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Unit-2

Indian
Business
Environment
Economic Environment of Business
The economic environment in which a business operates has a great influence upon it.
We can divide economic environment into Micro & Macro economic environment,
 Micro environment which affects business decision making, such as individual actions
of firms and consumers.
 Macroeconomic environment, which affects an entire economy and all its participants
either directly or indirectly Including our business.
Let's look at both broad factors in more detail.

Macroeconomic factors include such things as:


 Interest rates
 Taxes
 Inflation
 Currency exchange rates
 Consumer discretionary income
 Savings rates
 Consumer confidence levels
 Unemployment rate
 Recession
 Depression
Microeconomic factors influencing a business include
I. Market size
II. Demand
III. Supply
IV. Competitors
V. Suppliers
VI. Distribution chain, such as retail stores

Significance and Elements of Economic Environment Economic System


 Economic means "pertaining to the production and use of income”.
 It includes System, Policies and Nature of an economy, Trade cycles, Economic resources, Level of
Income, Distribution of income and wealth etc.

Important elements that affect the Economic Environment are

 Economic systems
 Economic Policies
 Economic Conditions
 Regional economic groups
Economic Planning in India
From 1947 to 2017, the Indian economy was premised on the concept of planning.
 This was carried through Five-Year Plans, developed, executed and monitored by Planning
Commission (1951-2014) and NITI Aayog (2014-2017).
 With the Prime Minister as the ex-officio Chairman, commission has a nominated Deputy Chairman,
who holds rank of a Cabinet Minister.
 Montek Singh Ahluwalia was the last Deputy Chairman of the Commission (resigned on 26 May
2014).

The Eleventh Plan completed its term in March 2012 and the Twelth Plan is currently underway.

 Prior to the Fourth Plan, allocation of state resources was based on schematic patterns rather than
a transparent and objective mechanism, which led to the adoption of the Gadgil formula in 1969.
 Revised versions of formula have been used since then to determine the allocation of central
assistance for state plans.

The new government led by Narendra Modi, elected in 2014, has announced the dissolution of Planning
Commission, and its replacement by think tank called NITI Aayog (National Institution for
Transforming India).
 Five-Year Plans (FYPs) are centralized and integrated national economic programs.

 Joseph Stalin implemented the first Five Year Plan in Soviet Union in late 1920s.

 Most communist states and several capitalist countries subsequently adopted.

 China and India both continue to use FYPs, although China renamed its Eleventh FYP, from 2006 to
2010, as guideline (guihua), rather plan (jihua), to signify central government’s more hands-off
approach to development.

India launched its First FYP in 1951, immediately after independence under socialist influence of first
Prime Minister Jawaharlal Nehru.
 The First Five-Year Plan was one of the most important because it had a great role in the launching of
Indian development after the Independence.
 Thus, it strongly supported agriculture production and it also launched the industrialization of the
country (but less than the Second Plan, which focused on heavy industries).

It built a particular system of mixed economy, with a great role for the public sector (with an
emerging welfare state), as well as growing private sector (represented by personalities who published
the Bombay Plan).
Government Policies
New Government Policies and Programmes
 Coal linkage policy for 12th Plan Power Projects (Amendment).
 Revised mega power project policy.
 Distribution reforms under the modified Mega Power Policy.
 New Hydro Policy 2008.
 Mega Power Projects: Policy guidelines. (August 2006)
 Procedure for processing of proposals for IPPs/CPPs (Independent Power Producers & captive power
plants)seeking coal blocks/coal linkage received from the Ministry of Coal.
 Guidelines for Allocation of Coal Blocks/Coal Linkages for Power Sector.
 Rural Electrification Policy
 Amendment to the Tariff Policy(English). (Hindi)
 Tariff Policy (English)
 Tariff Policy (Hindi)
 Policy on Hydro Power Development
 National Electricity Policy
 Deen Dayal Upadhyaya Gram Jyoti Yojana
 Notification regarding transfer of BTPS to NTPC (Badarpur Thermal power plant)
Principles/Procedures adopted for grant of LOA (Letter of Approval )to the power projects.
Industrial Policy
Meaning of Industrial Policy:
Any government action aimed at affecting industry may be part of industrial policy, which makes it a
limitless field.

 It excludes macroeconomic policies affecting industry, but it may be viewed as supporting


macroeconomic policy by improving the performance of an important part of the supply side of the
economy.

 It includes procedures, principles (i.e., the philosophy of a given economy), policies, rules and
regulations, incentives and punishments, tariff policy, labor policy, government’s attitude towards
foreign capital, etc.

 In the immediate post-independence period, inflation appeared, production declined and economic
security dwindled.

 Labour leaders demanded total nationalisation while the industrialists wanted free enterprise.

 “In view of the various cross-currents that confused the industrial climate, a statement of industrial
policy was necessary to clear the foggy atmosphere.”
Industrial Policy Resolution of 1948
In a mixed economy government should declare its industrial policy clearly indicating what should be
the sphere of the State and private enterprise.
 The Industries (Development and Regulation) Act was passed in 1951 to implement the Industrial
Policy Resolution, 1948.
 A mixed economy means co-existence of the two sectors public and private.
 Government of India did by a policy resolution on 30 April 1948 called the first Industrial Policy
Resolution of 1948, which made it clear that India was going to have a mixed economy.
The Industrial Policy Resolution, 1948, drawn in the context of objectives of Democratic Socialism
through mixed economic structure, divided the industrial structure into four groups:

1. Basic and strategic industries such as arms and ammunition, atomic energy, railways, etc., shall
be the exclusive monopoly of the State.
2. The second group consisted of key industries like coal, iron and steel, ship-building, manufacture of
telegraph, telephone, wireless apparatus, mineral oils, etc. after first ten years of operation State would
review the situation and explore the necessity of nationalization.
3. In the third group, 18 industries including automobiles, tractors, machine tools, etc., could be in
the private sector subject to government regulation and supervision.
4. All other industries were left open to the private sector. However, the State might participate and/or
intervene if circumstances so demanded.
Industrial Policy Statement of 1956
On 30 April 1956, Government revised its first Industrial Policy (policy of 1948) and announced the
Industrial Policy of 1956.
The reasons for the revision were:
(i) Introduction of the Constitution of India
(ii) Adoption of a planned economy
(iii)Declaration by the Parliament that India was going to have socialist pattern of society.
. “The IPR 1956 is known as Economic Constitution of India” or “The Bible of State Capitalism”.
The Resolution classified industries into three categories regards to the role of State would play in
each of them:

1. Schedule A consisting of 17 industries would be the exclusive responsibility of the State.


2. Out of these 17 industries, four industries, namely arms and ammunition, atomic energy, railways
and air transport would be Central Government monopolies; new units in the remaining industries
would be developed by State Governments.
3. Schedule B, consisting of 12 industries, would be open to both private and public sectors; however,
such industries would be progressively State-owned.
4. All the other industries not included in these two Schedules constituted the third category which
was left open to the private sector. However, State reserved the right to undertake any type of indus-
trial production.
The IPR 1956, stressed the importance of cottage and small-scale industries for expanding
employment opportunities and for wider decentralisation of economic power and activity.
 The Resolution also called for efforts to maintain industrial peace; a fair share of the proceeds of
production should be given to toiling mass in keeping with the avowed objectives of democratic
socialism.
 Regional disparities in industrialisation should be reduced.
 The Government’s attitude to foreign capital would remain unchanged.
The features of the new policy that distinguishes it from the previous one is:

1. Expansion of role of State:


This was in keeping with Mahalanobis Strategy of large-scale industrialisation embodied in the Second
Five Year Plan.
2. Reduced threat of nationalisation:
The apprehensions of nationalisation contained in the previous policy was reduced to bare minimum.
More meaningful approach to our concept of a ‘mixed economy’: Various complementariness of the
public and private sectors were made clear
Industrial policy Resolution 1977

In 1977 govt again announce a new industrial policy. (a) Emphasis On:

 Producing inputs needed by many smaller units and making adequate marketing arrangements.
 Up gradation the technology of small Industries.
 Promoting & development of a system of linkages between nucleus large plants and the satellite
ancillaries.
 In this policy, main emphasis was on development of small scale Industries & industries limit was
enhanced for tiny units and small-scale units.
 For its development, government has established Industrial Development Cooperation in the state
and National Small Industries Cooperation in centre and some other targets also decided like

1. Optimum utilization of installed capacity


2. Maximum production and achieving higher productivity.
3. Higher employment generation.
4. Correction of regional imbalances.
5. Strengthening agriculture base through agri-based Industries and promotion of optimum inter-
sect oral relationship.
6. Promotion of export oriented Industries.
Industrial Policy of 1991
The long-awaited liberalised industrial policy was announced by Government of India on 24 July
1991; with several important departures in the latest policy.
The New Industrial Policy has scrapped the asset limit for MRTP companies and abolished industrial li-
censing of all projects, except for 18 (now 5) specific groups.
It has raised the limit for foreign participation of foreign capital in the country’s industrial landscape.
The new policy has dismantled all needless irksome bureaucratic controls on industrial growth.

The new policy has re-defined the role of public sector and asked private sector to operate even in
those areas which were hitherto reserved for the public sector.

The new policy considers big monopoly business houses, foreign capital and multinational
corporations (MNCs) are no longer “fearsome” and they can begin to country’s industrial growth.

New policy has decided to take series of initiatives in respect of policies relating to the following areas:

A. Industrial licensing
B. MRTP Act
C. Public sector policy
D. Foreign investment
E. Foreign technology agreements.

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