NAIPUNNYA SCHOOL OF MANAGEMENT

CHERTHALA, ALAPPUZHA
BBA SEMESTER III – MODULE II NOTES
BUSINESS ENVIRONMENT AND POLICY
ECONOMIC ENVIRONMENT
 Economic environment refers to all the external economic factors that influence buying
habits of consumers and businesses and therefore affect the performance of a company.
(Or)
 Economic environment of a business refers to the overall economic conditions and
factors that can influence its operations, performance, and decision-making.
ELEMENTS/ FACTORS/ TYPES OF ECONOMIC ENVIRONMENT OF A BUSINESS
 Factors affecting the economic environment of a business can be broadly categorized into
two main types: microeconomic factors and macroeconomic factors.
 These factors operate at different levels and have distinct impacts on businesses.
 Let's delve into each type:
1. Microeconomic Factors:
 Microeconomic factors refer to the individual economic elements that directly
influence the operations and decision-making of a specific business, industry, or
market.
 These factors are more localized and deal with specific economic agents.
 Some key microeconomic factors include:
a) Supply and Demand:
 The foundation of microeconomics lies in the theory of supply and demand.
 The demand for goods and services by consumers and the supply of those goods
and services by producers determine market prices and quantities traded.
b) Market Structure:
 The type of market structure in which a business operates (e.g., perfect
competition, monopolistic competition, oligopoly, monopoly) affects its pricing
power, competition level, and potential for profit.
c) Production Costs:
 The cost of inputs (e.g., labor, raw materials, machinery) required for production
significantly impacts a firm's profitability and pricing decisions.
d) Consumer Behaviour:
 Understanding consumer preferences, purchasing habits, and price sensitivity
is crucial for businesses to design effective marketing strategies and develop
products that meet customer needs.
e) Elasticity of Demand:
 Elasticity measures how responsive the quantity demanded is to changes in
price or income.
 Businesses need to consider demand elasticity when pricing their products or
services.
 f) Factor Markets:
 The markets for resources such as labour, land, and capital affect a business's
production costs and ability to hire skilled workers.
2. Macroeconomic Factors:
 Macroeconomic factors, on the other hand, deal with the overall behaviour and
performance of an entire economy or country.
 These factors have a broader impact on the economic environment in which
businesses operate.
 Some key macroeconomic factors include:
a) Gross Domestic Product (GDP):
 GDP represents the total value of goods and services produced within a
country's borders.
 It indicates the overall economic health and growth rate of the country.
b) Inflation Rate:
 The rate at which the general level of prices for goods and services is rising and
purchasing power is falling.
 High inflation can erode purchasing power and affect consumer spending.
c) Unemployment Rate:
 The unemployment rate measures the percentage of the labour force that is
jobless and actively seeking employment.
 High unemployment rates can lead to reduced consumer spending and lower
demand for goods and services.
d) Interest Rates:
 The rate at which a bank lends money to its customers.
 Reserve banks set interest rates to influence borrowing costs and control
money supply.
 Changes in interest rates affect consumer spending, business investment, and
overall economic activity.
e) Government policies and regulations:
 Policies related to taxes, trade, labour laws, and other areas can have a
significant impact on business operations.
f) Exchange Rates:
 The value of one currency relative to another. Fluctuations in exchange rates
can impact import and export costs, affecting international trade and
competitiveness.
g) Consumer spending:
 The amount of money that consumers are willing to spend on goods and
services, which is a key determinant of economic growth.
h) Economic System:
 The type of economic system, such as capitalism, socialism, or mixed economy,
in a country determines the allocation of resources and the role of the
government in the economy.
 Both microeconomic and macroeconomic factors are interconnected, and businesses
need to consider both types when making decisions.
 Microeconomic factors address specific issues within a business's control or industry,
while macroeconomic factors deal with broader economic conditions that can shape the
overall economic environment and business landscape.
 Understanding and analyzing these factors enable businesses to respond effectively to
changes in the economic environment and formulate sound strategies for success.
ECONOMIC SYSTEM
 Economic systems are structures that define how a society allocates its resources,
produces goods and services, and distributes them among its members.
 There are several different types of economic systems, each with its own characteristics
and methods of organization.
 The main economic systems are:
1. MARKET ECONOMY (CAPITALISM):
 Under capitalism, the economic environment is characterized by private ownership of
the means of production and the operation of economic activities primarily driven by
market forces.
 It is a system where individuals and businesses are free to pursue their economic
interests with limited government intervention.
 Capitalism is often associated with competitive markets, profit motive, and individual
economic freedom.
KEY FEATURES OF A CAPITALIST ECONOMY:
1. Private Ownership:
 In a capitalist economy, the means of production, such as land, capital, and
enterprises, are owned and controlled by private individuals or entities.
 This includes private businesses, corporations, and individuals who can own and
use property for economic activities.
2. Market-Driven Economy:
 Capitalism operates on the principles of supply and demand.
 Prices of goods and services are determined by market forces, and decisions
regarding production, consumption, and investment are guided by the profit motive.
3. Profit Motive:
 In a capitalist system, businesses aim to maximize profits.
 The pursuit of profit serves as a powerful incentive for entrepreneurship, innovation,
and investment.
4. Competition:
 Capitalism promotes competition among businesses.
 This competition is believed to lead to efficiency, better products, and lower prices
for consumers.
5. Consumer Sovereignty:
 Under capitalism, consumer preferences and choices play a significant role in
determining which goods and services succeed in the market.
6. Minimal Government Intervention:
 Capitalism generally advocates for limited government interference in the economy.
 The role of the government is primarily to ensure a level playing field, enforce
property rights, and provide essential public goods and services.
7. Profit and Loss System:
 Capitalism is characterized by a profit and loss system, where successful businesses
earn profits, while those that fail to meet market demands incur losses.
8. Mobility and Social Class:
 Capitalism allows for social and economic mobility, where individuals can move
between different social classes based on their skills, efforts, and entrepreneurship.
 There is a potential for upward mobility through economic success.
9. Investment and Savings:
 Capitalism encourages investment and savings by providing incentives for
individuals and businesses to invest in productive activities, fostering economic
growth and development.
10. Financial Markets:
 Capitalist economies have well-developed financial markets, including stock
markets, bond markets, and banking systems, which facilitate the allocation of
capital and promote investment.
While capitalism offers numerous advantages such as efficiency, innovation, and economic growth, critics
argue that it can lead to income inequality, worker exploitation, and market failures. As a result, many
modern economies, including those with capitalist foundations, implement regulatory measures and social
safety nets to address these concerns and achieve a balance between market forces and social welfare.

2. COMMAND ECONOMY (SOCIALISM OR COMMUNISM):

 A command economy is an economic system in which the government or a central
authority has significant control over the allocation of resources, production, and
distribution of goods and services.
 It is closely associated with socialism and in its most extreme form, communism.
KEY FEATURES OF SOCIALISM OR COMMUNISM
1. Central Planning:
 The government takes on the role of central planning and sets production targets,
allocates resources, and decides what goods and services will be produced, in what
quantities, and at what prices.
2. Public Ownership:
 The means of production, including industries, infrastructure, and natural resources,
are often owned and controlled by the state or the public, rather than by private
individuals or corporations.
3. Absence of Private Property:
 In its purest form (communism), private property is abolished, and all resources are
collectively owned by the society.
 In socialism, there might still be some private ownership, but key industries and
resources are under state control.
4. Income Equality:
 Command economies aim to reduce income inequality by ensuring a more equitable
distribution of wealth among citizens.
 In theory, this helps address social disparities and fosters a classless society.
5. Limited Consumer Choice:
 Consumer choices are restricted, as the government determines the range and
availability of goods and services.
 There might be shortages of certain items and an abundance of others that the
government prioritizes.
6. Limited Market Forces:
 Market forces of supply and demand have little influence on resource allocation and
production decisions, as the government directs economic activity based on its central
plan.
7. Employment Assurance:
 The government typically ensures full employment by providing jobs for the
population, even in non-profitable sectors, to minimize unemployment.
8. Lack of Incentives:
 Without the profit motive driving businesses, there might be less incentive for
innovation and efficiency.
 This can lead to inefficiencies and lower productivity in some cases.
9. Limited Economic Freedom:
 Individual economic freedom and entrepreneurial activities are curtailed as the state
controls most aspects of the economy.
 Examples of countries with historical or present-day command economies include the
former Soviet Union, North Korea, and Cuba.
 In reality, most economies have some mix of market and command elements.
 Pure command economies have faced challenges in terms of inefficiency, lack of
innovation, and difficulty in satisfying consumer demands, leading many countries to
adopt mixed economic systems instead.
3. MIXED ECONOMY (CAPITALISM & SOCIALISM OR COMMUNISM)
 A mixed economy is an economic system that incorporates elements of both market
and command economies.
 It combines private enterprise with varying degrees of government intervention to
achieve economic goals and address societal needs.
KEY FEATURES OF MIXED ECONOMY
1. Coexistence of Private and Public Sectors:
 In a mixed economy, both private businesses and public entities coexist.
 Some industries and resources are privately owned and operated, while others are
owned and controlled by the government.
2. Role of Market Forces:
 Market forces of supply and demand play a significant role in determining prices,
 resource allocation, and production decisions in the private sector.
 Competition is encouraged to drive efficiency and innovation.
3. Government Regulation:
 The government regulates certain industries and economic activities to protect
consumers, ensure fair competition, and address market failures.
 Regulations may include labour laws, environmental standards, and safety
regulations.
4. Provision of Public Goods and Services:
 The government provides essential public goods and services, such as
infrastructure, education, healthcare, and social welfare programs, to address
societal needs and promote public well-being.
5. Income Redistribution:
 Mixed economies often employ progressive taxation and social welfare programs to
redistribute wealth and reduce income inequality.
6. Balancing Economic and Social Objectives:
 Mixed economies aim to balance economic efficiency and growth with social equity
and welfare.
 They seek to promote economic development while ensuring that the benefits are
distributed more evenly among the population.
7. Economic Stability:
 Government intervention can help stabilize the economy during periods of recession
or economic instability by implementing fiscal and monetary policies.
8. Private Property Rights:
 Mixed economies typically recognize and protect private property rights, which
encourage investment and entrepreneurship.
9. Flexibility:
 The degree of government intervention and regulation can vary, giving mixed
economies a degree of flexibility to adapt to changing economic conditions and
societal needs.
 Examples of countries with mixed economies include the United States, Canada, most
European countries, and many others worldwide.
 The specific mix of market and government influence can differ significantly among
these countries based on their political, cultural, and historical contexts.
 The mixed economy approach aims to harness the strengths of both market and
command economies while mitigating some of their respective weaknesses.
EXPLAIN ABOUT THE ECONOMIC ENVIRONMENT OF A BUSINESS IN INDIA /
EFFECTS OF ECONOMIC ENVIRONMENT ON BUSINESSES/ ECONOMIC SYSTEMS AND
BUSINESS ENVIRONMENT
 The economic environment of a business in India refers to the various economic factors
that influence the functioning and decision-making of a business operating in India.
 Some of the key elements of the economic environment in India include:
 1. Gross Domestic Product (GDP): India is one of the fastest-growing economies in the
world, with a robust GDP growth rate that has averaged over 7% in recent years.
2. Interest Rates: The Reserve Bank of India (RBI) sets interest rates in the country,
which can impact the cost of borrowing for businesses. Interest rates in India have
been on a downward trend in recent years, which has been favourable for businesses.
3. Inflation: Inflation in India has been generally under control in recent years, although
it has increased somewhat in the past year due to rising food and fuel prices.
4. Exchange Rates: The value of the Indian Rupee has been relatively stable in recent
years, although it has been subject to some fluctuations due to global economic
conditions.
5. Unemployment rate: The unemployment rate in India has been steadily declining in
recent years, which is a positive sign for businesses as it suggests that consumer
spending is likely to increase.
6. Government policies and regulations: The Indian government has been
implementing a number of reforms aimed at improving the business environment,
including streamlining regulations and reducing red tape.
7. Consumer spending: With a large and growing middle class, consumer spending in
India is on the rise, providing a strong market for goods and services.
 Overall, the economic environment in India presents a mix of opportunities and
challenges for businesses.
 However, the country's strong economic growth, favourable government policies, and
large consumer market make it an attractive destination for investment and growth.
INDUSTRIAL POLICY
 Industrial Policy is the set of standards and measures set by the Government to
evaluate the progress of the manufacturing sector that ultimately enhances economic
growth and development of the country.
 The government takes measures to encourage and improve the competitiveness and
capabilities of various firms.
OBJECTIVES OF INDUSTRIAL POLICY
1. To maintain steady growth in productivity.
2. To create more employment opportunities.
3. Utilize the available human resources better
4. To accelerate the progress of the country through different means
5. To match the level of international standards and competitiveness
INDUSTRIAL POLICY IN INDIA
1. Industrial policies 1948 to 1956
 Industrial policies refer to the government's efforts to promote, regulate, and guide the
growth of a country's industrial sector.
 In 1948, India implemented its first industrial policy after independence.
 This policy aimed to accelerate industrialization, create employment opportunities, and
reduce dependence on imports.
 Some of the key features of the industrial policies during this period include:
 a) State control of key industries: The government nationalized several key industries,
such as coal, electricity, and transportation, in order to ensure their growth and
development.
b) Import substitution: The government encouraged domestic production by imposing
restrictions on imports and providing incentives for domestic manufacturing.
c) Promotion of heavy industries: The government prioritized the development of heavy
industries, such as iron and steel, in order to build a strong industrial base.
d) Encouragement of private investment: The government also encouraged private
investment in certain sectors, such as textiles and consumer goods, in order to
promote economic growth and job creation.
e) Creation of public sector enterprises: The government established a number of
public sector enterprises (PSEs) in key industries, such as steel, oil, and machine
tools, in order to promote self-sufficiency and control the strategic industries.
 These industrial policies were part of India's efforts to build a mixed economy that
combined elements of socialism and capitalism.
 While they had some successes, such as the creation of a strong public sector and the
development of heavy industries, they also had some limitations, such as the lack of
private sector investment and the slow pace of industrialization.
2. Industrial Policies 1956
 The 1956 Industrial Policy of India marked a significant shift in the country's approach
to industrialization.
 It was a revision of the 1948 industrial policy and aimed to create a more liberal and pro-
business environment for the growth of industry.
 The 1956 policy was focused on the following key objectives:
a) Encouragement of private enterprise: The policy aimed to encourage private
enterprise by removing controls and restrictions on industry.
b) Expansion of production: The policy aimed to increase the production of goods, both
for domestic consumption and for export.
c) Diversification of production: The policy aimed to diversify the production base of
the economy, particularly in areas like consumer goods and small-scale industries.
d) Modernization of industry: The policy aimed to promote technological upgrading
and modernization of the industrial sector.
e) Development of infrastructure: The policy aimed to develop the necessary
infrastructure for industrial growth, such as transport, power, and communication
networks.
 Overall, the 1956 Industrial Policy aimed to create a more favourable environment for
industrial growth and to promote the development of a dynamic and competitive
industrial sector.
 This policy helped to lay the foundation for India's rapid industrialization and economic
growth in the decades to come.
INDUSTRIAL POLICY OF 1991
 The industrial policy of 1991 refers to the set of economic reforms and changes in the
regulatory environment introduced by the Indian government in 1991.
 These reforms aimed to liberalize the Indian economy and make it more competitive in
the global market.
 Some of the key changes introduced as part of this policy include:
1. Liberalization of foreign investment and trade policies, allowing more foreign
companies to invest and operate in India.
2. Deregulation of industries, leading to reduced government control and greater
freedom for businesses to operate.
3. Privatization of state-owned enterprises, aimed at increasing efficiency and
competitiveness.
4. Encouragement of entrepreneurship and innovation through tax incentives and
easier access to capital.
 The industrial policy of 1991 was a significant turning point for the Indian economy,
marking a shift from a heavily regulated and centralized economy to a more market-
driven and open economy.
 These reforms have played a key role in driving India's economic growth and development
over the past few decades.
OUTCOMES/ IMPACT OF NEW INDUSTRIAL POLICY 1991

 Removal of Restrictions Regarding License, Permit, And Quota Raj: It removed the restrictions experienced during
the license, permit, and quota raj. It intended to liberalize the economy by removing bureaucratic restrictions on
industrial growth.
 Public Sector’s Role and Disinvestment: The role of the public sector was decreased and two sectors were reserved
for the public. The process of disinvestment was started in PSUs.
 Entry of Multi-National Companies: By removing restrictions it enabled the entry of multinational companies,
privatization, removal of asset limits on MRTP companies, liberal licensing policy, etc.
 Increment in Domestic and Foreign Investment: Domestic, as well as foreign investment, increased in almost every
sector of the economy.
 Increment in Exports and Related Activities: Increased efforts were undertaken to increase exports such as Export
Oriented Units (EOU), Export Processing Zones (EPZ), Agri-Export Zones (AEZ), etc. emerged.
 Establishment of A Separate Ministry: To better resolve the issues of MSMEs in 2006 a new act and separate
ministry were established.

FISCAL POLICY
 Fiscal policy refers to the use of government spending and taxation to influence and
regulate the economy.
 It is one of the essential tools available to the government for macroeconomic
management and aims to achieve various economic objectives, such as economic growth,
price stability, full employment, and sustainable development.
There are two main components of fiscal policy:
1. Government Spending:
 The government can directly impact the economy by spending money on various
projects and initiatives.
 This spending can be on infrastructure development, social welfare programs, defence,
education, healthcare, and more.
  When the government increases its spending, it injects money into the economy, which
can lead to increased demand for goods and services and stimulate economic growth.
2. Taxation:
 The government can control the amount of money flowing into the economy by adjusting
tax rates.
 When taxes are reduced, individuals and businesses have more disposable income,
which can boost consumer spending and investment.
 On the other hand, increasing taxes can help reduce inflationary pressures and control
excessive economic growth.
The government can use fiscal policy in two ways:
1. Expansionary Fiscal Policy:
 This type of policy is employed during economic downturns or recessions.
 The government increases its spending or reduces taxes to stimulate economic activity,
create jobs, and encourage investment.
 By doing so, the government aims to boost aggregate demand and get the economy back
on track.
2. Contractionary Fiscal Policy:
 On the other hand, during periods of high inflation and economic overheating, the
government may implement contractionary fiscal policy.
 This involves reducing government spending or increasing taxes to decrease aggregate
demand and control inflation.
OBJECTIVES/ AIM/ PURPOSE OF FISCAL POLICY
1. Economic Stability: To maintain stable economic growth and control fluctuations in
business cycles, aiming for low inflation and reduced unemployment rates.
2. Full Employment: To promote job creation and reduce unemployment by implementing
measures that stimulate economic activity and encourage investment.
3. Price Stability: To control inflation and prevent excessive price increases, ensuring a
stable and predictable economic environment.
4. Economic Growth: To support long-term economic expansion by fostering investment,
productivity, and innovation.
5. Income Distribution: To address income inequality and promote a fair distribution of
wealth by using progressive tax policies and social spending.
6. Public Debt Management: To manage government borrowing and debt levels responsibly
to ensure fiscal sustainability over the long term.
7. Macroeconomic Balance: To maintain a stable balance between government revenue
and expenditure, avoiding excessive budget deficits or surpluses.
MONETARY POLICY
 Monetary policy is another essential tool used by governments and Reserve Bank of India
(RBI), to control and stabilize the economy. Unlike fiscal policy, which involves changes
in government spending and taxation, monetary policy focuses on managing the money
supply and interest rates to achieve specific economic objectives.
 The primary tool used by the RBI to implement monetary policy is setting interest rates,
i.e. the repo rate (the rate at which banks borrow from the RBI) and the reverse repo rate
(the rate at which banks lend to the RBI).
 By adjusting these rates, the RBI can influence the cost and availability of credit in the
economy and therefore impact economic activity.
 The aim of monetary policy in India is to maintain price stability, support economic
growth, and manage liquidity in the financial system.
KEY INSTRUMENTS OF MONETARY POLICY IN INDIA
The RBI uses various tools or instruments to implement monetary policy. Some of the key instruments include:
1) Repo Rate:
 The repo rate is the rate at which the RBI lends money to commercial banks for short
periods, typically up to 14 days.
 By changing the repo rate, the RBI influences the cost of borrowing for banks, which,
in turn, affects the interest rates they charge on loans to businesses and consumers.
2) Reverse Repo Rate:
 The reverse repo rate is the rate at which the RBI borrows money from commercial
banks. It acts as a tool to absorb excess liquidity from the banking system.
 Changes in the reverse repo rate influence the interest rates on surplus funds held by
banks with the RBI.
3) Cash Reserve Ratio (CRR):
 The CRR is the percentage of a bank's total deposits that it must keep with the RBI in
the form of cash reserves.
 By adjusting the CRR, the RBI controls the liquidity available with banks and,
consequently, affects the money supply in the economy.
4) Statutory Liquidity Ratio (SLR):
 The SLR requires banks to maintain a certain portion of their net demand and time
liabilities (NDTL) in the form of specified liquid assets, such as government securities.
 Changes in the SLR impact banks' ability to lend and the money supply.
5) Marginal Standing Facility (MSF):
 The MSF rate is the rate at which banks can borrow overnight funds from the RBI
against approved government securities.
 It provides a higher interest rate window for banks to meet their emergency liquidity
requirements.
EXIM POLICY/ FOREIGN TRADE POLICY (FTP)
 The EXIM policy ("Export-Import Policy" of India), also known as the Foreign Trade
Policy (FTP), is a set of guidelines and regulations formulated by the Government of India
to govern the country's import and export activities.
 The primary objective of an FTP is to promote exports, boost economic growth, create
employment opportunities, and enhance the competitiveness of domestic industries in
the global market.
 The policy is updated by the Indian government every five years and provides details on
import duties, trade agreements, export incentives, and other related matters.
KEY ELEMENTS/ OBJECTIVES/ FEATURES OF FTP/ EXIM POLICY
1. Tariffs and Duties:
 Governments may use import tariffs and export duties as instruments to control the
flow of goods and services across their borders.
 Tariffs are taxes levied on imported goods, while export duties are taxes applied to goods
leaving the country.
2. Export Promotion:
 The primary goal of most FTPs is to encourage and support exports.
 Governments may provide various incentives and benefits to exporters, such as tax
breaks, subsidies, export credits, and export promotion schemes.
3. Import Regulations:
 Countries may impose import restrictions or licensing requirements on certain goods
to protect domestic industries, ensure quality standards, or control the flow of specific
items.
4. Trade Agreements:
 Governments often engage in bilateral or multilateral trade agreements with other
countries to facilitate trade and investment.
 These agreements aim to reduce trade barriers and promote economic cooperation.
5. Special Economic Zones (SEZs):
 Many countries establish SEZs, which are geographically demarcated areas with special
economic regulations.
 SEZs offer various incentives to attract foreign investment, promote exports, and
facilitate industrial growth.
6. Trade Facilitation:
 Measures are taken to simplify and streamline customs procedures, reduce
bureaucratic red tape, and enhance logistical efficiency to promote smoother trade
transactions.
7. Foreign Investment:
 FTPs often address foreign direct investment (FDI) regulations and incentives to attract
investments from abroad.
8. Export-Import Documentation:
 Detailed guidelines on export and import documentation are provided to ensure
compliance with international trade regulations and standards.
9. Exchange Rate Policies:
 Governments may intervene in the foreign exchange market to stabilize the exchange
rate, which can have a significant impact on export competitiveness.
10. Trade Remedies:
 FTPs may include provisions for trade remedies, such as anti-dumping duties,
countervailing duties, and safeguard measures, to protect domestic industries from
unfair trade practices.
11. Market Access:
 FTPs may address market access issues, advocating for reduced trade barriers and
increased market opportunities for domestic exporters in other countries.
Foreign Trade Policy is a dynamic instrument that can be updated periodically to respond to changing
global economic conditions, geopolitical situations, and domestic economic goals. It plays a crucial role in
shaping a country's economic trajectory and its integration into the global economy.

Extra Note *************************************************************************************

ECONOMIC ENVIRONMENT IN INDIA

Economic environment refers to all these forces that have an economic impact on business
activities. We know that business is an economic organization. Therefore, its survival and
growth are dependent on economic factors. The economic environment includes various
factors, such as inflammation, interest rate, price level, money supply in the market, etc.
These factors serve a business as an opportunity or as a threat to a business. Therefore,
management always remains active to grab the opportunity and tries to change threats into
opportunities.
Important factors of Economic Environment
Economic environment is one of the most crucial elements of the business environment. In
India, the economic environment consists of various macro-level factors that are related to
the production and distribution of the organization. These factors have an impact on the
wealth of businesses and industries. Some of the important factors are as follows:
 Stage of Economic Development: The stage of economic development of the country
means the physical frame and framework environment.
 Economical Structure: The type of economic system determines the role of the public
and private sectors in India. A mixed economic system operates where both public
and private sectors exist, and India is an example of a mixed economy.
 Economic Planning: Economic planning gives direction to the changes in the
economic environment. It includes five years plan, an annual budget, etc.
 Economic Policy: There are various important economic policies that influence the
business decisions, such as monetary policies, fiscal policies, etc.
 Fluctuations and trends in Economic Indicator: The functioning of an economic
indicator like national income, distribution of income, growth rate, GDP, NDP, etc.
Any change or fluctuation in these will affect the Economic environment.
 Infrastructural Factors: Infrastructure refers to all such activities and facilities
which are needed to provide different kinds of services in an economy. It includes
financial institutions, banks, modes of transportation, communication facilities, etc.
Poor infrastructural facilities hamper the economic growth of the country.
Economic Environment at the time of Independence
The economic environment of India has been rapidly changing mainly due to government
policies. The main features of economic environment at the time of independence are as
follows:
  At the time of Independence, the Indian economy was mostly agricultural and rural
in nature. With almost 85% of the population of the county living and carrying out
their occupations in villages.
 Low productivity or inefficient techniques of production were used for performing any
operation.
 There was no good public health care system due to which several communicable
diseases were spreading everywhere.
 There was a high infant mortality rate as there was no proper health care system.
Economic Environment since Independence
The government opted for ‘Economic Planning’ to revive the economy from the damages
caused by the British Rule.
The main objectives of the development plan adopted by India are as follows:
 India’s development plans aimed at initiating rapid economic growth in order to
decrease unemployment and poverty, thereby increasing the standard of living of the
people.
 It aimed at establishing a well-built industrial base focusing on heavy and primary
industries.
 It aimed to become self-reliant and bring down the inequalities of income. This plan
also included following a socialist pattern of development, i.e. based on equality by
avoiding capitalism, as it focuses on attaining the welfare of the society.
 With respect to economic planning, the government gave the responsibilities for
infrastructure industries to the public sector.
 Private sector industries were responsible for the development of the consumer goods.
 Mixed economy pattern was adopted by giving more importance to the socialist
pattern.
Crisis of 1991
The government could not get a very positive effect by making a new economic policy that
gave more importance to the public sector and imposing restrictions on the Private sector. As
a result, India faced foreign trade exchange crisis in 1991.
The major crises of 1991 were:
 The fiscal deficit approximately reached 7% of GDP, which was a warning situation.
 Internal debt also rose to 50% of GDP.
 Negative growth in agriculture and industrial production.
 The value of the rupee was depreciating day by day. It depreciated by 26.7 percent (in
terms of US Dollars). There was also a fall in foreign exchange reserves.
 There was a negative balance of payment.
 India was on the verge of becoming a defaulter. As a result, SBI and RBI sold and
Pledged Gold in the international market.
 Imports fell (in terms of US Dollars) by 19.4 percent and exports by 26.7 percent.
India borrowed a loan of $600 million from the World Bank and International Monetary Fund
to manage the crisis of 1991. In order to revive the economy, India decided to reform the
economy.
Reform Measures
To save our country from the serious situation of crisis Government of India took the following
reform measures:
 Firstly, the fiscal deficit was reduced, and the New Industrial Policy was announced
in July 1991.
 The abolition of the Industrial Licensing Policy was established with the amendment
of the MRTP Act.
 There was an open entry for the private sector to areas that were earlier public sector.
 There was a rise in foreign equity holders from 40% to 51%.
 The government set up the Foreign Investment Promotion Board(FIPB).
 Introduction of Indian development Bond scheme to get funds from IMF.
 Buying back of gold, pledged with Bank of England and Bank of Japan.
 Measures were laid to control the imports and encourage more export.
 There was an introduction of Liberalized Exchange Rate Management System.
 Government eliminated import licenses on capital goods and abolished export duties.
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