Economic Policy and Analysis Nature and significance of the study of economics Economics is the branch of social science

that studies the production, consumption and distribution of goods and services. It examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants. It studies hoe firms use their scarce resources in the best optimal manner to attain maximum profits. Firms want to achieve objectives like profit maximization, thus managers need to make several decisions while producing a commodity like what to produce, how much to produce, how to produce, for whom to produce. A manager also needs to keep the knowledge of demand, its nature, consumer preferences, impact of prices on sales, type of market etc. All this requires to have the knowledge of basic concepts of economics.

Resource allocation decisions An economys resources can be divided into four main categories: Land, forest, minerals etc are commonly called natural resources and are called by economists land, for short. All human resources, mental and physical, both inherited and acquired, are called labour. All those man-made aids to further production, such as tools, machinery, factories, that are used in the process of making other goods and services rather than being consumed for their own sake is called capital. Those who take risks by making new products and new ways of making old products, developing new businesses and forms of employment are called entrepreneurs and the resource they provide is entrepreneurship. These resources are called factors of production or factors of input. Every resource has a reward attached to it. Resource Land Labour Capital Entrepreneurship Reward Rent Wages / Salaries Interest Profits

The allocation of these resources is an important decision. Questions like how much land to purchase, what labour- capital input combination should be used to produce a product, whether to launch a new product or modify the older one, whether to use own capital or to get finance from external source, are important for every firm to attain maximum profits. Thus, resource allocation forms an important part of a business activity.

Influence of macroeconomic policies on business conditions Some of the important policies that influence business conditions are: Fiscal policy Government can undertake fiscal expansion and fiscal contraction to influence business conditions. If the demand in the market is low, the fiscal expansion can take the form of tax relief to boost demand and increased expenditure on public projects to create employment and public assets. Government through its reduction in indirect tax policies can boost the production levels of the companies. It also takes up the projects in the neglected sectors like small scale industries so as to boost the demand in the economy. This, eventually makes the business environment better for the companies. Increased expenditure by the Government on public projects makes the infrastructure better for the entire nation, which helps the businesses in reducing their cost and increasing productivity. Monetary policy RBI keeps a check on money supply in the market so that a sound business environment is maintained through the year. It keeps a check on inflation rate through its expansion and contraction mode so that high prices do not hamper the sales of the businesses. Moreover, it also keeps a check on high interest rate in the economy so that it does not discourage the businessman to borrow for expansion purposes. A low level of interest rate in the economy also helps consumers to borrow funds from the banks to finance their requirements like car, television, LCD etc. This in turn helps in keeping the production of the companies on high levels.

Industrial policy It covers all the rules, regulations, policies and principles that control the industrial undertakings of a country. Through this policy, the Government has decontrolled many industries and has made way for the private sector to start new businesses without its permission. 1. Industrial Policy Resolution (IPR), 1948 a) Mainly every industry was under Government. 2. IPR, 1956 Under this, three schedules were formed: In the first schedule, industries were under the control of the Government.

In the second schedule, industries were under the control of the Government, but supplemented with the help from the private sector. The third schedule consisted of private sector. 3. Industrial Policy, 1980 This policy laid emphasis on : a) b) c) d) Operational management of public sector Integrating industrial development in private sector Merger and acquisition of sick units. Industrial Licensing Policy

4. Industries (Development and Regulation) Act, 1951 Under this, permission from the Government was required to set up an industry. 5. New Licensing Policy and Procedures, 1970 6. a) b) c) d) e) Industrial Policy, 1991 Licensing was abolished Limit for foreign equity holding was raised from 40% to 51%. Foreign Investment Promotion Board was established. List of industries reserved for public sector was decreased. Disinvestment by the Government took place.

Thus, the Government through its policy changes like decontrolling private sector and allowing them to enter into almost all the business fields has made the industrial environment more suitable for businesses.

Export Import (EXIM) Policy This policy makes the export policies and import policies of a country. Flexible export and import policies make the business conditions favourable for the economy. This means, low duties imposition and less processes and procedures encourage the exporters and importers to expand their businesses abroad. On the other hand, high duties on commodities discourage them to start new businesses or expand the earlier ones. During the phase of 1951 to 1985, there were quantitative restrictions and high import and export duties on various commodities. Imports were prohibited; there were controlled imports with quantitative restrictions and with high import duties varying between 150-300 percent. Export of essential goods was allowed only under the Government permission; export of some goods was freely allowed and export of certain category of goods was facilitated with

subsidy and lower bank rate. This hampered the growth of the businesses as they were not able to export and import those products. During the phase of 1980 to 1991, policy of liberalization was adopted by India. The list of prohibited imports was reduced, import duties of many import items were reduced, import licensing was restricted to fewer goods and foreign exchange control measures were relaxed. Reforms of 1991 brought a change in the scenario. More liberalized and duty free flow of goods and services started. The quantitative restrictions on imports from 714 commodities were abolished. The changes include the reduction of duty from 15% to 10% under Export promotion Capital Goods (EPCG) scheme that enabled Indian firms to import capital goods which helped in improving the quality and productivity of the Indian industry, provision of additional Special Import License (SIL) of 1 % for export of agro products, allowing Export Oriented Units and other units in Export Promotion Zones (EPZs) in agriculture sectors to 50% of their output in the domestic tariff area (DTA) on payment of duty that boosted Indian agricultural sector, 100% foreign equity participation in the case of 100% EOUs, and units set up in EPZs that encouraged foreign investment in the country. Indian currency was made partially convertible on capital account.

Foreign Direct Investment (FDI) Policy This policy deals with regulation and rules regarding foreign investment in India. The processes and procedures have been made more flexible and less time consuming so that foreign entities are encouraged to enter Indian market. Foreign entities can enter India through automatic route, that is, without the permission of Government. However, there are ceilings in certain areas by the Government. For example FDI into telecom industry is allowed upto 51% only in a single brand. All these changes make business conditions healthy and help businesses to expand themselves. Competition Act, 2002 The Competition Act, 2002 was passed by the Parliament in the year 2002. It was subsequently amended by the Competition (Amendment) Act, 2007. The provisions of the Competition Act relating to anti-competitive agreements and abuse of dominant position were notified on May 20, 2009. The Act prevents practices having adverse effect on competition, promotes and sustains competition in markets, protects the interests of consumers and ensures freedom of trade carried on by other participants in the market. Anti-competitive agreements No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition.

Prohibition of abuse of dominant position No enterprise or group shall abuse its dominant position. Regulation of combinations There are certain regulations for mergers, acquisitions and combinations of firms. This Act ensures that the business conditions in the market are healthy and favourable for the firms to function.