The economic environment of India has undergone significant changes since independence: - At independence, India had a primarily agricultural and rural economy with low productivity. - Since then, India has pursued economic planning and reforms to promote growth, reduce poverty and inequality, and become more self-reliant. - The 1991 crisis prompted major reforms like liberalization, privatization, and globalization to open the economy and attract foreign investment. - Currently, India's economy is growing at around 5-8% annually and becoming more globally integrated, though challenges around infrastructure and development remain.

1. Economic Environment of Business
The economic environment relates to all the economic determinants
that influence commercial and consumer compliance. The term
economic environment indicates all the external economic
circumstances that affect the purchasing practices of customers and
markets. Hence, it influences the production of the business.
By- Ms.Shivani Naik Devrukhkar, ASSISTANT PROFESSOR, (MBA,
MCOM, PGDHE, NET, B.ED)

2. Important factors of Economic Environment
Economic environment is one of the most crucial elements of the business
environment. In India, the economic environment consists of various macro-level
factors that are related to the production and distribution of the organization. These
factors have an impact on the wealth of businesses and industries. Some of the
important factors are as follows:
•Stage of Economic Development: The stage of economic development of the
country means the physical frame and framework environment.
•Economical Structure: The type of economic system determines the role of the
public and private sectors in India. A mixed economic system operates where both
public and private sectors exist, and India is an example of a mixed economy.
•Economic Planning: Economic planning gives direction to the changes in the
economic environment. It includes five years plan, an annual budget, etc.

3. •Economic Policy: There are various important economic policies that influence
the business decisions, such as monetary policies, fiscal policies, etc.
•Fluctuations and trends in Economic Indicator: The functioning of an economic
indicator like national income, distribution of income, growth rate, GDP, NDP, etc.
Any change or fluctuation in these will affect the Economic environment.
•Infrastructural Factors: Infrastructure refers to all such activities and facilities
which are needed to provide different kinds of services in an economy. It includes
financial institutions, banks, modes of transportation, communication facilities, etc.
Poor infrastructural facilities hamper the economic growth of the country.

4. Economic Environment – the Indian Perspective

5. Economic Environment at the time of Independence
The economic environment of India has been rapidly
changing mainly due to government policies. The main
features of economic environment at the time of
independence are as follows:
•At the time of Independence, the Indian economy was
mostly agricultural and rural in nature. With 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.

6. Economic Environment since Independence
The government opted for ‘Economic Planning’ to revive the economy from the
damages caused by the British Rule.
The main objectives of the development plan adopted by India are as follows:
•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, i.e. based on
equality by avoiding capitalism, as it focuses on attaining the welfare of the
society.
•With respect to economic planning, the government gave the responsibilities for
infrastructure industries 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.

7. Crisis of 1991
The government could not get a very positive effect by
making a new economic policy that gave more importance
to the public sector and imposing restrictions on the
Private sector. As a result, India faced foreign trade
exchange crisis in 1991.
The major crises of 1991 were:
•The fiscal deficit approximately reached 7% of GDP,
which was a warning situation.
•Internal debt also rose to 50% of GDP.
•Negative growth in agriculture and industrial production.
•The value of the rupee was depreciating day by day. It
depreciated by 26.7 percent (in terms of US Dollars).
There was also a fall in foreign exchange reserves.
•There was a negative balance of payment.
•India was on the verge of becoming a defaulter. As a
result, SBI and RBI sold 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 International Monetary Fund to manage the crisis of
1991. In order to revive the economy, India decided to
reform the economy.

8. Reform Measures
To save our country from the serious situation of crisis
Government of India took the following reform measures:
•Firstly, 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 an open entry for the private sector to areas
that were earlier public sector.
•There was a rise in foreign equity holders from 40% to
51%.
•The government set up the Foreign Investment
Promotion Board(FIPB).
•Introduction of Indian development Bond scheme to get
funds from IMF.
•Buying back of gold, pledged with Bank of England and
Bank of Japan.
•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.

9. As a component of economic reformations, the government of India declared a new industrial system in
July 1991. The extensive characteristics of this system were as follows:
•The government decreased the number of enterprises below mandatory licensing to six.
•Many of the businesses held for the public sector under the initial policy were justified. The purpose of
the public sector was defined only to four industries of vital importance.
•Disinvestment was conducted in case of many public sector industrial companies.
•The policies towards foreign funds were expanded. The percentage of foreign equity partnerships was
extended. In many ventures, 100 percent of foreign direct investment (FDI) was allowed.
•The automatic approval was now given for technology transactions with foreign firms.
•Foreign investment promotion board (FIPB) was established to support and channelise the foreign
financing in India.

10. Liberalisation
The economic reforms that were presented were directed at liberalising the Indian business
and trade from all the redundant restrictions and limitations. They indicated the end of the
licence-permit-quota raj. The liberalisation of the Indian business has taken place with respect
to the following:
•By eliminating the licensing terms in most of the industries, excluding a shortlist
•By providing freedom in determining the range of marketing activities, i.e., no constraints on
the development or consolidation of business pursuits
•By dismissing the restraints on the transportation of commodities and services
•By providing freedom in deciding the cost prices of commodities and services

11. Privatisation
The new set of economic changes intended at proffering a prominent
position to the private sector in the nation-building rule and a
diminished role to the public sector. This was a withdrawal of the
growth policy attempted so far by the Indian directors. To accomplish
this, the administration redefined the role of the public sector in the
new industrial policy of 1991, approved the policy of proposed
disinvestments of the public sector, and determined the loss-making
and weak industries to the Board of Industrial and Financial
Reconstruction (BIFR).

12. Globalisation
Globalisation implies the combination of different economies of the world heading towards the
development of a united (closely-knitted) global marketplace. Till 1991, the government of India had
followed a course of stringently controlling imports in terms of price and quantity. These laws were with
respect to the following:
•Licensing of imports
•Tariff limitations
•Quantitative constraints
The new economic reforms directed at business liberalisation were focused towards import
liberalisation, export improvement through rationalisation of the tax structure, and changes with respect
to the foreign exchange so that the nation does not remain separate from the rest of the world.

13. Current Economic Environment in India
The United Nations Conference on Trade and
Development (UNCTAD) expects India’s economy to grow
5.7% in 2022 and 4.7% in 2023. India’s gross domestic
product (GDP) grew 8.7% in FY22.
In its annual Trade and Development Report 2022
released on Monday, it said that world economy is
expected to grow 2.6% in 2022 which is 0.9 percentage
points below the rate projected in last year’s
report.