Economic Environment In India

Introduction

The economy not only became synonymous with global economies of scale but the reforms also established a golden standard for the Indian economy. Since then, the Indian firms got an opportunity to collect foreign funds to improve their financial infrastructures.

The economic factors that affect the growth and survival of an organization include inflation, interest rates, price levels, demand, the money supply in the market, etc. These factors may be either a threat or an opportunity for business organizations. The management tries to convert the threats into opportunities for every business.

Crucial Factors in Economic Environment

The economic environment is the most crucial factor for the business environment. Indian economic environment has some important macroeconomic factors that impact the productivity of organizations. These factors contribute to the overall wealth accumulation and revenues of the firms. Some of these factors are as listed below.

Stage of Economic Development − The stage of economic development is the physical frame and framework of the environment.

Economical Structure − Economic structure refers to the types of the economic system. This, on the other hand, determines the role of the public and private sectors in India.India is an example of a mixed economy where a mixed economic system operates where both public and private sectors co-exist.

Economic Planning − Economic planning drives the economic systems. Some examples of economic planning include five years’ plan, an annual budget, etc.

Economic Policy − Various policies are made in order to influence the business decisions, such as monetary policies, fiscal policies, etc.

Fluctuations and trends in Economic Indicators − Changes in national indicators such as distribution of income, national income, growth rate, GDP, NDP, etc. Even a small change in any of these factors may impact the economic environment hugely.

Infrastructural Factors − Infrastructure refers to systems and services needed to provide different kinds of services in an economy. It includes financial institutions, banks, transportation, communication facilities, etc. When economic infrastructure is poor it impacts the business and economic environment negatively.

India’s Economic Environment During Independence

The economic environment in India has changed rapidly after liberalization. However, the conditions were not conducive enough at the time of independence.

Major features of the economic environment at the time of independence were as follows −

• During the independence, the Indian economy was mostly agricultural and rural in nature. Out of the total population, more than 85% lived and carried out their occupations in villages.

• The productivity of agriculture and inefficient techniques of production were prevalent. This resulted in widespread poverty.

• As there was no public health care system, several communicable diseases used to spread in the country killing thousands of people every year.

• The infant mortality rate was very high as there were no proper medical facilities to look after the newborn in the system.

Economic Reforms of 1991

The economic environment in India is rapidly changing since the 1991 reforms that were aimed to support the Indian economy. The government realized that if India were to continue the old path of license raj and economic restrictions, it won’t be able to attain a position of growth in the world market. That is why the reforms were made.

The government of India declared a new industrial system in July 1991 that aimed at ending the dilapidated Indian economy that was on the verge of bankruptcy. The extensive characteristics of this system were as follows −

• The government brought the number of organizations below mandatory licensing to six.

• Most businesses in the public sector under the initial policy were justified. The public sector was made responsible only for four industries of vital importance.

• Disinvestment was carried out in the case of numerous public sector industrial companies.

• The policies towards foreign funds got an expansion. The percentages of foreign equity partnerships were also expanded. In many ventures, a complete (100%) Foreign Direct Investment (FDI) was allowed.

• Automatic approval was now offered for transactions of technology with foreign firms.

• The Foreign Investment Promotion Board (FIPB) was established. It was meant for supporting and channelizing foreign funds in India.

Liberalization

The economic reforms were made with an aim to liberalize Indian business and trade from all the complex restrictions, redundancies, and limitations. Liberalization was the beginning of the end of the license raj. The liberalization of the Indian business has taken place with respect to the following −

• The licensing terms in most industries, excluding a shortlist were removed.

• There was freedom in determination of the range of marketing activities. For example, no constraints were now applicable to the development or consolidation of businesses.

• The restraints on the transportation of commodities and services were removed.

• The enterprises were free to determine the cost prices of commodities and services

Privatization

The aim of privatization was to engage the private sector in the nation-building rule and reduce the role of the public sector. This established a withdrawal policy of the growth patterns attempted by the Indian directors before the privatization measures were taken.

To accomplish these aims, the administration diminished the role of the public sector in the new industrial policy of 1991. It also approved the policy of proposed disinvestments of the public sector, and agreed to contract the loss-making and weak industries to the Board of Industrial and Financial Reconstruction (BIFR).

Globalization

Globalization implies a closely-knitted global marketplace where participants may come from any region and sell their products and services to the entire global marketplace.

Till 1991, the government of India held stringent control on imports in terms of price and quantity.

These laws were with respect to the following −

• Import licenses
• Limitations of tariffs
• Quantitative constraints

The new economic reforms aimed at business liberalization were focused on import liberalization, improvement of exports by rationalizing the tax structure, and changes in foreign exchange so that the nation does not remain secluded from the rest of the world.

Conclusion

As more FDI was allowed in various sectors, many MNCs and global firms were attracted by the growing Indian market potential. This helped India chart a path of progress with the FDI procured from firms from around the world. It was a beginning of a new era for Indian firms that became more effective due to globalization.

India, however, needs to make more progress in order to claim a powerful position on the world economic map. India’s progress is fine as the fastest growing economy in the world. But, it will have to make more progress yet to be a developed economy. Therefore, the economic environment in India should be made more productive and inclusive presently.

FAQs

Q1. How was the economic environment of India after independence?

Ans. The economic condition of India after independence was quite dilapidated. The education, health care, and public distribution systems were in a dismal condition. This led to widespread diseases, increases infant mortality rate, reduced education rate, etc. Most people used to stay in villages where lifestyle and other conditions were deteriorating. The overall condition of the economy was very poor in nature.

Q2. When did the reform measures for the Indian economy take place?

Ans. The reforms to the Indian economy took place in 1991.

Q3. Give two examples of factors with which the Indian economy was associated before the reforms.

Ans. The Indian economy was associated with license-permit-quota raj and import licenses before the introduction of reforms in 1991.