Economic Environment of Business: Important Factors

Dr. Sukumar Nandi Indian Institute of Management Lucknow

Principal Factors
Government: Level of governance Law and order situation Monetary factors Fiscal factors Social factors

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Government
Perception of people at large about the law and order situation How the authority is handling the law and order situation Level of efficiency in government level The prevalence of corruption

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Monetary policy
The growth of money supply in economy The level of inflation overall Sectoral inflation The interest rate factor The structure of the money markets

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Example: RBI monetary policy announcement in October, 2009

Reserve Bank of Indias second quarter review of the monetary policy kept the key policy rates i.e. the repo rate (4.75%), reverse repo rate (3.25%) and cash reserve ratio (5 %) intact. The only policy action that was undertaken was the hiking of the statutory liquidity ratio (SLR) from 24% to 25%. The hike in SLR as such doesnt make much sense in the present scenario. The commercial banks have already been investing heavily in government securities with investments in SLR investments hovering around 30.4% (of net demand and time liabilities (NDTL), October 2009) as compared to 25% last year. The hike in SLR can be considered only as a signal showing RBIs concern for inflation and as a soft tightening measure to combat the excess liquidity in the economy.

However, the status quo has been maintained on the back of higher future inflationary expectations (WPI inflation) by the RBI by raising its inflationary projection at the end of the year to 6.5% from the earlier 5%.

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Example:: Inflation in India in recent years

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Fiscal policy
Position of the government budget___ how is budget deficit Whether budget deficit is monetized Taxation policy_ direct and indirect taxes

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Macroeconomic factors
How open is the economy Attitude of the government towards business Overall GDP growth Employment situation Balance of payments situation

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Countries in transition
Regulatory and legal frameworks are major constraints on growth in transition countries In these countries, the domestic policy environment is hostile to private sector start-ups, investment, and innovation.

Structural and economic policy reforms have accelerated in most countries. But reforms to date have barely changed most legal and regulatory constraints affecting private sector activity

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Five ideal characteristics sought after

Security (legal security, consistent respect for market solutions,

predictable enforcement) Transparency (clear and simple rules, openness through the entire policy process, less corruption)
Legitimacy (must protect safety, health, environment, consumers, public interests) Efficiency (low-cost rules, orderly and timely decisions, move swiftly to meet market needs) Expertise (good regulatory skills and understanding of complex markets and technologies)
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Market Characteristic of a Country Population - Households - Urbanization Income - Per capita GDP - Per capita Income - Per capita Discretionary Income - Purchasing power parity (PPP) Consumption Patterns - Per capita expenditures on basic needs, Transportation, Health, Education and leisure - Households owing of appliances, Autos, Computers,TVs - Household debt Infrastructure - Roadways, Railways, Airways, Water ways - Tele Communications - Internet Foreign Direct Investment in the economy
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Quality of Regulations as perceived

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State of some countries

How does India stand vis--vis some prominent nations regarding business environment

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Mindshare Favorability Towards Countrys Business Environments

very favorable view of business environment Lowest unfavorable rating
100%

80%

76%

China India Mexico Poland Brazil Russia

63% 57%

60%
45% 34% 29% 24% 22% 18%

42%

40%

20%

14%

11%

0%

Ch

In

Mx

Pl

Br

Ru

Ch

In

Mx

Pl

Br

Ru

Favorable

Unfavorable

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Economic Environment of business - SN Source: Edelmans India Media Audit, 2004

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India Most Favorable Five-Year Business Environment

India
100%
87%

China Brazil
80%

80%

Mexico Poland Russia

60%

60%

44%

40%
27% 28%

40%

40%

20%

14% 9%

0%

Ch

In

Mx

Pl

Br

Ru

4%

Ch

In

5%

Mx

Pl

Br Ru

Favorable

Unfavorable

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Economic Environment of business - SN Source: Edelmans India Media Audit, 2004

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Media are MORE Optimistic About India Than Any Other Country

China
Optimistic

Brazil 19%

Russia 4%

Poland 9%

India 31%

Mexico 7%

30%

Pessimistic

0%

0%

83%

17%

0%

0%

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Important factors to consider

India

China

Mexico

Brazil

Russia

Poland

Democracy

Democracy (lack of)

Good Business Environmen t Growth

Good Business Environment

Economy

Economy

Trade

Democracy

English Language

Good Business Environment

Economy

Good Business Environment

Innovation

Democracy

Good Business Environment

Huge Population

Trade

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Key Industrial Sectors in countries

India

China
IT

Mexico
Tobacco/ Alcohol
Textiles

Brazil
Coffee

Russia
Oil/gas

Poland
Shipbuilding

IT

Manufacture

Manufacture

Agriculture

Pharmaceuti cal Aeronautics

IT

Auto

Consumer Goods Agriculture

Auto

Auto

Telecomm

Manufacture

Aeronautics

Shipbuilding

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How does India fair in Industrial Sectors: Survey results

Excels
High Tech
Software Textile Pharmaceutical sector Call centers Automotive

Lags
96%
44% 40% 32% 17% 16%

Infrastructure
Transportation Financial Services Pharmaceuticals Manufacturing Automobiles Heavy Industry Poverty

35%
35% 30% 20% 20% 15% 15% 14%

Consumer Products
Computers Outsourcing

16%
16% 16%

Consumer electronics

12%

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Decision model to enter a foreign market

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Example: How American Recession has affected Spain [ IMF]

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