Entrepreneurship development and Industrial Consultancy

Lesson 2. OVERVIEW OF INDIAN SOCIAL, POLITICAL AND ECONOMIC SYSTEMS AND THEIR IMPLICATION FOR DECISION MAKING BY INDIVIDUAL ENTREPRENEURS, PART-I

Module 1. Entrepreneurial environment

Lesson 2

OVERVIEW OF INDIAN SOCIAL, POLITICAL AND ECONOMIC SYSTEMS AND THEIR IMPLICATION FOR DECISION MAKING BY INDIVIDUAL ENTREPRENEURS, PART-I

2.1 Introduction

Indian leaders, notably the first Prime Minister Dr. Jawaharlal Nehru, who implemented the concept of five year plans, believed that high economic growth and more income amongst the poor population are the prime goals before the newly independent nation. To achieve these goals, government was assigned important role and since 1951, number of five year plans have played major role in economic development of the country. Although there was considerable growth in 1950s, but it was a less than many other Asian countries. From 1951-79, the Indian economy grew at an average rate of 3.1 percent a year at constant prices. In the same period, growth in industrial sector was about 4.5 percent a year and for agriculture sector, it was 3.0 percent. Many political leaders associated with Independence movement were favoring socialistic pattern of development. They were in favor of government intervention in the economy. They propagated ownership by state for key industries.

Indian economic systems: India has a mixed economic system. Indian economy comprises of traditional village farming, modern agriculture, handicrafts, modern industries and new emerging social sector. Since 1991, government has adopted liberalization policy. Restrictions on foreign trade and investment have reduced. The economic growth rate is around and above 6% in the liberalized era since 1991. This has resulted in reduction in poverty by about 10 percent. India possesses large number of educated youth, which has helped in economic progress; and the country and India emerged as an important destination for business process outsourcing services.

In layman’s terminology, environment means the natural forces like air, water etc. For a business organization environment means all the internal and external forces affecting the organization. Management of business organizations should visualize and foresee the impact of environmental forces. In a strict economic sense, environment refers to all external forces which have profound influence on the functioning of business. Environmental factors are beyond the control of individual business organization. All business organizations function within the broad framework of the external environment which either provides opportunity or act as a threat to the business organization. The external environment is a mix of complex dynamic forces uncontrollable by the business organization but can also be influenced or affected by the organization. The external environmental forces decide the choice of a strategy. The marketing decisions are also influenced by external environment forces. Successful business organizations continuously monitor external environment and likewise adopt appropriate strategy so as to meet the customer’s need in a most effective way.

Looking from the system’s viewpoint, all business organizations operate in an open system. It takes resources from the external environment, carries out conversion process and gives output in the form of goods or services to external environment.

2.2 Type of Environment

A) Macro environmental factors

1. Economic Environment

A close relationship exists between business and its economic factors which include business cycles, inflation, unemployment interest rates, income level of saving and investments, fiscal, monetary and balance of payment situations and overall growth activity. The economic factors affect consumer purchasing power and spending pattern. Economic environmental factors decide the growth prospects of business houses. During recession, the demand of goods and services decreases leading to slowdown of business. The economic policies framed by the government may either act as opportunity or threat for a business.

2. Technological environment

Technology is the most dynamic force. Technology implies systematic application of scientific or organized knowledge to practical tasks. Technological development occurs at a very fast pace. Business organizations have to keep pace with the fast changing technology by adopting latest technology in their production process. Technology has a profound impact on life styles, consumption pattern and economy. The rate of change in technology also acts as opportunity or threat for existing business organizations. Technological development leads to establishment of new industries at the same time.

3. Political Legal Environment

This refers to influence exerted by all the three constitutional wings namely legislature, executive and judiciary on business. Government frames legal rules and regulations for smooth functioning of business organizations Subsidies, tariffs, import quotas and deregulation of industries are some of the regulating forces imposed by government for business organizations. The political environment includes role played by government and other non government organizations (NGOs) influencing the business activities.

The legislature, executive and judiciary either singly or in combination shapes, direct, develops or controls the activities of business organizations. In recent times there is growth of many NGOs which exert influence on business organizations and compel them to adopt right practices in the larger interest of all sections of society. The legal environment becomes more complicated as business organizations expand globally and face government structures quite different from those within their host country. A stable and dynamic political environment is very essential for business growth.

4. Demographic Environment

Demography is the study of human population with respect to size, density, location, age, sex, race, occupation and other statistics. Demographic trends such as worldwide explosive population growth, a changing age – education and esthetic mix of population, changes in the household pattern, geographical shifts in population etc act as opportunity or threat to business organizations.

5. Socio Cultural Environment

These are most difficult uncontrollable factors to predict. It is necessary for business organizations to understand and appreciate the socio cultural values of society in which they conduct their operations. The cultural environment is composed of society’s basic values, perceptions, preferences and behaviors, cultural values & beliefs is a mix of concepts like quality, achievement, youthfulness, efficiency, practicality, freedom, self actualization, individualism, patriotism, religious beliefs, morality, courage, ownership of responsibility, materialism etc. Each country has a specific and unique socio-cultural environment. Business organizations have to comply with this unique socio cultural environment.

6. Natural Environment

Business as an economic system that is established by man but it is impacted upon by natural forces. Business activities also influence the nature in positive and negative ways. The ecosystem refers to natural system and its resources that are required as inputs by business organizations or that are affected by business activities. In recent years the concepts & preserving the natural environment or green marketing have emerged. The natural resources are of renewable and non renewable type. It is necessary for business organizations to make efficient use of natural resources for the benefit of mankind.