Economic environment refers to all these forces that have an economic impact on business activities. We know that business is an economic organization. Therefore, its survival and growth are dependent on economic factors. The economic environment includes various factors, such as inflammation, interest rate, price level, money supply in the market, etc. These factors serve a business as an opportunity or as a threat to a business. Therefore, management always remains active to grab the opportunity and tries to change threats into opportunities.
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Important Factors of Economic Environment
Economic environment is one of the most crucial elements of the business environment. In India, the economic environment consists of various macro-level factors that are related to the production and distribution of the organization. These factors have an impact on the wealth of businesses and industries. Some of the important factors are as follows:
- Stage of Economic Development: The stage of economic development of the country means the physical frame and framework environment.
- Economical Structure: The type of economic system determines the role of the public and private sectors in India. A mixed economic system operates where both public and private sectors exist, and India is an example of a mixed economy.
- Economic Planning: Economic planning gives direction to the changes in the economic environment. It includes five years plan, an annual budget, etc.
- Economic Policy: There are various important economic policies that influence the business decisions, such as monetary policies, fiscal policies, etc.
- Fluctuations and trends in Economic Indicator: The functioning of an economic indicator like national income, distribution of income, growth rate, GDP, NDP, etc. Any change or fluctuation in these will affect the Economic environment.
- Infrastructural Factors: Infrastructure refers to all such activities and facilities which are needed to provide different kinds of services in an economy. It includes financial institutions, banks, modes of transportation, communication facilities, etc. Poor infrastructural facilities hamper the economic growth of the country.
Economic Environment at the Time of Independence
The economic environment of India has been rapidly changing mainly due to government policies. The main features of economic environment at the time of independence are as follows:
- At the time of Independence, the Indian economy was mostly agricultural and rural in nature. With almost 85% of the population of the county living and carrying out their occupations in villages.
- Low productivity or inefficient techniques of production were used for performing any operation.
- There was no good public health care system due to which several communicable diseases were spreading everywhere.
- There was a high infant mortality rate as there was no proper health care system.
Economic Environment Since Independence
The government opted for ‘Economic Planning’ to revive the economy from the damages caused by the British Rule.
The main objectives of the development plan adopted by India are as follows:
- India’s development plans aimed at initiating rapid economic growth in order to decrease unemployment and poverty, thereby increasing the standard of living of the people.
- It aimed at establishing a well-built industrial base focusing on heavy and primary industries.
- It aimed to become self-reliant and bring down the inequalities of income. This plan also included following a socialist pattern of development, i.e. based on equality by avoiding capitalism, as it focuses on attaining the welfare of the society.
- With respect to economic planning, the government gave the responsibilities for infrastructure industries to the public sector.
- Private sector industries were responsible for the development of the consumer goods.
- Mixed economy pattern was adopted by giving more importance to the socialist pattern.
Crisis of 1991
The government could not get a very positive effect by making a new economic policy that gave more importance to the public sector and imposing restrictions on the Private sector. As a result, India faced foreign trade exchange crisis in 1991.
The major crises of 1991 were:
- The fiscal deficit approximately reached 7% of GDP, which was a warning situation.
- Internal debt also rose to 50% of GDP.
- Negative growth in agriculture and industrial production.
- The value of the rupee was depreciating day by day. It depreciated by 26.7 percent (in terms of US Dollars). There was also a fall in foreign exchange reserves.
- There was a negative balance of payment.
- India was on the verge of becoming a defaulter. As a result, SBI and RBI sold and Pledged Gold in the international market.
- Imports fell(in terms of US Dollars) by 19.4 percent and exports by 26.7 percent.
India borrowed a loan of $600 million from the World Bank and International Monetary Fund to manage the crisis of 1991. In order to revive the economy, India decided to reform the economy.
Reform Measures
To save our country from the serious situation of crisis Government of India took the following reform measures:
- Firstly, the fiscal deficit was reduced, and the New Industrial Policy was announced in July 1991.
- The abolition of the Industrial Licensing Policy was established with the amendment of the MRTP Act.
- There was an open entry for the private sector to areas that were earlier public sector.
- There was a rise in foreign equity holders from 40% to 51%.
- The government set up the Foreign Investment Promotion Board(FIPB).
- Introduction of Indian development Bond scheme to get funds from IMF.
- Buying back of gold, pledged with Bank of England and Bank of Japan.
- Measures were laid to control the imports and encourage more export.
- There was an introduction of Liberalized Exchange Rate Management System.
- Government eliminated import licenses on capital goods and abolished export duties.