Unit II

Economic and Political Environment: Concept-Definition of Economic Environment-Economic Systems-

Relative merits and demerits of each systems-Economic Policies-Monetary-Fiscal- Industrial policies
sinceindependence and their significance – regulatory and promotional framework . Structure of Indian
Economy-Nature and significance. Economic Planning- Objectives, Merits, Limitations- Concept and
Meaning of Political Environment.

Economic Environment

The term economic environment refers to all the external economic factors that influence buying habits of
consumers and businesses and therefore affect the performance of a company. These factors are often
beyond a company‟s control, and may be either large-scale (macro) or small-scale (micro).

The economic environment is based on all the factors which involves in the functioning of the business. The
business enterprise is affected by various economic factors which cannot be control by the business. The one
of the main usage of economic environment is to understand the more economists to the find in the place of
industrial establishment such as
 Economic system: The economic system of a country reflects the economic composition, economic
thinking and the economic liberalization. It also helps in preparation of the business strategies.
o Socialist Economic System: Under socialistic economic system, the factors of producing are
to be organized, owned and managed by the government.
o Capitalist Economic System: A capitalist economic system is that system which encourages
private enterprises, free play of market force, strong competition and directs the scare
resource to most profitable once.
o Mixed Economy: It is a midway between socialist economy and capitalist economy. Co-
existence of both public and private sectors is the feature of mixed economy. Our Indian
economy system is also a mixed economy.
 Economic Policies: The term economic policy refers to Government policy towards economy as a
whole. These policies have great impact on the business. Economic policy establishes relationship
between Government and business.
 Economic Conditions: The impact of economic environmental changes can be seen on business
prospects over time in different ways. Increase in Green Revolution in certain part of India led to
growth in demand for a number of products like transistors, radio sets, bicycles, tube wells and low
horse power motors, as well as synthetic textiles.

Merits of Socialism:
Prof. Schumpeter has advanced four arguments in favour of socialism: one. greater economic efficiency;
two, welfare due to less inequality; three, absence of monopolistic practices; and four, absence of
business fluctuations. We discuss these merits of socialism one by one.
(1) Greater Economic Efficiency:

Economic efficiency under socialism is greater than under capitalism. The means of production are
controlled and regulated by the central planning authority towards chosen ends. The central planning
authority makes an exhaustive survey of resources and utilises them in the most efficient manner.

Increased productivity is secured by avoiding the wastes of competition and by undertaking expensive
research and production processes in a coordinated manner. Economic efficiency is also achieved by
utilising resources in producing socially useful goods and services which satisfy the basic wants of the
people, like cheap food, cloth, and housing.
(2) Greater Welfare:

In a socialist economy there is less inequality of income as compared with a capitalist economy because
of the absence of private ownership of the means of production, private capital accumulation, and private
profit. All citizens work for the welfare of the state and each is paid his remuneration according to his
ability, education and training. All rents, interests and profits from various sources go to the state which
spends them for public welfare in providing free education, cheap and congenial housing, free public
health amenities, and social security to the people.
(3) Absence of Monopolistic Practices:

Another advantage of socialism is that it is free from monopolistic practices to be found in a capitalist
society. Since under socialism all means of production are owned by the state, both competition and
monopoly are eliminated. The exploitation by the monopolistic is absent. Instead of private monopoly,
there is the state monopoly of the productive system but this is operated for the welfare of the people. In
the state-owned factories, socially useful commodities are produced which are of high quality and are
also reasonably priced.
(4) Absence of Business Fluctuations:

A socialist economy is free from business fluctuations. There is economic stability because production
and consumption of goods and services are regulated by the central planning authority in accordance
with the objectives, targets and priorities of the plan. Thus there is neither overproduction nor
unemployment.

Demerits of Socialism:
A socialist economy has also certain disadvantages:
1. Loss of Consumers‟ Sovereignty:

There is loss of consumers‟ sovereignty in a socialist economy. Consumers do not have the freedom to
buy whatever commodities they want. They can consume only those commodities which are available in
department stores. Often the quantities which they can buy are fixed by the state.
2. No Freedom of Occupation:

There is also no freedom of occupation in such a society. Every person is provided job by the state. But
he cannot leave or change it. Even the place of work is allotted by the state. All occupational movements
are sanctioned by the state.
3. Malallocation of Resources:

Under socialism, there is arbitrary allocation of resources. The central planning authority often commits
mistakes in resource allocation because the entire work is done on trial and error basis.
4. Bureaucratic:

A socialist economy is said to be a bureaucratic economy. It is operated like a machine. So it does not
provide the necessary initiative to the people to work hard. People work due to the fear of higher
authorities and not for any personal gain or self-interest.
There is no doubt that a socialist economy is better than a capitalist economy because of its
overwhelming merits. But it is disliked for the loss of political, economic and personal freedoms.
Capitalism
Merits of Capitalism:
The main merits and advantages of capitalism are as follows:
1. Production According to the Needs and Wishes of Consumers:

In a free market economy consumer needs and wishes are the upper most in the minds of the producers.
They try to produce goods according to the tastes and liking of the consumers. This leads to maximum
satisfaction of the consumers as obtained from his expenditure on the needed goods.
2. Higher Rate of Capital Formation and More Economic Growth:

People under capitalism have the right to hold property and pass it on in inheritance to their heirs and
successors. Owing to this right, people save a part of their income so that it can be invested to earn more
income and leave larger property for their heirs. The rate of capital formation increases when savings are
invested. This accelerates economic growth.
3. There is Complete Freedom of Choice in a Capitalist Economy:
Economic freedom means the right to earn and retain property. It also means the freedom of enterprise
and choice of occupation. This leads to the automatic channelization of the country‟s man power
resources in different vocations. There is no need to direct people or force them. Further, there is the
freedom of contract which ensures smooth and flexible functioning of different production units.
4. Optimum Utilisation of Resources Available:

The limited resources of the community are put to the most economical uses with as little waste as
possible. There is keen competition among producers and entrepreneurs to produce and sell goods. Every
producer and entrepreneur tries to use the productive resources at his disposal in the most economical
manner in order to make maximum profit.
5. Efficient Production of Goods and Services:

Due to competition every entrepreneur tries to produce goods at the lowest cost and of a durable nature.
Entrepreneurs also try to find out superior techniques of producing the goods consumers get the highest
quality goods at the least possible cost because the producers are always busy in making their production
methods more and more efficient.
6. Varieties of Consumer Goods:

Competition is not only in price but also in the shape design, colours and packing of products.
Consumers therefore get a good deal of variety of the same product. They need not be given limited
choice. It is said that variety is the spice of life. Free market economy offers variety of consumer goods.
7. In Capitalism there is no Need of Inducement or Punishment for Good and Bad Production:

A capitalist economy provides encouragement to efficient producers. The able an entrepreneur is, the
higher is the profit he obtains. There is no need to provide any kind of inducement. The price mechanism
punishes the inefficient and rewards the efficient on its own.
8. It Encourages the Entrepreneurs to Take Risks and Adopt Bold Policies:

Because by taking risk they can make higher profits. Higher the risk, greater the profit. They also make
innovations in order to cut their costs and maximise their profits. Hence capitalism brings about great
technological progress in the country.
9. It Provides the Best Atmosphere for Inventions:

Entrepreneurs are always on the look-out for new ideas to be applied to production. They try to beat each
other in innovations. This leads to rapid expansion, greater employment and income. The investors are
suitably rewarded with their royalties, through the copy right. Similarly, innovators enjoy the benefits of
their research, through the system of patents and trade-marks.

De-Merits of Capitalism:
The capitalist economy has been showing signs of stress and strain at different times. Some have called
for a radical reform of the free-market economy. Others like Marx have considered capitalism economy
to be contradictory in itself. They have predicted the ultimate doom of capitalist economy after a series
of deepening crisis.
The main de-merits or dis-advantages of capitalist economy are as follows:
1. Inequality of Distribution of Wealth and Income:

The system of private property acts as a means of increasing inequalities of income among different
classes. Those who have wealth can obtain resources and start big enterprises. The property less classes
have only their labour to offer. Profits and rents less classes have only their labour to offer. Profits and
rents are high.

Wages are much lower. Thus the property holders obtain a major share of national income. The common
masses have their wages to depend upon. Although their number is overwhelming their share of income
is relatively much lower.
2. Class Struggle as Inevitable in Capitalist Economy:
Some critics of capitalism consider class struggle as inevitable in a capitalist economy. Marxists point
out that there are two main classes into which capitalist society is divided. The „haves‟ which are the rich
propertied class own the means of production. The “have not‟s” which constitute the wage earning
people have no property.

The „haves‟ are few in number. The „have not‟s are in majority. There is a tendency on the part of the
capitalist class to exploit the wage-earners. As a result there is a conflict between the employers and the
employees which leads to labour unrest. Strikes, lockouts and other points of tension. All this have a
very bad effect on production and employment.
3. Social Costs are Very High:

A capitalist economy industrialises and develops but the social costs of the same are very heavy. Factory
owners running after private profit do not care for the people affected by their production. The
environment is polluted because factory wastes are not properly disposed of. Housing for factory labour
is very rarely provided with the result that slums grow around big cities.
4. Unnecessary Multiplicity and too Much of Competition:

Consumers have to pay a high price for their freedom of choice and provision of variety. There is
sometimes too much competition leading to unnecessary high costs of production because competitors
bid the prices of resources too high. There is wasteful advertisement. Sometimes sub-standard goods are
highly advertised and the consumer is deceived.
5. Instability of the Capital Economy:
A capitalist economy is inherently unstable. There is recurring business cycle. Sometimes there is a
slump in economic activity. Prices fall, factories close down, workers are rendered unemployed. At other
times business is brisk, prices rise, fast, there is a good deal of speculative activity. These alternating
periods of recession and boom lead to a good deal of wastage of resources.
6. Unemployment and Under-employment:

A capitalist economy has always some unemployment because the market mechanism is slow to adjust
to the changing conditions. Business fluctuations also result in a large part of the labour force going
unemployed during depressions. Not only this, workers are not able to get full time employment except
under boom conditions.
7. Working Class does not have Adequate Social Security:
In a capitalist economy, the working class does not have adequate social security, commodity, the
factory owners do not provide for any pension, accident benefits or relief to the families of those who die
in employment. As a result, widows and children have to undergo a good deal of suffering. Governments
are not in a position to provide for adequate social security in over populated less developed countries.
8. Slow and Unbalanced Growth:

A free market economy may work automatically but the rate of growth is rather slow. Moreover as the
economy progresses, there is no all round development. Some areas develop much faster while others
remain backward. In-dustries may expand fast while there may be poverty in agriculture.
9. No Bargaining Capacity of Labourers hence Exploitation:

In a capitalist economy, workers are often paid a wage rate below their productivity. This is because;
they do not have the bargaining power to get their due from the rich capitalist. Women and children are
often paid a very low wage rate. There is no equal pay for equal work.
10. Growth of Monopolies with their Evils:

A capitalist economy is competitive only in theory. In practice, the few competitors often arrive at an
understanding and exploit the consumer. Sometimes the bigger firms buy or eliminate the smaller firms
to establish their supremacy in particular lines or production. They charge high prices and do not have
any compulsion to improve efficiency of production. Thus, the much talked about efficient working of a
capitalist economy becomes a myth.
MIXED ECONOMY
List of Advantages of Mixed Economy
1. It promotes a quick economic development.

In this type of economic system, both the public and private sectors can operate equally, which means
that economic development will be quicker. This is especially true considering that economic resources
will be utilized efficiently. Also, depletion of resources will be slowed down.
2. It creates a balance in regional developments.

The planning commission of a country will be able to create policies for the improvement of every
region. In addition, the government would also try to develop each sector of the population.
3. It encourages lesser income inequality.

With a mixed economy, there will be lesser inequality when it comes to income, where the inheritance
law is applied to enable members of society to become richer. As for the public sector, it would try to
provide economic utility to the general public, leading to further reduction of inequality in income.
4. It provides the freedom to own a private property.
People are free to obtain property in a mixed economy, which means that the idea to work even more
will be encouraged. Again, this will help in the fast economic development, especially in the areas of
industries and agriculture.

List of Disadvantages of Mixed Economy

1. It brings about the fear of nationalization.

As the private and public sectors coexists, the government would have the ability to own and nationalize
any industry. This means that private entities will have to stay on the psychological apprehension that
their business would be nationalized or taken over by the government.
2. It could risk the government to go too far.

In a mixed economy, determining the exact role of the government in the private sector would
sometimes become a guessing game that would result to unfair practices in both sides. It is believed that
the government would manage the economy poorly, so its involvement is usually regarded as
inappropriate.
4. It can lead to higher taxes.

With more state intervention in the economy, it would mean that the government would invest more and
would get their funds largely from tax revenues. More taxes would be required from the people, which
can lead to negative consequences.

Basically, the success or failure of a mixed economy would still depend on how it is managed. However,
based on the advantages and disadvantages listed above, we will be able to know whether it will do our
country any good or just make situations even worse.
 ECONOMIC POLICIES-MONETARY-FISCAL
Monetary Policy
Monetary and Fiscal policy are two powerful instruments of economic management. Why? Necessary? In
free enterprise economy.
Definition:

“Policy employing the central banks control of the supply of money as an instrument for achieving the
objective of general economic policy” - Hary G. Johnson
According to economists:

 Monetary policy is the changes in the supply of money.

 Credit policy is the changes in the supply of credit (different in broader sense)

Main objectives are:

1. Maximum feasible output
2. High rate of economic growth
3. Fuller employment
4. Price stability
5. Greater equality in the distribution of income and wealth
6. Health balance of payments

Monetary Control Measures:

The instruments of monetary policy refer to the exo variable that the Central Bank can change at its
discretion with a view to controlling and regulating the money supply and the availability of credit.
The measures of monetary policy are classified under two categories.
I. Quantitative measures of monetary control
II. Qualitative and selective credit controls

I. Quantitative measures of monetary control

Bank rate
Bank rate is the official minimum rate of interest at which central bank lends money to commercial banks.
So bank rate is known as the central bank‟s lending rate. Usually the central bank lends to commercial banks
by re-discounting their bills of exchange. Bank rate is also known as the re-discount rate.

In order to correct excess demand or inflationary situations, Central Bank increase bank rate. Consequent
upon an increase in bank rate, commercial banks raise their lending rate to the general public. This makes
the borrowing from commercial banks costlier. Therefore, businessmen and enterprises reduce borrowing
and cut investment. As a result, income of the people declines and demand for goods is curtailed. In this
way, the situation of excess demand or inflation is checked.
Likewise, central bank can control the state or deficient demand or deflation by reducing the bank rate.
Open Market Operations:
Open market operation refers to the purchase and sale of Government securities by the Central bank in open
market.

In order to correct the excess demand or inflation, the central bank sells securities to the commercial banks
and general public. When commercial banks buy securities, their cash reserves are reduced directly. When
people buy securities, they make large withdraw of cash from commercial banks. Here their cash reserves
are diminished indirectly. Consequently, commercial banks‟ capacity to create credit is curtailed. This leads
to a reduction in the volume of investment on the part of businessmen and entrepreneurs and a decline in
national income. As a result, the state of excess demand or inflation is checked.

On the contrary, central bank can correct the state of deficient demand or deflation by purchasing securities
in the open market.

Variable cash reserve ratio:

According to the law, each commercial bank has to keep a part of its deposits with the central bank is a ratio
known as the cash reserve ratio (CRR).

Central bank can increase or decrease this ratio; therefore, it is known as the variable cash this ratio. It is
very powerful instrument of credit control.

In order to correct the state of excess demand or inflation central bank increase the cash reserve ratio (CRR).
So commercial banks are required to keep larger amount of cash reserves with the central bank and
consequently, amount of cash available with them is reduced. This leads to a decline in the credit creating
capacity of commercial banks. When smaller amount of credit is given to the entrepreneurs, investment falls.
Consequently, national income declines and the state of excess demand are checked.

Likewise, the central bank can correct the state of deficient demand or deflation by reducing the cash reserve
ratio (CRR).
II. Qualitative or Selective Credit Controls

The qualitative methods of monetary control affect (when effective), the entire credit market in same
direction. They lead either to expansion or to contraction of the total credit. The impact is uniform.
Authorities face problems like,
i) Rationing the credit
ii) Diverting the flow of credit from non-priority sectors
iii) Curbing speculating tendency based on the availability of bank credit.
These are not served well by quantitative measures, qualitative or selective credit controls is used.
i) Credit Rationing: When there is shortage of institutional credit available for the business sector, the large
and financially strong sectors or industries tend to capture the lions share, in the total instalments. Credit
priority sectors and weak industries are starved of necessary fund and bank credit goes to non-priority
sector.
a) Imposition of upper limits on the credit available to large industries and firms.
b) Charging higher interest rate on bank beyond a certain limit.
ii) Change in lending margins:

Banks lends Jew % only on value of the mortgaged properly. The gap between the value of the
mortgaged property and amount advanced is called lending margin. E.g. if value of stock = Rs. 10 M,
amount advanced = Rs. 6 M, Lending margin = 40% [can be increase in central bank with view to increase
or decrease credit].
iii) Moral Suasion

Method by persuading and convincing the commercial banks to advance credit in accordance with
the directive of the central bank in the economic interest of the country. But not effective in underdeveloped
country. In this method, the central bank writers letters to and holds meetings with the banks on moey and
credit matters, with clear directive to the banks to carry out their lending activity in a specified manner.

FISCAL POLICY

The term „Fisc‟ in English means „treasury‟. Hence policy concerning treasury or Government exchequer is
known as „Fiscal Policy‟.

Fiscal policy is that part of Government policy which is concerned with raising revenues through taxation
and other means deciding on the level and pattern of expenditure it operates through budget. However,
generally the expenditure exceeds the revenue income of the Government. In order to meet this situation, the
Government imposes new taxes or increases rates of taxes, takes internal or external loans or resorts to
deficit financing by issuing fresh currency.

Thus, the collective form of policies of imposing taxation, taking loans or deficit financing is known as
fiscal policy. The authors have defined it as follows:

By fiscal policy is meant the use of public finance or expenditure, taxes, borrowing and financial
administration to further our national income objective. –Buchler

Changes in Government expenditure and taxation designed to influence the pattern and level of activity.
– J. Harry and Johnson
“Fiscal policy is a policy under which the Government uses its expenditure and revenue programmes to
produce desirable effects and avoid undesirable effects on national income, production and employment.”
- Arthur Smithies

There are mainly three constituents of the fiscal policy; these are: (i) taxation policy, (ii) public expenditure
policy, and (iii) public debt policy. All these constituents must work together to make the fiscal policy sound
and effective.
Objectives of fiscal policy

1. Development by effective Mobilization of Resources

2. Efficient allocation of Financial Resources
3. Reduction in inequalities of Income and Wealth
4. Price Stability and Control of Inflation
5. Employment Generation
6. Balanced Regional Development
7. Capital Formation
8. Reducing the Deficit in the Balance of Payment

NATURE OF FISCAL POLICY

1. Rationalization of product classification codes: The rationalized standard product code structure for
indirect taxes. The change has resulted in reduced disputes and litigations about product
classification.
2. Common accounting year for income tax: Taxation policy has adopted standard accounting year
(April-March) for the purpose of income tax.
3. Long term fiscal policy: Since 1986 budget, the Government of India has introduced long term fiscal
policy to provide greater certainties in its budgetary policies and to improve the overall environment
of business.
4. Impact on rural employment: Generation of employment is the main objective of the fiscal policy.
5. Reliance on indirect taxes:
6. Inadequate public sector contribution:
7. Introducing of GST:

SIGNIFICANCE OF FISCAL POLICY

1. Capital formation
2. Mobilization of resources
3. Incentives to savings
4. Inducement to private sector
5. Alleviation of poverty and unemployment
6. Reduction in inequality

INDUSTRIAL POLICIES SINCE INDEPENDENCE

1. Industrial Policy Resolution of 1948
2. Industrial Policy Resolution of 1956
3. Industrial Policy Resolution of 1973
4. Industrial Policy Resolution of 1977
5. Industrial Policy Resolution of 1980
6. The New Industrial Policy of 1991
Industrial Policy Resolution of 1948

The first industrial policy resolution was introduced by the Indian Government on 6 April in 1948. The
policy resolution emphasized the importance of the state in the growth of industry.
Importance of industrial policy 1948

1. Different Labour laws, such as, minimum wage act, employees state insurance act, Labour welfare
act, etc., were passed for the welfare and betterment of the workers.
2. Nationalization of limited but important industrial sector to strengthen the economy.
3. A mixed economy pattern was adopted under which private, public and cooperative sectors were
involved
The industrial activities were divided into four broad areas:

1. Industries where state had monopoly: This category includes arms and ammunition, atomic energy
and rail transport where they had been governed by state.
2. Mixed Sector: This category includes 6 industries coal, iron and steel, aircraft manufacture,
shipbuilding, telephones, telegraphs, and wireless apparatus and mineral oils.
3. Field of Government Control: This category includes 18 industries such as automobiles, Heavy
chemicals, heavy machinery, machine tools, etc.
4. Private Sector: It includes all the remaining all other items left to the private sector.

Industrial policy resolution of 1956

After the adoption of the industrial policy resolution of 1948, significant development took place in the
country. When India became republic, the first five year plan was visualized. The socialistic pattern of
society was accepted by the parliament as the basic aim of social and economic policy. The concept of
mixed economy was recognized as the basis for the national economic policy. All these aspects cleared the
way for a new policy and the second industrial policy resolution was announced on 30 April, 1956.

The classification of industries under three heads, viz., Schedule A, schedule B, and schedule C, made in
this policy are still being followed.
Classification of industries Schedule A-
1. Arms and ammunitions and defense equipment,
2. Atomic energy Heavy castings and forging of iron and steel.
3. Iron and steel Heavy plant and machinery required for iron and steel production. Mining, machinery
tools, and other basic industries.
4. Heavy electrical plant
5. Coal and lignite Mineral oils,
6. Mining of iron ore, manganese ore, crome ore, gypsum, gold, diamonds, and sulphur
7. Mining and processing of copper, zinc, lead, tin.
8. Minerals as per Atomic Energy Order, 1953.
9. Aircraft
10. Air transport,
11. Railway transport
12. Shipbuilding,
13. Telephones and telephones cable, telegraph and wireless
14. Generation and distribution of electricity.
Schedule B

1. Other minerals excepting minor minerals defined in the minerals concession rules.
2. Aluminum and other non-ferrous metals not included in schedule A
3. Ferro alloys and tool steels
4. Machine tools Manufacture of drugs
5. Antibiotics and other essential drugs
6. Fertilizers
7. Synthetic rubber
8. Carbonisation of coal
9. Chemical pulp
10. Road transport
11. Sea transport.

Schedule „C‟ : The industries where state is exclusively responsible comes under schedule „A‟, which
include 17 industries while the progressively owned state industries comes under schedule “B” which
include 12 industries. Schedule „C‟ include private industries. The development of industries of this category
was left to the private enterprises. This sector is control under industries (Development and Regulation) Act,
1951.
Objective and importance of industrial policy, 1956

1. To accelerate the rate of economic growth and speed up industrialization.

2. To develop heavy industries and machine making industries
3. To prevent monopolies and concentration of economic power in different fields I the hands of a few
individuals.
4. To expand the public sector
5. To build up large and growing cooperative sector
6. To reduce disparities in income and wealth

Industrial Policy, 1991

1. The spread of industrialization to backward areas of the country will be actively promoted through
appropriate incentives, institutions and infrastructure investments.
2. Foreign investment and technology collaboration will be welcomed to obtain higher
technology, to increase exports and to expand the production base.
3. Abolish monopoly
4. Workers‟ participation in management will be promoted

Issues of Industrial policy, 1991

 Government recognizes the need for

o Social and economic justice, to end poverty and unemployment and to build a modern,
democratic, socialist, prosperous and forward-looking India
 India to grow as part of the world economy and not in isolation
 Enhanced support to the small-scale sector so that it flourishes in an environment of economic
efficiency and continuous technological up gradation
 Emphasis on building our ability to pay for imports through our own foreign exchange earnings
Industrial Policy, 1991 objectives

In pursuit of the above objectives, Government has decided to take a series of initiatives in respect of the
policies relating to the following areas:
A. Industrial Licensing.
B. Foreign Investment.
C. Foreign Technology Agreements.
D. Public Sector Policy.
E. MRTP Act.

Industrial Licensing:
1. Industrial licensing abolished for all projects except a short list of 18 industries related to security
and strategic concerns, social reasons, hazardous chemicals etc. (Annex II)
2. Areas where security & strategic concerns predominate reserved for public sector. (Annex I)
3. In projects where imported capital goods are required, automatic clearance given.
4. In locations other than cities of more than 1 million population, no requirement of obtaining
industrial approvals from Central Government.
5. Incentives & investments in infrastructural development, to promote dispersal to rural and backward
areas.
6. Existing units enabled to produce any article without additional investment.

Foreign Investment:

1. Approval up to 51 percent foreign equity in high priority industries.(Annex-III)

2. Imports governed by general policy applicable to other domestic units, payment of dividends
monitored by RBI to ensure that outflows on account of dividends are balanced by export earnings.

3. Other foreign equity proposals, not covered above, need prior clearance.

4. A special Empowered Board- to negotiate with a number of large international firms & get FDIs
approved.

Foreign Technology Agreements:

1. Automatic permissions for foreign technology agreements in high priority industries (Annex-III) up
to a lump sum payment of Rs. 1 crore.

2. For industries other than those in Annex III, automatic permissions if no foreign exchange is required
for payment

3. All other proposals need specific approval

4. No permission for foreign technicians, foreign testing of indigenously developed technologies.

Public Sector Policy:

1. Portfolio of public sector investments reviewed with a view to focus public sector on strategic, high
tech & essential infrastructure.
2. Chronically sick public enterprises, referred to Board of Industrial & Financial Reconstruction
(BIFR).
 3. A part of government‟s shareholding in public sector offered to mutual funds, financial institutions,
public & workers.
4. Boards of public sector companies- more professional & powerful.
5. MOU system- managements would be granted greater autonomy & held accountable.

MRTP Act: (Monopolistic Restrictive Trade Practices):

1. Removal of threshold limits of assets in respect of MRTP Companies & dominant undertakings.

2. Elimination of need of prior approval of Central Government for establishment, expanding, merger,
amalgamation & takeover.

3. Emphasis on controlling & regulating monopolistic, restrictive & unfair trade practices.

4. Enabling the MRTP Commission to exercise punitive & compensatory powers.

REGULATORY AND PROMOTIONAL FRAMEWORK

In its most common context, regulation is an attempt to control or influence private behaviour in the
desired direction by imposing costs on or proscribing undesirable behaviour. Since regulation can have
important consequences for economic efficiency and private incentives, it is usually justified only under
special conditions. Accordingly, there are three sets of justifications for regulatory interventions --
prevention of market failures, restriction or removal of anti-competitive practices, and promotion of
public interest.

To prevent market failure Market failure is a condition in which the market mechanism fails to allocate
resources efficiently to maximize social welfare. Market failures occur in the provision of public goods,
in case of natural monopolies or asymmetric information, and in the presence of externalities.

To check anti-competitive practices Firms may resort to anti-competitive practices such as price fixing,
market sharing or abuse of dominant or monopoly power. Laws that empower officials to take action can
help deter such practices. Regulation through a set of transparent, consistent, and non-discriminatory
rules can create a competitive and dynamic environment in which market players can thrive. In its
absence, anticompetitive practices and regulatory failures may not allow the market process to yield
socially optimal outcomes.
To promote the public interest A third set of justification arise from concerns about the promotion of
public interest which is an important policy objective for governments. Ensuring fair access, non-
discrimination, affirmative action, or any other matter of public importance can provide an important
reason for regulation. Some major regulations in this regard in India are:  Support pricing i.e.
government offering to buy wheat or rice from farmers at a price which is higher than the market price 
Public distribution system: supply of food grains at a price which is lower than the market price  Free
distribution of piped water and free power to agriculture – these are regulatory decisions to levy zero
tariffs which stem from policy stances  Free power to agriculture which happens before elections -- a
policy with regulatory

Regulation in India can be mapped under three broad categories: economic regulation, regulation in the
public interest and environmental regulation.

Economic regulation: Economic regulation Economic regulation aims at preventing or tackling market
failure. This is achieved with rules that proscribe and punish market distorting behaviour. Examples in
the Indian context include The Foreign Trade (Development and Regulation) Act, 1992 for facilitating
 imports into and augmenting exports from India and the Electricity Act of 2003, which allows State
regulators to fix tariffs for power consumption, thus preventing suppliers from taking advantage of
natural monopolies

Regulation in the public interest: This covers areas where industries are failing to meet a standard or
uphold something of public importance. This is different from market failure. A classic case is of health
and safety, where firms can fall short in protecting employees or the general public from harm. Although
market competition can make firms more willing to address such issues, the standards adopted may not
be adequate or uniform across the industry. In India, there is very little evidence to suggest that
competition in its existing form has had a positive impact on quality.
Environmental regulation: Environmental regulation covers actions to protect the environment from
harm. A healthy environment is desirable not just on aesthetic grounds but because environmental
degradation imposes costs on land, labour and resources that have important consequences for economic
development. Unsafe water, unhealthy air, species and habitat loss, and degradation of soil are some
concerns with real world effects sought to be addressed through environmental regulation
Some major regulations – economic or in the public interest – enforced in India are listed below

Ac
t e
Securities Contracts (Regulation) Act, 1956 To prevent undesirable transactions in
The Foreign Exchange Management Act
(FEMA), 1999
The Foreign Trade (Development and
Regulation) Act, 1992
The Industries Act, 1951
The Indian Contract Act, 1872
The Sale of Goods Act, 1930
Indian Patents Act, 2005
Purpos
securities by regulating the business
To facilitate external trade and payments and
to promote the orderly development and
maintenance of
the foreign exchange market.
To provide for development and regulation
of foreign trade by facilitating imports into
and augmenting exports from India and for
matters connected
herewith.
To empower the Government to take
necessary steps for the development of
industries; to regulate the pattern and
direction of industrial development; and to
control the activities, performance and
results of industrial undertakings in the
public interest.
Governing legislation for contracts, which
lays down the general principles relating to
formation, performance and enforceability
of contracts and the rules relating to certain
special types of contracts like Indemnity
and Guarantee; Bailment and Pledge; as
well as Agency.
To protect the interest of buyers and sellers.
To grant significant economic exclusiveness
to manufacturers of patented products with
some in-built mechanisms to check extreme

The Company Act, 1956
Competition Act, 2002
The Trade Marks Act, 1999
The Information Technology Act, 2000
The Consumer Protection Act, 1986
(amended 1993, 2002) COPRA
The Industrial Disputes Act, 1947
The Factories Act, 1948
The Indian Trade Unions Act, 1926
causes of competition
restriction.
To regulate setting up and operation of
companies in India: it regulates the
formation, financing, functioning and
winding up of companies.
To ensure a healthy and fair competition in
the market economy and to protect the
interests of consumers: aims to prohibit the
anti-competitive business practices, abuse of
dominance by an enterprise as
well as regulate various business
combinations such as mergers and
acquisitions.
To amend and consolidate the law relating to
trade marks, to provide for registration and
better protection
of trade marks for goods and services and
for the prevention of the use of fraudulent
marks.
To provide legal recognition for transactions
carried out by means of electronic data
interchange and other means of electronic
communication, commonly referred to as
"electronic commerce", which involve the
use of alternatives to paper-based methods
of communication and storage of
information; to facilitate
electronic filing of documents with
Government agencies
To protect consumer rights and providing a
simple
quasi-judicial dispute resolution system for
resolving complaints with respect to unfair
trade practices.
To facilitate investigation and settlement of
all
industrial disputes related to industrial
employees and employers.
Umbrella legislation to regulate the working
conditions in factories.
To facilitate the registration of trade unions,
their rights, liabilities and responsibilities as
well as ensure that their funds are utilised
properly: it gives legal and corporate status

The Bureau of Indian Standards Act, 1986
to registered trade unions and also seeks to
protect them from civil or criminal
prosecution so that these could carry on their
legitimate activities for the benefit of the
working class.
To set standards (quality, safety etc) for
various kinds of products to protect
consumer safety.

STRUCTURE OF INDIAN ECONOMY

Indian economy has experience a number of structural changes since Independence. Therefore a major trust
of economy has been towards modernisation, respectable standard of living and renewed emphasis on the
market conditions. Development of secondary and tertiary sectors has given more importance.
Occupational structure:
People earn their incomes by doing different kinds of jobs which becomes the means of livelihood. The
distribution of working population among different occupations or productive activates is known as
„Occupational Structure‟. There are three types of occupations in an economy. They are

1. Primary 2. Secondary 3.Tertiary Sectors

Primary Sector: Occupations include agriculture, fishing, plantations, mining and allied activities. Ex:
Production of food of grains and raw materials.

Secondary Sector: occupations comprise manufacturing operations in industries both large and small and
also include in construction activity.
Ex: Capital goods, consumption goods and building activities.

Tertiary Sector: This sector generates occupations in such services like in banking, commerce,
communications, computers and other professions inside as well as outside the government.
Ex: banking, commerce and communication, There is a gradual but persistent due line in the employments
of agriculture during the 1970‟s and the 1980‟s there was an accompanied rise in the employment share of
the secondary and tertiary sectors.

Agriculture: Most of the underdeveloped countries have large agriculture sector and working population. In
these countries mostly depend on agriculture for employment.
Agricultural Production and productivity:

In India agricultural production is influenced by monsoon rainfall and weather conditions. The productivity
in agriculture depends upon among other things, the size of land holdings and the level of technology. The
small farms are more productive than the large farms because of intensive cultivation. Therefore the
productivity per acra in small farms greater than the bigger one.
The crops are divided into two types
Food Grains: Rice, wheat, Cereals and Pulses etc.
Non Food Grains: oil, Sugarcane, cotton etc.
The yield of either food grains or non-food grains in India is most behind other countries in the world.
Industry:

Industrialisation and economic development are the inseparable things in the most of the under developed
countries. Industrialisation depends on the availability of capital resources.
Structure of Industry:
The industrial structure can be classified on the basis of

1. Type of ownership
a. The public Sectors
b. Private Sector
c. Foreign Sectors: some foreigners invest large sums in the Indian industries. Their share
holdings is determined by the assets and capital of the firm, this pattern of shareholding is
called „Equity” Accoding to Foreign Exchange Regulation Act of 1970 any company
which allows foreign, nations more than 40% of the equity is treated as the foreign sector
2. Size of investment
a. The large- scale Sector: The industries whose capital is more than Rs. 35 lakhs.
b. The small scale sector: The industries whose capital is between Rs. 5 laks to Rs 35 lakhs.
c. The tiny sector: Those capital investment not exceeding Rs 5.
3. Type of output
a. Basic Industries: Basic industries are which provides essential inputs to all industries and
agriculture Ex: Iron and steel, coal, chemicals, fertilizers etc.
b. The capital goods industries: There industries produce the machinery and equipment
require for all industries and agriculture.
c. The intermediate goods industries: These industries produce goods which are used in the
production process of other goods, rather than for final consumption.
d. Consumer goods industries: These industries produce goods for final consumption such
as power products, cosmetics & electronics goods. Etc.

ECONOMIC PLANNING
Planning is a continuous process that involves choices and decision making about allocation of available
resources with the objective of achieving effective and efficient utilisation and growth of these resources. In
India, planning is done both at the center as well as the state level. Economic planning is done by the central
authority after a complete survey of the economic situation. The policy objectives are designed based on the
future development goals of the country.

In India, until 2014, planning was the responsibility of the National Planning Commission that was
established on March 15, 1950. The first five-year plan was prepared by the Planning Commission for the
period 1951-56. The first Prime Minister of India, Pandit Jawaharlal Nehru was the first chairman of the
Planning Commission. The Prime Minister was always the ex-officio chairman of the Planning Commission.
The Deputy Chairman who was nominated by commission held the rank of a cabinet minister.
Objectives of economic Planning

1. Economic Growth and Development: Every five-year plan had a growth target that had to be
achieved by the end of the planning period. In order to bring about an improvement in standard of
living of the people, the per capita income has to rise. A rise in per capita income is necessary to
overcome the problems of poverty and its effects.
2. Increase in Employment: The developing economies generally suffer from open unemployment and
disguised unemployment. India is no exception to it. Slow growth of the agricultural sector and lack
 of investments in the industrial sector are major causes for high levels of unemployment in the
country. Measures have been taken in every five- year plan to create employment opportunities,
thereby, increasing labor productivity.
3. Increase in Investment: Economic growth cannot be achieved unless adequate investments are made
to bring about an increase in output capacity. Investments help in creating employment opportunities.
One of the objectives of planning is, thus, to push up the rate of investment to ensure smooth flow of
capital to various sectors of the economy.
4. Social Justice and Equity: The five-year plans also focused on reducing inequalities in the
distribution of income in order to ensure social justice. Prevalence of inequalities in the economy
results in exploitation of the poor wherein the rich become richer and the poor become poorer.
5. Balanced Regional Development: In India, there exists a wide gap in the development of different
states and regions. While Gujarat, Tamil Nadu, Maharashtra etc., enjoy high levels of development,
there are states like Bihar, Odisha, Nagaland etc., which remain backward. Planning aims at bringing
about a balanced regional development by diverting more resources to the poor and backward
regions.
6. Modernisation: Modernisation refers to a shift in the composition of output, innovation and
advancement in technology. Modernisation helps an economy to advance at a faster pace and
compete with the developed nations of the world. The objective of planning is to encourage and
incentivise investments into various sectors of the economy, especially the industrial sector, to help
them adopt new technologies and thus, increase efficiency.

MERITS OF ECONOMIC PLANNING IN INDIA:

Economic planning in India, formally conceived in 1951, has come a long way in helping the economy to
tackle the challenges in various sectors and has enabled it to achieve rapid economic progress.
Some of the major achievements of planning in India are as follows:
1. Economic Growth:

Economic planning in India has been successful in increasing the national income and the per capita income
of the country resulting in economic growth. The net national income at factor cost increased from Rs.
4393.45 billion in 1966- 67 to Rs.45, 733 billion in 2011-12 (at 2004-05 prices). The per capita income
increased from Rs.8876 to Rs.38, 048 during the same period (at 2004-05 prices).

The average growth rate has increased from 3.5 percent during 1950 to 1970 to about 5.5 percent after
1990‟s. The economy recorded a growth rate of 7.8 percent during the eleventh five- year plan.

2. Progress in Agriculture:

The first five-year plan focused on agricultural development. However, agricultural sector did not receive
priority in the subsequent plans. Yet, with various initiatives implemented in the agricultural sector such as
the green revolution and agricultural pricing policies, there has been a considerable increase in the output of
the agricultural sector.

The index of agricultural production increased from 85.9 in 1970-71 to 165.7 in 1999-2000 (Base year-
1981-82). The production of major food grains which includes rice, wheat, coarse cereals and pulses has
increased from 77.14 million tons in 1958-59 to 252.22 tons in 2015-16. With the introduction of green
revolution, the yield per hectare of food grains has increased from 662 kg in 1959-60 to 2056 kg in 2015-16.
Similarly, the production of commercial crops has also recorded an increasing trend. Various reforms in the
agricultural sector such as the Rashtriya Krishi Bima Yojana and Kisan credit cards during the ninth plan
and National Food Security Mission and Rashtriya Krishi Vikas Yojana during the eleventh plan have been
quite successful in improving the performance of the agricultural sector.

3. Industrial Growth:
Economic planning has also contributed to the progress of the industrial sector. The index of industrial
production increased from 54.8 in 1950-51 to 152.0 in 1965-66 (Base year- 1960-61) which is about 176
percent increase in production during the first three five-year plans.

It went up from 109.3 in 1981-82 to 232.0 in 1993-94 (Base year- 1980-81). Taking 2004-05 as the base
year, the index of industrial production recorded an increase from 108.6 in 2005-06 to 181.1 in 2015-16. The
introduction of reforms in 1991 relieved the industrial sector from numerous bureaucratic restrictions that
were prevalent earlier.
This has led to the rapid growth of the industrial sector in India. India has made remarkable progress in
cotton textiles, paper, medicines, food processing, consumer goods, light engineering goods etc.

4. Public Sector:

The public sector played a predominant role in the economy immediately after the independence. While
there were only 5 industrial public sector enterprises in 1951, the number increased to 244 in 1990 with an
investment of Rs.99, 330 cores. However, the number of public sector enterprises fell to 217 in March 2010.

Yet, the cumulative investment went up to Rs.5, 79,920 cores. The ratio of gross profit to capital employed
increased from 11.6 percent in 1991-92 to 21.5 percent in 2004-05. Heavy engineering and transport
equipment industries recorded a 117 percent and 111 percent growth respectively in 2006-07 over the
previous year.

Very high profits were recorded by petroleum, telecommunication services, power generation, coal and
lignite, financial services, transport services and minerals and metal industries. The government has
eliminated a number of restrictions on the operational and financial powers of the Navaratnas, Miniratnas
and several other profit making public sector enterprises.

5. Infrastructure:

Development of infrastructure such as transport and communication, power, irrigation etc., is a pre-requisite
to rapid economic growth and development. Expansion of transport facilities enables easy movement of
goods and services and also enlarges the market. Irrigation projects contribute significantly to rural
development.
Power projects help in meeting the growing demand for power by both industrial and household sector. The
total road length increased from about 400,000 km in 1951 to about 4.7 million km in 2011. India has the
second largest road network in the world with about 5,472,444 kilometers of road, as on March 31, 2015.

The route length of the Indian railway network has increased from about 53,596 km in 1951 to about 64,450
km in 2011. The investment in infrastructure as a percentage of GDP was about 5.9 percent during the tenth
plan and increased to about 7.2 percent during the eleventh plan.
6. Education and Health Care:

Education and health care are considered as human capital as they contribute to increased productivity of
human beings. Considerable progress was achieved in the education as well as health sector during the five-
year plans. The number of universities increased from about 22 in 1950-51 to 254 in 2000-01. There were
about 22 central universities, 345 state universities, 123 deemed universities and about 41,435 colleges in
2016.

The number of institutions in higher education has increased to over 100 percent since 2008. With the
growth in the number of institutions, the literacy rate in India has increased from 16.7 percent in 1950-51 to
74.04 percent in 2011. With improvements in the health infrastructure, India has been able to successfully
control a number of life threatening diseases such as small pox, cholera, polio, TB etc.

As a result, there has been a fall in the death rate from 27.4 per thousand persons in 1950-51 to 7.3 per
thousand persons in 2016. The life expectancy has increased from about 32.1 years in 1951 to 68.01 years in
2014. The infant mortality rate has declined from 149 per thousand in 1966 to 37.42 per thousand in 2015.

7. Growth of Service Sector:

Service sector is the key contributor to the economic growth of India. The service sector contributed to about
53.2 percent of the gross value added growth in 2015-16. The contribution of the IT sector to India‟s GDP
increased from about 1.2 percent in 1998 to 9.5 percent in 2015. The service sector has recorded a growth
rate of about 138.5 percent in the last decade.

Financial services, insurance, real estate and business services are some of the leading services that have
been recording a robust growth in the past few years. The rapid growth of the service sector in India could
be attributed to the inflow of huge amount of FDI in this sector. India‟s share of service exports in the world
service exports has increased from 0.6 percent in 1990 to 3.3 percent in 2011.

8. Savings and Investment:

Savings and Investments are major driving forces of economic growth. The gross domestic savings in India
as a proportion of GDP has increased from 8.6 percent in 1950-51 to about 30 percent in 2012-13. The gross
capital formation has increased from 8.4 percent in 1950-51 to 34.70 in 2012-13. Capital accumulation is the
key to economic development. It helps in achieving rapid economic growth and has the ability to break the
vicious circle of poverty.

9. Science and Technology:

India is the third most preferred destination for technology investments. It is among the top most countries in
scientific research and space exploration. India is also making rapid progress in nuclear technology. ISRO
has made a record of launching 104 satellites in one go on a single rocket. India today has the third largest
scientific manpower after U.S.A and Russia.
The government has undertaken various measures such as setting up of new institutions for science
education and research, launching the technology and innovation policy in 2013, strengthening the
infrastructure for research and development in universities, and encouraging public- private partnership etc.
10. Foreign Trade:

On the eve of independence, India‟s primary exports were agricultural commodities and UK and US were its
major trading partners. India was largely dependent on other countries for various capital and consumer
goods. However, with the development of heavy industries during the five-year plans, India has been able to
reduce its dependence on other countries and was able to achieve self-reliance in a number of commodities.

With the liberalisation of trade, India now exports about 7500 commodities to about 190 countries and it
imports about 6000 commodities from about 140 countries. The exports of the country increased from Rs.
54.08 billion in 1977- 78 to Rs. 17,144.24 billion in 2015-16. And imports have increased from Rs. 60.20
billion in 1977-78 to Rs. 24, 859.27 billion in 2015-16.

LIMITATIONS OF ECONOMIC PLANNING IN INDIA

1. Slow Growth:
The planning process in India has been able to achieve considerable increase in the national income and per
capita income. Yet, the rate of increase has been slow as compared to developing countries like China,
which have been able to achieve more than 10 percent growth rate consistently. India was able to achieve a
growth rate of only about 4 to 5 percent during the pre-reform period. It was only during the post reform
period that is after 1991, that the country could experience a growth rate of over 7 percent.

2. Neglect of Agriculture:

The five year plans failed to pay attention to the agricultural sector except for the first five-year plan. As a
result, the agricultural growth rate declined from 3.62 percent in 1991-92 to 0.81 percent during 2009-10.
And the share of agriculture in GDP declined from about 50 percent during 1950-51 to about 16 percent of
the GDP in 2015.

3. Unemployment:

The plans have failed to address the problem of unemployment which is a cause of many social evils. The
unemployment rate has marginally reduced from 8.35 percent during 1972-73 to about 6.53 percent in 2009-
10. It was about 4.19 percent in 2013. The growth rate of employment has recorded a decline from 2.61
percent in 1972-73 to 1.50 percent during 2009-10. The employment in primary sector recorded a negative
growth rate of 0.13 percent in 2009-10.

4. Widespread Poverty:

Failure to address the problem of unemployment has resulted in widespread poverty in the country. The first
four plans failed to address the problem of poverty. It was only during the fifth five-year plan that measures
were taken to tackle poverty directly by introducing various poverty alleviation programmes. These
programmes, however, have achieved only limited success. The poverty rate in India declined from about
26.1 percent in 2000 to 21.9 percent in 2011.
5. Inflation:

Poverty is aggravated under the situation of inflation. The five-year plans have not been able to stabilise the
prices due to which there has been a steep rise in the general prices.
6. Rising Inequality:

With rapid economic growth, the country has been witnessing a rise in the level of inequality. It has been
estimated that the richest 1 percent own about 58 percent of the country‟s wealth. Poor performance of the
agricultural sector and lack of investments in rural infrastructure are cited as the primary reason for such
rising inequalities.

7. Political Instability:

Political instability and inefficient administration are the major hurdles in successful implementation of the
plans. Though the plans are formulated after complete analysis of the economic situation, most of the plans
fail to achieve the targets due to inefficient administration, corruption, vested interests and red tapism.

The achievements and failures of the economic planning in India, thus, reveal the underlying gaps in the
process of planning. It is an undeniable fact that the current level of growth and development that the
country has achieved could not have been possible without planning.

Yet, systematic and efficient implementation of the plans and strategic policies to tackle the problem of
unemployment and poverty could take the country to greater heights. It is strongly believed that the NITI
Aayog would address these gaps that existed in the planning process in India and would strive to build a
vibrant economy over the years.

CONCEPT AND MEANING OF POLITICAL ENVIRONMENT

Political Environment is the state, government and its institutions and legislations and the public and private
stakeholders who operate and interact with or influence the system. The political atmosphere should be good
and very stable for a firm to operate successfully. Political Environment forms the basis of business
environment in a country. If the policies of government are stable and better then businesses would get
impacted in a positive way and vice versa. Changes in government often results in changes in policy.
The following are the Political factors affecting business:

 Bureaucracy
 Corruption level
 Freedom of the press
 Tariffs
 Trade control
 Education Law
 Employment law
 Environmental Law
 Health and safety law
 Competition regulation
 Tax policy (tax rates and incentives)
 Government involvement in trade unions and agreements
  Import restrictions on quality and quantity of product
 Intellectual property law (Copyright, patents)
 Consumer protection and e-commerce
 Laws that regulate environment pollution

The Importance of Observing the Political Environment

1. Firms should track their political environment. Change in the political factors can affect
business strategy because of the following reasons:
2. The stability of a political system can affect the appeal of a particular local market.
3. Governments view business organizations as a critical vehicle for social reform.
4. Governments pass legislation, which impacts the relationship between the firm and its
customers, suppliers, and other companies.
5. The government is liable for protecting the public interest.
6. Government actions influence the economic environment.
7. Government is a major consumer of goods and services.