Business Environment

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.

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 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.
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• 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

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Impact of Liberalisation,Privatisation and
Globalisation

• In the early 1990s, India faced a major crisis followed by a foreign exchange
deficit, resulting in its economic downfall. To overcome the crisis, the
government came up with adjustments to the economy by bringing new
reforms. The reforms introduced were called ‘structural reforms’ and
launched under the ‘New Economic Policy (NEP)’.
• The New Economic Policy was introduced in 1991. There are three broad
concepts of New Economic Policy: Liberalisation, Privatisation, and
Globalisation, or the LPG Model. The LPG Model was introduced to replace
the LQP Model, i.e., Licensing, Quotas, and Permits. The main aim of
introducing the reforms was to attain a high rate of economic growth, reduce
the rate of inflation, reduce the fiscal deficit, and overcome the BoP (Balance
of Payment) crisis.
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 Liberalisation

• Liberalisation of the economy is considered a key component of NEP. Before the New
Economic Policy of 1991, the private sector was in control of the government. Because of
this, the domestic industries were not allowed to take any decisions regarding the industry’s
work without the government’s interference. This resulted in a fall in professionalism and
inefficiency of work within the industry. With the introduction of the liberalisation policy, this
sector gained the freedom of decision-making without any interference from the government.
• The government also decided to abolish the licensing system. Before 1991, a business
needed to get a license from the government to start any industrial activity. This resulted in a
delay in getting a license, as there was a long queue of people before the window of the
government department, seeking authorisation to get a license. This also resulted in
corruption as the officers started taking bribes to make the process faster. To end this, the
government abolished the licensing system and permitted individuals to start their industrial
activities without any permission (however permission is still required in industries, such as
medicine, defense equipment, etc.).
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 Privatisation

• Privatisation refers to the partial or full ownership and operation of the public
sector enterprises by the private sector. It implies the withdrawal of
government ownership from the public sector. It can be done in two ways:
• Outright sale of part of the equity of Public Sector Undertakings (PSUs) to
private entrepreneurs (also known as Disinvestment), or
• Withdrawal of ownership and management of the public sector companies
from the government to the private sector.
• The need for privatisation was felt mainly because of the poor performance
of the Public Sector Undertakings, PSUs. As a result, the consumers were
facing a major loss, as they did not receive quality products, and other
services, such as the delivery system were also very poor
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 Globalisation

• Globalisation refers to the integration of the economy of a country with the economies of
other countries. The process of globalisation is associated with the free flow of trade,
capital across borders, increasing openness, growing economic independence, and
deepening of economic integration in the world. The main aim of globalisation was to
integrate the Indian economy with the global economy. As a result, there will be an
unrestricted flow of information, goods and services, technologies, and even people
across countries, which will eventually enhance the development of the country. The
government allowed foreign companies to hold 51 percent or more share of the Indian
companies in the case of collaboration so that they can function freely and as the owner.
This also promoted the transfer of the latest technologies into Indian territory due to
collaboration with MNCs. The reduction of the tariff and non-tariff barriers, adoption of
policies to promote exports, increase in Foreign Investments, increase of foreign
currency in the country (Forex), growth of the IT industry in India, and several other
features came under the globalisation policy.
Presentation title 8
 Impact of LPG

• Positive Impacts
• Increase in GDP growth rate in India. After 1991, India’s GDP growth rate increased year by year, and in the
year 2015-16, it was estimated to be 7.5%, whereas it was only 1.1% during the year 1990-91. Because of the
privatisation, advanced foreign technology, reduction of taxes, and the abolition of industrial licensing, there
was major growth in the GDP of the country.
• The rate of unemployment was high before the adaptation of the new economic policy. But, in 1991, the rate of
employment increased as the MNCs started investing in India, which resulted in the new job opening, and the
requirement for employees was created. And due to the removal of the industrial licensing, many individuals
started their businesses.
• An increase in the country’s per capita income. Per capita income refers to the average income earned by
a person in a given country. In 1991, the Per capita Income of India was ₹11,235, but in 2014-15 Per Capita
Income reached ₹85,533.
• Increase in Foreign Direct Investment from ₹408 Crores in 1991 to ₹106,693 Crores in 2015 after the
introduction of the new economic reforms of globalisation.
• Decrease in the Fiscal Deficit. A fiscal deficit refers to a situation where the revenue generated is exceeded
by the expenditures made by the government. The fiscal deficit of India before 1991 was 8.5% of Gross
Operating Profit, but it came down to 4% of the Gross Operating Profit in 2015. 9
• Negative Impacts
• Agriculture has been the backbone of the Indian economy but, because of NEP,
there was a decrease in the growth rate of the agricultural sector.The
agricultural sector came from giving employment to 72% of the population in
agriculture, and a contribution of 29.02% to GDP in 1991 to a drastic fall of only
17.9% contribution to GDP in 2014.
• Reduction in employment level. Because of the strict labour laws imposed due
to the economic liberalisation in the manufacturing industries, the employment
level of the country had a downfall.
• The globalisation of the economy caused threats to local businesses and
companies. Due to the invasion of MNCs, the level of competition increased, as
the Indian market had limited finance, a lack of adequate technologies, and
inefficiency of production.
• Because of the emission of harmful gases and chemicals from manufacturing
plants and the construction of new companies, there has been an adverse effect
on the environment, which resulted in pollution and clearing of the vegetation
covers.
• The reforms focused mainly on the formal sector of the economy, thus other
sectors such as the urban informal sector, the agricultural sector, and forest- 10