Economic Environment

There are three types of economic systems :-

Capitalism

Socialism

Mixed economy

Capitalism :-
It is that profit-oriented system where the factors of production are privately owned.


USA, Spain, England, Sweden, South Korea all have capitalist economy.

It is characterized by: :-

Private ownership of means of production

Production for the market

Price mechanism

Labour power as a commodity

Exploitation of labour

Growing wealth of capitalists

Emergence of the working class

Class contradiction

Socialism :-

Here there is social ownership of factors of production and objective of economy is to maximize social benefit rather than private benefit.

It was 1st established in Russia. Gradually countries of Europe, China adopted the socialist system.

It is characterized by :-

Social ownership of means of production

Predominance of public sector

Decisive role of planning

Production guided by social benefit

Abolition of exploitation of labour

Mixed economy :-

It is an economic system where elements of both capitalism as well as socialism are found. It is characterized by:-

Private and state ownership of means of production.

Decisive role of market mechanism and supportive role of planning.

Intervention role of the state.

Public sector activities guided by social benefit.

Supportive role of economic planning.

Economic factors

Nature of economic environment:-

Business is dependent on economic environment for inputs.

Business is dependent on economic environment for selling its finished goods.

Economists are supplying macro economic forecasts to various industrial establishments.

Factors affecting business:-

Growth strategy
Economic systems
Economic planning
Industry
Agriculture
Infrastructure
Removal of regional imbalances
Price and distribution controls
Human resources
Per capita and national income

Growth strategy:-

Growth strategy of India was based on Soviet model.

State owned and invested capital and mobilized savings.

Private sector activities had to be strictly regulated and controlled.

Foreign trade had a relatively smaller role.

It was thought that labour force in developing countries could only be absorbed in industry and hence agriculture was neglected.


Economic systems:-

The concept of welfare state has become popular which is a modification of capitalism that provides for state intervention when certain deficiencies occur.

India’s economic philosophy:-

Mixed economy has been chosen under which we have three parts:
Sectors in which

1. Both production and distribution are managed and controlled by the State
2. State and private enterprise jointly participate in production and distribution
3. Private enterprise has complete access subject to general state regulation

Economic planning:-

The public sector will have to operate according to certain priorities to realize.

specific social and economic goals.

Close watch is kept on private sectors’ operations.

Objectives of 5-year plans:
Increase production to have greater NI.
Achieve full employment.

Industry:-

During 1960s, India was ahead of South Korea, Malaysia, Taiwan, Thailand and Indonesia etc.


But administrative controls like product reservation for public sector and small scale industries, tariffs and quotas, labour market rigidities held the country behind.


Although services sector is India’s strength it has not grown in double digits in last 9 years

Industrial sector should overtake services sector, if India were to attain 8% growth in GDP.

To improve industrial performance:-

1.Indian firms must come out of the local- market enough mindset and think in global terms.
2.SEZs should be encouraged.

Indian labour laws need to be reformed and made flexible and industry friendly


Skill development of workers should be given additional attention

National income and Per Capita Income:-

Aggregate flow of goods and services during a time period by the factors of production is known as national income or national product.
A high growth rate indicates that the economy is a developed one.
Primary reason for low growth in NI is:-
1.Deficiency in investment
2.High capital-output ratio

Low agricultural growth

Low industrial growth

Population explosion

Human resource :-

People provide market for goods produced and services rendered.

People together constitute one of the factors of production.

Degree of economic prosperity depends on the quality of its people.

Agriculture:-

Contribution of agriculture to GDP has come down from 57% in 1950 to 18% in 2006-07.

Major source of livelihood-more than 70% of working population engaged in agriculture.

Agricultural exports mainly are tea, coffee, oil, fruits, vegetables, spices, tobacco, cotton, cocoa, sugar etc.

Industrial production precedes economic growth and agriculture precedes industrial growth through
Product contribution

Market contribution

Factor contribution

Foreign exchange contribution

Infrastructure:-

Distinguishing features
Public Goods
Externalities
Monopolies
Public sector

It includes energy, transport and communication.

Growth of Infrastructure:-

Power generation in 2003-04 stood at 5,32,430 mn units from 3,80,084 mn units during 1995-96.

Indian Railways runs about 14,000 trains everyday to transport 13 mn passengers and 1.3 mn tones of freight.

IR contributes 1% to the GDP and employs 1.6 mn people.

India has one of the largest road networks in the world 3.3 mn km.

The subscriber base in telecommunications segment grew from 41.48 mn in 2003 to 42.84 mn in 2004.

Internet subscriber base has increased from 3.32 mn in 2003 to 4.92 mn in 2004.


There are about 189 Internet service providers operating across India.

Balanced Regional Development:-

It means the fullest development of the potentialities of an area according to its capacity so that the benefits of overall economic growth are shared by the inhabitants of all the regions.


It means widespread diffusion of industries to backward areas so far as it is economically feasible

Causes for backwardness and regional imbalances:-

British developed some regions at the cost of others.
Richness of factor endowments of a region is also a cause for regional imbalances.
Political factors also contribute to regional imbalances.
Financial institutions prefer borrowers from developed regions.

Disparity among different states in the provision of educational and training facilities, particularly technical education.

Fiscal policy by favoring high income areas for public investment and spending

Measures to remove regional imbalances:-

Financial support to backward regions

Special are development programmes

Dispersal of industries

Growth centers

Banking policy

Increasing Government expenditure

Price and distribution controls:-

Objectives:-
Supply of essential commodities at reasonable prices.
Prevention of hoarding and black-marketing.
Maintain quality of goods and services.
Prevent monopoly and unfair trade practices.
Ensure supply of inputs to priority sectors.
Ensure price stability.
Ensure minimum returns to producers.