as privately owned enterprises in the same areas.
In common with capitalist economies such as the UK and New Zealand, Australian
governments are reducing these activities by privatising state-operated businesses. Other
examples are seen in eastern Europe and the former Soviet Union, where newly
independent states have embraced the principles of private enterprise. China, too,
provides a striking illustration of the transition to a mixed economy.

INDUTRIAL POLICY OF INDIA

Pandit Jawaharlal Nehru laid the foundations of modern India. His vision and
determination have left a lasting impression on every facet of national endeavour since
Independence. It is due to his initiative that India now has a strong and diversified
industrial base and is a major industrial nation of the world. The goals and objectives set
out for the nation by Pandit Nehru on the eve of Independence, namely, the rapid
agricultural and industrial development of our country, rapid expansion of opportunities
for gainful employment, progressive reduction of social and economic disparities,
removal of poverty and attainment of self-reliance remain as valid today as at the time
Pandit Nehru first set them out before the nation. Any industrial policy must contribute to
the realisation of these goals and objectives at an accelerated pace. The present statement
of industrial policy is inspired by these very concerns, and represents a renewed initiative
towards consolidating the gains of national reconstruction at this crucial stage.

In 1948, immediately after Independence, Government introduced the Industrial Policy

Resolution. This outlined the approach to industrial growth and development. It
emphasised the importance to the economy of securing a continuous increase in
production and ensuring its equitable distribution. After the adoption of the Constitution
and the socio-economic goals, the Industrial Policy was comprehensively revised and
adopted in 1956.

Post 1990s have seen a sea of change in the Industrial Policy of India. The
overprotective Indian Market were opened to foreign companies andinvestors.
Thus Indian Industryregistered an impressive growth during the last decade and half.
The number ofindustries in India have increased manifold in the last fifteen years.
Though the main occupation has been agriculture for the bulk of the Indian population, it
was realized that India would become a prosperous and a modern state with
industrialization. Therefore different programs were formulated and initiated to build up
an adequate infrastructure for rapid industrialization and improve theindustrial scenario
in India.

Industrial Policy revolves around the core parameters like -

 Industrial Licensing.

 Industrial
Entrepreneurs Memorandum.

 Locational Policy.

 Policy Relating to Small Scale Undertakings.

 Environmental issues.

The Industrial Policy of India fueled rapid increase in the various sectors in all
verticals. But the striking factor was observed in the IT, Telecommunication and
Pharmaceutical Industry. The Indian software industry has grown at a massive rate from a
mere US $ 150 million in 1991-92 to a staggering US $ 5.7 billion (including over $4
billion worth of software exports) in 1999-2000. No other Indian industry has performed
this well against the global competition. The telecommunication industry also marked
stupendous growth, so is the pharmaceutical industry. The Industrial Policy of resurgent
India has helped Indian industry to grow in leaps and bounds.

The Government of India's liberalized Industrial Policy aims at rapid and substantial
economic growth, and integration with the global economy in a harmonized manner.
The Industrial Policy reforms have reduced the industrial licensing requirements,
removed restrictions on investment and expansion, and facilitated easy access to foreign
technology and foreign direct investment. Industrial Policy

Main features

Objectives of the Industrial Policy of the Government are –

l to maintain a sustained growth in productivity;

l to enhance gainful employment;

l to achieve optimal utilisation of human resources;

l to attain international competitiveness and

l to transform India into a major partner and player in the global arena.

Policy focus is on –

l Deregulating Indian industry;

l Allowing the industry freedom and flexibility in responding to market forces and

l Providing a policy regime that facilitates and fosters growth of Indian industry.

Policy measures

Some of the important policy measures announced and procedural simplifications

undertaken to pursue the above objectives are as under:

i) Liberalisation of Industrial Licensing Policy

The list of items requiring compulsory licensing is reviewed on an ongoing basis. At

present, only six industries are under compulsory licensing mainly on account of
environmental, safety and strategic considerations. Similarly, there are only three
industries reserved for the public sector. The lists of industries reserved for the public
sector and of items under compulsory licensing are at Appendix III and IV respectively.

ii) Introduction of Industrial Entrepreneurs’ Memorandum(IEM)

Industries not requiring compulsory licensing are to file an Industrial Entrepreneurs’
Memorandum (IEM) to the Secretariat for Industrial Assistance (SIA). No industrial
approval is required for such exempted industries. Amendments are also allowed to IEM
proposals filed after 1.7.1998.

iii) Liberalisation of the Locational Policy

A significantly amended locational policy in tune with the liberlised licensing policy is in
place. No industrial approval is required from the Government for locations not falling
within 25 kms of the periphery of cities having a population of more than one million
except for those industries where industrial licensing is compulsory. Non-polluting
industries such as electronics, computer software and printing can be located within 25
kms of the periphery of cities with more than one million population. Permission to other
industries is granted in such locations only if they are located in an industrial area so
designated prior to 25.7.91. Zoning and land use regulations as well as environmental
legislations have to be followed.

iv) Policy for Small Scale Industries

Reservation of items of manufacture exclusively for the small scale sector forms an
important focus of the industrial policy as a measure of protecting this sector. Since 24th
December 1999, industrial undertakings with an investment upto rupees one crore are
within the small scale and ancillary sector. A differential investment limit has been
adopted since 9th October 2001 for 41 reserved items where the investment limit upto
rupees five crore is prescribed for qualifying as a small scale unit. The investment limit
for tiny units is Rs. 25 lakhs.

749 items are reserved for manufacture in the small scale sector. All undertakings other
than the small scale industrial undertakings engaged in the manufacture of items reserved
for manufacture in the small scale sector are required to obtain an industrial licence and
undertake an export obligation of 50% of the annual production. This condition of
licensing is, however, not applicable to those undertakings operating under 100% Export
Oriented Undertakings Scheme, the Export Processing Zone (EPZ) or the Special
Economic Zone Schemes (SEZs).

V) Non-Resident Indians Scheme

The general policy and facilities for Foreign Direct Investment as available to foreign
investors/company are fully applicable to NRIs as well. In addition, Government has
extended some concessions specially for NRIs and overseas corporate bodies having
more than 60% stake by the NRIs. These inter-alia includes (i) NRI/OCB investment in
the real estate and housing sectors upto 100% and (ii) NRI/OCB investment in domestic
airlines sector upto 100%.
 NRI/OCBs are also allowed to invest upto 100% equity on non-repatriation basis in all
activities except for a small negative list. Apart from this, NRI/OCBs are also allowed to
invest on repatriation/non-repatriation under the portfolio investment scheme.

vi) Electronic Hardware Technology Park (EHTP)/Software Technology Park (STP)

scheme

For building up strong electronics industry and with a view to enhancing export, two
schemes viz. Electronic Hardware Technology Park (EHTP) and Software Technology
Park (STP) are in operation. Under EHTP/STP scheme, the inputs are allowed to be
procured free of duties.

The Directors of STPs have powers to approved fresh STP/EHTP proposals and also
grand post-approval amendment in repsect of EHTP/STP projects as have been given to
the Development Commissioners of Export Processing Zones in the case of Export
Oriented Units. All other application for setting up projects under these schemes, are
considered by the Inter-Ministerial Standing Committee (IMSC) Chaired by Secretary
(Information Technology). The IMSC is serviced by the SIA.

vii) Policy for Foreign Direct Investment (FDI)

Promotion of foreign direct investment forms an integral part of India’s economic

policies. The role of foreign direct investment in accelerating economic growth is by way
of infusion of capital, technology and modern management practices. The Department
has put in place a liberal and transparent foreign investment regime where most activities
are opened to foreign investment on automatic route without any limit on the extent of
foreign ownership. Some of the recent initiatives taken to further liberalise the FDI
regime, inter alia, include opening up of sectors such as Insurance (upto 26%);
development of integrated townships (upto 100%); defence industry (upto 26%); tea
plantation (utp 100% subject to divestment of 26% within five years to FDI);
Encenhancement of FDI limits in private sector banking, allowing FDI up to 100% under
the automatic route for most manufacturing activities in SEZs; opening up B2B e-
commerce; Internet Service Providers (ISPs) without Gateways; electronic mail and voice
mail to 100% foreign investment subject to 26% divestment condition; etc.

The Department has also strengthened investment facilitation measures through Foreign
Investment Implementation Authority (FIIA).