ECONOMIC ENVIRONMENT IN INDIA

 ECONOMIC ENVIRONMENT IN INDIA 

The economic environment in India consists of various macro level factors related to the means of production and distribution of wealth which have an impact on business and industry. These include: 

(a) Stage of economic development of the country. 

(b) The economic structure in the form of mixed economy which recognises the role of both public and private sectors. 

(c) Economic policies of the Government, including industrial, monetary and fiscal policies. 

(d) Economic planning, including five year plans, annual budgets, and so on. 

(e) Economic indices, like national income, distribution of income, rate and growth of GNP, per capita income, disposal personal income, rate of savings and investments, value of exports and imports, balance of payments, and so on. 

(f) Infrastructural factors, such as, financial institutions, banks, modes of transportation communication facilities, and so on. 

Business enterprises in India do realise the importance and impact of the economic environment on their working. Almost all annual company reports presented by their chairpersons devote considerable attention to the general economic environment prevailing in the country and an assessment of its impact on their companies. 

The economic environment of business in India has been steadily changing mainly due to the government policies. At the time of Independence: 

(a) The Indian economy was mainly agricultural and rural in character; 

(b) About 70% of the working population was employed in agriculture; 

(c) About 85% of the population was living in the villages; 

(d) Production was carried out using irrational, low productivity technology; 

(e) Communicable diseases were widespread, mortality rates were high. These was no good public health system. 

In order to solve economic problems of our country, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. 

The main objectives of India’s development plans were: 

(a) Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty; 

(b) Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries; 

(c) Reduce inequalities of income and wealth;

(d) Adopt a socialist pattern of development — based on equality and prevent exploitation of man by man. 

In accordance with the economic planning, the government gave a lead role to the public sector for infrastructure industries whereas the private sector was broadly given the responsibility of developing consumer goods industry. At the same time, the government imposed several restrictions, regulations and controls on the working of private sector enterprises. India’s experience with economic planning has delivered mixed results. In 1991 the economy faced a serious foreign exchange crisis, high government deficit and a rising trend of prices despite bumper crops. 

As a part of economic reforms, the Government of India announced a new industrial policy in July 1991. 

The broad features of this policy were as follows: 

1. The Government reduced the number of industries under compulsory licensing to six. 

(b) Many of the industries reserved for the public sector under the earlier policy, were reserved. The role of the public sector was limited only to four industries of strategic importance. 

(c) Disinvestment was carried out in case of many public sector industrial enterprises. 

(d) Policy towards foreign capital was liberalised. The share of foreign equity participation was increased and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted. 

(e) Automatic permission was now granted for technology agreements with foreign companies. 

(f) Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign investment in India. 

Appropriate measures were taken to remove obstacles in the way of growth and expansion of industrial units of large industrial houses. Small-scale sector was assured all help and accorded due recognition. 

In essence, this policy has sought to liberate industry from the shackles of the licensing system (liberalisation), drastically reduce the role of the public sector (privatisation) and encourage foreign private participation in India’s industrial development (globalisation). 

Liberalisation: 

The economic reforms that were introduced were aimed at liberalising the Indian business and industry from all unnecessary controls and restrictions. They signalled the end of the licence-pemit-quota raj. Liberalisation of the Indian industry has taken place with respect to: 

1. abolishing licensing requirement in most of the industries except a short list, 
2. freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities, 
3. removal of restrictions on the movement of goods and services, 
4. freedom in fixing the prices of goods services,
5. reduction in tax rates and lifting of unnecessary controls over the economy, 
6. simplifying procedures for imports and experts, and 
7. making it easier to attract foreign capital and technology to India. 

Privatisation: 

The new set of economic reforms aimed at giving greater role to the private sector in the nation building process and a reduced role to the public sector. This was a reversal of the development strategy pursued so far by Indian planners. To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991, adopted the policy of planned disinvestments of the public sector and decided to refer the loss making and sick enterprises to the Board of Industrial and Financial Reconstruction. The term disinvestments used here means transfer in the public sector enterprises to the private sector. It results in dilution of stake of the Government in the public enterprise. If there is dilution of Government ownership beyond 51 percent, it would result in transfer of ownership and management of the enterprise to the private sector. 

Globalisation: 

Globalisation means the integration of the various economies of the world leading towards the emergence of a cohesive global economy. Till 1991, the Government of India had followed a policy of strictly regulating imports in value and volume terms. These regulations were with respect to (a) licensing of imports, (b) tariff restrictions and (c) quantitative restrictions. The new economic reforms aimed at trade liberalisation were directed towards import liberalisation, export promotion through rationalisation of the tariff structure and reforms with respect to foreign exchange so that the country does not remain isolated from the rest of the world. Globalisation involves an increased level of interaction and interdependence among the various nations of the global economy. Physical geographical gap or political boundaries no longer remain barriers for a business enterprise to serve a customer in a distant geographical market. This has been made possible by the rapid advancement in technology and liberal trade policies by Governments. Through the policy of 1991, the government of India moved the country to this globalisation pattern. 

Demonetisation: 

The Government of India, made an announcement on November 8, 2016 with profound implications for the Indian economy. The two largest denomination notes, `500 `1,000, were ‘demonetised’ with immediate effect, ceasing to be legal tender except for a few specified purposes such as paying utility bills. This led to eighty six per cent of the money in circulation invalid. The people of India had to deposit the invalid currency in the banks which came along with the restrictions placed on cash withdrawals. In other words, restrictions were placed on the convertibility of domestic money and bank deposits. 

The aim of demonetisation was to curb corruption, counterfeiting the use of high denomination notes for illegal activities; and especially the accumulation of ‘black money’ generated by income that has not been declared to the tax authorities. 

Features 

1. Demonetisation is viewed as a tax administration measure. Cash holdings arising from declared income was readily deposited in banks and exchanged for new notes. But those with black money had to declare their unaccounted wealth and pay taxes at a penalty rate. 

2. Demonetisation is also interpreted as a shift on the part of the government indicating that tax evasion will no longer be tolerated or accepted. 

3. Demonetisation also led to tax administration channelizing savings into the formal financial system. Though, much of the cash that has been deposited in the banking system is bound to be withdrawn but some of the new deposits schemes offered by the banks will continue to provide a base loans, at lower interest rates. 

4. Another feature of demonetisation is to create a less-cash or cash-lite economy, i.e., channeling more savings through the formal financial system and improving tax compliance. Though there are arguments against this as digital transactions require use of cell phones for customers and Point-of-Sale (PoS) machines for merchants, which will only work if there is internet connectivity. On the contrary, these disadvantages are counterbalanced by an understanding that it helps people into the formal economy, thereby increasing financial saving and reducing tax evasion. 

IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY 

The policy of liberalisation, privatisation and globalisation of the Government has made a significant impact on the working of enterprises in business and industry. The Indian corporate sector has come face-to-face with several challenges due to government policy changes. These challenges can be explained as follows: 

1. Increasing competition: 

As a result of changes in the rules of industrial licensing and entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector. 

1. More demanding customers: 

Customers today have become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services. 

1. Rapidly changing technological environment: 

Increased competition forces the firms to develop new ways to survive and grow in the market. New technologies make it possible to improve machines, process, products and services. The rapidly changing technological environment creates tough challenges before smaller firms. 

1. Necessity for change: 

In a regulated environment of pre1991 era, the firms could have relatively stable policies and practices. After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.

1. Need for developing human resource: 

Indian enterprises have suffered for long with inadequately trained personnel. The new market conditions require people with higher competence and greater commitment. Hence the need for developing human resources. 

1. Market orientation: 

Earlier firms used to produce first and go to the market for sale later. In other words, they had production oriented marketing operations. In a fast changing world, there is a shift to market orientation in as much as the firms have to study and analyse the market first and produce goods accordingly. 

1. Loss of budgetary support to the public sector: 

The central government’s budgetary support for financing the public sector outlays has declined over the years. The public sector undertakings have realised that, in order to survive and grow, they will have to be more efficient and generate their own resources for the purpose. 

On the whole, the impact of Government policy changes particularly in respect of liberalisation, privatisation and globalisation has been positive as the Indian business and industry has shown great resilience in dealing with the new economic order. Indian enterprises have developed strategies and adopted business processes and procedures to meet the challenge of competition. They have become more customer-focused and adopted measures to improve customer relationship and satisfaction.