Economic and Social Environment

Course structure
Economic and social Environment Structure of Indian Economy Planning and Policies External sector Economic Reforms since 1991.

Unit I Economic and Social Environment

Economic Environment of Business Socio-cultural and Politico-legal environment Changing role of Government

Why know environment?

Env. Totality of all factors which are external to and beyond control of manager Env. macro, complex, variable Firm micro unit Manager must be aware of all the aspects of environment for efficient decisionmaking

Economic Environment
Refers to the broad characteristics of economic system in which the firm operates Complexities firms have to maintain relations with govt, K-market, household sector, foreign sector Limited resources so problem of choice Free market mechanism Role of govt Openness of economies

Critical elements of economic environment

Kind of economic system Structure of economy whether high income, low income How does the economy function? Level of income, emp, savings, etc. Planning process Economic policies

Contd
Functioning of markets Objectives of national planning Policies of government Pattern of economic changes. Forms of international co-operation A manager must be aware of all these aspects of environment.

Non economic aspects of env.

Social Educational-cultural Political-legal Historical Physical All these factors have influence over economic env of a firm so manager must know them.

Socio-cultural Environment
Social institutions and systems Caste System, position of Women, children Social attitudes and values towards business, work Education and culture matching with requirement Role of govt Social movements and groups trade union, consumer, management, shareholders, environment movements Socio-economic order Social problems poverty, inequality, etc.So Cost Benefit Analysis is required Process of industrialisation can be analysed thru these factors Social movements are also important

Social Responsibility of Business firm

Profit maximization is not the only goal Serving the public Carrying out innovations Balancing manifold expectations of general social groups

Politico-legal environment
Forms of govt Ideology of ruling party Strength of opposition Role and responsibility of bureaucracy Political stability Govt plans Socio-economic legislation Institutions

Indian environment
Mixed Economy Public and private sectors coexist Central planning and pricing Social Welfare objective of govt This status evolved thru Industrial Act -1951 Directive Principles IPR 1956 MRTP Act Now new direction thru NIP 1991. (A note on the changing role of Govt. page 104)

Govt machinery for industries

What is the Purpose of: Company Laws SEBI MRTP FERA BIFR Consumer Protection Act Environment Protection Act

Unit II Structure of Indian Economy

Structural Dimensions of Indian Economy Structure of Indian Industry Public sector of India Private sector of India Small sector of India Sickness in the Indian industry

Basic structural Changes

NI has grown by average of 4%p.a. There has been fluctuation in the growth rate plan wise. Share of agriculture in Indias GDP has declined from 60% to 28% Share of industry has gone up from 13 to 25% Share of services 28 to 47%.

Contd
Saving rate 20% Money supply has increased by 17%p.a. Population growth rate 2.3 to 2.1% Sex ratio fallen from 972 to 933 Birth rate 9 per 1000 High dependency ratio 42% Urban population 11% to 23% Literacy rate 65% Life expectancy 65 years

Structure of Indian Industry

1951-65 period of strong foundation to Indian industries 1965-1980 period of industrial retrogression and deceleration 1980 onwards period of rehabilitation Diversification Table 5.5

Public sector
Role of Public Sector Capital formation Development of infrastructure Strong industrial base Economies of scale Removal of regional disparities Import substitution and export promotion Growth and Performance of Public sector Table 6.2)

Problems of Public sector

Nearly 50% of the units were incurring mounting losses particularly in irrigation works, state electricity boards, etc. Returns in the public sector investment remained to be low due to huge investment base. There are many administrative problems like lack of autonomy to the individual units, political interference regarding the locational and employment policies, lack of accountability, etc. Many Public sector enterprises have become overstaffed due to the employment generation programmes of the government. About 22% of the units are operating with the capacity utilization of less than 50%.

Why privatization?
Privatisation is a process that reduces the involvement of the state or public sector in the economic activities Why? Improves efficiency Fixing responsibility is possible Capital market discipline Remedial measures taken early Better services Tables 7.1, 7.2

Small Scale Industries

Role and performance Expansion and share in the NI Employment generation Equitable distribution of NI Mobilisation of capital and entrepreneurial skill Regional dispersal of industries Less industrial disputes Contribution to exports

Problems
Scarcity of Finance Problem of raw materials Problem of Outdated technology Marketing problem Other problems They face the problem of inefficient management. They do not get sufficient power and infrastructure facilities in comparison with the large-scale units. Many of the units have excess capacity which remains unutilized either due to lack of funds to buy raw material or due to lack of adequate power resources.

Govts policy towards SSIs

Establishment of many institutions Increase in investment limit Reforms in equity participation Change in ownership pattern Single Window Scheme for raising working capital as well as long term loans Marketing and other technical assistance. Promotion of competition by dereserving items Rs. 75,000 for getting ISO certification

Unit III planning and policies

Planning Goals and strategies Evolution of industrial policies Regulatory and promotional framework

Goals of planning
Increase NI and PCI Full employment Reduce inequalities Socialistic society based on equality and social justice.

Planning strategies
Different in different plans 1st plan (51-56) - rehabilitation, food selfsufficiency 2nd plan(56-60) big push for heavy industry 3rd plan (61-66) two legged strategy 4th plan(69-74) growth with stability and self reliance 5th plan(74-79) poverty eradication thru wage good model rather than heavy industry model 6th plan(80-85) - infrastructure

Contd
7th plan(85-90) direct attack on poverty, unemp, regional imbalance 8th plan(92-97) correcting fiscal deficit 9th plan (97-03) social welfare In nutshell, three types of strategies were followed: Nehru- Mahalanobis Model (13) Gandhian Model (15) Rao-Manmohan Model (16)

Industrial Policy
1948 division of industries in 4 categories 1956 3 categories gave more power to govt to nationalise 1980 redefined small units, dealt with industrial sickness, excess capacity 1991

Regulatory Framework
Industrial licensing Control over monopoly Foreign investment control SSI taxation Industrial location policy

Unit IV External Sector

Indian Foreign trade Indias balance of payment Export and import policies Foreign capital and collaborations Indias external debts

Indias Foreign Trade

Composition goods imported and exported. Reveals the economic status of a country Change in composition reflects the economic transformation of a country (table 13.4 and 13.5) Direction countries which are our trading partners. (table 13.6 and 13.7) There has been a change in the direction and composition of Indias trade since independence.

Balance of Payments
Systematic record of all economic transactions taking place between the residents of a country and the rest of the world within a given period of time Current account Capital account Official reserve account Trends in Indias BOPs (tables 14.2 and 14.3)

Trade policy
EXIM Policy (1997-2002) and 2002-07 page 55 Foreign investment policy Other trade policy reforms towards liberalisation ER, SEZ, etc.

Foreign Capital
Role of foreign capital Policy towards foreign capital FERA

External Debt
Role War Unexpected events To control inflation Depression Development Current expenditure on human capital

Unit V Economic Reforms since 1991

Industrial policy of 1991 Economic reforms: liberalisation, Globalisation and privatisation Financial sector reforms Fiscal sector reforms Economic reforms and social justice

Industrial Policy 1956

Monopoly of state 17 industries like arms, railway, atomic energy, air transport, heavy chemicals Mixed sector 12 industries like road and sea transport, machine tools, fertilizers, etc. Private sector rest of the industries

Contd.
Features of Indias IP Industries were divided into three categories exclusively for state ownership, state and pvt ownership and entirely for pvt sector. Importance given to small scale industries with employment generation view Balanced regional growth through concessions for units in backward areas.

New Industrial Policy 1991

Main Features 1. Industrial licensing 2. Policies relating to foreign investment 3. Role of public sector 4. MRTP act 5. Policy package for the small scale industries

Licensing
Only six industries need licensing now alcohol, cigarettes, hazardous chemicals, defence equipment, industrial explosives and drugs The delicensed industries are required to submit an Industrial Entrepreneur Memorandum to Secretariat for Industrial Approvals which acknowledges the receipt.

Foreign investment policies

High technology and high investment priority industries were allowed 51% initially and the 100% foreign equity such as capital goods, food processing, exportoriented services,etc. Except arms, gold, atomic energy, railway, coal and lignite, most of the industries are under the purview of automatic route.

Role of Public sector

Diluted role Only 3 industries left for pub sector atomic energy, minerals for atomic energy and railway Rehabilitation, reconstruction or selling of the existing public sector units

MRTP Act
MRTP limit goes All the units will be on par and need no prior govt approval in the delicensed industries. MRTP act accordingly amended to protect interests of the consumers against monopolistic and restrictive trade practices.

Policies for SSIs

Investment limit of Rs.1 crore Tiny units 25 lakhs Separate package to support them in skill and technological upgradation Equity participation by other industrial units to cement the economic bonds between the large and small sectors Limited or restricted partnership liability of at least one partner is unlimited and the others can have limited liability. This may attract capital from friends and relatives.

Concepts
Liberalisation Globalisation Privatisation

Indian Financial System

Structure of Indian Financial System Techniques of credit control Role of development banks

Financial sector Reforms

Regulation and supervision Rehabilitation of nationalised banks Reduction in SLR and CRR Deregulation of Interest Rates Phasing out of directed credit competition

Recos of Narasimhan Committee

Strong banks should be merged and weak banks should be closed 2-3 banks with international orientation, 8 to 10 national banks and large no of local banks. Budgetary support to recapitalisation should be abandoned. Rationalisation of branches and staff.

Contd..
Variable reserve ratio can range between 3 to 15%. Was 15% in 1980s. But the NC recommended reduction as it reduces the profitability of banks. Today, CRR is 5% of time and demand liabilities of banks. This has freed the cash balances of the commercial banks. Statutory Liquidity ratio SLR has to be between 25 to 40% of the net demand and time liabilities of banks. In 1990s it was as high as 39% which reduced the ability of banks to create credit and reduced inflation and also made more funds available for govt. But NC did not favour this. So SLR was brought down to 25%.

Fiscal reforms
Taxation Raja Chelliah Committee Public Expenditure Reforms Issues related to public debt.

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