Economic Environment of Business

1 Business Environment
The term Business Environment is composed of two words Business and Environment. In simple terms, the state in which a person remains busy is known as Business. The word Business in its economic sense means human activities like production, extraction or purchase or sales of goods that are performed for earning profits. On the other hand, the word Environment refers to the aspects of surroundings. Therefore, Business Environment may be defined as a set of conditions Social, Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of organization. 1. Internal Environment 2. External Environment 1. Micro/Operating Environment (1) Supplier (2) Customers (3) Market Intermediaries (4) Competitors (5) Public 2. Macro/General Environment (1) Economic Environment (2) Non-Economic Environment (i) Political Environment (ii) Socio-Cultural Environment (iii) Technological Environment (iv) Natural Environment (v) Demographic Environment (vi) International Environment 1. Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of business. Business can make changes in these factors according to the change in the functioning of enterprise.

2. External Environment: Those factors which are beyond the control of business enterprise are included in external environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc.

It is of two Types:

1. Micro/Operating Environment

2. Macro/General Environment 1. Micro/Operating Environment: The environment which is close to business and affects its capacity to work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public. (1) Suppliers: They are the persons who supply raw material and required components to the company. They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier. (2) Customers: - Customers are regarded as the king of the market. Success of every business depends upon the level of their customers satisfaction. Types of Customers: (i) Wholesalers (ii) Retailers (iii) Industries (iv) Government and Other Institutions (v) Foreigners (3) Market Intermediaries: - They work as a link between business and final consumers. Types:(i) Middleman (ii) Marketing Agencies (iii) Financial Intermediaries (iv) Physical Intermediaries (4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself according to the strategies of the Competitors. (5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and local public. They may be the users or non-users of the product.

2. Macro/General Environment It includes factors that create opportunities and threats to business units. Following are the elements of Macro Environment:

(1) Economic Environment

It is very complex and dynamic in nature that keeps on changing with the change in policies or political situations. It has three elements: (i) Economic Conditions of Public (ii) Economic Policies of the country (iii)Economic System (iv) Other Economic Factors: Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc. (2) Non-Economic Environment: - Following are included in non-economic environment:(i) Political Environment

It affects different business units extensively. Components: (a) Political Belief of Government (b) Political Strength of the Country (c) Relation with other countries (d) Defense and Military Policies (e) Centre State Relationship in the Country (f) Thinking Opposition Parties towards Business Unit (ii) Socio-Cultural Environment

Influence exercised by social and cultural factors, not within the control of business, is known as SocioCultural Environment. These factors include: attitude of people to work, family system, caste system, religion, education, marriage etc. (iii) Technological Environment

A systematic application of scientific knowledge to practical task is known as technology. Everyday there has been vast changes in products, services, lifestyles and living conditions, these changes must be analysed by every business unit and should adapt these changes. (iv) Natural Environment

It includes natural resources, weather, climatic conditions, port facilities, topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business. (v) Demographic Environment

It is a study of perspective of population i.e. its size, standard of living, growth rate, age-sex composition, family size, income level (upper level, middle level and lower level), education level etc. Every business unit must see these features of population and recongnise their various need and produce accordingly. (vi) International Environment

It is particularly important for industries directly depending on import or exports. The factors that affect the business are: Globalisation, Liberalisation, foreign business policies, cultural exchange. Characteristics 1. Business environment is compound in nature. 2. Business environment is constantly changing process. 3. Business environment is different for different business units. 4. It has both long term and short term impact. 5. Unlimited influence of external environment factors. 6. It is very uncertain. 7. Inter-related components. 8. It includes both internal and external environment.

2. Macroeconomics
Macroeconomics is the study of aggregates or averages covering the entire economy such as total employment, national income, national output, total investment, total consumption, total savings, aggregate supply, aggregate demand, general price level, wage level and cost structure. It is aggregative economics which examines the interrelations among the various aggregates, their determination and causes of fluctuations in them. Definitions R. G. D. Allen The term macro economics applies to the study of relations between broad economic aggregates such as total employment, income and production.

Edward Shapiro The major task of macro economics is the explanation of what determines the economys aggregate output of goods and services. It deals with the functioning of the economy as a whole. K. E. Boulding Macro economics is that part of economics which studies the overall averages and aggregates of the economic system. It does not deal with individual incomes but with the national income, not with individual prices but with the price level, not with individual output, but with national output. Importance / Scope of Macro Economics 1. It helps in understanding the determination of income and employment 2. Determination of general level of prices 3. Economic growth 4. Macro economics and business cycles 5. International trade 6. Income shares from the national income 7. Unemployment 8. Macro economic policies 9. Global economic system Limitations of Macro Economics 1. The macro economies ignores the welfare of the individual. 2. The macro economics analysis regards aggregates as homogeneous but does not look into its internal composition. 3. It is not necessary that all aggregate variable are important. 4. The macro economic models are designed mostly to suit the developed countries of the world. The developing countries face different economic realities, so they do not benefit much from them.

3. Economic Growth and Development 4. Economic growth and economic development are two popular concepts in Economics. In general, they imply an improvement achieved over a period of time. There is no difference between the

two to a layman and he often uses it as synonyms. Economists however, draw a distinction between the two. While economic growth implies a rise in national income, economic development refers to a rise in national income along with an improvement in economic welfare. These concepts are explained at the aggregate level and not at the individual or institutional level. Similarly growth or development is related to the entire economy not to that of a particular sector or a specific economic activity. In brief, both are macro concepts. Economic Growth Economic growth refers to the increase in the output of goods and services produced by an economy over a period of time. It refers to long term increase in national output or income. National income increases when output of goods and services increases when prices of the same remain constant or when prices increase and output remaining the same. Economic growth refers to the increase in national income when output rises while prices remain constant. This is termed as real growth. When real growth takes place, the per capita availability of goods and services will increase provided population remains constant. Further, economic growth refers to increase in the flow of goods and services over a period of time. It implies that occasional increase in agricultural output or industrial output due to good monsoon or due to new technology cannot be considered as growth. The increase in output or income should sustain for a long period of time. Definition Professor Meier Economic growth has been defined as the process whereby the per capita real income of a country increases over a long period of time. Pro. Salvatore Economic growth can be defined as The process whereby a countrys real per capita gross national product or income increases over a sustained period of time through continuing increase in per capita productivity. Economic growth is generally measured in terms of Gross Domestic Product at Factor Cost at constant prices (GDP fc). G = [(A/P) -1] x 100 G = Growth, A = Latest GDP, P = Base years GDP Example : Suppose the GDP at factor cost in 2000-01at 93-94 prices was Rs 20,000 lakh crores and 19992000 it was Rs 18,000 lakh crores. Find the growth rate G = [(A/P) -1] x 100 = 20,000 - 1 18,000 = (1.11 -1) x 100 = 0.11 x 100 = 11%

3 Economic Development
Economic development is a wider term compared to economic growth. It refers to a process which consists of economic growth and economic welfare. Economic development has been defined as economic growth and a number of other changes leading to overall development of the economy.

1. 2. 3. 4. 5.

Some of the changes are rise in productivity of labour and capital, development of money market and capital market, reduction in poverty and unemployment, equitable distribution of income and above all changes in the attitude of the people moving from traditional values to modern values. Thus economic development is a very comprehensive term. Economic growth may take place in an economy, but if it is not accompanied by qualitative changes, then it cannot be termed as economic development. Definition Prof Peterson Economic development is a process whereby the real per capita income and economic welfare increases over a long period of time. Prof. M. P. Todaro Economic development is a multi-dimensional process involving major changes in social structures, popular attitudes and national institutions as well as the acceleration of economic growth, the reduction of inequality and the eradication of absolute poverty. The definitions imply the following 1. Development indicates a rise in real per capita income, The real per capita income is calculated as - (Real Nation Income / Population). 2. Development is a long-term process. It brings about significant changes in demand for goods and services, supply of factors of production etc. 3. Development should result in an increase in real per capita income and reduction in poverty and inequality. In other words there should be increase in the economic welfare of the people. 4. Development process should lead to significant structural technological and institutional changes in the economy. Structural change implies a fundamental change in the economy. For example, the secondary and the tertiary sectors replacing the agricultural sector as the dominant one is a structural change. When economic development takes place in an economy, many changes take place. The notable are as uncer 1. Improvement in the standard of living of the people 2. Eradication of absolute poverty 3. Increase in the productivity of factors of production 4. Social parameters like literacy rate, life expectancy etc. show a positive trend. 5. Population growth gets stabilised 6. Greater equality in the distribution of income and wealth is witnessed 7. Infrastructural development is given importance to sustain growth and development 8. Environmental protection and sustainable development are given much importance Indicators of Development Per capital Income Per capita Consumption Physical Quality of Life Index Human Development Index Quality of Life Index Per Capita Income Per capita income is the average income of the people of a country. It is obtained with the help of the following formula Per Capita Income = National Income / Population

When per capita income is calculated according to current prices, it is called money or monetary per capita income. When it is calculated according to the prices of a base year it is termed as real per capital income. It is estimated as Real Per Capita Income = National Income at Constant Prices Population 2. Per Capita Consumption Per capita Consumption indicate average consumption of goods and services by the people. It is obtained by dividing the total consumption expenditure by the population of a country. If per capita consumption is high, than it indicates, a high standard of living and vice-versa. It implies that quantity and quality of goods consumed by the people should increase when development takes place, otherwise, development has no meaning. This may not be true a) If a part of the increased national income is used for savings and capital formation than consumption, b) If restrictions are imposed by the government on the production and consumption of consumer goods c) When resources have to be diverted to other purposes like war or major projects, resource allocation for consumption goods will decline. 3. Physical Quality of Life Index This index was developed by the famous economist David Morris in the 1970s. He considered three criteria to formulate this index. They are 1. Life expectancy 2. Infant mortality rate 3. Literacy rate 4. Human Development Index Human Development Index (HDI) is an average of three parameters namely life expectancy, educational attainment and standard of living 5. Quality of Life Index There are six parameters to development Quality of Life Index. They are Per Capita Income in PPP$ Infant Mortality Rate Life Expectancy at Birth Adult Literacy Rate Civil Rights of the People Political Rights of the People

Differences between Economic Growth and Economic Development Economic Growth Economic Development

1. It is defined as the long-term increase in real per capital income

1. It is defined as the long-term rise in the real per capita inco economic welfare.

2. It is a narrow concept as it is concerned only with the rise in real per capita income.

2. It is a broader concept as it focuses on economic welfare a increase in real per capita income.

3. It is a quantitative concept. It is measured in terms of increase in per capital income.

3. It is both qualitative and quantitative as it is concerned wit improvement in economic growth and economic welfare.

4. It is a concept associated with the developed countries.

4. It is generally related to the developing countries

5. It is not concerned with the distribution of income.

5. Equality in the distribution of income and weal concerns of economic development.

6. Other factors like changes in the productivity of factors of production, changes in the attitudes of the people are not included.

6. These changes are a part and parcel of econom

7. Structural technological or institutional changes need not occur when growth takes place. Growth is independent of structural changes.

7. These changes are indispensable for the proces Development and structural change go together.

Sustainable Development Economic development is a process wherein economic growth is accompanied by structural changes. While growth implies a rise in national income structural changes refer to changes in the sectoral contribution. When an economy progresses, the contribution made by the primary sector to GDP will decline, while that of the secondary and tertiary sectors will increase. Along with structural changes, development is supposed to increase the welfare of the people reducing inequality, poverty and unemployment.

4 Indian Economy
Economic System An economic system is loosely defined as countrys plan for its services, goods produced, and the exact way in which its economic plan is carried out. In general, there are three major types of economic systems prevailing around the world. 1. Market / Capitalist Economy In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of prices for different commodities, and the amount of regulation controlling different industrial sectors. The USA is an example of a market economy. 2. Planned / Socialism Economy A planned economy is also sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government. The planned economy is government directed, and market forces have very little say in such an economy. Russia and China used to have planned economies. 3. Mixed Economy A mixed economy combines elements of both the planned and the market economies in one cohesive system. This means that certain features from both market and planned economic systems are taken to form this type of economy. The private and the public sectors operate side by side and work in co-ordination as part of a single mechanism. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country - both sectors play an important role in the economic decision-making of the country. In a mixed economy there is flexibility in some areas and government control in others. India adopted mixed economy system National Income National income is a measure of the total flow of earnings of the factor-owners through the production of goods & services. In a simple way, it is the total amount of income earned by the citizens of a nation. All incomes are based on production. In this sense, national income reflects the level of aggregate output. National income is measured in terms of GDP / GNP Gross Domestic Product (G D P) The GDP can be represented by the following formula: GDP = C + G + I + NX Where: C = All private consumption G = All government spending I = Investment by businesses NX = The countrys net exports (total exports total imports) Nominal GDP Growth and Real GDP Growth

The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year. Example Suppose in the year 2000, the economy of a country produced $100 billion worth of goods and services based on year 2000 prices. Since we're using 2000 as a basis year, the nominal and real GDP are the same. In the year 2001, the economy produced $110B worth of goods and services based on year 2001 prices. Those same goods and services are instead valued at $105B if year 2000 prices are used. Then: Year 2000 Nominal GDP = $100B, Real GDP = $100B Year 2001 Nominal GDP = $110B, Real GDP = $105B Nominal GDP Growth Rate = 10% Real GDP Growth Rate = 5% Gross National Product (G N P) The total value of the level of aggregate output is called Gross National Product or G.N.P. G.N.P. is a measure of the total market value of all final goods & services currently produced by all the citizens of a nation within a period, usually a year. It measures how much people produce. It counts current production only. It counts the level of output with a market value. It relies on the market prices of goods & services as a measure. Measurement of National Income There are mainly 3 approaches to measure GNP. 1. Output or Value-Added Approach The total value of all final goods & services ( i.e. outputs ) can be found by adding up the total values of outputs produced at different stages of production. 2. Expenditure Approach The amount of expenditures refers to all those spending on currently-produced final goods & services only. In an economy, there are 3 main agencies which buy goods & services. They are the households, firms and the government. In economics, we have the following terms: C = Private Consumption Expenditure ( of all households ) I = Investment Expenditure ( of all firms) G = Government Consumption Expenditure ( of the local government ) G N P = G D P + Net Income from abroad 3. Income Approach The income approach tries to measure the total flows of income earned by the factorowners in the provision of final goods & services in a current period. There are 4 types of factors of production and 4 types of factor incomes accordingly. National Income = Wages + Interest Income + Rental Income + Profit Net National Product ( N N P )

The investment expenditure of the firms is made up of 2 parts. One part is to buy new capital goods & machinery for production. It is called net investment because the production capacity of the firms can be expanded. Depreciation refers to all those expenses to replace physical capital due to wear and tear, obsolescence, destruction and accidental loss etc. The sum of these 2 amounts is called Gross Investment in economics. Gross Investment = Net Investment + Depreciation Net investment will increase the production capacity and output of a nation, but not by depreciation expenditure. So we have, N N P = G N P - Depreciation G N P at factor cost The amount of national income found by the income approach will not be the same as the amount of G N P at market prices found by the expenditure approach. In the expenditure approach, the value of G N P includes some types of expenses which are NOT factor incomes earned by the citizens. They include depreciation, indirect business taxes, and government subsidies. G N P at factor cost = GNP at market prices - Indirect Business Taxes subsidies GNP at factor cost carries the meaning that we are measuring the total output by their costs of production. As output generates income to the factor-owners, it is also related with the value of national income. Indian Economy - Salient Features The Economy of India is the 4th largest in the world by GDP by purchasing power parity (PPP). The country is one of the G-20 major economies and a member of BRIC. The country's per capita GDP (PPP) was $4.05 trillion (4th in the world) in 2010, making it a lower-middle income economy. PPP (Purchasing Power Parity) Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. The exchange rate between two countries should equal the ratio of the two countries price level of a fixed basket of goods and services. When a countrys domestic price level is increasing (i.e. a country experiences inflation), that countrys exchange rate must depreciated in order to return to ppp. The basis for PPP is the law of one price. In the absence of transportation and other transaction costs, competitive markets will equalize the price of an identical good in two countries when the prices are expressed in the same currency. For example, a particular TV set that sells for 750 Canadian Dollars (CAD) in Canada should cost 500 USD in US when the exchange rate between Canada and the US is 1.50 CAD/USD.

Indian Economy - Salient Features . Contd

Rank

th

4 largest (PPP)

GDP GDP by sector

$4.057 trillion (PPP 4 2010) Service Industry Agriculture 57.70% 27.9% 14.40% (2010-11) 52% 14% 34% (2009 est)

th

Labour Force by Occupation

Agriculture Industry Service

Unemployment Exports Export goods Main Export Partners

9.4% (2009-10) $225.6 billion (2010 est)

Petroleum products, precious stones, machinery, iron and steel, chemicals, vehicles, a US 12.6%, UAE 12.2%, China 8.1%, Hong Kong 4.1% (2010)

Salient Features of the Indian Economy

Imports

$357.7 billion (2010 est)

Import goods

Crude oil, precious stones, machinery, fertilizer, iron and steel, chemicals

Main import Parterners

China 12.4%, UAE 6.5%, Saudi Arabia5.8%, US 5.7%, Australia 4.5% (201

External debt Public debt

$238 billion (31.12.2010 est) 71.84% of GDP (2010 est)

Revenues Expenses

$184 billion (2010 est) $269.8 billion (2010 est)

Forex Reserve

$306 billion

Overview of the Indian Economy The independence-era Indian economy was inspired by the economy of the Soviet Union with socialist practices, large public sectors, high import duties and lesser private participation characterizing it, leading to massive inefficiencies and widespread corruption. Indian economic policy after independence was influenced by the colonial experience, which was seen by Indian leaders as exploitative, and by those leaders' exposure to democratic socialism as well as the progress achieved by the economy of the Soviet Union. Domestic policy tended towards protectionism, with a strong emphasis on import substitution, economic interventionism, a large public sector, business regulation and central planning, while trade and foreign investment policies were relatively liberal. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, telecommunications, insurance, and power plants, among other industries, were effectively nationalised in the mid1950s. Jawaharlal Nehru the first Prime Minister of India, along with the statistician Prasanta Chandra Mahalanobis, formulated economic policy during the initial years of the country's existence. They expected favorable outcomes from their strategy, involving the rapid development of heavy industry by both public and private sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet-style central command system. Since 1965, the use of high-yielding varieties of seeds, increased fertilisers and improved irrigation facilities collectively contributed to the Green Revolution in India, which improved the

condition of agriculture by increasing crop productivity, improving crop patterns and strengthening forward and backward linkages between agriculture and industry. Later on India adopted free market principles and liberalized its economy to international trade under the guidance of Manmohan Singh, who then was the Finance Minister of India under the leadership of P.V.Narasimha Rao the then Prime Minister. Following these strong economic reforms, the country's economic growth progressed at a rapid pace with very high rates of growth and large increases in the incomes of people. India recorded the highest growth rates in the mid-2000s, and is one of the fastest-growing economies in the world. The growth was led primarily due to a huge increase in the size of the middle class consumer population, a large workforce comprising skilled and non-skilled. 1990-91. 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 5.6 1.3 5.1 5.9 7.3 7.3 7.8 4.8 6.5 6.1 4.4 3.8 8.5 8.2

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

7.5 9.0 8.4 9.1 6.7 7.2 6.9

Industry Growth

2008-09

2009-10 (QE)

2010-11 (RE)

2008-09

2009-1

1 2. a b c d 3 a b c

Agriculture Industry Mining Mfg Electri Construction Services Trade, hotel etc. Finance Insu. Commu & Ser

-0.1 4.4 1.3 4.2 4.9 5.4 10.1 7.6 12.5 12.7

0.4 8.0 6.9 8.8 6.4 7.0 10.1 9.7 9.2 11.8

6.6 7.9 5.8 8.3 5.7 8.1 9.4 10.3 9.9 7.0

15.7 28.1 2.3 15.8 2.0 8.0 56.2 26.1 17.0 13.1

GDP at FCo

6.8

8.0

8.5

100.0

5 Economic Planning
Economic Planning Economic planning refers to a time-bound economic programme of action. It is designed to achieve certain pre-determined objectives by consciously and deliberately allocating scare resources in different fields. This is done under an over-all control of a planning body. Thus planning is not an automatically directly activity. Planning may be comprehensive or corrective or developmental Comprehensive planning refers to the totalitarian planning for the entire economy as was the case in the former USSR, under the communist regime where it was forcibly imposed. Corrective planning refers to planning adopted by a modern capitalist country to remove the economic evils of monopoly etc Developmental planning refers to planning as a means for accelerating the pace of economic development especially in an underdeveloped country. It may be democratic or dictatorial in nature. Features of Economic Planning Main Objectives Concept of Socialistic Pattern of Society Planning in a Mixed Economy Long-term Planning Planning in India is Democratic in Nature Main Objectives and Priorities of Planning in a Developing Country Like India Increase in National Income and Per Capita Income Raising the Level of Investment Reduction to income and Wealth Inequalities and Concentration of Economic Power. Reduction in Unemployment and Underemployment Achievement of Self-sufficiency in Agricultural Commodities High rate of Capital Formation and Rapid Industrialisation Removing the Balance of Payments Difficulties Priorities in the Allocation of Resources Balanced Development Price Stability and Growth Provision of Social Justice 5. Five Plans in India

1. 2. 3. 4. 5. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1. First Five-Year Plan (1951-1956) The first Indian Prime Minister, Jawaharlal Nehru presented the first five-year plan to the Parliament of India on 1 April 1951. The plan addressed, mainly, the agrarian sector, including investments in dams and irrigation. The agricultural sector was hit hardest by the partition of India and needed urgent attention. The total planned budget of 206.8 billion (US$23.6 billion in the 1950 exchange rate) was allocated to seven broad areas: irrigation and energy (27.2 percent), agriculture and community development (17.4 percent), transport and communications (24 percent), industry (8.4 percent), social services (16.64 percent), land rehabilitation (4.1 percent), and for other sectors and services (2.5 percent). The most important feature of this phase was active role of state in all economic sectors. Such a role was justified at that time because immediately after independence, India was facing basic problemsdeficiency of capital and low capacity to save. The target growth rate was 2.1% annual gross domestic product (GDP) growth; the achieved growth rate was 3.6%. The net domestic product went up by 15%. The monsoon was good and there were relatively high crop yields, boosting exchange reserves and the per capita income, which increased by 8%. National income increased more than the per capita income due to rapid population growth. Many irrigation projects were initiated during this period, including the Bhakra Dam and Hirakud Dam. The World Health Organization, with the Indian government, addressed children's health and reduced infant mortality, indirectly contributing to population growth. At the end of the plan period in 1956, five Indian Institutes of Technology (IITs) were started as major technical institutions. The University Grant Commission was set up to take care of funding and take measures to strengthen the higher education in the country. Contracts were signed to start five steel plants, which came into existence in the middle of the second five-year plan. 2. Second Five-Year Plan (19561961) The second five-year plan focused on industry, especially heavy industry. Unlike the First plan, which focused mainly on agriculture, domestic production of industrial products was encouraged in the Second plan, particularly in the development of the public sector. The plan followed the Mahalanobis model, an economic development model developed by the Indian statistician Prasanta Chandra Mahalanobis in 1953. The plan attempted to determine the optimal allocation of investment between productive sectors in order to maximise long-run economic growth . It used the prevalent state of art techniques of operations research and optimization as well as the novel applications of statistical models developed at the Indian Statiatical Institute. The plan assumed a closed economy in which the main trading activity would be centered on importing capital goods. Hydroelectric power projects and five steel mills at Bhilai, Durgapur and Rourkela were established. Coal production was increased. More railway lines were added in the north east. The Atomic Energy Commission was formed in 1948 with Homi J Bhabha as the first chairman. The Tata Institute of Fundamental Research was established as a research institute. In 1957 a talent search and scholarship program was begun to find talented young students to train for work in nuclear power.

The total amount allocated under the second five year plan in India was Rs. 4,800 crore. This amount was allocated among various sectors: Power and irrigation Social services Communications and transport Miscellaneous Target Growth: 3. Third Five-Year Plan (19611966) The third plan stressed on agriculture and improving production of wheat, but the brief CineseIndian War of 1962 exposed weaknesses in the economy and shifted the focus towards the Defense industry. In 1965-1966, India fought a war with Pakistan. The war led to inflation and the priority was shifted to price stabilisation. The construction of dams continued. Many cement and fertilizer plants were also built. Punjab began producing an abundance of wheat. Many primary schools were started in rural areas. In an effort to bring democracy to the grassroot level, Panchayat elections were started and the states were given more development responsibilities. State electricity boards and state secondary education boards were formed. States were made responsible for secondary and higher education. State road transportation corporations were formed and local road building became a state responsibility. The target growth rate of GDP(gross domestic product)was 5.6 percent.The achieved growth rate was 2.2 percent. 4. Fourth Five-Year Plan (19691974) At this time Indira Gandhi was the Prime Minister. The Indira Gandhi government nationalised 14 major Indian banks and the Green Revolution in India advanced agriculture. In addition, the situation in East Pakistan (now Bangladesh) was becoming dire as the Indo-Pakistani War of 1971 and Bangladesh Liberation War took place. Funds earmarked for the industrial development had to be diverted for the war effort. India also performed the Smiling Buddha underground nuclear test in 1974, partially in response to the United States deployment of the Seventh Fleet in the Bay of Bengal. The fleet had been deployed to warn India against attacking West Pakistan and extending the war. Target Growth: 5.7% Actual Growth: 3.30%. 5. Fifth Five-Year Plan (19741979) Stress was by laid on employment, poverty alleviation, and justice. The plan also focused on selfreliance in agricultural production and defense. In 1978 the newly elected Morarji Desai government rejected the plan. Electricity Supply Act was enacted in 1975, which enabled the Central Government to enter into power generation and transmission. The Indian national highway system was introduced for the first time and many roads were widened to accommodate the increasing traffic. Tourism also expanded. Target Growth: 4.4% Actual Growth: 5.0 6. Sixth Five-Year Plan (19801985) The sixth plan also marked the beginning of economic liberalization. Price controls were eliminated and ration shops were closed. This led to an increase in food prices and an increase in

the cost of living. This was the end of Nehruvian Plan and Rajiv Gandhi was prime minister during this period. Family planning was also expanded in order to prevent overpopulation. In contrast to China's strict and binding one-child policy, Indian policy did not rely on the threat of. More prosperous areas of India adopted family planning more rapidly than less prosperous areas, which continued to have a high birth rate. Target Growth: 5.2% Actual Growth: 5.4%. 7. Seventh Five-Year Plan (19851990) The Seventh Plan marked the comeback of the Congress Party to power. The plan laid stress on improving the productivity level of industries by upgrading of technology. The main objectives of the 7th five year plans were to establish growth in areas of increasing economic productivity, production of food grains, and generating employment . As an outcome of the sixth five year plan, there had been steady growth in agriculture, control on rate of Inflation, and favourable balance of payments which had provided a strong base for the seventh five Year plan to build on the need for further economic growth. The 7th Plan had strived towards socialism and energy production at large. The Thrust areas of the 7th Five year plan Social Justice Removal of oppression of the weak Using modern technology Agricultural development Anti-poverty programs Full supply of food, clothing, and shelter Increasing productivity of small and large scale farmers Making India an Independent Economy Based on a 15-year period of striving towards steady growth, the 7th Plan was focused on achieving the pre-requisites of self-sustaining growth by the year 2000. The Plan expected a growth in labour force of 39 million people and employment was expected to grow at the rate of 4 percent per year. Expected outcomes of the Seventh Five Year Plan Balance of Payments (estimates): Export - 33,000 crore (US$ 6.3 billion), Imports - (-) 54,000 crore (US$10.3 billion), Trade Balance - (-) 21,000 crore (US$ 4 billion) Merchandise exports (estimates): 60,653 crore (US$ 11.5 billion) Merchandise imports (estimates): 95,437 crore (US$ 18.1 billion) Projections for Balance of Payments: Export - 60,700 crore (US$ 11.5 billion), Imports - (-) 95,400 crore (US$ 18.1 billion), Trade Balance- (-) 34,700 crore (US$ 6.6 billion) Seventh Five Year Plan India strove to bring about a self-sustained economy in the country with valuable contributions from voluntary agencies and the general populace. Target Growth: 5.0% Actual Growth: 5.7%. 8. Eighth Five-Year Plan (19921997) 1989-91 was a period of economic instability in India and hence no five year plan was implemented. Between 1990 and 1992, there were only Annual Plans. In 1991, India faced a crisis in Foreign Exchange (Forex) reserves, left with reserves of only about US$1 billion. Thus, under pressure, the country took the risk of reforming the socialist economy.

P. V. Narasimha Rao was the twelfth Prime Minister of the Republic of India and head of Congress Party, and led one of the most important administrations in India's modern history overseeing a major economic transformation and several incidents affecting national security. At the same time Dr. Manmohan Singh (currently, Prime Minister of India) launched India's free market reforms that brought the nearly bankrupt nation back from the edge. It was the beginning of privatisation and liberalisation in India. Modernization of industries was a major highlight of the Eighth Plan. Under this plan, the gradual opening of the Indian economy was undertaken to correct the burgeoning deficit and foreign debt. Meanwhile India became a member of the World Trade Organization on 1 January 1995.This plan can be termed as Rao and Manmohan model of Economic development. The major objectives included, controlling population growth, poverty reduction, employment generation, strengthening the infrastructure, Institutional building, tourism management, Human Resource development, Involvement of Panchayat raj, Nagar Palikas, N.G.O'S and Decentralisation and people's participation. Energy was given priority with 26.6% of the outlay. An average annual growth rate of 6.78% against the target 5.6% was achieved. To achieve the target of an average of 5.6% per annum, investment of 23.2% of the gross domestic product was required. The incremental capital ratio is 4.1.The saving for investment was to come from domestic sources and foreign sources, with the rate of domestic saving at 21.6% of gross domestic production and of foreign saving at 1.6% of gross domestic production. 9. Ninth Five-Year Plan (19972002) Ninth Five Year Plan India runs through the period from 1997 to 2002 with the main aim of attaining objectives like speedy industrialization, human development, full-scale employment, poverty reduction, and self-reliance on domestic resources. Background of Ninth Five Year Plan India: Ninth Five Year Plan was formulated amidst the backdrop of India's Golden jubilee of Independence. The main objectives of the Ninth Five Year Plan to prioritize agricultural sector and emphasize on the rural development to generate adequate employment opportunities and promote poverty reduction to stabilize the prices in order to accelerate the growth rate of the economy to ensure food and nutritional security to provide for the basic infrastructural facilities like education for all, safe drinking water, primary health care, transport, energy to check the growing population increase to encourage social issues like women empowerment, conservation of certain benefits for the Special Groups of the society to create a liberal market for increase in private investments During the Ninth Plan period, the growth rate was 5.35 per cent, a percentage point lower than the target GDP growth of 6.5 per cent 10. Tenth Five-Year Plan (20022007) Attain 8% GDP growth per year. Reduction of poverty ratio by 5 percentage points by 2007. Providing gainful and high-quality employment at least to the addition to the labour force;*All children in India in school by 2003; all children to complete 5 years of schooling by 2007.

Reduction in gender gaps in literacy and wage rates by at least 50% by 2007;*Reduction in the decadal rate of population growth between 2001 and 2011 to 16.2%;*Increase in Literacy Rates to 75 per cent within the Tenth Plan period (2002 - 2007) 11. Eleventh Five-Year Plan (20072012) The eleventh plan has the following objectives Income & Poverty Accelerate GDP growth from 8% to 10% and then maintain at 10% in the 12th Plan in order to double per capita income by 2016-17 Increase agricultural GDP growth rate to 4% per year to ensure a broader spread of benefits Create 70 million new work opportunities. Reduce educated unemployment to below 5%. Raise real wage rate of unskilled workers by 20 percent. Reduce the headcount ratio of consumption poverty by 10 percentage points. Education Reduce dropout rates of children from elementary school from 52.2% in 2003-04 to 20% by 2011-12 Develop minimum standards of educational attainment in elementary school, and by regular testing monitor effectiveness of education to ensure quality Increase literacy rate for persons of age 7 years or above to 85% Lower gender gap in literacy to 10 percentage point Increase the percentage of each cohort going to higher education from the present 10% to 15% by the end of the plan Health Reduce infant mortality rate to 28 and maternal mortality ratio to 1 per 1000 live births Reduce Total Fertility Rate to 2.1 Provide clean drinking water for all by 2009 and ensure that there are no slip-backs Reduce malnutrition among children of age group 0-3 to half its present level Reduce anaemia among women and girls by 50% by the end of the plan Women and Children Raise the sex ratio for age group 0-6 to 935 by 2011-12 and to 950 by 2016-17 Ensure that at least 33 percent of the direct and indirect beneficiaries of all government schemes are women and girl children Ensure that all children enjoy a safe childhood, without any compulsion to work Infrastructure Ensure electricity connection to all villages and BPL households by 2009 and round-theclock power. Ensure all-weather road connection to all habitation with population 1000 and above (500 in hilly and tribal areas) by 2009, and ensure coverage of all significant habitation by 2015 Connect every village by telephone by November 2007 and provide broadband connectivity to all villages by 2012 Provide homestead sites to all by 2012 and step up the pace of house construction for rural poor to cover all the poor by 2016-17

Environment Increase forest and tree cover by 5 percentage points. Attain WHO standards of air quality in all major cities by 2011-12. Treat all urban waste water by 2011-12 to clean river waters. Increase energy efficiency by 20 percentage points by 2016-17. 12. 12th Five Year Plan to Focus on Inclusive Growth As Indias government prepares to submit its approach paper for its 12th five -year plan (a plan which covers years 2012 to 2017), the Planning Commissions focus on instilling inclusive growth is making headway. The plan is expected to be one that encourages the development of Indias agriculture, education, health and social welfare through government spending. It is also expected to create employment through developing Indias manufacturing sector and move the nation higher up the value chain. Prime Minister Manmohan Singh, however, warned that maintaining fiscal discipline is important as well. The commission will likely strive to enact policies that will achieve somewhere around a 10 percent growth rate in factories and a 4 percent growth rate in farm produce, though Prime Minister Singh has asked the plan to set the nations growth rate firmly at 9 percent to 9.5 percent. Come May, a view into the implementation of these goals should be apparent. A question that Indias government will have to grapple with, much like that of any emerging market, is whether to continue to focus on GDP growth in the face of soaring food prices and economy-wide inflation. An important aspect of generating inclusive growth is shifting the target of government aid to rural areas. Typically, large projects such as power generation, roads whereby freight can travel, and airports receive the lions share of government subsidies, while rural infrastructure receives comparatively little. A recent op-ed piece in the Wall Street Journal by Saurabh Tripathi, a partner with Boston Consulting Group, echoed these sentiments. Rural infrastructure, which serves 70 percent of the population, doesnt get the attention it deserves. As the Planning Commission sets out to draft the countrys planned investments for the next five years, it is important to take note of this gap, and the innovative solutions needed to fill it, Tripathi wrote. As indicated from the planning commissions presentation to the prime minister on April 21, the quantitative metrics known thus far in the early stage of the five-year plan are: A target of GDP growth in the 9 percent to 9.5 percent range An increase in literacy rates to 100 percent between the plans period from 2012 to 2017 An increased expenditure on health from 1.3 percent to 2.0 percent of GDP In a boon for industry, the planning commission indicated that it aims to have industry and manufacturing-related activities grow by 11 percent over the next five years, contrasted to 8 percent over the previous 11th five-year plan. It also aims to undertake somewhat vaguely defined, but certainly well-intentioned, structural and regulatory reforms to facilitate investment. The presentation highlighted the planning commissions views that commercial energy demand is expected to increase by 7 percent per year over the next five years.

To address that increase in demand, the planning commission recommended that all methods of current energy production and distribution be developed, from coal to nuclear energy to solar and wind, and proposed that existing taxes on electricity should not be raised. Interestingly, the Planning Commission envisioned an expansive role for Indian SOE Coal India: Coal India must become a coal supplier and not just a mining company. Should plan to import coal to meet coal demands. This requires blending of imported and domestic coal as supplied by Coal India. All told, in its early stages, the 12th five-year plan promises a lot for rural development and growth. In that sense, it is similar to Chinas latest iteration of its five-year plan, which seeks to improve the lot of rural Chinese peoples by increasing urbanization and industrial efforts in central and western China. But, by contrast, while the Chinese government seems to be continuing with nation-wide industrialization efforts, the Indian government may be attempting to promote a policy of reverse migration by making rural living more attractive with some access to modern amenities, but hopefully without the accompanying chaos that goes with it.

7 Indian Money Market

Money Market Money market refers to a mechanism whereby on the one hand borrowers manage to obtain shortterm loanable funds and on the other, lenders succeed in getting creditworthy borrowers for their money. Commercial banks are the most important lenders. They also create credit. The Indian money market is broadly divided into two parts Unorganized Money Market Organized Money Market The rates of interest differ in the two markets. 1. Unorganized Money Market Comprises the indigenous bankers and the moneylenders. Services offered by organized money market hardly reached to remote parts like villages. As a result, farmers, artisans, small scale producers and traders can not have access to the borrowing facilities offered by the organized money market comprising commercial, banks, cooperative banks and other regulated financial institutions. The only option for them to borrow money from moneylenders. Types of lenders Unregulated non-bank financial intermediaries i) Finance Companies ii) Chit Funds iii) Nidhis Indigenous bankers Moneylenders 1. Unregulated non-banking financial intermediaries In India there are several types of unregulated non-banking financial intermediaries. Among these the most prominent are (i) Finance companies

1. 2.

1.

2. 3.

Finance companies generally give loans to retailers, wholesale traders, artisans and other self-employed persons. Since finance companies charge high rates of interest varying from 36 to 45 per cent, corporate firms do not borrow from these companies. (ii) Chit funds The chit funds are saving institutions. They are of various types lacking any standardized form. A chit fund has regular members who make periodical subscriptions to the fund. The periodic collection is given to some member of the chit fund selected on the basis of previously agreed criterion. (iii) Nidhis Nidhis operate in the unregulated credit market for mutual benefits of members. 2. Indigenous Bankers Indigenous bankers are individuals or private firms which receive deposits and give loans and thereby operate as banks. Since their activities are not regulated, they belong to the unorganised segment of the money market. Indigenous bankers to not constitute a homogenous group. Broadly they may be classified under four main sub-groups Gujarati Shroffs, Multani or Shikarpuri Shroffs, Chettiars and Marwari Kayas. The Gujarati Shroffs operate in Mumbai, Kolkata and industrial and trading cities of East Gujarat. The Marwari Shroffs are active in Kolkata, Mumbai, tea-gardens of Assam and other parts of North-East India. The Multani or Shikarpuri Shroffs are found mainly in Mumbai and Chennai The Chettiars are concentrated in the South. 3. Moneylenders Moneylenders do not constitute one homogeneous category. Broadly they are of three types : (1) Professional moneylenders whose main activity is money lending (2) Itinerant money lenders like Phathans and Kabulis (3) Non-professional money lenders whose main source of income is not money lending. The method of operation of the money lenders are not uniform. Their activities are generally localised. 2. Organised Money Market The organised sector of the Indian money market comprises the RBI, commercial banks, foreign banks, cooperative banks, finance corporations, Mutual Funds and the Discount and Finance House of India Limited (DFHI). Mumbai, Kolkata, Delhi, Chennai, Ahmedabad and Bangalore are the principal centres of the organised sector of the Indian money market, of which Mumbai is the most prominent. The principal constituents of the Indian money market are Call money market The Treasury Bill Market The Repo Market The Certificate of Deposits Market The Commercial Paper Market and

1. 2. 3. 4. 5.

6. The Call Money Market The call money market consists of overnight and money at short notice for periods upto 14 days. It is meant to balance the short-term needs of banks. The call money market exists in almost all developed money markets. It is generally the most sensitive part of the financial system. Any change in flow of funds and the demand for them is clearly reflected in it. The response is generally quick. In India, the call money market is centred at Mumbai, Kolkata and Chennai. 2. The Treasury Bills Market Treasury Bills are the instruments of short term borrowing by the Central/State govt. They are promissory notes issued for a fixed period. These were first issued in India in 1917. Treasury Bills are issued to raise funds for meeting expenditure needs and also provide outlet for parking temporary surplus funds by investors. Treasury bills can be purchased by any one (including individuals) except State govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids. Minimum amount of face value Rs.1 lack and in multiples there of. There is no specific amount/limit on the extent to which these can be issued or purchased. This instrument is normally issued for 14 days, 91 days, 182 days and 364 days. 14-Day Intermediate Treasury Bills 3. Repo Market Repo is an instrument for borrowing funds by selling securities with an agreement to repurchase the said securities on a mutually agreed further date at an agreed price which includes interest for the funds borrowed. The reverse of the repo transaction is called reverse repo which is lending of funds against buying securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent. 4. Certificate of Deposits (CD) Certificate of Deposit is a certificate issued by a bank to depositors of funds that remain on deposit at the bank for a specified period. The CDs are similar in the traditional term deposits but are negotiable and tradable in the short-term money markets. CDs could initially be issued only by scheduled commercial banks in multiple of Rs 10 lakh subject to the minimum size of an issue being Rs 1 crore. Their maturity varied between 7 days to 3 years. 5. Commercial Paper (CP) Commercial Paper (CP) is a short-term instrument of raising funds by corporates. It is essentially a sort of unsecured promissory note sold by the issuer to the investor or via some agent like a merchant bank or a security house.

The issuance of commercial paper is not related to any underlying self liquidating trade. So, maturity of this instrument is flexible. Characteristics of the Indian Money Market Lack of integration Lack of rational interest rates structure Absence of an organized bill market Shortage of funds in the money market Seasonal stringency of funds and fluctuations in interest rates Inadequate banking facilities

1. 2. 3. 4. 5. 6.

8 Capital Market
Every business unit needs money to finance its activities. The money is invested in physical resources that is land and building, machines and equipment, stock of raw materials etc. which are used by the enterprises in production . All these resources together constitute capital. Capital is often defined as wealth used in the production of further wealth. A business enterprise can raise capital from various sources. Long-term funds can be raised either through issue of securities or by borrowing from certain institutions. Short term funds can also be borrowed from various agencies. Thus business units can raise capital from issue of securities and borrowings. In addition to business units, public corporations and governments are the other major borrowers of funds. The lenders of funds include the individual investors, the institutional investors, banks and special industrial financing institutions. The borrowers and lenders are brought together through the financial markets. The term financial market collectively refers to all those organisations and institutions which lend funds to business enterprises and public authorities. It is composed of two constituents the money market and the capital market. The money market deals with short term credit, while the capital market deals with the grant of medium term and ling-term credit. Structure of the Capital Market Broadly speaking capital market can be divided into two constituents The financial institutions The securities Market The financial institutions such as IDBI, IFCI, Exim Bank, IDBI , IDFC SFCs, LIC etc. provide long-term and medium term loan facilities. The securities market is divided into The gilt-edged market The corporate securities market The gilt-edged market The gilt-edged market is the market in government securities or the securities guaranteed by the government. Since the government cannot default on its payment obligation the government securities are risk free and hence are known as gilt-edged . Important features of the government securities market

1) 2)

1) 2) i)

1. It is a risk free market and returns are guaranteed. 2. The government securities market consists of two parts the new issues market and the secondary market. Since it is the RBI that manages entirely the public debt operations of the Central as well as the State government, it is responsible for all the new issues of government loans. The secondary market deals in old issues of government loans and operates largely through a few large stocks brokers who keep in touch with the Reserve Bank and other prospective buyers and sellers. RBI on its part keeps on ready sale securities of various maturities to meet the market demand for them. 3. RBI plays a dominant role in the government securities market. In fact, its position is that of a monopolist. 4. The investors in the gild-edged market are predominantly institutions which are required statutorily to invest a certain portion of their funds in government securities. These institutions include commercial banks, the LIC, the GIC and the provident funds. They mobilise the savings of the people through their various schemes and invest a certain proportion in government securities. They constitute what is called the captive market for government securities. 5. Government securities are the most liquid debt instruments. 6. The transactions in the government securities market are very large and such transaction may run into several crores of rupees. 7. For several years, the government securities market in India has been an over the counter market. However, since 1992 government securities have been mostly issued through a system of first price sealed bid auctions. In this system of auction, when auctioning a single unit, the highest bidder is awarded the item at the bid price. The auction of multiple unit is called discriminatory auction, which involves awarding of stock to the highest bidders at the prices and quantities quoted in their bids until the supply is exhausted. ii) Corporate Securities Market Corporate securities market is a market where securities issued by firms (that is shares, bonds and debentures) can be bought and sold freely. It consists of the new issues market (the primary market) and the stock exchange (the secondary market). The New Issues Market The new issues market is that part of the capital market which is concerned with the issue of new securities, that is bonds, debentures, shares and so on. The public limited companies often raise funds through the primary market for setting up or expanding their business. However, to sell securities is not an easy task as the company has to fulfill various requirements and decide upon the appropriate timing and method of issue. It is quite normal to obtain the assistance of underwriters, merchant banks or special agencies to look after these aspects. The various methods through which capital can be raised are 1. By prospectus

2. By offer of sale 3. By private Placing 4. By offering rights issue The stock Exchange The stock exchange (or the secondary market) is a highly organised market for the purchase and sale of second-hand quoted or listed securities (quoting or listing of a particular security implies incorporating that security in the register of the stock exchange so that it can be bought and sold there). The Securities Contracts (Regulation) Act, 1956 defines a stock exchange as an association, organisation or body of individuals, where incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.

6 Product Market
Product market is a mechanism that allows people to easily buy and sell products. Services are often included in the scope of the term. Product market regulation is an economic term that describes restrictions in the market. Related terms are financial market and labour market. In absence of price discrimination, a firm will delineate the product market to be a product or group of products such that a hypothetical profit-maximizing firm a monopolist likely would impose a significant increase in price. The price increase would be assuming that buyers unlikely to respond to an increase in price of a product, and may shift to other products. If the alternatives are sufficiently attractive at their existing terms of sale, an attempt to raise prices would result in a reduction of sales large enough. Hence, the price increase would not prove profitable, and the tentatively identified product group would prove to be too narrow. In considering the likely reaction of buyers to a price increase, the Agency will take into account all relevant evidences like (1) evidence that buyers have shifted or have considered shifting purchases between products in response to relative changes in price or other competitive variables; (2) evidence that sellers base business decisions on the prospect of buyer substitution between products in response to relative changes in price or other competitive variables; (3) the influence of downstream competition faced by buyers in their output markets; and (4) the timing and costs of switching products.

The price increase question is then asked for a hypothetical monopolist controlling the expanded product group. In performing successive iterations of the price increase test, the hypothetical monopolist will be assumed to pursue maximum profits in deciding whether to raise the prices of any or all of the additional products under its control. This process will continue until a group of products is identified such that a hypothetical monopolist over that group of products would profitably impose at least a small but significant increase. The Agency generally will consider the relevant product market to be the smallest group of products that satisfies this test. If the firm uses prevailing prices of the products of the merging firms and possible substitutes for such products, unless premerger circumstances are strongly suggestive of coordinated interaction, in which case the agency will use a price more reflective of the competitive price. However, the agency may use likely future prices, absent the merger, when changes in the prevailing prices can be predicted with reasonable reliability. Changes in price may be predicted on the basis of, changes in regulation, which affect price either directly or indirectly by affecting costs or demand. In general, the price for which an increase will be postulated will be whatever is considered to be the price of the product at the stage of the industry being examined. In attempting to determine objectively the effect of a small but significant increase in price, the agency, in most contexts, will use a price increase of five per cent lasting for the foreseeable future. However, what constitutes a small but significant increase in price will depend on the nature of the industry, and the agency at times may use a price increase that is larger or smaller than five per cent. Effects on Economic growth Product market may have great impacts on the economic growth. Substitute products or innovative products may have positive impacts on the economic growth of a country, depends upon cost incurred on the product. In absence of use of technology in the production process, the cost is likely to go up than the prevailing cost structure, which may affect the economic growth.

9. Union Budget
What is Union Budget? Budget is a systematic plan for the expenditure of a usually fixed resource during a given period. Thus, Union Budget, which is a yearly affair, is a comprehensive display of the Governments finances. It is the most significant economic and financial event in India. The Finance Minister puts down a report that contains Government of Indias revenue and expenditure for one fiscal year. The fiscal year runs from April 01 to March 31. The Union budget is preceded by an Economic Survey which outlines the broad direction of the budget and the economic performance of the country. The Budget is the most extensive account of the Government`s finances, in which revenues from all sources and expenses of all activities undertaken are aggregated. It comprises the revenue budget and the capital budget. It also contains estimates for the next fiscal year called budgeted estimates. Barring a few exceptions -- like elections Finance Minister presents the annual Union Budget in the Parliament on the last working day of February. The budget has to be passed by the Lok Sabha before it can come into effect on April 01. What is revenue budget? The revenue budget consists of revenue receipts of the government (revenues from tax and other sources) and the expenditure met from these revenues. Revenue receipts are divided into tax and non-tax revenue. Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties which the government levies. Non-tax revenue consist of interest and dividend on investments made by government, fees and other receipts for services rendered by Government. Revenue expenditure is the payment incurred for the normal day-to-day running of government departments and various services that it offers to its citizens. The government also has other expenditure like servicing interest on its borrowings, subsidies, etc. Usually, expenditure that does not result in the creation of assets, and grants given to state governments and other parties are revenue expenditures. However, all grants given to state governments and other parties are also clubbed under revenue expenditure, although some of them may go into the creation of assets.

The difference between revenue receipts and revenue expenditure is usually negative. This means that the government spends more than it earns. This difference is called the revenue deficit.

What is a capital budget? It consists of capital receipts and payments. The main items of capital receipts are loans raised by Government from public which are called Market Loans, borrowings by Government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign Governments and bodies and recoveries of loans granted by Central Government to State and Union Territory Governments and other parties. Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, equipment, as also investments in shares, etc., and loans and advances granted by Central Government to State and Union Territory Governments, Government companies, Corporations and other parties. Capital Budget also incorporates transactions in the Public Account. Budgeting Principles 1. Be conservative Don't budget on the basis that everything will turn out as expected. Build in a safety factor by tending to underestimate your income and overestimate your expenses. A common strategy in developing a budget is to insert an additional expense called "contingencies" which allows for unforeseen expenses. 2. Consult other people in setting a budget One person may be responsible for the compilation of the budget but one person should not be responsible for all the work involved. Budgeting requires teamwork. The task of budgeting should be split and allocated among those individuals who have the best chance of knowing what expenditure is likely to be needed and what income is reasonable to expect. Involvement by many people in budgeting might slow the process down, but the answer is far more likely to be accurate and dependable. 3. Allow plenty of time Budgeting is not an activity that is completed in a few hours. A good budget may be worked on for several weeks if not months, adding and changing figures as new information comes to light. 4. Excellence in documentation

It is very important that the author(s) of the budget strive to produce documents that can be read and understood by anyone. If figures are not clearly labeled even the author will, as time passes, have trouble understanding where the figures come from and how the calculations were made. It should be assumed that budgeting workings will be: These charges are passed on to the consumer. What is plan and non-plan expenditure? There are two components of expenditure - plan and non-plan. Of these, plan expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission. Plan expenditure forms a sizeable proportion of the total expenditure of the Central Government. The Demands for Grants of the various Circulated to many different people who may have lower levels of financial literacy Useful again in a year's time when the budgeting process begins again. Unless workings are well labeled it may be difficult to remember. What are direct taxes? These are the taxes that are levied on the income of individuals or organisations. Income tax, corporate tax, inheritance tax are some examples of direct taxation. Income tax is the tax levied on individual income from various sources like salaries, investments, interest etc. Corporate tax is the tax paid by companies or firms on the incomes they earn. What are indirect taxes? These are the taxes paid by consumers when they buy goods and services. These include excise and customs duties. Customs duty is the charge levied when goods are imported into the country, and is paid by the importer or exporter. Excise duty is a levy paid by the manufacturer on items manufactured within the country. .

Ministries show the Plan expenditure under each head separately from the Non-Plan expenditure. Non-plan revenue expenditure is accounted for by interest payments, subsidies (mainly on food and fertilisers), wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments. Non-plan capital expenditure mainly includes defence, loans to public enterprises, loans to States, Union Territories and foreign governments. What is the Central Plan Outlay? It is the division of monetary resources among the different sectors in the economy and the ministries of the government.

What is fiscal policy? Fiscal policy is a change in government spending or taxing designed to influence economic activity. These changes are designed to control the level of aggregate demand in the economy. Governments usually bring about changes in taxation, volume of spending, and size of the budget deficit or surplus to affect public expenditure. What is a fiscal deficit? This is the gap between the government`s total spending and the sum of its revenue receipts and non-debt capital receipts. It represents the total amount of borrowed funds required by the government to completely meet its expenditure.

What is the difference between fiscal deficit and primary deficit? Primary deficit is one of the parts of fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that a government makes on its borrowings to the creditors. What is revenue deficit? A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue deficit arises when the governments actual net receipts is lower than the projected receipts.

On the contrary, if the actual receipts are higher than expected one, it is termed as revenue surplus. A revenue deficit does not mean actual loss of revenue. Lets take a hypothetical example, if a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net revenue of Rs 25. But the actual revenue of Rs 90 is realised and expenditure is Rs 70. This translates into net revenue of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit. What is the Finance Bill? The proposals of the Government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament are submitted to Parliament through the Finance Bill. The Budget documents presented in terms of the Constitution have to fulfil certain legal and procedural requirements and hence may not by themselves give a clear indication of the major features of the Budget. To facilitate an easy comprehension of the Budget, certain explanatory documents are presented along with the Budget. Current Account Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account. This means that changes in the patterns of trade are key drivers in the current accounts of most of the world's economies. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. Positive net sales to abroad generally contributes to a current account surplus; negative net sales to abroad generally contributes to a current account deficit. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports. The net factor income or income account, a sub-account of the current account, is usually presented under the headings income payments as outflows, and income receipts as

inflows. Income refers not only to the money received from investments made abroad (note: investments are recorded in the capital account but income from investments is recorded in the current account) but also to the money sent by individuals working abroad, known as remittances, to their families back home. If the income account is negative, the country is paying more than it is taking in interest, dividends, etc. For example, the United States' net income has been declining exponentially since it has allowed the dollar's price relative to other currencies to be determined by the market to a point where income payments and receipts are roughly equal of trade forms part of the current account, which also includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position. India Current Account India reported a current account deficit equivalent to 16.9 Billion USD in the third quarter of 2011. India is leading exporter of gems and jewelry, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imported products are: machinery, gems, fertilizers and chemicals. Main trading partners are European Union, The United States, China and UAE . This page includes: India Current Account chart, historical data and news.

10 India and the World