Economicenvironm

ECONOMIC ENVIRONMENT
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ECONOMICS OF DEVELOPMENT

We need to realize that economic prosperity for a
nation is not about Economics alone. A nation
cannot be run like a department store with the only
motive of profit maximization. Economic prosperity
encompasses social development which is crucial to
the soul of nation

Arindam Chaudhari
ECONOMICS OF DEVELOPMENT
An economy or economic system refers in which the various
economic activities relating to production, distribution,
exchange and consumption of goods and services are
organized in a country and the way in which the people of a
country earn their living.

It comprises the factories, firms, mines, shops, banks, schools,
offices, transport systems, theatres, hospitals, public
administration, defense etc., which help in the production and
distribution of goods and services in the country.
DIFFERENCE BETWEEN ECONOMIC GROWTH &
DEVELOPMENT
Economic growth- refers to increases over time in a countrys real output
of goods and service or more appropriately product per capita.

The term Eco.development refers to the progressive changes in the socio-
economic structure of a country.
It involves a steady decline in agriculture share in GDP & a corresponding
increase in the share of industries, banking, trade, construction, services.

This change in economic structure is invariably accompanies by a shift in
the occupational structure of the labor force.
DIFFERENCE BETWEEN ECONOMIC GROWTH &
DEVELOPMENT
Economic growth- merely refers to raise in output.

While Eco.development implies changes in
technological & institutional organization of
production as well as in distributive pattern in
income
CHARACTERISTICS OF INDIAN ECONOMY
An economy of a country consists of three sectors:
1. Primary sector includes agriculture, mining, fishing etc.,
and it is generally called agricultural sector.

2. The Secondary sector includes all kinds of industries
both large as well as small and it is generally called
industrial sector.

3. Tertiary sector includes services like transport, banking,
insurance Public administration, defense etc., and it is
called as service sector.

Indian economy is presently characterized as an under
developed & developing economy.
CHARACTERISTICS OF INDIAN ECONOMY
Important features of Indian Economy are:

Rapid growth of population: Over the 50 years, rate of
population Growth was over 2.0 percent per annum This
demographic situation is major constraint on the growth
of business.

Predominance of Agriculture: About 64.9% of the
working population depend on agriculture for their
livelihood. It is still primitive and is gamble in the
monsoons and it is still underdeveloped.
Though we have adopted planning for about five
Decades we have not achieved much in agriculture.

CHARACTERISTICS OF INDIAN
ECONOMY
Poor quality of Indian working population: compared to advanced
countries the poor quality of Indian labor is due to the reason that the
laborers of India are poor and under fed.

Low level of technology: technical backwardness in all the fields of
production, techniques of production are mostly old and obsolete.
Also lack of quality education and technical training to absorb modern
technology.

Inadequate Transport and Communication systems: Even today
many of our rural areas are not provided with well developed roadways and
power facilities.

CHARACTERISTICS OF INDIAN
ECONOMY

Existence of Dualistic or Dual sector: In India both ancient and
modern sectors exist side by side. We find ancient wooden ploughs as well
as the modern tractors. Similarly in industries old and obsolete machines
and modern sophisticated machines.

Under utilization of resources: though India is rich in natural
resources like land, minerals, forests, wild life, power, fisheries etc., but
they are not properly utilized due to shortage of capital, low level of
technology and technological skill.

MAJOR ISSUES OF DEVELOPMENT
India is an underdeveloped though a developing economy.
Bulk of the population lives in conditions of misery.

Poverty is not only acute but also chronic. At the same time ,
there exist un utilised natural resources.

The co-existence of the vicious circle of poverty with the
vicious circle of affluence perpetuates misery and foils all
attempts at removal of poverty.

It is in this context that an understanding of the major issues
of development should be made.

The following are the major development issues in India.

1. Low percapita income

2. High proportion of people below the poverty line.

3. Low level of productive efficiency due to inadequate nutrition and
malnutrition.

4. Imbalance between population size, resources and capital.

5. Problem of unemployment

6. Instability of output of agriculture and related sectors.

7. Imbalance in distribution and growing inequalities.

Low percapita Income: The annual income per head of the
population in India is very low: after independence government
wanted to give a big push to the standstill economy. With the
efforts of the government some development has indeed taken
place during the five decades of planning. But India still remains
one of the most underdeveloped countries in terms
of per capita income.

Low standard of living: Due to low percapita income the
standard of living is very low. 39% of the total population of the
country live below poverty line and there is mass chronic
poverty.


High proportion of people below the poverty line & Low level of
productive efficiency due to inadequate nutrition and malnutrition. :

Defining poverty line on the basis of norms of nutritional requirements, i.e.
2,400 calories PPP- rural areas
2,100 calories PPP- urban areas.

The percentage of population below the poverty line is quite high.
Alarming situation from the point of view of the business even after 60 years
of independence .

More than 40 percent of Indias population neither has any capacity to
contribute to capital accumulation nor to create any demand for industrial
goods..


Imbalance between population size, resources and capital.
Rate of population Growth was over 2.1 percent per annum.
the
requirement of feeding additional numbers compels the use of
resources in low return agriculture rather than higher return
manufacturing

This demographic situation is major constraint in accumulating
capital on the growth of business.

DETERMINANTS OF ECONOMIC DEVELOPMENT

Growth of population :Economic development and population are
inter-connected. History has shown that birth rate only falls
significantly when the standard of living rises significantly for the
majority of people.

Building Human capital: by focusing on education and health
thereby increasing the productivity of the economy.
Harmonization of the objective of expanding production with that
of securing full employment is a logical necessity in India.

MAJOR ISSUES OF ECONOMIC DEVELOPMENT

Predominance of Agriculture: About 64.9% of the working
population depend on agriculture for their livelihood. It is still
Primitive and is gamble in the monsoons still underdeveloped.
Though we have adopted planning for about five decades we
have not achieved much in agriculture.

Problem of unemployment: Widespread unemployment is
probably the most striking symptom of inadequate development
in India.
Employment situation did not improve in the period of
liberalization.
Economic growth was jobless. A large no. of workers lost jobs
as a consequence of downsizing of industrial unit.

MAJOR ISSUES OF ECONOMIC DEVELOPMENT

Inequalities of Income and wealth:

Various studies and surveys have clearly indicated that
even the small gains of development over the years
have not been equitably distributed.

Economic development implies the process of securing levels of
productivity in all sectors of economy.

Capital Formation
Capital output Ration
Curb the Growth of population
Create Human capital

Capital formation to the full extent by domestic savings is of crucial
importance in the process of economic Development. It is quite necessary
to step up the rate of capital formation that the community accumulates
a large stock of machine tools and equipment which can be geared into
production.
Technological framework implicit high rate of capital formation.

Capital output Ratio: refers to the number of units of capital that
are required in order to produce one unit of output .

In certain sectors of the economy out put can be increased with
comparatively small additions to capital.

For instance, in Japan between 1885 and 1915 labour
productivity in agriculture was doubled by a comparatively small
quantum of investment in the form of better seeds, improvement
in water supply, control of crop diseases and the use of fertilizers.

INDIA AS A DEVELOPING ECONOMY
Strategy and planning in India In 1951 economic
planning was adopted as an instrument of
development.

Over the past 6 decades the country has completed
10
th
five year plans. National income has increased &
also considerable improvement has taken in the
various sectors.

An Approach to the 11th Five Year Plan
(2007-2012) towards developing economy
SECTOR WISE ANALYSIS

PRIMARY SECTOR

SECONDARY SECTOR

TERTIARY SECTOR

India started marching towards economic progress India as a
developing country . During past 60 years, the country has made
Progress in Agriculture, Industry, science & technology, health
& education and various other fields.

1850-1950 Indian economy was stagnant for 100 years, but now
the economy is progressing also with the recent LPG of Indian
economy.
CONTRIBUTION OF AGRICULTURE TO INDIAN ECONOMY
Agricultural sector - reached the stage of development and maturity.
Share of agriculture in NI taken as an indicator of economic
development.
Continuous increase in agricultural production and productivity in
India..

Total production of food grains has increased
1950 -51 - 50.8 million tones
During seventh plan - 187 million tones
Eighth plan 209.8 million tonnes
Considerable improvement in non food grains like oilseeds reached a
recorded level of 24.7 million tonnes .

During mid 1960s Green revolution due to the adoption of New
agricultural strategy.
Contribution of secondary sector
The share of industrial sectors to NI has increased steadily.
Several Industrial policy resolutions were introduced to develop
industrial sector of our country.

New Industrial policy of 1991 has enabled the industrial sector
to develop to a greater extent

1951-1965 foundation for Industrial development in the
country

Basic industries like iron and steel, heavy engineering and
machine building industry registered significant increase in their
growth.

CONTRIBUTIONS OF SECONDARY SECTOR
sectors 1970-71 1980-81 2003-04
Primary 45.8% 39.6% 24.0%
Secondary 22.3% 24.4% 25%
tertiary 31.9% 40% 51.4%
Contributions of secondary sector

Year 2003-04 2004-05 2005-06 2006-07

Industry 7.0 8.4 8.3 10.6
Mfrg. 7.4 9.2 9.1 11.5
Services 8.5 9.6 9.8 11.2
Annual growth rate of Industrial Production

TOTAL GDP AT FACTOR COST

OBJECTIVE OF 11
TH
PLAN
The 11th Plan provides an opportunity to restructure policies to
achieve a new vision based on faster, more broad-based and
inclusive growth.

It is designed to reduce poverty and focus on bridging the various
divides that continue to fragment our society.

The 11th Plan must aim at putting the economy on a sustainable
growth with a growth rate of approximately 10per cent by the
end of the Plan period.

It will create productive employment at a faster pace than
before, and target robust agriculture growth at 4%
per year. It must seek to reduce disparities across

CURRENT ECONOMIC SCENARIO
It was announced recently that India would
be achieving a GDP growth of 9.2% against
project figure of 8.5%,all members of ruling
party at Delhi complemented each other.
this was possible due to a very good
performance of manufacturing, IT,
pharmaceutical and service sector.

10% planned growth in the next 5 years of
11
th
five year plan.
INFLATION
Inflation refers to a situation when there is a general rise in prices
and a corresponding fall in value of money.

Inflation occurs when the volume of money in circulation
increases faster than the volume of goods and services.

Prof. Coulbourn defines inflation as too much of money
chasing too few goods.

Modern definition by Crowther
Inflation is a state in which the value of money is falling, i.e
prices are rising. Inflation is usually associated with rising activity
and employment.

Inflation - excess purchasing power in the hands of the people.
TYPES OF INFLATION
Creeping inflation Price Rise by 2% -PA not controlled in time prove
disastrous economic & political stability of the economy

Walking inflation mild & tolerable > 10% PA moderate stable
inflation- people expectations remain more or less stable.

Running inflation rises rapidly < 10% ranges 10-20%-exceeds Galloping
inflation. Causes economic distortions and disturbances in the economy.

Hyper inflation: 1000% PA . Low purchasing power, real wages fall and
inequalities increases serious distortions overall economic condition.

CAUSES OF INFLATION
The basic cause of inflation normally occurs, when aggregate
demand for output tends to be excessive in relative to the
supply
of output.
CAUSES OF
INFLATIONS
1.CHANGES IN MONEY SUPPLY
2. Change in disposable income
3. Changes in business & consumer expenditure
4. Changes in foreign demand
CAUSES OF INFLATION
1. Changes in money supply:
(a) Deficit financing
(b) Expansion of credit
(c ) Increase in Govt Expenditure on large development
project.

2. Disposable income: due to fall in the level of taxation,
increase in national income, a fall in the savings ratio, rise in
the income corresponding rise in savings.

CAUSES OF INFLATION
3. Changes in Business and Consumer Expenditure :
consumer spends more on goods & services the
demand also increase business activity.

Higher purchase & installment schemes.

4. Foreign demand: inflation may also be caused due
to changes in supply of goods and services, when it
does not keep pace with the increased demand for
goods and service

CAUSES OF INFLATION

Inflation may occur due to the following different causes:

Increase in the money circulation
Increase in the disposable income
Increase in community's aggregarate spending on consumption
& investment or in goods.
Excessive speculation and the tendency to hoarding & profiteering
Increase in population as the widening gap between demand &
supply.
Drought, famine, earthquake , storm, volcano eruption and other
natural calaminities adversely affecting agricultural production and
output of other industries.
Prolonged industrial unrest industry or industries,
nationwide truck strike that would cause stagnation of goods that
would not ensure the match in demand and supply)

EFFECTS OF INFLATION
Effect on Production & Employment: motivates Cos to expand
its production normally leads to generation of Employment
opportunities.
Effect on Distribution of national income
Effect on producers
Effect on wage and salary earners
Effect on fixed income groups
Effect on debtors (gain)and creditors suffer badly)
Effect on farmers-benefit due to increase in prices of crops
CONTROL ON INFLATION
1. DIRECT MEASURES control on prices and rationing
of scarce goods. Ceiling on certain goods and should
not allow to it to rise further.

2. FISCAL MEASURES: deployed to check inflationary
pressures.
An increase in Govts revenue and decrease in its
expenditure can successfully check inflationary
pressures. in the economy

CONTROL ON INFLATION

3. MONETARY MEASURES: RBI Open market operations, & Bank rate policy.
.
4. WAGE CONTROL : money wage rate rises faster than the productivity of
labor. However wage controls difficult to implement.

5. PRICE CONTROL: fixation of maximum prices at which
commodities are to be sold.

6. OTHER MEASURES: diverting funds only towards production of
necessary commodities, instead of luxury items.
Exports can be increased and imports restrictions can be relaxed.

Govt. try to restrict the growth rate of population increase
production levels in the economy
PRICE INDICES
The numerical value that summarizes price level is called price
indices.
The purpose Of PI helps in explaining the purchasing power or
inflation/Deflation from one period to another.

Types of Price Indices:
1. Wholesale price Index (WPI)
2. Consumer Price Index (CPI)

PRICE INDICES

1. Wholesale price Index (WPI): It is an indication of price
movements in all wholesale markets other than the retail
market.
It is worked out for a whole country or for a very large area.
Here the prices are collected from the wholesale dealers.

2. Consumer Price Index (CPI)-PI with special reference to a class
or category for whom it is meant.

TYPES OF CONSUMER PRICE INDEX
1. Consumer Price Index for Industrial Workers (CPI-IW)
2. Consumer Price Index for Urban Non-manual Employees (CPI-
UNME)
3. Consumer Price Index for agricultural laborers (CPI-AL)

Relationship between Price Indices & Inflation
Inflation is estimated through Price Indices.
Earlier it was estimated in terms of wholesale price. However from
the point of view of consumers, retail prices are far more relevant
and thus today inflation is measures in terms of CPI.
BUSINESS CYCLE
A business cycle can be defined as wavelike
fluctuations of business activity characterized by
recurring phases of expansion and contraction in
periods varying from three to four years.

Fluctuation rather than stability is the rule in every
business record.

FEATURES OF BUSINESS CYCLE
1. Recurring Fluctuations

2. Period of business cycle is longer than a year.

3. Presence of the alternating forces of
expansion
and contraction Prosperity & depression.

4. Phenomenon of the crisis: this implies that
peak & trough are asymmetrical. Normally, the
prosperity phase of business comes to an end
abruptly, whereas, recovery after the depression is
gradual and slow.
PHASES OF BUSINESS CYCLES
Prosperity upswing, expansion phase.

Recession a turn from prosperity to depression

Depression contraction or downswing

Recovery turn from depression to prosperity


Prosperity phase

Income level tends to raise
Unemployment rate declines
Industrial growth rate accelerates
Actual output level exceeds the potential output level
Investment increases
Investors become more optimistic and more enthusiastic
Consumer demand for goods and services in the market tend to increase,
even at the rising prices
Prices tend to raise and provide greater incentives for business expansion.
Interest rates rise
Money supply increases
There is a risk of over heating of the economy
The prosperity phase comes to an end when the forces favouring expansion
become progressively weak.

RECESSIONARY PHASE
The prosperity comes to end when the forces favoring expansion
become progressively weak.

Bottlenecks begin to appear at the peak of prosperity.

In fact profit inflation and over optimism which increase the tempo,
carry with them the seeds of self destruction.

In view of high profits and business optimism, entrepreneurs invest
more and expand further. But scarcity of resources, particularly ,
shortage of raw materials and labor, causes bottlenecks and
business calculations go wrong,

Over optimism pave the way to over pessimism.
Thus, prosperity digs its own grave.

DEPRESSIONARY PHASE

Characteristic features of a depression are the reverse of
prosperity

Shrinkage in the volume of output, trade and transactions
Rise in the level of unemployment
Price deflation
Fall in aggregate income of the community
Fall in the structure of interest rates.
Contraction of bank credit
Prosperity - economic activity will be at its peak
Depression economic activity is at its trough.

RECOVERY /STAGFLATION PHASE

However depression cant be permanent feature of an
economy.

The revival or recovery phase refers to the lower turning
point undergoes change from depression to prosperity.

Improvement in demand for capital goods, new investment
will be induced, such investment will cause rise in
employment and income. Increased income in turn will lead
to rise in consumption pushup demand rise in prices,
profits further investment.

Thus during recovery, expansionary process will be self
reinforcing.
Revival or recovery phase slowly turns into prosperity and
the cycle repeats itself.

INDICATORS OF BUSINESS CYCLE
Gross Domestic Product
Fixed Investment
Net exports
Unemployment rate
Real earnings
CPI

TYPES OR TIMINGS OF INDICATORS
There are three timings in which these indicators lead to changes
in the business cycle namely:

1. Leading: are those indicators due to operation of which,
changes in Business cycle happens. Change in leading
indicators bring immediate change in the business cycle.
E.g. The consumer confidence Index, Industrial new order,
personnel consumption of Mfg. goods etc.,
2. Coincidental : are those indicators wherein the changes in
indicators simultaneously bring changes in the business
cycle : e.g. GDP
3. Lagging: are those indicators wherein there is a time lag
between indicators change and Business cycle change e.g.
Unemployment as it increases after trough of the business
& bottom after peak of the business cycle.

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