UNIT-II

Theoretical Frame work and Functioning of the Economy: Economic System, types Objectives of five year Planning LPG policy in India

Economic Environment of Business Business is an economic activity, through business, trade, commerce and industry an economy of a country either flourish or diminish. The economic environment includes (elements of economic environment) the structure and nature of the economy, the stage of development of the economy, economic resources, the level of income, the distribution of income and assets, global economic linkages, economic policies etc.,

structure and nature of the economy The structure of the economy factors such as contribution of different sectors like primary (mostly agricultural), secondary (industrial) and services sectors, large, medium, small and tiny sectors to the economy, and their linkages, integration with the world economy etc. The structure of the economy of a nation is important to business because these factors indicate the prospects for different types of business, certain factors which affect the business etc.,

 Nature of the Economy A widely used method of classification of the economies is on the basis of the per capita income (i.e., the average annual income per person). Accordingly, countries are broadly classified as: Low Income Economies Middle Income Economies High Income Economies

 Low Income Economies are economies with very low level of per capita income. All economies with per capita GNI (Gross National Income new term for GNP) of $875 or less in 2005 are regarded as low income economies. There were 54 low income economies in 2005 Middle Income Economies are subdivided into lower middle income (those with per capita GNI between $875 and $3,465 in 2005) and upper middle income ($3,466 -$10,725) economies. In 2005, there were 98 middle income economies (39 upper and 59 lower middle income)

 High Income Economies are countries with very rich income per capita. Those with a per capita GNI of $10726 or above in 2005 fall in the category of high income economies. In 2005, there were 57 high income economies. There are mainly two categories of high income economies namely, industrial economies and oil exporters.

Economic Polices
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 foreign investment and technology policy. (For more details refer page 79-81)

Economic Environment of Business and its Significance

To understand the stage of the economy To know the living standards and purchasing power of the people The sectoral distribution of income and employment generation Use of modern and sophisticated technology High rate of GDP contribution from industrial and services sectors Investment policies

Economic systems and business environment The scope of private business depends, to a large extent, on the economic system which indeed is rooted in political philosophy The economic systems are:
Free enterprise/market economies or capitalist economies Mixed economies Centrally planned economies (Communist countries economies)

Economic systems and business environment

Free enterprise/market economies or capitalist economies the freedom of private enterprise is the greatest in the market economy, which is characterized by the following assumptions: - the factors of production (labour, land capital) are privately owned, and production occurs at the initiative of the private enterprise

Economic systems and business environment

Cont.. Free market economies - Income is received in monetary form by the sale of services of the factors of production and from the profits of the private enterprise. - Members of the free market economy have freedom of choice in so far as consumption, occupation, savings and investment are concerned.

Economic systems and business environment

Cont.. Free market economies - The free market economy is not planned, controlled or regulated by the government. The government satisfies community or collective wants, but does not compete with private firms; nor does it tell the people where to work/or what to produce. Countries like the United States, Australia, Japan, Canada are regarded as market economies.

Economic systems and business environment

Centrally Planned Economic System/Socialist System

The communist countries have, by and large, a centrally planned economic system. Under the rule of a communist or authoritarian socialist government, the state owns all the means of production, determines the goals of production and controls the economy according to a central master plan. There is hardly any consumer sovereignty in the system. The consumption pattern in a centrally planed economy is dictated by the state. Hungary, Poland, Czechoslovakia, East Germany etc., are have this system.

Economic systems and business environment Mixed Economic System India is following this economic system. Under which both the public and private sectors co-exist. The extent of state participation varies widely between the mixed economies. However, in many mixed economies, the strategic and other nationally very important industries are fully owned or dominated by the state.

 The economic system, thus a very important determinant of the scope of private business. The economic system and policy are, therefore a vary important external constraint on business

Economic Planning in India

In India, planning has come to have a very specific meaning, one that is atterned largely on the Russian model. It has meant a sequence of five-year plans, each attempting to specify the allocation of investment expenditures and productive capacity to different lines of activity, with great emphasis being placed on the expansion of the so-called heavy or basic industries.

Economic Planning in India

A Planning Commission in New Delhi is charged with drawing up the plans and supervising their implementation. There is some decentralization to the separate states but the general idea is centralized governmental control of the allocation of physical resources. The kind of centralized economic planning India has adopted can enable a strong authoritarian government to extract a high fraction of the aggregate output the people for governmental purposes

Economic Planning in India

The Economic Planning has been going on great since independence and this has played a major role in the Indian Economic Growth and development of the country and it has led India become self sufficient. Pre-independence there was a lot of problem about the food and the health and the home for the people. This all improved and has seen a new dimension all because of the Economic Development and Planning in India.

Objectives of five year Planning

There are generally two sets of objectives for planning, namely the short-term objectives and the long-term objectives. While the short-term objectives vary from plan to plan, depending on the immediate problems faced by the economy, the process of planning is inspired by certain long term objectives. In case of our Five Year plans, the long-term objectives are:

Objectives of five year Planning

In case of our Five Year plans, the long-term objectives are: (i) A high rate of growth with a view to improvement in standard of living. (ii) Economic self-reliance; (iii) Social justice and (iv) Modernization of the economy (v) Economic stability

Brief description of Five year plans in India

First Five-year plan (1951-56) - The plan addressed, mainly, the agrarian sector, including investments in dams and irrigation. The total planned budget of 206.8 billion. Second Five year plan (1956-61) the plan focused on industry, especially heavy industry. The total amount allocated under the plan in India was Rs. 4,800 crore.

 Third Five year plan (1961-66) The plan stressed on agriculture and improving production of wheat. The target growth rate of GDP(gross domestic product)was 5.6 percent. The achieved growth rate was 2.2 percent Fourth Five year plan (1969-74) The plan focused on nationalization of banks, green revolution and advanced agricultural. Target Growth: 5.7% Actual Growth: 3.30% Fifth Five year plan (1974-79) - Stress was by laid on employment, poverty alleviation, and justice. The plan also focused on self-reliance in agricultural production and defence . Target Growth: 4.4% Actual Growth: 5.0

 Sixth Five year plan (1980-85) The plan also marked the beginning of economic liberalization. Top priority was given on poverty alleviation. Target Growth: 5.2% Actual Growth: 5.4% . Seventh Five year plan (1985-89) - stress on improving the productivity level of industries by upgrading of technology. The main objectives of the 7th five year plans were to establish growth in areas of increasing economic productivity, production of food grains, and generating employment. Target Growth: 5.0% Actual Growth: 5.7%

 1989-91 was a period of economic instability in India and hence no five year plan was implemented. Between 1990 and 1992, there were only Annual Plans.

Eighth Five-Year Plan (19921997) Modernization of industries was a major highlight of the plan. An average annual growth rate of 6.78% against the target 5.6% was achieved. Ninth Five-Year Plan (19972002) - the main aim of attaining objectives like speedy industrialization, human development, full-scale employment, poverty reduction, and self-reliance on domestic resources. During the Ninth Plan period, the growth rate was 5.35 per cent, a percentage point lower than the target GDP growth of 6.5 per cent.

 Tenth Five-Year Plan (20022007) -the plan spell out strategies through which the desired levels of socio-economic development to be achieved. Some of the objectives of the plan are:
To ensure social, economic and political empowerment of the weaker sections of the society. To increase the agricultural production through extensive and intensive cultivation. To expand the existing irrigation facilities and conservation of water resources. To improve the physical infrastructure like power and roads. To develop information technology and biotchnology.

 Eleventh Five-Year Plan (20072012) The plan is multifaceted sectoral development objectives. The major objectives of the plan are:
Accelerate GDP growth from 8% to 10% and then maintain at 10% in the 12th Plan in order to double per capita income by 2016-17 Reduce dropout rates of children from elementary school from 52.2% in 2003-04 to 20% by 2011-12 Reduce malnutrition among children of age group 0-3 to half its present level Ensure that at least 33 percent of the direct and indirect beneficiaries of all government schemes are women and girl children Provide homestead sites to all by 2012 and step up the pace of house construction for rural poor to cover all the poor by 2016-17 Attain WHO standards of air quality in all major cities by 2011-12

LPG POLICY IN INDIA

The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of economic reforms is commonly known as the LPG or Liberalization, Privatization and Globalization model. The primary objective of this model was to make the economy of the seventh largest country in the world the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world.

 Liberalization Liberalization refers to the slackening of government regulations. The economic liberalization in India denotes the continuing financial reforms which began since July 24, 1991.

 Privatization and Globalization Privatization refers to the participation of private entities in businesses and services and transfer of ownership from the public sector (or government) to the private sector as well. Globalization stands for the consolidation of the various economies of the world.