Economic Policy and Analysis - Notes

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Economic Policy and Analysis

Natur e and signif icance of the study of economics

Economics is the branch of social science that studies the production, consumption and

distribution of goods and services. It examines how people choose to use limited or scarceresources in attempting to satisfy their unlimited wants. It studies hoe firms use their scarce

resources in the best optimal manner to attain maximum profits.

Firms want to achieve objectives like profit maximization, thus managers need to make

several decisions while producing a commodity like what to produce, how much to produce,

how to produce, for whom to produce. A manager also needs to keep the knowledge of

demand, its nature, consumer preferences, impact of prices on sales, type of market etc.

All this requires to have the knowledge of basic concepts of economics.

Resource all ocation decisions

An economys resources can be divided into four main categories:

Land, forest, minerals etc are commonly called natural resources and are called by

economists land, for short.

All human resources, mental and physical, both inherited and acquired, are called labour.

All those man-made aids to further production, such as tools, machinery, factories, that are

used in the process of making other goods and services rather than being consumed for their

own sake is called capital.

Those who take risks by making new products and new ways of making old products,

developing new businesses and forms of employment are called entrepreneurs and the

resource they provide is entrepreneurship.

These resources are called factors of production or factors of input. Every resource has a

reward attached to it.

Resource Reward

Land Rent

Labour Wages / Salaries

Capital Interest

Entrepreneurship Profits


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The allocation of these resources is an important decision. Questions like how much land to

purchase, what labour- capital input combination should be used to produce a product,

whether to launch a new product or modify the older one, whether to use own capital or to get

finance from external source, are important for every firm to attain maximum profits.

Thus, resource allocation forms an important part of a business activity.

I nf luence of macroeconomic policies on business conditi ons

Some of the important policies that influence business conditions are:

Fiscal policyGovernment can undertake fiscal expansion and fiscal contraction to

influence business conditions. If the demand in the market is low, the fiscal expansion can

take the form of tax relief to boost demand and increased expenditure on public projects to

create employment and public assets. Government through its reduction in indirect taxpolicies can boost the production levels of the companies. It also takes up the projects in the

neglected sectors like small scale industries so as to boost the demand in the economy. This,

eventually makes the business environment better for the companies. Increased expenditure

by the Government on public projects makes the infrastructure better for the entire nation,which helps the businesses in reducing their cost and increasing productivity.

Monetary policyRBI keeps a check on money supply in the market so that a sound

business environment is maintained through the year. It keeps a check on inflation rate

through its expansion and contraction mode so that high prices do not hamper the sales of the

businesses. Moreover, it also keeps a check on high interest rate in the economy so that it

does not discourage the businessman to borrow for expansion purposes. A low level of

interest rate in the economy also helps consumers to borrow funds from the banks to finance

their requirements like car, television, LCD etc. This in turn helps in keeping the production

of the companies on high levels.

Industrial policyIt covers all the rules, regulations, policies and principles that control the

industrial undertakings of a country. Through this policy, the Government has decontrolled

many industries and has made way for the private sector to start new businesses without its

permission.

1. Industrial Policy Resolution (IPR), 1948 -a) Mainly every industry was under Government.2. IPR, 1956 -

Under this, three schedules were formed:

In the first schedule, industries were under the control of the Government.


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In the second schedule, industries were under the control of the Government, but

supplemented with the help from the private sector.

The third schedule consisted of private sector.

3. Industrial Policy, 1980 -This policy laid emphasis on :

a) Operational management of public sectorb) Integrating industrial development in private sectorc) Merger and acquisition of sick units.d) Industrial Licensing Policy4. Industries (Development and Regulation) Act, 1951

Under this, permission from the Government was required to set up an industry.

5. New Licensing Policy and Procedures, 19706. Industrial Policy, 1991a) Licensing was abolished

b) Limit for foreign equity holding was raised from 40% to 51%.c) Foreign Investment Promotion Board was established.d) List of industries reserved for public sector was decreased.e)

Disinvestment by the Government took place.

Thus, the Government through its policy changes like decontrolling private sector and

allowing them to enter into almost all the business fields has made the industrial environment

more suitable for businesses.

ExportImport (EXIM) Policy

This policy makes the export policies and import policies of a country. Flexible export and

import policies make the business conditions favourable for the economy. This means, low

duties imposition and less processes and procedures encourage the exporters and importers to

expand their businesses abroad. On the other hand, high duties on commodities discourage

them to start new businesses or expand the earlier ones.

During the phase of 1951 to 1985, there were quantitative restrictions and high import and

export duties on various commodities. Imports were prohibited; there were controlled imports

with quantitative restrictions and with high import duties varying between 150-300 percent.

Export of essential goods was allowed only under the Government permission; export ofsome goods was freely allowed and export of certain category of goods was facilitated with


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subsidy and lower bank rate. This hampered the growth of the businesses as they were not

able to export and import those products.

During the phase of 1980 to 1991, policy of liberalization was adopted by India. The list of

prohibited imports was reduced, import duties of many import items were reduced, import

licensing was restricted to fewer goods and foreign exchange control measures were relaxed.

Reforms of 1991 brought a change in the scenario. More liberalized and duty free flow of

goods and services started. The quantitative restrictions on imports from 714 commodities

were abolished. The changes include the reduction of duty from 15% to 10% under Export

promotion Capital Goods (EPCG) scheme that enabled Indian firms to import capital goods

which helped in improving the quality and productivity of the Indian industry, provision of

additional Special Import License (SIL) of 1 % for export of agro products, allowing Export

Oriented Units and other units in Export Promotion Zones (EPZs) in agriculture sectors to

50% of their output in the domestic tariff area (DTA) on payment of duty that boosted Indian

agricultural sector, 100% foreign equity participation in the case of 100% EOUs, and units set

up in EPZs that encouraged foreign investment in the country. Indian currency was made

partially convertible on capital account.

Foreign Direct Investment (FDI) Policy

This policy deals with regulation and rules regarding foreign investment in India.

The processes and procedures have been made more flexible and less time consuming so thatforeign entities are encouraged to enter Indian market. Foreign entities can enter India

through automatic route, that is, without the permission of Government. However, there are

ceilings in certain areas by the Government. For exampleFDI into telecom industry is

allowed upto 51% only in a single brand. All these changes make business conditions healthy

and help businesses to expand themselves.

Competition Act, 2002

The Competition Act, 2002 was passed by the Parliament in the year 2002. It was

subsequently amended by the Competition (Amendment) Act, 2007.The provisions of the

Competition Act relating to anti-competitive agreements and abuse of dominant position

were notified on May 20, 2009. The Actprevents practices having adverse effect on

competition, promotes and sustains competition in markets, protects the interests of

consumers and ensures freedom of trade carried on by other participants in the market.

Anti-competitive agreements

No enterprise or association of enterprises or person or association of persons

shall enter into any agreement in respect of production, supply, distribution,

storage, acquisition or control of goods or provision of services, which causes or

is likely to cause an appreciable adverse effect on competition.


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Prohibition of abuse of dominant position

No enterprise or group shall abuse its dominant position.

Regulation of combinations

There are certain regulations for mergers, acquisitions and combinations of firms.

This Act ensures that the business conditions in the market are healthy and favourable for the

firms to function.

Economic Policy and Analysis - Notes

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