Economic

Environment
 Elements of Economy

PoliticalSystems
Economic System
Economic policies
Economic planning
Growth strategy
Industry
Agriculture
Infrastructure
 Elements of Economy

 Financial and fiscal Sectors

 Foreign Trade
 Balance of Payment
 Economic Development
 Sustainable Development
 Political Systems
System of Government in Nations”

Political systems have two dimensions

 Degree of collectivism vs. individualism

 Degree of democracy vs. totalitarianism
 Collectivism

Collective goals are more important than individual

goals
Individual rights are sacrificed for the good of the
majority
In the modern world collectivism is expressed
through socialism
 Socialism
Socialist ideology is split into 2 broad camps
Communism
 Communists believe that socialism can only be
achieved through violent revolution and totalitarian
dictatorship
Social democracy
 Marxist roots. State owned enterprises run for
public good rather than private profit
 Individualism

Is the direct opposite of collectivism

Central tenet is that individual economic and

political freedoms are the ground rules on which
society is based
 Democracy versus totalitarianism

Democracy and totalitarianism are at different

ends of a continuum with many shades of gray
in between
 Democracy

Government is by the people, exercised either

directly or through elected representatives
(representative democracy)
Elected representatives are held accountable
through safeguards
 Totalitarianism
One person/party exercises absolute control
over all spheres of human life (competing
political parties are banned)
communist totalitarianism
theocratic totalitarianism
tribal totalitarianism
right wing totalitarianism
 Economic systems
Connection between political ideology and
economic systems
countries where individual goals are given
primacy free market economic systems are
fostered
countries where collective goals are given
primacy there is marked state control of markets
 Types of economic systems

Capitalism
Socialism
 Mixed Economy
 Capitalism
 All the production and distribution activity is owned and
controlled by the private people.
 Such and economy is characterized by economic
liberty.
Individuals have right to own property.
It is s profit motive economy where there is a choice of
consumer exploitation
 Socialism
 All the production and distribution activity is owned and
controlled by the Government
 It is characterized by social ownership of production,
central planning, social welfare objective
Individuals have no right to own property.
 Mixed Economy
 All the production and distribution activity is owned and
controlled by the both public and private sectors.
 Such and economy is characterized by combination of
planning with price system, and coordination among
the objectives of private and social welfare.
 “But in the actual world there is no pure system of the
capitalism or socialism”

“Different countries have developed their own economic

systems based on economic characteristics”

So, it is said that “ The branding of economic systems

into fixed labels is no more in existence”
 Characteristics of Mixed Economy
(India)
 Government intervention

 Government role supports/facilitates free market enterprise in

following ways:
 establishing monetary system & legal system
 controlling monopolies
 provision of essential goods & services
 regulating undesirable business practices
 alleviate inequality in society (progressive tax, social welfare)
 attempting to provide stable economy
 Characteristics of Mixed Economy
(India)
The positive economic role of the state
 Regulatory role
 Promotional role
 Planner role
 Entrepreneur role
Co- existence of public and private role
Combined features of capitalism and socialism.
Profit motive and social welfare
Planning and pricing
 Sectors of Economy
House hold, Business and Govt. Sectors.
Primary, Secondary and Tertiary Sectors
Domestic and External Sectors.
Public, Private, Joint and Co- operative Sectors.
Productive and Unproductive Sectors.
Formal and Informal Sectors.
 Economic Policies
Industrial Policy

Foreign Exchange Policy

Fiscal Policy

Trade Policy

Monetary Policy
 Industrial Policy
 Industrial policy covers all those procedures,
principles, policies, rules and regulation which
control the industrial undertaking of a country
and shape the pattern of industrialization.
It may influence the location of industrial
undertakings, choice of technology, scale of
operation, product mix.
 Foreign Exchange Policy
Exchange rate policy and the policy in respect of
cross border movement of capital are important
for business.

The abolition/ liberalization of exchange controls

all around the world since the 1970’s has made
India to change its foreign exchange policy.
 Fiscal Policy
 Fiscal policy refers to the policy of government
regarding taxation, public expenditure, and
public debt.
It is that part of government policy which is
concerned with raising revenue through and
other means and deciding on the level and
pattern of expenditure.
It includes the union budget, state budgets.
 Trade Policy
Trade policy related to the export and imports of
the country

Government gives more importance to export

promotion and import substitution in trade
policy.
 Monetary Policy
Monetary policy refers to the use of instruments
with in the control of the Central Bank to
influence the level of aggregate demand for
goods and services or to influence the trends in
certain sectors of the economy.
MP operate through varying the cost and
availability of credit.
These producing desired changes in the assets
pattern of credit institutions, principally
commercial banks.
 Objectives of Monetary Policy
 Speed up economic development in the country to raise
national income and standard of living.
To control and reduce inflationary pressure in the country.
Adequate financing of economic growth and at the same time
ensuring reasonable price stability.
Expansion of credit and money supply with the rapid
development and diversification of the economy.
Check the rapid sliding of the rupee against the dollar.
Preventing heavy depreciation of the rupee.
 Measures of Money Stock
 The RBI employs measures of money stock
 M1 – Money supply
Currency with public, deposits.
 M2 – M1 + Post office savings, bank deposits
 M3 – M2 + Time deposits with the banks
 M4 – M3 + the total post office deposits
 Instruments of Monetary Policy
 The instruments of monetary policy my be
broadly classified in to
1. General( Quantitative) Methods
2. Selective method
 General Methods
 Bank Rate Policy

 Open Market Operation

Variable reserve Ratios

 SLR
 Selective control Method
Minimum margins for lending against specific
securities.
Ceilings on the amounts of credit for certain
purpose.
Discriminatory rate of interest charged on
certain types of advances.
Moral suasion
 Economic Planning
Afterthe attainment of independence the Prime
minister Nehru setup the planning commission
in 1950 to assess the country’s needs of
material, capital and human resources and to
formulate economic plans for their more balance
and effective utilisation.
Objectives of Planning
 To increase production to the maximum
possible extent so as to achieve higher level of
national and per capita income.
To achieve full employment.
To reduce inequalities of income and wealth.
To set up socialist society based on equality and
justice.
 achieve the absence of exploitation.
To increase productivity of agriculture and
industrial sectors.
 So, it is said that “ major strategy of our economic
planning all through has been to achieve growth
with justice”
 It can be justified with two points
1. Economic planning and Removal of poverty.
2. Economic planning and Social change
 Economic planning and Removal of
poverty.
1. Rapid Economic Growth
 The basic aim of economic planning in India is
bring rapid economic growth through
development of agriculture, industry, power,
transport and communications and all other
sectors of the economy.
1. Increase in Employment
 Removal of unemployment and
underemployment has been an important
objective of economic planning in the country.
 Economic planning and
Social change
1. Reduction of inequality of incomes.

2. Establishment of a socialist society

 Achievements
of
Economic planning in India
1. Initiation of process of growth
Since the beginning of planned economic
development in 1951, over the five decades
period country has been maintaining a trend
growth rate of 4.26% PA
This is mainly the result of economic planning.
2. Development of Infrastructure
During five decades period more than 9,300 KM
of railway tracks has been constructed.
About 13,000 KMS long railway track has been
electrified and steam engines have been
generally replaced by diesel and electronic
engines.
1996-97 irrigation potential was 8.94 crore
hectors as against 2.26 crore hectors in 1956-
57.
 3. Development of basic and capital
goods industries

Industrialmachinery and machine tools, electrical

engineering, transport equipment and iron and steel
industries were developed in the public sectors on a
considerable manner.
4. Increase in national Income

 1996-97 national income was 8,52,085 crores

compare to 1,32,367 crores in the year 1950-51.
5. Progress in Agriculture

During the last 50 years, the govt. had spent on and average 23 to 24
percent of the plan outlay in each of the five year plans on the
development of the agriculture and allied activities.
7. Progress in Industry

Between 53 to 55 percent of all planned outlay of the

govt. in each five year plan was on different industry.
 7. Diversification of exports and import
substitution

India’s dependence on foreign countries for the

import of capital goods has declined.
Similarly, a good number of consumer goods
imported earlier are being produced
indigenously.
 8. Development of Science and
technology

An other achievement of significance is the growth of

science and technology and the development of
technical and managerial application of science to run
the modern industrial structure.
Failures of Planning

1. Failure to eliminate poverty.

2. Failure to provide employment to all able citizens.
3. Failure to reduce inequalities of income and wealth.
4. Failure to check the growth of black money.
5. Failure to reduce concentration of economic power.
6. Neglect of social justice.
 Foreign Trade

Trade between different countries.

Referred to as international trade.
Includes import and export.
Legislative Measures for
Foreign Trade
 The Foreign Trade
( Development and Regulation) Act 1992

This act was replaced the Imports and Exports

(Control) Act 1947.
Enacted in the year 1992.
Came into force on 19th June 1992.
Objectives
 Importance of Foreign Trade in
Economic Development
 It provides the urge to develop the knowledge and
experience that makes development possible and
the means to accomplish it.
Foreign trade creates new capacity in some lines of
production. i.e. Developmental Imports.
Foreign trade makes full utilization of productive
capacity i.e. Maintenance imports.
Foreign trade is anti-inflationary because they
reduce the scarcity of consumer goods.
 Importance of Foreign Trade in
Economic Development
 It increases the flow of technology and
skills.
Helpful to earn foreign exchange reserves.
Promoting industrialization.
Promotes efficiency and effectiveness of
Indian companies.
 Balance of Payment
 A BOP statement is a double entry system
of record of all economic transactions
between the residents of a country and the
rest of the world carried out in a specific
period of time.
The BOP statement is divided in to two
major accounts namely
 Current account
 Capital account
 Causes for Imbalance in the BOP
 Sharp rise in imports.
Slow rise in export earnings.
Deficits on capital transaction.
 Foreign Investment
 Two types
 FDI
 Portfolio Investment
 Foreign Direct Investment
 Investment in a foreign country where the
investor retains control over the investment.
 It takes in the form of starting a subsidiary,
acquiring a stake in an existing firm or
starting a joint venture in the foreign
country.
 Portfolio Investment
 If investor investing the money in buying
equities, bonds, or other securities abroad,
then it is referred to as portfolio
investment.
In this case, the investor uses his capital in
order to get return on it. But has not much
control over the use of the capital.
 Foreign Investment

FDI Portfolio Investment

Wholly Owned Investment by

Subsidiary Joint Venture Acquisition
FII’s

Investment in
Securities, GDR’S
ADR’s
 Role of Foreign Capital
 Sustaining high level of investment.
Overcome the technological gap.
Utilization of Natural resources.
Development of basic economic
infrastructure.
Improvement of BOP position.
 Foreign Institutional Investors
The Indian stock market was opened up to
FII’s in 1992-93.
 Since then there has been a significant
increase in the portfoloio investment by FII’s.
According to the regulation of 1995, FII’s
may invest only in
 Securities in the primary and secondary
markets including shares, debentures of
companies listed on a recognized stock
exchanges in India.
 Foreign Institutional Investors
 Units
of schemes floated by domestic mutual
funds including UTI, whether listed on a
recognized stock exchange or not.
 Rloe of FII’s IN Capital market
FII’s investment has become an important
determinant of the stock market trends in India.
 Recognition of Indian stock exchanges by
foreign investors.
 Recognition of Indian companies in
international financial markets.
It contributing 95% to portfolio investment.
FII’s shift the burden of risk of an investment
from domestic to foreign investors.
 Economic Growth

“ Rate of expansion that can move an

underdeveloped country from a near
subsistence mode of living to substantially
higher levels in a comparatively short period
of time i.e. in decades rather than
centuries.”
• Economic growth includes two aspects
 Increase in GDP.
 Rise in per-capita income.
 Economic Development
The term economic development , in
contrast, is more comprehensive.
It implies progressive changes in the
socio – economic structure of a country.
Economic development involves a steady
decline in agriculture’s share in GNP and a
corresponding increase in the share of
industries, trade, banking, construction and
services.
 Sustainable Development

“ Sustainable development seeks to meet the

needs and aspiration of the present without
compromising the ability of future
generations to meet their own needs.”
Sustainable development approach was
presented in 1980 by “International Union for
the Conservation of Nature and Natural
Resources.”
 Sustainable development can be achieved
only if environment is conserved and
improved.
 Sustainable Development

So it is Said that “ There is conflicts between sustainable

development and business activities.”
 Why Conflicts

Business activities create

 Water pollution.
Air pollution
 Soil degradation
Deforestation
Resource Scarcity
 How to Minimize Conflicts
 Water supply Service.
 Sanitation
 Drainage facility.
 Solid waste management
 Use of renewable resources
 Land management
 Recycling the resources.
 Optimum utilization of resources
 Globalization and Its Impact
 Increase in the export of goods and services.
Increase in employment-
 In manufacturing sectors- 2.05% PA
 Construction- 7.09%
 In the year 1999-00 manufacturing sector
only provided employment opportunity for
48.01 million workers.
Foreign investment flows in India.
 Globalization and Its Impact

 Innovation with fresh ideas

 Effected domestic industries.
Contribution to the economic development.
 Business activities and Clean
Environment
“ For implementing any business activity
effectively, business needs a clean
environment. Clean environment should
include following features-.”
Good industrial policy.
Economic planning
Effective economic legislation.
Good economic conditions.
 Business activities and Clean
Environment

Politicalstability.
 Availability of resources.
Effective fiscal and monetary policy.
 Clean Environment and Economic
Development
 Clean environment of a country contributes to
the economic development of the country.
 But clean environment and economic
development in the country is inconsistent.
 In India there no effective industrial policy,
monetary and fiscal policy, political stability,
economic planning etc.
 these all factors affect the economic
development of the country.
 Present Economic conditions and
business
 Comparatively good for the business.
 economic liberalization.
Rapid growth in certain sectors.
 Moderate growth rate.
Moving towards developed country.