Bus Env-II Class 2
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BUSINESS ENVIRONMENT-IIBY
S.SENTHIL GAVASKAR M.E;MBA ;(P.hD)
CLASS :2DATE:19/8/2013
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contentsSalient features of Indian economic planning
Achievements of economic planningUrbanization and its impact
Fiscal Policy
Monetary policy
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SALIENT FEATURES OF INDIAS FIVE YEAR PLANS
Democratic
Decentralized planning
Regulatory mechanismExistence of central and state plan
Public and private sector plan
Periodic plan
Balanced regional developmentPerspective planning on basic issues or problems
Programme implementation and evaluation
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ACHIEVEMENTS OF PLANNINGIncrease in national income
Increase in per capita income
Increase in rate of capital formation
Development of agriculture
Elimination of disparity among people in the society
Development of infrastructure
Employment generationAttainment of selfreliance
Development of science and technology
Price stability and control
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URBANIZATION AND ITS IMPACT
An urban area is defined as follows: all places with a municipality,
corporation, cantonment board or notified town area committee,
all other places which satisfy the following criteria : 1) a minimum
population of 5000 ii) at least 75% of the male working population
engaged in non-agricultural pursuits iii) a density of population of
at least 400 persons per sq km.
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Urbanization means the proportion of a nations population
living in urban areas. Urbanization occurs when the urban
population increases at a rate higher than that of the increase
in total population.
The degree of urbanization in India has been increasing at a
slow pace. Urban population as a percentage of total
population increased from 17.3 % in 1951 to 45% in 2012.
In India the growth of industries also made a significant
contribution to the cause of urbanization.
Urbanization has taken place largely due to migration of
people from rural to urban areas mainly in search for Job.
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POSITIVE EFFECTS
Economic growth through economies of scale
enlarge market due to population growth results in increase in
demand for products and services
It leads to specialization, inventions, advanced technology, greater
diversity of goods and services. Efficient transport and communication
system .
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NEGATIVE EFFECTS
It leads to overcrowding in cities and considerable pressure on basic civic
amenities.
The Government has to spend huge resource on power, water facilities,
transport, public health and other services.
More demand for specialized labor due to shortage of labour
labors demand for more wages
Increase in pollution rate.
Cost of living is high in urban areas
Difficult to get land within the city, where many industries are located at the
outskirts of the city.
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FISCAL POLICY
In economicsand political science, fiscal policy is the use of government expenditure
and revenue collection (taxation) to influence the economy.
It refers to the Revenue and Expenditure policy of the Govt. which is generally used
to cure recession and maintain economic stability in the country.
Fiscal policy can be contrasted with the other main type of macroeconomic policy,
monetary policy, which attempts to stabilize the economy by controlling interest
rates and spending.
The two main instruments of fiscal policy are government expenditure and taxation.
Changes in the level and composition of taxation and government spending can
impact the following variables in the economy:
Aggregate demandand the level of economic activity; The pattern of resource
allocation; The distribution of income.
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Stances of fiscal policy
The three main stances of fiscal policy are:
i) Neutral fiscal policy is usually undertaken when an economy is in equilibrium.Government spendingis fully funded by taxrevenueand overall the budget
outcome has a neutral effect on the level of economic activity.
ii)Expansionary fiscal policy involves government spending exceeding tax
revenue, and is usually undertaken during recessions.
iii) Contractionary fiscal policy occurs when government spending is lower than
tax revenue, and is usually undertaken to pay down government debt..
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INSTRUMENTS OF FISCAL POLICY
1. Reduction of Govt. Expenditure
2. Increase in Taxation
3. Imposition of new Taxes4. Wage Control
5.Rationing
6. Public Debt
7. Increase in savings
8. Maintaining Surplus Budget
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OTHER MEASURES
1. Increase in Imports of Raw materials
2. Decrease in Exports
3. Increase in Productivity
4. Provision of Subsidies
5. Use of Latest Technology
6. Rational Industrial Policy
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Methods of funding
Governments spend moneyon a wide variety of things, from the
military and police to services like education and healthcare, as
well as transfer paymentssuch as welfare benefits. This
expenditure can be fundedin a number of different ways:
Taxation
Seigniorage, the benefit from printing money
Borrowingmoney from the population or from abroadConsumptionof fiscal reserves.
Saleof fixed assets (e.g., land).
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Borrowing
A fiscal deficit is often funded by issuing bonds, like treasury bills
or consolsand gilt-edged securities. These pay interest, either for a
fixed period or indefinitely. If the interest and capital requirements
are too large, a nation may defaulton its debts, usually to foreign
creditors. Public debt or borrowing : it refers to the government
borrowing from the public.
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What is monetary policy?The Monetary and Credit Policy is the policy statement, traditionally announced
twice a year, through which the Reserve Bank of India seeks to ensure price
stability for the economy.
The Monetary Policy regulates the supply of money and the cost and availabilityof credit in the economy. It deals with both the lending and borrowing rates of
interest for commercial banks.
The Monetary Policy aims to maintain price stability, full employment and
economic growth.
The Monetary Policy is different from Fiscal Policy as the former brings about a
change in the economy by changing money supply and interest rate, whereas
fiscal policy is a broader tool with the government.
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The Fiscal Policy can be used to overcome recession and control
inflation. It may be defined as a deliberate change in government
revenue and expenditure to influence the level of national output
and prices.
What are the objectives of the Monetary Policy?
The objectives are to maintain price stability and ensure adequate
flow of credit to the productive sectors of the economy.
Stability for the national currency (after looking at prevailingeconomic conditions), growth in employment and income are also
looked into. The monetary policy affects the real sector through
long and variable periods while the financial markets are also
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INSTRUMENTS OF MONETARY POLICY
1. Bank Rate of Interest
2. Cash Reserve Ratio
3. Statutory Liquidity Ratio
4. Open market Operations5. Margin Requirements
6. Deficit Financing
7. Issue of New Currency
8. Credit Control
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1.BANK RATE OF INTEREST
It is the interest rate which is fixed by the RBI to control the
lending capacity of Commercial banks . During Inflation , RBI
increases the bank rate of interest due to which borrowing
power of commercial banks reduces which thereby reduces the
supply of money or credit in the economy .When Money
supply Reduces it reduces the purchasing power and thereby
curtailing Consumption and lowering Prices.
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2. CASH RESERVE RATIO (CRR)
CRR, or cash reserve ratio, refers to a portion of deposits (as
cash) which banks have to keep/maintain with the RBI. During
Inflation RBI increases the CRR due to which commercial
banks have to keep a greater portion of their deposits with
the RBI . This serves two purposes. It ensures that a portion of
bank deposits is totally risk-free and secondly it enables that
RBI control liquidity in the system, and thereby, inflation.
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3. STATUTORY LIQUIDITY RATIO (SLR)
Banks are required to invest a portion of their deposits in
government securities as a part of their statutory liquidity
ratio (SLR) requirements . If SLR increases the lending capacity
of commercial banks decreases thereby regulating the supply
of money in the economy.
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4. OPEN MARKET OPERATIONS
It refers to the buying and selling of Govt. securities in the
open market . During inflation RBI sells securities in the open
market which leads to transfer of money to RBI.Thus money
supply is controlled in the economy.
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5. MARGIN REQUIREMENTS
During Inflation RBI fixes a high rate of margin on the
securities kept by the public for loans .If the margin increases
the commercial banks will give less amount of credit on the
securities kept by the public thereby controlling inflation.
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6. DEFICIT FINANCING
It means printing of new currency notes by Reserve Bank of India.
If more new notes are printed it will increase the supply of money
thereby increasing demand and prices.
Thus during Inflation, RBI will stop printing new currency notes
thereby controlling inflation.
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7. ISSUE OF NEW CURRENCY
During Inflation the RBI will issue new currency notes replacing
many old notes.
This will reduce the supply of money in the economy.
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THANK YOU
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