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7/31/2019 MBA_P_-IBE-UNIT-II

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UNIT-II

Theoretical Frame work andFunctioning of the Economy :Economic System, types Objectives of five yearPlanning LPG policy in

India


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Economic Environment of Business

Business is an economic activity, throughbusiness, trade, commerce and industry aneconomy 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 developmentof the economy, economic resources, the level of income, the distribution of income and assets,global economic linkages, economic policiesetc.,


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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 andtiny sectors to the economy, and their linkages,integration with the world economy etc.The structure of the economy of a nation isimportant to business because these factors

indicate the prospects for different types of business, certain factors which affect thebusiness etc.,


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Low Income Economies are economies with very lowlevel of per capita income. All economies with percapita GNI (Gross National Income new term forGNP) of $875 or less in 2005 are regarded as lowincome economies. There were 54 low incomeeconomies in 2005

Middle Income Economies are subdivided intolower middle income (those with per capita GNIbetween $875 and $3,465 in 2005) and upper middle

income ($3,466 -$10,725) economies. In 2005, therewere 98 middle income economies (39 upper and 59lower middle income)


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High Income Economies are countries withvery rich income per capita. Those with a percapita GNI of $10726 or above in 2005 fall inthe category of high income economies. In2005, there were 57 high income economies.There are mainly two categories of highincome economies namely, industrialeconomies and oil exporters.


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Economic Polices

There are several economic policies which canhave a very great impact on business.Important economic policies are:industrial policy,trade policy,foreign exchange policy,monetary policy,fiscal policyforeign investment and technology policy.

(For more details refer page 79-81)


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Economic Environment of Business and itsSignificance

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 andservices sectors

Investment policies


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Economic systems and business environment

The scope of private business depends, to alarge extent, on the economic system whichindeed is rooted in political philosophyThe economic systems are:

Free enterprise/market economies or capitalisteconomies

Mixed economies

Centrally planned economies (Communistcountries economies)


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Free enterprise/market economies orcapitalist economies the freedom of privateenterprise is the greatest in the marketeconomy, which is characterized by thefollowing assumptions:

- the factors of production (labour, land capital)are privately owned, and production occurs atthe initiative of the private enterprise


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Cont.. Free market economies - Income is received in monetary form by the

sale of services of the factors of productionand from the profits of the private enterprise.

- Members of the free market economy havefreedom of choice in so far as consumption,occupation, savings and investment are

concerned.


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Cont.. Free market economies

- The free market economy is not planned,controlled or regulated by the government. Thegovernment satisfies community or collective

wants, but does not compete with privatefirms; nor does it tell the people where towork/or what to produce.

Countries like the United States, Australia, Japan, Canada are regarded as market economies.


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Mixed Economic System India is following this economic system.

Under which both the public and private

sectors co-exist. The extent of stateparticipation varies widely between the mixedeconomies. However, in many mixedeconomies, the strategic and other nationallyvery important industries are fully owned ordominated by the state.


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The economic system, thus a very importantdeterminant of the scope of private business.The economic system and policy are, thereforea vary important external constraint onbusiness


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Economic Planning in India

In India, planning has come to have a very specific

meaning, one that is atterned largely on the Russianmodel.

It has meant a sequence of five-year plans, eachattempting to specify the allocation of investmentexpenditures and productive capacity to differentlines of activity, with great emphasis being placed onthe expansion of the so- called heavy or basic

industries.


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A Planning Commission in New Delhi is chargedwith drawing up the plans and supervising theirimplementation. There is some decentralization to theseparate states but the general idea is centralizedgovernmental control of the allocation of physical

resources. The kind of centralized economic planning India has

adopted can enable a strong authoritarian governmentto extract a high fraction of the aggregate output thepeople for governmental purposes


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The Economic Planning has been going on greatsince independence and this has played a major rolein 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 aboutthe food and the health and the home for the people.This all improved and has seen a new dimension allbecause of the Economic Development and Planningin India.


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Objectives of five year Planning

There are generally two sets of objectives forplanning, namely the short-term objectivesand the long-term objectives . While theshort-term objectives vary from plan to plan,depending on the immediate problems facedby the economy, the process of planning isinspired by certain long term objectives. In

case of our Five Year plans, the long-termobjectives are:


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Objectives of five year Planning

In case of our Five Year plans, the long-termobjectives are:

(i) A high rate of growth with a view toimprovement in standard of living.

(ii) Economic self-reliance;(iii) Social justice and(iv) Modernization of the economy

(v) Economic stability


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Brief description of Five year plans in IndiaFirst Five-year plan (1951-56) - The plan addressed,mainly, the agrarian sector, including investments indams and irrigation. The total planned budget of 206.8 billion.

Second Five year plan (1956-61) the plan focusedon industry, especially heavy industry. The totalamount allocated under the plan in India was Rs.4,800 crore.


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Third Five year plan (1961-66) The plan stressedon agriculture and improving production of wheat. Thetarget growth rate of GDP(gross domestic product)was5.6 percent. The achieved growth rate was 2.2 percent

Fourth Five year plan (1969-74) The plan focusedon nationalization of banks, green revolution and

advanced agricultural. Target Growth: 5.7% ActualGrowth: 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 productionand defence . Target Growth: 4.4% Actual Growth: 5.0


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Sixth Five year plan (1980-85) The plan alsomarked the beginning of economic liberalization. Toppriority was given on poverty alleviation. TargetGrowth: 5.2% Actual Growth: 5.4% .

Seventh Five year plan (1985-89) - stress onimproving the productivity level of industries by

upgrading of technology. The main objectives of the7th five year plans were to establish growth in areasof increasing economic productivity, production of food grains, and generating employment. TargetGrowth: 5.0% Actual Growth: 5.7%


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1989-91 was a period of economic instability in India and hence no five year plan was implemented. Between 1990 and 1992, there wereonly Annual Plans.

Eighth Five-Year Plan (1992 1997) Modernization of industries was a major highlight of the plan. Anaverage annual growth rate of 6.78% against the target5.6% was achieved.

Ninth Five-Year Plan (1997 2002) - the main aim of attaining objectives like speedy industrialization,human development, full-scale employment, poverty

reduction, and self-reliance on domestic resources.During the Ninth Plan period, the growth rate was 5.35per cent, a percentage point lower than the target GDPgrowth of 6.5 per cent.


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Tenth Five-Year Plan (2002 2007) -the plan spellout 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 extensiveand intensive cultivation.To expand the existing irrigation facilities and conservationof water resources.To improve the physical infrastructure like power androads.To develop information technology and biotchnology.


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Eleventh Five-Year Plan (2007 2012) The plan ismultifaceted sectoral development objectives. The major

objectives of the plan are: Accelerate GDP growth from 8% to 10% and then maintain at 10% inthe 12th Plan in order to double per capita income by 2016-17

Reduce dropout rates of children from elementary school from 52.2%in 2003-04 to 20% by 2011-12

Reduce malnutrition among children of age group 0-3 to half itspresent level

Ensure that at least 33 percent of the direct and indirect beneficiariesof 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


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LPG POLICY IN INDIAThe economy of India had undergone

significant policy shifts in the beginning of the1990s. This new model of economic reforms iscommonly known as the LPG orLiberalization, Privatization and Globalization

model. The primary objective of this modelwas to make the economy of the seventhlargest country in the world the fastestdeveloping economy in the globe withcapabilities that help it match up with thebiggest economies of the world.


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Liberalization

Liberalization refers to the slackening of government regulations. The economicliberalization in India denotes the continuingfinancial reforms which began since July 24,

1991.


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Privatization and Globalization

Privatization refers to the participation of

private entities in businesses and services andtransfer 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.

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