Economic Environment

By Neeraj Chaudhary
 Economic Environment
Economic Environment consists of economic factors that influence the
business in a country.
Macro factors : Employment/unemployment,(GNP), Inflation, Interest rates, Tax
rates , BOP,Currency exchange rate, Saving rates, Consumer’s disposable
income, Recession,economic policies of the government.
Micro factors : The size of the available market, Demand for the company’s
products or services, Competition Availability and quality of suppliers, The
reliability of the company’s distribution chain (i.e., how it gets products to
customers)
 Concept of National Income

National income is the money value of all the final services and goods produced in an
economy during a given period of time.
The main concepts of national income are:
Gross Domestic Product (GDP): This is the market value of all final services and goods
produced within a country in a given period of time.
GDP = C + G + I + NX
(where G=government spending, C=consumption, I=Investment, and NX=net
exports).
Gross National Product(GNP): This is the market value of all final services and goods
produced by a country’s residents in a given period of time, regardless of where they
are located.
GNP = GDP + NF
(where NF=net factor income from abroad).
Net Domestic Product(NDP): This is the market value of all final services and
goods produced within a country in a given period of time, minus depreciation.

NDP = GDP –Depreciation

National Income (NI): This is NNI minus indirect taxes plus subsidies.

Per Capita GDP: is the measure of the total output of a country where GDP is
divided by the total population in the country

Per Capita Income (PI): is a measure of income earned per person in a country
within a given period of time.

PI=NI/Population
 Component of Economic Environment
1.General Economic Conditions: - amount of national income, per- capita
income, economic resources, distribution of income and wealth, economic
development are the variables that make or mar the economic prosperity of
the people.
Gross Domestic Product (GDP) the most widely used measure of a country's
economic activity. Businesses can be greatly impacted by changes in GDP,
2.Interest Rates: play a crucial role in the economic environment, as they
determine the cost of borrowing money. Changes in interest rates can have a
significant impact on the behaviour of consumers and businesses, as high
interest rates can discourage spending, while low interest rates can
encourage borrowing and spending
3.Inflation: High inflation can result in reduced purchasing power for
consumers, while low inflation can stimulate economic grow th.
4 .Exchange Rates: Exchange rates refer to the value of one currency in
relation to another currency. Fluctuations in exchange rates can
impact the cost of goods and services,
5.Employment and Labour Markets: Changes in employment levels
and labour market conditions can impact consumer spending and
business activity. A strong labour market can result in
increased consumer spending and business confidence, while a weak
labour market can lead to decreased spending and decreased business
activity
6. Government Policies: It is the apt and timely economic policies taken and
implemented by the government that decides the fortunes of the country.

7.Market Opportunities: Understanding the economic environment

can help businesses identify new market opportunities, as well as potential
areas of grow th and expansion.

8.Competition: The economic environment can also impact the level of

competition within a market, and businesses need to understand how
changes in the economic environment can impact their competitiveness.
9.Resource Allocation: Businesses need to understand the economic
environment in order to make informed decisions about resource
allocation and to manage costs effectively.

10.Investment Decisions: The economic environment can impact the cost of

capital and the availability of financing, and businesses need to
understand these factors in order to make informed investment
decisions.

11.Planning and Forecasting: The economic changes in consumer

confidence, government policies, or energy costs can impact the outlook for
future economic growth and the expected level of consumer spending.
12.Business Cycle: The business cycle represents the value of economic output and
activity in the macroeconomy.The business cycle is made up of four main phases.

The boom phase can be characterized by high levels of spending. The highest
point of an economic boom is known as the peak.
A contraction or recession can be characterized by slower economic activity.
A depression or slump phase is an extended period of low and declining economic
activity. The lowest point of depression is known as the trough.
A recovery or expansion comes right after the through and it can be characterized
by things getting better in the economy.
13,Industrial policy: Industrial policy is concerned with the steps taken by the
government for the industrial development.
13.Monetary Policy: Monetary policy involves adjusting interest rates,
manipulating exchange rates, and controlling the money supply. The purpose of
monetary policy is to keep inflation rates stable and low to promote economic
growth.
14 .Fiscal Policy:W hen expansionary fiscal policy is implemented (lower taxes,
higher government spending), consumers will likely demand more goods and
services - spend more. This can increase the profitability of a business and
encourage growth or expansion.
W hen contractionary fiscal policy is implemented, consumers demand less and
therefore spend less on products and services. A contractionary policy may also
increase unemployment. W hen consumers spend less, this can impact
businesses badly
15.Taxation:

A .Direct Taxation: with an increase in taxation rates for income, consumers

will most likely spend less, as their disposable income decreases.

B. Indirect Taxation: An increase in GST will decrease consumer spending, as

consumers now have to pay higher prices when purchasing goods and
services.

16.Financial System: finance is a basic requirement of business, the level of

development of the financial system is of crucial importance for business.
16.Consumer Confidence: High levels of consumer confidence can result
in increased spending, while low levels of consumer confidence can lead to
decreased spending and reduced economic growth

17.Trade Agreements: can impact the flow of goods and services

between countries, as well as the competitiveness of businesses in
different markets. For example, the negotiation and implementation of
free trade agreements can result in increased trade and investment, while
trade barriers and restrictions can limit the flow of goods and services
and negatively impact business activity
19.Natural Resources: Changes in the availability or cost of natural resources,
can have a significant impact on the cost of producing goods and services and
on the competitiveness of businesses in different markets.
20.Technological Developments: can lead to increased productivity, new
business opportunities, and reduced costs.For example, the widespread
adoption of automation and robotics in manufacturing and other industries can
lead to increased efficiency and lower costs
21.Demographic Trends: changes in population size and age structure, can
also have a significant impact on the economic environment. For example, an
aging population can result in increased demand for healthcare and
retirement- related services,while a young and growing population can lead to
increased demand for consumer goods and services.
 Economic system:
Determines the role of the public and private sectors

Market-Based (Capitalist) Economy

A market economy, also called a free-market economy, is characterized by
minimal government intervention and a high degree of individual freedom.
Capitalism grants the maximum economic freedom in managing economic
activities
Economic decisions are made by individuals and businesses based on
supply and demand in the market
Prices are determined through competition, and the allocation of resources
is driven by consumers' preferences and producers' pursuit of profit
Capitalism is closely associated with market economies.
Command Economy (Planned Economy)

The government or central authority has significant control over

economic activities.
It decides what goods and services will be produced, in what
quantities, and at what prices.
The government also owns most, if not all, of the means of production.
This type of economy is often associated with socialist or communist
ideologies.
The resources allocation, investment pattern, consumption, income
distribution, etc., are directed and regulated by the state.
 Mixed Economies

A mixed economy combines elements of both market and command

economies.
The government plays a role in regulating and controlling certain aspects of
the economy, while leaving other areas to market forces.
Most modern economies, including India,USA,UK are considered mixed
economies. They allow for private ownership and entrepreneurship while also
providing public services and safety nets.
Instruments of mixed economy includes: Industrial policy resolution, Industrial
licencing, Nationalisation, Subsidies
four important economic roles played by the government in a mixed
economy viz., regularity role, promotional role, entrepreneurial role and
planning role.
 Economic Environment in India

Economic Environment at the time of Independence:

The economic environment of India has been rapidly changing mainly due to
government policies.
At the time of Independence, the Indian economy was mostly agricultural and
rural in nature. W ith 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.
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
The responsibilities for infrastructure industries was given 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 fiscal deficit approximately reached 7% of GDP,
Internal debt also rose to 50% of GDP
Negative growth in agriculture and industrial production
The value of the rupee depreciated by 26.7 percent (in terms of US
Dollars).
There was also a fall in foreign exchange reserves(The reserves fell to
just about $1.2 billion, which was barely enough to cover two weeks'
worth of imports.).
India was on the verge of becoming a defaulter. As a result, SBI and RBI
sold(20 tonnes of gold through Union Bank of Switzerland) 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 $2.2
billion from International Monetary Fund to manage the crisis of 1991
Reform Measures:
The government of India declared a new industrial system in July 1991that
aimed at ending the dilapidated Indian economy that was on the verge of
bankruptcy
The government brought the number of organizations below mandatory
licensing to six.
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. (Maruti Udyog Ltd,Videsh Sanchar Nigam Ltd. (VSNL)
–The government sold its 25% stake in VSNL to the Tata Group in 2002, Air
India(Tata),Steel Authority of India Limited (SAIL)
There was an open entry for the private sector to areas that were earlier public
sector.
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 a rise in foreign equity holders from 4 0% to 51% .
The government set up the Foreign Investment Promotion Board(FIPB).
Buying back of gold, pledged with Bank of England (47 tones) and Bank of
Japan(20 tones).
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.
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
The economic reforms were made with an aim to liberalize Indian business and
trade from all the complex restrictions, redundancies, and limitations.
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 the beginning of a new era for Indian firms that became more
effective due to globalization.
 Indian Financial System

The Indian Financial System refers to all institutions, structures, and services
that provide pecuniary facilities to the public.

India, being a democracy has independent pillars of the financial system

especially in the areas of banking, capital and stock markets, insurance,
liabilities, claims, transactions, and investments.

It is important for wealth creation and the economic development of the

country.
Functions of the Indian Financial System

Issuing and gathering of deposits.

Supply of loans from the collected pool of money.
The undertaking of financial transactions.
Boosting the growth of stock markets and other financial markets.
Setting up the legal commercial substructure.
Provision of monetary and consultative services.
It forges a connection between depositors and investors.
Boosts depth and breadth of finances by increasing its
horizon.
It is responsible for capital creation.
To set up an entire payment structure and system.
Allocate and dissipate the economic resources.
To maintain the economic stability in the country and the
markets.
To create markets that can judge the investment
performance.
 Components of The Indian Financial System

1. Financial Institution:

Their role is to mediate between the lender and the borrower.

The lender’s savings are gathered through various commercial markets.
These can turn risky financings into safe investments.
A liability that is for a short duration can be turned into an investment for a longer
duration.
These provide a balance between the loan taker and the amount depositor.
 Financial Institution:
Banking Institutions or Depository Institutions:
Their role is to acquire money from the public.
Interests are paid on these deposits made by the people.
The lent money is then provided as loans to those w ho need it.
Interests are charged on these loans given to those w ho require.
Commercial banks operate their business for profit purposes w hile
the basis of operation for cooperative banks is on cooperative lines
i.e. service to its members and the society.
a) Scheduled commercial banks
b) Non- scheduled commercial banks.
 Financial Institution:
A scheduled bank is a bank that has been included in the 2nd schedule of the
RBI Act 1934 . A scheduled bank also had to be a corporation and the Paid-up
capital for it should be at least Rs. 500 crores.
The Non-Scheduled banks have to put some reserve requirements like SLR, and
CRR according to the banking regulation act 1949.
Co-operative Banks:
Urban Co-operative banks (UCB)
Rural Co-operative banks.
Public Sector Banks:
Banks are controlled by the federal or state governments, with a combined
ownership of more than 51% e.g. SBI and its affiliates, Punjab National Bank,
Bank of India,
 Financial Institution:
Private Sector Banks:
These are those Indian Banks that are owned by private individuals for example ICICI
bank, HDFC bank, Axis Bank etc.
Foreign Banks:
Those Banks that are established and provided services of banking in India but are
owned by foreign entities are called foreign banks. for example, Citi Bank, HSBC
Banks, Standard chartered banks etc.
Regional Rural Banks (RRBs):
The Regional Rural Banks Act of 1976 established RRBs in 1975 with the goal of
developing the rural economy by providing credit and other facilities, particularly to
small and marginal farmers, agricultural labourers, artisans, and small entrepreneurs,
 Financial Institution:
NABARD: Established in 1982 under the provisions of the
National Bank for Agriculture and Rural Development Act 1981.
NABARD gives credit to promote agriculture, small scale
industries, cottage and village industries, handicrafts and other
rural crafts and other allied economic activities in rural areas.
NABARD extends assistance to the government, RBI and other
organizations in matters relating to rural development. It offers
training and research facilities for banks, cooperatives and
organizations in matters relating to rural development
 Financial Institution:

Small Industries Development Bank of India (SIDBI): Established in

1990 under the provisions of the Small Industries Development of
India Act 1989
SIDBI serves as the primary financial institution for promoting,
funding, and developing the Micro, Small, and Medium Enterprise
(MSME) sector, as well as for coordinating the functions of other
organisations involved in similar activities.
SIDBI primarily provides banking institutions with indirect financial
support (in the form of refinancing) in order for them to lend to
MSMEs.
b. Non-banking Institutions or Non-depository Institutions:
Their role is to sell commercial and financial goods and products to those
who visit them.
These are based on offering insurance, mutual funds, brokerage deals, etc.
The NBFC is a company governed by the Companies Act, 1956/2013, that deals
with loans and advances, the acquisition of shares/bonds/debentures issued
by the government or a local authority, or other marketable securities of a
similar nature, leasing, hire-purchase, insurance, and chit business, Private
sector institutions make up the majority of NBFCs.
 Non-banking Institutions or Non- depository Institutions:

Regulatory: RBI,SEBI, IRDA,(Insurance Regulatory and Development

Authority of India) is a statutory body set up for protecting the interests of
the policyholders,

Intermediates: Those institutions which provide financial counseling and help

by offering loans etc. Example –PNB, SBI, HDFC, BO B, Axis Bank.

Non –Intermediates: These institutions help corporate visitors with their

finances. Examples –NABARD, SIDBI, etc.

2. Financial Assets:
These are the goods or products which are sold in the financial market.
Call Money: Call money is typically used by brokerage firms for short- term funding needs.
W ithout any assurance, this is a loan lent for just a day which is repaid the next day.
Notice Money: W ithout any assurance, this is a loan rent for more than a day but less than a
duration of 14 days.
Term Money: W hen the duration of the maturity of a particular amount deposited is more
than 14 days.
Treasury Bills: W ith the duration of maturity of less than a year, these belong to the
government in the bond or debt security format. These are bought in the form of
government T–Bills which are taken as loans from the government.
Certificate of Deposit: This remain deposited in a particular bank for a fixed period of time.
Commercial Paper: Used by corporates, it is an instrument that is not secured even though
for a short duration of debt.
 3. Financial Services:
The major objective of these is to provide counseling to their visitors regarding the
purchase or selling of a property, permitting transactions, deals, lending, and
investments.
These are usually taken up by asset and liability management companies.
Banking Services
Insurance Services:
Investment Services:
Foreign Exchange Services:
4 . Financial Markets:
The markets where trade and exchange of bonds, shares, money, investments, and
assets take place between buyers and purchasers
 SEBI

The Securities and Exchange Board of India (SEBI)- Regulator of the financial
markets in India that was established on 12th April 1988.

It was initially established as a non-statutory body, i.e. it had no control over

anything but later in 1992, it was declared an autonomous body with statutory
powers

It plays an important role in regulating the securities market of India.

Organization structure

The SEBI is managed by its members, which consists of following:

• a) The chairman who is nominated by central Government of India.

b) Two members, i.e. O fficers from central Finance Ministry.

• c) O ne member from The Reserve Bank of India.

d) The remaining 5 members are nominated by Union Government of India, out

of them at least 3 shall be whole- time members.
 O bjectives of SEBI

1. Protection to the investors:

2. Prevention of malpractices

3. Fair and proper functioning

Role of SEBI:

Acts as a watchdog for all the capital market participants. Its main purpose is to
provide such an environment for financial market enthusiasts that facilitate the
efficient and smooth working of the securities market.

1. Issuers of securities

2. Investor

3. Financial Intermediaries
Functions of SEBI:

1. Protective Functions : As the name suggests, these functions are performed

by SEBI to protect the interest of investors and other financial participants. It
includes-
Checking price rigging
Prevent insider trading
Promote fair practices
Create awareness among investors
Prohibit fraudulent and unfair trade practices
2. Regulatory Functions: These functions are basically performed to keep a
check on the functioning of the business in the financial markets. These
functions include-

Designing guidelines and code of conduct for the proper functioning of

financial intermediaries and corporate.
Regulation of takeover of companies
Conducting inquiries and audit of exchanges
Registration of brokers, sub-brokers, merchant bankers etc.
Levying of fees
Performing and exercising powers
Register and regulate credit rating agency
3. Development Functions: This regulatory authority performs certain
development functions also that include but they are not limited to-
Imparting training to intermediaries

Promotion of fair trading and reduction of malpractices

Carry out research work
Encouraging self-regulating organizations
Buy-sell mutual funds directly from AMC (Asset Management Company
approved by SEBI,It manages the funds by making investments in various
types of securities)through a broker
a. Capital Market:
These deal with trades and transactions which take place in the
market.
These take place for a period of 1year.
These are of 3 major types:
Corporate Securities Market
Government Securities Market
Long Term Loan Market
b. Money Market:
These are for short-duration investments.
Organized Money Market: comes within the direct purview of
RBI. It includes banking & sub-markets.
a. Banking sector –Commercial banks [under Banking regulation
act 1949 & consist of both private & public], RRBs, Cooperative
Banks.
b. Sub Markets –Meet the need of govt and industries. It includes
call money, Bill market [Commercial bill, T-Bill], Certificate of
Deposit [CD] & Commercial Paper [CP].
2. Unorganized sector –consists of indigenous bankers, money
lenders, non-banking financial institutions, etc.
Security Market:

a) Government Securities [gilt edge] security market

b) Industrial Security Market [New Issue Market is the primary market & O ld Issue
Market is the secondary market].

Development Financial Institutions: They provide long- term loans to industries

engaged in infrastructure where projects have long gestation periods & require
long term loans.
c. Foreign Exchange Market:
A highly developed market dealing with several currencies.
It is responsible for the foreign transfer of funds.
This takes place on the basis of foreign currency rates.

d. Credit Market:
This involves both short- duration loans and long- duration loans.
It can be given to both individuals and organizations.
These are granted by several banks, financial institutions, non –financial
institutions, etc.
Comparison between Money Market and Capital Market

Money Market Capital Market

Involves dealing with short- term funds. Involves dealing with long- term funds.

Associates with assets like treasury bills, Associates with assets such as shares,
commercial paper, bills of exchange, debentures, bonds and government
certificate of deposits, etc. securities.
Its participants include commercial banks, Its participants include Stockbrokers,
NBFS, chit funds, etc. underwriters, mutual funds, individual
investors, financial institutions etc.

The RBI is responsible for its working The SEBI is responsible for its working.
 Economic Planning

Economic Planning refers to the system in which the central authority sets targets,
programs, and policies to achieve those specified targets and policies within a
specific period. The primary purpose is to achieve optimum utilization of the
resources. W ith this, social welfare, along with growth, can be maximised.
The idea of economic planning for five years was taken from the Soviet Union
under the socialist influence of first Prime Minister Pt. Jawahar Lal Nehru.
Economic Planning means the utilisation of a country’s resources in different
development activities as per the national priorities.–Planning Commission
Features of Economic Planning:
The government set up the Planning Commission of India under the chairmanship
of Prof. Mahalanobis in 1950. W ith this, the idea of economic planning became the
reality.
The Commission mainly aims to evaluate the country’s human and physical
resources and make plans for the effective utilisation of the resources.
The Planning Commission fixed five year period for Economic Planning which set
the era of the Five-Year Plan (borrowed from the former Soviet Union).
In the Indian Constitution, economic and social planning exists in the concurrent
list of the Seven Schedules.
Broad functions of the planning commission :
1. Assessment of capital, material, and human resources.
2. Allocation of resources & determination of priorities.
3. Formation of a plan for its balanced and most effective utilization.
 The Components of economic planning

Goals and Objectives: This involves setting clear and specific economic targets, such as
reducing unemployment, increasing GDP grow th, and improving social welfare.
Resource Allocation: This involves identifying the resources available to achieve the goals and
objectives, including financial resources, labor, natural resources, and technology.
Policies and Strategies: This involves designing and implementing policies and strategies to
achieve the goals and objectives. This includes policies to promote investment, encourage
economic diversification
Monitoring and Evaluation: This involves tracking progress towards the goals and objectives
and evaluating the effectiveness of policies and strategies.
Coordination and Collaboration: between different stakeholders, including government
agencies, private sector organizations, civil society groups, and international organizations.
 Stages of Economic Planning

1.Formulation of Plan: The first stage of the economic planning. At the top, the
Planning Commission formulates a draft plan in consultation with the various
ministries or economic councils.
at the bottom, individual perspective plan on the basis of past experience and future
requirements is prepared.
The Planning Commission assesses the balances of technical possibilities,
recommendations, suggestions and requirements in the light of reports given by two
agencies— one from the top and the other from the bottom. The final draft is
comprehensive, coherent and well knit document.
First of all, Planning Commission lays down tentatively certain general goals for the
long time
In the second stage, the Commission formulates a short memorandum which is
placed before the cabinet and the National Development Council.

In the third stage, a draft outline of the Five Year Plan is prepared keeping in view
observations made by the National Development Council.

2. Execution or Implementation of the Plan: In most of the planned

economies, the Central Planning Commission is merely an advisory body and the
execution of the plan is entrusted to the central administration which involves the
various agencies and departments of the government. In the initial stages, there is
greater possibility of centralization but in the later stage, decentralization brings
effective control and administration.
3. Supervision of the Plan: execution of plans necessitates constant
supervision as it helps to detect failures and shortcomings from time to time.
Constant supervision improves of the conditions of successful implementation of
the plan. In India, supervision is done by the planning agency.

4 . Programme Evaluation Organisation: Every programme should always be

assessed in a systematic way. W ith the assistance from the Ford Foundation,
Programme Evaluation O rganisation was set up in 1952. The organisation is
independent organisation working under the guidance and direction of the planning
Commission. Now, there are seven Regional Evaluation offices at Mumbai, Calcutta,
Chennai, Lucknow, Chandigarh, Jaipur and Hyderabad, working at different places.
 Five Year Plans (1951-2017)

The planning commission proposed that India should formulate a plan for a
period of 5 years for its development and economic growth, known as the
Five Year Plan.
Till now, twelve five- year plans have been completed in India.
The first eight plans in India were focused on growing the public sector,
Since the launch of the Ninth Plan, The focus has shifted towards making the
government a growth facilitator.
Goals or Objective of Five Year Plans:
Economic Development: This is the main objective of planning in India. It
is measured by the increase in Gross Domestic Product (GDP) and Per Capita
Income
Increased Levels of Employment: An important aim of economic planning in India
is to better utilise the available human resources of the country by increasing the
employment levels.
Self Sufficiency: India aims to be self-sufficient in major commodities and also
increase exports through economic planning. The Indian economy had reached the
take-off stage of development during the third five-year plan in 1961-66.
Economic Stability: Economic planning in India also aims at stable market conditions
in addition to the economic grow th of India. This means keeping inflation low w hile
also making sure that deflation in prices does not happen.
Social Welfare and Provision of Efficient Social Services: Development of social
services in India, such as education, healthcare and emergency services have been
part of planning in India.
Regional Development: aims to reduce regional disparities in development of different
states by studying these disparities and suggest strategies to reduce them.
Comprehensive and Sustainable Development: Development of all economic sectors such
as agriculture, industry, and services is one of the major objectives of economic planning.
Reduction in Economic Inequality : Measures to reduce inequality through progressive
taxation, employment generation and reservation of jobs has been a central objective of
Indian economic planning since independence.
Social Justice: It aims to reduce the population of people living below the poverty line and
provide them access to employment and social services.
Increased Standard of Living: Increasing the standard of living by increasing the per capita
income and equal distribution of income is one of the main aims of India’s economic planning.
 Five Year Plans (1951-2017)

Five Year Plans Assessment O bjective

First Five year Plan (1951- 1956) Targets and objectives more or Rehabilitation of refugees, rapid
less achieved. W ith an active agricultural development to
role of the state in all economic achieve food self- sufficiency in
sectors. Five Indian Institutes of the shortest possible time and
Technology (IITs) were started control of inflation.
as major technical institutions.

Second Five year Plan It could not be implemented The Nehru- Mahalanobis model
(1956- 1961) fully due to the shortage of was adopted.‘Rapid
foreign exchange. Targets had industrialisation with particular
to be pruned. Yet, Hydroelectric emphasis on the development
power projects and five steel of basic and heavy industries
mills at Bhilai, Durgapur, and Industrial Policy of 1956
Rourkela were established. accepted the establishment of
a socialistic pattern of society as
the goal of economic policy.
Third Five year Plan (1961-1960) Failure, W ars and droughts. Yet, Panchayat establishment of a self-
elections were started.State electricity reliant and self-
boards and state secondary education generating economy
boards were formed.

Plan Holidays –Annual A new agricultural strategy w as implemented. It crisis in agriculture and serious
Plans(1966-1969) involved the distribution of high-yielding varieties of food shortage required attention
seeds, extensive use of fertilizers, exploitation of
irrigation potential and soil conservation measures.

Fourth Five year Plan Was ambitious.Achieved grow th of 3.5 percent but grow th w ith stability ’ and
(1969-1974 ) w as marred by Inflation. The Indira Gandhi progressive achievement of self-
government nationalized 14 major Indian banks and reliance Garibi HataoTarget: 5.5 pc
the Green Revolution in India advanced agriculture.
Fifth Five year Plan (1974 -1979) High inflation. the Indian national ‘removal of poverty and attainment of
highw ay system w as introduced for the self-reliance’
first time.

Sixth Five year Plan (1980-1985) Most targets achieved. Grow th: ‘direct attack on the problem of poverty
5.5% .Family planning w as also expanded by creating conditions of an expanding
in order to prevent overpopulation. economy ’

Seventh Five year Plan (1985-1990) With a grow th rate of 6 %, this plan w as Emphasis on policies and programs that
proved successful in spite of severe w ould accelerate the grow th in
drought conditions for the first three foodgrains production, increase
years consecutively. This plan employment opportunities and raise
introduced programs like Jaw ahar productivity
Rozgar Yojana.
Annual Plans (1989-1991) It w as the beginning of privatization and No plan due to political uncertainties
liberalization in India.
Eighth Five year Plan (1992-1997) Partly success. An average annual Rapid economic grow th, high grow th of
grow th rate of 6.78% against the target agriculture and allied sector, and the
5.6% w as achieved. manufacturing sector, grow th in exports
and imports, improvement in trade and
current account deficit.
Ninth Five year Plan (1997-2002) It achieved a GDP grow th rate of 5.4% , Q uality of life, generation of productive
low er than the target. Yet, industrial employment, regional balance and self-
grow th w as 4 .5% w hich w as higher reliance.Grow th w ith social justice and
than targeted 3% . The service industry equality.
had a grow th rate of 7.8% . An average
Tenth Five year Plan (2002 –2007) annual grow th rate
It w as successful in of 6.7% w as
reducing thereached. To achieve 8% GDP grow th rate,Reduce
poverty ratio by 5% , increasing forest poverty by 5 points and increase the
cover to 25% , increasing literacy rates to literacy rate in the country.
75 % and the economic grow th of the
country over 8% .
Eleventh Five year Plan India has recorded an average annual Rapid and inclusive grow th.Empow erment
(2007-2012) economic grow th rate of 8% , farm sector through education and skill development.
grew at an average rate of 3.7% as against Reduction of gender inequality. Environmental
4% targeted. The industry grew w ith an sustainability.
annual average grow th of 7.2% against 10% To increase the grow th rate in agriculture,
targeted. industry, and services to 4% ,10% and 9% resp.
Provide clean drinking w ater for all by 2009.

Tw elfth Five year Its grow th rate target w as 8% . “faster, sustainable and more inclusive grow th”.
Plan(2012-2017) Raising agriculture output to 4 percent.
Manufacturing sector grow th to 10 % The target
of adding over 88,000 MW of pow er generation
capacity.
 Monetary Policy

The monetary policy is a policy formulated by the central bank, i.e., RBI
(Reserve Bank of India) and relates to the monetary matters of the country.

It involves measures taken to regulate the supply of money, availability, and

cost of credit in the economy.
It also oversees distribution of credit among users as well as the borrowing
and lending rates of interest. In a developing country like India, the
monetary policy is significant in the promotion of economic growth.
The various instruments of monetary policy include variations in bank rates,
other interest rates, selective credit controls, supply of currency, variations in
reserve requirements and open market operations.
 Instruments of Monetary Policy:
Bank Rate(6.75% ) The bank rate is the minimum rate at which the central
bank lends money and rediscounts first- class bills of exchange and securities
held by commercial banks.
W hen RBI gets a hint that inflation is rising, it increases the bank interest
rates so that commercial banks borrow less money and the inflation stays
under control.
O n the other hand, when RBI reduces bank rates, that means borrowing
for commercial banks will become cheap and easier. This allows the
commercial banks to lend money to borrowers on a lower lending rate,
which will further encourage borrowers and businessmen.
 Instruments of Monetary Policy:
Liquidity Adjustment Facility (LAF): The liquidity adjustment facility (LAF) of the Reserve
Bank of India assists banks in adjusting their daily liquidity mismatches. Repo (repurchase
agreement) and reverse repo are the two components of a LAF.

REPO rate (6.50%): REPO means Re Purchase O ption –the rate by which RBI gives loans to
other banks. Bank re- purchases the securities deposited with RBI at the REPO rate.

Reverse REPO rate(3.35%): RBI at times borrows from banks at a rate lower than the REPO
rate, and that rate is known as the Reverse REPO rate.

Marginal Standing Facility (6.75%)(MSF): MSF is the rate at which scheduled commercial
banks could borrow money overnight from RBI against approved securities. The borrowing
limit of banks under the marginal standing facility is 2 % of their respective Net Demand and
Time Liabilities (NDTL).

Open Market Operations: These include the outright purchase and sale of government
securities for the injection and absorption of long- term liquidity, respectively.
 Instruments of Monetary Policy:
CRR (Cash Reserve Ratio 4 .50%): The percentage of liquid reserves each
bank have to keep as cash reserve with RBI (in their current accounts)
corresponding to the deposits they have.Banks will not get any interest
for these deposits. It is the minimum amount of funds that a commercial
bank has to maintain with the Reserve Bank of India, in the form of
deposits.
SLR (Statutory Liquidity Ratio 18%): The percentage of liquid reserves
each bank have to keep as cash reserve with themselves
corresponding to the deposits they have. Banks have to mandatory
keep reserves corresponding to SLR locked with themselves in the
form of gold or government securities.
 Instruments of Monetary Policy:
The Market Stabilisation Scheme (MSS): This is a scheme introduced in
2004 to regulate the excess availability of money in the economy in which the
Reserve Bank of India (RBI) withdraws surplus liquidity by selling government
assets to banks and other institutions.
Credit Ceiling: W ith this instrument, RBI issues prior information or direction
that loans to the commercial bank will be given up to a certain limit. In this case,
a commercial bank will be tight in advancing loans to the public. They will
allocate loans to limited sectors.
Moral suasion: - By way of persuasion, the RBI convinces banks to keep money
in government securities, rather than certain sectors.
Selective credit control: - Controlling credit by not lending to selective
industries or speculative businesses.
 Monetary Policy Objectives

Promotion of saving and investment: A higher rate of interest translates to a

greater chance of investment and savings, thereby, maintaining a healthy
cash flow within the economy.

Controlling the imports and exports: By helping industries secure a loan at a

reduced rate of interest, monetary policy helps export- oriented units to
substitute imports and increase exports.

Managing business cycles: The monetary policy is the greatest tool using
which the boom and depression of business cycles can be controlled by
managing the credit to control the supply of money.
Regulation of aggregate demand: W hen credit is expanded and the rate of interest
is reduced, it allow s more people to secure loans for the purchase of goods and
services. This leads to the rise in demand. On the other hand, w hen the authorities
w ish to reduce demand, they can reduce credit and raise the interest rates.
Generation of employment: As the monetary policy can reduce the interest rate,
small and medium enterprises (SMEs) can easily secure a loan for business
expansion. This can lead to greater employment opportunities.
Helping w ith the development of infrastructure: The monetary policy allow s
concessional funding for the development of infrastructure w ithin the country.
Allocating more credit for the priority segments: Under the monetary policy,
additional funds are allocated at lower rates of interest for the development of the
priority sectors such as small-scale industries, agriculture, underdeveloped sections
of the society, etc.
 Characteristics of good monetary policy

Price Stability: It aims to control inflation and maintain stable prices.

Economic Grow th: Supports sustainable economic grow th by influencing interest
rates and credit availability.
Full Employment: Strives to achieve and maintain low unemployment levels.
Financial Stability: Ensures the stability of the financial system by preventing banking
crises and excessive market volatility.
Flexibility: Can respond to both domestic and international economic shocks.
Transparency: Communicates clearly w ith the public to manage expectations.
 Types of Monetary Policy
Contractionary Policy: The central bank adopts contractionary monetary
policies to control the economic conditions like inflation by shrinking the
money supply in the financial system. For this purpose, the central bank sells
off short- term government securities, hikes borrowing rates or increases
banks’ reserve requirements.

Expansionary Policy: In situations of economic slowdown, the central bank

implements various expansionary policies like buying short- term
government securities, lowering borrowing rates and decreasing the banks’
reserve requirements. The purpose is to uplift the money supply in the
economy for enhancing consumer spending and decreasing unemployment.
 Fiscal Policy

Fiscal Policy refers to the use of government spending and tax policies to affect
macroeconomic conditions, particularly employment, inflation, and macroeconomic
variables such as aggregate demand for goods and services.
These actions are primarily intended to stabilize the economy.
Everything relating to the government’s income and expenditures is covered under
Fiscal Policy.
The most significant aspects of the economy are addressed through fiscal policy
measures, which range from budgeting to taxation.
To accomplish these macroeconomic objectives, fiscal and monetary policy actions
are usually combined.
 Objectives of Fiscal Policy

To mobilise adequate resources for financing various programmes and projects

adopted for economic development.
To raise the rate of savings and investment for increasing the rate of capital
formation
To promote necessary development in the private sector through fiscal incentive
To arrange an optimum utilisation of resources
To control the inflationary pressures in economy in order to attain economic stability
To remove poverty and unemployment
To attain the growth of public sector for attaining the objective of socialistic
pattern of society
 To reduce regional disparities
To reduce the degree of inequality in the distribution of income and
wealth.

Fiscal Policy Components:

Government Receipts
Government Expenditures
Public Accounts of India
Government Receipts:
The government's income in the form of Taxes, interests, and earnings on
investments, GST and other receipts for services rendered are altogether known as
government receipts. This is the total amount of money received by the government
from all sources.
Government receipts are divided into two groups— Revenue Receipts and Capital
Receipts.
Revenue Receipts:
Receipts that neither create liabilities nor reduce assets
Revenue Receipts can be subdivided into two: Tax and non- tax revenues.
Tax revenues are of two types: direct and indirect taxes
Non tax revenue sources are interest and dividend on government investment,
GST and other receipts for services rendered by the government, income through
licenses, permits, fines, penalties, etc.
Capital Receipts:
Capital Receipts refer to funds that the government receives, which either create
liabilities or reduce assets.
These are non-recurring and non-routine in nature, and they do not affect the
income or revenue - generating capacity of the government.
All kinds of borrowings, loans, disinvestments etc. are treated as capital
receipts
Main objectives of taxation policy in India:
Mobilisation of resources for financing economic development;
Formation of capital by promoting saving and investment through time deposits,
investment in government bonds, insurance etc.
Attainment of equality in the distribution of income and wealth through the
imposition of progressive direct taxes; and
Attainment of price stability by adopting anti-inflationary taxation policy.
Government Expenditure:
The government’s expenditure can be classified into
Revenue expenditures:
They are short- term expenses used in the current period or typically
within one year.
Revenue expenditures include the expenses required to meet the
ongoing operational costs of the government,
They are recurring expenses in contrast to the one- off nature of most
capital expenditures.
Example: Salaries and employee wages, utilities, rents, property taxes on
government- owned properties, etc.
Capital Expenditure:
Investments made by the government in capital to maintain or to expand
its business and generate additional revenue.
Purchase of long- term assets, buying fixed assets, which are physical
assets such as equipment. As a result, capital expenditures are typically for
larger amounts than revenue expenditures.
Example: purchase of factory equipment, purchases for business, other
government purchases like furniture, spending on infrastructure, etc.
Public Accounts of India (Public Debt):
The Public Account of India accounts for flows for those transactions where
the government is merely acting as a banker.This fund was constituted under
Article 266 (2) of the Constitution. Examples: provident funds, small savings,
etc. These funds do not belong to the government, but rather have to be paid
back at some time to their rightful owners. Therefore expenditures from the
public account are not required to be approved by the Parliament.
Fiscal Consolidation:
The process of fiscal consolidation entails those measures adopted to reduce
the fiscal deficit.
The crisis imposed by the rising fiscal deficit and sustainable growth of debt
(both at the center and in states) of the late 1990s prompted the
government to adopt institutional measures to control the fiscal deficit.
Ways through which the government plans to achieve fiscal consolidation:
Better targeting of government subsidies and extending Direct Benefit
Transfer schemes
Improving the efficiency of tax administration
Enhancing tax GDP ratio by widening the tax base and minimizing tax
concessions and exemption
 Advantages of Fiscal Policy of India:

Capital Formation:
Mobilisation of Resources:
Incentives to Savings:
Inducement to Private Sector:
Reduction of Inequality:
Export Promotion:
Alleviation of Poverty and Unemployment: through its various poverty eradication
and employment generation programmes, like, IRDP, JRY, PMRY, MGNREGA(The
Mahatma Gandhi National Rural Employment Guarantee Act 2005)
Shortcomings of Fiscal Policy in India:

(i) Instability:

(ii) Defective Tax Structure:

(iii) Inflation:

(iv) Negative Return of the Public Sector:

(v) Growing Inequality:

Suggestions for Necessary Reforms in Fiscal Policy:
Progressive Taxes:
Agricultural Taxation:
Broad-based Tax Net:
Checking Tax Evasion:
Increasing Reliance on Direct Taxes:
Simplified Tax Structure:
Reduction of Non-Development Expenditure:
Checking Black Money:
Raising the Profitability of PSUs:
 Regional Imbalance

Regional Imbalance is the unequal distribution of resources, wealth,

development, and opportunity across different regions within a country.
This disparity is often reflected in the contrast between urban and rural
areas, or between various geographical regions.
The concentration of industries, employment opportunities, and wealth in
certain regions often leads to regional imbalance.
This divergence is further intensified by factors like population density,
educational attainment, and government policies.
 Indicators of Regional Disparity in India

State Per- Capita Income

Inter-State Disparities in Agricultural and Industrial Development
Intra-State Disparities
Spatial Distribution of Industries
Population below poverty line
Degree of Urbanization
Per- Capita Consumption of electricity
Employment Pattern
Foreign Direct Investment
Human Development Index
 Causes of Regional Imbalances in India

Historical Factor:
Regional imbalances in India started from its British regime. The British rulers as
well as industrialists started to develop only those earmarked regions of the
country w hich as per their ow n interest were possessing rich potential for
prosperous manufacturing and trading activities.
Concentrated their activities in two states like West Bengal and Maharashtra
and more particularly to three metropolitan cities like Kolkata, Mumbai and
Chennai.
Geographical Factors:
The difficult terrain surrounded by hills, rivers and dense forests leads to
increase in the cost of administration, cost of developmental projects, besides
making mobilisation of resources particularly difficult.
Locational Advantages:
Regional imbalances arise due to locational advantages and
disadvantages attached to some regions.
Inadequacy of Economic O verheads:
Economic overheads like transport and communication facilities, power,
technology, banking and insurance etc. are considered very important for
the development of a particular region.
Failure of Planning Mechanism:
Planning mechanisms has enlarged the disparity between the developed
states and less developed states of the country.
In respect of allocating plan outlay relatively developed states get much
favour than less developed states.
Marginalisation of the Impact of Green Revolution to Certain Regions:
In India, the green revolution has improved the agricultural sector to a
considerable extent through the adoption of new agricultural strategy. But
unfortunately the benefit of such new agricultural strategy has been marginalised
to certain definite regions keeping the other regions totally untouched.
Lack of Growth of Ancillary Industries in Backward States:
The Government of India has been follow ing a decentralised approach for the
development of backward regions through its investment programmes on public
sector industrial enterprises located in backward areas like Rourkela, Barauni,
Bhilai, Bongaigaon etc.
But due to lack of grow th of ancillary industries in these areas, all these areas
remained backward in spite of huge investment made by the Centre.
Lack of Motivation on the part of Backward States:
W hile the developed states like Maharashtra, Punjab, Haryana, Gujarat, Tamil
Nadu etc. are trying to attain further industrial development, but the backward
states have been show ing their interest on political intrigues and manipulations
instead of industrial development.
Financial Sector Reforms:
Financial sector reforms have led to a booming stock market that has helped
large firms finance their expansion easily, however small and medium
enterprises w hich are important engine of grow th and productivity have not
been able to access finance in rural areas.
Disparities in Socio-Economic Development :
In India, the states are earmarked w ith w ide disparity in socio- economic
development. This in turn influences the regional imbalances in a country.
 Consequences of Regional Imbalances in India:

1. Inter - States and Intra State Agitations:

Uneven regional development or regional imbalances lead to several

agitations within a State or between the States.
The erstwhile combined State of Andhra Pradesh can be cited as the best
example of the consequences of intra - state regional imbalance in terms
of development, which has lead to several agitations for separate
Telangana State for several decades from 1969 –2014 finally it is formed as
a separate State in 2014 as 29th State of India.

2. Migration:

Migration takes place from backward areas to the developed areas in

search of livelihood.
3. Social Unrest: Differences in prosperity and development leads to friction
between different sections of the society causing social unrest. For example
Naxalism. Naxalites in India function in areas which have been neglected for long
time for want of development and economic prosperity.
4 . Pollution: Centralization of industrial development at one place leads to air and
sound pollution.
5. Housing, Water Problem: Establishment of several industries at one place leads
to shortage of houses as a result rental charges will increase abnormally. For
example, Mumbai, New Delhi, Chennai and Hyderabad overpopulation leads to
water crisis.
6. Frustration among Rural Youth: In the absence of employment
opportunities in rural and backward areas leads to frustration especially
among educated youth.
7. UnderDeveloped Infrastructure: Rural and backward areas do not have 24
hours power supply, safe drinking water, sanitation, hospitals, doctors,
telephone and internet facilities.
8. Aggregation of the imbalance: Once an area is prosperous and has
adequate infrastructure for development, more investments pour-in
neglecting the less developed regions. So an area which is already
prosperous develops further. For examples, the rate of growth of the
metropolitan cities like Mumbai, Delhi, Kolkata, Chennai, Bangalore and
Hyderabad is higher compared to other metro cities of India.
 Suggestions to Reduce Regional Imbalance

Identification of the Backward Areas and Allocation of funds:

Need for Investments in Backward Areas:
Good Governance:
Incentives:
Promoting New Financial Institution in Backward Region:
Setting Up of Regional Boards:
Growth Corridors:
Usage of natural resources for the development of tribal areas to be
implemented.
A composite criteria for identifying backward areas (with the Mandal/Block
as a unit) based on indicators of human development including poverty,
literacy and infant mortality rates, along with indices of social and economic
infrastructure should be developed by the NITI Aayog.
Union and State Governments should adopt a formula for Mandal / Block-
wise devolution of funds targeted at more backward areas.
A system of rewarding States (including developed States) achieving
significant reduction in intra-State disparities should be introduced.
Development of forward and backward linkages in the backward regions.
Special grants are to be given to the backward and tribal areas.
Cottage and small industries are to be promoted to provide employment
opportunities.
 Privatization

Privatization is the process of transferring ownership of a business, enterprise,

agency, public service or public property from the public sector to the private
sector. It means a transfer of ownership, management, and control of public
sector enterprises to the private sector.
RATIONALE BEHIND PRIVATISATION:
The monopoly status of public sector enterprises (PSEs) bred inefficiency.
Lack of competitiveness affects PSEs performance very adversely.
Bureaucracy was also responsible for poor performance of PSEs.
 Objectives of Privatisation:

Privatisation aims at providing a strong base to the inflow of FDI

The efficiency of PSU's was improved by giving them the autonomy to make
decisions.
To achieve higher allocative and productive efficiency, leading to faster
economic growth and development;
To strengthen the role of the private sector in the economy through job
creation and economic development.
To improve the public sector's financial health by reducing the burden
incurred by having to subsidize public enterprises
 Modes of Privatisation

Strategic Sale (Full or Partial Privatization)

The government sells a significant portion of its stake (often a majority stake) to a private
entity, thereby transferring management control.
Features:
The buyer could be a private company or a consortium of investors.
Often results in the transfer of management control to the private entity.
The government may or may not retain a minority stake.
Example: The sale of Air India to Tata Group, where a significant portion of the company's
shares and management control were transferred to a private entity.
 Modes of Privatisation

Public Offering (IPO/FPO)

Initial Public Offering (IPO): The government offers shares of the PSU to the public for the first time,
allowing private investors to purchase equity.

Follow- on Public Offering (FPO): The government, after the initial public offering, sells additional shares of
an already listed PSU to reduce its stake further.

Features:

The PSU becomes publicly listed on a stock exchange.

Ownership is transferred to individual or institutional investors.
The government retains some stake but reduces its majority shareholding.

Example: The IPO of Life Insurance Corporation of India (LIC) in 2022, where the government sold part of
its stake to the public.
 Modes of Privatisation

Disinvestment through Stock Exchange

The government gradually reduces its stake in the PSU by selling shares on the stock market without
transferring management control.
Features:
The government retains management control but allows private investors to hold equity.
It is usually used for partial privatization, where the goal is to raise revenue without giving up control.
Popular method for selling minority stakes.
Example: The sale of government shares in ONGC and NTPC through the stock exchange, where the
government sold portions of its stake to raise funds but retained control.
 Modes of Privatisation

Management/Employee Buyout:

The management and/or employees of the PSU purchase a significant stake in the company.

Features:

Employees or management take control of the company, often with financial backing from external
investors or banks.
This method gives employees a vested interest in the company's success.
May involve offering shares at a discount to employees.

Example: Hindustan Zinc Ltd, where management was involved in purchasing a stake in the company.
 Modes of Privatisation

Sale to Private Investor (Outright Sale)

The government sells the entire PSU or a controlling stake to a private investor or
company.
Features:
The private investor gains full control and ow nership of the PSU.
The government completely exits the enterprise.
This method is used w hen the government wants to fully divest its ow nership.
Example: The sale of BALCO (Bharat Aluminium Company) to Sterlite Industries.
 Modes of Privatisation

Joint Ventures (Partial Privatization)

The government creates a joint venture with a private sector company by selling part of its
stake or forming a new entity with joint ownership.
Features:
Both the public and private sectors share ownership and control of the enterprise.
Often used when the government wants to maintain a significant stake while benefiting
from private sector expertise.
Example: Formation of joint ventures like Bharat Oman Refineries Ltd (BORL), where the
government partnered with Oman Oil Company.
 Modes of Privatisation

Cross-Holding or Strategic Shareholding:

The government sells its stake in a PSU to another PSU or a group of PSUs.
Features:
Allows partial privatization while keeping control within the public sector.
This method can be used as an intermediate step before full privatization.
Example: Sale of shares of one PSU like O il and Natural Gas Corporation (O NGC)
to another PSU like Hindustan Petroleum Corporation Limited (HPCL).
 Modes of Privatisation

Asset Sale: The government sells specific assets (land, equipment , technology) of the PSU rather
than the entire entity.
Features:
Used when the objective is to offload non- core or unproductive assets rather than privatizing
the entire company.
May be a precursor to broader disinvestment or restructuring.
Example: Sale of land or factories of unviable PSUs that are being wound up or restructured.
Lease, Concessions, or Management Contracts: Instead of outright selling ownership, the government
leases the operation or management of a PSU to a private company for a specified period.
Features:
Ownership remains with the government, but management is handled by the private sector.
 Forms of Privatization

Complete Privatization:
Example: A state-owned enterprise (SOE) is entirely sold to a private company, and the
government no longer has any stake in it.
In 2001Govt. sold 51% stake in Bharat Aluminium Company Ltd. (BALCO ) to the private company
Vedanta Resources (then Sterlite Industries).
Partial Privatization:
Example: The government might sell 4 9% of an SOE to private investors but keep 51% to maintain
control.
In the late 1990s and early 2000s, the government of India decided to partially privatize IOCL by
offering shares to the public through multiple IPOs.
Management Buyout (MBO ): A company's management team purchases the enterprise, becoming
the owners.
 Forms of Privatization

Public- Private Partnership (PPP): A collaboration between the public and private sectors to deliver services
or infrastructure. Both parties share risks, investments, and rewards.
Example: A private company builds and operates a toll road, but the government retains oversight and
shares in the profits over a long- term agreement.
The Delhi Metro Rail Corporation (DMRC) operates through a collaborative partnership involving
Government of India, Government of Delhi, Delhi Metro Rail Corporation, Private Sector Partners such as
L&T (Larsen & Toubro) and IVRCL. Japan International Cooperation Agency (JICA) and the World Bank
Franchising: The government grants a private company the right to operate a public service (such as
utilities or transportation) under a specific set of rules and conditions.
Example: A private firm runs bus services in a city under a government - regulated contract. Delhi Metro
Rail Corporation (DMRC) partnering with private companies for operating metro feeder services.
 Forms of Privatization

Greenfield Privatization:
Refers to building new infrastructure or projects from scratch, w ith private sector
involvement.
In this case, the government contracts the private sector to create and manage
new public infrastructure or services.
It usually involves private investment in the creation of assets that did not
previously exist.
Example: A government might invite private firms to build and operate new roads,
airports, or power plants that were not previously part of public infrastructure. The
development of the Delhi-Mumbai Industrial Corridor (DMIC).
 Forms of Privatization

Brownfield Privatization:

Refers to the privatization of existing public assets that are already in operation.
The private sector takes over existing infrastructure, often improving or upgrading it,
but does not create new facilities from scratch.

Example: A private company takes over the operation of an existing railway system or an
already-built power plant.The Mumbai International Airport Limited (MIAL), a consortium
led by the Adani Group
Lease or Contracting O ut: Example:
Private companies manage public hospitals or schools under a contract, while the assets
remain government- owned. the contracting out of the Indian Railways' catering services
to private operators like IRCTC and other private players.
 Advantages of Privatization

1. Save taxpayers' money

2. Increase flexibility
3. Improve service quality
4 . Increase efficiency and innovation
5. Allow policymakers to steer, rather than row
6. Streamline and dow nsize government
7. Improve maintenance
 Disadvantages of Privatization

1. Problem of Price: The government usually want to sell the least profitable Enterprises, those
that the private sector is not w illing to buy at a price acceptable to the government.

2. Opposition from Employees: Disinvestment tends to arise political opposition from

employees w ho may lose their jobs, from politicians w ho fear short-term unemployment
consequence of liquidation of cost reduction by private ow ners, from bureaucrats w ho stand
to lose patronage and from those sections of the public w ho fear that national assets are
being concerned by foreigners, the rich or a particular ethnic group.

3. Problem of Finance : In the developing countries underdeveloped capital market

sometimes makes it difficult for the government to float shares and for individual buyers to
finance the large purchase
4 . High- Cost Economy: Another problem with the private sector is that its cost,
in general, are large and the price of products are unduly high.

5. Concentration of Economic Power: The dominance of some business groups

in terms of capital and assets is an economic and social problem.

6. Bad Industrial Relations: An unfortunate aspect of the private sector is the

recurrence of industrial disputes which hamper the smooth progress of the
industries.

7. Imbalanced Development: Private sector units are influenced in those areas

which are most suitable for-profit purpose.
 Devaluation
Devaluation is the deliberate downward adjustment of the value of a
country's money relative to another currency or standard. It is a monetary
policy tool used by countries with a fixed exchange rate or semi- fixed
exchange rate.

A currency is called devalued when it loses the relative value with other
currencies in the foreign market.
 Objectives of the Devaluation of the Currency

By devaluing its currency, a country makes its money cheaper and boosts
exports, rendering them more competitive in the global market. Conversely,
foreign products become more expensive, so the demand for imports falls.
To encourage the flow of capital into the country from outside i.e foreign
countries.
It is done to improve the balance of payment position due to the reduced
imports and increase in exports.
 Economic effect of devaluation of a currency

Exports cheaper
Imports more expensive.
Increased AD. A devaluation could cause higher economic growth. Part of AD
is (X-M) therefore higher exports and lower imports should increase AD
(assuming demand is relatively elastic).
Inflation is likely to occur because: Imports are more expensive causing cost
push inflation.AD is increasing causing demand pull inflation
W ith exports becoming cheaper manufacturers may have less incentive to
cut costs and become more efficient. Therefore over time, costs may increase.
 Disadvantages of Devaluation

It reduces foreign investors’ confidence because it causes a decline in the real

value of their investments, which causes capital to leave the country and, in
turn, creates a panic-like environment in the stock market and other markets
where they have made investments.
it raises the value of the country’s external debts, which results in higher
interest payments on the debt as well as higher costs for domestic tourists
traveling abroad and makes all other exports more expensive.
 Difference Between Devaluation and Depreciation
Devaluation occurs when a government changes the fixed exchange rate of its
currency.

If the demand for one currency changes relative to another due to market
forces and loses value, it is called depreciation.
 Trade agreement

A trade agreement is a formal arrangement between two or more countries

that outlines the rules and terms of trade between them.
These agreements aim to promote economic cooperation by reducing or
eliminating barriers to trade such as tariffs, quotas, and import/export
restrictions, while fostering fair competition and enhancing market access
for goods and services
Trade agreements may be bilateral or multilateral— that is, between two
states or more than two states.
 OBJECTIVES

To obtain economic benefits.

To pursue non- economic objectives
To ensure increased security of market access.
To improve members bargaining strength.
To promote regional infant industries.
 Importance of trade agreements

It reduces trade barriers

It increase the combined economic productivity of the countries by economic
cooperation
Trade agreements bring many benefits for economies around the world such as:
New markets, Jobs, Competitiveness, Foreign investment
Free trade agreements spawn foreign investment, creating economic grow th
As markets open for each of the trade partners so does investment opportunities
Free trade agreements increase industry competitiveness and the expansion of
exports
Competition from abroad forces domestic firms to keep prices down
 Merits of trade agreements

Removal of disputes
Expanded Markets for Exports
Foreign employment and economic growth
Increased production efficiently & effectively
Consumer satisfaction
 Demerits of trade agreements

Removing a trade barrier on a particular good hurts the shareholders and

employees of the domestic industry who produces that good
Some of the groups that are hurt by foreign competition wield enough
political power to obtain protection against imports
Increased domestic economic instability from international trade cycles, as
economies become dependent on global markets
W ith the removal of trade barriers, structural unemployment may occur in
the short term
Pollution and other environmental problems may arise
 Levels of Regional Economic Integration

Free trade Area :

Lowest level of integration.
All barriers to the trade of goods and services among member
countries are removed but members determine their own trade
policies with regard to non- member countries.
For Example- European Free Trade Agreement (EFTA) - Norway,
Iceland, Liechtenstein and Switzerland
North American Free Trade Agreement (NAFTA) - U.S., Canada and
Mexico.
 Levels of Regional Economic Integration

2. Customs Union:

Higher form of integration than free trade area.

Eliminates trade barriers between member countries and adopt a
common external trade policy against non-member countries.
Examples: The Andean Pact between Bolivia, Columbia, Ecuador,
Venezuela, and Peru
 Levels of Regional Economic Integration

3. Common Market-
Common Market involves all the feature of Custom Union.
In addition, the restriction on the movement of the factors of
production between member countries is removed. Factors of
production include Labours, Technology, Capital etc.
The restriction is abolished on immigration, emigration and cross
border Investments
Higher level of integration than customs union.
Examples: MERCOSUR (between Brazil, Argentina, Paraguay, and
Uruguay)
Gulf cooperation council( 1981)
 Levels of Regional Economic Integration

4 . Economic Union-

Free flow of products and factors of production between member

countries.
A common external trade policy.
A common currency.
It requires harmonization of the member countries' tax rates and a
common monetary and fiscal policy, social welfare programs etc.
Economic Union Involves full integration between two or more
economies.
Example: European Union
 Levels of Regional Economic Integration

5.Political Union-
Political Union involves all features of Economic Union and also complete political
integration between Member countries. The member countries share a common
decision making and Judicial body and there is complete unity between member
nations.
A political union requires that a central political apparatus coordinate economic,
social and foreign policy for Member states.
It requires the establishment of a common parliament and other political
Institutions.
Examples: United States of America includes thirteen separate colonies operating
under Article of Confederation.
 THE ECONOMIC EFFECTS OF REGIONAL TRADE AGREEMENTS

Trade creation:

O ccurs when the formation of a FTA or CU leads to a switching of imports from

a high- cost source to a low- cost source tends to improve welfare

Trade diversion:

O ccurs when imports switch from a low- cost source to a high- cost source
tends to worsen welfare
 TYPES OF FREE TRADE AGREEMENT
Bilateral Agreement: A bilateral agreement, refers to an agreement
between parties or states that aims to keep trade deficits to a minimum.
It varies depending on the type of agreement, scope, and the countries
that are involved in the agreement.
Examples:
Indo-Lanka Free Trade Agreement (ISFTA)
Bangladesh mulls FTA with Sri Lanka
Pakistan-Sri Lanka FTA (PSFTA)
Canada and USA Trade Agreement
 Objectives of Bilateral Trade

To expand access between two countries’ markets and increase their economic
growth.
Bilateral trade agreements standardize regulations, labour standards, and
environmental protections.
Bilateral trading agreements also standardize regulations across countries to ensure
trading partners play by the same rules.
They often include information-sharing, enforcement, and dispute resolution
provisions.
Since they are created to address specific issues between each country, bilateral
agreements can be easier to negotiate and implement than multilateral
agreements.
 Benefits of Bilateral Trading

Economic Growth Expansion: Bilateral trade agreements increase access to

new markets, enabling smaller economies to increase their exports.
Standardized Business O perations: Trade agreements between two
countries standardize regulations, labour standards, and environmental
protections to prevent one country from stealing another's innovative products,
dumping goods at a small cost, or using unfair subsidies.
Stronger Trade Relations: The countries involved establish stronger business
relationships which can help create trust.
Creation of a Stable Business Environment: that prevents governments from
changing the rules of the game by creating new tariffs or barriers to entry.
More Job Opportunities:
 Drawbacks of Bilateral Trade

Lack of market size:

The ability to trade with another country only expands market access if that
country is large enough compared to the trading partner.

Higher costs:
O ne disadvantage of bilateral trading agreements is the cost of complying with
additional regulations and standards.
 Multilateral Trade Agreements

A multilateral agreement is a trade agreement established between three or more

countries with the intention of reducing barriers to trade, such as tariffs, subsidies, and
embargoes, that limit a nation’s ability to import or export goods. They are considered
the best method of encouraging a truly global economy that opens markets to small and
large countries on an equitable basis.
The most successful international trade agreement being the General Agreement on
Trade and Tariffs (GATT), negotiated between 153 countries following the end of World
War II. Other example includes
South Asian Free Trade Area(SAFTA) (Afghanistan, Bangladesh, Bhutan, India, Maldives,
Nepal, Pakistan and Sri Lanka).
North American Free Trade Agreement NAFTA (USMCA) Mexico, Canada, and the
United States)
 Advantages of Multilateral Trade Agreements

Granting of “favoured nation status” – No nation that is a party to a multilateral

agreement can be granted more favourable trading rights than any other party
to the agreement. Each country is treated as an equal partner.

Best use of a nation’s resources –Countries can focus on producing only those
goods that are deemed valuable by its partners to the agreement, creating
efficiencies in the allocation of resources.

Exported goods are cheaper – Reduced tariffs mean that countries exporting
their products no longer face artificial barriers to trade.
Standardization of regulations - Companies can more easily navigate trade
between signatory countries as a result of agreed upon rules of commerce.

O ne agreement versus many –W hile multilateral agreements are often complex

by their very nature, they actually save countries the time and effort it takes to
negotiate separate agreements with every potential trading partner.

Emerging markets flourish –Bilateral agreements tend to favour the powerful.

Multilateral agreements level the playing field for all participants, particularly the
little guys who have been pushed around for years.
 Disadvantages of Multilateral Agreements

Ceding of sovereign rights –Countries that are partners in a multilateral

agreement give up degrees of sovereignty over the way they conduct business
with other countries, which often is in direct opposition to the democratic
principles on which they were founded.

Some parties win, but some parties lose –Certain industries within partner
countries may be adversely affected by the low cost of imported goods by
competing nations.
Complex and time-consuming negotiations – Due to the complex nature of an
agreement that must be negotiated by several countries w ith often competing
interests, multilateral agreements can take a great deal of time to complete. There is
no guarantee that after years of negotiation an agreement w ill actually be reached.

Misunderstandings and Misconceptions - Negotiations during an agreement are often

conducted in a confidential manner that breeds mistrust and controversy between
corporations, special interest groups, labour organizations, and the media.

Rise of multinational corporations – Small businesses often find it difficult to compete

w ith large corporations as traditional borders to trade are erased. This can lead to
unemployment in certain industries and lower standards of living as wages are cut in
order for these companies to compete.