Political Environment

and
Economic Systems
 4 dimensions of political environ

1. Political System & Ideology of the host

country

2. Role of government in the economy

3. Political Instability

4. Country’s International Political Relationships

 ECONOMIC SYSTEMS

Capitalism: Adam Smith & The

Wealth of Nations (1776)

Communism: Karl Marx & Das

Kapital (1886)

Mixed Economy
 The Free Market of Adam Smith
“The uniform, constant and uninterrupted
effort of every man, to better his own
condition, the principle from which national
and public as well as private opulence is
originally derived, is frequently powerful
enough to maintain the natural progress of
things toward improvement, in spite both of
the extravagance of government, and of the
greatest errors of administration.”
 How Does This Happen?

Buyers and sellers negotiate prices

in a free market and carry out

transactions of buying and selling

that leave all parties mutually

better off.
 Capitalism
System based on Free market
•

Capital: owned by a minority of individuals

•

Private Property rights: legal right to use

•

this capital for private gain

Market system (Supply & Demand factors)
•

• To determine distribution of goods &

services
• To allocate resources
• To establish income levels, wages, rents &
profits
• Govt. Role is limited
 A Startling Idea

Economic order can emerge as the

unintended consequence of the actions
of many people, each seeking his own
interest.

-Milton Friedman
 Communism - According to Marx

The natural evolution of communism

•

after capitalism

State owns all factors of production

•

and distribution. Ex: Cuba

The workers reap the profits from

•

their labor rather than subsistence

wages
ECONOMIC ENVIRONMENT
•
Structure & Nature of Economy
•
Stage of development of Economy
•
Economic Resources
•
Level of Income
•
Distribution of Income & Assets
•
Global Economic Linkages
•
Economic Policies
 Nature of the Economy

The general level of

development of the Economy
has bearing on:
•Nature & size of Demand

•Government policies affecting

business
 Structure of the Economy

Alternative Sectoral Classifications

 Structure of the Economy

Household Sector: Individuals or Groups

providing services to Business sector against
incomes;
Business Sector: Public & Private sectors
producing Goods & Services
Government Sector: produces range of
administrative, protective, supportive &
regulatory services
 Structure of the Economy

Primary sector - Agriculture

Secondary sector- Industry

Tertiary sector - Services

Sectoral Shares
 GDP (2007 estimates)

Agriculture 17.8%

Industry 29.4%

Services 52.8%

Total $ 2966 billion

 Labour Force (2003 estimates)

Agriculture 60%

Industry 12%

Services 28%

Total 516 million (2007)

 National Income – 4 versions

1. Gross Domestic Product (GDP)

1. Gross National Product (GNP)

1. Net Domestic Product (NDP)

1. Net National Product (NNP)

 GDP

Basic measure of national output &

economic growth
= value of all final goods and services
produced within country-
irrespective of ownership
Normally measured on annual basis
 GNP

Income produced through country’s own

resources, irrespective of place of
production;
i.e. – includes factor payments from abroad
GNP–GDP=Net Factor Income from abroad
 NDP & NNP

As Capital is used to get Output, it

depreciates;
The ‘net’ figures of Domestic & National
products refer to the netting off of
‘depreciation’ from the gross figures
NDP = GDP - Depreciation
 Structure of the Economy

Domestic Sector

External Sector
 Structure of the Economy

Real Sector

Monetary Sector
 Structure of the Economy

Public Sector

Private Sector

Joint Sector

Cooperative Sector
Classification of Economies
…on basis of ‘per-capita income’:

Low-income Economies

High-income Economies

Middle-income Economies
…on basis of level of development:

Developing Economies

Developed Economies
Characteristics of ‘development’

Distribution of income
Standard of living
Composition of output
Character of working conditions
Overall improvement in economic
welfare
 ess developed countries/economies
More developed countries
east developed countries/economies
ewly industrializing economies
ransition economies
Electricity Generation
Inflation
Money Supply
Foreign Trade
Foreign Exchange Reserves
Exchange Rate
Electricity Generation
 Electric Power
Driver of modern technology
A major component of country’s
infrastructure
Needs a nationwide network, and
massive investments in Generation &
Distribution
Hence, either Government companies
or big private companies run
electricity companies
 Electricity
Important resource for a firm
Important component of cost for a firm
Hence, Pricing is a sensitive factor
Availability of sufficient and quality electric
power determines feasibility of development of
power-based firms
Large no. of firms put up back-up generating
sets to ensure sufficient power availability
 Electricity
Inadequacy discourages both domestic and
foreign investment in industries
Shortages adversely affect agricultural sector
Should not only be adequate at any given point
of time, but also should adjust to demand due
to industrial growth
GOI has initiated a number of power sector
‘reforms’ (corporatization of electricity boards,
energy audit at all levels, commercialization of
distribution & transmission, etc.)
INFLATION
A process in which the
general price index records a
sustained and appreciable
increase over a period of time
 In India…..
Annual Inflation Rate (%) is based
on Wholesale Price Index using
1993 – 94 as base year
Product groups are suitable weights
depending on share in total output
Annual inflation data also prepared
in major commodity groups –
primary product group,
manufactured product group and
fuel power, light & lubricant group
 In India…..

In addition,
Consumer Price Index are also
constructed for different socio-
economic groups:
1. Urban non-manual employees
2. Agricultural labourers
3. Industrial workers
MONEY SUPPLY
Money Supply in an economy
determines Liquidity conditions in
the market, Interest Rate structure
and hence the Cost of Capital to
the firms, and, the Rate of Inflation
FOREIGN TRADE
Foreign Trade =
Exports + Imports
Not only affects National Income but also
indicates ‘openness’ and ‘competitiveness’
Foreign Trade, as a % of National Income, is
called ‘foreign trade Orientation’
A high level indicates competitive conditions,
economic liberalization and positive attitude of
government towards globalization, and is viewed
favorably by export firms and MNCs
A low level of exports & imports indicates
‘inward Orientation’ and poor international
relations
The commodity composition of
•

foreign trade indicates the nature of

the economy
Foreign Trade Balance =
•

Exports – Imports
A key indicator of contribution of
•

foreign trade to national income &

‘foreign exchange Reserves’
If negative, is called “Trade Deficit”
•
FOREIGN EXCHANGE
RESERVES
 Foreign Exchange Reserves

Consist of
Foreign Currency Assets
Gold holdings of the Central
Bank
Special Drawing Rights (SDRs)
 Foreign Exchange Reserves

Indicate a country’s ability to:

Pay for Imports
Discharge its external debt liabilities
Raise fresh borrowings in international
markets
Intervene in foreign exchange market
to stabilize its rate of exchange
EXCHANGE RATE
“Price of one unit of a currency in terms of units of
another currency”
Determined in the ‘foreign exchange Market’
Depends on ‘demand’ & ‘supply’ of foreign currency
under competitive conditions
Major participants in FE market: Exporters/
Importers, Commercial Banks, FE
ECONOMIC INFRASTRUCTURE

Foundation for all economic activities

Power, Communication, Transport, Roads
Calls for high investments, long gestation
periods, wide maintenance network
Poor infrastructure leads to high operational
costs
 SOCIAL INDICATORS

Economic growth without human

development is of very little use
Social development includes Education,
Training, Health care, Sanitation, Family
welfare, Water supply, social security, etc.
UN brings out HDI for various countries
Anatomy
of the
Indian
Economy
 MIXED ECONOMY

India’s experience since the First Five

Year Plan:
Equal importance to private and public
sector. However, major factors of
production and distribution are owned
and managed by the state.
Success or Failure?…Debatable issue
 OVERVIEW
=
India was among the few poorest countries in the
50s;
Govt. employed technique of `democratic planning’ to
achieve economic development;
5-year plans were launched in 1951. Planning
Commission set up in 1950 with 8 members;
National Development Council formed in 1952 with
members of Planning Commission and all state chief
ministers;
 Profile of Indian Economy

Low per capita income US$ 1000 [2600 $ (PPP)

(Approx.)] in 2007;

Inequitable distribution of income, and poverty

Predominance of agriculture, traditionally;

 INDIAN SCENARIO
Impact of planning strategy of last 2 decades
•

on social sector indicate improvements;

•
yet, there is need to improve the quality of
life.
Govt expenditure for social services has
•

grown from Rs.11,631 crore in 95-96 to

Rs.35,478 crore in 03-04.
As per estimates, there was significant
•

decline in proportion of people living b.p.l ,

from 51.3% (77-78) to 25.0% (06-07).
Profile (contd.)…

Rapid population growth

361 million - 1951

955 million - 1997

1016 million - 2000

1148 million (estimate) - 2008

Unemployment - 7.2%

Technological Backwardness
 ANALYSIS OF SECTORS

1. External Sector

2. Industrial Sector

3. Agricultural Sector

4. Service Sector

5. Social Sector and Poverty Alleviation

 External Sector
Key role in external liberalization
Strong & driving macro-economic strength
B.O.P resilient despite heavy imports
Image: from ‘ land of farmers’ to ‘technology
hub’
Export of ‘services’ has helped
Trade is important for any economy
Need for focus on ‘service’ exports as India has
potential to be a major player
 Industrial Sector
Only 27% since India is strong in ‘Services’
IIP has been rising since 2003
Automobile industry growing at 15-20%
Indian jewelery industry grew by 15-22%
Textile industry- a major forex earner
Steel industry has seen upward curve due to high
global demand+ very high demand from China
Steel industry has modernized – both machinery
and automation
 Agricultural Sector
>65% of population produces 23% of GDP
Rice, Wheat, Pulses, Oilseeds, corn, etc
Rice & Wheat – 42% & 35% of food grain
Milk production highest in the world
Plantation crops: Coffee, Tea, Rubber
Livestock sector – 6.5% of GDP
Agricultural credit has increased
Tops in irrigated land area – through improved
irrigation
 Infrastructure Sector
Transportation, Electricity, Communication, Water
Supply, Sanitation
Policies being modified to encourage Private investment
Power generation increased 7-8% per year
Railways – second largest network in world
Self-sufficient in meeting demand for locos, coaches,
etc.
Privatizing maintenance of railway stations, catering,
drinking water, cleaning
Infrastructure Sector (contd)

Roadways – Grand quadrilateral

India manufactures most of vehicles
Aviation caters to every aspect
HAL – major aerospace orgn & complex
Aviation policy being liberalized fast
Telecom: digital technology, network expansion,
manufacturing technology
Telecom growth has engendered several other
sectors
 Infrastructure Sector – challenges ahead
Power: development of national grid
reduce transmission losses
Railways: outdated infrastructure
Roadways: more national highways
Linking to remotest villages
Aviation: modernization of airports
Telecom: lowest telephone penetration
New technologies
 Social Sector
UNDP: ”India has consistently improved its
position on human development
Rank in ‘gender development’ low
High regional disparity
Social sector programs come under state
governments
Central government assists with funds
Large scale poverty – still, the face of India
SWOT of Indian Economy
 STRENGTHS
Huge pool of labour force
High % of cultivable land
Diversified nature of the economy
Huge English speaking population;
Availability of skilled manpower
Third largest reservoir of engineers
Extensive higher education system
High growth rate of economy
Abundance of natural resources
 WEAKNESS
High % of agricultural work force
Quarter of population below poverty line
High unemployment rate
Inequality in socio-economic conditions
Poor infrastructural facilities
Low productivity
Huge population pressure on resources
Bureaucracy, Red Tapism
Low literacy rate
Unequal distribution of wealth
Rural-urban divide – inequality in living standards
 OPPORTUNITIES
Large scope for entry of private firms
Larger inflow of FDI in many sectors
Investment in R&D, engineering design
Area of Bio-technology
Huge NRI population in many countries
Infrastructure development
Huge domestic market
Natural Gas as fuel (huge deposits)
Huge forest area, diverse wildlife
 THREATS

High fiscal deficit

Government intervention in some states
Volatility in crude prices
Growing import bill
Population explosion
Agriculture still excessively dependent on
monsoon
 ASSIGNMENT

Write a note on Corporate Governance and

Code of Conduct in India
Recommendations of NRN’s committee on
above
Companies Act amendments re above
Birla committee’s recommendations
SEBI’s revised ‘code of conduct’
Instructions to cos while following CG