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Nature of economyCritical element in business environmentEconomy- organization of farms, firms,institutions, and factories which enablesindividuals to get their livingIndividuals as traders, consumers, suppliers,producers organize their economic activities
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Based on role of factors like prices,markets, planning, policy guidelines,regulations, control and other forms of governmental intervention- economy canbe classified
Economic environment refers to all thoseeconomic factors which have a bearingon the functioning of a business unit
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Economic systemsIndian economy classified in many ways
Poor, underdeveloped, emerging, agrarian,backward, less developed, developing etc
Means it is much below its potential growth
and quality of life of people is low
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Indian economy - socialistic
Welfare stateMixed economyDualistic economyPlanned economy
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Features of Capitalist
EconomyPrivate PropertyFree private enterpriseProfit motiveConsumers SovereigntyFreedom of choice of occupationFreedom to save and investThe Price mechanism/ market mechanismCompetitionLimited role of government
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Merits of Capitalism
Automatic workingHigher efficiency and incentive to hard workHigher rate of capital formationEconomic development and prosperityOptimum utilization of resourcesJust systemDemocraticEncouragement to enterprise and risk takingAdaptability
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Disadvantages of Capitalist
EconomyConcentration of economic power and wealthClass war ExploitationMonopoly Power Unequal and equitable distribution of incomeNeglect social welfare and serviceWasteful CompetitionEconomic instability and unemployment
Social injusticeMisallocation of resources
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Features of a Socialist
EconomySocial ownership of means of productionNo private enterpriseEconomic equalityEquality of opportunityEconomic/ central planningSocial welfare and social securityClassless society
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Case for Socialism
Social justiceBetter allocation of resourcesRapid economic growthImproving productive efficiency
Social security and welfareEconomic stability
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Demerits of SocialismBureaucracy and red tapismInsufficient resourcesMisallocation of resourcesLoss of consumers SovereigntyLack of IncentivesLoss of economic freedom
Concentration of power in the state
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Features Of Mixed economy
Private and State ownership of Means of productionCo-existence of private andPublic sectorsDecisive role of marketing andsupportive role of planningProfit induced private enterprise
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The intervention role of the state
Planning and pricingProfit motive and social welfareobjective
Production in the state sector guidedby social benefit
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Critical appraisal of the working of
Mixed economiesLess firm framework of the mixed economyand its vulnerability to politicalmaneuverings.
Concentration of economic power Bureaucratic inefficiency and corruptionDenial of social justiceBuilt-in-tendency to slide back
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Indian Economy A Snapshot
One of the fastest growing in the world
Consumption growth fuelling economic growth consumption
expenditure forming 78% of GDP
Services sector contributing over 60% to GDP
Emerging as a hub of manufacturing excellence. new growth
engines of Indian economy include IT, ITes, pharmaceuticals, bio-
technology, nano technology, agri. businesses
Where forces of competition are at work
Innovation driving enterprises
Economic reforms well on course entering second phase
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Inclusive growth occupying central place
High untapped potential in rural / agri - economy
Indian companies on acquiring spree and going global
Indian companies pursuing global best practices and producing
world-class managers
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Underdeveloped economy
Predominance of agriculture- 60-70% of population,account for 18.5% of GDP(2006-07), productivitylow
Low per capita income - $820Inequitable distribution of income and poverty-lowest 20% account for 8.9 aggregate householdexpenditure, share of top 20% is 41.6%(2000)
Poverty- 27% population BPL
Low demand for industrial goods and low capitalformation
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Rapid population growth- life expectancy64 yrs, 1.5% per annum is the growthrateUnemployment- widespread, didntimprove during liberalization period, dueto structural defects in economy
Scarcity of capital- Low, leads to low rateof economic growth, savings andinvestment recently increased- 32 to34%
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Technological backwardness-agriculture, wide gap between developed
and UDCsLack of entrepreneurs- till 1990s notmuch initiative, emergence of new classof entrepreneurs since 90s
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Developing economy
Both quantitative and structural changesNational income trends- 2006-07 9.9%, now5.5%Structural changes- sluggish changes, shareof agriculture in GDP declining, growth of large number of basic capital goodsindustries, infrastructure growth although
inadequate, progress in banking and financialsector- nationalization, reforms
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Mixed economy
Private ownership of means of productionPredominance of market- regulated to some
extentGrowth of private sector monopoliesLarge public sector Economic planning
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The Economic Environment
Interest RatesInterest Rates
Global EconomyGlobal Economy Rapid ChangeRapid Change
KeyEconomic
Forces
3-6
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Mixed economic systemEconomic planning
Industry-basic, capital, intermediate,consumer goods, consumer durables,and non durablesNational income and per capita incomeHR- populationInflation, exchange rates
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Poverty and public policyAgriculture and rural development
Financial marketsBanking sector Transport
Telecommunications
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InflationPersistent and appreciable rise in general level of
prices
Creeping inflation- positive effect on output andemploymentMild inflation increase in aggregate demand
business growthWhole Price Index used in India
Sometimes, misallocation of resources- adverseeffect on businessHigh inflation reduces aggregate demand
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Rate of savings and investmentDetermine business potentialMassive investment in industries, agriculture- scope
for business activity increases , demand for industrial goods increases
Investment in transport, power and communicationfacilitates business activity
Foreign capital boost investment rateIndia high level of savings and investment- 34%
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Fiscal imbalanceDeficit financing , high fiscal balance- adverse
effect on businessLeads to increase in purchasing power withoutcorresponding increase in production- timelag
Inflationary situation
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Balance of payments deficitsExcessive current account deficits
adverse effect on businessShortage of foreign exchange- curb
imports- protection policyLarge net foreign inflows/ investment
desirable
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Economic policies
Determine economic environment of business
Industrial policyTrade policyMonetary policy
Fiscal policy
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Industrial policy
Directly related to businessSince 1956- importance of private and
public sector recognizedIndustrial policy resolutions of 1956
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New industrial policy 1991
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Trade policy
Outward oriented and inward- orientedOutward oriented policy doesn't discriminatebetween production for domestic market andexports, provides liberalized environment , freedomto businesses to produce for exports or for domestic markets onlyInward oriented policy- in favor of domestic market,
import substitution strategy, protection to domesticindustryIndia till 1991, inward oriented
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Monetary policy
Influences cost and availability of creditand money
Objectives-
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Increasing openness of economy, needto service external debt, improve exports
require stable domestic pricesInflation of 3-4 % good
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Fiscal policy
Process of shaping taxation and publicexpenditure to dampen swings of businesscycle, achieve rapid economic growth with highemployment and stable pricesIndia, non-develpmental expenses huge-unsatisfactoryFiscal deficit- unsustainableLeads to higher interest rates due to publicborrowing