UNIT-II Theoretical Frame work and Functioning of the Economy: Economic System, types Objectives of five year Planning

g LPG policy in India Economic Environment of Business

Business is an economic activity, through business, trade, commerce and industry an economy of a country either flourish or diminish. The economic environment includes (elements of economic environment) the structure and nature of the economy, the stage of development of the economy, economic resources, the level of income, the distribution of income and assets, global economic linkages, economic policies etc., structure and nature of the economy The structure of the economy factors such as contribution of different sectors like primary (mostly agricultural), secondary (industrial) and services sectors, large, medium, small and tiny sectors to the economy, and their linkages, integration with the world economy etc. The structure of the economy of a nation is important to business because these factors indicate the prospects for different types of business, certain factors which affect the business etc., Nature of the Economy A widely used method of classification of the economies is on the basis of the per capita income (i.e., the average annual income per person). Accordingly, countries are broadly classified as: Low Income Economies Middle Income Economies High Income Economies

Low Income Economies are economies with very low level of per capita income. All economies with per capita GNI (Gross National Income new term for GNP) of $875 or less in 2005 are regarded as low income economies. There were 54 low income economies in 2005 Middle Income Economies are subdivided into lower middle income (those with per capita GNI between $875 and $3,465 in 2005) and upper middle income ($3,466 -$10,725) economies. In 2005, there were 98 middle income economies (39 upper and 59 lower middle income) High Income Economies are countries with very rich income per capita. Those with a per capita GNI of $10726 or above in 2005 fall in the category of high income economies. In 2005, there were 57 high income economies. There are mainly two categories of high income economies namely, industrial economies and oil exporters. Economic Polices

There are several economic policies which can have a very great impact on business. Important economic policies are: industrial policy, trade policy, foreign exchange policy, monetary policy, fiscal policy foreign investment and technology policy. (For more details refer page 79-81) Economic Environment of Business and its Significance To understand the stage of the economy To know the living standards and purchasing power of the people The sectoral distribution of income and employment generation Use of modern and sophisticated technology High rate of GDP contribution from industrial and services sectors Investment policies Economic systems and business environment

The scope of private business depends, to a large extent, on the economic system which indeed is rooted in political philosophy The economic systems are: Free enterprise/market economies or capitalist economies Mixed economies Centrally planned economies (Communist countries economies)

Economic systems and business environment Free enterprise/market economies or capitalist economies the freedom of private enterprise is the greatest in the market economy, which is characterized by the following assumptions:

- the factors of production (labour, land capital) are privately owned, and production occurs at the initiative of the private enterprise Economic systems and business environment

Cont.. Free market economies Income is received in monetary form by the sale of services of the factors of production and from the profits of the private enterprise. Members of the free market economy have freedom of choice in so far as consumption, occupation, savings and investment are concerned. Economic systems and business environment Cont.. Free market economies The free market economy is not planned, controlled or regulated by the government. The government satisfies community or collective wants, but does not compete with private firms; nor does it tell the people where to work/or what to produce. Countries like the United States, Australia, Japan, Canada are regarded as market economies. Economic systems and business environment

Centrally Planned Economic System/Socialist System The communist countries have, by and large, a centrally planned economic system. Under the rule of a communist or authoritarian socialist government, the state owns all the means of production, determines the goals of production and controls the economy according to a central master plan. There is hardly any consumer sovereignty in the system. The consumption pattern in a centrally planed economy is dictated by the state. Hungary, Poland, Czechoslovakia, East Germany etc., are have this system. Economic systems and business environment

Mixed Economic System India is following this economic system. Under which both the public and private sectors coexist. The extent of state participation varies widely between the mixed economies. However, in many mixed economies, the strategic and other nationally very important industries are fully owned or dominated by the state. The economic system, thus a very important determinant of the scope of private business. The economic system and policy are, therefore a vary important external constraint on business Economic Planning in India

In India, planning has come to have a very specific meaning, one that is atterned largely on the Russian model. It has meant a sequence of five-year plans, each attempting to specify the allocation of investment expenditures and productive capacity to different lines of activity, with great emphasis being placed on the expansion of the so-called heavy or basic industries. Economic Planning in India A Planning Commission in New Delhi is charged with drawing up the plans and supervising their implementation. There is some decentralization to the separate states but the general idea is centralized governmental control of the allocation of physical resources. The kind of centralized economic planning India has adopted can enable a strong authoritarian government to extract a high fraction of the aggregate output the people for governmental purposes Economic Planning in India The Economic Planning has been going on great since independence and this has played a major role in the Indian Economic Growth and development of the country and it has led India become self sufficient. Pre-independence there was a lot of problem about the food and the health and the home for the people. This all improved and has seen a new dimension all because of the Economic Development and Planning in India. Objectives of five year Planning There are generally two sets of objectives for planning, namely the short-term objectives and the long-term objectives. While the short-term objectives vary from plan to plan, depending on the immediate problems faced by the economy, the process of planning is inspired by certain long term objectives. In case of our Five Year plans, the long-term objectives are: Objectives of five year Planning

In case of our Five Year plans, the long-term objectives are: (i) A high rate of growth with a view to improvement in standard of living. (ii) Economic self-reliance; (iii) Social justice and (iv) Modernization of the economy (v) Economic stability

Brief description of Five year plans in India First Five-year plan (1951-56) - The plan addressed, mainly, the agrarian sector, including investments in dams and irrigation. The total planned budget of 206.8 billion. Second Five year plan (1956-61) the plan focused on industry, especially heavy industry. The total amount allocated under the plan in India was Rs. 4,800 crore. Third Five year plan (1961-66) The plan stressed on agriculture and improving production of wheat. The target growth rate of GDP(gross domestic product)was 5.6 percent. The achieved growth rate was 2.2 percent Fourth Five year plan (1969-74) The plan focused on nationalization of banks, green revolution and advanced agricultural. Target Growth: 5.7% Actual Growth: 3.30% Fifth Five year plan (1974-79) - Stress was by laid on employment, poverty alleviation, and justice. The plan also focused on self-reliance in agricultural production and defence . Target Growth: 4.4% Actual Growth: 5.0 Sixth Five year plan (1980-85) The plan also marked the beginning of economic liberalization. Top priority was given on poverty alleviation. Target Growth: 5.2% Actual Growth: 5.4% . Seventh Five year plan (1985-89) - 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. Target Growth: 5.0% Actual Growth: 5.7% 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. Eighth Five-Year Plan (19921997) Modernization of industries was a major highlight of the plan. An average annual growth rate of 6.78% against the target 5.6% was achieved. Ninth Five-Year Plan (19972002) - the main aim of attaining objectives like speedy industrialization, human development, full-scale employment, poverty reduction, and selfreliance on domestic resources. 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. Tenth Five-Year Plan (20022007) -the plan spell out strategies through which the desired levels of socio-economic development to be achieved. Some of the objectives of the plan are: To ensure social, economic and political empowerment of the weaker sections of the society. To increase the agricultural production through extensive and intensive cultivation. To expand the existing irrigation facilities and conservation of water resources.

 To improve the physical infrastructure like power and roads. To develop information technology and biotchnology. Eleventh Five-Year Plan (20072012) The plan is multifaceted sectoral development objectives. The major objectives of the plan are: 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 Reduce dropout rates of children from elementary school from 52.2% in 200304 to 20% by 2011-12 Reduce malnutrition among children of age group 0-3 to half its present level Ensure that at least 33 percent of the direct and indirect beneficiaries of all government schemes are women and girl children 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 Attain WHO standards of air quality in all major cities by 2011-12

LPG POLICY IN INDIA

The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of economic reforms is commonly known as the LPG or Liberalization, Privatization and Globalization model. The primary objective of this model was to make the economy of the seventh largest country in the world the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world. Liberalization Liberalization refers to the slackening of government regulations. The economic liberalization in India denotes the continuing financial reforms which began since July 24, 1991. Privatization and Globalization Privatization refers to the participation of private entities in businesses and services and transfer of ownership from the public sector (or government) to the private sector as well. Globalization stands for the consolidation of the various economies of the world.

Unit iii Industrial Policy

An industrial policy expressed governments policy towards foreign capital and technology, labor policy, tariff policy etc. in respect of the industrial sector.

FINALLY we can understand, an industrial policy of a nation is to guide, regulate and foster industrial development, and there by economic development to a very significant extent. Industrial policy 1991

It was announced on July 24, 1991, which indicated the economic reforms in India, has enormously expanded the scope of the private sector by opening up most of the industries for the private sector and substantially dismantling the entry and growth restrictions. Objectives of the policy The major objectives of the new Industrial policy package are: 1. To build on the gains already made. 2. To correct the distortions or weakness that may have crept in 3. To maintain a sustained growth in productivity and gainfull employment. 4. To attain internal competitiveness. It has been stated that the pursuit of these objectives will be tempered by the need to preserve the environment and ensure the efficient use of available resources. All sectors of industry, whether small, medium or large, belonging to the public, private or co-operative sectors will be encouraged to grow and improve on their past performance. The salient features of the new policy are the following The role of the public sector was redefined and the scope of the public sector has been drastically reduced. The number of industries reserved for the public sector was reduced to eight and it was later reduced, in stages, to two (atomic energy and railway transport) The policy also seeks selective privatization and withdrawal of the public sector from industries which do not conform to its redefined role. Expansion of the scope of private sector and dismantling of entry and growth restriction.

The scope of private sector has been expanded enormously by drastically reducing the number of industries reserved for the public sector and by substantially dismantling the barriers to entry and growth. Foreign Direct Investment (FDI) is allowed in all industries, except industries falling in a small negative list, in varying levels, ranging from 26 per cent to 100 per cent of the total equity. The import policy has been made more liberal by drastically reducing the tariff levels and quantitative restrictions and procedural reforms. Another very significant change has been the reform of the foreign exchange rate policy. An evaluation of the new policy Freeing the Indian industry from the shackles of abortive and crippling controls. No entry and growth restrictions on the private sector, except in a very small number of industries. The policy towards foreign capital and technology has been substantially liberalised. Imports have been very significantly liberalized; quantitative restrictions on imports, by and large have been removed. Competition (Amendment) Act, 2007 An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto. It extends to the whole of India except the State of Jammu and Kashmir. The main objective of competition act is to promote economic efficiency using competition as one of the means of assisting the creation of market responsive to consumer preferences. The advantages of perfect competition are three-fold: i) Allocative efficiency, which ensures the effective allocation of resources, ii) Productive efficiency, which ensures that costs of production are kept at a minimum and iii) Dynamic efficiency, which promotes innovative practices.

Competition (Amendment) Act, 2007

The Act prohibits anti-competitive agreements, abuse of dominant position by enterprises and regulates combinations (acquisition, acquiring of control and M&A), which causes or likely to cause an appreciable adverse effect on competition within India.

Prohibition of agreements Anti-competitive agreements : No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.

Prohibition of agreements Prohibition of abuse of dominant position: directly or indirectly, imposes unfair or discriminatory (i) condition in purchase or sale of goods or service; or (ii) price in purchase or sale (including predatory price) of goods or service. dominant position" means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to (i) operate independently of competitive forces prevailing in the relevant market; or (ii) affect its competitors or consumers or the relevant market in its favour. Prohibition of agreements "predatory price" means the sale of goods or provision of services, at a. price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors. Prohibition of agreements

Regulation of combinations : No person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. Competition Commission of India Competition Commission of India (CCI), has been established by the Central Government with effect from 14 October 2003.

CCI consists of a Chairperson and 6 Members appointed by the Central Government. It is the duty of the Commission to eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade in the markets of India. The Commission is also required to give opinion on competition issues on a reference received from a statutory authority established under any law and to undertake competition advocacy, create public awareness and impart training on competition issues Competition Commission of India The Competition Commission of India endeavors to do the following to achieve its objectives:

Make the markets work for the benefit and welfare of consumers. Ensure fair and healthy competition in economic activities in the country for faster and inclusive growth and development of economy. Implement competition policies with an aim to effectuate the most efficient utilization of economic resources. Develop and nurture effective relations and interactions with sectoral regulators to ensure smooth alignment of sectoral regulatory laws in tandem with the competition law. Effectively carry out competition advocacy and spread the information on benefits of competition among all stakeholders to establish and nurture competition culture in Indian economy.

MNCs
As the name suggests, any company is referred to as a multinational company or corporation (M. N. C.) when that company manages its operation or production or service delivery from more than a single country. A M. N. C. is one, which has its operational headquarters based in one country with several other operating branches in different other countries. The country where the head quarter is located is called the home country whereas, the other countries with operational branches are called the host countries. Apart from playing an important role in globalization and international relations, these multinational companies even have notable influence in a country's economy as well as the world economy. The budget of some of the M. N. C.s are so high that at times they even exceed the G. D. P. (Gross Domestic Product) of a nation.

These are not the sole prior causes of the Nokia, Vodafone, Fiat, Ford Motors and as the list moves on- to flourish in India. As the basic economic data suggest that after the liberalization in 1991, it has brought in hosts of foreign companies in India and the share of U.S shows the highest. They account about 37% of the turnover from top 20 companies that function in India.

Following are the reasons why multinational companies consider India as a preferred destination for business: Advantages of the growing MNCs to India There are certain advantages that the underdeveloped countries like and the developing countries like India derive from the foreign MNCs that establishes. They are as under: Initiating a higher level of investment. Reducing the technological gap The natural resources are utilized in true sense. The foreign exchange gap is reduced Boosts up the basic economic structure. Disadvantages of MNCs: Competition to SMSI Pollution and Environmental hazards Some MNCs come only for tax benefits only Exploitation of natural resources Lack of employment opportunities Diffusion of profits and Forex Imbalance Working environment and conditions Slows down decision making Economical distress Huge market potential of the country FDI attractiveness Labor competitiveness Macro-economic stability

UNIT 5 What is National Income?

Income of the nation during a period of time- provides a comprehensive measure of the economic activities of a nation. National income is the money value of all the final goods and services produced by a country during a period of one year. National income consists of a collection of different types of goods and services of different types. Since these goods are measured in different physical units it is not possible to add them together. Thus we cannot state national income is so many millions of meters of cloth. Therefore there is no way except to reduce them to a common measure. This common measure is money Concepts of National Income There are several versions of national income, though strictly speaking, only one of them is referred to as the national income. These include: Gross National Product (GNP) Net National Product (NNP) Gross Domestic Product (GDP) Net Domestic Product (NDP) Gross National Product(GNP)

GNP is expressed in terms of money (rupees in India) The GNP at market price stands for the monetary value of all goods and services that are: a) Currently produced b) Sold through the official market c) Not resold or used in further production d) Produced by nationally owned resources e) Valued at market prices for a given period of time Gross Domestic Product (GDP) The GDP refers to the value of goods and services produced within the nations geographical territory, irrespective of the ownership of the resources. Hence

GDPF = GNPF NIA NIA (Net factor income earned abroad ), where NIA stands for the income earned (by way of wages, interest and dividends) by the resident factors abroad minus the income earned by the non-resident factors in the home country Net National Product (NNP) NNP is referred to as national income NNPF = GNPF D Here D is the difference between the gross and net capital consumption, called depreciation. Net Domestic Product (NDP) NDPF = GDPF - D Production or Value Added Approach Under this we get the GDP at the factor cost as the sum of the values of the flows of value added from the sum of the production of all final goods and services. Thus, the GDP at the factor cost is given by GDPF = P1Q1 + P2Q2+.+PnQn Where Pi = price of final good i Qi = output of final good i n = number of goods and services produced in the economy Income Approach Under this approach the national income equals the sum of the costs of production of final goods and services, which equals the incomes of labour and capital. NDPF = W+R+I+P Where W Wage, R - Rent I Interest P - Profit

Expenditure Approach Under this method, national is measured as the sum of all final expenditures. GDPM = C + I + G + X Z Where C Private consumption expenditure on domestic goods I Domestic gross investment expenditure on domestic goods/assets both and private and public G government consumption expenditure on domestic goods X foreigners expenditure on domestic exports of domestic goods services Z net of domestic expenditure on imports of foreign goods and services Fiscal Policy Fiscal Policy is the use of government expenditure and revenue collection (taxation) to influence the economy which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: Aggregate demand and the level of economic activity; The pattern of resource allocation; The distribution of income

Monetary Policy Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard.

Business cycles Theories - Phases A Business cycle is defined as ups and downs in the real GDP or its growth Rate. Real GDP means GDPF (GDP at Factor Cost) The other definition to business cycle is Economic fluctuations/business cycles are ups and downs in economic variables over time. Real GDP, which is relatively a better measure for macro economic variables such as level of employment, price level and real national income. The business cycle occurs when economic activity speeds up or slows down. A business cycle is a swing in total national output, income and employment, usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in many sectors of the economy. Some Definitions on Business Cycle Gordon has defined as Business Cycles consist of recurring alteration of expansion and contraction in aggregate economic activity, the alternating movements in each direction being self reinforcing and pervading virtually all parts of the economy. The most satisfactory definition is by Estey: Cyclical fluctuations are characterised by altering waves of expansion and contractions. They do not have a fixed rhythm they are cycles of contraction and expansion recur frequently and in fairly similar patterns. Business Cycle Economic theory define three types of business cycle: Short-term (Kitchin) cycle: from 2 to 4 years, it results from the changes in business inventories. Medium-term (Jouglar) cycle: from 7 to 11 years, it refers to new business investment. Long-term (Kondratiev) cycle: from 30 to 50 years, it results from the technological innovation.

Characteristics of Business Cycle Business Cycles posses the following characteristic features: Cyclical fluctuations are wave like shifts Fluctuations are recurring in nature

They are non-periodic or uneven. In other words the peaks and channel do not occur at usual intervals. They transpire in such total variables as productivity, earnings, employment and prices. These variables move at about the same period in the same course but at diverse rates.

Characteristics of Business Cycle The sturdy commodity industries experience associatively wide fluctuations in productivity and employment but relatively small variations in prices. On the other hand, non-durable commodity industries experience relatively wide variations in prices but associatively small variations in productivity and employment. Business cycles are not seasonal variations such as upswings in retail trade during festive seasons. They are not secular trends such as long run growth or decline in fiscal performance. Upswings and downswings are collective in their effects. Therefore, business cycles are recurring fluctuations in total employment, earnings, productivity and price level.

Phases of Business Cycle

A business cycle is referred to as a cycle of recession and recovery or a cycle of prosperity and recession. Accordingly, a business cycle is a described by four phases. Trough Recovery Peak Recession The first is the phase where the real GDP reaches its floor level within a cycle. The turning point to that bottom, where the real GDP keeps growing, is referred to as the recovery/prosperity phase. Once the recovery stops and hits the local top/hill, the cycle is at the peak.

i) ii) iii) iv)

The turning point from the top, where the real GDP starts and continues descending, marks the recession phase. Once the recession ends, the next bottom is hit, and the next business cycle begins. A business cycle length is counted from trough to trough or peak to peak. Based on phases of business cycle a business cycle can gauged by examining the growth rates in the real GDP

So long as the growth rate is positive, there is the recovery phase. When the growth stops, the GDP reaches the local top and that is the peak point on the cycle The negative growth rate denotes the recession phase When the negative growth ends, we have trough point of the local cycle. Business Cycle -Theories

Although the main interpretation of business cycles looks to changes in aggregate demand (AD), we may classify the different theories into two categories: The external theories find the root of the business cycles in the fluctuations of something outside the economic system (wars, revolutions, elections, economic policy, migrations, discoveries of new lands and resources). The internal theories look for mechanism within the economic system itself (selfgenerating business cycles).

Some of the most important business cycle theories are: Neoclassical theories attribute the business cycle to the expansion and contraction of money and credit. Credit Cycle: the net expansion of credit (increase in private credit, equivalently debt, as a percentage of GDP) yields economic expansions, while the net contraction causes recessions, and if it persists, depressions. In particular, the bursting of speculative bubbles ( is a trade in products or assets with inflated values)is seen as the proximate cause of depressions, and this theory places finance and banks at the center of the business cycle. Keynesian theories attribute fluctuations to the economic system itself. They think that the macro economy is prone to extended business cycles, with high levels of unemployed resources for long period of time. They further hold that the government can stimulate the economy. The fluctuations in wages are almost the same as in the level of employment (wage cycle lags one period behind the employment cycle), for when the economy is at high employment, workers are able to demand rises in wages, whereas in periods of high

unemployment, wages tend to fall. According to Goodwin, when unemployment and business profits rise, the output rises. Political theories of business cycle attribute fluctuations to politicians who manipulate fiscal and monetary policies in order to be reelected. The political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on Election Day.

ECONOMIC BUSINESS CYCLE INDICATORS Business cycles involve periodic fluctuations of economic activity, such as production and employment. The typical cycle involves a rise in activity that reaches a high point, or peak, followed by a decline in output and employment until the economy reaches a low point, known as a trough. Business cycles are difficult to predict, but certain measures, known as indicators, can provide signals to corporate leaders, Wall Street investors, economists and government officials about the onset or progress of business cycles. Types of Indicators The Conference Board, a global business research association, identifies three main classes of business cycle indicators, based on timing: leading, lagging and coincident indicators. The Conference Board website states that all these indicators are designed to predict the peaks and troughs of business cycles in the United States and 10 other nations and regions around the world, including Britain, Australia, China, Japan, the Euro area of Europe, Germany and France and Mexico. Leading Indicators Leading indicators consist of measures of economic activity in which shifts may predict the onset of a business cycle. Examples of leading indicators include average weekly work hours in manufacturing, factory orders for goods, housing permits and stock prices. Increases or decreases in these measures could signal the beginning of a business cycle. The Conference Board reports that leading indicators receive the most attention because of their tendency to shift in advance of a business cycle. Other leading indicators include the index of consumer expectations, average weekly claims for unemployment insurance and the interest rate spread. The interest rate spread is the difference between the rate on the 10-year Treasury Bond and the Federal Funds Rate, the interest rate banks charge each other for overnight loans. Lagging Indicators If leading indicators signal the onset of business cycles, lagging indicators confirm these trends. Lagging indicators consist of measures that change after an economy has entered a period of fluctuation. Lagging indicators reported by the Conference Board include the average length of unemployment, labor cost per unit of manufacturing output, the average prime rate, the consumer price index and commercial lending activity. Because lagging indicators change direction after the economy enters a business cycle, they are sometimes dismissed as unimportant. The Conference Board

points out, however, that lagging indicators represent costs of doing business and can provide valuable insight into structural problems in the economy. Coincident Indicators Coincident indicators consist of aggregate measures of economic activity that change as the business cycle progresses. Therefore, these indicators help define business cycles themselves, according to the Conference Board. Examples of coincident indicators include the unemployment rate, personal income levels and industrial production. Considerations Although leading indicators receive the most attention, as discussed previously, the Conference Board emphasizes the importance of all three classes of indicators when observing business cycles. Leading indicators are most meaningful, the board reported, when they are included as part of a framework that includes coincident and lagging indicators that help define and describe fluctuations in economic activity.

FISCAL POLICY Meaning of Fiscal Policy The fiscal policy is concerned with the raising of government revenue and incurring of government expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue. Main Objectives of Fiscal Policy in India: The fiscal policy is designed to achieve certain objectives as follows :1. Development by effective Mobilization of Resources The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and the state governments in India have used fiscal policy to mobilise resources. The financial resources can be mobilised by :1. Taxation : Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation. 2. Public Savings : The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises. 3. Private Savings : Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing. 2. Efficient allocation of Financial Resources The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways,

infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc. But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable. 3. Reduction in inequalities of Income and Wealth Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society. 4. Price Stability and Control of Inflation One of the main objective of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by Reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc. 5. Employment Generation The government is making every possible effort to increase employment in the country through effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generates more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self employment scheme is taken to provide employment to technically qualified persons in the urban areas. 6. Balanced Regional Development Another main objective of the fiscal policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc. 7. Reducing the Deficit in the Balance of Payment Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc. The foreign exchange is also conserved by Providing fiscal benefits to import substitute industries, Imposing customs duties on imports, etc. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export. 8. Capital Formation

The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending.

9. Increasing National Income The fiscal policy aims to increase the national income of a country. This is because fiscal policy facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country. 10. Development of Infrastructure Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost. 11. Foreign Exchange Earnings Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem.

Indias fiscal policy architecture The Indian Constitution provides the overarching framework for the countrys fiscal policy. India has a federal form of government with taxing powers and spending responsibilities being divided between the central and the state governments according to the Constitution. There is also a third tier of government at the local level. Since the taxing abilities of the states are not necessarily commensurate with their spending responsibilities, some of the centres revenues need to be assigned to the state governments. To provide the basis for this assignment and give medium term guidance on fiscal matters, the Constitution provides for the formation of a Finance Commission (FC) every five years. Based on the report of the FC the central taxes are devolved to the state governments. The Constitution also provides that for every financial year, the government shall place before the legislature a statement of its proposed taxing and spending provisions for legislative debate and approval. This is referred to as the Budget. The central and the state governments each have their own budgets. The central government is responsible for issues that usually concern the country as a whole like national defence, foreign policy, railways, national highways, shipping, airways, post and telegraphs, foreign trade and banking. The state governments are responsible for other items including, law and order, agriculture, fisheries, water supply and irrigation, and public health. Some items for which responsibility vests in both the Centre and the states include forests, economic and social planning, education, trade unions and industrial disputes, price control and electricity. There is now increasing devolution of some powers to local governments at the city, town and village levels. The taxing powers

of the central government encompass taxes on income (except agricultural income), excise on goods produced (other than alcohol), customs duties, and inter-state sale of goods. The state governments are vested with the power to tax agricultural income, land and buildings, sale of goods (other than interstate), and excise on alcohol.

Besides the annual budgetary process, since 1950, India has followed a system of five-year plans for ensuring long-term economic objectives. This process is steered by the Planning Commission for which there is no specific provision in the Constitution. The main fiscal impact of the planning process is the division of expenditures into plan and non-plan components. The plan components relate to items dealing with long-term socio-economic goals as determined by the ongoing plan process. They often relate to specific schemes and projects. Furthermore, they are usually routed through central ministries to state governments for achieving certain desired objectives. These funds are generally in addition to the assignment of central taxes as determined by the Finance Commissions. In some cases, the state governments also contribute their own funds to the schemes. Non-plan expenditures broadly relate to routine expenditures of the government for administration, salaries, and the like. While these institutional arrangements initially appeared adequate for driving the development agenda, the sharp deterioration of the fiscal situation in the 1980s resulted in the balance of payments crisis of 1991, which would be discussed later. Following economic liberalisation in 1991, when the fiscal deficit and debt situation again seemed to head towards unsustainable levels around 2000, a new fiscal discipline framework was instituted. At the central level this framework was initiated in 2003 when the Parliament passed the Fiscal Responsibility and Budget Management Act (FRBMA). Taxes are the main source of government revenues. Direct taxes are so named since they are charged upon and collected directly from the person or organisation that ultimately pays the tax (in a legal sense).2 Taxes on personal and corporate incomes, personal wealth and professions are direct taxes. In India the main direct taxes at the central level are the personal and corporate income tax. Both are till date levied through the same piece of legislation, the Income Tax Act of 1961. Income taxes are levied on various head of income, namely, incomes from business and professions, salaries, house property, capital gains and other sources (like interest and dividends). Other direct taxes include the wealth tax and the securities transactions tax. Some other forms of direct taxation that existed in India from time to time but were removed as part of various reforms include the estate duty, gift tax, expenditure tax and fringe benefits tax. The estate duty was levied on the estate of a deceased person. The fringe benefits tax was charged on employers on the value of in-kind non-cash benefits or perquisites received by employees from their employers. Such perquisites are now largely taxed directly in the hands of employees and added to their personal income tax. Some states charge a tax on professions. Most local governments also charge property owners a tax on land and buildings. Indirect taxes are charged and collected from persons other than those who finally end up paying the tax (again in a legal sense). For instance, a tax on sale of goods is collected by the seller from the buyer. The legal responsibility of paying the tax to government lies with the seller, but the tax is paid by the buyer. The current central level indirect taxes are the central excise (a tax on manufactured goods), the service tax, the customs duty (a tax on imports) and the central sales tax on inter-state sale of goods. The main state level indirect tax is the post-manufacturing (that is wholesale and retail levels) sales tax (now largely a value added tax with intra-state tax credit). The complications and economic inefficiencies of this multiple cascading taxation across the economic value chain (necessitated by the constitutional assignment of taxing powers) are discussed later in the context of the proposed Goods and Services Tax (GST).

Conclusion on Fiscal Policy The objectives of fiscal policy such as economic development, price stability, social justice, etc. can be achieved only if the tools of policy like Public Expenditure, Taxation, Borrowing and deficit financing are effectively used. Though there are gaps in India's fiscal policy, there is also an urgent need for making

India's fiscal policy a rationalised and growth oriented one. The success of fiscal policy depends upon taking timely measures and their effective administration during implementation.

MONETARY POLICY Meaning of Monetary Policy The term monetary policy is also known as the 'credit policy' or called 'RBI's money management policy' in India. How much should be the supply of money in the economy? How much should be the ratio of interest? How much should be the viability of money? etc. Such questions are considered in the monetary policy. From the name itself it is understood that it is related to the demand and the supply of money. Definition of Monetary Policy According to Prof. Harry Johnson, "A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy." According to A.G. Hart, "A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy." From both these definitions, it is clear that a monetary policy is related to the availability and cost of money supply in the economy in order to attain certain broad objectives. The Central Bank of a nation keeps control on the supply of money to attain the objectives of its monetary policy. Objectives of Monetary Policy The objectives of a monetary policy in India are similar to the objectives of its five year plans. In a nutshell planning in India aims at growth, stability and social justice. After the Keynesian revolution in economics, many people accepted significance of monetary policy in attaining following objectives. 1. Rapid Economic Growth 2. Price Stability 3. Exchange Rate Stability 4. Balance of Payments (BOP) Equilibrium 5. Full Employment 6. Neutrality of Money 7. Equal Income Distribution These are the general objectives which every central bank of a nation tries to attain by employing certain tools (Instruments) of a monetary policy. In India, the RBI has always aimed at the controlled expansion of bank credit and money supply, with special attention to the seasonal needs of a credit. Let us now see objectives of monetary policy in detail :1. Rapid Economic Growth : It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability.

2. Price Stability : All the economics suffer from inflation and deflation. It can also be called as Price Instability. Both inflation are harmful to the economy. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable. It helps in reducing the income and wealth inequalities. When the economy suffers from recession the monetary policy should be an 'easy money policy' but when there is inflationary situation there should be a 'dear money policy'. 3. Exchange Rate Stability : Exchange rate is the price of a home currency expressed in terms of any foreign currency. If this exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate. The RBI by altering the foreign exchange reserves tries to influence the demand for foreign exchange and tries to maintain the exchange rate stability. 4. Balance of Payments (BOP) Equilibrium : Many developing countries like India suffers from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the domestic economy, while the later stands for stringency of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved. 5. Full Employment : The concept of full employment was much discussed after Keynes's publication of the "General Theory" in 1936. It refers to absence of involuntary unemployment. In simple words 'Full Employment' stands for a situation in which everybody who wants jobs get jobs. However it does not mean that there is a Zero unemployment. In that senses the full employment is never full. Monetary policy can be used for achieving full employment. If the monetary policy is expansionary then credit supply can be encouraged. It could help in creating more jobs in different sector of the economy. 6. Neutrality of Money: Economist such as Wicksted, Robertson have always considered money as a passive factor. According to them, money should play only a role of medium of exchange and not more than that. Therefore, the monetary policy should regulate the supply of money. The change in money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion. However this objective of a monetary policy is always criticized on the ground that if money supply is kept constant then it would be difficult to attain price stability. 7. Equal Income Distribution: Many economists used to justify the role of the fiscal policy is maintaining economic equality. However in resent years economists have given the opinion that the monetary policy can help and play a supplementary role in attainting an economic equality. Monetary policy can make special provisions for the neglect supply such as agriculture, smallscale industries, village industries, etc. and provide them with cheaper credit for longer term. This can prove fruitful for these sectors to come up. Thus in recent period, monetary policy can help in reducing economic inequalities among different sections of society. --------0000------

(I) High Rate of Growth All the Indian Five Year Plans have given primary importance to higher growth of real national income. During the British rule, Indian economy was stagnant and the people were living in a state of abject poverty. The Britishers exploited the economy both through foreign trade and colonial administration. While the European industries flourished, the Indian economy was caught in a vicious circle of poverty. The pervasive poverty and misery were the most important problem that has to be tackled through Five Year Plan. During the first three decades of planning, the rate of economic growth was not so encouraging in our economy Till 1980, the average annual growth rate of Gross Domestic Product was 3.73 percent against the average annual growth rate of population at 2.5 percent. Hence the per-capita income grew only around 1 percent. But from the 6th plan onwards, there has been considerable change in the Indian economy. In the Sixth, Seventh and Eight plan the growth rate was 5.4 percent, 5.8 percent and 6.8 percent respectively. The Ninth Plan, started in 1997 targeted a growth rate of 6.5 percent per annum and the actual growth rate was 6.8 percent in 1998 - 99 and 6.4 percent in 1999 - 2000. This high rate of growth is considered a significant achievement of the Indian planning against the concept of a Hindu rate of growth. (ii) Economic Self Reliance Self reliance means to stand on ones own legs. In the Indian context, it implies that dependence on foreign aid should be as minimum as possible. At the beginning of planning, we had to import food grains from USA to meet our domestic demand. Similarly, for accelerating the process of industrialization, we had to import, capital goods in the form of heavy machinery and technical know-

how. For improving infrastructure facilities like roads, railways, power, we had to depend on foreign aid to raise the rate of our investment. As excessive dependence on foreign sector may lead to economic colonialism, the planners rightly mentioned the objective of self-reliance from the third Plan onwards. In the Fourth Plan much emphasis was given to self-reliance, more specially in the production of food grains. In the Fifth Plan, our objective was to earn sufficient foreign exchange through export promotion and important substitution. By the end of the fifth plan, Indian became self-sufficient in food-grain production. In 1999-2000, our food grain production reached a record of 205.91 million tons. Further, in the field of industrialization, now we have strong capital industries based on infrastructure. In case of science and technology, our achievements are no less remarkable. The proportion of foreign aid in our plan outlays have declined from 28.1 percent in the Second Plan to 5.5 percent in the Eighth Plan. However, in spite of all these achievements, we have to remember that hike in price of petroleum products in the inter national market has made self-reliance a distant possibility in the near future. (iii) Social Justice: Social justice means to equitably distribute the wealth and income of the country among different sections of the society. In India, we find that a large number of people are poor; while few lead a luxurious life. Therefore, another objective of development is to ensure social justice and to take care of the poor and weaker sections of the society. The Five-Year Plans have highlighted four aspects of social justice. They are: (i) Application of democratic principles in the political structure of the country; (ii) Establishment of social and economic equity and removal of regional disparity;

(iii) Putting an end to the process of centralization of economic power; and (iv) Efforts to raise the condition of backward and depressed classes. Thus the Five Year Plans have targeted to uplift the economic condition of socio-economically weaker sections like scheduled caste and tribes through a number of target oriented programmes. In order to reduce the inequality in the distribution of landed assets, land reforms have been adopted. Further, to reduce regional inequality specific programmes have been adopted for the backward areas of the country. In spite of various efforts undertaken by the authorities, the problem of inequality remains as great as ever. According to World Development Report (1994) in India the top 20 percent of household enjoy 39.3 percent of the national income while the lowest 20 percent enjoy only 9.2 percent of it. Similarly, another study points out that the lowest 40 percent of rural household own only 1.58 percent of total landed asset while the top 5.44 percent own around 40 percent of land. Thus the progress in the field of attaining social justice has been slow and not satisfactory. (iv) Modernization of the Economy: Before independence, our economy was backward and feudal in character. After attainment of independence, the planners and policy makers tried to modernize the economy by changing the structural and institutional set up of the country. Modernization aims at improving the standard of living of the people by adopting a better scientific technique of production, by replacing the traditional backward ideas by logical reasoning's and bringing about changes in the rural structure and institutions. These changes aim at increasing the share of industrial output in the national income, upgrading the quality of products and diversifying the Indian industries. Further, it also includes expansion of banking

and non-banking financial institutions to agriculture and industry. It envisages modernization of agriculture including land reforms.

(v) Economic Stability: Economic stability means to control inflation and unemployment. After the Second Plan, the price level started increasing for a long period of time. Therefore, the planners have tried to stabilize the economy by properly controlling the rising trend of the price level. However, the progress in this direction has been far from satisfactory. Thus the broad objective of Indian plans has been a non-inflationary self-reliant growth with social justice.

TOP TEN MNCS IN INDIA The country has got many M. N. C.s operating here. Following are names of some of the most famous multinational companies, who have their headquarters of operational branches based in the nation: IBM: IBM India Private Limited, a part of IBM has been operating from this country since the year 1992. This global company is known for invention and integration of software, hardware as well as services, which assist forward thinking institutions, enterprises and people, who build a smart planet. The net income of this company post completion of the financial year end of 2010 was $14.8 billion with a net profit margin of 14.9 %. With innovative technology and solutions, this company is making a constant progress in India. Present in more than 200 cities, this company is making constant progress in global markets to maintain its leading position.

Microsoft: A subsidiary, named as Microsoft Corporation India Private Limited, of the U. S. (United

States) based Microsoft Corporation, one of the software giants has got their headquarter in New Delhi. Starting its operation in the country from 1990, this company has got the following business units:

Microsoft Corporation India (Pvt.) Limited (Marketing Division) Microsoft Global Services India Microsoft Global Technical Support Centre Microsoft India Development Center Microsoft IT Microsoft Research India

The net income of Microsoft Corporation grew from $ 14, 569 million in 2009 to $ 18, 760 million in 2010. Working in close association with all the stakeholders including the Government of India, the company is committed towards the development of the Indian software as well as I. T. (Information Technology) industry.

Nokia Corporation: Nokia Corporation was started in the year 1865. Being one of the leading mobile companies in India, their stylish product range includes the following:

Normal mobile handsets Smartphones Touch screen phones Dual sim phones Business phone

The net sales of the company increased by 4 % in the last financial year with sales of EUR 42.4 billion as compared to 2009's EUR 41 billion. Over the past few years, this company in India has been acquiring companies, which have got new and interesting competencies and technologies so as to enhance their ability of creating the mobile world. Besides new developments to fight against mineral conflicts, they

are even to set up Bridge Centers in the country for supporting re-employment. Their first onsite for the installation of renewable power generation are already in place. PepsiCo: PepsiCo. Inc. entered the Indian market with the name of PepsiCo India from the year 1989. Within a short time span of 20 years, this company has emerged as one of the fast growing as well as largest beverage and food manufacturer. As per the annual report of the company in the last business year, the net revenue of PepsiCo grew by 33 %. By the year 2020, this food manufacturing company intends to triple their portfolio of enjoyable and wholesome offerings. The expansion of their Good-ForYou portfolio is believed to be assisting the company in attaining the competitive advantage of the growing packaged nutrition market in the world, which is presently valued at $ 500 billion. Ranbaxy Laboratories Limited: Ranbaxy Laboratories Limited, one of the biggest pharmaceutical companies in India, started their business in the country from the year 1961. The company made its public appearance in 1973 though. Headquartered in this nation, this international, research based, integrated pharmaceutical company is the producer of a huge range of affordable cum quality medicines that are trusted by both patients and healthcare professionals all over the world. In the business year 2010, the registered global sales of the company was US $ 1, 868 Mn. Successful development of business forms the key component of their trading strategy. Apart from overseas acquisitions, this company is making a continuous endeavor to enter the new global markets, which have got high potential. For this, they are offering value adding products as well. Reebok International Limited: This global brand is a famous name in the field of sports as well as lifestyle products. Reebok International Limited, a subsidiary of Adidas AG, is based in U. S. A. (United States of America) started its operation in 1890s. During the last financial year, Adidas's currency neutralized group sales increased by 9 %. Apart from their alliance with CrossFit that is among the largest contemporary fitness movements, in the current year, Reebok's announcement of its partnership with artist, designer and producer Swizz Beatz reflects its long term future growth.

Sony: Sony India is a part of the renowned brand name Sony Corporation, which started their business operation in the year 1946 in Japan. Established in India in November 1994, this company has captured one of the leading positions in the field of consumer electronics goods. By the end of the business year 2010 on 31st March, 2011, the company showed a remarkable increase in the share related to numerous categories. Sony India is planning to invest around INR. 150 crore for the marketing of the activities related to ATL and BTL. As far as Bravia TVs are concerned, they are looking forward to hold their market share of 30 %. In between the last and the current financial year, the number of their outlets in the country increased by 1, 000. Tata Consultancy Services: Commonly known as T. C. S., this multinational company is a famous name in the field of I. T. (Information Technology) services, Business Process Outsourcing (B. P. O.) as well as business solutions. This company is a subsidiary of the Tata Group. The first center for software researching was established in the country in 1981 in the city of Pune. Tata Consultancy earned a growth of 8.9 % during the latest quarter of this financial year, which ended on 30th September, 2011. This renowned company is presently looking forward to the 10 big deals that they have received besides the Credit Union Australia's contract as well as Government of Karnataka's INR. 94 crore deal for a total period of 6 years. In this current business year, they are about to employ 60, 000 people to meet their business requirement. Vodafone: Vodafone Group Plc is an international telecommunication company, which has got it's headquarter based in London in the United Kingdom (U. K.). Earlier known as Vodafone Essar and Hutchison Essar, Vodafone India is among the largest operators of mobile networking in the country. The parent company Hutchison started its business in the year 1992 along with the Max Group, which was its business partner in India. Much later in 2011, Vodafone Group Plc decided to buy out mobile operating business of Essar Group, its partner. The turnover of the Vodafone Group Plc after the

completion of the last financial year grew to 44, 472 m from 41, 017 m that was the turnover of the business year 2009. Tata Motors Limited: The biggest automobile company in India, Tata Motors Limited, is among the leading commercial vehicles manufacturer in the country. They are one of the top 3 passenger vehicle manufacturers. Established in the year 1945, this company, a part of the famous Tata Group, has got its manufacturing units located in different parts of the nation. Some of their well known products of the company are categorized in the following heads:

Commercial Vehicles Defence Security Vehicles Homeland Security Vehicles Passenger Vehicles

Post completion of the financial year 2010 to 2011, the global sales of the company grew by 24.2 % with sales crossing INR. 1 million.