Business Environment_Unit 2.pdf

Unit 2 - Economic Environment

1. 1
Business Environment
(Subject Code-MBT-105)
By
Dr. H. L. Bhaskar
(PhD, MBA-HRM & Marketing, UGC-NET/JRF)
Assistant Professor
Business Environment (MBA++ 1
st
Semester, Session-2022-23)
RoorkeeInstitute of Technology, Uttarakhand

2. TableofContents
Units:
1.Introduction to Business Environment
2.Economic Environment
3.Politico-Legal Environment
4.(a)Technological Environment:(b)Demographic
and Socio-Cultural Environment:
5.Foreign Investment and Trade Regulation

3. Unit 2
Economic Environment
Contents/Topics
1.History of Economic Systems, Market,
2.Planned and Mixed Economy,
3.Planning in India: Emergence and Objective;
4.Planning Monetary Policy,
5.Fiscal Policy.
6.Union Budget as instrument of growth and its Impact on
Business,
7.Industrial Policy: Meaning Objective and Recent Development
in New Economics Policy (1991) and its Impact on Business.

4. History of Economic Systems
•Economicsystem,anyofthewaysinwhichhumankindhas
arrangedforitsmaterialprovisioning.
•Aneconomicsystem,oreconomicorder,isasystemof
production,resourceallocationanddistributionofgoodsand
serviceswithinasocietyoragivengeographicarea.Itincludes
thecombinationofthevariousinstitutions,agencies,entities,
decision-makingprocessesandpatternsofconsumptionthat
comprisetheeconomicstructureofagivencommunity.
•Aneconomicsystemisatypeofsocialsystem.Themodeof
productionisarelatedconcept.Alleconomicsystemsmust
confrontandsolvethefourfundamentaleconomicproblems:
1.Whatkindsandquantitiesofgoodsshallbeproduced:
2.Howgoodsshallbeproduced:
3.Whentoproduce:
•historyhasproducedbutthreesuchkindsofeconomicsystems:
thosebasedontheprincipleoftradition,thosecentrallyplanned
andorganizedaccordingtocommand,andtherathersmall
number,historicallyspeaking,inwhichthecentralorganizing
formisthemarket.

5. Main types
1.Capitalism:Capitalismgenerallyfeaturestheprivateownershipofthe
meansofproduction(capital)andamarketeconomyforcoordination.
Corporatecapitalismreferstoacapitalistmarketplacecharacterizedby
thedominanceofhierarchical,bureaucraticcorporations.
2.Mixedeconomy:itmayrefertoaneconomicsystemthatcombinesoneof
threecharacteristics:publicandprivateownershipofindustry,market-
basedallocationwitheconomicplanning,orfreemarketswithstate
interventionism.
3.Socialisteconomy:Socialisteconomicsystems(allofwhichfeaturesocial
ownershipofthemeansofproduction)canbesubdividedbytheir
coordinatingmechanism(planningandmarkets)intoplannedsocialist
andmarketsocialistsystems.

6. What Is a Market Economy?
•Amarketeconomyisaneconomicsysteminwhicheconomic
decisionsandthepricingofgoodsandservicesareguidedbythe
interactionsofacountry'sindividualcitizensandbusinesses.
•Theremaybesomegovernmentinterventionorcentralplanning,
butusuallythistermreferstoaneconomythatismoremarket
orientedingeneral.
•Inamarketeconomy,mosteconomicdecisionmakingisdone
throughvoluntarytransactionsaccordingtothelawsofsupplyand
demand.
•Amarketeconomygivesentrepreneursthefreedomtopursue
profitbycreatingoutputsthataremorevaluablethantheinputs
theyuseup,andfreetofailandgooutofbusinessiftheydonot.
•Economistsbroadlyagreethatmarket-orientedeconomiesproduce
bettereconomicoutcomes,butdifferontheprecisebalance
betweenmarketsandcentralplanningthatisbestforanation's
long-termwellbeing.

7. Planned and Mixed Economy
•Theeconomycanbedividedintomainlythreetypes
basedonthegovernment’scontrolovertheeconomy.
•Inaplannedeconomy,thegovernmenttakesallthe
decisionsandrunstheshow.
•Incontrast,bothgovernmentandprivateplayersare
activelyinvolvedinrunningeconomicactivitiesina
mixedeconomy.
•Thereisanothercategorywhereinonlytheprivate
playersarethedecision-makers.
•Wearecurrentlyfocusingontwotypesofeconomies,
i.e.,plannedandmixedeconomies.

8. Planned economy
•Aneconomicsysteminwhichtheelementsofaneconomy(suchas
labour,capital,andnaturalresources)aresubjecttogovernment
controlandregulationdesignedtoachievetheobjectivesofa
comprehensiveeconomicdevelopmentplaniscalledaplanned
economy.
Featuresorcharacteristicsofaplannedeconomy
•Oneofthemaincharacteristicsoftheplannedeconomyisthatthe
governmenthasownershipoveralltheresources.Otherfeatures
ofaplannedeconomyare:
•Importantdecisionssuchaswhattoproduce,howtoproduceand
howtodistributegoodsorservicesaretakenbythegovernment
•Usually,pricesaredecidedbythepricecontrolmechanism
•Productionisplannedforatleastfiveortenyearsinadvance
•Involvesahighlevelofbureaucracytomanageandplaneconomic
decisions
•Ahigherdegreeofpoliticalcontrol.
Source: https://unacademy.com/content/bpsc/study-material/economics/mixed-and-planned-economy/

9. Mixed Economy
•Inamixedeconomy,boththepublicandprivatesectors
coexist.Itfallssomewhereinbetweenthecapitalists,i.e.,
freemarketsandsocialisteconomies,andenjoysthebenefit
ofboth.
•Inthistypeofeconomy,somepartislefttothefreemarket,
whereassomepartismanagedbythegovernment.
•Amixedeconomyisbasedonasystemthatallowsprivate
enterprisestorunmostbusinesses.
•Yet,thegovernmentsalsointerveneincertainareasofthe
economy.
•ApartfromtheUSA,Indiaisalsoonesuchcountrythathas
adoptedthiskindofeconomicmodelforitsdevelopment.
•Thebasicideabehindtheformulationofamixedeconomy
istocomeupwithauniquesystemthatcanhavethe
benefitsofbothtypesofeconomies.

10. Socialist Economy
•Socialisteconomicscomprisestheeconomictheories,practicesand
normsofhypotheticalandexistingsocialisteconomicsystems.
•Asocialisteconomicsystemischaracterizedbysocialownershipand
operationofthemeansofproduction
•thatmaytaketheformofautonomouscooperativesordirectpublic
ownershipwhereinproductioniscarriedoutdirectlyforuseratherthan
forprofit.
•Inasocialisteconomy,thesetupisexactlyoppositetothatofa
capitalisteconomy.Insuchaneconomythefactorsofproductionareall
state-owned.Soallthefactories,machinery,plants,capital,etc.is
ownedbyacommunityincontroloftheState.
•Allcitizensgetthebenefitsfromtheproductionofgoodsandservices
onthebasisofequalrights.Hencethistypeofeconomyisalsoknown
astheCommandEconomy.
•Sobasicallyinasocialisteconomy,privatecompaniesorindividualsare
notallowedtofreelymanufacturethegoodsandservices.Andthe
productionoccursaccordingtotheneedsofthesocietyandatthe
commandoftheStateorthePlanningAuthorities.Themarketandthe
factorsofsupplyanddemandwillplaynorolehere.

11. Planning in India: Emergence
•Planning,wasfirstinitiatedinIndiain1938byCongressPresident
andIndianNationalArmysupremeleaderNetajiSubhash
ChandraBose,lateronJawaharlalNehruwasmadeheadofthe
NationalPlanningCommittee.
•thePlanningCommissionwassetupon15March1950andthe
planerastartedfrom1April1951withthelaunchingoftheFirst
FiveYearPlan(1951-56).

12. Six major objectives of planning in
India
Herewedetailaboutthesixmajorobjectivesof
planninginIndia,i.e.,
1.EconomicGrowth:Attainmentofhigherrateof
economicgrowthreceivedtopmostpriorityinalmostall
theFiveYearPlansofthecountry.Astheeconomyof
thecountrywassufferingfromacutepovertythusby
attainingahigherrateofeconomicgrowtheradication
ofpovertyispossibleandthestandardoflivingofour
peoplecanbeimproved.

13. Continue…..
2.AttainingEconomicEqualityandSocialJustice:Reductionofeconomic
inequalitiesanderadicationofpovertyarethesecondgroupofobjective
ofalmostalltheFiveYearPlansofourcountryparticularlysincethe
FourthPlan.
Duetothefaultyapproachfollowedintheinitialpartofourplanning,
economicinequalitywidenedandpovertybecameacute.Undersucha
situation,theFifthPlanadoptedthesloganof‘GaribiHatao’forthefirst
time.
Thustoachievethetarget,variouspovertyalleviationprogrammeslike
theNationalRuralEmploymentProgramme(NREP),CompositeRural
TrainingandTechnologyCentre(CRTTC),CrashSchemeforRural
Employment Programme (CSREP),RuralLandlessEmployment
GuaranteeProgramme (RLEGP)etc.wereintroduced.Butthe
performanceoftheseprogrammesisnotuptothesatisfaction.

14. 3.AchievingFullEmployment:Toachievethistargetthemajor
programmeswhichwereintroducedduringthisPlanwere
IntegratedRuralDevelopmentProgramme(IRDP),theNational
RuralEmploymentProgramme(NREP),theOperationFloodII
DairyDevelopmentProject,schemesinthevillagesandsmall
industriessectorthenationalSchemeofTrainingRuralYouthfor
SelfEmployment(TRYSEM)andvariousothercomponentsofthe
MinimumNeedsProgramme.
4.AttainingEconomicSelf-Reliance:thisplanaimedatachieving
self-sufficiencyintheproductionoffood-grains,rawmaterials
andotheressentialconsumptiongoods.
Continue…..

15. 5.ModernisationofVariousSectors:Anothervery
importantobjectiveofFiveYearPlansofourcountrywas
themodernisationofvarioussectorsandmorespecifically
themodernisationofagriculturalandindustrialsectors.
Heretheobjectiveofmodernisationmeansthosestructural
andinstitutionalchangesineconomicactivitieswhichcan
transformafeudalandcolonialeconomyintoaprogressive
andmoderneconomy.
Thusthroughmodernisationeconomymaybediversified.It
requiressettingupofvarioustypesofindustriesand
advancementoftechnology.
Presentlycountryisfacingaconflictbetweentheobjective
ofmodernisationandtheobjectiveofremovalof
unemploymentandpoverty.
Continue…..

16. 6.RedressingImbalancesintheEconomy:
Regionaldisparitiesandimbalancesintheeconomyhavebecomeso
acuteinIndiathatitneededspecialattentioninourFiveYearPlans.
Thusbyregionaldevelopmentwemeaneconomicdevelopmentofall
theregionsbyexploitingvariousnaturalandhumanresourcesandby
increasingtheirpercapitaincomeandlivingstandards.
SincetheSecondPlanonwards,theGovernmentrealizedtheneedfor
balanceddevelopment.ThustheSecond,Third,FourthandFifth
Planslaidemphasisontheredressalofeconomicimbalancesfor
attainingabalancedregionaldevelopment.
TheSixthPlanagainaimedatprogressivereductioninregional
inequalitiesinthepaceofdevelopmentandinthediffusionof
technologicalbenefits.
TheSeventhPlanandEighthPlanalsocarriedthisobjectiveof
balanceddevelopmentinsystematicmanner.
Besidesthenlongtermobjectives,ourplansalsolaidimportanceon
shorttermobjectiveslikecontrolofinflation,industrialization,
rehabilitationofrefugees,buildingupinfrastructuralfacilitiesetc.
Continue…..

17. Monetary Policy
WhatIsMonetaryPolicy?
•Monetarypolicyreferstothepolicyofthecentralbank–ie
ReserveBankofIndia–inmattersofinterestrates,money
supplyandavailabilityofcredit.
•Monetarypolicyisasetoftoolsusedbyanation'scentral
banktocontroltheoverallmoneysupplyandpromote
economicgrowthandemploystrategiessuchasrevising
interestratesandchangingbankreserverequirements.
•Inshort,Monetarypolicyreferstotheuseofmonetary
instrumentsunderthecontrolofthecentralbanktoregulate
magnitudessuchasinterestrates,moneysupplyand
availabilityofcreditwithaviewtoachievingtheultimate
objectiveofeconomicpolicy.
WhatisthemaingoalofMonetaryPolicyofIndia?
•Theprimaryobjectiveofmonetarypolicyistomaintainprice
stabilitywhilekeepinginmindtheobjectiveofgrowth.Price
stabilityisanecessarypreconditionforsustainablegrowth.

18. Types of Monetary Policy
Monetarypoliciesareseenaseitherexpansionaryor
contractionarydependingonthelevelofgrowthorstagnation
withintheeconomy.
1.Contractionary:Acontractionarypolicyincreasesinterestrates
andlimitstheoutstandingmoneysupplytoslowgrowthand
decreaseinflation,wherethepricesofgoodsandservicesinan
economyriseandreducethepurchasingpowerofmoney.
2.Expansionary:Duringtimesofslowdownorarecession,an
expansionarypolicygrowseconomicactivity.Bylowering
interestrates,savingbecomeslessattractive,andconsumer
spendingandborrowingincrease.

19. Fiscal Policy
•Ineconomicsandpoliticalscience,fiscalpolicyistheuseof
governmentrevenuecollectionandexpendituretoinfluencea
country'seconomy.
•Fiscalpolicyistheuseofgovernmentspendingandtaxation
toinfluencetheeconomy.
•Governmentstypicallyusefiscalpolicytopromotestrongand
sustainablegrowthandreducepoverty.

20. Deference between Fiscal & Monetary Policy

21. Union Budget as instrument of growth
and its Impact on Business:
Whatis'UnionBudget'
Definition:AccordingtoArticle112oftheIndian
Constitution,theUnionBudgetofayear,alsoreferredtoas
theannualfinancialstatement,isastatementofthe
estimatedreceiptsandexpenditureofthegovernmentfor
thatparticularyear
Description:UnionBudgetkeepstheaccountofthe
government'sfinancesforthefiscalyearthatrunsfrom1st
Aprilto31stMarch.UnionBudgetisclassifiedintoRevenue
BudgetandCapitalBudget.
Insimplewords,theunionbudgetofIndiaisourcountry'sannual
financialstatement.AsperArticle112oftheIndianConstitution,
budgetpresentationismandatorybeforeanewfiscalyearbegins.

22. What Comprises the Union Budget?
Theunionbudgetisdividedintotwoparts-
1.CapitalBudget-capitalbudgetprovidesdetailswithregardstothe
capitalpaymentsandcapitalreceiptsofthegovernment.The
capitalpaymentscanbethemoneyspentoninfrastructure,
healthcarefacilities,etc.Thecapitalreceiptsaccountfortheloans
takenfromtheRBIorthegeneralpublic.
2.RevenueBudget-Therevenuebudgetcomprisesoftherevenue
expenditureandrevenuereceipts.Thegovernmentisknowntobe
sufferingfroma‘revenuedeficit’incaseiftherevenuereceiptsare
lowerthantherevenueexpenditure.

23. Importance
Someofthemostimportantreasonsthatexplaintheimportanceofunion
budgetareasfollows-
1.ResourceAllocation:Astheresourcesarelimited,itiswiththehelpof
aunionbudgetthatthegovernmenttriestoemploythemeffectivelyso
thattheprofitscanbemaximized.
2.ControlPrices:Oneofthemostimportantdutiesoftheunionbudgetis
tohandleandforeseeinflationanddeflation.Surpluspoliciesanddeficit
policiesarefocuseduponduringinflationanddeflation,respectively,to
keeptheeconomystable.
3.ReducingEconomicInequality:Nosocietyisfreefromeconomic
inequalities.Itiswiththehelpofbudgetarypoliciesthatthegovernment
triestobridgethegapbetweentherichandthepoor.

24. Impact on Business:
UnionBudget2022,announcedbytheFinanceMinister,Nirmala
SitharamanonFebruary1,2022.Therewereseveralannouncementson
tax,5G,digitalcurrencies,infrastructure,agriculture,education,and
more,withsomegainersandsomelosers.
Budgetannouncementscanalsohavequiteanimpactonthestock
markets.
1.Sensexroseto848points,whileNiftyendedat17,600
2.Withsignificantgainsinstockslikepharma,metalandcapitalgoods,
Sensexroseby600pointsintheopeningtrade.SensexstockslikeTata
Steelsurgedover7.2%andSunPharmaover6.7%,withL&Tand
InfosystakingoveralmosthalfoftheSensexgains.
3.InfrastocksalsogainedwiththeannouncementofanallocationofRs.
7.5lakhcroreforcapitalexpenditureforFY2022-23.Thisis35.4%
higherthanRs.5.54lakhcrorelastyear.
4.Bankingstockswitnessedstrengthasbefore.
5.Posttheannouncementof400newVandeBharattrainstobelaunched
inthenextthreeyears,railwaystocksalsogainedsignificantly.IRCTC
stockswereupby3.7%,IRCONinternationalstocksby2%,IRFCstocks
by1%,andRailVikasNigamstocksby4%.

25. Industrial Policy: Meaning
•IndustrialPolicyisthesetofstandardsandmeasuressetbythe
Governmenttoevaluatetheprogressofthemanufacturingsector
thatultimatelyenhanceseconomicgrowthanddevelopmentofthe
country.
•Anindustrialpolicyorindustrialstrategyofacountryisits
officialstrategicefforttoencouragethedevelopmentand
growthofallorpartoftheeconomy,
•Itcoversrules,regulations,policies,principles&procedureslaid
downbygovernmentforregulating&controllingindustrial
undertakingsinthecountry.

26. Objective:
1.Tomaintainsteadygrowthinproductivity.
2.Tocreatemoreemploymentopportunities.
3.Utilizetheavailablehumanresourcesbetter
4.Toacceleratetheprogressofthecountrythrough
differentmeans
5.Tomatchthelevelofinternationalstandardsand
competitiveness

27. Recent Development in New Economics
Policy (1991)

28. Continue…..
Theneweconomicpolicyof1991Indiafocusesonbuilding
foreignexchangereserves,removingmarketrestrictions,and
increasingtheexchangeofgoods,services,capital,human
resources,andtechnologyworldwide,thusencouragingthe
economy'sgrowth.
Thepolicyemphasizedliberalizationandprivatization,allowingglobal
exposure.
Theneweconomicpolicyrecommendedstructuralreformsand
measurestocontrolinflation.
Thepolicyfocusedonincreasinginternationalmarketcompetitiveness
byallowingtheentryofforeigncompanies.
Thepolicyreducedcontrolandreservationbythegovernmentin
differentsectorsandallowedmoreparticipationofprivatecompaniesto
helpingrowthandprofitability.
Largerroleswereprovidedby
L–Liberalization(Reductionofgovernmentcontrol)
P–Privatization(Increasingtherole&scopeoftheprivatesector)
G–Globalisation(IntegrationoftheIndianeconomywiththeworld
economy)

29. Steps Taken in the New Economic Policy
1.Privatisation:Amajorstepwastoallowprivateenterprisesto
setupindustriesandbusinessesinpreviouslyreservedsectors
andcontrolledbythegovernmentasthepublicsector.Themain
objectivewastoimprovetheefficiencyofpublicsector
companiesthatweresufferinglossesandstagnationduetothe
under-utilizationofcapacityandresources.
Themeasurestakenundertheprocessofprivatizationareas
follows:
Sellingsharesofpublicsectorunitstoallowmore
involvementofprivatecompanies.
Disinvestmentinpublicsectorunitsthatsufferlossesand
sellouttotheprivatesector.
Replacingmostofthepublicsectorownershipwithprivate
companiestohelpinindustrialdevelopmentandeconomic
stability.

30. 2.Liberalisation:theneweconomicpolicyabolished
thepracticeofgettinglicensesbytheprivatesectorfor
startinganewventureinIndia.Thisallowsmore
privatecompaniestocomeforwardtoinvestinthe
industrialsector.Thestepsaretaken:
•Freedeterminationofinterestratebyallcommercial
banks.
•Increaseintheinvestmentlimitforthesmall-scale
industriesforthenecessaryupgrade.
•Freedomtoimportrawmaterialsandcapitalgoodsby
Indianindustries.
•Diversificationandincreaseinproductioncapacityby
privatecompanieswithoutanygovernmentrestrictions.
Continue…..

31. 3.Globalisation
Globalizationmeanstheexposureandinvolvementintheworld’s
economiclandscapethroughcontributiontotrade,investment,
production,technology,andfinancialmatterswithothercountries.
ThemeasurestakenwiththeaimofglobalizationoftheIndianeconomy
areasfollows:
1.Reductioninimportandexportdutiestoattractmoreinternational
investorsandsupplierstotheIndianmarket.
2.Implementationofalong-termtradepolicywithreducedforeigntrade
restrictionsthatencouragehealthycompetitionbetweendomesticand
foreignproductswithcompetitivepricing.
3.PartialconvertibilityoftheIndiancurrencytothecurrencyofother
countriestoincreasetheextentofforeigninvestment.
Conclusion
The New Economic Policy 1991 India was envisioned with a long-
term goal of controlling corruption, inefficiency, and inactivity in
growth.

32. Industrial Policy and its Impact on Business
Themainfeatureofthenewindustrialpolicywastocreateamore
competitiveenvironmentintheeconomyandgrowthofthebusiness.
Themainfeaturesofthepolicyareasfollows:De-licensingPolicy:The
newpolicyabolishedcompulsorylicensingforallprojects,exceptforsix
industries.
ThepolicyofLPGmadeasignificantimpactontheworkingofbusinesses
andindustries.Theimpactofchangesinthegovernmentpoliciesisas
follows:
1.Increasingcompetition:Beforeeconomicreforms,theIndianfirmswere
enjoyingprotectionduetolicensingsystemandotherrestrictions,but
afterreform,entryofforeignfirmswasliberalizedwhichgavetough
competitiontotheIndianfirms.E.g.TheentryofCoca-Colaruinedthe
marketoftheexistingIndianbrands.
2.Moredemandingcustomers:Increasedcompetitioninthemarketalso
increasedthechoiceofcustomers.
3.Rapidlychangingtechnologicalenvironment:Increasedcompetitionmade
theIndianfirmcompulsorytoadoptthelatesttechnology.E.g.Handlooms
industriesshiftedtopowerloomsinordertoadoptnewtechnology.
4.Necessityforchange:E.g.Mobilephonesthesedayscomeupwith
differentfeaturesfromtimetotime.

33. 5.Needfordevelopinghumanresources:E.g.Organizations
trainedtheiremployeestoworkfromhomeandcameupwith
variousmanagementtoolsinthisCovid-19era.Here,thehuman
resourcewasdeveloped.
6.MarketOrientation:Earlier,thefirmsusedtofollowtheselling
concept.Itmeanstheyproducefirstandthengotomarketforsale.
However,withanincreaseincompetition,thefirmadoptedthe
marketingconcept.Itmeansthestudyandanalyzingtheneedofthe
market,andthenproducinggoodstosatisfycustomerseffectively.
E.g.Organizationscarryoutvarioussurveysinordertocollectthe
dataaboutlikesanddislikesofcustomersandthenusethedata
collectedforproductionorservicedevelopment.
Continue…..
ItcanbeconcludedthatNewIndustrialPolicy(EconomicReforms)have
positivelyaffectedtheIndianeconomy.Indianfirmshavechangedtheir
strategyandhavebecomecustomer-oriented.Theyfocusmoreon
customers’needsandsatisfaction.TheentryofMNCshasprovided
employmentandincreasedtheforeigncapitalinvestmentsinIndia.