ECONOMIC ENVIRONMENT & STRUCTURAL CHANGES IN ECONOMY

Meaning of Economic Environment

Those Economic factors which have their affect on the working of a business is known as economic environment. It includes system, policies and nature of an economy, trade cycles, economic resources, level of income, distribution of income and wealth etc. Economic environment is very dynamic and complex in nature. It does not remains the same. It keeps on changing from time to time with the changes in an economy like changes in Govt. policies.

Elements of Economic Environment

It has mainly 5 components:1. Economic Conditions 2. Economic Systems 3. Economic Policies 4. International Economic Environment 5. Economic Legislations

1.Economic Conditions
Economic policies of a business unit are largely affected by the economic conditions of an economy. Any improvement in the economic conditions such as standard of living, purchasing power of public, demand and supply, distribution of income etc. largely affects the size of the market. Business cycle is another economic condition that is very important for a business unit. Business cycle has 5 different stages viz. (1) Prosperity, (2) Boom, (3) Decline, (4) Depression, (5) Recovery.

2.Economic Systems
An Economic System of a nation or a country may be defined as a framework of rules, goals and incentives that controls economic relations among people in a society. It also helps in providing framework for answering the basic economic questions. Different countries of a world have different economic systems and the prevailing economic systems in a country affect the business units to a large extent.

Economic conditions of a nation can be of any one of the following type:-

I.

Capitalism:- The economic systems in which business units or factors of production are privately owned and governed is called Capitalism. The profit earning is the sole aim of the business units. Government of that country does not interfere in the economic activities of the country. It is also known as free market economy. All the decisions relating to the economic activities are privately taken. Eg of capitalistic economy like England, Japan, America etc. II. Socialism:- Under socialism economic system, all the economic activities of the country are controlled and regulated by the Government in the interest of the public. The first country to adopt this concept was Soviet Russia.

lll. Mixed Economy :- The economic system in which both public and private sector co-exist is known as Mixed Economy. Both private and public sectors play key role in the development of the country

3.Economic Policies
Government frames economic policies. Economic Policies affects the different business units in different ways. It may or may not be favorable effect on a business unit. The government may grant subsidies to one business or decrease the rates of excise or custom duty or the government may increase the rates of custom duty or the government may increase the rate of custom duty and excise duty, tax rates for another business. All the business enterprises frame their policies keeping in view the prevailing economic policies. Important economic policies of a country are as follows:-

i.

Monetary Policies:-The policy formulated by the central bank of a country to control the supply and the cost of money in order to attain some specified objectives is known as Monetary policy. ii. Fiscal Policy:-It may be termed as budgetary policy. It is related with the income and expenditure of a country. Fiscal Policy works as an instrument in economic and social growth of a country. It deals with taxation, government expenditure, borrowings, deficit financing and management of public debts in an economy. iii. Foreign Investment policy:-The policy related to the investment by the foreigners in a country is known as Foreign Investment Policy. If the government has adopted liberal investment policy then it will lead to more inflow of foreign capital in the country which ultimately results in more industrialization and growth in the country.

4.International Economic Environment

The role of international economic environment is increasing day by day. If any business enterprise is involved in foreign trade, then it is influenced by not only its own country economic environment but also the economic environment of the country from/to which it is importing or exporting goods. There are various rules and guidelines for these trades which are issued by many organizations like World Bank, WTO, UN etc.

5.Economic Legislations
Besides the above policies, Governments of different countries frame various legislations which regulates and control the business.

STRUCTURAL CHANGES IN THE ECONOMY

1.Changing Sectoral Distribution of Domestic Product

Change in composition of domestic product or change in national income by industry of origin refers to changes in relative significance of different sectors of the economy. Generally an economy is divided into 3 sectors viz. primary, secondary and tertiary sectors. Primary sectors includes agriculture and allied activities, secondary sector includes manufacturing industries and tertiary sector includes services.

2.Growth of Basic Capital Goods Industries

When country attained independence, the share of basic and capital goods industries in the total industrial production was roughly one-fourth. Under the second plan, a high priority was accorded to capital goods industries, as their development was considered a pre- requisite to the overall growth of the economy. Consequently, a large number of basic industries which produce capital equipment and useful raw materials have been set up making the countrys industrial structure pretty strong.

3.Expansion in Social Overhead Capital

Social overhead capital broadly includes transport facilities, irrigation systems, energy production, educational system and organization and health facilities. Their development creates favorable conditions for growth and also for better human living. The transport system in India has grown both in terms of capacity and modernization. The railways route length increased by more than 9000 km & the operation fleet practically doubled. The Indian road network is now one of the largest in the world as a result of development. India has also seen growth in Literacy Rate and Education.

4.Progress in the Banking and Financial Sector

Since independence, significant progressive changes have taken place in the banking and financial sector of India. The growth of commercial banks and cooperative credit societies has been really spectacular and as a result of it the importance of indigenous bankers and money-lenders has declined. Since nationalization, these banks have radically changed their credit policy. Now more funds are made available to priority sectors such as agriculture, small-scale industries, transportation, etc.

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