Unit 1 Business Environment Introduction Every business organization has to interact and transact with its environment.

Hence, the business environment has a direct relation with the business organization. The effectiveness of interaction of an enterprise with its environment determines the success or failure of a business. The environment imposes several constraints on an enterprise and has considerable impact and influence on the scope and direction of its activities. The enterprise has very little control over its environment. The basic job of the enterprise is to identify with the environment in which it operates, and to formulate its policies in accordance with the forces which operate in its environment. Nature of Business Business may be understood as the organized efforts of enterprise to supply consumers with goods and services for a profit. Businesses vary in size, as measured by the number of employees or by sales volume. But, all businesses share the same purpose: to earn profits. The purpose of business goes beyond earning profit. There are: It is an important institution in society. Be it for the supply of goods and services Creation of job opportunities Offer of better quality of life Contributing to the economic growth of the country. Hence, it is understood that the role of business is crucial. Society cannot do without business. It needs no emphasis that business needs society as much. Modern business is dynamic. If there is any single word that can best describe todays business, it is change. This change makes the companies spend substantially on Research and development (R & D) to survive in the market. Mass production and mass marketing are the norms followed by business enterprises. The number of companies with an annual turnover of

Rs.100 crore each was only three in 1969-70.The figure has gone up by hundreds these days. Business Goals 1. Profit: Making profit is the primary goal of any business enterprise. 2. Growth: Business should grow in all directions over a period of time. 3. Power: Business houses have vast resources at its command. These resources confer enormous economic and political power. 4. Employee satisfaction and development: Business is people. Caring for employee satisfaction and providing for their development has been one of the objectives of enlightened business enterprises. 5. Quality Products and Services: Persistent quality of products earns brand loyalty, a vital ingredient of success. 6. Market Leadership: To earn a niche for oneself in the market, innovation is the key factor. 7. Challenging: Business offers vast scope and poses formidable challenges. 8. Joy of creation: It is through business strategies new ideas and innovations are given a shape and are converted into useful products and services. 9. Service to society - Business is a part of society and has several obligations towards it. Meaning and Definition of Business Environment Environment refers to all external forces which have a bearing on the functioning of business. Environment literally means the surroundings, external objects, influences, or circumstances under which someone or something exists. Davis Keith defines the environment of business as the aggregate of all conditions, events, and influence that surround and affect it. Business environment consists of all those factors that have a bearing on the business, such as the strengths, weaknesses, internal power relationships and orientations of the organization; government policies and regulations; nature

of the economy and economic conditions; socio-cultural factors; demographic trends; natural factors; and global trends and cross-border developments.

Objectives The three basic goals of Environmental Analysis are: To provide an understanding of current and potential changes taking place in the task environment. To provide inputs for strategic decision making. To facilitate and foster strategic thinking in organizations-typically a rich source of ideas and understanding of the context within which a firm operates. Importance of Study 1. It helps an organization to develop its broad strategies and long-term policies. 2. It enables an organization to analyze its competitors strategies and thereby formulate effective counter strategies. 3. Knowledge about the changing environment will keep the organization dynamic in its approach. 4. Such a study enables the organization to foresee the impact of socioeconomic changes at the national and international level on its stability. 5. Executives are able to adjust to the prevailing conditions and thus influence the environment in order to make it congenial for business.

Business Environment of an Organization The business environment of an organization can be considered at three levels:

a) Internal Environment b) Micro Environment c) External/ Macro Environment Every business organization has to tackle its internal as well as external environment.

a) Internal Environment The internal environment of a firm reveals its strengths and weaknesses. The organization can modify or alter such factors to suit its needs. For example, the personnel of the firm, physical facilities, organization and functional means such as marketing mix etc can be altered by the firm to suit its needs, thus they are factors that form the internal environment of the firm. b) Micro Environment Some of the external factors have a direct intimate impact on the firm like the suppliers and distributors of the firm. These factors are classified as micro environment, also known as task environment and operating environment. It is the task environment which needs constant surveillance, though elements outside are not ignored, but are paid less attention.

c) External Environment The external environment, by and large, is beyond the control of a company. The external or environmental factors such as the economic factors, socio cultural factors, government and legal factors, demographic factors, geo-physical factors etc. are regarded as uncontrollable factors. There are other external factors which affect an industry very generally such as industrial policy, demographic factors etc. They constitute what is called macro environment, general environment or remote environment. These factors outside the firm can lead to opportunities or threats to the firm.

Internal Environment a. Value System The value system of the founders has important implications on the choice of business, the mission and the objectives of the organization, business policies and practices. The value system of the organization

influences its portfolio strategy, HRM, marketing strategy and CSR. In the selection of suppliers, distributors, collaborators; the value system and ethical standards play a very important role. b. Vision, Mission and Objectives The business domain of the company, priorities, direction of development, business philosophy, business policy etc. is guided by the vision, mission and objectives of the company. c. Management Structure and Nature The organizational structure, the composition of the Board of Directors, extent of professionalization of management etc are important factors influencing business decisions. d. Internal Power Relationship Factors like the amount of support the top management enjoys from different levels of employees, shareholders and Board of Directors have important influence on the decisions and their implementation. The relationship between the members of Board of Directors and between the CEO and the Board are also critical factors.

e. Human Resources The characteristics of the human resources like skill, morale, commitment, attitude etc. contributes to the strength and weakness of an organization. The involvement, initiative etc of people at different levels may from organization to organization. The organizational culture and overall environment have bearing on them. f. Company Image and Brand Equity The image of the company matters while raising finance, forming joint ventures or other alliances, seeking marketing intermediaries, entering sale or purchase contracts, launching new products etc. Brand equity is also relevant in several such cases.

g. Miscellaneous Factors Other internal factors that contribute to the business decision making are:
1.

Physical Assets and Facilities like the production capacity, technology and efficiency of the productive apparatus, distribution logistics etc., are among the factors which influence the competitiveness of the firm. R & D and Technological Capabilities determine a companys ability to innovate and compete. Market Resources like the organization for marketing, quality of the marketing men, brand equity and distribution network have direct impact on the marketing efficiency. Financial Factors like financial policies, financial position and capital structure are also important internal environment affecting business performance, strategies and decisions.

2.

3.

4.

Micro Environment The micro environmental factors are more closely linked with the company than the macro environmental factors. The micro forces need not necessarily affect all the firms in a particular industry in the same way. 1. Suppliers Suppliers are those who supply the inputs like raw materials and components to the company. For the smooth functioning of the business, timely supply becomes indispensible. Thus, vendor selection and development becomes a critical issue. Vender integration, where feasible, helps solve the supply problem. 2. Customers The major task of a business is to create and sustain customers. Monitoring customer sensitivity is a prerequisite for the business success. A company has different categories of customers like

individuals, households, industries and other commercial establishments, and government and other institutions. With the growing globalization, the customer environment is increasingly becoming global. 3. Competitors A firms competitors include the firms which market the same or similar products as well as those who compete for the discretionary income of the consumers. Thus competition can be further classified as:
a.

Desire competition- The primary task of the competitor is to influence the basic desire of the consumer. Such desire competition is generally very high in countries characterized by limited disposable incomes, many unsatisfied desires and many alternatives for spending. Generic competition- The competition among alternatives which satisfy a particular category of desire. Example: for recreation, buying a TV or stereo or to-in- one can be considered. Product form competition- The competition between similar or same product forms based on the features available with them. Brand competition- The competition between the different brands of the same product form.

b.

c.

d.

A marketer should strive to create primary and selective demand for his products. 4. Marketing Intermediaries Firms that aid the company in promoting, selling and distributing its goods to final buyers are called as marketing intermediaries. They include middlemen such as agents, physical distribution firms, marketing service agencies, marketing research firms, media firms and consulting firms and financial intermediaries.

5. Financiers Besides the financing capabilities, polices and strategies, attitude (including attitude towards risk), ability to provide non financial assistance etc. are very important. 6. Publics A public is any group that has an actual or potential interest in or impact on an organizations ability to achieve its interests. Media publics, citizen action publics and local publics are some examples.

Macro Environment 1. Local Environment Economic environment, political and regulatory environment, social/cultural environment, demographic environment, technological environment, natural environment of the home country constitutes the local environment. 2. Global Environment The global environment refers to those global factors which are relevant to business like WTO principles and agreements; other international conventions/treaties/declarations/protocols etc.; economic and business conditions/ sentiments in other countries and certain developments like hike in crude oil prices.

Factors Affecting Business Environment Many factors can be included in the environmental factors- social, economic, cultural, geographical, technological, political, legal, and ecological factors, in addition to government policies, labor factors, competitive market conditions, locational factors, emerging globalization and so on. Although there are many factors, the most important factors are socio-economic, technological, suppliers, competitors, and government.

 Social Factors The social and cultural environment refers to the influence exercised by certain factors which are beyond the control of the company. Such factors include peoples attitude to work and wealth; role of family, marriage, religion and education; ethical issues and social responsiveness of business. Social and cultural environment is highly relevant for a business unit as the variety of goods it produces, the type of employees it gets and its obligation to society depend on the cultural environment in which the firm operates. The social factors such as Culture, values, tastes and preferences, social disintegration, and so on must be a part of the agenda of every business organization. Economic Factors Economic environment refers to all forces which have an economic impact on business. Economic factors such as industrial production, agriculture, planning, basic economic philosophy, infrastructure, national income, per capita income, resource mobilization, capital formation, employment generation, propensity to consume, money supply, price level, population, savings, stages in the economic development and trade cycles are major factors which make up the total economic environment. The economic performance of a country determines the business environment. Cultural Factors The cultural factors of a business environment should also be taken into consideration while scanning the environment and during policy formulation. Managers and policy makers in a global business cannot disregard cultural variables like social and religious practices, education, knowledge, rural community norms and beliefs, and so on which are predominant in India, especially in the rural society. Social stratification plays a vital role in rural societies while cultural differences are unthinkable for any international manager or even an urban Indian manager.

 Geographical Factors In global business environment, geographic location, seasonal variations, climatic conditions and so on considerably affect the tastes and preferences of customers and prospects as well as the labor force. The industrial location policies of the government are considerably influenced by the pace of the development in various geographic locations. Technological Factors Technological environment exercises considerable influence on business. Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. Technology changes fast and to keep pace with it, businessmen should be ever alert to adopt updated technology in their business. Political Factors Political environment refers to the influence exerted by the three political institutions, viz., legislature, executive and the judiciary in shaping, directing, developing and controlling business activities. The legislature decides on a particular course of action; the executive, also called the government, implements whatever was decided by the Parliament and the judiciary functions as the watchdog in order to ensure that both the legislature and the executive function in public interest and within the boundaries of the Constitution. The philosophy and approach of the political party in power substantially influences the business environment. Legal Factors Every aspect of business is regulated by law in India. Hence, the legal environment plays very vital role in business. Laws relating to

industrial licensing, company formation, factory administration, industrial disputes, payment of wages, trade unionism, monopoly control, foreign exchange regulation, shops and establishment, and so on are examples of what forms the legal business environment in India.

Ecological Factors Ecology deals with the study of the environment, biotic factors (plants, animals and micro organisms), abiotic factors (water, soil, sunlight, air) and their interaction with one another. Changing any biotic or abiotic factor causes ecological imbalance. Pollution free industrial activity is considered to be a necessary condition of industrial organizations. The Government of India is committed to preservation of ecological balance, for example 1. The Water (Prevention and Control of Pollution ) Act, 1974 2. The Air (Prevention and Control of Pollution ) Act, 1981 3. The Environment (Protection) Act, 1986. Government Policies Government policies provide the basic environment for business. Industrial policy resolution and licensing policies, trade policies, labor policies, location policies, export-import policies, foreign exchange policies, monetary and fiscal policies, taxation policies, and so on pave the way for business environment. Labor Factor Labor within the organization makes its internal environment, general labor policies and climate may form a part of the external environment. Militant unionism becomes the labor climate and comprises the external environment whereas a committed labor force could be the strength of the internal environment of that organization.

 Competitive Market Condition It is an important environmental factor, especially in a global business environment. In a competitive situation, the market forces of demand and supply must interact with each other providing a business environment. As a result of liberalization, some characteristics integrating the Indian economy with the global economy have emerged. As a result a competitive market condition has emerged in India, making for a competitive business environment. Locational Factors Locational policies are adopted by many countries for attaining economic balance. The establishment of the Tennesse Valley Authority for regional planning in the USA is an example. In India, metropolitan cities and their suburbs have been active with business and industrial activities while many areas continued to remain backward. In order to develop the backward areas and to attain economic balance, an industrial dispersal policy has been adopted by the government to boost business in India. Environmental Analysis Process The analysis consists of four sequential steps: Scanning It involves general surveillance of all environmental factors and their interactions in order to: Identify early signals of possible environmental change Detect environmental change already underway Monitoring It involves tracking the environmental trends, sequences of events, or streams of activities. It frequently involves following signals or indicators unearthed during environmental scanning.

Forecasting Strategic decision-making requires a future orientation. Naturally, forecasting is an essential element in environmental analysis. Forecasting is concerned with developing plausible projections of the direction, scope, and intensity of environmental change.

Assessment In assessment, the frame of reference moves from understanding the environment- the focus of scanning, monitoring and forecasting to identify what the understanding means for the organization. Assessment, tries to answer questions such as what are the key issues presented by the environment, and what are the implications of such issues for the organization.

Limitations of Environmental Analysis

1. It does not foretell the future, nor does it eliminate the uncertainty for any organization. It can only minimize the frequency of occurrence of unforeseen events. 2. It does not guarantee organizational effectiveness and can only act as tool to achieve effectiveness. 3. The results depend on the accuracy of data collected. 4. Too much reliance on analysis makes a manager become complacent or inactive due to either shock or overconfidence.

Economic Environment Economic environment refers to all those economic factors which have a bearing on the functioning of a business unit. Business depends on the economic environment for all the needed inputs. It also depends on economic environment to sell the finished goods. Naturally, the dependence of business on the economic environment is total and it is not surprising because, as it is rightly said, business is one unit of the total economy. The importance of an economic environment is reinforced by the fact that more and more business economists are finding place in industrial establishments. Economic Factors Growth Strategy, Economic Systems, Economic Planning, Economic Structure, Removal of Regional Imbalances, Price and Distribution Controls, Economic Reforms, and Per capita and National Income. Growth Strategy The economic environment which now prevails in our country is the result of the economic growth strategy relentlessly pursued by the Government of

India. The growth strategy of followed was based on Soviet Planning model which gave central role to the government in the control and direction of economic activity. It was believed that the savings rate and the growth rate in the economy could be increased if India invested in capital goods and heavy industrial sectors at the expense of the consumer goods sector. The First Five Year Plan (1951) was silent on exports. It only highlighted the limitations to the prospects of increasing export earnings. The Second Five Year Plan concluded that no significant earnings from exports could be expected in the short run. The intellectual basis for pessimism about exports which was widely shared by the development economists of the time was broadly the same as that articulated by Nurkse in his Export Lag thesis. The theory postulated that the exports of a primary producing country tend to lag behind the rate of increase in the international trade. From the Second Five Year Plan (1956), the State emerged as the mobiliser of savings as well as an important investor and owner of capital. Since the State emerged as the primary agent of economic change, it followed that private sector activities had to be strictly regulated and controlled to conform to the objectives of the State policy. In the early years of planning, a relative neglect of public investment in agriculture was observed. This was supported by the prevailing view that a growing labor force in the developing countries could only be absorbed in industry and that in the early stages of industrialization, it was necessary to contribute to the building up of modern industry. The growth strategy followed was subjected to the following criticism: Neglect of exports and trade opportunities Excessive protectionism and import substitution Undue reliance on physical controls Inefficiency of the public sector Total neglect of agriculture. Much of this criticism is exaggerated. Economic growth decelerated in 2008-09 to 6.7 per cent. This represented a decline of 2.1 per cent from the average growth rate of 8.8 per cent in the previous five years (2003-04 to 2007-08). The five years of high growth has

raised the expectations of the people. Few remember that during the preceding five-year period from 1998-99 to 2002-03 average growth was only 5.4 per cent, while the highest growth rate achieved during the period was 6.7 per cent (in 1998-99). Economic Systems An economic system is a mechanism which deals with the production, distribution and consumption of goods and services in a particular society and comprises of people, institutions and their relationships. It addresses the problems like the allocation or scarcity of resources. Different economic systems adopt different ways to addresses these questions. In other words, an economic system defines the institutional framework regulating the business environment in a country. An economic system can be considered a part of the social system and is hierarchically equal to law system, political system, cultural system, and so on. The three basic and general economic systems are: Market Economy: the basis for several right wing systems, such as capitalism. Planned or Command Economy: the basis for several left wing systems, such as communism. Mixed Economy: arguably the centrist economic system. Free Enterprise Economy or Market Economy or Capitalism It is an economic system that operates in a free market and is not planned or controlled by a central authority. In Market Economy, market mechanism co-ordinates on the economic decision-making of various economic agents. It helps the economic system decide what to produce, how to produce and for whom. Consumer demand determines what to produce, competition forces the firms to decide how to produce most economically and factor prices determine the purchasing power of individuals, i.e. for whom to produce. Consumers are assumed to act in a rational manner so as to maximize their economic welfare. Given the demand, firms decide how to produce the required goods and services in the most efficient manner so as to

maximize their profits. This results in optimum allocation of scarce resources. Adam Smith proclaimed that through the functioning of the invisible hand, those who pursue their own self-interest in a competitive economy would most effectively promote the public interest. It has been proved that under restrictive assumptions, a perfectly competitive economy is efficient. The system of capitalism stresses the philosophy of individualism believing in private ownership of all agents of production, in private sharing of distribution processes that determine the functional rewards of each participant, and individual expression of consumer choice through a free market place. In its political manifestation capitalism may fall in a range between extreme individualism and no government (anarchism) and the acceptance of some State sanctions as mentioned by Adam Smith and the later philosophers of modern capitalism. Example: USA, Canada. This economic system works on the principle of Laissez Faire system, i.e., the least interference by the government or any external force. The primary role of the government, if any, is to ensure free working of the economy by removing obstacles to free competition. A free Enterprise Economy is characterized as follows: Means of production are privately owned by the people who acquire and posses them Private gains are the main motivating and guiding force for carrying out economic activities Both consumers and firms enjoy the freedom of choice; consumers have the freedom to consume what they want to and firms have the choice to produce what they want to The factor owners enjoy the freedom of occupational choice, i.e., they are free to use their resources in any legal business or occupation; There exists a high degree of competition in both commodity and factor markets and There is least interference by the government in the economic activities of the people; the government is in fact supposed to limit its traditional functions viz, to defence, police, justice, some financial organizations and public utility services.

Government Controlled Economy or Command Economy Under socialism, the tools of production are to be organized, managed and owned by the government, with the benefits accruing to the public. A strong public sector, agrarian reforms, controls over private wealth and investment and national self-reliance are the other planks of socialism. Socialism does not involve an equal division of existing wealth among the people but advocates the egalitarian principle. It believes in providing employment to all and emphasizes suitable rewards to the efforts put in by every worker. Also called Fabian socialism, this philosophy is followed in our country and other social democratic countries in the world. Communism goes further to abolish all private property and property rights to income would own and direct all instruments of production. Sharing in the distributive process would have relationship to private property since this right would not exist. Alternatively called Marxism, communism was followed in Russia, China and East European countries. A command economy is a method of determining what, how, when, where and for whom goods and services are produced, using a hierarchical organization structure in which people carry out the instruction given to them. The economic system that prevailed in the former communist nations of Eastern Europe was called a command economy because under that system central planning authorities determined resource allocation, production goals, and prices. A command economy differs from a market economy in two important ways: In a command economy the state owns all the productive resources, like land, factories, financial institutions, retail stores, and the bulk of the housing stock. Government enterprise and government ownership of resources are the rule rather than the exception in a command economy. Authoritarian methods are used to determine resource use and prices. A centrally planned economy is one in which politically appointed committees plan production by setting target outputs for factory and

enterprise managers and in general manager the economy to achieve political objectives. The other features of a pure socialist economy are: Means of production are owned by the society or by the state in the name of the community private ownership of factors and property is abolished; Social welfare is the guiding factor for economic activities private gains, motivations and initiatives are absent, Freedom of choice for the consumers is curbed to what society can afford for all, and The role of market forces and competition is eliminated by law. Mixed Economy Mixed economy is followed by countries where equal importance is given to both public and private sectors. Mixed economies entail democratic control of the economy, though they differ over issues like extent to which an economy could involve markets and whether control should be centralized or extensively dispersed. An economy that uses a market coordinating mechanism is called a mixed economy. It is an economy that relies on both markets and command mechanism. Most of the modern nations have a mixed economy, where governments as well as business firms provide goods and services. India is a perfect example mixed economy. A mixed economy is one in which there exist both government and private economic systems. It is supposed to combine good elements of both free enterprise and socialist economies. A mixed economy is widely known as one, which had both public sector (the government economy) and private sector (the private economy). The private sector has features of a free enterprise economy and the public sector has features of socialist economy. Characteristics Capitalism Socialism Communism

Economic markets

Freedom to compete Limited with the right to competition with invest. State owned industries. Profits and wages in relation to ones ability and willingness to work. Capital invested by owners who may also borrow on credit. Capital may be reinvested from profits. Depreciation is legal. Workers are free to select an employer and occupation.

Absence of competition with State owned markets and industries.

Individual Incentives

Profits recognized. Profits not allowed. Wages fairly in Workers urged to relation to efforts. work for the glory of the State. Obtained from owners and from State issued bonds for State owned industries. Depreciation permitted. Workers allowed selecting occupation. State planning encourages employment. Managers in State owned industries are answerable to the State. Non monetary rewards emphasized. State owns the basic industries. Other business may exist. State provides all resources to start business owned by the state. No depreciation.

Capital Sources

Labor

The State determines ones employer and employment.

Management

Managers are selected on the basis of ability. Managers have freedom to make decisions. Individuals have the right to contract with others

Key managers must be party members. Absence of freedom to make decisions.

Business Ownership

State owns all productive capacity including communes.

Risk Assumption

Losses assumed by owners. May transfer business risks to other businesses through insurance.

People assume risks of State owned industries. Losses taken from taxes.

Economic production owned by the state. Risks assumed by the State. Losses reduce standard of living.

Economic Planning A mixed economy is necessarily a planned economy. It does not mean simply a controlled economy in which the government interferes in the economic matters through fiscal and monetary policies but it is an economy in which the government has a clear and definite economic plan. The public sector will have to operate according to certain priorities and to realize specific social and economic goals. At the same time, the government cannot leave the private sector to function in its own unorganized way. The government has to prepare and implement a comprehensive economic plan integrating the private sector with the public sector. For this reason Five year plans were launched. All the five year plans were designed to achieve four important long term objectives: i. ii. iii. iv. Increase production to the maximum possible extent so as to achieve a higher level of national and per capita income; Achieve full employment; Reduce inequalities of income and wealth; Set up a socialist society based on equality and justice and the absence of exploitation.

Economic Structure The structure of the economy factors such as contribution of different sectors like primary (mostly agricultural), secondary (industrial) and tertiary (secondary) sectors, large, medium, small and tiny sectors to the economy,

and their linkages, integration with the world economy etc. are important to business, certain factors which affect the business etc. Normally, as the economy develops the share of the primary sector in the GDP and employment declines and those of the other sector increases. After a certain stage the share of the manufacturing sector may also decline. The developed economies are primarily service economies in the sense that the service sector generates bulk of the employment and income. The contribution of services to GDP and employment is substantially high in particularly the developed economies. In most of the countries the service sector is the largest and fastest growing sector. The services sector now contributes nearly 70 percent of the world economy. Removal of Regional Imbalances The co-existence of relatively developed and economically depressed States and even regions within the same state is known as regional imbalance. Balanced regional growth is necessary for the harmonious development of a federal state such as India. India presents a picture of extreme regional variations in terms of such indicators of economic growth as per capita income, proportion of population living below poverty line etc. The government provides with Dearness Allowance to match for the inflation to remove imbalances. RBI controls the money supply so as to check the inflation. An investment of the government in education is also an effort to reduce the imbalance in the social order.

Indicators of Regional Imbalance To study regional imbalance, 15 major States of India have been classified into two major groups: Forward States and Backward States. The nine forward States are Punjab, Maharashtra, Haryana, Gujarat, West Bengal, Karnataka, Kerala, Tamil Nadu and Andhra Pradesh. The six backward States are Madhya Pradesh, Assam, Rajasthan, Orissa, and Bihar. a. Net State Domestic Product An important indicator of regional disparity is the growth rate of Net State Domestic Product (NSDP) observed during the last two decades. The planning process, by helping the backward regions, made an effort to reduce regional disparities, but the force of liberalization and globalization strengthened investments in forward states much more than in backward states. b. Trends in investment and financial assistance A study indicated that more than two-third of investment proposals (69.2%) in the post-reform period were concentrated in the forward states and a similar situation prevailed in terms of financial assistance distributed by AllIndia Financial Institutions as well as State Financial Corporations. c. Infrastructure disparities Consumption of power per capita is an indicator of level of energy consumption. ] Andhra Pradesh, Kerala and West Bengal, all the other forward states are above national average as against them, the backward

states, specially Uttar Pradesh and Bihar are way behind . State wise number of registered vehicles per 1000 person is an important indicator, though it cannot be treated as a comprehensive indicator of the level of transport developing since it does not take into account (a) Railways and (b) Road length per 100 sq. Km which has became a major source of transport. While creation of infrastructure important, but the intensity of its use would depend upon the state of development the state in term of Net State Domestic Product as well as per capita NSDP. For instance, Orissa has 154 Kms of road length per 100 sq. kms of area, but it ranks very low in terms of NSDP (both total and per capita). This explains the under utilization of roads. Price and Distribution Controls The methods adopted by the government for controlling price and distribution of goods and services are:
a)

Price Ceiling: Rationing of prices implies a price ceiling which is a maximum price that can be said to be legally charged for a good or service. A price ceiling is said to be effective if it is set below the price that would otherwise emerge as the market equilibrium price. Floor pricing: When the supply is abundant, a minimum standard price is fixed below which the product is not sold so as to safeguard the interest of the supplier/producer. This fixed price is effective if it is above the market equilibrium price. Licensing: Products such as tobacco, alcohol, some drugs etc can only be sold by a license bearer to control the distribution of such goods. Taxes/duties: The government can charge heavy duties/taxes for the products it wants to discourage and can promote the business of other products by reducing the duty/tax levied on them. This controls the distribution of the products.

b)

c) d)

Economic Reforms
1.

Liberalization: India has been facing grave economic crises and external pressure for foreign exchange. There was an internal debt trap from 1986.There were several liquidity crises. India was almost on the threshold of defaulting on international payments which would have damaged our image in the international market. Its monetary

system, particularly the foreign exchange situation, was in a unstable position when the Narsimha Rao government took over in June 1991. Dr. Manmohan Singh, the then Union Finance minister, had the great task of introducing ways for the recovery of the ailing monetary system.
2.

Privatization: In majority of nations there was an expansion of the public sector particularly of state-owned enterprises in the 1960s and 1970s. 1960s witnessed a trend of nationalization in Britain but since late 1970s, the trend changed towards privatization by selling State owned enterprises. The major drawbacks of public ownership can be summed up as follows:

a. Economic inefficiency of the public sector in production activities, high cost of production, inability to innovate, costly delays in delivery of goods produced. b. Ineffective provision of goods and services such as failure to meet objectives, diversion of benefits to select few, political interference in the management of enterprises. c. Bureaucracy, corruption, nepotism, lack of concern of customer needs, large burdens on public budgets, problems in labor relations, inefficient government. 2. Globalization of Indian Business: India's economic integration with the rest of the world has been limited because of restrictive economic policies followed until 1991. With the new economic policy ushered in 1991, there has, however, been a change. Globalization has in fact become a buzz-word with Indian firms now, and many are expanding their overseas business by different strategies. 3. Abolished licensing for all projects except in 18 industries. 4. MRTP Act amended to eliminate prior approval to large companies for capacity expansions. The requirement of Phased Manufacturing Programs (PMP) discontinued for all new projects. 5. Small scale enterprises allowed offering up to 24 per cent of shareholding to large enterprises. 6. As far as foreign direct investment regulations were concerned, following changes were made: Limit on foreign equity holdings raised from 40% to 51 % in a wide range of industries; Foreign equity proposals need not be accompanied by Foreign technology transfer agreement;

 Procedures for foreign direct investment streamlined by creating a Foreign Investment Promotion Board to consider individual applications case-by-case. 7. Technology imports liberalized by increasing royalty limits. 8. From public sector policy point of view, following changes were made: a. List of industries reserved for the public sector (Schedule A) reduced from 17 to 8. b. List of sectors reserved for dominance by public sector (Schedule B) effectively abolished. c. Disinvestment in selected public sector enterprises to raise finances for development, bring greater accountability and help create a new culture in their working for improved efficiency. d. Government equity ranging from 5% to 20% in 31 PSHs (Public Sector Enterprises) with 'go track record' disinvested to public sector mutual funds and financial institutions. 9. Softening of MRTP regulations and FERA was modified into FEMA.

Per Capita and National Income Every sector of the economy employs natural, human and material resources and contributes to the aggregate flow of goods and services during a time period, usually specified as one year. This aggregate flow of goods and services represents the total income earned by factors of production employed during the year and is popularly known as national income or national product. The rate of growth of the national income in an economy is an indication of the pace at which the economy has been growing. A high growth rate indicates that the economy is a developed one and the overall environment is favorable for business. A low growth rate signals the economy is a developing or a poor one. Per capita GDP growth, a proxy for per capita income, which broadly reflects the improvement in the income of the average person, grew by an estimated 4.6 per cent in 2008-09. Though this represents a substantial slowdown from the average growth of 7.3 per cent per annum during the previous five years, it is still significantly higher than the average 3.3 per cent per annum income growth during 1998-99 to 2002-03.