Business & Environment

Business
Exchange of goods and services for mutual
benefits
Institution organized and operated to provide
goods and services for the purpose of private
gains
Is a human activity of converting resources into
goods and services for the purpose of wealth
creation.
Human activity carried out by the unified efforts
of different categories of people. To produce
wealth through production and distribution of
goods and services.
Characteristics of Business
Old
Unified Human activity
Continuous (going concern)
Focuses production and
exchange of goods and
services for value
Aiming wealth and demand
creation
Economic, legal, social and
cultured activity
Encourages saving and capital
formation
Provides
Form utility
Time utility
Place utility
Can have different ownerships
Private
Public
Government
Involves risk and returns
Its an art, science and system
New
Trustee of social and national
resources
Instrument for social change
Maximization of opportunities
Creation of employment
Innovative and dynamic
Interdisciplinary and pluralistic
approach
Focus on customer
satisfaction
Business Environment
Consists of all those factors that have a
bearing on the business.
The Business survival, success, and
sustenance depends on its ability to
understand, align, adapt and predict the
environment
Environment can be broadly segregated
into External and Internal factors
Environment
Micro/ Internal - The conditions, entities, events, and factors within an
organization that influence its activities and choices, particularly the behavior of
the employees. Factors that are frequently considered part of
the internal environment include the organization's mission statement, leadership
styles, and its organizational culture.
Narrow
Internal
Direct and continuous impact
Employees, customers, suppliers and vendors,
local community, competitive status
Macro/External
Broader dimension
Economic, political, technological, bureaucratic,
legal, social, cultural factors
Environment
Internal
Owners/Top management
Employees
Resources, R&D capabilities
Corporate Culture & Values
Mission, vision, Goals, Strategy, Policies
Industrial Relations & Team spirit
Compensation systems and career progression
Task (operating Environment)
Customers/consumers
Competitors
Laws, rules and regulations
Suppliers and vendors
External
External Environment
Physical
Economic
Technological
Demographic
Global
Legal
Social
Cultural
Political
Ethical
Historical
Natural
Business and Environment
Interdependence
Dynamism
Medium of change
Uncertainties
Controllable and uncontrollable factors
Responsibilities towards environment
Focus on changing scenario and
adaptability
Why?
Understanding and being prepared as per
internal and external environment
Knowledge of problems, threats,
challenges and opportunities
Adaptability
To understand the policies of government
and act accordingly
Increasing profitability
For long and short term planning and
strategy formulation
Economic Reforms
in India
History
Around 50 to 100 years before our
independence in 1947, there was hardly any
discernible economic growth in the whole Indian
sub-continent. Per capita income was stagnant,
perhaps declining over that whole long period.

After independence, annual per capita growth
broke out of this long period of slumber and was
in the range of 1 to 1.5 per cent for about 30
years or so until around 1980.
History
After 1980 it increased to about 3-4 per cent,
which was a major departure in our recorded
history.
There was a full blown economic crisis at the
end of the 1980s
The balance of payments came under severe
pressure, and a realistic threat of sovereign
default loomed over us.
Fiscal deficits had increased significantly over
the 1980s; and inflation began to creep up to the
late teens.
History
Financial system is viewed as a tool in the hands of
govt. for developmental process.
Characterized by
Socialist pattern of economy
Administered interest rates, industrial licensing and control
Dominant public sector, limited competition
Uneconomic and inefficient production systems at high
cost
Funds used for govt. expenditure and credit to priority
sector and that too at subsidized rates
History
Domestic savings achieved by levying heavy taxes,
suppressing consumption
Despite rise in savings, greater dependence on aid
and assistance on abroad resulting in mounting fiscal
deficit
Resource mobilization subjected to various controls
which prevented the process of price discovery.


A rate of growth of average 3.2 per cent
High population growth denies a significant
dent on poverty
A huge public sector with minimum returns
A protective private sector
A Critical Assessment
Philosophy of Reforms
To free the economy from the suspicion of
socialist equity in the form of pervasive state
control on production, low productivity, a
distorted and dis-functional price system and a
complacent over-protective private sector.

To establish the supremacy of individual and the
role of economic freedom
Perspective: year 1990-91
International reserve came down to $ 1.3 billion, less
than 1 month import bill, and India was on the verge of
default in foreign obligations [ short term debt]
Stagnant exports
Indias ratings down
High deficits in domestic budget
Public sector banks having large NPA
PSU incurring huge losses
Mechanism
Dismantling of the license and permit raj so that
the rent-seeking system is abolished
Minimize the role of the state in production
except in some core and strategic areas
Reform of the legal system to end monopoly of
any group/ sector
Financial sector reforms
Reform of the system to allow free
market mechanism by
Dismantling the administered price mechanism
Inducing firms to set own targets of production
Removing all artificial barriers to unleash forces
of competition
Reforms of the tax system
Removal of trade barriers
What Has Been Done
Macroeconomic Reforms and Fiscal
Stabilizations
Microeconomic Reforms


What Has Been Done
Macroeconomic Reforms and Fiscal
Stabilizations
Fiscal Policy (Taxation)
Monetary Policy
Trade Policy
Exchange Rate Management


What Has Been Done
Fiscal Policy
Over the whole reform period, both the
personal income tax and corporate tax rates
have gradually been brought down to 30 per
cent, along with considerable simplification.
The rates in case of customs duties have
been brought down from an average of 110
per cent in 1991 (with highs over 400 percent)
to a non agricultural peak of 12.5 per cent in
2006.
What Has Been Done
Fiscal Policy
There has been massive simplification of the
excise tax structure to achieve a central rate
(CENVAT) of 14 per cent (apart from a few
exceptions like food products, textiles and
some optical fibers that attract lower tax
rates).
Excise, which is levied at the manufacturing
stage, is now essentially levied as a VAT
(Value Added Tax) so that cascading is
avoided.
What Has Been Done
Fiscal Policy
The service tax has been introduced in order
to tax the whole economy more fairly and to
reduce the excessive burden on one sector,
the manufacturing sector.
Introduction of the Fiscal Responsibility and
Budget Management Act (FRBM) in 2004,
which enjoins the government to eliminate
its revenue deficit and reduce its fiscal deficit
to 3 per cent of GDP by 2009.
What Has Been Done
Fiscal Policy
Similar acts have been passed by most state
governments (23 states so far). So fiscal
responsibility has now become part of our
legislative commitments.
Overall, the fiscal reform process spanning
both the central and state governments over
the last 15 years has been truly wide ranging.

What Has Been Done
Monetary Policy
Elimination of automatic monetization*
Reduction of statutory pre-emption of the
lendable resource of banks and interest rate
deregulation.
There was a consequent movement from
direct to indirect instruments of monetary
policy.
* http://www.business-standard.com/article/economy-policy/backdoor-monetization-110042600081_1.html
What Has Been Done
Trade Reforms
The trade regime has undergone massive
change with the removal of quantitative
restrictions along with rationalization of the
tariff structure.
There has been a massive reduction in the
number of tariff rates and the peak rate of tariff
has been reduced from around 400 per cent to
12.5 per cent for nonagricultural products.

What Has Been Done
Exchange Rate Management
Among the first reform moves was an ex ante
real devaluation of the exchange rate in 1991
and a move of the exchange rate regime from
that of a crawling peg towards a market
determined one, though somewhat managed.
With the change in the exchange rate regime
and accomplishment of trade reforms the
current account is now open along with limited
capital account convertibility.
What Has Been Done
Exchange Rate Management
The exchange rate regime focuses on
management of volatility without a fixed rate
target and the underlying demand and supply
conditions determine the exchange rate
movements in an orderly way.
What Has Been Done
Micro Economic Reforms
Industrial deregulation
Infrastructure reforms
Financial sector strengthening
Agriculture Reforms
What Has Been Done
Industrial deregulation
Massive deregulation of the industrial sector,
in fact, constituted the first major package of
reforms in July 1991.
The obsolete system of capacity licensing of
industries was discontinued
The existing legislative restrictions on the
expansion of large companies were removed
What Has Been Done
Industrial deregulation
Phased manufacturing programmes were
terminated;
The reservation of many basic industries for
investment only by the public sector was
removed.
Restrictions that existed on the import of
foreign technology were withdrawn.
A new regime welcoming foreign direct
investment was introduced.
What Has Been Done
Industrial deregulation
One area of industrial reform that has been
sluggish has been the removal of restrictions
that exist on investment in most labor using
industries known as small scale industry
reservations.
In 1991 as many as 836 industries were
reserved for investment by only small firms,
defined by the level of investment. The
number of these industries has come down to
326 by 2006.
What Has Been Done
Infrastructure
The major reforms in roadways were
imposition of a fuel cess
To finance highway construction
The commissioning of the National Highway
Development Project
PMGSY (Prime Minister's Gram Sadak Yojana or
the Rural Roads Programme).
What Has Been Done
Infrastructure
In case of ports private operators have been
introduced and then the Tariff Authority of
Major Ports (TAMP) formed
In civil aviation new private airlines, new
private airports and the beginning of an open
skies policy are in evidence.
With deregulation, introduction of the private
sector and formation of the Telecom
Regulatory Authority of India (TRAI).
What Has Been Done
Infrastructure
Urban infrastructure is another area where reform
has been inadequate and thinking has just begun.
In transportation, considerable reforms have taken
place in air and road transportation.
Although there has been noted improvement in
financial performance of railways in the last couple
of years, there is need for much greater structural
reforms for this vital transportation system to be put
in a sound sustained growth path.

What Has Been Done
Financial Sector Reforms
Introduction of operational autonomy and partial
disinvestment of public ownership in public sector
banks
Entry of new private and foreign banks and permission
for FDI and portfolio investment in banking.
The introduction of partial private sector ownership in
public sector banks and their consequent listing has
been extremely important for market orientation of
these banks and transparency in their accounts and
operations.
What Has Been Done
Financial Sector Reforms
Among other segments of the financial sector, new
private insurance companies have been introduced
with limited foreign ownership.
A new regulator, the Insurance Regulation and
Development Authority (IRDA) has been formed to
govern the insurance industry.
The Securities and Exchange Board of India was
formed as the capital market regulator; a new modern
technology oriented stock exchange was formed (the
National Stock Exchange, NSE)
Private sector mutual funds allowed and encouraged
What Has Been Done
Agricultural Reforms
Removal of restraints on interstate movement of food
grains.
The restructuring of the public distribution system
(PDS).
Relaxation of restrictions under the Essential
Commodities Act.
Introduction of forward trading in most agricultural
commodities.
Removal of some marketing restrictions on crop
produce.
India From Socialist to Market
Economy
Prior to 1947 there was no public sector barring a
few instances include railways, postal &
telegraph, ordinance and aircraft factories etc
Characterised by
weak industrial base,
heavy unemployment,
low income, saving and investments,
poor infrastructural facilities,
weak financial support,
funds and managerial capability starved private sector
Expansion of PSU was an integral part of
Industrial Policy 1956

India From Socialist to Market
Economy
Assumption was that the big planned govt.
intervention and control could
Accelerate industrial and agricultural production
Reduce unemployment and poverty
Ensure sustainable and equitable economic growth of
different sectors of economy and society
Focus and support

Let us see some developments
in economic scene

India: Growth rates in 1990s
ECONOMIC GROWTH
OF INDIA
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India: External Sector
India: International Liquidity