INDIAN ECONOMIC ENVIRONMENT«

BASIC PROPOSITIONS«
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Business is an economic activity.

Economic activity is the task of adjusting means to ends & vice versa. Economic activities may assume different forms such as consumption, production, distribution and exchange. Each business has a target to achieve with some available resources. Sometimes the level of target has to be matched with given resources and vice versa. The task of business is to optimize the outcome of economic activities.

structure. The business firm undertakes this transformation process to generate surplus (profit)Activities may be of different types such as manufacturing. It transforms a set of inputs into a flow of output-either goods or services or a combination of both and the nature of inputs and outputs are determined by the size. The firm hence carefully plans the optimum allocation of resources and optimum production mix.CONTDt ´ Business firm is an economic unit. farming etc. . The basic aim is to maximize the profit in the long run and with this surplus the firm can grow if it is productively invested.location and effiency of the firm under consideration. trading. transporting. mobilization. So creation . utilization of surplus forms the economic activity of the firm.

procurement or production. Whatever may be the decision variable . the decision making itself is the process of selecting the best available alternative. The firm therefore intends to get the best out of given resources or to minimize the use of resources for achieving a given goal. distribution or sale. . The business firm thinks of optimum allocation of resources because resources are limited in supply and same resources has alternative uses.CONTD« ´ Business decision making is an economic process. So business decision making is an economic process. input or output.

geography. By ¶environment· the reference is to the set of external factors which affect the operation of the business firm.ENVIRONMENT OF BUSINESS: ´ The business firm is a micro economic unit. sociology. forces and factors. space. polities & the govt. culture.. The internal dynamics of the firm is meant to adjust itself to the external environment. Non economic environment will encompass the country·s history. On the other hand business environment furnishes the macro economic context within which the firm operates. Business environment may be classified on the basis of time. Based on the relevance of economic & non-economic ¶factors· we may specify economic & non economic environment of business. .

Such arrangements have relevance from the standpoint of the macroeconomic decision making. whether capitalist.Capital market. Hard fact is that in each & every economy the resources are scarce. socialist. The design & structure of any economic system is conditioned by the socio-political arrangements. The business sector has economic relation with the Govt. Present day economic environment of business is a complex one. household sector & abroad sector.. . All civilized economies .ECONOMIC ENVIRONMENTt ´ ´ ´ ´ Economic environment of business has reference to the broad characteristics of the economic system in which the business operates. communist or mixed have certain fundamental economic problems to solve.

This is what constitutes the functioning of the economy.CONTD« ´ ´ ´ From the standpoint of resources the basic economic problem of every economy is that allocation of resources & subsequent production. In most of the economies. The process of decision making differs depending on how the problems are solved in different economies. . By free market mechanism or price mechanism we mean the free play of the forces of market demand & market supply to determine the equilibrium solution of the allocation problem.the nature of economic environment. This problem has got many facets: What to produce? How to produce? For whom to produce? When to produce? Every economy has to decide the qualities & quantities of goods & services to be produced. both free market pricing & centralized planning exist in different degrees.

´ Modern economies are not ¶closed· but ¶open·. they are actively engaged in international trade & cooperation. ´ . in day-today economic affairs is on the increase.CONTD« In most of the economies positive intervention by the Govt. ´ These facts define the environment & set the constraints within which the modern business firm must operate.

´ Typical factors of the non economic environment are sociological. educational-cultural.NON ECONOMIC ENVIRONMENT OF BUSINESSt Non economic environment is particularly essential in view of the fact that it influences and gets influenced by the economic environment. ´ . historical. physical etc.

markets. production. control & other forms of governmental interventions provides further insight into the nature of the economic system. . Economic system can be broadly classified as either feudalist or capitalist or socialist or mixed.CRITICAL ELEMENTS OF ECONOMIC ENVIRONMENTt ´ ´ ´ ´ The nature of the economic system obtained within a country is a critical element of the economic environment of business of that country. regulations. The role of factors like price. planning.). distribution & exchange transaction. The nature of the economy can be described in terms of the system of the consumption. monetary policies. policy guidelines (trade policies. fiscal policies etc.

6. Singular & Dual Economies. 4. Closed & Open economies. Barter & Monetized economies Developed & Underdeveloped economies. 7. 5. Subsistence & Commercialized economies. 1. 2. Dynamic & Static Economies. 3.CONTD« ´ Classification may be between: Simple & Complex Economies. .

The pure economic system everywhere is a mixed system: either mixed capitalism or mixed socialism. highly complex. ´ . monetized. dynamic. ´ Indian economy contains the elements of a mixed system. underdeveloped.CONTD« Indian economic system is modern. dual & open.

INDIAN ECONOMIC ENVIRONMENT: The economic environment of business in India has been changing at a fast rate mainly due to the changes in the economic policies of the government. The Government adopted several control measures on the functioning of private sector enterprises. ´ . economic planning. At the time of independence. etc. reduced role of private sector. All these efforts resulted a mixed response. To speed up the industrial growth and solve various economic problems. the Indian economy was basically agrarian with a weak industrial base. the government took several steps like state ownership on certain categories of industries.

As a result. the government of India introduced a radical change in economic policies in 1991.CONTD« ´ There was growth in net national product. (b) Privatisation. viz. This policy abolished industrial licensing in most of the cases. But rate of industrial growth was slow. disinvestment was carried out in many public sector industrial enterprises and opened up the economy considerably. . per capita income and development of capital goods sector and infrastructure.. allowed private participation in most industries. Let us discuss the developments under three heads. inflation increased and government faced a serious foreign exchange crisis during eighties. Foreign Investment Promotion Board was set up to channelize foreign capital investment in India. and (c) Globalisation. (a) Liberalization.

. It includes: ´ (i) abolishing industrial licensing requirement in most of the industries. ´ . ´ (ii) freedom in deciding the scale of business activities.LIBERALISATION : Liberalisation refers to the process of eliminating unnecessary controls and restrictions on ´ the smooth functioning of business enterprises.

CONTD« freedom in fixing prices of goods and services. ´ (v) reduction in tax rates. and ´ (vi) simplified policies to attract foreign capital and technology to India ´ . ´ (iv) simplifying the procedure for imports and exports.

Due to the policy reforms announced in 1991. 2.reduction in the number of industries reserved for the public sector from 17 to 8 (reduced further to 3 later on) and the introduction of selective competition in the reserved area. the expansion of public sector has literally come to a halt and the private sector registered fast growth in the postliberalised period.´ PRIVATIZATION : Privatisation refers to reducing the role of public sector by involving the private sectors in most activities.disinvestment of shares of selected public sector industrial enterprises in order to raise . The issues of privatisation include: 1.

improvement in performance through an MOU system by which managements are to be granted greater autonomy but held accountable for specified results.CONTD« resources and to encourage wider participation of general public and workers in the ownership in business. ´ .

removal of quantitative restrictions or quotas on exports and imports. capital. facilitating foreign investment and encouragement of foreign technology. technology and labour across national boundaries. These measures are expected to achieve a higher rate of growth. To achieve these objectives of globalisation. This implies free flow of goods and services. . the government has adopted various measures such as reduction in custom duties. and reduction of regional disparities. enlargement of employment potential.GLOBALISATION : Globalisation means ¶integrating· the economy of a country with the world economy.

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