BBALLB-213 BUSINESS ENVIRONMENT

UNIT-I
Important Note:

Dear Students,
The text book in the form of e-book is also shared for reference purposes. You must study
from the text-book. These compiled notes are for ready reference only.
God bless.
Dr. Vivek Verma

Meaning of Business Environment:

The word „business environment‟ indicates the aggregate total of all people, organisations
and other forces that are outside the power of industry but that may affect its production.
According to an anonymous writer- “Just like the universe, withhold from it the subset that
describes the system and the rest is environment”. Therefore, the financial, cultural,
governmental, technological and different forces which work outside an enterprise are part of
its environment. The individual customers or facing enterprises as well as the management,
customer groups, opponents, media, courts and other establishments working outside an
enterprise comprise its environment.

Importance of Business Environment:

Just like us, business operations do not survive in confinement. Every enterprise is not an
island to itself; it subsists, endures and develops within the circumstances of the part and
forces of its situation. While an individual enterprise is able to do minute to change or
manage these forces, it has no choice to reacting or modifying according to them. Good
knowledge of the environment by business managers allows them not only to recognise and
assess but also to respond to the forces outside to their enterprises. The significance of the
business environment and its perception by managers can be understood if we contemplate
the below-mentioned following points:
(A) It Helps in Identifying Opportunities and Making First Mover Advantage
 The environment provides numerous opportunities, and it is necessary to identify the
opportunities to improve the performance of a business.
 Early identification gives an opportunity to an enterprise be the first to identify
opportunity instead of losing them to competitors. Example: „Airtel‟ identified the
 need for fast internet and took first-mover advantage by providing 4G speed to its
users followed by Vodafone and Idea.
 Asian paints lost market share to Nerolac because it failed to match its technology.
(B) It Helps the Firm Identify Threats and Early Warning Signals
 The business environment helps in understanding the threats which are likely to
happen in the future.
 Environmental awareness can help managers identify various threats on time and
serve as an early warning signal. Example: Patanjali products have become a warning
signal to the rest of the FMCG
 The sector to develop similar products. Similarly, if an Indian firm finds that a foreign
multinational is entering the Indian market with new substitutes; it needs to prepare
accordingly.
 Chinese mobile phones have become a threat for Indian mobile phone manufacturers.
(C) It Helps in Tapping Useful Resources
 Business and industry avail the resources (inputs) from the environment and convert
them into usable products (outputs) and provide to society.
 The environment provides various inputs (resources) the like finance, machines, raw
materials, power and water, labour, etc.
 The business enterprise provides outputs such as goods and services to the customers,
payment of taxes to the government, to investors and so on.
Example: With the demand for the latest technology, manufacturers will tap the resources
from the environment to manufacture LED TVs and Smart TVs rather than collecting
resources for colour or Black & White TVs.
(D) It Helps in Coping With Rapid Changes
 The business environment is changing very rapidly, and the industry is getting
affected by changing market conditions.
 Turbulent market environment, less brand loyalty, divisions of markets, changes in
fashions, more demanding customers, and global competition are some examples of
changing the business environment.
Example: Jack Ma started Alibaba as he could see the potential of interest in E-Commerce.
(E) It Helps in Assisting in Planning and Policy Formulation
 The business environment brings both threats and opportunities to a business.
 Awareness of business environment helps in deciding future planning or decision
making.
Example: Multiple entries of Chinese phones like VIVO, Gionee, OPPO, etc. have posed a
threat to local players like Micromax, Karbonn, Lava etc. to think afresh how to deal with the
situation.
(F) It Helps in Improving Performance
 Environmental studies reveal that the success of any enterprise is closely bound with
the changes in the environment.
 The enterprises which monitor and adopt suitable business practices not only improve
their performance but become leaders in the industry also.
Example: Apple has been successful in maintaining its market share due to its proper
understanding of the environment and making suitable innovations in its products.

Features of Business Environment:

(A) The totality of External Forces
 Business environment includes everything which is outside the organisation.
 If we add all these forces, they will form a business environment.
Example: When Pepsi and Coca-Cola got permission to set up their business in India, it was
an opportunity for them and threat for local manufacturers like gold spot, camp-cola etc.
(B) Specific and General Forces
 Specific forces are those forces which directly affect the operational activities of the
business enterprise.
 Example: Suppliers, Customers, Investors, Competitors, Financers etc.
 General forces are those forces which indirectly affect the functioning of business
enterprises.
Example: Economic, Social, Political, Legal and Technological conditions.
(C) Inter-relatedness
 Different forces of business environment are interrelated to each other.
 One component of the business environment affects the functioning of other
components.
Example: The increased life expectancy of people and awareness of health consciousness has
increased the demand for many health products like diet coke, olive oil, and so many health
products.
(D) Dynamic Nature
The business environment is dynamic in nature and keeps on changing in terms of :
(a) Technological improvement,
(b) Shifts in consumer preferences,
(c) The entry of new competition in the market.
Example: Many established companies in FMCG (Fast Moving Consumer goods) sector are
focusing on producing the goods with natural ingredients with the entry of „Patanjali
Products‟.
(E) Uncertainty
 The changes in the business environment cannot be predicted accurately because of
future uncertainties.
 It is very difficult to predict the changes in the economic and social environment.
Example: There has been a sharp decline in the prices of Android smartphones due to the
entry of many new companies.
(F) Complexity
 All forces of the Business environment are interrelated and dynamic, which makes it
difficult to understand.
 Complex nature of Business environment can be understood if we study it in parts.
 Example: Increase in goods and service tax to 15 % would increase the revenue of
the government (economic), which would help the government to improve social being
of people (social) and reduce the personal disposable income of rich people and
thereby controlling inflation.
(G) Relativity
 Business Environment differs from place to place, region to region and country to
country.
Example: In China, the electricity to the industry is provided at cheaper rates as the
consumption increases and hence, it leads to mass production whereas, in India, it is
otherwise, higher consumption of electricity leads to costly electricity which results in lower
production & higher cost of production.

There are mainly two types of business environment, internal and external. A business has
absolute control in the internal environment, whereas it has no control on the external
environment. It is therefore, required by businesses, to modify their internal environment on
the basis of pressures from external.
Why It is Important for Business Enterprises to Understand Their Environment?
A) It Benefits in Tapping Useful Resources
  Business and industry avail the resources (inputs) from the environment and convert
them into usable products (output) and provide to society.
 The environment provides various inputs (resources) like finance, machines, raw
materials, power and water, labour etc.
 The business enterprise provides outputs such as goods and services to the customers,
payment of taxes to the government, interest/dividend to investors and so on.
Example: With the demand for the latest technology, manufacturers will tap the resources
from the environment to manufacture LED TVs and Smart TVs rather than collecting
resources for colour or black & white TVs.
(B) It Helps in Coping With Rapid Changes
 The business environment is changing very rapidly and the industry is getting affected
by changing market conditions.
 Turbulent market environment, less brand loyalty, divisions of markets, changes in
fashion, more demanding customers, and global competition are some examples of
changing the business environment.
Example: Jack Ma started Alibaba as he could see huge potential in E-Commerce.
INTERNAL ENVIRONMENT
Types of Business Environment

INTERNAL ENVIRONMENT

The internal environment has received considerable attention by firms. Internal environment
contains the owner of the business, the shareholders, the managing director, the non-
managers, employees, the customers, the infrastructure of the business organization, and the
culture of the organization.

It includes 6 Ms i.e.
– Man (Human Resource)
– Money (Financial Factors)
– Marketing Resources
– Machinery (Physical Assets)
– Management Structure and Nature
– Miscellaneous Factors (Research and Development, Company Image and Brand Equity,
Value System,
Competitive Advantage)

Usually, these factors are within the control of business. Business can make changes in these
factors according to the change in the functioning of enterprise.

Human Resource (MAN)

The human resource is the important factor for any organization as it contributes to the
strength and weakness of any organization. The human resource in any organization must
have characteristics like skills, quality, high morale, commitment towards the work, attitude,
etc. The involvement and initiative of the people in an organization at different levels may
vary from organization to organization. The organizational culture and over all environment
have bearing on them. It is an internal factor and an organisation has absolute control on
changing this factor as per the needs of the enterprise and other forces.

Financial Factors (MONEY)

Factors like financial policies, financial positions and capital structure are another important
internal factor which has a substantial impact on business functioning and performance.
Financial facilities are required to start and operate the organisation. The sources of finance
are share capital, banking and other financial institutions and unorganised capital markets.
The recent changes in the Indian capital market indicate the availability of plenty of finance,
both from the financial institutions as well as from the general public. The availability of
finance coupled with various incentives attached is a facilitating internal
factor.

Marketing Resources
Resources like the organization for marketing, quality of the marketing men, brand equity
and distribution network have direct impact on marketing efficiency of the company and
thereby, affecting the decision making component of the management. This, in lieu has great
impact on the internal environment of business.

Physical Assets and Facilities

Facilities like production capacity, technology are among the factors which influences the
competitiveness of the firm. The proper acquisition and working of the assets is indeed
essential for efficient working of the organization. An organisation invests money in plant
and machinery because it expects a positive rate of return over cost in future. The revenue
from the use of plant and machinery should be sufficient so as to cover the invested money,
operating costs, and generate enough profit to satisfy the organisation. The availability of
plant and machinery is dependent on technological development of the country and the
government‟s approach towards foreign technical collaboration.

Management Structure and Nature

The structure of the organization also influences the business decisions. Being internal forces,
the organizational structure like the composition of board of directors influences the decisions
of business. The structure and style of the organization directly has an impact on the decision
making decisions of a firm. These need to be appropriately managed for smooth functioning
and operations. The strategies available to an organisation are determined by its structure.
Different strategies are better suited to different environments. Thus, if an organization has to
thrive, its structure must fit its business environment in which it develops. Some markets and
environments change faster than others.

A firm working in high technological environment, for example, needs to have a fast reaction
time because its competitors are introducing new products all the time. In rapidly changing
environments, organizations may find it difficult to stay up to date on all the changes and
implications of their own operations and activities. Organizations in slow markets tend to
have rigid, hierarchical structures, while those in changing markets are more adaptive. They
can create new divisions in their management structure, to deal with emerging issues.

Miscellaneous Factors
The other internal factors that contribute to the business environment are as follows:

(i) Research and Development: Though Research and Development needs are mostly
outsourced from
the external environment but it has a direct impact on working, operations and decision
making of the organization. This aspect mainly determines the company‟s ability to innovate
and compete. R&D mainly results in technological improvements of the Business
environment. The technological environment refers to the sum total of knowledge providing
ways of doing things. It may include inventions and techniques which affect the way of doing
things that is, designing, producing and distributing products. A given technology affects an
organisation, in the manner it is organised and faces competition.

(ii) Company Image and Brand Equity: The image of the company in the outside market has
the impact on the internal environment of the company. It helps in raising the finance,
making joint ventures, other
alliances, expansions and acquisitions, entering sale and purchase contracts, launching new
products,
etc. Brand equity also helps the company in similar manner.

(iii) Value System: The principles of right and wrong that are accepted by an individual or
organisation are
what comprise value system. The value system of the founders and those at the helm of
affairs has important bearing on the choice of business, the mission and the objectives of the
organization, business
policies and practices. These values helps guide the basic principles of business for a period
of time which moulds an impression of positivism among people dealing with the business.
The values are
independent of business purposes and are integral part for success of business.

(iv) Competitive Advantage: Competitor analysis is a critical aspect of analyzing the internal
business environment. Competitor‟s actions affect the ability of the business to make profits,
because competitors will continually seek to gain an advantage over each other, by
differentiating their product and service, and by seeking to provide better value for money.

It involves:
– identifying the actual competitors
– assessing competitors‟ objectives, strategies, strengths & weaknesses, and reaction patterns
– selecting the strategies to deal with competitors.

The internal analysis of strengths and weaknesses focuses on internal factors that give an
organization certain advantages and disadvantages in meeting the needs of its target market
thereby gaining the competitive edge over the competitors.
EXTERNAL ENVIRONMENT
The external environment of an organisation comprises of all entities that exists outside its
boundaries, but have significant influence over its growth and survival. An organisation has
little or no control over its external environment but needs to constantly monitor and adapt to
these external changes. A proactive or reactive response leads to significantly different
outcomes.

There are two types of external environment

– Micro/Operating Environment
– Macro/General Environment
MICRO ENVIRONMENT
Micro Environment
The micro environment is also known as the task environment and operating environment
because the micro environmental forces, though are external factors, still have a direct
bearing on the operations of the firm. The micro environment consists of the factors in the
company‟s immediate environment that affects the performance and working of the company.
The micro environmental factors are more intimately linked with the company than the macro
factors. The micro forces need not necessarily affect all the firms in a particular industry in
the similar ways. Some of the micro factors may be particular to any given type of
organisation.

Micro environmental factors, internal factors close to a business that have a direct impact on
its strategy includes:
– Customers
– Employees
– Suppliers
– Shareholders
– Media
– Competitors

Customers: Organizations survive on the basis of meeting „customer needs and wants‟ and
providing benefits to their customers. Failure to do so will result in a failed business strategy.
This includes offering
customers the best quality products at reasonable prices.
(ii) Employees: Employing the correct staff and keeping staff motivated is an essential part of
an organization‟s strategic planning process. Training and development play a critical role in
achieving a competitive edge; especially in service sector marketing. Employees have a
substantial influence on the success of the enterprise. They help in executing the policies and
plans of business. If this factor is not given, as much attention as it requires, it may prove to
be non beneficial for the organisation as employees after customer, are the backbone of the
organisation.

(iii) Suppliers: Suppliers provide businesses with the materials they need to carry out their
manufacturing
and production activities. A supplier‟s behaviour will directly impact the business it supplies.
For example,
if a supplier provides a poor service, this could increase timescales or lower product quality.
An increase in raw material prices will affect an organization‟s marketing mix strategy and
may even force price increases. Close supplier relationships are an effective way to remain
competitive and secure
quality products.

(iv) Shareholders: A shareholder is an individual that invests into company‟s business. They
own shares of the company thereby end up owning the company itself. Therefore, they have
the right to vote on decisions that affect the operations of company. This means that
shareholders affect the functions of the business. The introduction of public shareholders
brings new pressures as public shareholders want a return from their money invested in the
company. Shareholder pressure to increase profits will affect organizational strategy.
Relationships with shareholders need to be managed carefully as rapid short term increases in
profit could detrimentally affect the long term success of the business, if all is distributed as
dividend. On the other hand, to keep shareholder‟s motivation, appropriate dividends are
needed to be distributed. There has to be a balance between health of the organisation and
interests of shareholders.

(v) Media: Positive media attention can „make‟ an organisation (or its products) and negative
media attention can „break‟ an are required. Organizations need to mange the media so that it
helps promote the
positive things about the organisation and conversely reduce the impact of a negative event
on their reputation. Some organizations will even employ public relations (PR) consultants or
„gurus‟ to help them manage a particular event or incident. Consumer television programmes
with a wide and more direct audience can also have a very powerful impact on the success of
an organisation. Some business recognizes this and uses media support for building their
image and reputation.

(vi) Competitors: The name of the game in marketing a product is differentiation. Can the
organisation offer benefits that are better than those offered by competitors? Does the
business have a unique selling
point (USP)? Competitor analysis and monitoring is crucial if an organisation is to maintain
or improve its position within the market. If a business is unaware of its competitor‟s
activities, they will find it very difficult to „beat‟ them. The market can move very quickly,
whether that is a change in trading conditions,
consumer behaviour or technological developments. As a business, it is important to examine
competitors‟ responses to the changes, so that firm can maximize the benefits.

Macro Environment
Macro environment is also known as general environment and remote environment. Macro
factors are generally more uncontrollable than micro environment factors. When the macro
factors become uncontrollable, the success of company depends upon its adaptability to the
environment. This environment has a bearing on the strategies adopted by the firms and any
changes in the areas of the macro environment are likely to have a far-reaching impact on
their operations.

The macro environment is primarily concerned with major issues and upcoming changes in
the environment.

The acronym for the macro analysis is “STEEPG.” The five areas of interest are:
– Socio-Cultural and Demographics
– Technology
– Economic Conditions
– Ecology and Physical Environment
– Political and Legal
(i) Socio Cultural and Demographics: Societal values and lifestyles change over time, and
the most important of these; directly or indirectly leave an impact on the business
environment. For example, over the past generation, it has become acceptable for women to
work; people are not retiring at 65; and people are more aware of the environment etc.

The changes in culture and lifestyle may come from many sources: medical (smoking,
healthy eating,
exercises); science (global warming, going „green‟); economic (people working longer,
women in the
workforce); cultural diversity (music preferences, foods, living accommodations, medicine);
and technologies (biodegradable plastic) are just a few examples.
These changes will be important to the industry and to the business. The social environment
of business
includes social factors like customs, traditions, values, beliefs, poverty, literacy, life
expectancy rate etc. The social structure and the values that a society cherishes have a
considerable influence on the functioning of business firms. For example, during festive
seasons, there is an increase in the demand for new clothes, sweets, fruits, flower, etc. Due to
increase in literacy rate, the consumers are becoming more conscious of the quality of the
products. Due to change in family composition, more nuclear families with single child
concepts have come up. This increases the demand for the different types of household
goods. It may be noted that the consumption patterns, the dressing and living styles of people
belonging to different social structures and culture vary significantly.

Demographics refer to the size, density, distribution and growth rate of population. All these
factors have a bearing on the demand for various goods and services. For example, a country
where population rate is high and children constitute a large section of population, and then,
there will be more demand for such products. Similarly, the demand of the people of cities
and towns are different than that of people of rural areas. The high rise of population
indicates the easy availability of labour. These encourage the business enterprises to use
labour intensive techniques of production. Moreover, availability of skilled labour in certain
areas motivates the firms to set up their units in such area. For example, the business units
from America, Canada, Australia, Germany, UK, are coming to India due to easy availability
of skilled manpower. Thus, a firm that keeps a watch on the changes on the demographic
front and reads them accurately will find opportunities knocking at its doorsteps.

(ii) Technology: Technology is understood as the systematic application of scientific or other

organised
knowledge to practical tasks. Technology changes fast and to keep the pace with the
dynamics of business environment; organisation must be on its toes to adapt to the changed
technology in their system. The business in a country is greatly influenced by the
technological development. The technology
adopted by the industries determines the type and quality of goods and services produced.
Technological
environment influences the business in terms of investment in technology, consistent
application of technology and the effects of technology on markets. Technological
environment include the methods, techniques and approaches adopted for production of
goods and services and its distribution. The varying technological environments affect the
designing of products in different countries. Technology encompasses something more than
computers. Technology comes in many forms such as medical devices, new plastics, and
production techniques.

(iii) Economic Conditions: There is a close relationship between business and its economic
environment. It obtains all inputs from economic environment and all its output is absorbed
here with. The state of the
economy is usually in flux. The current situation (specific to the industry) and any changes
that may be
forecast are important. The economy goes through a series of fluctuations associated with
general booms and recessions in economic activity. In a boom nearly all business are
benefited whereas recession is a case vice versa. Business is influenced by economic aspects
like interest rates, wage rates etc. The survival and success of each and every business
enterprise depends fully on its economic environment. The main factors that affect the
economic environment are:

– Economic Conditions: The economic conditions of a country refer to a set of economic

factors that have great influence on business organizations and their operations. These
include gross domestic product, per capita income, markets for goods and services,
availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital
market etc. All these help in improving the pace of economic growth.

– Economic Policies: All business activities and operations are directly influenced by the
economic
policies framed by the government from time to time. Some of the important economic
policies are:
• Industrial Policy
• Fiscal Policy Monetary Policy
• Foreign Investment Policy
• Export –Import Policy (EXIM Policy)

The government keeps on changing these policies from time to time in view of the
developments taking place in the economic scenario, political expediency and the changing
requirement. Every business organization has to function strictly within the policy framework
and respond to the changes therein.

– Economic System: The world economy is primarily governed by three types of economic
systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. The
type of economic system influences greatly the choice of business.

(iv) Ecology and Physical Environment: The ecology and physical environment plays a
large part in many businesses – especially for those which carry out production and
manufacturing activities. Infact, business are affected on daily basis due to enviornmental and
ecological changes. For example, the impact of climate change must be considered: water and
fuel costs could change dramatically, if the world
warms by only a couple of degrees. The natural environment includes geographical and
ecological factors that influence the business operations. These factors include the availability
of natural resources, weather and climatic condition, location aspect, topographical factors,
etc. For example, sugar factories are set up only at those places where sugarcane can be
grown. It is always considered better to establish manufacturing unit near the sources of
input. Further, government‟s policies to maintain ecological balance, conservation of natural
resources etc. put additional responsibility on the business sector.
(v) Political and Legal: Political environment refers to three political institutions viz.
legislature, executive
and the judiciary in shaping, directing, developing and controlling business activities. The
political environment of a country is influenced by the political organisations such as
philosophy of political parties, ideology of government or party in power, nature and extent
of bureaucracy influence of primary groups. The political environment of the country
influences the business to a great extent. The political environment includes the political
system, the government policies and their attitude towards the business community. All these
aspects have a bearing on the strategies adopted by the business firms. The stability of the
government also influences business and related activities to a great extent. It sends a signal
of strength, confidence to various interest groups and investors. Further, ideology of the
political party also influences the business organisation and its operations. Political changes
are closely tied up with legal changes. Legal environment includes flexibility and adaptability
of law and other legal rules governing the business. It may include the exact rulings and
decision of the courts. These affect the business and its managers to a great extent. This refers
to set of laws, regulations, which influence the business organisations and their operations.
Every business organisation has to obey, and work within the framework of law.
Additionally, an industry may have specific laws and regulations. For example, a pet store
would deal with federal animal welfare and prohibited pet laws as wells as state laws
concerning animal cruelty, housing, veterinary care and so on.

(vi) Global Environment: International Business Environment is multidimensional including

the political risks, cultural differences, exchange risks, legal & taxation issues. Therefore
(IBE) International Business Environment comprises the political, economic, regulatory, tax,
social & cultural, legal, & technological environments. The main cultural and social factors
that affect international business are language, education, religion, values, customs, and
social relationships. These relationships include interactions among families, labor unions,
and other organizations.

Assessing Risk in Business Environment

What is Business Risk?
Business risk is a component of total risk. Business risk represents the notion that a firm may
experience events or circumstances that create a threat to its ability to continue operating.
A firm‟s management team is regularly tasked with making decisions about how to grow and
operate a business. However, every decision about a new product offering, a new target
market, or a potential merger (and many other examples) has the potential to fail and put the
company‟s ability to operate at risk.
Understanding Risk – Business Risks vs. Financial Risks
Broadly speaking, risk can be split up into two main categories – financial risk and business
risk.
Financial Risk
Financial risk comes with the use of leverage (sometimes called gearing); it occurs when a
company has a heavy reliance on debt as a funding source.
Liquidity becomes a much bigger concern for a management team that borrows, as principal
and interest payments must be made to service its debt obligations. A company that uses debt
in its capital structure becomes susceptible to rising interest rates and is required to adhere to
the terms of its various credit agreements.
Financial risk represents the notion that a company‟s commitment to meet debt service
obligations, as well as potentially onerous covenants and reporting requirements, could push
the firm into an event of default.
Business Risk
Business risk, on the other hand, is about internal and external forces that converge to create
threats to a company and its management team. These threats could emerge from:
1. The external business environment, including macroeconomic forces well outside the
control of management (like inflation, foreign exchange rates, or prevailing interest
rates).
2. Industry-specific risks, like the level of concentration in the industry, regulatory risk,
barriers to entry, the threat of disruption, and other factors.
3. Company or firm-level concerns, like ineffective management, reputational risk, a
toxic corporate culture, and customer or supplier concentration risk.

Examples of Company-Level Business Risks

Company-level business risks are typically tied to a firm‟s strategy and operations. Company
level business risks include countless subcategories of potential threats; they include (but are
not limited to):

 How viable a company‟s business model is.

 How good the product-market fit is.
 How effectively management is able to identify and reach its target market.
  The size of the total addressable market (TAM), and whether it‟s growing or
contracting.
 The bargaining power of suppliers and customers.

Frameworks to Assess Business Risk

There are many tools and frameworks available to management teams and the analyst
community that can help assess and quantify business risk. We‟ve organized some of these
into two buckets:

Economy, Business Environment, and Industry

 PESTEL Analysis – Stands for Political, Economic, Social, Technological,

Environmental, and Legal. The framework seeks to understand factors in each of
these 6 buckets that may create opportunities or risks for a business.
 Porter’s 5 Forces – An analysis tool that helps conceptualize the attractiveness of a
particular industry, measured against factors like barriers to entry, customer and
supplier bargaining power, and the threat of substitute products or services.

Company Level

 Competitive positioning and competitive advantage help us understand how a

business looks to differentiate itself from competitors. A tool like Hax‟s Delta Model
is a useful framework to accomplish this.
 Ansoff’s Matrix – Sometimes referred to as the Product-Market Expansion Grid. The
framework helps analysts quantify the relative risk of different growth strategies.
 SWOT Analysis – SWOT stands for Strengths, Weaknesses, Opportunities, and
Threats. Strengths and weaknesses are characteristics of a business that put it at a
relative advantage or disadvantage (respectively) over its competitors. Opportunities
and threats are elements in the external environment that may present areas for growth
or significant risk to a specific firm.

Social Responsibility of Business

e-book Francis Cherunilam- Page no. 177 (type in box)

Unit-II
Economic System
Meaning of Economic System
An economic system is a mechanism with the help of which the government plans and
allocates accessible services, resources, and commodities across the country. Economic
systems manage elements of production, combining wealth, labour, physical resources, and
business people. An economic system incorporates many companies, agencies, objects,
models, and deciding procedures.
Types of Economic Systems
Capitalist economy: In a capitalist system, the products manufactured are divided among
people, not according to what they want but on the basis of purchasing power, which is the
ability to buy products and services. This means an individual needs to have the money with
him to buy the goods and services. The low-cost housing for the underprivileged is much
required but will not include demand in the market because the needy do not have the buying
power to back the demand. Therefore, the commodities will not be manufactured and
provided as per market forces.
Socialist economy: This economy system acknowledges the three inquiries in a different
way. In a socialist society, the government determines what products are to be manufactured
in accordance with the requirements of the society. It is believed that the government
understands what is appropriate for the citizens of the country. Therefore, the passions of
individual buyers are not given much attention. The government concludes how products are
to be created and how the product should be disposed of. In principle, sharing under
socialism is assumed to be based on what an individual needs and not what they can buy. A
socialist system does not have a separate estate because everything is controlled by the
government.
Mixed economy: Mixed systems have characteristics of both the command and the market
economic system. For this purpose, the mixed economic systems are also known as dual
economic systems. However, there is no sincere method to determine a mixed system.
Sometimes, the word represents a market system beneath the strict administrative control in
certain sections of the economy.

Economic Sector
The economic sector is divided into three economic sectors. They are as follows:
Primary sector: It is that sector which relies on the environment for any production or
manufacturing. A few examples of the primary sector are mining, farming, agriculture,
fishing, etc.
Secondary sector: In this sector, the raw material is transferred to a valuable product. A few
examples are construction industries and manufacturing of steel, etc.
Tertiary sector: It is also known as service sector, and it includes production and exchange
of services. A few examples are banking, insurance, transportation, communication, etc.
Differences between Capitalist, Socialist, and Mixed Economies
Parameters Capitalist Socialist Mixed economy
economy economy

Ownership of Private ownership Public ownership Both public and private

property ownerships

Price Prices are Prices are Prices are determined

determination determined by the determined by the by the central planning
market forces of central planning authority, and demand
demand and authority. and supply.
supply.

Motive of Profit motive Social welfare Profit motive in the

production private sector and
welfare motive in the
public sector

Role of No role Complete role Full role in the public

government sector and limited role
in the private sector

Competition Exists No competition Exists only in the

private sector

Distribution of Very unequal Quite equal Considerable

income inequalities exist

Difference between Economic Growth and Economic Development

Economic Growth refers to the rise in the value of everything produced in the economy. It
implies the yearly increase in the country‟s GDP or GNP, in percentage terms. It alludes to a
considerable rise in the per-capita national product, over a period, i.e. the growth rate of
increase in total output, must be greater than the population growth rate.
Economic Growth is often contrasted with Economic Development, which is defined as the
increase in the economic wealth of a country or a particular area, for the welfare of its
residents. Here, you should know that economic growth is an essential but not the only
condition for economic development.
The economic trend in a country as a whole is the major component of its business
environment. An economy whose growth rate is high provides a promising business prospect
and thus builds business confidence. In this post, you will find all the substantial differences
between these two.
Comparison Chart

BASIS FOR ECONOMIC ECONOMIC

COMPARISON GROWTH DEVELOPMENT

Meaning Economic Growth is Economic Development

the positive change in involves rise in the level of
the real output of the production in an economy along
country in a particular with the advancement of
span of time. technology, improvement in
living standards and so on.

Concept Narrow Broad

Scope Increase in the Improvement in life expectancy

indicators like GDP, rate, infant mortality rate,
per capita income etc. literacy rate and poverty rates.

Term Short term process Long term process

Applicable to Developed Developing Economies

Economies

How it can be Upward movement in Upward movement in real

measured? national income. national income.

Which kind of Quantitative changes Qualitative and quantitative

changes are changes
expected?

Type of process Automatic Manual

BASIS FOR ECONOMIC ECONOMIC
COMPARISON GROWTH DEVELOPMENT

When it arises? In a certain period of Continuous process.

time.

Definition of Economic Growth

Economic Growth is defined as the rise in the money value of goods and services produced
by all the sectors of the economy per head during a particular period. It is a quantitative
measure that shows the increase in the number of commercial transactions in an economy.

Economic growth can be expressed in terms of gross domestic product (GDP) and gross
national product (GNP), which helps in measuring the size of the economy. It lets us compare
in absolute and percentage change, i.e. how much an economy has progressed since last year.
It is an outcome of the increase in the quality and quantity of resources and advancement of
technology.
Definition of Economic Development
Economic Development is defined as the process of increase in volume of production along
with the improvement in technology, a rise in the level of living, institutional changes, etc. In
short, it is the progress in the socio-economic structure of the economy.
Human Development Index (HDI) is the appropriate tool to gauge the development in the
economy. Based on the development, the HDI statistics rank countries. It considers the
overall development in an economy regarding the standard of living, GDP, living conditions,
technological advancement, improvement in self-esteem needs, the creation of opportunities,
per capita income, infrastructural and industrial development, and much more.
Key Differences Between Economic Growth and Economic Development
The fundamental differences between economic growth and development are explained in the
points given below:
 1. Economic growth is the positive change in the real output of the country in a
particular span of time economy. Economic Development involves a rise in the level
of production in an economy along with the advancement of technology,
improvement in living standards, and so on.
2. Economic growth is one of the features of economic development.
3. Economic growth is an automatic process. Unlike economic development, which is
the outcome of planned and result-oriented activities.
4. Economic growth enables an increase in the indicators like GDP, per capita income,
etc. On the other hand, economic development enables improvement in the life
expectancy rate, infant mortality rate, literacy rate, and poverty rates.
5. Economic growth can be measured when there is a positive change in the national
income, whereas economic development can be seen when there is an increase in real
national income.
6. Economic growth is a short-term process that takes into account the yearly growth of
the economy. But if we talk about economic development it is a long-term process.
7. Economic Growth applies to developed economies to gauge the quality of life, but as
it is an essential condition for development, it applies to developing countries also. In
contrast, economic development applies to developing countries to measure progress.
8. Economic Growth results in quantitative changes, but economic development brings
both quantitative and qualitative changes.
9. Economic growth can be measured in a particular period. As opposed to economic
development is a continuous process so that it can be seen in the long run.
Example
To understand the two terms, we will take an example of a human being. The term growth of
human beings simply means the increase in their height and weight which is purely physical.
But if you talk about human development, it will take into account both the physical and
abstract aspects like maturity level, attitudes, habits, behaviour, feelings, intelligence, and so
on.
In the like manner, growth of an economy can be measured through the increase in its size in
the current year in comparison to previous years, but economic development includes not
only physical but also non-physical aspects that can only be experienced like improvement in
the lifestyle of the inhabitants, increase in individual income, improvement in technology and
infrastructure, etc.
Conclusion
After the above discussion, we can say that economic development is a much bigger concept
than economic growth. In other words, the economic development includes economic growth.
As the former uses various indicators to judge the progress in an economy as a whole, the
latter uses only specific indicators like gross domestic product, individual income etc.

New Economic Policy

The new economic policy (NEP) is a major shift in India‟s economic trajectory. The NEP
aims to make India a global economic leader in sectors such as information technology,
innovation, and manufacturing. The policy also aims to create jobs, reduce poverty, and
improve the country‟s infrastructure. Let‟s take a closer look at the key aspects of the NEP
and see how it might impact India‟s economy.
What Is The New Economic Policy?
The New Economic Policy, or the NEP, is a policy introduced in India in 1991 aimed at
restoring macroeconomic stability. The NEP was designed to address the crisis of stagflation,
which was a result of the simultaneous increase in prices for both food and manufactured
goods. The NEP consisted of several reforms, including the liberalisation of the financial
sector, the reduction of import duties, and the removal of subsidies on food, fuel, and
fertilisers.
The NEP was successful in restoring macroeconomic stability and encouraging economic
growth. Between 1991 and 1994, GDP growth averaged 7%. Between 1995 and 2000, GDP
growth averaged 9%. In 2001, the government introduced the Multi-Year Programme (MAP)
which aimed to achieve even greater economic growth. The MAP was successful in
achieving growth rates of 10% to 12%. However, following the global financial crisis of
2007-2008, growth rates declined to 5% in 2009 and 2% in 2010.
What Is The New Economic Policy Of India?
The new economic policy of India, unveiled in 1991, was a drastic change from the socialist
policies that had been in place for decades.
The policy‟s goal was to open up India‟s economy to the rest of the world and encourage
private enterprise. The policy has been a success, with India becoming one of the fastest-
growing economies globally.
The new economic policy of India has also helped to reduce poverty and raise living
standards for Indian citizens.
When Was The New Economic Policy Implemented In India?
When was the new economic policy introduced in India? The current economic policy (NEP)
was announced by the P. V. Narasimha Rao government in 1991.
The policy responded to an economic crisis that had gripped the country. The goal of the
NEP was to open up the Indian economy to foreign investment and promote economic
growth. The policy has successfully achieved these goals, and India has experienced rapid
economic growth in recent years.
What Are The Goals Of The New Economic Policy?
The new economic policy was made in India through privatisation, liberalisation and
globalisation. It refers to the relaxation of many tariffs, opening the market for foreign
players. It also refers to lessening the burden of taxes for the economic growth of India.
 The main motto was to boost the Indian economy through globalisation.
 The New Economic Policy was built to reduce the rate of inflation
 To attain economic stabilisation. To mould existing markets into a market economy
by withdrawing unnecessary restrictions.
 To allow the international flow of capital, technology, goods, human resources, and
services without any limitations.
How Is The New Economic Policy Being Implemented?
The new economic policy is being implemented in a few different ways. One way is through
the development of a national digital economy, which will help to transition the country to a
digital-based society.
Additionally, the government is working to improve the business environment, encouraging
entrepreneurs and startups to establish new businesses and contribute to economic growth.
They are also focusing on infrastructure development, which will help to improve economic
efficiency and spur growth.
Benefits Of The New Economic Policy
The new economic policy has had a positive impact on society. By providing incentives for
businesses to invest in the country, jobs have been created, and the economy has begun to
grow.
The policy also promotes entrepreneurship, so citizens have the opportunity to start their
businesses. This has led to more innovation and diversity in the workforce. In addition, the
government is working to improve education and healthcare, which will benefit all citizens.
It is exciting to see how the new economic policy continues to help society grow and thrive!
Conclusion
The new economic policy of India has come with its own set of challenges. Critics say that
the policy favours the wealthy elite, while others argue that it has not gone far enough in
providing relief to the poor and marginalised.
There is also concern that the deregulation of the economy may have negative consequences
on the environment and social stability. Despite these challenges, most observers agree that
the new economic policy has made a positive difference in the lives of millions of people. It
has helped revive the economy and has provided much-needed social support to the most
vulnerable members of society.

India’s Industrial Policy

Meaning
 Government action to influence the ownership & structure of the industry and its
performance. It takes the form of paying subsidies or providing finance in other ways,
or of regulation.
 It includes procedures, principles (i.e., the philosophy of a given economy), policies,
rules and regulations, incentives and punishments, the tariff policy, the labour policy,
government‟s attitude towards foreign capital, etc.
Objectives
The main objectives of the Industrial Policy of the Government in India are:
 to maintain a sustained growth in productivity;
 to enhance gainful employment;
 to achieve optimal utilisation of human resources;
 to attain international competitiveness; and
 to transform India into a major partner and player in the global arena.

Industrial Policies in India since Independence

 Industrial Policy Resolution of 1948- It defined the broad contours of the
policy delineating the role of the State in industrial development both as an
entrepreneur and authority.

o It made clear that India is going to have a Mixed Economic Model.

o It classified industries into four broad areas:

 Strategic Industries (Public Sector): It included three industries in which

Central Government had monopoly. These included Arms and ammunition,
Atomic energy and Rail transport.
 Basic/Key Industries (Public-cum-Private Sector): 6 industries viz. coal,
iron & steel, aircraft manufacturing, ship-building, manufacture of telephone,
telegraph & wireless apparatus, and mineral oil were designated as “Key
Industries” or “Basic Industries”.

 These industries were to be set-up by the Central Government.

 However, the existing private sector enterprises were allowed to
continue.
 Important Industries (Controlled Private Sector): It included 18
industries including heavy chemicals, sugar, cotton textile & woollen
industry, cement, paper, salt, machine tools, fertiliser, rubber, air and sea
transport, motor, tractor, electricity etc.

 These industries continue to remain under private sector however, the

central government, in consultation with the state government, had
general control over them.
  Other Industries (Private and Cooperative Sector): All other industries
which were not included in the above mentioned three categories were left
open for the private sector.
o The Industries (Development and Regulation) Act was passed in 1951 to
implement the Industrial Policy Resolution, 1948.
 Industrial Policy Statement of 1956 : Government revised its first Industrial Policy
(i.e.the policy of 1948) through the Industrial Policy of 1956.

o It was regarded as the “Economic Constitution of India” or “The Bible of

State Capitalism”.
o The 1956 Policy emphasised the need to expand the public sector, to build up a
large and growing cooperative sector and to encourage the separation of
ownership and management in private industries and, above all, prevent the rise
of private monopolies.
o It provided the basic framework for the government’s policy in regard to in-
dustries till June 1991.
o IPR, 1956 classified industries into three categories

 Schedule A consisting of 17 industries was the exclusive responsibility of

the State. Out of these 17 industries, four industries, namely arms and
ammunition, atomic energy, railways and air transport had Central
Government monopolies; new units in the remaining industries were
developed by the State Governments.
 Schedule B, consisting of 12 industries, was open to both the private and
public sectors; however, such industries were progressively State-owned.
 Schedule C- All the other industries not included in these two Schedules
constituted the third category which was left open to the private sector.
However, the State reserved the right to undertake any type of industrial
production.
o The IPR 1956, stressed the importance of cottage and small scale
industries for expanding employment opportunities and for wider
decentralisation of economic power and activity
o The Resolution also called for efforts to maintain industrial peace; a fair
share of the proceeds of production was to be given to the toiling mass in
keeping with the avowed objectives of democratic socialism.
o Criticism: The IPR 1956 came in for sharp criticism from the private sector
since this Resolution reduced the scope for the expansion of the private
sector significantly.

 The sector was kept under state control through a system of licenses.
Industrial Licenses

 In order to open new industry or to expand production, obtaining a license from the
government was a prerequisite.
 Opening new industries in economically backward areas was incentivised through
easy licensing and subsidization of critical inputs like electricity and water. This was
done to counter regional disparities that existed in the country.
 Licenses to increase production were issued only if the government was convinced
that the economy required more of the goods.

 Industrial Policy Statement, 1977- In December 1977, the Janata Government

announced its New Industrial Policy through a statement in the Parliament.

o The main thrust of this policy was the effective promotion of cottage and
small industries widely dispersed in rural areas and small towns.
o In this policy the small sector was classified into three groups—cottage and
household sector, tiny sector and small scale industries.
o The 1977 Industrial Policy prescribed different areas for large scale industrial
sector- Basic industries,Capital goods industries, High technology industries
and Other industries outside the list of reserved items for the small scale sector.
o The 1977 Industrial Policy restricted the scope of large business houses so that
no unit of the same business group acquired a dominant and monopolistic
position in the market.
o It put emphasis on reducing the occurrence of labour unrest. The
Government encouraged the worker‟s participation in management from
shop floor level to board level.
o Criticism: The industrial Policy 1977, was subjected to serious criticism as
there was an absence of effective measures to curb the dominant position of
large scale units and the policy did not envisage any socioeconomic
transformation of the economy for curbing the role of big business houses
and multinationals.
 Industrial Policy of 1980 sought to promote the concept of economic
federation, to raise the efficiency of the public sector and to reverse the trend of
industrial production of the past three years and reaffirmed its faith in
the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign
Exchange Regulation Act (FERA).
New Industrial Policy During Economic Reforms of 1991

The long-awaited liberalised industrial policy was announced by the Government of India in
1991 in the midst of severe economic instability in the country. The objective of the policy
was to raise efficiency and accelerate economic growth.

Features of New Industrial Policy

 De-reservation of Public sector: Sectors that were earlier exclusively reserved for
public sector were reduced. However, pre-eminent place of public sector in 5 core
areas like arms and ammunition, atomic energy, mineral oils, rail transport and
mining was continued.

o Presently, only two sectors- Atomic Energy and Railway operations- are
reserved exclusively for the public sector.
 De-licensing: Abolition of Industrial Licensing for all projects except for a short list
of industries.

o There are only 4 industries at present related to security, strategic and

environmental concerns, where an industrial license is currently required-

 Electronic aerospace and defence equipment

 Specified hazardous chemicals
 Industrial explosives
 Cigars and cigarettes of tobacco and manufactured tobacco substitutes
 Disinvestment of Public Sector: Government stakes in Public Sector Enterprises
were reduced to enhance their efficiency and competitiveness.
 Liberalisation of Foreign Investment: This was the first Industrial policy in which
foreign companies were allowed to have majority stake in India. In 47 high priority
industries, upto 51% FDI was allowed. For export trading houses, FDI up to 74%
was allowed.

o Today, there are numerous sectors in the economy where government allows
100% FDI.
 Foreign Technology Agreement: Automatic approvals for technology related
agreements.
 MRTP Act was amended to remove the threshold limits of assets in respect of
MRTP companies and dominant undertakings. MRTP Act was replaced by the
Competition Act 2002.
Outcomes of New Industrial Policies
 The 1991 policy made „Licence, Permit and Quota Raj‟ a thing of the past. It
attempted to liberalise the economy by removing bureaucratic hurdles in
industrial growth.
 Limited role of Public sector reduced the burden of the Government.
 The policy provided easier entry of multinational companies, privatisation,
removal of asset limit on MRTP companies, liberal licensing.

o All this resulted in increased competition, that led to lower prices in many goods
such as electronics prices. This brought domestic as well as foreign investment
in almost every sector opened to private sector.
 The policy was followed by special efforts to increase exports. Concepts like Export
Oriented Units, Export Processing Zones, Agri-Export Zones, Special Economic
Zones and lately National Investment and Manufacturing Zones emerged. All these
have benefitted the export sector of the country.
Limitations of Industrial Policies in India
 Stagnation of Manufacturing Sector: Industrial policies in India have failed to
push manufacturing sector whose contribution to GDP is stagnated at about 16%
since 1991.
 Distortions in industrial pattern owing to selective inflow of investments: In the
current phase of investment following liberalisation, while substantial investments
have been flowing into a few industries, there is concern over the slow pace of
investments in many basic and strategic industries such as engineering, power,
machine tools, etc.
 Displacement of labour: Restructuring and modernisation of industries as a sequel
to the new industrial policy led to displacement of labour.
 Absence of incentives for raising efficiency: Focussing attention on internal
liberalisation without adequate emphasis on trade policy reforms resulted
in „consumption-led growth‟ rather than „investment‟ or „export-led growth‟.
 Vaguely defined industrial location policy: The New Industrial Policy, while
emphasised the detrimental effects of damage to the environment, failed to define a
proper industrial location policy, which could ensure a pollution free development of
industrial climate.
Way Forward
 Industrial policies in India have taken a shift from predominantly Socialistic pattern
in 1956 to Capitalistic since 1991.
 India now has a much liberalised industrial policy regime focusing on increased
foreign investment and lesser regulations.
 India ranked 77th on World Bank’s Doing Business Report 2018. Reforms related
to insolvency resolution (Bankruptcy and Insolvency Act, 2017) and the Goods
and Services Taxes (GST) are impressive and will result in long-term gains for
the industrial sector.
 Campaigns such as Make in India and Start up India have helped to enhance the
business ecosystem in the country.
 However, electricity shortages and high prices, credit constraints, high unit labour
costs due to labour regulations, political interference and other regulatory burdens
continue to remain challenges for firm growth of the industrial sector in India.
 There is a need for a new Industrial Policy to boost the manufacturing sector in
the country. Government in December 2018 also felt the need to introduce a new
Industrial Policy that would be a road map for all business enterprises in the country.

Difference Between Small Scale and Large Scale Industries

In general, any industry can be classified as a small scale industry or large scale industry as
per the investment made in procuring the plant and machinery for manufacturing goods. In
this way, small scale industries are said to be the ones whose investment in the capital assets
is limited to the amount specified by the Government of the country.

On the contrary, those industries which make an investment in their plant and machinery
beyond that limit, are considered as large scale industries.
Nevertheless, there are several other factors like a number of workers employed, the
geographical area occupied, the volume of the output, etc. which can also be used to classify
the industries. Let‟s move further to understand the difference between small scale and large
scale industries.

Comparison Chart

BASIS FOR SMALL SCALE LARGE SCALE

COMPARISON INDUSTRY INDUSTRY

Meaning Small scale industry is an Large scale industry

industrial undertaking in encompasses big industrial
which there is a definite units whose investment in
capital investment in its their plant and machinery is
plant and machinery. beyond the limit specified by
the Government.

Industry type Labour-intensive industry Capital intensive industry

Geographical area Small Large

covered

Skills required It requires semi-skilled It requires highly skilled

labours. labours.

Technology used Indigenous technology State-of-the-art technology

Raw materials Procured from the local Procured from various

suppliers suppliers of raw materials
are there from within and
outside the country.

Objective To generate employment To produce consumer goods

opportunities with less and capital goods within the
investment. country, to make it self
reliant.

Definition of Small Scale Industries

Small Scale industries, as the name suggests are the industries wherein the production process
is undertaken at a small or say micro level. It is often set up by private individuals, usually
with the help and support of their family members and hiring local workers who understand
the work. It uses simple machinery, tools and equipment.

These are small enterprises which are known for the manufacturing of the products using
light machinery, and less manpower, however, it depends on the production scale.

These industries play a crucial role in rural industrialization as well as in providing subsidiary
employment to rural people.

Its aim is to create employment for local residents while using less capital. It helps in
eradicating backwardness from rural areas, which results in decreasing regional imbalances,
as it raises the income level and improves the standard of living.

Moreover, it mobilizes as well as uses the hidden and untapped resources of the country. In
addition to this, it encourages indigenization.

Definition of Large Scale Industries

Large scale industry refers to undertakings which have a vast infrastructure, and employee
base along with heavy power-driven machinery and huge capital investment. To manage and
operate these industries effectively, complex management is required.

It embraces both manufacturing concerns and others that make use of both indigenous and
imported technology to manufacture the products, so as to cater the domestic as well as
international markets.

In these industries division of labour and specialization principles are followed, with the aim
of improving productivity. Further, modern capital assets are used for manufacturing goods to
reduce cost. These industries get the benefit of economies of scale due to the high volume of
output.

Large scale industries are the backbone of the economy, as they facilitate in the production of
those consumer goods and capital goods which are imported from abroad, which encourages
self-reliance. Further, they provide employment to a large number of people belonging to
different areas. In addition to this, exports are promoted which increases the country‟s
revenue.

Key Differences Between Small Scale and Large Scale Industries

The difference between small scale and large scale industries can be drawn clearly on the
following grounds:

1. Small Scale Industries are the undertakings that undertake manufacturing, processing
and conversion of goods and involves investment in the fixed asset, i.e. plant and
machinery, up to a specified amount. Conversely, large scale industries imply those
industrial undertaking which is set up to manufacture consumer goods and capital
 goods on a substantial level, for which huge investment is made in the plant and
machinery.
2. Small Scale Industries are labour intensive, as their dependency on the labour force is
high, but they also require capital for its operation and expansion. On the contrary,
Large Scale Industries are capital intensive, as they require huge capital investment to
establish and operate it.
3. When it comes to the geographical area, small scale industries are established in a
limited area generally at the location from where the raw material and labour supply is
easily available. On the contrary, large scale industries are set up in a vast area, indeed
they are located in multiple locations in the country.
4. Small scale industries require skilled or semi-skilled workers. As against, skilled
workers are required in large scale industries and so proper training is given to the
workers on the way in which they can operate machinery.
5. Small scale industries use indigenous (native) technology for manufacturing the
products. As against, large scale industries use advanced technology to create the
products, so as to reduce the cost and maximize profit.
6. Small Scale Industries purchase raw material from the local suppliers and sometimes
from external suppliers. In contrast, large scale industries procure raw materials from
different suppliers from within and outside the country.
7. Small scale industries aim at generating employment opportunities with less
investment. Contrastingly, the aim of large scale industries is to produce consumer
goods and capital goods within the country, to make it self reliant.

Examples

Small Scale Industry

Bakery, Cashew processing, Bread production, Biscuit making, Incense sticks making,
Coconut oil manufacturing, Candle making, Cotton buds making, Custard powder
production, Envelope making, Eraser making, Fruit bar making, Ice cream making, Jam jelly
making, Leather bag making, Microbrewery, Paper cup making, Palm oil processing, Pickles
making, Slipper manufacturing, Soap manufacturing, Woodworking, etc.

Large Scale Industry

Tea Industry, Textile Industry, Iron and Steel Industry, Jute Industry, Cement Industry, Paper
Industry, Petrochemical Manufacturing, Oil refineries, Food Processing, Automobile, Silk
Industry, Fertilizer Manufacturing, Sugar Industry, Paper Industry, Chemicals and
Pharmaceuticals, Distilleries and Breweries, Gul making, Metal Processing, Aviation
industry, Shipbuilding, Construction, etc.

Conclusion

Both Small Scale Industries and Large Scale Industries occupy a significant place in the
development of the country, not just because they provide employment to a large number of
people but also because they contribute to the country‟s GDP. Moreover, they help in raising
the standard of living of the people.

Monetary and Fiscal Policy

The economic position of a country can be monitored, controlled and regulated by the sound
economic policies. The fiscal and monetary policies of the nation are the two measures, which can
help in bringing stability and developing smoothly. Fiscal policy is the policy relating to government
revenues from taxes and expenditure on various projects. Monetary Policy, on the other hand, is
mainly concerned with the flow of money in the economy.

Fiscal policy alludes to the government’s scheme of taxation, expenditure and various financial
operations, to attain the objectives of the economy. On the other hand, monetary policy, scheme
carried out by the financial institutions like the Central Bank, to manage the flow of credit in the
country’s economy. Here, in this article, we provide you all the differences between the fiscal policy
and monetary policy, in tabular form.

Comparison Chart
BASIS FOR
FISCAL POLICY MONETARY POLICY
COMPARISON

Meaning The tool used by the The tool used by the

government in which it uses its central bank to regulate the
tax revenue and expenditure money supply in the
policies to affect the economy economy is known as
is known as Fiscal Policy. Monetary Policy.

Administered by Ministry of Finance Central Bank

Nature The fiscal policy changes every The change in monetary

year. policy depends on the
economic status of the
nation.

Related to Government Revenue & Banks & Credit Control

Expenditure

Focuses on Economic Growth Economic Stability

Policy Tax rates and government Interest rates and credit

instruments spending ratios

Political influence Yes No

Definition of Fiscal Policy

When the government of a country employs its tax revenue and expenditure policies to influence the
overall demand and supply for commodities and services in the nation’s economy is known as Fiscal
Policy. It is a strategy used by the government to maintain the equilibrium between
government receipts through various sources and spending over different projects. The fiscal policy of
a country is announced by the finance minister through budget every year.

If the revenue exceeds expenditure, then this situation is known as fiscal surplus, whereas if the
expenditure is greater than the revenue, it is known as the fiscal deficit. The main objective of the
fiscal policy is to bring stability, reduce unemployment and growth of the economy. The instruments
used in the Fiscal Policy are the level of taxation & its composition and expenditure on various
projects. There are two types of fiscal policy, they are:

 Expansionary Fiscal Policy: The policy in which the government minimises taxes and
increase public spending.
 Contractionary Fiscal Policy: The policy in which the government increases taxes and
reduce public expenditure.

Definition of Monetary Policy

Monetary Policy is a strategy used by the Central Bank to control and regulate the money supply in an
economy. It is also known as credit policy. In India, the Reserve Bank of India looks after the
circulation of money in the economy.

There are two types of monetary policies, i.e. expansionary and contractionary. The policy in which
the money supply is increased along with minimization of interest rates is known as Expansionary
Monetary Policy. On the other hand, if there is a decrease in money supply and rise in interest rates,
that policy is regarded as Contractionary Monetary Policy.

The primary purposes of the monetary policy include bringing price stability, controlling inflation,
strengthening the banking system, economic growth, etc. The monetary policy focuses on all the
matters which have an influence on the composition of money, circulation of credit, interest rate
structure. The measures adopted by the apex bank to control credit in the economy are broadly
classified into two categories:

 General Measures (Quantitative Measures):

 Bank Rate
 Reserve Requirements i.e. CRR, SLR, etc.
 Repo Rate Reverse Repo Rate
 Open market operations
Selective Measures (Qualitative Measures):
 Credit Regulation
 Moral persuasion
 Direct Action
 Issue of directives

Key Differences Between Fiscal Policy and Monetary Policy

The following are the major differences between fiscal policy and monetary policy.

1. The policy of the government in which it utilises its tax revenue and expenditure policy to
influence the aggregate demand and supply for products and services the economy is known
as Fiscal Policy. The policy through which the central bank controls and regulates the supply
of money in the economy is known as Monetary Policy.
2. Fiscal Policy is carried out by the Ministry of Finance whereas the Monetary Policy is
administered by the Central Bank of the country.
3. Fiscal Policy is made for a short duration, normally one year, while the Monetary Policy lasts
longer.
4. Fiscal Policy gives direction to the economy. On the other hand, Monetary Policy brings price
stability.
5. Fiscal Policy is concerned with government revenue and expenditure, but Monetary Policy is
concerned with borrowing and financial arrangement.
6. The major instrument of fiscal policy is tax rates and government spending. Conversely,
interest rates and credit ratios are the tools of Monetary Policy.
7. Political influence is there in fiscal policy. However, this is not in the case of monetary policy.
Conclusion
The main reason of confusion and bewilderment between fiscal policy and monetary policy is that the
aim of both the policies is same. The policies are formulated and implemented to bring stability and
growth in the economy. The most significant difference between the two is that fiscal policy is made
by the government of the respective country whereas the central bank creates the monetary policy.