Unit 1: Political and economic environment

The business environment is the sum of all external forces and institutions that affect a business but are largely beyond its control.

Significance: identifying opportunities and threats early, planning and strategy, adapting to change, and improving performance.

• Legislature (Parliament and state legislatures) makes laws affecting business — taxation, labour, company law.
• Executive (government and ministries) implements policies and regulations.
• Judiciary (courts) interprets laws, settles disputes and protects rights.

A stable political system, clear policies and good governance encourage investment.

• Forms of state intervention: regulation (licensing, standards), ownership (public sector), promotion (subsidies, PLI schemes), planning, taxation and spending, price controls.

A mixed economy — like India's — combines private enterprise with a significant public sector and government regulation.

• New Industrial Policy, 1991: licensing abolished except for a few hazardous/strategic industries; public sector reserved areas cut (now only atomic energy and railway operations); MRTP Act replaced by the Competition Act, 2002; FDI automatic route.

The public sector in India

• Role: infrastructure, heavy industry, employment, balanced regional development, self-reliance, control of the economy's commanding heights.
• Problems: low profitability, political interference, overstaffing, inefficiency.
• Reforms: Maharatna/Navratna/Miniratna autonomy, MoU system, disinvestment and strategic sale (Air India 2022), New Public Sector Enterprise Policy (2021) — minimum presence in strategic sectors, privatisation elsewhere.

• Recession: a significant decline in economic activity — often two consecutive quarters of falling real GDP.
• Effects: falling demand and sales, excess capacity, lower profits and investment, layoffs, credit tightening, rising NPAs, price wars; some sectors (discount retail, essentials) are resilient.
• Business responses: cost control, cash conservation, diversification, value products, renegotiating debt, investing for recovery (counter-cyclical strategy).

• Economic planning is the deliberate direction of economic activity by a central authority to achieve definite objectives in a specified period.
• India followed twelve Five-Year Plans (1951–2017) and annual plans; planning was democratic, indicative (after 1991), comprehensive and decentralised in parts.

• Achievements: higher growth, industrial base, food self-sufficiency, infrastructure, education and health institutions.
• Failures: persistent poverty and unemployment, regional imbalance, inflation, inefficient public sector, implementation gaps.

Monetary policy (RBI)

Monetary policy regulates money supply, credit and interest rates to achieve price stability with growth. Decided by the Monetary Policy Committee (MPC) — six members, inflation target 4% ± 2%.

Fiscal policy (Government)

Fiscal policy uses government expenditure, taxation and borrowing to influence the economy.

• Objectives: growth, price stability, employment, equitable distribution, resource mobilisation.
• Instruments: taxation, public expenditure, public debt, deficit financing.

• FRBM Act, 2003: fiscal discipline; the Centre's medium-term target is to bring the fiscal deficit below 4.5% of GDP (achieved for FY 2025–26 budget estimates) and then reduce the debt-to-GDP ratio.