Business Environment

Topic 2: Overview
Business Environment refers to all
factors which have a direct or indirect
bearing on the activities of a business.
Modern business covers a complex field
of industry and commerce which
involve activities related to production
and distribution to satisfy societys
needs on the one hand and bring
profits to the firm on the other.

Internal, External, Micro, Macro Environment

Internal environment of business is made up of the
philosophy, ways and means used in order to achieve
the pre-determined goals with given resources.
External envt of business consists of insttns,
organisations and forces operating outside the
company, but having a direct or indirect impact on it.
Micro-envt refers to such players whose decisions
and actions have a direct bearing on the company.
Macro-envt comprises large societal forces, economic
and non-economic, which affect the company and
also the players in the companys microenvironment.

Non-economic envt
1. Political envt: govt ideology, political stability
and government activism
2. Legal envt: legislations defining property;
constrainning the way business activities are
carried out
3. Social envt: attitudes, desires, expectations,
intelligence, education, beliefs, customs in
groups
4. Cultural envt: ways of thinking and doing
things, mainly shaped by members of the
organisation, and which new members must
learn.

5. Demographic envt: Population size

and growth rate, age structure,
gender-bias, urban-rural, density,
burden on environment
6. Technological envt: R & D, Import of
technology, Diffusion of technology
7. Natural envt: Profit-oriented
industry caused tremendous damage
to exhaustible natural resources; it
contaminated water and polluted air.
But now there is environmental
awareness, prohibitive laws and ethical

Economic Environment of
Business

Economic Systems
Macroeconomic Indicators
Economic Policies
Trade Cycle Phases

Business Goals /objectives: profit and

non-profit goals

Market Systems
Capitalism
Private ownership of
means of production
Predominant private
sector
Decisive role of
market
Profit-induced
business
Exploitation of labour
Restricted role of State
Strong incentive
system for efficiency
Disincentive for
mistakes

Socialism
State (i.e. government)
ownership
Predominant public sector
Decisive role of planning
Objective Social benefit
No exploitation
Dominant role of state
No incentive (profit
motive)
No disincentive (no private
ownership of business)

Features of India as a Mixed

Economy
Private ownership of means of
production
Co-existence of public sector (govt
ownership)
Predominance of market forces
Growth of private sector monopolies
Intervention role by the government
Economic planning by the govt

Topic 3: Features of Indian Economy

1. Low per capita income (2010, USD)
Exch rate basis; PPP
basis
Switzerland
71,520
49,960
USA
47,340
47,340
Japan
41,850
34,610
China
4,770
7,640
India
1,200
3,400
High NI (1553mn$ & 4159mn$ =Rs 52,43,582 Cr)
But high pop 1170 Mn, so low pcy Rs 38,037 pa.

2. Occupational pattern
% pop in agri

Origin of GDP
Agri
Ind Services
USA
20.0
78.9
Japan
26.6
71.9
Pakistan
25.4
53.3
China

1.0

1.4

52

21.1

47

10.1

3. Demographics

High birth rate + falling death rate

Population growth rate (annual
average): 1.31% (1941-50);1.93%
(1991-2001) and 1.64% (2001-11)
Population in China: 1.344Bn;
India:1.241Bn; USA: 311.6Mn
Pop. density world average: 50 per
sq km
Canada, Australia: 3 to 4 per sq km
USA: 33 China: 141
India: 373

4. Prevalence of chronic unemployment,

underemployment and disguised
unemployment.
Job requirement: 37mn from 11th FYP +
45mn new entrants in XII FYP = 82mn new
jobs needed
5. Steadily improving savings and capital
formation
Domestic savings as % of GDP increased from
23 to 31.5 bet 1990 and 2010.
Capital formation as % of GDP increased from
24 to 36.4 in the same period.

6. Sharp Inequalities:
Mal-distribution of Income and wealth
51% of the total households owned just 10% of
the total assets and 9.6% of the total
households owned 49% of total assets.

7. Poor Quality of human capital (HDI)

Based on: Life expectancy, Adult literacy,
Combined enrollment ratio and PCY.
Ranks: Norway, Australia, New Zealand at the
top alternately;
Japan 10, USA 13, China 92, India 134

8. Technological problem: Diffusion of tech in

ssi and agriculture has not happened yet. It
needs availability of capital, strong R&D and
training facilities of high quality and adequate
quantity.

9. Socio-Economic Indicators of std of living:

p.c.calorie intake TV sets Physicians per
1000 ppl

USA
Japan
China
India

3,699
2,932
2,897
2,496

847
707
272
69

2.5
7.3
2.0
0.4

10. Dualistic nature and Vicious

Cycle of Poverty
Huge divide between: Rich-Poor; RuralUrban; Regional; Access to facilities
Simultaneous existence of vicious cycle of
poverty and virtuous circle of prosperity in
two distinct segments of India
Low incomes -> low savings -> low
productivity -> low incomes (Vicious cycle)
High incomes -> high savings -> high
productivity -> high incomes (virtuous
circle)

Doing Business 2013 report

of World Bank
India:
134th of 189 countries in ease of
doing business
179th in ease of starting business
182nd in getting construction permit
111th in getting electric connection
186th in enforcing contracts

Place of Agriculture in Indian Economy

Provision of food to the population

Source of raw material supply to industry
Contribution to national income
Employment generation
Export earning (international trade)
Support to the transport system (bulk
transport)
Demand for capital goods used in agri
processes
Huge market for consumer goods

Green Revolutions
The First Green Revolution (1967-68) arose
from new high yield varieties of Mexican
wheat and dwarf rice, but was confined to
Punjab, Haryana & Western UP. Agriculture
GDP growth rate shot up to 14.1% p.a.
The Second Green Revolution (1988-89)
came from expansion in supplies of inputs
and services to farmers, agricultural
extension and better management. It spread
to W Bengal, Bihar, Orissa, MP & Eastern UP.

Problems of Agriculture in India

Rain dependency
Market access
Storage facilities
Input availability
Timely availability of finances
Access to information, technology
Social Infrastructure lacking
Supply chain management
Perpetual indebtedness and rural
poverty

GATT, WTO
The General Agreement on Tariff and
Trade was established in Geneva in
1948 to pursue the objective of free
trade, to encourage growth and
development of all member
countries. Purpose was to ensure
competition in commodity trade
through removal or reduction of
trade barriers.
The World Trade Organisation was
established on 1 Jan 1995 and India

WTO, Subsidies and Agriculture

WTO Agreement required developed
countries to reduce subsidies by 20%
in 6 years and developing countries
by 13% in 10 years.
Developing countries, especially
India complied, but developed
countries eg USA tried to circumvent
this by providing Green box
(research, infra, disease control etc)
and Blue box (direct payments, rural
devt etc) subsidies to support

Doha, Cancun (Geneva) rounds

Doha Ministerial (2001) forced developed
countries to consider issues of
implementation before considering new
issues. Rich countries annual subsidies
(311bn$) > sub-Saharan Africas NI (52bn$)
Geneva Framework of WTO (2003): The
Cancun round ended in a fiasco due to the
stubborn attitude of USA and EU not to
discuss reduction of subsidies.
The 7th WTO Ministerial meeting held in
Geneva in Nov-Dec 2009 provided a platform
to assess the direction of negotiations. (next:
Bali)