ASC DEGREE COLLEGE

A3, 1st Main Road, Rajajinagar Industrial Estate, Bengaluru-560010

Business Environment

UNIT-3 2nd Sem

ECONOMIC AND BBA
POLITICAL ENVIRONMENT
ECONOMIC ENVIRONMENT
The term economic environment refers to all the external economic factors that influence buying
habits of consumers and businesses and therefore affect the performance of a company. These factors
are often beyond a company’s control, and may be either large-scale (macro) or small-scale (micro).
Economic environment of business has reference to the broad characteristics of the economic system
in which the business firm operates.
Economic environment includes Economic System (Capitalism, Socialism & Mixed Economy),
National Income Concepts, Business Cycle, Inflation and Deflation. Any improvement in the
economic conditions such as standard of living, purchasing power of public, demand and supply,
distribution of income etc., influences business environment significantly.

FACTORS AFFECTING THE ECONOMIC ENVIRONMENT

There are various factors which affect an economic environment. These factors can be divided into
two categories.
1. MICROECONOMIC ENVIRONMENT: Microeconomic environment factors are those factors
which affect and individual organization and do not affect the whole industry. The examples of
microeconomic factors are demand, competitors, market size, distribution chain, suppliers, supply,
etc.
2. MACROECONOMIC ENVIRONMENT: Macroeconomic environment factors are those which
impacts at a larger level and does not only impact one company but impact the whole economy. The
examples of microeconomic factors are inflation, unemployment, interest rates, taxes, tariff, the trust
of customers, etc.
FACTORS AFFECTING THE ECONOMIC ENVIRONMENT
1. Demand: Increased demand for product results in more profits whereas a decrease in demand
cause loss. Therefore, companies use various strategy to increase the demand for their product
in the market.
2. Market Size: Market size is the total number of potential buyers in a market. The profit
margin of the organization will be low if it has a small market size and vice versa.
3. Suppliers and supplies: The production of a company will close if its suppliers suddenly stop
to provide supplies of raw material to produce a product and the production cost will also
increase with the increase in the price of supplies by the supplier. Similarly, the production
process highly dependent on the supplies supplied by the supplier. The production process will
suffer if there is a scarcity of supplies.

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4. Income: Income is the total earning of an individual or an entire family. Income affects the
buying habits of the consumers and thus impacts the commercial businesses. There is a direct
relationship between the buying habits of an individual and his income. High income of people
is good for commercial businesses and low income of the population is cause loss to commercial
businesses.
5. Inflation rate: The inflation rate can be defined as the rate at which the process of goods and
services increases. With increased prices, the buying ability of people gets affected. People start
buying less, and they spend their money on the necessary goods and services only. Inflation rate
put bad impact on services businesses.
6. Increasing Interest Rates: Increasing interest rates also impact the businesses, especially those
businesses where people require to take a loan to buy goods.
7. Unemployment level: Another factor which impacts the economic environment is the
unemployment level. The countries with high unemployment level have a weaker economic
environment. If most of the population will not earn, then they will not have sufficient money to
spend on buying goods and services. This creates a bad economic cycle in the country.
8. Taxes and Tariffs: High taxes in the country impacts the economic environment badly. People
will have low disposable income. Taxes not only affect the consumers, but it also affects
businesses as high taxes results in the high cost of production.
Tariffs are a type of taxes which is imposed on imported goods. Tariffs put an opposite impact
on the sales of goods than taxes. People will import more goods from foreign countries if there
are low tariff rates, and the local markets will be flooded with cheap foreign products and will
impact the sales of local products. High tariff rates are preferable, as a result of which there will
be less import of foreign products and people will buy more local products.
9. Cost of Labour: Cost of labor also impacts the economic environment of the business. High
labor cost means the high cost of production and high cost of production forces businesses to
increase the price of the products. People will buy a smaller number of goods if the price of the
goods is high and they will look for cheap alternatives for expensive products. Reduced sales
will impact the business negatively.
10. Population: The population has both positive and negative impact on the economic
environment. High population results in tough competition and people get ready to even at low
wages which is good for the business as they can hire more people to increase their production.
On the other hand, underpopulation is also not good, as there will be a smaller number of
consumers in the market and lower chances of getting skilled and unskilled employees.
Therefore, it is important to keep a balanced population in the country.
11. Innovation: Innovation has both positive and negative impact of the economic environment.
Innovation pose risk for already established businesses. As entrepreneurs come with innovative
ideas of business and they give competition to the already established businesses, which impacts
the sales of their products.
However, if companies look ahead and invest in research and development and can develop
innovative ideas to improve their products to fulfill the current requirement of customers,
innovation also helps in to reduce the production cost.
12. Capital Market: Capital market impact the economic environment. A healthy capital market
results in lower dependence on foreign currency. The nation becomes self-sufficient, and areas
like agriculture, banking, trade, etc. develops.
13. Economic Laws: There are various economic laws such as labor laws, competition laws, factory
act, commercial act; industrial laws impact the economic environment. Companies are required
to set up their business by being bound by the law, and violation of any law can result in a penalty
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 or the cancellation of business license. The government can introduce a new law which forces
companies to change their method of doing business which puts a bad impact on the business.
14. Social Cultural environment: Social and cultural environment put a great impact on the
economic environment of business. The buying habits and choices of people are highly
influenced by the culture they are born in or the society that they are part of.
15. Government Policies: Government policies also put an impact on the economic environment.
Companies might be required to change the production process of a product according to the
change in government policies.
16. Technological environment: Technological environment put a huge impact on the economic
environment. Technology changes rapidly, and organizations are required to change their
technology or update their technology to keep up with the changing technological environment.
17. Natural Resources: Natural resources play an important role in the business environment.
Many business activities are reliable on natural resources. For example, fuel, water, mineral
resources, soil, vegetation, rainfall, topography, etc. are the basic natural resources which are
used frequently in the production process.

ECONOMIC POLICIES
▪ An economic policy is any activity that tries to influence or manage an economy. The
government normally implements and administers the economic policy. Taxation,
government budgets, interest rates, and other aspects of the economy are all subject to
economic policy by governments.
▪ In other words, economic policy refers to government initiatives to influence the economy
of a particular region, state, or country. The setting of interest rates, tax rates and the
allocation of government funds are examples of such activities.
▪ There are several economic policies which can have a very great impact on business.
Important economic policies are industrial policy, trade policy, foreign exchange policy,
monetary policy, fiscal policy, and foreign investment and technology policy.
▪ Some types or categories of business are favorably affected by government policy, some
adversely affected, while it is neutral in respect of others.
▪ For example, a restrictive import policy or a policy of protecting the home industries may
greatly help the import-competing industries, while a liberalization of the import policy
may create difficulties for such industries.
▪ Similarly, an industry that falls within the priority sector in terms of the government policy
may get a number of incentives and other positive support from the government, whereas
those industries which are regarded as inessential may have the odds against them.
▪ For giving a boost to the development of the country and eliminating the issues of the
economy such as poverty, lack of infrastructure, low industrial production, and so forth.
▪ India embarked on the path of economic reforms in the year 1991. Economic policy
enables the government to formulate and take various actions for the economy’s welfare.
▪ These actions involve designing yearly budgets, framing tax rates and other plans. In a
business environment, such economic policies influence the nature of ownership, labour
markets, industrial relations and the other related aspects.

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MONETARY POLICY
▪ Monetary policy is an economic policy that manages the size and growth rate of the money
supply in an economy. It is a powerful tool to regulate macroeconomic variables such
as inflation and unemployment.
▪ In other words, Monetary Policy refers to the credit control measures adopted by the
central bank of a country. It is the policy of Central Bank (RBI, in the context of India) of
an economy in which the cost, availability and the usage of money are controlled and
regulated by using monetary methods in order to achieve predetermined goals and
objectives.
▪ These policies are implemented through different tools, including the adjustment of
the interest rates, purchase or sale of government securities, and changing the amount of
cash circulating in the economy. The central bank or a similar regulatory organization is
responsible for formulating these policies.
▪ The Reserve Bank of India (RBI)is vested with the responsibility of formulation of
monetary policy in India. This responsibility is explicitly mandated under the RBI Act,
1934.
▪ RBI uses several tools to set the level of aggregate demand for goods and services or to
assess the patterns and trends in the economic sectors.
DEFINITIONS OF MONETARY POLICY
▪ Johnson defines monetary policy “as policy employing central bank’s control of the
supply of money as an instrument for achieving the objectives of general economic
policy.”
▪ G.K. Shaw defines it as “any conscious action undertaken by the monetary authorities to
change the quantity, availability or cost of money.”

OBJECTIVES or SIGNIFICANCE or IMPACT OF MONETARY POLICY

1. Promotion of saving and investment: Since the monetary policy controls the rate of interest
and inflation within the country, it can impact the savings and investment of the people. A
higher rate of interest translates to a greater chance of investment and savings, thereby,
maintaining a healthy cash flow within the economy.
2. Controlling the imports and exports: By helping industries secure a loan at a reduced rate
of interest, monetary policy helps export oriented units to substitute imports and increase
exports. This in turn, helps improve the condition of the balance of payments.
3. Managing business cycles: The monetary policy is the greatest tool using which the boom,
recession and depression of business cycles can be controlled by managing the credit to control
the supply of money.
4. Regulation of aggregate demand: Since the monetary policy can control the demand in an
economy, it can be used by monetary authorities to maintain a balance between demand and
supply of goods and services.
5. Generation of employment: As the monetary policy can reduce the interest rate, Small and
Medium Enterprises (SME) can easily secure a loan for business expansion. This can lead to
greater employment opportunities.
6. Helping with the development of infrastructure: The monetary policy allows concessional
funding for the development of infrastructure within the country.
7. Allocating more credit for the priority segments: Under the monetary policy, additional
funds are allocated at lower rates of interest for the development of the priority sectors such
as small-scale industries, agriculture, underdeveloped sections of the society etc.
8. Managing and developing the banking sector: The entire banking industry is managed by
the RBI. While RBI aims to make banking facilities available far and wide across the nation,
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 it also instructs other banks using the monetary policy to establish rural branches wherever
necessary for agricultural development. Additionally, the government has also set up Regional
Rural Banks (RRB) and Co-operative Banks to help farmers to receive the financial aid.
9. Inflation: Monetary policies can target inflation levels. A low level of inflation is considered
to be healthy for the economy. If inflation is high, a contractionary policy can address this
issue.
10. Unemployment: Monetary policies can influence the level of unemployment in the economy.
For example, an expansionary monetary policy generally decreases unemployment because
the higher money supply stimulates business activities that lead to the expansion of the job
market.
11. Economic Growth: Economic growth is the process whereby, the real per capita income of a
country increases over a long period of time. Rapid economic growth of an economy has been
the most important objectives of monetary policy.
12. Exchange Rate Stability: Exchange rate is the price of a home currency expressed in terms
of any foreign currency. If the exchange rate is very volatile leading to frequent ups and downs
in the exchange rate, the international community might lose confidence in our economy. The
monetary policy aims at maintaining the relative stability in the exchange rate.
13. Control Inflation or Deflation: Monetary policy is the policy used by the government of a
country to control inflation or deflation in an economy, and these policies been implemented
by the central bank through the ministry of finance.
14. Availability of the Supply of money and Credit: Monetary policy is concerned with the
charges in the supply of the money and credit. It refers to the policy measures under taken by
the government or central bank to influence the availability, cost and use of money and credit
with the help of monetary techniques to achieve specific objectives.
15. Long-Term Loans for Industrial Development: Monetary policy can promote industrial
development in the developing countries by promoting facilities of medium-term and long-
term loan to the manufacturing units.
16. Creation of Financial Institutions: The Monetary policy in a developing economy must aim
to improve its currency and credit system. More banks and financial institutions should be set
up, particularly in both areas which lack these facilities.

INSTRUMENTS OF MONETARY POLICY

The instruments of monetary policy are of two types:
(I) QUANTITATIVE or GENERAL or INDIRECT INSTRUMENTS: It includes bank rate
variations, open market operations and changing reserve requirements. They are meant to regulate
the overall level of credit in the economy through commercial banks.
QUANTITATIVE INSTRUMENTS
1. Bank rate: The bank rate, also known as the Discount Rate, is the oldest instrument of
monetary policy. Bank rate is the rate at which the RBI is ready to buy or rediscount bills of
exchange or other commercial papers.
2. Open Market Operation: Open market operations are the means of implementing
monetary policy by which a central bank controls its national money supply by buying and
selling government securities or another financial instruments.
3. Variations in the reserve requirements: The reserve bank also uses the method of variable
reserve requirements to control credit in India. By changing the ratio, the reserve bank seeks
to influence the credit creation power of the commercial banks. Cash Reserve Ratio (CRR)
and Statutory Liquidity Ratio (SLR) have been the traditional tools of the central bank's
monetary policy to control credit growth, flow of liquidity and inflation in the economy.

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 ▪ Cash Reserve Ratio (CRR): The average daily balance that a bank is required to
maintain with the Reserve Bank as a share of such percent of its Net Demand and
Time Liabilities (NDTL) that the Reserve bank may notify from time to time in the
Gazette of India. Current Cash reserve Ratio is 4.50%.
▪ Statutory Liquidity Ratio (SLR): Statutory Liquidity Ratio or SLR is a minimum
percentage of deposits that a commercial bank has to maintain in the form of liquid
cash, gold or other securities. It is basically the reserve requirement that banks are
expected to keep before offering credit to customers. These are not reserved with the
Reserve Bank of India (RBI), but with banks themselves. The SLR is fixed by the
RBI. Current Statutory Liquidity Ratio (SLR) is 18%.
4. Repo rate and Reverse Repo Rate: Repo rate is the rate at which the central bank of a
country (Reserve Bank of India in case of India) lends money to commercial banks in the
event of any shortfall of funds. Repo rate is used by monetary authorities to control
inflation.
Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India
in case of India) borrows money from commercial banks within the country. It is a
monetary policy instrument which can be used to control the money supply in the country.
5. Liquidity Adjustment Facility (LAF): It is a tool, used in monetary policy that allows
banks to borrow money through repurchase agreements. This arrangement allows banks
to respond to liquidity pressures and is used by governments to assure basic stability in the
financial markets.
6. Marginal Standing Facility (MSF): It is a facility under which scheduled commercial
banks can borrow additional amount of overnight money from the Reserve Bank by
dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of
interest. This provides a safety valve against unanticipated liquidity shocks to the banking
system.
(II) QUALITATIVE or SELECTIVE or DIRECT INSTRUMENTS
It aims at controlling specific types of credit. They include changing margin requirements and
regulation of consumer credit.
QUALITATIVE INSTRUMENTS
1. Rationing of Credit: Credit rationing is a method of controlling and regulating the purpose
for which credit is granted by commercial bank. It aims to limit the total amount of loans
and advances granted by commercial banks.
RBI fixes a credit amount to be granted for commercial banks. Credit is given by limiting
the amount available for each commercial bank. For certain purposes, the upper credit limit
can be fixed, and banks have to stick to that limit. This helps in lowering the bank's credit
exposure to unwanted sectors. This instrument also controls the bill rediscounting.
2. Change in Marginal Requirement: Margin is referred to the certain proportion of the loan
amount that is not offered or financed by the bank. Change in marginal can lead to change
in the loan size. This instrument is used to encourage the credit supply for the necessary
sectors and avoid it for the unnecessary sectors. That can be done by increasing the marginal
of unnecessary sectors and reducing the marginal of other needy sectors.
3. Publicity: RBI uses media for the publicity of its views on the current market condition and
its directions that will be required to be implemented by the commercial banks to control
the unrest.
4. Regulation of Consumer Credit: In this instrument, consumers' credit supply is regulated
through the instalment of sale and hire purchase of consumer goods. Here, features like

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 instalment amount, down payment, loan duration, etc., are all fixed in advance, which helps
to check the credit and inflation in the country.
If there is excess demand for certain consumer durable leading to their high prices, central
bank can reduce consumer credit by increasing down payment, and reducing the number of
instalments of repayment of such credit.
5. Moral Suasion: Moral Suasion means persuasion and request. It refers to the suggestions
to commercial banks from the RBI that helps in restraining credits in the inflationary period.
RBI implies pressure on the Indian banking system without taking any strict action for
compliance with rules. To arrest inflationary situation central bank persuades and request
the commercial banks to refrain from giving loans for speculative and non-essential
purposes.
6. Direct Action: Under the Banking Regulation Act, 1949 the Central Bank has the authority
to take strict action against any of the commercial bank that refuses to obey the directions
given by Reserve Bank of India.

FISCAL POLICY
▪ Fiscal policy refers to the use of government spending and tax policies to influence economic
conditions, especially macroeconomic conditions, including aggregate demand for goods and
services, employment, inflation, and economic growth.
▪ Fiscal Policy is a form of economic policy which regulates and controls the management of
public debt, borrowings, expenditure and tax system within a country.
▪ Fiscal policy is largely based on ideas from “John Maynard Keynes”.
▪ Fiscal Policy in India is the guiding force that helps the government decide how much money
it should spend to support the economic activity and how much revenue it must earn from the
system.
DEFINITION OF FISCAL POLICY
In the words of Arthur Smithies, “Fiscal policy is a policy under which government uses its
expenditure and revenue programmes to produce desirable effects and avoid undesirable effects
on the national income, production and employment.”

GENERAL OBJECTIVES OF FISCAL POLICY

1. To maintain and achieve full employment.
2. To stabilize the price level.
3. To stabilize the growth rate of the economy.
4. To maintain equilibrium in the Balance of Payments.
5. To promote the economic development of underdeveloped countries.

MAIN OBJECTIVES or ROLE OF FISCAL POLICY IN INDIA

1. Development by effective Mobilization of Resources: The principal objective of fiscal
policy is to ensure rapid economic growth and development. This objective of economic
growth and development can be achieved by Mobilization of Financial Resources. The central
and state governments in India have used fiscal policy to mobilize resources.
The financial resources can be mobilised by: -
(a) Taxation: Most important source of resource mobilisation in India is taxation. Through
effective fiscal policies, the government aims to mobilise resources by way of direct
taxes as well as indirect taxes.
(b) Public Savings: The resources can be mobilised through public savings by reducing
government expenditure and increasing surpluses of public sector enterprises.

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 (c) Private Savings: Through effective fiscal measures such as tax benefits, the
government can raise resources from private sector and households. Resources can be
mobilised through government borrowings by ways of treasury bills, issuance of
government bonds, loans from domestic and foreign parties, deficit financing etc.
2. Reduction in inequalities of Income and Wealth: Fiscal policy aims at achieving equity or
social justice by reducing income inequalities among different sections of the society. The
direct taxes such as income tax are charged more on the rich people as compared to lower
income groups. Indirect taxes are also more in the case of semi-luxury and luxury items which
are mostly consumed by the upper middle class and the upper class. The government invests
a significant proportion of its tax revenue in the implementation of Poverty Alleviation
Programmes to improve the conditions of poor people in society.
3. Price Stability and Control of Inflation: One of the main objectives of fiscal policy is to
control inflation and stabilize price. Therefore, the government always aims to control the
inflation by reducing fiscal deficits, introducing tax savings schemes, productive use of
financial resources, etc.
4. Employment Generation: The government is making every possible effort to increase
employment in the country through effective fiscal measures. Investment in infrastructure has
resulted in direct and indirect employment. Lower taxes and duties on Small-Scale Industrial
(SSI) units encourage more investment and consequently generate more employment. Various
rural employment programmes have been undertaken by the Government of India to solve
problems in rural areas. Similarly, self-employment scheme is taken to provide employment
to technically qualified persons in the urban areas.
5. Accelerate the rate of economic growth: Fiscal measures such as taxation, public
borrowings and deficit financing etc., should be used properly so that production, consumption
and distribution may not adversely affect. It should promote the economy as a whole which in
turn helps to raise national income and per capita income.
6. Economic Stability: Fiscal measures, to a larger extent promote economic stability in the face
of short-run international cyclical fluctuations. These fluctuations cause variations in terms of
trade, making the most favourable to the developed and unfavourable to the developing
economies. Therefore, fiscal policy plays a leading role in maintaining economic stability in
the face of internal and external forces.
7. Balanced Regional Development: There are various projects like building up dams on rivers,
electricity, schools, roads, industrial projects etc run by the government to mitigate the
regional imbalances in the country. This is done with the help of public expenditure.
8. Reducing the deficit in the Balance of Payment: Some time government gives export
incentives to the exporters to boost up the export from the country. In the same way import
curbing measures are also adopted to check import. Hence the combine impact of these
measures is improvement in the balance of payment of the country.
9. Development of Infrastructure: When the government of the concerned country spends
money on the projects like railways, schools, dams, electricity, roads etc to increase the
welfare of the citizens, it improves the infrastructure of the country. An improved
infrastructure is the key to further speed up the economic growth of the country.
10. Increases National Income: It’s the strength of the fiscal policy that is brings out the desired
results in the economy. When the government want to increase the national income of the
country then it increases the direct and indirect taxes rates. There are some other measures like
reduction in tax rate so that, more peoples get motivated to deposit actual tax.
11. Foreign Exchange Earnings: when the central government of the country gives incentives
like, exemption in custom duty, concession in excise duty while producing things in the

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 domestic markets, it motivates the foreign investors to increase the investment in the domestic
country.
12. Encourages Investment: Fiscal Policy aims at the acceleration of the rate of investment in
the public as well in private sectors of the economy. Fiscal Policy should also aim at rapid
economic development and encouraging investment in those channels which are considered
most desirable from the point of view of society.

IMPORTANCE OF FISCAL POLICY IN INDIA

1. Fiscal policy plays a key role in elevating the rate of capital formation both in the public
and private sectors.
2. Through taxation, the fiscal policy helps mobilize considerable amount of resources for
financing its numerous projects.
3. Fiscal policy helps in providing stimulus to elevate the savings rate.
4. The fiscal policy gives adequate incentives to the private sector to expand its activities.
5. Fiscal policy aims to minimize the imbalance in the dispersal of income and wealth.

EXIM POLICY
▪ EXIM Policy or Export-Import policy also known as The Foreign Trade Policy (FTP) is
regulated by the Foreign Trade (Development and Regulation Act), 1992.
▪ EXIM policy is a set of guidelines and instructions related to the import and export of goods.
It deals in general provisions pertaining to exports and imports, promotional measures, duty
exemption schemes, export promotion schemes, SEZ programs and other details for different
sectors.
▪ The main governing body in the matters concerning the EXIM policy in India is Directorate
General of Foreign Trade (DGFT).
▪ EXIM Policy is announced every Five Years by the Ministry of Commerce & Industry, Govt.
of India. It is updated every year on the 31st March and all the amendments and improvements
in the scheme are effective from 1st April of the announcing year.

OBJECTIVES OF EXIM POLICY OF INDIA

1. It aims to developing export potential, improving export performance and encouraging
foreign trade.
2. To promote persistent growth in exports to acquire a share of international merchandise
trade
3. To strengthen the base for export production of the country.
4. To facilitate sustained growth in exports and import in India.
5. To facilitate technological upgradation and modernization of domestic production.
6. To provide employment opportunities with in the country by increasing export.
7. To simplify and streamline foreign trade procedures.
8. To stimulate sustained economic growth by providing access to essential raw materials,
intermediates, consumables, installations and capital goods required for augmenting
production and providing services.
9. To enhance the technological strength and efficiency of Indian agriculture, industries and
services, thereby enhancing their competitive strength while generating new employment
possibilities, and to encourage the accomplishment of globally accepted standards and
quality.
10. To supply consumers with fine condition or high-quality goods and services at globally
competitive rates while simultaneously generating a level playing range for domestic
production.

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 SALIENT FEATURES OF CURRENT EXIM POLICY
1. Increase in number of export items
2. Special Economic Zones (SEZ)
3. Restriction free export policy
4. Liberalization of export-oriented import
5. Convertibility and devaluation of rupee
6. Targets to double India’s exports in goods and services over the next five years.
7. Proposed to promote export of defense materials, farm produces, eco-friendly products,
textiles and leather goods.
8. Introduction of single window system of custom clearance.
9. Development of towns of excellence.
10. Campaign to promote “Make in India” brand by GOI.

NEW INDUSTRIAL POLICY, 1991

▪ The industrial policy means the rules, regulations, principles, policies, & procedures laid
down by government for regulating & controlling industrial undertakings in the country and
pattern of industrialization. It explains the approach of Government in context to the
development of industrial sector.
▪ It prescribes the respective roles of the public, private, joint, cooperative, large, medium &
small-scale sectors for the development of industries.
▪ In order to accelerate Industrial Development in India, and in accordance with the changing
circumstances, various industrial policies were declared in the years 1948, 1956, 1977, 1980
and 1985.
▪ Therefore, in order to lift unnecessary restrictions on Industries, under the licensing policy,
and to increase their efficiency, development and technological level, in order to make
Indian goods usable in the competitive global market, on 24th July, 1991, in Lok-Sabha the
Minister of States for industries, Mr. P. J. Kurian declared the Industrial Policy, 1991.

WHY DO WE NEED INDUSTRIAL POLICY?

To create a high-wage, high- productivity, high-innovation, high- investment economy based
on diversity of ownership and enterprise type with many different industry sectors.

OBJECTIVES OF NEW INDUSTRIAL POLICY, 1991

1. To maintain a sustained growth in productivity.
2. To increase employment opportunities.
3. To prevent undue concentration of economic power.
4. To achieve optimal utilization of human resources.
5. To attain international competitiveness.
6. To transform India into a major partner and player in the global arena.
7. To liberalize the economy.
8. To encourage foreign assistance and co-partnership.
9. To make the Public Sector more competitive.
10. To liberate the economy from various government restrictions.
11. Industrial development of backward areas.
12. To give liberty to private sector to work independently.
13. To make development for modern competitive economy.
14. To give encouragement for expansion of production capacity.
15. To increase exports and liberalize (facilitate) imports.

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POLITICAL ENVIRONMENT
The Political environment is one of the external environmental factors which affect the
business. It can impact business organizations positively or negatively depending on the
situation and many other factors.
Companies must address the risk of political factors by making decisions that will reduce the
external impact on the environment of business.
Political factors of any country can impact the business. Political factors can introduce a risk
in the industry, which can suffer losses or it can reduce profitability. These factors may be
current and impending legislation, political stability and changes, freedom of speech,
protection and discrimination laws are factors affecting business operation and activities.
Managers must keep a bird’s eye view over political factors.

TYPES OF POLITICAL ENVIRONMENT

The political environment is usually classified into the following types of political ideologies
which are most prevalent in many countries.
1. Democracy: Democracy is a type government in which the supreme power is vested in
the people and exercised by them directly or indirectly through a system of
representation usually involving periodically held free elections. It involves full
participation by citizens in the crucial decision-making processes. There are voting rights
granted to citizens for the selection of representatives, and freedom of speech is considered
as the primary or fundamental right of the citizens.
2. Totalitarianism: Totalitarianism is a form of government and a political system that
prohibits all opposition parties, outlaw’s individual and group opposition to the state and
its claims, and exercises an extremely high degree of control and regulation over public
and private life. It is regarded as the most extreme and complete form of authoritarianism.
In totalitarian states, political power is often held by autocrats, such
as dictators and absolute monarchs, who employ all-encompassing campaigns in
which propaganda is broadcast by state-controlled mass media in order to control the
citizenry.
3. Communism: Communism is a philosophical, social, political, and economic ideology
and movement whose goal is the establishment of a communist society, namely
a socioeconomic order based on the idea of common ownership of the means of
production, distribution, and exchange—allocating products to everyone in the society.
4. Fascism:Fascism is, authoritarian, ultranationalist political ideology, philosophy and mo
vement, characterized by a dictatorial leader, centralized autocracy, militarism, forcible
suppression of opposition, belief in a natural social hierarchy, subordination of individual
interests for the good of the nation and race, and strong regimentation of society and the
economy.
IMPACT OF POLITICAL ENVIRONMENT ON BUSINESS IN INDIA
▪ Political factors can impact a business by making the market environment more or less
friendly for that business. Typically, governments have a great deal of power over
businesses and many times, there is not much that businesses can do about it.
▪ Political factors can impact businesses in various ways. These external environmental
factors can add in a risk factor which can lead to a major loss in business. These factors
can change the entire results and hence, companies should be able to deal with both
local as well as international political outcomes.

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 ▪ With a change in administration policies, there arise political factors that can change
the entire business scenario. These changes can be economic, legal or social and can
include the following factors:
1. Tax and economic policies: Increasing or decreasing rate of taxes is a good example of
a political component. Government regulations may raise the tax rate for some businesses
and can lower the same for others due to specific reasons. This decision will directly impact
businesses. This is why maintaining a strategy which can deal with such situations is very
important.
2. Political stability: Lack of political stability within a country can significantly impact
the operations of a business. This can especially be true for businesses that are operating
on the global scale. For instance, a hostile takeover can take over a government.
Eventually, such a situation will lead to looting, riots and general disorder within the
environment. Such situations can disrupt business operations and activities which can have
a major impact on its bottom line.
3. Foreign Trade Regulations: Every business has a need to expand business operation to
other countries. However, political background of a country can influences the desire for
a business to expand its operations. Tax policies that are particularly controlled by the
government can induce a particular business to expand operations in different regions
whereas, other tax policies can hinder the process of business expansion for some
industries. Government initiatives, which have been designed to support local businesses,
might work against international companies when the question is of their competitiveness
in a foreign region.
4. Employment Laws: Employment laws are made to protect the rights of employees and
include every aspect of employer and employee relationship. Employment law is an aspect
that is very complex and involves several pitfalls as well. When businesses are in touch
with the latest developments in this law, they can manage to take their business in the right
direction.

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