Saturday, October 06, 2012

Economic Environment

Economic Environment and Its Elements
Introduction: - Various environmental factors such as economic environment, socio-cultural environment, political, technological, demographic and international, affect the business and its working. Out of these factors economic environment is the most important factor.

Meaning of Economic Environment: - Those Economic factors which have their affect on the working of the business are 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 remain the same. It keeps on changing from time to time with the changes in an economy like change in Govt. policies, political situations.

Elements of Economic Environment: - It has mainly three main components:-
(a) Economic Conditions
(b) Economic System
(c)Economic Policies

(a) Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth.

(b) Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are:
(i) Licensing  policy
(ii) Fiscal policy
(iii) Monetary policy
(iv) Foreign Trade policy
(v) Price Policy
(vi) Technology Policy

Since the days of independence, India adopted licensing policy, which in effect made the government control the growth of independence in accordance with the national priorities. Till 1985, liberalization was never accepted as a part of growth strategy. But after 1985, the situation slowly changed that by 1991 India adopted a policy of liberalization.  Consequently, the business scope and prospects of the Indian business organization changed since 1991.

By fiscal policy we mean, the government's tax efforts, public expenditure and public borrowing. Through these the government can effectively encourage consumption, investment and savings habits and also restrict them.

Monetary policy refers to the set of policies determined and implemented by the central bank of a country to control the economic condition. The central bank of a country has the basic responsibility to maintain the price level and money supply in a country. This is possible only when the central bank has certain instruments. These instruments available with the central bank to control the money supply and price level are called monetary policy instruments. They are called Credit control policy.

The foreign trade policy determines the scope for trade between countries. It would directly affect the business prospects of the business organizations. A liberal policy would extend the scope for exports and imports, while a restrictive policy would narrow the scope. Similarly, if protectionism is favored, then the business organizations will have lesser market threats from multinational corporations.

This refers to the controls that government has on the price in a country. This is necessary, because, unless price is controlled, there is bound to be inflation and then economic instability. Further in Indian context, nearly 35% of the population is living below the poverty line. They do not have any permanent employment. Especially the rural poverty is very serious. To overcome this situation, the government resorts to price control policy.

One of the most important economic policies is the technology policy.  Improvement in technology is a condition for growth and survival in any organization.

The government keeps on changing these policies from time to time in view of the developments taking place in the economic scenario, political expediency and the changing requirement. Every business firm has to function strictly within the policy framework and respond to the changes therein.

(c) Economic System: The world economy is primarily governed by three types of economic systems, viz.
i)        Capitalism economy;
ii)       Socialist economy; and
iii)     Mixed economy.

Capitalism is an economic system based on the principle of free enterprise. Individual ownership of resources is an important feature.   With control and command over resources, individuals can conduct any type of business. The object in such a system is to maximize private gains. Any type of enterprise or production of any commodity or service is permitted, so long it is wanted by the society.   In such a system the market forces determine the resource allocation and price.

In a socialist country, government can adopt licensing system and other types of regulations to prevent the emergence of monopolist and exploitative tendencies. Maximization of Community welfare is the objective than profit maximization. The resources are owned by the State or state owned institutions. Government decides the type of productive efforts to be permitted.

In a mixed economy, one will find the existence of both the private and public sectors. In such a system, the government will undertake the responsibility to build and develop certain sector activities and leave the other activities for the private initiative.

Business Cycle

The business cycle is an alternate expansion and contraction in overall business activity, as evidenced by fluctuations in aggregate economic activity such as GNP, industrial production, employment and income.
According to J.M.Keynes “A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages, alternating with periods of bad trade characterized by fall in prices and high unemployment percentages.”
Phases of a Business Cycle: A business cycle will have 5 different phases or stages. They are
1)      Depression
2)      Recovery
3)      Prosperity or full employment
4)      Boom or overfull employment
5)      Recession

(1) Depression: During this period business activity in the country will be much below normal level. It is characterized by a short fall in production, mass unemployment, fall in prices, low wages, and contraction of credit, a high rate of business failures and an atmosphere of all round pessimism.

(2) Recovery: During this period business activity increases. The industrial production and volume of employment steadily increases. The prices and wages increases. The recovery may take place due to the following reasons:
•New government expenditure
•Exploitation of new sources of energy
•Investment in new areas
•Changes in the techniques of production

(3) Prosperity: This stage is characterized by high capital investment in basic industries, expansion of bank credit, high prices, high profits, high rate of formation of new business enterprises and the full employment.

(4) Boom: It is the stage of rapid expansion in business activity resulting in high stocks and commodity prices, high profits and over-full employment. A situation develops in which the no. of jobs exceeds the no. of workers in the market. Such a situation is known as over-full employment. Profits will further increase. This will lead to more investment and in turn further rise in price level and inflation.

(5) Recession: In this stage more business enterprises fail, prices collapse and confidence is shaken. Building construction slows down and unemployment increases. There is fall in income during recession.
Characteristics of Business Cycles:
i)        Business cycle is a wave like movement.
ii)       The cyclical fluctuations are recurrent in nature.
iii)     The upward or downward swing of the business cycle is self reinforcing.
iv)     Business cycle contains self generating forces.
v)      They are all pervasive in their effects.
vi)     The peak and the trough of business cycles are not symmetrical.
vii)   In cyclical fluctuations the prices and the production generally rise or fall together.
viii)  The cyclical upward and downward swings move parallel with production and monetary demand.
ix)     The cyclical fluctuations are felt more in capital goods industries than in consumer goods industries.
x)      They are not periodical in nature.
xi)     Prices of manufactured goods are comparatively rigid while that of agricultural goods are normally flexible.
xii)   The cyclical fluctuation tends to be not only national but also international in character.

Economic Growth

Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output.

As an area of study, economic growth is generally distinguished from development economics. The former is primarily the study of how countries can advance their economies. The latter is the study of the economic aspects of the development process in low-income countries. As economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure.

Following are the main factors affecting economic growth in  India
The Economy of India is the eleventh largest in the world by nominal GDP and the fourth major by purchasing power parity (PPP). In 2010 the country's per capita GDP (PPP) is $3,290 (IMF, 127th). Following strong economic reforms from the post-independence socialist economy, the country's economic growth progress at a quick pace, as free market principles were initiate in 1991 for international antagonism and foreign investment.

The value of any money in an economy is hard to bet, to be stable for a long stage of time as there are number of factor influence its approval and the depreciation. The currency value of an economy influences the growth rate of GDP in an economy. Several other factors that have a direct power on the over or the undervaluation of a currency are listed below:
Following are the main factors affecting economic growth India

1. Capital flows and the stock market of India:  This is important to note that in spite of suffering depression, an economy can grow if the capital inflow is constant or incessantly rising. In India even if the GDP rate is less, the currency can still get overvalued due to great capital inflows made by the FII’s in the Indian economy.

2. Global currency trends:  Like many other money Indian rupee have also tied its knot with some of the big economy of the world as well as the names of UK, US, Japan and Canada. The depreciation or approval in the currency any of these, especially in the US dollar, influences the valuation of the Indian currency in one way or the other.

3. RBI Intervention: The assessment of the Indian currency highly depends on RBI that manages the ‘balance of payments’, slight modification in which can define the over or the under assessment of the Indian currency.

4. Oil factors: India is a major importer of oil and the valuation of Indian money gets with no trouble exaggerated by the increase in the prices of the crude oil. It can further result in spreading inflation in an economy due to the over valuation of the Indian currency.

5. Political factors: Several other factors that influence the currency constancy are some political factors like change in the government set up, introduction of new export and import policies, tax rates and many more.

Decisively, there are many factors that arise from the economic arrangement of Indian economy and affect the valuation of the Indian currency that in turn affect the economic growth rate of the economy of a country.

Industrial Sickness

Industrial sickness is a universal phenomenon. It is a major problem of all industries in the world whether it is developed or developing countries. It is a serious matter of the countries.
Definition of a sick unit is given by Sick Industrial companies act, 1985. According to the act “ The sick industrial company is a company which has at the end of any financial year accumulated losses equal to or excluding its entire net worth and has also suffered cash losses in that financial year and in the financial year immediately preceding it.”              
According to state bank of India,” A sick unit is that unit which falls to generate internal surplus on a continuing basis and depends for its survival on subsequent infusion of external funds”.
Industrial sickness especially in small-scale Industry has been always a demerit for the Indian economy, because more and more industries like – cotton, Jute, Sugar, and Textile small steel and engineering industries are being affected by this sickness problem.

1) Internal Cause for sickness: Internal causes are those which are within the control of management.  This sickness arises due to internal disorder in the areas justified as following:
            a) Lack of Finance:  This including weak equity base, poor utilization of assets, inefficient working capital management, absence of costing & pricing, absence of planning and budgeting and inappropriate utilization or diversion of funds.

             b) Bad Production Policies :  The another very important reason for sickness is wrong selection of site which is related to production, inappropriate plant & machinery, bad maintenance of Plant & Machinery, lack of quality control, lack of standard research & development and so on.

             c) Marketing and Sickness: This is another part which always affects the health of any sector as well as SSI.  This including wrong demand forecasting, selection of inappropriate product mix, absence of product planning, wrong market research methods, and bad sales promotions. 

            d) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs is inappropriate personnel management policies which includes bad wages and salary administration, bad labour relations, lack of behavioural approach causes dissatisfaction among the employees and workers.

             e) Ineffective Corporate Management:  Another reason for the sickness of SSIs is ineffective or bad corporate management which includes improper corporate planning, lack of integrity in top management, lack of coordination and control etc.

2) External causes for sickness:
                a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non availability of skilled labour or manpower wages disparity in similar industry and general labour invested in the area.

                b) Marketing Constraints: The second cause for the sickness is related to marketing.  The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and market recession.

                c) Production Constraints:  This is another reason for the sickness which comes under external cause of sickness.  This arises due to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions.

                d)  Finance Constraints:  The external cause for the sickness of SSIs is lack of finance.  This arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable investments, fear of nationalization.

Effect of sickness 
                Industrial Sickness contributes to high cost economy. This in turn, will affect the competitiveness of the economy at home and abroad. Dead investment is a burden on both banks and budgets and ultimately consumers should pay the high cost. Money locked up in sick units gives no returns and effects the availability of resources to the other viable units 

Majority of sick units is retrievable in order to tackle the problem of sickness from the two angles the role of three agencies assumes significance: a) The government   b) Financial institutions and  c)the industry associations  

a) The Role of Government: If the number of units in the country has increased some 10 times since independence and if we have diversified industrial structure with wide spread entrepreneurship the credit for this largely belongs to government.      
Second area where the government can be helpful is Vis-à-vis industrial licensing. The very existence of licensing and monopoly regulation legislation implies that there is a stampede to “to get in” whenever licensing is liberalized for an industry or an economy as a whole  

b) The Role of Financial Institutions: The following are the ways by which sickness can be prevented by financial institutions :
1.       Continuous monitoring of unit
2.       Careful project appraisal
3.       Professional institutional response to unit’s problems
4.       Required systems at client units
5.       Incentives to units to remain healthy 

c) The Role Of Industry Associations : A good practical review by each industry association of installed and usable capacity in the industry , capacity utilization , growth trends , problems etc should be useful for the potential new entrants for deciding whether to enter the industry or not. The industry can have some sort of 1st aid cell this could consist of professionals who could go to the aid of a unit that is beginning to fall with the offer of managerial and technical help also. 


The economy of North- East India has got its definite identity due to its peculiar physical, economic and socio-cultural characteristics. This region consists of eight states viz., Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim. The NER of India covers an area of 2.62 lakh It accounts for 7.9% of total geographical area of the country. With a total population of 39 million (2001), it accounts for 3.8% of total population of India. 

There are differences among the eight States in the North Eastern region with respect to their resource endowments, level of industrialization as well as infrastructural facilities. The industrial sector has mainly grown around tea, petroleum (crude), natural gas etc. in Assam and mining, saw mills and steel fabrication units in other parts of the region. The full potential of the region is yet to be exploited and this has left the economy in a primarily agrarian state. 

Industrially, the NER continues to be the most backward region in the country, and the states in the region hardly have any industrial base, except perhaps Assam, because of its traditional tea, oil and wood based industries .To some extent Meghalaya has made some headway in setting up of small and medium industries. There are a number of factors contributing to the lack of industrial growth in the region, like
i)        Poor infrastructure
ii)       Inadequate electricity supply
iii)     Violence and extortion. 
iv)     Shyness of capital due to high cost of production
v)      Vulnerability of the region
vi)     Lack of entrepreneurial motivation on the part of the local people 
vii)   Low level of public sector investment, etc.

In recent years the “Look East Policy” of Government of India has made North East more important and strategic. The region has to gear up to take up more challenges and capitalize on the opportunities thrown open by the huge market in the South East Asian Countries.  The industries of this region can be broadly classified as under:

a)      Agro-based industries: It includes tea industry, sugar industry, grain mill products industry (rice, oil and flour mills), food processing industry and the textile industry.

b)      Mineral-based industries: Mineral-based industries of the north eastern region include railway workshops, engineering industry, and re-Rolling Mills, steelworks, motor-vehicle workshops, galvanised wire units, cycle factories, aluminium utensils industry, cycle spare parts, steel wire net, barbed wire, cement industry etc. Moreover, the non-metal based industries include petroleum oil industry and natural gas-based industry .

c)       Forest-based industries: It includes plywood industry, saw-mill industry, paper and paper pulp industry, match industry, letter industry, hard board industry etc.

d)      Other industries: It includes power generation industry, fertiliser industry, printing press, brick and tiles industry, Ice industry, chemical industry etc. The industries of the north eastern region can also be classified into (a) organised industries and (b) unorganized industries. 

The organised industries of the north eastern region include tea, petroleum, paper, cement, plywood, coal, jute, sugar, fertiliser etc. 


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