ECONOMIC

ENVIRONMENT
OF
BUSINESS

2011 02

BRAIN TEASER

HOW MANY SQUARES?




1 INTRODUCTION

The Behavior of an Enterprise in an Economic
Environment.

FOCUS Macro-economic Environment

The Business Sector depends on

- The Household Sector

- The Capital Market Sector

- The Government Sector

- The External Sector




Individually Companies can do little
Collectively they can Influence the Policies

CII Confederation of Indian Industry
FICCI Federation of Indian Chamber of Commerce
and Industry
ASSOCHAM Associated Chambers of Commerce and
Industry of India

They extract Tax Concessions and Subsidies from
the Government

Economic Laws in Favor of the Industry


2 ECONOMIC SYSTEM

The Sum Total of the Devices by which the
Preference among Alternative Purposes of
Economic Activity is determined and by which
Individual Activities are Coordinated for the
Achievement of these Purposes.

2.1 CAPITALISM
A Mixed Economic System in which the Private and
the Public Sectors coexist side by side.

Is Capitalism a fully Competitive Economic System?

2.2 SOCIALISM
The Responsibility of taking all Decisions Related
to Production and Economic Development lies with the
State.

- Apart from Labor all other means of Production
are owned by the State.

- Objective is Social Welfare and no Private Profit

- State Controls Production Pattern, Quantities and
Distribution.
3 MACRO-ECONOMIC SCENARIO

3.1 HIGH RATE OF GROWTH
Sales of Consumer and Consumer Durables Increase


3.2 INFLATION
Rise in General Level of Prices
Decrease in Demand
Consumer defers Purchase


3.3 HIGH RATES OF SAVINGS AND INVESTMENT
High Savings result in Higher Investment
Savings in the Bank
Investment either Internal or Foreign

3.4 FISCAL IMBALANCE

Government Funds
Income and Expenditure
What are the Funds used for?

3.5 BALANCE OF PAYMENT DEFECITS

Shortage of Foreign Exchange
Forces Restrictions on Imports
Protection of Domestic Industries

India example : Coco Cola, IBM

4 PROSPERITY, RECESSION & STAGFLATION

4.1 PROSPERITY
Supply and Demand High
Income High; Basic Needs Increase
Generates Competition

4.2 RECESSION
Crash in the Stock Market
Prices fall
Consumer Goods Sales are Maintained

4.3 DEPRESSION
Long Period of Recession results in Depression
US example

4.4 STAGFLATION
Result of Wrong Government Policies
Inadequate Growth; Inflation; Unemployment

5 FINANCIAL SYSTEMS

Basic Function: Accelerate Business Growth
Collection of Savings
Investment Transfer to Business Enterprises
Capital Formation

Households are Net Savers
Business Firms are Net Investors

There are 2 Markets
1 Money Market
Organized Sector and Unorganized Sector
2 Capital Market
Long-term Funding
IFCI, IDBI, SFC, SIDC, LIC, GIC

6 ECONOMIC POLICIES

6.1 INDUSTRIAL POLICY

Government allocated Capital to Industries

INDIA since 1956 Public and Private Sector

1973 Concession to Private Sector and Foreign
Multinationals
1980 Liberalization
Govt. Delicensed 28 Industry Categories

1991 New Industrial Policy
Deregulated the Indian Economy

6.2 TRADE POLICY

1 Outward Oriented
No discrimination in Domestic Markets
and Exports
2 Inward Oriented
Domestic Focus Only

India, since 1951 followed a Domestic Policy
1992 the Policy Changed

6.3 MONETARY POLICY
RBI

6.4 FISCAL POLICY
Provide a Stable Background for the Industry
For meeting Non-developmental Expenditures
Taxation for Public Expenditures
THANK YOU