ibe economy india

8/14/2019 IBE Economy India

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Nature of economyCritical element in business environmentEconomy- organization of farms, firms,institutions, and factories which enablesindividuals to get their livingIndividuals as traders, consumers, suppliers,producers organize their economic activities


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Based on role of factors like prices,markets, planning, policy guidelines,regulations, control and other forms of governmental intervention- economy canbe classified

Economic environment refers to all thoseeconomic factors which have a bearingon the functioning of a business unit


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Economic systemsIndian economy classified in many ways

Poor, underdeveloped, emerging, agrarian,backward, less developed, developing etc

Means it is much below its potential growth

and quality of life of people is low


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Indian economy - socialistic

Welfare stateMixed economyDualistic economyPlanned economy


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Features of Capitalist

EconomyPrivate PropertyFree private enterpriseProfit motiveConsumers SovereigntyFreedom of choice of occupationFreedom to save and investThe Price mechanism/ market mechanismCompetitionLimited role of government


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Merits of Capitalism

Automatic workingHigher efficiency and incentive to hard workHigher rate of capital formationEconomic development and prosperityOptimum utilization of resourcesJust systemDemocraticEncouragement to enterprise and risk takingAdaptability


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Disadvantages of Capitalist

EconomyConcentration of economic power and wealthClass war ExploitationMonopoly Power Unequal and equitable distribution of incomeNeglect social welfare and serviceWasteful CompetitionEconomic instability and unemployment

Social injusticeMisallocation of resources


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Features of a Socialist

EconomySocial ownership of means of productionNo private enterpriseEconomic equalityEquality of opportunityEconomic/ central planningSocial welfare and social securityClassless society


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Case for Socialism

Social justiceBetter allocation of resourcesRapid economic growthImproving productive efficiency

Social security and welfareEconomic stability


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Demerits of SocialismBureaucracy and red tapismInsufficient resourcesMisallocation of resourcesLoss of consumers SovereigntyLack of IncentivesLoss of economic freedom

Concentration of power in the state


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Features Of Mixed economy

Private and State ownership of Means of productionCo-existence of private andPublic sectorsDecisive role of marketing andsupportive role of planningProfit induced private enterprise


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The intervention role of the state

Planning and pricingProfit motive and social welfareobjective

Production in the state sector guidedby social benefit


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Critical appraisal of the working of

Mixed economiesLess firm framework of the mixed economyand its vulnerability to politicalmaneuverings.

Concentration of economic power Bureaucratic inefficiency and corruptionDenial of social justiceBuilt-in-tendency to slide back


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Indian Economy A Snapshot

One of the fastest growing in the world

Consumption growth fuelling economic growth consumption

expenditure forming 78% of GDP

Services sector contributing over 60% to GDP

Emerging as a hub of manufacturing excellence. new growth

engines of Indian economy include IT, ITes, pharmaceuticals, bio-

technology, nano technology, agri. businesses

Where forces of competition are at work

Innovation driving enterprises

Economic reforms well on course entering second phase


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Inclusive growth occupying central place

High untapped potential in rural / agri - economy

Indian companies on acquiring spree and going global

Indian companies pursuing global best practices and producing

world-class managers


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Underdeveloped economy

Predominance of agriculture- 60-70% of population,account for 18.5% of GDP(2006-07), productivitylow

Low per capita income - $820Inequitable distribution of income and poverty-lowest 20% account for 8.9 aggregate householdexpenditure, share of top 20% is 41.6%(2000)

Poverty- 27% population BPL

Low demand for industrial goods and low capitalformation


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Rapid population growth- life expectancy64 yrs, 1.5% per annum is the growthrateUnemployment- widespread, didntimprove during liberalization period, dueto structural defects in economy

Scarcity of capital- Low, leads to low rateof economic growth, savings andinvestment recently increased- 32 to34%


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Technological backwardness-agriculture, wide gap between developed

and UDCsLack of entrepreneurs- till 1990s notmuch initiative, emergence of new classof entrepreneurs since 90s


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Developing economy

Both quantitative and structural changesNational income trends- 2006-07 9.9%, now5.5%Structural changes- sluggish changes, shareof agriculture in GDP declining, growth of large number of basic capital goodsindustries, infrastructure growth although

inadequate, progress in banking and financialsector- nationalization, reforms


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Mixed economy

Private ownership of means of productionPredominance of market- regulated to some

extentGrowth of private sector monopoliesLarge public sector Economic planning


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The Economic Environment

Interest RatesInterest Rates

Global EconomyGlobal Economy Rapid ChangeRapid Change

KeyEconomic

Forces

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Mixed economic systemEconomic planning

Industry-basic, capital, intermediate,consumer goods, consumer durables,and non durablesNational income and per capita incomeHR- populationInflation, exchange rates


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Poverty and public policyAgriculture and rural development

Financial marketsBanking sector Transport

Telecommunications


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InflationPersistent and appreciable rise in general level of

prices

Creeping inflation- positive effect on output andemploymentMild inflation increase in aggregate demand

business growthWhole Price Index used in India

Sometimes, misallocation of resources- adverseeffect on businessHigh inflation reduces aggregate demand


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Rate of savings and investmentDetermine business potentialMassive investment in industries, agriculture- scope

for business activity increases , demand for industrial goods increases

Investment in transport, power and communicationfacilitates business activity

Foreign capital boost investment rateIndia high level of savings and investment- 34%


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Fiscal imbalanceDeficit financing , high fiscal balance- adverse

effect on businessLeads to increase in purchasing power withoutcorresponding increase in production- timelag

Inflationary situation


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Balance of payments deficitsExcessive current account deficits

adverse effect on businessShortage of foreign exchange- curb

imports- protection policyLarge net foreign inflows/ investment

desirable


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Economic policies

Determine economic environment of business

Industrial policyTrade policyMonetary policy

Fiscal policy


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Industrial policy

Directly related to businessSince 1956- importance of private and

public sector recognizedIndustrial policy resolutions of 1956


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New industrial policy 1991


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Trade policy

Outward oriented and inward- orientedOutward oriented policy doesn't discriminatebetween production for domestic market andexports, provides liberalized environment , freedomto businesses to produce for exports or for domestic markets onlyInward oriented policy- in favor of domestic market,

import substitution strategy, protection to domesticindustryIndia till 1991, inward oriented


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Monetary policy

Influences cost and availability of creditand money

Objectives-


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Increasing openness of economy, needto service external debt, improve exports

require stable domestic pricesInflation of 3-4 % good


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Fiscal policy

Process of shaping taxation and publicexpenditure to dampen swings of businesscycle, achieve rapid economic growth with highemployment and stable pricesIndia, non-develpmental expenses huge-unsatisfactoryFiscal deficit- unsustainableLeads to higher interest rates due to publicborrowing

ibe economy india

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