• ENVIRONMENT IN INDIAN ECONOMY

• Business means an organized effort of enterprise to supply goods and services to

consumer for a profit. These activities satisfy society’s needs ,desires and bring
profits to business firms.

Nature of modern business

• Modern business : large size, oligopolistic nature, diversification, global presence,
technology orientation and government regulation.

• a)Large size of business : Modern business is large in size. Private sector

companies of India are not as large as the big companies of developed nations in
terms of sales and assets but are quite large by the standards of developing
countries. These can be compared favorably even with a large number of middle
size companies of western world. The notable private sector large business
organizations include Reliance, Tata, Larsen & Toubro, Bharati Airtel, Adani, etc.
• b)Oligopolistic nature : Oligopoly is characterized by small number of firms seeking
a homogenous or a differentiated product. Ex: Cold Drinks(Pepsi,Coca-cola)
• c)Diversification : today business houses adopt the policy of diversification. The
Tata has a diversified portfolio consisting of automobiles, iron and steel, insurance,
telecommunication etc. Reliance group has a diversified portfolio of oil, telecom,
 like:
• d) Global presence: In the wake of liberalization and reduction of trade
restrictions , business organization also expands by doing the business overseas.
The Indian companies like Reliance, Ranbaxy, Sundaram, Bajaj Auto, Tata etc also
export their products to different nations of the world.

• e) Technology orientation: To satisfy ever changing needs of large number of

consumers, modern business organizations adopt new technology to
introduce new products in the market. Ex: Apple Inc.,Google, Microsoft

• f) Government regulations: There is reduction in government controls with the

initiation of liberalization. But government control over business organizations is
also necessary to correct market failures represented in the form of monopoly .
Government attempts to create stable market conditions by monetary and fiscal
regulations.

Business environment
• It is divided into two broad categories- external and internal environments.
External environment is further categorized as macro and micro environment.
Micro environment ( PESTLE)
Macro environment
• Indian economy is characterized as developing economy having more than
50% agriculture dependent population .
Characteristic Features of Indian Economy
• India has a mixed economy wherein both private and public enterprises
prevail. Indian constitution allows private ownership of means of production.
At the time of independence,several sectors of the economy were developed
under public sector mode by government due to huge resource requirement
and long gestation period to realize profit. Market mechanism in India is still
not completely free from government control. After liberalization in 1991, there
is much higher growth in private sector compared to public sector.

• 1.Low per capita income : In 2009, India’s per capita income:Rs 37490 ; in
 2018-19 :Rs 1,26,406 at current prices. According to World Bank, in
2017, UK's per capita income was $42,515. for Indians: $1,964

• 2.Unequal distribution of income and poverty : The inequality in income is

gauged from unequal expenditure on house hold items . This is detrimental to
the appropriate growth of business. People below poverty line can not create
large demands for industrial goods.
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3)Agricultural based economy : At the time of independence around 70% of
people were dependent on agriculture for their livelihood. Only there is
marginal decline in this number. In 2006-07, agriculture and allied
activities contributed 18.5 percent of gross domestic product.
This figure is still higher compared to many third world countries like Argentina,
Brazil, Mexico etc. wherein contribution of agriculture is around 10% of GDP.
Due to less productivity of agriculture sector compared to industrial
sector, the agriculture dependent people have less purchasing power.

4)Higher population : India is second largest populated country after China.

This puts tremendous pressure on the existing natural resources.

5)Unemployment: Coupled with higher population growth rate, large scale

unemployment and underemployment also characterizes the Indian
economy.

6)Scarcity of capital : In India, investment rate has risen at a lower pace which
can contribute only a moderate growth rate. It acts as hindrance to
7)Technological backwardness : Modern latest technology is certainly scale
neutral but it is not resource neutral. This acts as a hindering factor for large
number of small and marginal farmers to adopt latest agricultural
technology.

8)Limited Entrepreneur potential : An entrepreneur takes risks and ventures

into new business. Unfortunately, there are limited persons possessing
entrepreneurial skills in India.

Assessing Overall Present Business Environment

•India is a key player in the world economy.
•Indian economy is diversified from agriculture to latest modern
technology.
•Contribution of agricultural activity to the GDP w.r.t workforce.
•India has advantage w.r.t higher proportion of people with technical
skills & English language proficiency . It is conducive for entrepreneurs.
•Indian economy has changed from controlled public sector to more
liberalized system .Market has also changed from seller’s market with limited
competition to buyer’s market with increased competition. These changes give
rise to entrepreneur opportunities.
• Indian Economy has changed from quantitative restrictions and
tariffs to quota free and open economy .

• Still Indian economy is considered as a developing economy based on

its characteristic features like predominance of agriculture, rapid
population growth, low per capita income, unemployment, limited
capital .

• Some of the problems of Indian economy are: inadequate

employment opportunities, economic inequality, poverty, poor
infrastructure, fiscal deficit and higher proportion of non
performing assets.

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• Fiscal Policy
• Fiscal policy relates to the impact of government spending and tax
on aggregate demand and the economy.
• Expansionary fiscal policy is an attempt to increase aggregate
demand and will involve higher government spending and lower
taxes.
• Expansionary fiscal policy will lead to a larger budget deficit.
• Deflationary fiscal policy is an attempt to reduce aggregate demand.
It will involve lower spending and higher taxes.
• This deflationary fiscal policy will help to reduce budget deficit.
• Monetary Policy
• Monetary policy involves influencing the supply and demand for money
through interest rates and other monetary tools.
• Monetary policy is usually conducted by the Central Bank, e.g. UK – Bank of
England, US – Federal Reserve.
• The target of Monetary policy is to achieve low inflation (and usually promote
economic growth)
• The main tool of monetary policy is changing interest rates. For example, if
the Central Bank feel the economy is growing too quickly and inflation is
increasing, then they will increase interest rates to reduce demand in the
economy.
• In some circumstances, Central Banks may use other tools than just interest
rates. For example, in the great recession 2008-12, Central Banks in UK and
US pursued quantitative easing. This involved increasing the money supply
to increase demand.
• Major Steps in the 1991 Reforms
• Fiscal Reforms: The data reveals that fiscal deficit during 1990-91 was as large as 8.4 percent of
GDP. The budget for 1991-92 took a bold step in the direction of correcting fiscal imbalance. It
envisaged a reduction in fiscal deficit by nearly two percentage points of GDP from 8.4 percent in
1990-91 to 6.5 percent in 1991-92.The budget aimed at containing government expenditure and
augmenting revenues; reversing the downtrend in the share of direct taxes to total tax revenues
and curbing conspicuous consumption.
• Monetary and Financial Sector Reforms: Monetary reforms aimed at doing away with interest
rate distortions and rationalizing the structure of lending rates.The new policy tried in many ways to
make the banking system more efficient. Some of the measures undertaken were:
– Reserve Requirements: reduction in statutory liquidity ratio (SLR) and the cash reserve ratio
(CRR) in line with the recommendations of the Narasimham Committee Report, 1991. In mid-
1991, SLR and CRR were very high. It was proposed to cut down the SLR from 38.5 percent to
25 percent within a time span of three years. Similarly, it was proposed that the CRR br brought
down to 10 percent (from the earlier 25 percent) over a period of four years
– Interest Rate Liberalisation: Earlier, RBI controlled the rates payable on deposits of different
maturities and also the rates which could be charged for bank loans which varied according to
the sector of use and also the size of the loan. Interest rates on time deposits were
decontrolled in a sequence of steps beginning with longer term deposits, and liberalisation was
progressively extended to deposits of shorter maturity
– Greater competition among public sector, private sector and foreign banks and elimination of
administrative constraints
– Liberalisation of bank branch licensing policy in order to rationalize the existing branch network
– Banks were given freedom to relocate branches and open specialized branches
– Guidelines for opening new private sector banks
– New accounting norms regarding classification of assets and provisions of bad debt were
• Reforms in Capital Markets: Recommendations of the Narasimham Committee were
initiated in order to reform capital markets, aimed at removing direct government control and
replacing it with a regulatory framework based on transparency and disclosure supervised by
an independent regulator. The Securities & Exchange Board of India (SEBI) which was set
up in 1988 was given statutory recognition in 1992 on the basis of recommendations of the
Narasimham Committee. SEBI has been mandated to create an environment which would
facilitate mobilization of adequate resources through the securities market and its efficient
allocation.
• Industrial Policy Reforms:  The government announced a New Industrial Policy on 24 July
1991. The New Industrial Policy established in 1991 sought substantially to deregulate
industry so as to promote growth of a more efficient and competitive industrial economy. The
central elements of industrial policy reforms were as follows:
– Industrial licensing was abolished for all projects except in 18 industries. With this, 80
percent of the industry was taken out of the licensing framework.
– The Monopolies & Restrictive Trade Practices (MRTP) Act was repealed to eliminate the
need for prior approval by large companies for capacity expansion or diversification.
– Areas reserved for the public sector were narrowed down and greater participation by
private sector was permitted in core and basic industries. The new policy reduced the
number of areas reserved from 17 to 8. These eight are mainly those involving strategic
and security concerns. (Example, railways, atomic energy etc.)
– The policy encouraged disinvestment of government holdings of equity share capital of
public sector enterprises.
– The public sector units were provided greater autonomy and professional management
that could be helpful for generating reasonable profits, through an MOU(Memorandum of
Understanding) between the enterprise and the concerned Ministry, through which
• Trade Policy Reforms: 
– Freer imports and exports: Prior to 1991, in India imports were regulated by means of a positive list of freely importable
items. From 1992, imports were regulated by a limited negative list. For instance, the trade policy of 1 April 1992, freed
imports of almost all intermediate and capital goods. Only 71 items remained restricted.
– Rationalization of tariff structure and removal of quantitative restrictions: The Chelliah Committee’s Report had suggested
drastic reduction in import duties. It had suggested a peak rate of 50 percent. As a first step towards a gradual reduction in
the tariffs, the 1991-92 budget had reduced the peak rate of import duty from more than 300 percent to 150 percent. The
process of lowering the customs tariffs was carried further in successive budgets.
– Trading Houses: The 1991 policy allowed export houses and trading houses to import a wide range of items. The
Government also permitted the setting up of trading houses with 51 percent foreign equity for the purpose of promoting
exports. For instance, under the 1992-97 trade policy, export houses and trading houses were provided the benefit of self-
certification under the advance license system, which permits duty free imports for exports.
• Promoting Foreign Investment: 
– In 1991, the government announced a specified list of high technology and high-investment priority industries wherein
automatic permission was granted for foreign direct investment (FDI) up to 51 percent foreign equity. The limit was raised to
74 percent and subsequently to 100 percent for many of these industries. Moreover, many new industries have been added
to the list over the years.
– Foreign Investment Promotion Board (FIPB) has been set up to negotiate with international firms and approve direct foreign
investment in select areas.
– Steps were also taken from time to time to promote foreign institutional investment (FII) in India.
• Rationalization of Exchange Rate Policy: One of the important measures undertaken to improve the balance of payments
situation was the devaluation of rupee. In the very first week of July 1991, the rupee was devalued by around 20 percent. The
purpose was to bridge the gap between the real and the nominal exchange rates that had emerged on account of rising inflation
and thereby to make the exports competitive.
• The 1991 economic reforms were focused primarily on the formal sector, and as a result, we have seen significant boom in
those areas that were liberalized. Sectors such as telecom and civil aviation have benefited greatly from deregulation and
subsequent reforms. However, liberalisation and economic reforms still have a long way to go, especially for the informal sector
—including the urban poor who hold jobs as street vendors or rickshaw pullers, the agricultural sector, Micro, Small and Medium
Enterprises (MSMEs) and tribals. The slow growth and stagnation in these sectors which have not seen any reform further
highlights the significant role of the 1991 reforms in helping India’s economy become what it is today.
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