How does economic system of India affect the Business Environment?
At the time of budget preparations the government interacts with the trade associations and offer tax relief in the deserving cases. Government also gives concessions, incentive for certain industries which require development and protection. Thus trade associations can contribute a lot in changing environment.
Economic system followed in a country has a lot of influence in determining economic environment. Economic systems are aggregation of various strategies which determine a coordinated structure suitable for a particular country. There are various types of economies in the world such as capitalism, socialism, and mixed economies. The economic system decides what to produce, how to produce and for whom to produce.
This is the primary decision an economy has to make. If it is a capitalist economy, market mechanism process would be the chief deciding factor about quality, quantity, price of a product. A socialist economy would go in for mass consumption products.
Product differentiation, snob appeal may not be the part of production and marketing culture. In a mixed economy, however, there are all sorts of features, viz., features of market economy as well as socialistic outlook.
Within mixed economy there are wider variations. Americans enjoy more freedom and consumer’s sovereignty, but Indians have to face lot of control. Most of the economies are now mixed economy after the collapse of Soviet Union, China though an out and out socialist economy but a massive freedom has been offered to the produces. Freedom to private enterprise helps to bring diversification of quality and quantity of products. Government sector’s presence in the manufacturing sector does not ensure proper diversification.
In many countries Government in most cases is engaged in infrastructure building, production of highly capital-intensive products. After independence Government of India produced and was engaged in setting many consumer goods and services industries. This was done partially to promote industry and to protect industry taking over a large number of industrial units which fell sick in the private management.
After 1991, massive economic reforms have been started; there has been a series of economic activities relating to liberalisation, privatisation and globalisation. The process of economic decision making has changed, philosophy of planning has also changed but Indian economy remains a mixed economy. Now there is more stress on price mechanism process.
American economy under President Reagan and British economy under the prime minister ship of Mrs. Thatcher also experienced reduction of government ownership and control, curtailment of social security etc.
There has been an overall attempt to establish market economy all over the world in last three decades but this process is subject to massive control through regulatory bodies. Economies of Europe, U.S.A, Japan, Australian, Canada, members of the EEC are market economy where price mechanism process plays a great role.
The recent exercises the world over are modes of discarding control system and encouraging price mechanism as far as practicable. The economic system now gives more freedom to production decision and consumer’s sovereignty. The private business enjoys more independence in decision making process.
The individual business unit enjoys more freedom now in production and pricing decision. This is due to changes in economic policy and philosophy in the economic system. Even a socialist economy like China has given enough freedom to the investors. But the freedom in many countries is not absolute; it is subject to control by various regulatory bodies. The difference is that the governments in all the countries are not engaged in production and other economic activities as could be seen in post war II and Great Depression years in thirties of last century.
Hence we see, it is the philosophy and policy frame of economic system that decides the nature and course of economic activity. The major ingredients of economic policy which have a proactive role in influencing economic environment are industrial policy, trade policy monetary policy and fiscal policy.
Major Industrial policies in India were declared in 1948, 1956, 1980 and 1991. The last policy of 1991 was a dramatic one since it brought various broad changes in the economic and industrial activities. The 1991 policy abolished many licensing procedures and kept only 5 items reserved for public sector.
This policy heralded a new era and diminished the role of public sector hitherto placed in the commanding height of the economy. The foreign capital was allowed to enter freely and FERA, MRTP Acts were subsequently abolished.
The trade policy was also liberalised and various support and incentive schemes such as cash compensatory support, duty drawback for export were withdrawn. India’s foreign trade policy became now more and more influenced by market forces. Monetary policy also showed same new elements such as deregulation of interest rates, reduction of interest to make a conducive atmosphere of growth of industry and higher productivity.
As far as fiscal policy is concerned government of India for the first time recognised the need for reducing fiscal deficit and reduction of public borrowing. They tried to make massive fiscal corrections to provide a steady environment for further growth. A steady effort could be seen to reduce inflation rate. The export showed a positive sign of growth.
Foreign capital and foreign investment began to grow as Exim policy was liberalised. Indian economic environment became a competitive one as indigenous producers had to face competition to maintain their existence. Many public sector units closed their operation and made private sector units lose their existence and identity.