What Is Economic Environment?
Various environmental factors such as economic environment, socio-cultural environment, political, technological, demographic and international, affect the business and its working. Out of these factors economic environment is the most important factor.
Meaning of Economic Environment:- Those Economic factors which have their affect on the working of the business is known as economic environment.
It includes system, policies and nature of an economy, trade cycles, economic resources, level of income, distribution of income and wealth etc. Economic environment is very dynamic and complex in nature. It does not remain the same. It keeps on changing from time to time with the changes in an economy like change in Govt. policies, political situations.
Elements of Economic Environment:-
It has mainly five main components:-
1. Economic Conditions
2. Economic System
3. Economic Policies
4. International Economic Environment
5. Economic Legislations
Economic Policies of a business unit are largely affected by the economic conditions of an economy. Any improvement in the economic conditions such as standard of living, purchasing power of public, demand and supply, distribution of income etc. largely affects the size of the market.
Business cycle is another economic condition that is very important for a business unit. Business Cycle has 5 different stages viz. (i) Prosperity, (ii) Boom, (iii) Decline, (iv) Depression, (v) Recovery.
Following are mainly included in Economic Conditions of a country:-
I. Stages of Business Cycle
II. National Income, Per Capita Income and Distribution of Income
III. Rate of Capital Formation
IV. Demand and Supply Trends
V. Inflation Rate in the Economy
VI. Industrial Growth Rate, Exports Growth Rate
VII. Interest Rate prevailing in the Economy
VIII. Trends in Industrial Sickness
IX. Efficiency of Public and Private Sectors
X. Growth of Primary and Secondary Capital Markets
XI. Size of Market
An Economic System of a nation or a country may be defined as a framework of rules, goals and incentives that controls economic relations among people in a society. It also helps in providing framework for answering the basic economic questions. Different countries of a world have different economic systems and the prevailing economic system in a country affect the business units to a large extent. Economic conditions of a nation can be of any one of the following type:-
1. Capitalism:- The economic system in which business units or factors of production are privately owned and governed is called Capitalism. The profit earning is the sole aim of the business units. Government of that country does not interfere in the economic activities of the country. It is also known as free market economy. All the decisions relating to the economic activities are privately taken. Examples of Capitalistic Economy:- England, Japan, America etc.
2. Socialism:- Under socialism economic system, all the economic activities of the country are controlled and regulated by the Government in the interest of the public. The first country to adopt this concept was Soviet Russia. The two main forms of Socialism are: –
(a) Democratic Socialism:- All the economic activities are controlled and regulated by the government but the people have the freedom of choice of occupation and consumption.
(b) Totalitarian Socialism:- This form is also known as Communism. Under this, people are obliged to work under the directions of Government.
3. Mixed Economy:- The economic system in which both public and private sectors co-exist is known as Mixed Economy. Some factors of production are privately owned and some are owned by Government. There exists freedom of choice of occupation and consumption. Both private and public sectors play key roles in the development of the country.
4. Economic Policies:- Government frames economic policies. Economic Policies affects the different business units in different ways. It may or may not have favorable effect on a business unit. The Government may grant subsidies to one business or decrease the rates of excise or custom duty or the government may increase the rates of custom duty and excise duty, tax rates for another business. All the business enterprises frame their policies keeping in view the prevailing economic policies. Important economic policies of a country are as follows:-
1. Monetary Policy:- The policy formulated by the central bank of a country to control the supply and the cost of money (rate of interest), in order to attain some specified objectives is known as Monetary Policy.
2. Fiscal Policy:- It may be termed as budgetary policy. It is related with the income and expenditure of a country. Fiscal Policy works as an instrument in economic and social growth of a country. It is framed by the government of a country and it deals with taxation, government expenditure, borrowings, deficit financing and management of public debts in an economy.
3. Foreign Trade Policy:- It also affects the different business units differently. E.g. if restrictive import policy has been adopted by the government then it will prevent the domestic business units from foreign competition and if the liberal import policy has been adopted by the government then it will affect the domestic products in other way.
4. Foreign Investment Policy:- The policy related to the investment by the foreigners in a country is known as Foreign Investment Policy. If the government has adopted liberal investment policy then it will lead to more inflow of foreign capital in the country which ultimately results in more industrialization and growth in the country.
5. Industrial Policy:- Industrial policy of a country promotes and regulates the industrialization in the country. It is framed by government. The government from time to time issues principals and guidelines under the industrial policy of the country.
Global/International Economic Environment:-
The role of international economic environment is increasing day by day. If any business enterprise is involved in foreign trade, then it is influenced by not only its own country economic environment but also the economic environment of the country from/to which it is importing or exporting goods. There are various rules and guidelines for these trades which are issued by many organizations like World Bank, WTO, United Nations etc.
Economic Legislations:- Besides the above policies, Governments of different countries frame various legislations which regulates and control the business.
Indian Economic Law
If you want to do business in India, it is important to recognize some essential economic laws in India. These include laws framed as early as 1872 (which are still applicable) as well as those framed just a few years ago.
Broadly speaking, you need to be familiar with 20 essential economic laws, listed here in chronological order. They form the overall legal framework of the Indian business environment.
- The Indian Contract Act (1872): Established the framework within which contracts can be executed and enforced.
- Negotiable Instruments Act (1881): Set rules for promissory notes, bills of exchange, and checks.
- Workmen’s Compensation Act (1923): Set the compensation to be paid by employers to injured workers.
- Sale of Goods Act (1930): A mercantile law that complemented the Contract Act (see above).
- Payment of Wages Act (1936): Established a minimum monthly salary for industrial and factory workers.
- Industrial Disputes Act (1947): Provided for the investigation and settlement of industrial disputes.
- Minimum Wages Act (1948): Fixed minimum pay rates for certain jobs.
- Factories Act (1948): Regulated labor in factories.
- Employees Provident Fund and Miscellaneous Provisions Act (1952): Established provident funds, family pensions, and other monetary benefits for factory employees.
- Maternity Benefits Act (1961): Regulated post-childbirth time off for female employees.
- Payment of Bonus Act (1965): Regulated bonus payments to be made to certain categories of employees on the basis of production, profit, or productivity.
- Monopolies and Restrictive Trade Practices Act (1969): Established rules to prevent unfair concentrations of economic power.
- Indian Patents Act (1970): Set rules for patent protection in India.
- Payment of Gratuity Act (1972): Provided for payment of gratuities to Indian employees in certain industries.
- Copyright Act (1975): Helped establish copyright protection in India.
- Arbitration and Conciliation Act (1996): Set up to govern arbitration issues.
- Geographical Indications of Goods Act (1999): Provided legal protection for goods originated in a particular area or region within India (examples include Darjeeling tea and Basmati rice).
- Trademarks Act (1999): Helped establish trademark protection in India.
- Designs Act (2000): Helped establish protection of designs.
- Competition Act (2002): Provided for the establishment of a commission that promotes competition, protects consumers, and ensures freedom of trade.
In addition to the above acts, you need to take note of Indian Company Law, which gives details of how to function as a corporate entity in India.
By and large, the economic legal system provides a fair, equitable, and transparent framework for both employers and employees. The Indian Contract Act and the Negotiable Instruments Act are both considered top of the legal charts. A fair understanding of at least these two laws is essential for doing business in India.