Economic Environment Ppt MBA

7/31/2019 Economic Environment Ppt MBA

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ECONOMIC

ENVIRONMENT

INDIAN ECONOMY

MODULE - 3


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ECONOMICS OF DEVELOPMENT

We need to realize that economic prosperity for anation is not about Economics alone. A nationcannot be run like a department store with theonly motive of profit maximization. Economicprosperity encompasses social development which

is crucial to the soul of nation

Arindam Chaudhari

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ECONOMICS OF DEVELOPMENT

An economy or economic system refers in which thevarious economic activities relating to production,distribution, exchange and consumption of goods and

services are organized in a country and the way in whichthe people of a country earn their living.

It comprises the factories, firms, mines, shops, banks,schools, offices, transport systems, theatres, hospitals,public administration, defense etc., which help in theproduction and distribution of goods and services in thecountry.

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DIFFERENCE BETWEEN ECONOMIC GROWTH

& DEVELOPMENT

Economic growth- refers to increases over time in a countrys realoutput of goods and service or more appropriately product per capita.

The term Eco.development refers to the progressive changes in thesocio-economic structure of a country.

It involves a steady decline in agriculture share in GDP & acorresponding increase in the share of industries, banking, trade,construction, services.

This change in economic structure is invariably accompanies by a shiftin the occupational structure of the labor force.

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DIFFERENCE BETWEEN ECONOMIC GROWTH

& DEVELOPMENT

Economic growth- merely refers to raise in output.

While Eco.development implies changes intechnological & institutional organization of

production as well as in distributive pattern in

income

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CHARACTERISTICS OF INDIAN ECONOMY

An economy of a country consists of three sectors:

1. Primary sector includes agriculture, mining, fishing etc.,and it is generally called agricultural sector.

2. The Secondary sector includes all kinds of industries bothlarge as well as small and it is generally called industrial

sector.

3. Tertiary sector includes services like transport, banking,insurance Public administration, defense etc., and it iscalled as service sector.

Indian economy is presently characterized as an underdeveloped & developing economy.

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CHARACTERISTICS OF INDIAN ECONOMY

Important features of Indian Economy are:

Rapid growth of population: Over the 50 years, rate ofpopulation Growth was over 2.0 percent per annum Thisdemographic situation is major constraint on the growthof business.

Predominance of Agriculture: About 64.9% of theworking population depend on agriculture for theirlivelihood. It is still primitive and is gamble in themonsoons and it is still underdeveloped.Though we have adopted planning for about five

Decades we have not achieved much in agriculture.

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CHARACTERISTICS OF INDIAN

ECONOMY Poor quality of Indian working population: compared to advancedcountries the poor quality of Indian labor is due to the reason that the laborers

of India are poor and under fed.

Low level of technology: technical backwardness in all the fields ofproduction, techniques of production are mostly old and obsolete.

Also lack of quality education and technical training to absorb modern

technology.

Inadequate Transport and Communication systems: Even todaymany of our rural areas are not provided with well developed roadways and

power facilities.

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CHARACTERISTICS OF INDIAN

ECONOMY

Existence of Dualistic or Dual sector: In India both ancient andmodern sectors exist side by side. We find ancient wooden ploughs as

well as the modern tractors. Similarly in industries old and obsoletemachines and modern sophisticated machines.

Under utilization of resources: though India is rich in naturalresources like land, minerals, forests, wild life, power, fisheries etc.,

but they are not properly utilized due to shortage of capital, low level

of technology and technological skill.

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MAJOR ISSUES OF DEVELOPMENT

India is an underdeveloped though a developing economy.Bulk of the population lives in conditions of misery.

Poverty is not only acute but also chronic. At the sametime , there exist un utilised natural resources.

The co-existence of the vicious circle of poverty with thevicious circle of affluence perpetuates misery and foils all

attempts at removal of poverty.

It is in this context that an understanding of the majorissues of development should be made.

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The following are the major development issues in India.

1. Low percapita income

2. High proportion of people below the poverty line.

3. Low level of productive efficiency due to inadequate nutritionand malnutrition.

4. Imbalance between population size, resources and capital.

5. Problem of unemployment

6. Instability of output of agriculture and related sectors.

7. Imbalance in distribution and growing inequalities.

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Low percapita Income: The annual income per head of thepopulation in India is very low: after independence government

wanted to give a big push to the standstill economy. With theefforts of the government some development has indeed takenplace during the five decades of planning. But India still remainsone of the most underdeveloped countries in termsof per capita income.

Low standard of living: Due to low percapita income thestandard of living is very low. 39% of the total population of thecountry live below poverty line and there is mass chronicpoverty.

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High proportion of people below the poverty line & Low level of

productive efficiency due to inadequate nutrition and malnutrition. :

Defining poverty line on the basis of norms of nutritional requirements, i.e.

2,400 calories PPP- rural areas2,100 calories PPP- urban areas.

The percentage of population below the poverty line is quite high.

Alarming situation from the point of view of the business even after 60 years

of independence .

More than 40 percent of Indias population neither has any capacity to

contribute to capital accumulation nor to create any demand for industrial

goods..

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Imbalance between population size, resources and capital.

Rate of population Growth was over 2.1 percent per annum. the

requirement of feeding additional numbers compels the use ofresources in low return agriculture rather than higher return

manufacturing

This demographic situation is major constraint in accumulating

capital on the growth of business.

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DETERMINANTS OF ECONOMIC DEVELOPMENT

Growth of population :Economic development and populationare inter-connected. History has shown that birth rate onlyfalls significantly when the standard of living rises

significantly for the majority of people.

Building Human capital: by focusing on education and healththereby increasing the productivity of the economy.

Harmonization of the objective of expanding production with

that of securing full employment is a logical necessity in India.

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MAJOR ISSUES OF ECONOMIC DEVELOPMENT

Predominance of Agriculture: About 64.9% of the workingpopulation depend on agriculture for their livelihood. It is stillPrimitive and is gamble in the monsoons still underdeveloped.Though we have adopted planning for about five decades wehave not achieved much in agriculture.

Problem of unemployment:Widespread unemployment isprobably the most striking symptom of inadequate development

in India.Employment situation did not improve in the period ofliberalization.Economic growth was jobless. A large no. of workers lost jobsas a consequence of downsizing of industrial unit.

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MAJOR ISSUES OF ECONOMIC DEVELOPMENT

Inequalities of Income and wealth:

Various studies and surveys have clearly indicated that

even the small gains of development over the yearshave not been equitably distributed.

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Economic development implies the process of securing levels ofproductivity in all sectors of economy.

Capital Formation Capital output Ration

Curb the Growth of population Create Human capital

Capital formationto the full extent by domestic savings is of crucialimportance in the process of economic Development. It is quite necessaryto step up the rate of capital formation that the community accumulatesa large stock of machine tools and equipment which can be geared into

production.Technological framework implicit high rate of capital formation.

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Capital output Ratio: refers to the number of units of capitalthat are required in order to produce one unit of output .

In certain sectors of the economy out put can be increased with

comparatively small additions to capital.

For instance, in Japan between 1885 and 1915 labourproductivity in agriculture was doubled by a comparativelysmall quantum of investment in the form of better seeds,improvement in water supply, control of crop diseases and the

use of fertilizers.

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A AS A O G CO O


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INDIA AS A DEVELOPING ECONOMY

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Strategy and planning in IndiaIn 1951 economic

planning was adopted as an instrument ofdevelopment.

Over the past 6 decades the country has completed

10th five year plans. National income has increased &also considerable improvement has taken in the

various sectors.

An Approach to the 11th Five Year Plan

(2007-2012)towards developing economy

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SECTOR WISE ANALYSIS

PRIMARY SECTOR

SECONDARY SECTOR

TERTIARY SECTOR

India started marching towards economic progressIndia as adeveloping country . During past 60 years, the country has made

Progress in Agriculture, Industry, science & technology, health

& education and various other fields.

1850-1950Indian economy was stagnant for 100 years, but now

the economy is progressing also with the recent LPG of Indian

economy.

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CONTRIBUTION OF AGRICULTURE TO INDIAN ECONOMY

Agricultural sector - reached the stage of development and maturity.

Share of agriculture in NItaken as an indicator of economicdevelopment.

Continuous increase in agricultural production and productivity in

India..

Total production of food grains has increased

1950 -51 - 50.8 million tones

During seventh plan - 187 million tones

Eighth plan 209.8 million tonnes

Considerable improvement in non food grains like oilseedsreached arecorded level of 24.7 million tonnes .

During mid 1960sGreen revolution due to the adoption of New

agricultural strategy. 23

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Contribution of secondary sector

The share of industrial sectors to NI has increased steadily.

Several Industrial policy resolutions were introduced to developindustrial sector of our country.

New Industrial policy of 1991 has enabled the industrial sector

to develop to a greater extent

1951-1965 foundation for Industrial development in thecountry

Basic industries like iron and steel, heavy engineering andmachine building industry registered significant increase in theirgrowth.

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CONTRIBUTIONS OF SECONDARY SECTOR

sectors 1970-71 1980-81 2003-04

Primary 45.8% 39.6% 24.0%

Secondary 22.3% 24.4% 25%

tertiary 31.9% 40% 51.4%

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Contributions of secondary sector

Year 2003-04 2004-05 2005-06 2006-07

Industry 7.0 8.4 8.3 10.6

Mfrg. 7.4 9.2 9.1 11.5

Services 8.5 9.6 9.8 11.2

Annual growth rate of Industrial Production

TOTAL GDP AT FACTOR COST26

O C O 11TH A


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OBJECTIVE OF 11TH PLAN

The 11th Plan provides an opportunity to restructure policies toachieve a new vision based on faster, more broad-based andinclusive growth.

It is designed to reduce poverty and focus on bridging the variousdivides that continue to fragment our society.

The 11th Plan must aim at putting the economy on a sustainablegrowth with a growth rate of approximately 10per cent by the endof the Plan period.

It will create productive employment at a faster pace than before,and target robust agriculture growth at 4%

per year. It must seek to reduce disparities across

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CURRENT ECONOMIC SCENARIO

It was announced recently that India would

be achieving a GDP growth of 9.2% againstproject figure of 8.5%,all members of rulingparty at Delhi complemented each other. thiswas possible due to a very good performanceof manufacturing, IT, pharmaceutical andservice sector.

10% planned growth in the next 5 years of11th five year plan.

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INFLATION Inflation refers to a situation when there is a general rise in prices

and a corresponding fall in value of money.

Inflation occurs when the volume of money in circulationincreases faster than the volume of goods and services.

Prof. Coulbourn defines inflation as too much of moneychasing too few goods.

Modern definition by Crowther

Inflation is a state in which the value of money is falling, i.eprices are rising. Inflation is usually associated with rising activityand employment.

Inflation - excess purchasing power in the hands of the people.30


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TYPES OF INFLATION

Creeping inflation Price Rise by 2% -PAnot controlled in timeprove disastrouseconomic & political stability of the economy

Walking inflation mild & tolerable > 10% PAmoderatestableinflation- people expectations remain more or less stable.

Running inflationrises rapidly < 10% ranges 10-20%-exceedsGalloping inflation. Causes economic distortions and disturbances inthe economy.

Hyper inflation: 1000% PA . Low purchasing power, real wages falland inequalities increasesserious distortionsoverall economiccondition.

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CAUSES OF INFLATION

The basic cause of inflation normally occurs, when aggregate

demand for output tends to be excessive in relative to the supply

of output.

CAUSES OF

INFLATIONS

1.CHANGES IN MONEY SUPPLY

2. Change in disposable income

3. Changes in business & consumer expenditure

4. Changes in foreign demand

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CAUSES OF INFLATION

1. Changes in money supply:

(a) Deficit financing

(b) Expansion of credit

(c ) Increase in Govt Expenditure on large development

project.

2. Disposable income: due to fall in the level of taxation,

increase in national income, a fall in the savings ratio, rise in

the income corresponding rise in savings.

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CAUSES OF INFLATION

3. Changes in Business and Consumer Expenditure :consumer spends more on goods & services the

demand also increase business activity.

Higher purchase & installment schemes.

4. Foreign demand: inflation may also be caused dueto changes in supply of goods and services, when it

does not keep pace with the increased demand forgoods and service

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CAUSES OF INFLATION

Inflation may occur due to the following different causes:

Increase in the money circulation

Increase in the disposable income

Increase in community's aggregarate spending on consumption

& investment or in goods.Excessive speculation and the tendency to hoarding & profiteering

Increase in population as the widening gap between demand &

supply.

Drought, famine, earthquake , storm, volcano eruption and other

natural calaminities adversely affecting agricultural production and

output of other industries.

Prolonged industrial unrest industry or industries,

nationwide truck strike that would cause stagnation of goods that

would not ensure the match in demand and supply) 35


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EFFECTS OF INFLATION

Effect on Production & Employment:motivates Cos to

expand its production normally leads to generation of

Employment opportunities.

Effect on Distribution of national income

Effect on producers

Effect on wage and salary earners

Effect on fixed income groups

Effect on debtors (gain)and creditors suffer badly)

Effect on farmers-benefit due to increase in prices of crops

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CONTROL ON INFLATION

1. DIRECT MEASUREScontrol on prices and rationing

of scarce goods. Ceiling on certain goods and should

not allow to it to rise further.

2. FISCAL MEASURES: deployed to check inflationary

pressures.

An increase in Govts revenue and decrease in its

expenditure can successfully check inflationary

pressures. in the economy

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CONTROL ON INFLATION

3. MONETARY MEASURES: RBIOpen market operations, & Bank rate

policy..

4. WAGE CONTROL : money wage rate rises faster than the productivity oflabor. However wage controls difficult to implement.

5. PRICE CONTROL: fixation of maximum prices at which

commodities are to be sold.

6. OTHER MEASURES: diverting funds only towards production of

necessary commodities, instead of luxury items.

Exports can be increased and imports restrictions can be relaxed.

Govt.try to restrict the growth rate of populationincreaseproduction levels in the economy

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PRICE INDICES

The numerical value that summarizes price level is called price

indices.

The purpose Of PIhelps in explaining the purchasing power or

inflation/Deflation from one period to another.

Types of Price Indices:

1. Wholesale price Index (WPI)2. Consumer Price Index (CPI)

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PRICE INDICES

1. Wholesale price Index (WPI): It is an indication of price

movements in all wholesale markets other than the retail

market.

It is worked out for a whole country or for a very large area.

Here the prices are collected from the wholesale dealers.

2. Consumer Price Index (CPI)-PI with special reference to a classor category for whom it is meant.

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TYPES OF CONSUMER PRICE INDEX

1. Consumer Price Index for Industrial Workers (CPI-IW)

2. Consumer Price Index for Urban Non-manual Employees (CPI-

UNME)

3. Consumer Price Index for agricultural laborers (CPI-AL)

Relationship between Price Indices & Inflation

Inflation is estimated through Price Indices.

Earlier it was estimated in terms of wholesale price. However fromthe point of view of consumers, retail prices are far more relevant

and thus today inflation is measures in terms of CPI.

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BUSINESS CYCLE

A business cycle can be defined as wavelike

fluctuations of business activity characterized by

recurring phases of expansion and contraction inperiods varying from three to four years.

Fluctuation rather than stability is the rule in every

business record.

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FEATURES OF BUSINESS CYCLE

1. Recurring Fluctuations

2. Period of business cycle is longer than a year.

3. Presence of the alternating forces of expansion

and contractionProsperity & depression.

4. Phenomenon of the crisis: this implies that peak& trough are asymmetrical. Normally, the

prosperity phase of business comes to an end

abruptly, whereas, recovery after the depression is

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PHASES OF BUSINESS CYCLES

Prosperityupswing, expansion phase.

Recessiona turn from prosperity to depression

Depressioncontraction or downswing

Recoveryturn from depression to prosperity

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Prosperity phase

Income level tends to raise

Unemployment rate declines

Industrial growth rate accelerates

Actual output level exceeds the potential output level

Investment increases Investors become more optimistic and more enthusiastic

Consumer demand for goods and services in the market tend to increase, evenat the rising prices

Prices tend to raise and provide greater incentives for business expansion.

Interest rates rise

Money supply increases

There is a risk of over heating of the economy

The prosperity phase comes to an end when the forces favouringexpansion become progressively weak.

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PHASES OF BUSINESS CYCLES RECESSIONARY PHASE

The prosperity comes to end when the forces favoring expansion

become progressively weak.

Bottlenecks begin to appear at the peak of prosperity.

In fact profit inflation and over optimism which increase the tempo,carry with them the seeds of self destruction.

In view of high profits and business optimism, entrepreneurs investmore and expand further. But scarcity of resources, particularly ,shortage of raw materials and labor, causes bottlenecks and businesscalculations go wrong,

Over optimism pave the way to overpessimism.

Thus, prosperity digs its own grave.46


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PHASES OF BUSINESS CYCLES DEPRESSIONARY PHASE

Characteristic features of a depression are the reverse ofprosperity

Shrinkage in the volume of output, trade and transactions

Rise in the level of unemployment

Price deflation

Fall in aggregate income of the community

Fall in the structure of interest rates.

Contraction of bank credit

Prosperity - economic activity will be at its peakDepressioneconomic activity is at its trough.

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PHASES OF BUSINESS CYCLESRECOVERY /STAGFLATION PHASE

However depressioncant be permanent feature of aneconomy.

The revival or recovery phase refers to the lower turningpointundergoes change from depression to prosperity.

Improvement in demand for capital goods, new investmentwill be induced, such investment will cause rise inemployment and income. Increased income in turn will leadto rise in consumptionpushup demandrise in prices,

profits further investment.

Thus during recovery, expansionary process will be selfreinforcing.

Revival or recovery phase slowly turns into prosperity and

the cycle repeats itself.48


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INDICATORS OF BUSINESS CYCLE

Gross Domestic Product

Fixed Investment

Net exports

Unemployment rate

Real earnings

CPI

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TYPES OR TIMINGS OF INDICATORS


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TYPES OR TIMINGS OF INDICATORS

There are three timings in which these indicators lead to changes

in the business cycle namely:

1. Leading: are those indicators due to operation of which,changes in Business cycle happens. Change in leadingindicators bring immediate change in the business cycle.

E.g. The consumer confidence Index, Industrial new order,

personnel consumption of Mfg. goods etc.,2. Coincidental : are those indicators wherein the changes in

indicators simultaneously bring changes in the businesscycle : e.g. GDP

3. Lagging: are those indicators wherein there is a time lag

between indicators change and Business cycle change e.g.Unemployment as it increases after trough of the business &bottom after peak of the business cycle.

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Economic Environment Ppt MBA

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