Saturday, October 06, 2012

Economic Environment of Business

Unit – 2: Economic Environment of India
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 – Meaning, Phases and characteristics
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 Business 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, and 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
•Innovations
•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 Cycle
A business cycle must possess the following characteristics:
1. Fluctuation of Aggregate Economic Activity: Business cycles refer to the fluctuations in aggregate economic activity rather than as fluctuations in a single specific economic variable such as GDP.
2. Alteration of expansion and contraction in economic activity: A trade cycle is characterized by alteration of expansion (Prosperity) and contraction (Depression) in economic activity. They are repetitive and rhythmic. The period of prosperity is followed by depression and which again is followed by a period of prosperity. This indicates that the movement is wave like in character, it is not an erratic fluctuation.
3. Co-movement: Business cycles do not take place in just a few sectors or in just a few economic variables. Instead, expansions or contractions take place at the same time in a number of economic activities. Thus, although some industries are more sensitive to the business cycle than the rest, the level of output and employment in most industries tends to fall in recessions and rise in expansions. Many other economic variables like prices, productivity, investment and government purchases also have regular and predictable patterns of behaviors over the course of the business cycle. The tendency of many economic variables to move together in a predictable way over the business cycle is called co-movement.
4. Self- Reinforcing: A trade cycle is a self- reinforcing in nature. It means that the process of expansion and contraction is a cumulative self- reinforcing nature. Each upswing or downswing feeds on itself and generates further movement (change) in the same direction until its direction is reversed by external forces.
5. The degree of regularity: A trade cycle has a degree of regularity. It is possible that the upswing of a trade cycle is longer than the downswing or vice versa, but it maintains regularity.
6. The presence of crisis: A trade cycle is characterized by the presence of a crisis, i.e. peak and the trough are not symmetrical. In the words, the change from upward to downward may be more sudden and violent than is the change from downward to upward movement. Consequently, the peak of the trade cycle is pointed with steep bends on either side whereas trough has a gently sloping swing of 16 – 22 years’ duration.
7. International in character: When business fluctuations occur in a country, it will be spread all over the countries.
Economic Growth and Factors affecting it
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.
Factors affecting economic growth in  India
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. Natural resources: The principal factor affecting the development of an economy is the natural resources. For economic growth, the existence of natural resources in abundance is essential. A country deficient in natural resources may not be in position to develop rapidly.
3. Population growth: Labour supply comes from population growth. But the population growth should be normal. A galloping rise in population retards economic progress. Population growth is desirable only in an under-developed country. It is, however, unwarranted in an overpopulated country like India.
4. 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.
5. Technological Factors: The technological changes are most essential in the process of economic growth. Adam smith, the father of political economy, pointed out the great importance of technological progress in economic development. Ricardo visualized the development of capitalist economies as a race between technological progress and growth of population.
6. Social and psychological factors: Modern economic growth process has been largely influenced by social and psychological factors. Social factors include social attitudes, social values and social institutions which change with expansion of education and transformation of culture from one society to the other.
7. Education: It is now fairly recognised that education is the main vehicle of development. Greater progress has been achieved in those countries, where education is wide spread.
8. Urbanisation: Another noneconomic factors promoting development in the process of urbanisation. In poor agrarian economies, the structural change must begin with the change in the size of population in rural and urban sectors.
9. Religious factors: Religious plays a great role in economic growth. It may give rise to a peculiar sense of self-satisfaction. 
10. Global factors:
a) 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.
b) 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.
In short economic growth is the result of concerted efforts of both economic and non-economic factors. However, the presence of one or more or all of these factors may not ensure that the economy will be in position to generate forces that bring about a fast economic growth.
Hindrances/Obstacles in Economic Growth
Some of the major problems in economic growth of India are given below:
1. Misuse of Resources due to Market Imperfections: Main reason for the economic back wardens of the under developed countries is the misuse of resources owing to market imperfections by the market imperfections we mean the immobility of the factors of production , price rigidities, ignorance regarding market , trends static social structure , lack of specialization etc. These market imperfections are great obstacles in the way of economic growth . It is due to market imperfections that productive efficiency in these countries is low, the resources are either unutilized or underutilized and the resources are misallocated. When the resources are perfectly mobile and there is perfect competition among them, they can easily move from one sector to another in search of a better return and in this way they make an optimum contribution to the national output.
2. Low Rate of Saving and investment: Another main reason of the poverty and under development of the under – developed countries is that the rate of saving and investment in these countries is very low. In these countries only5-8 percent of the national income goes into savings , whereas the rate is 15-20 percent and even more in the developed countries. When the rat of saving in a country is low the rate of investment is bound to be low and the rate of capital formation is low too. Since capital per man is low, the productivity is also low productivity being low, the per capita income and the national income too are low.
3. Demonstration  Effect: The under development of the economically backward countries is also due to what has been called the demonstration effect the demonstration effect  increases propensity to consume which reduces the rate of savings and investment . A very important principle has been propounded regarding consumption. That an individual’s consumption does not merely depend on individuals own income but it is very much influenced by the standard of living or consumption of his friends and relations. When a man sees that some of his friends and relatives have refrigerator , scooter, radio or TV set. Thus , consumption does not depend upon absolute real income but on relative level of real income the is consumption expenditure does not depend on our own purchasing power but on what in being spent by other son the purchase of luxury articles.
4. Rapidly Growing Population: In the under – developed countries , especially in the over populated countries of Asia, population increases very rapidly. this has very adversely affected their rate of economic growth . In fact rapid population growth is the greatest obstacle to economic growth. Whatever increase takes place in the national output and income in such countries as  a result of development  is devoured by the ever pouring torrent of babies. It is like writing on the sand. That is why their standard of living and income per capita cannot rise. For example the major part of increase in national income that has accrued in India during the five year plans has been nullified by the rapid population growth.
5. Social and political obstacles to growth: There are several other factors which have retarded the economic growth of under developed countries, Among this we may mention the following in the under developed countries like India agriculture has been carried on in a very inefficient manner. Lack of adequate irrigation facilities and fertilizers, primitive agricultural practices. Poverty of the peasant out molded systems of tenure. The under developed countries are generally wanting in dynamic entrepreneurship. No wonder trade and industry have been conducted at a very low level and few new grounds have been broken. Economic development requires an army of trained and skilled personnel who serve as instruments of economic  progress these the under- developed countries lack and consequently remain backward. Not only have the economic factors handicapped economic progress of the under developed countries but social factors too. Have played their part to keep them economically backward . has divided the Indian society into ware tight compartments and has rendered co operation in the economic sphere impossible. It has created divergence between aptitude and the occupation actually pursued. By making functions here dietary. It killed imitative and enterprise. Untouchability   has demolished millions of our propel striking at the very root of dignity of labour.
6. Economic Factors Impeding Growth: Most of the countries of Asia and Africa, which are under developed, have been at one time or another under an alien rule. The most important cause of poverty in India and it’s under- development is its subjection to the British rule. The foreign rulers, naturally, exploited the dependent countries and used their resources to promote their own interest. These countries were made to supply raw material at low prices. The foreign industrialist also made investments in primary industries such as mining, drilling of oil wells, tea , coffee etc. Thus the foreign masters used these countries as suppliers of raw materials to their industries and markets for their manufactured goods. They did not take any interest in their economic development.
Difference between Economic Growth and Economic Development
Basis
Economic Development
Economic Growth
Scope

Concerned with structural changes in the economy.
Growth is concerned with increases in the economy’s output.
Growth
Development relates to growth of human capital indexes, a decrease in inequality figures, and structural changes that improve the general population’s quality of life.
Growth relates to a gradual increase in one of the components of Gross Domestic Product: consumption, government spending, investment, net exports.
Implication
It implies changes in income, saving and investment along with progressive changes in socioeconomic structure of a country (institutional and technological changes).
It refers to an increase in the real output of goods and services in the country like increase the income in savings, in investment etc.
Measurement
Qualitative, HDI (Human Development Index), gender-Related index (GDI), Human poverty index (HPI), infant mortality, literacy rate etc.
Quantitative Increase in real GDP.
Effect
Brings qualitative and quantitative changes in the economy.
Brings quantitative changes in the economy.
Concept
Normative concept.
Narrower concept than economic development.
Relevance
Economic development is more relevant to measure progress and quality of life in developing nations.
Economic growth is a more relevant metric for progress in developed countries. But it’s widely used in all countries because growth is a necessary condition for development.

Industrial Sickness – Meaning, Causes and Remedies
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.
CAUSES OF INDUSTRIAL SICKNESS
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 
Remedies
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. 
INDUSTRIAL SICKNESS IN NORTH EAST REGION
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 sq.km. 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 which are stated below:
1.       Geographical isolation: Geographical isolation is a characteristic feature of this region which always goes against its development strategy. The difficult terrain of this region surrounded by hills, rivers and dense forest leads to increase in the cost of administration and cost of developmental projects, besides making mobilization resources particularly difficult.
2.       Poor transport and communication facilities: This region is lacking a sound transport and communication system. Geographical isolation, difficult terrain and lack of attention are some of the basic factors which are responsible for poor development of transport and communication facilities. Both the railway and road transport facilities in the region are not adequate according to its need. Expansion works like preparation of new railway lines, conversion meter gauge lines into broad gauge lines, extension of national highways, construction of new bridges over Brahmaputra, development of well connected transport facilities and sound communication system etc. are not up to the mark. In the absence of all these above mentioned facilities, a region cannot develop industrially. However, in recent years, steps have been taken to improve the transport and communication system of the State without which the development of the economy is impossible.
3.       Wastage of Natural resources: In spite of having huge amount of natural resources, the economy of this region still remains largely under-developed and involves itself into the wastage of huge quantity of natural resources. Investment in this region is mainly channelized towards exploitation of rich resources viz. tea, jute and oil, which is reflection of the continuation of old colonial pattern of investment. Assam has 28 percent of the total hydro power potential of the country, which remains under-utilized. The vast coal resources have not been fully exploited (except for traditional use of the Railway etc. ) despite several possibilities for use as fuel for production of power, for production of coal and as base for several chemical industries. The forest resources in Assam are also under-utilized, particularly in the matter of non-standard species. Thus insufficient exploitation of natural resources in this region is responsible for this poor industrial development of the State.
4.       Lack of skilled personnel: This region is also suffering from an acute shortage of skilled labour. Most of the labours are unskilled. For higher skills, this region has to depend upon other parts of India and foreign countries. Consequently payment of higher wage rates for skilled labour affects cost of production. Besides, one has to import technicians from outside on attractive rates of remuneration for installation of capital goods industries and thus it raises the cost of the development projects besides making the gestation period of these projects lengthy.
5.       Poor credit facilities: Credit facility, which is a part of infrastructure requires for development, is very minimum. The credit deposit ration in Assam stood at 37.3 in 2012 as against 78.1 for all India. Thus the lending policy of the commercial banks is far from generous to this region. Thus in the absence of large scale credit facilities, industries in the private sector cannot grow satisfactorily.
6.       Primitive technology: Technological progress is the root of industrial growth. But North East is suffering from lack of technological development due to poor scientific educational facilities and vocational training. Farmers in North East region are still using Primitive technologies in agricultural sector and thus agricultural production remains stagnant whereas other State Punjab, Haryana, Gujarat, Uttar Pradesh have been able to make sufficient progress in agriculture by applying modern technologies. Small scale and cottage industries of this region are still following old orthodox technologies and cannot stand in the competitive market. Thus the industries of this region are still backward due to absence of technology up gradation.

7.       Power Shortage: Lack of power supply is also effecting the production of the Industrial units in north east. Power breakdown is the regular problem this region. Due to inadequate power supply the industries have to suffer from under utilization, low production and higher costs.