generally speaking an environment includes the air we breathe
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Richman & Copen
Environment factors orconstraints are largely, if not totally, external andbeyond the
control of individual industrialenterprises & their managements. These areessentially the givers within which the firms
&their managements must operate in a specificcountry & they vary often greatly from country tocountry.
Generally speaking an environment includes the air we breathe, the water we drink,the available business, social and educational infrastructure in the locality , stateand country etc. In the context of business the environment refers to the sum ofinternal and external forces operating on an organization. The managers mustperforce recognize the elements, severity and impact of these forces on theorganization. They must identify, evaluate and react to the forces triggered by theexternal environment.
More often than not, these forces are beyond the control of an organization and itsmanagers. Accordingly, the factors of the environment will need to be considered as
inputs in the planning and forecasting models developed by an organization.
It is quite possible that some large organizations themselves constitute a greaterpart of the business environment e.g. Public Sector Oil Companies in India.An organization operates within the larger framework of the external environmentthat shapes opportunities and poses threats to the organization. The externalenvironment is a set of complex, rapidly changing and significant interactinginstitutions and forces that affect the organization's ability to serve its customers.External forces are not controlled by an organization, but they may be influenced or
affected by that organization. It is necessary for organizations to understand theenvironmental conditions because they interact with strategy decisions. The
external environment has a major impact on the determination of marketingdecisions. Successful organizations scan their external environment so that theycan respond profitably to unmet needs and trends in the targeted markets.The Organization as a System
Internally, an organization can be viewed as a resource conversion machine thattakes inputs (labor, money, materials and equipment) from the externalenvironment (i.e., the world outside the boundaries of the organization), convertsthem into useful products, goods, and services, and makes them available tocustomers as outputs. The organization must continuously monitor and adapt to theenvironment if it is to survive and prosper. Disturbances in the environment mayspell profound threats or new opportunities. The successful organization will
identify, appraise, and respond to the various opportunities and threats in itsenvironment.External Macro environmentThe external macro environment consists of all the outside institutions and forcesthat have an actual or potential interest or impact on the organization's ability toachieve its objectives: competitive, economic, technological, political, legal,demographic, cultural, and ecosystem. Though noncontrollable, these forces requirea response in order to keep positive actions with the targeted markets. An
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organization with an environmental management perspective takes aggressiveactions to affect the forces in its marketing environment rather than simplywatching and reacting to it.1. Economic EnvironmentThe economic environment consists of factors that affect consumer purchasingpower and spending patterns. Economic factors include business cycles, inflation,unemployment, interest rates, and income. Changes in major economic variableshave a significant impact on the marketplace. For example, income affectsconsumer spending which affects sales for organizations. According to Engel's Laws,as income rises, the percentage of income spent on food decreases, while thepercentage spent on housing remains constant.2. Technological EnvironmentThe technological environment refers to new technologies, which create newproduct and market opportunities. Technological developments are the mostmanageable uncontrollable force faced by marketers. Organizations need to beaware of new technologies in order to turn these advances into opportunities and acompetitive edge. Technology has a tremendous effect on life-styles, consumption
patterns, and the economy. Advances in technology can start new industries,radically alter or destroy existing industries, and stimulate entirely separatemarkets. The rapid rate at which technology changes has forced organizations toquickly adapt in terms of how they develop, price, distribute, and promote theirproducts.3. Political and Legal EnvironmentOrganizations must operate within a framework of governmental regulation andlegislation. Government relationships with organizations encompass subsidies,
tariffs, import quotas, and deregulation of industries.The political environment includes governmental and special interest groups thatinfluence and limit various organizations and individuals in a given society.
Organizations hire lobbyists to influence legislation and run advocacy ads that statetheir point of view on public issues. Special interest groups have grown in numberand power over the last three decades, putting more constraints on marketers. Thepublic expects organizations to be ethical and responsible. An example of responseby marketers to special interests is green marketing, the use of recyclable orbiodegradable packing materials as part of marketing strategy.The major purposes of business legislation include protection of companies fromunfair competition, protection of consumers from unfair business practices andprotection of the interests of society from unbridled business behavior. The legalenvironment becomes more complicated as organizations expand globally and facegovernmental structures quite different from those within the United States.4. Demographic Environment
Demographics tell marketers who current and potential customers are; where theyare; and how many are likely to buy what the marketer is selling. Demography isthe study of human populations in terms of size, density, location, age, sex, race,occupation, and other statistics. Changes in the demographic environment canresult in significant opportunities and threats presenting themselves to theorganization. Major trends for marketers in the demographic environment includeworldwide explosive population growth; a changing age, ethnic and educationalmix; new types of households; and geographical shifts in population.
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5. Social / Cultural EnvironmentSocial/cultural forces are the most difficult uncontrollable variables to predict. It isimportant for marketers to understand and appreciate the cultural values of theenvironment in which they operate. The cultural environment is made up of forcesthat affect society's basic values, perceptions, preferences, and behaviors. U.S.values and beliefs include equality, achievement, youthfulness, efficiency,practicality, self-actualization, freedom, humanitarianism, mastery over theenvironment, patriotism, individualism, religious and moral orientation, progress,materialism, social interaction, conformity, courage, and acceptance ofresponsibility. Changes in social/cultural environment affect customer behavior,which affects sales of products. Trends in the cultural environment includeindividuals changing their views of themselves, others, and the world around themand movement toward self-fulfillment, immediate gratification, and secularism.6. Ecosystem EnvironmentThe ecosystem refers to natural systems and its resources that are needed asinputs by marketers or that are affected by marketing activities. Green marketingor environmental concern about the physical environment has intensified in recent
years. To avoid shortages in raw materials, organizations can use renewableresources (such as forests) and alternatives (such as solar and wind energy) fornonrenewable resources (such as oil and coal). Organizations can limit their energyusage by increasing efficiency. Goodwill can be built by voluntarily engaging inpollution prevention activities and natural resource.External MicroenvironmentThe external microenvironment consists of forces that are part of an organization'smarketing process but are external to the organization. These micro environmental
forces include the organization's market, its producer-suppliers, and its marketingintermediaries. While these are external, the organization is capable of exertingmore influence over these than forces in the macro environment.
1. The MarketOrganizations closely monitor their customer markets in order to adjust to changingtastes and preferences. A market is people or organizations with wants to satisfy,money to spend, and the willingness to spend it. Each target market has distinctneeds, which need to be monitored. It is imperative for an organization to knowtheir customers, how to reach them and when customers' needs change in order toadjust its marketing efforts accordingly. The market is the focal point for allmarketing decisions in an organization.2. SuppliersSuppliers are organizations and individuals that provide the resources needed toproduce goods and services. They are critical to an organization's marketingsuccess and an important link in its value delivery system.
3. Marketing IntermediariesLike suppliers, marketing intermediaries are an important part of the system usedto deliver value to customers. Marketing intermediaries are independentorganizations that aid in the flow of products from the marketing organization to itsmarkets. The intermediaries between an organization and its markets constitute achannel of distribution. These include middlemen (wholesalers and retailers whobuy and resell merchandise). Physical distribution firms help the organization tostock and move products from their points of origin to their destinations.
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Warehouses store and protect the goods before they move to the next destination.Marketing service agencies help the organization target and promote its productsand include marketing research firms, advertising agencies, and media firms.Financial intermediaries help finance transactions and insure against risks andinclude banks, credit unions, and insurance companies.
Importance of understanding the environmentThe managers job cannot be accomplished in a vacuum within the organization.There are a number of factors both internal as well as external which jointly affectmanagerial decision-making. It is therefore very important for the manager tounderstand and evaluate the impact of the business environment due to thefollowing reasons :
a)Businesses may be doomed to be non starters due to restrictive businessenvironment which may take the form of rigid government laws ( no pollutingindustry can ever be located in around 50 Km radius of the Taj) , state ofcompetition ( Car manufacturing capacity presently in the country is far in excess of
demand) etc.
b)The present and future viability of an enterprise is impacted by the environmentFor eg no TV manufacturer can be expected to survive by making only B&Wtelevision sets when consumer preference has clearly shifted to colour televisionsets.
c)The cost of capital and the cost of borrowing - two key financial drivers of any
enterprise are impacted by the external environment . For eg the ability of abusiness to fund its expansion plan by raising money from the stock marketsdepends on the prevalent public mood towards investment in stock markets.
d)The availability of all key inputs like skilled labour , trained managers , rawmaterials , electricity , transportation , fuel etc are a factor of the businessenvironment.
e)Increasing public awareness of the negative aspects of certain industries likehand woven carpets ( use of child labour ) , pesticides (damage to environment inthe form of chemical residues in groundwater), plastic bags (choking of sewer lines)have resulted in the slow decline of some industries.
f)Finally , the environment offers the opportunities for growth and profits . For egwhen the insurance and aviation industry was thrown open to the private sector ,
the new entrant could easily build on the expectations of the public.
Changing profile of Indian economic environmentIndia gained independence in 1947 paving the way for national leaders of theIndian Government to build an economically independent new India. Policiesbetween 1950-70 were implemented with a sincere belief in the efficacy of thesocialist philosophy and political democracy. Heavy investment by government inSteel plants, atomic energy, hydroelectric power and irrigation projects laid the
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foundation of a strong industrial edifice. The non-aligned movement at a time whenthe world was divided into two power blocks with cold war between the Super-powers, prevented India from becoming a satellite of any other nation and enabledit to protect Its economy and the Indian Population.Indian economy has made great strides in the years since independence. In 1947the country was poor and shattered by the violence and economic and physicaldisruption involved in the partition from Pakistan. The economy had stagnated sincethe late nineteenth century, and industrial development had been restrained topreserve the area as a market for British manufacturers. In fiscal year (FY) 1950,agriculture, forestry, and fishing accounted for 58.9 percent of the gross domesticproduct (GDP) and for a much larger proportion of employment. Manufacturing,which was dominated by the jute and cotton textile industries, accounted for only10.3 percent of GDP at that time.India's new leaders sought to use the power of the state to direct economic growthand reduce widespread poverty. The public sector came to dominate heavyindustry, transportation, and telecommunications. The private sector producedmost consumer goods but was controlled directly by a variety of government
regulations and financial institutions that provided major financing for large private-sector projects. Government emphasized self-sufficiency rather than foreign tradeand imposed strict controls on imports and exports. In the 1950s, there was steadyeconomic growth, but results in the 1960s and 1970s were less encouraging.Beginning in the late 1970s, successive Indian governments sought to reduce statecontrol of the economy. Progress toward that goal was slow but steady, and manyanalysts attributed the stronger growth of the 1980s to those efforts. In the late1980s, however, India relied on foreign borrowing to finance development plans to
a greater extent than before. As a result, when the price of oil rose sharply inAugust 1990, the nation faced a balance of payments crisis. The need foremergency loans led the government to make a greater commitment to economic
liberalization than it had up to this time. In the early 1990s, India's post-independence development pattern of strong centralized planning, regulation and
control of private enterprise, state ownership of many large units of production,trade protectionism, and strict limits on foreign capital was increasingly questionednot only by policy makers but also by most of the intelligentsia.But too much of protection from the Government had its own disadvantages. Ourquality standards were not in tune with international competition. It had producedmore traders than industrialists. It was high time that Indian economy becamemore open and entered the international market.India embarked on a series of economic reforms in 1991 in reaction to a severeforeign exchange crisis. Those reforms have included liberalized foreign investmentand exchange regimes, significant reductions in tariffs and other trade barriers,
reform and modernization of the financial sector, and significant adjustments ingovernment monetary and fiscal policies.The reform process has had some very beneficial effects on the Indian economy,including higher growth rates, lower inflation, and significant increases in foreigninvestment. Foreign portfolio and direct investment flows have risen significantlysince reforms began in 1991 and have contributed to healthy foreign currencyreserves ($32 billion in February 2000) and a moderate current account deficit ofabout 1% (1998-99). India's economic growth is constrained, however, by
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inadequate infrastructure, cumbersome bureaucratic procedures, and high realinterest rates. India will have to address these constraints in formulating itseconomic policies and by pursuing the second generation reforms to maintainrecent trends in economic growth.India's trade has increased significantly since reforms began in 1991, largely as aresult of staged tariff reductions and elimination of non-tariff barriers. The outlookfor further trade liberalization is mixed. India has agreed to eliminate quantitativerestrictions on imports of about 1,420 consumer goods by April 2001 to meet itsWTO commitments. On the other hand, the government has imposed "additional"import duties of5% on most products plus a surcharge of 10% over the past 2years. The U.S. is India's largest trading partner; bilateral trade in 1998-99 wasabout $10.9 billion. Principal U.S. exports to India are aircraft and parts, advancedmachinery, fertilizers, ferrous waste and scrap metal, and computer hardware.Major U.S. imports from India include textiles and ready-made garments,agricultural and related products, gems and jewelry, leather products, andchemicals.Significant liberalization of its investment regime since 1991 has made India an
attractive place for foreign direct and portfolio investment. The U.S. is India'slargest investment partner, with total inflow of U.S. direct investment estimated at$2 billion (market value) in 1999. U.S. investors also have provided an estimated11% of the $18 billion of foreign portfolio investment that has entered India since1992. Proposals for direct foreign investment are considered by the ForeignInvestment Promotion Board and generally receive government approval.Automatic approvals are available for investments involving up to 100% foreignequity, depending on the kind of industry. Foreign investment is particularly sought
after in power generation, telecommunications, ports, roads, petroleum explorationand processing, and mining.As India moved into the mid-1990s, the economic outlook was mixed. Most
analysts believed that economic liberalization would continue, although there wasdisagreement about the speed and scale of the measures that would beimplemented. It seemed likely that India would come close to or equal therelatively impressive rate of economic growth attained in the 1980s, but that thepoorest sections of the population might not benefit.In the recent past, India has witnessed changes in several critical factorsstrengthening its economy. With globalisation becoming the key word of the 90's, itseems to have paved the way for India's entry in world markets. Economic reformshave been initiated to facilitate stabilisation and structural -adjustments essentialfor the growth of the economy
Read more: http://www.articlesnatch.com/Article/Business-
Environment/252704#ixzz1J96jQDPdUnder Creative Commons License: Attribution No Derivatives Definition:Globalised World - What does it mean?Does it mean the fast movement of people which results in greater interaction?Does it mean that because of IT revolution people can be in touch with each other in anypart of the world?
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Does it mean trade and economy of each country is open in Non-Intrusive way so that allvarieties are available to consumer of his choice?Does it mean that mankind has achieved emancipation to a level of where we can say itmeans a social, economic and political globalisation?Though the precise definition of globalisation is still unavailable a few definitions worth
viewing, Stephen Gill: defines globalisation as the reduction of transaction cost oftransborder movements of capital and goods thus of factors of production andgoods.Guy Brainbant: says that the process of globalisation not only includes opening upof world trade, development of advanced means of communication, internationalisationof financial markets, growing importance of MNC's, population migrations and moregenerally increased mobility of persons, goods, capital, data and ideas but also infections,diseases and pollutionImpact on India:India opened up the economy in the early nineties following a major crisis that led by a foreignexchange crunch that dragged the economy close to defaulting on loans. The response was a slew
of Domestic and external sector policy measures partly prompted by the immediate needs andpartly by the demand of the multilateral organisations. The new policy regime radically pushedforward in favour of amore open and market oriented economy.Major measures initiated as a part of the liberalisation and globalisation strategy in the earlynineties included scrapping of the industrial licensing regime, reduction in the number of areasreserved for the public sector, amendment of the monopolies and the restrictive trade practicesact, start of the privatisation programme, reduction in tariff rates and change over to marketdetermined exchange rates.Over the years there has been a steady liberalisation of the current account transactions, moreand more sectors opened up for foreign direct investments and portfolio investments facilitatingentry of foreign investors in telecom, roads, ports, airports, insurance and other major sectors.
The Indian tariff rates reduced sharply over the decade from a weighted average of 72.5%in 1991-92 to 24.6 in 1996-97.Though tariff rates went up slowly in the late nineties it touched35.1% in 2001-02. India is committed to reduced tariff rates. Peak tariff rates are to be reduced tobe reduced to the minimum with a peak rate of 20%, in another 2 years most non-tariff barriershave been dismantled by march 2002, including almost all quantitative restrictions.India is Global:The liberalisation of the domestic economy and the increasing integration of India with theglobal economy have helped step up GDP growth rates, which picked up from 5.6% in 1990-91to a peak level of 77.8% in 1996-97. Growth rates have slowed down since the country has stillbee able to achieve 5-6% growth rate in three of the last six years. Though growth rates hasslumped to the lowest level 4.3% in 2002-03 mainly because of the worst droughts in twodecades the growth rates are expected to go up close to 70% in 2003-04. A Global comparisonshows that India is now the fastest growing just after China.This is major improvement given that India is growth rate in the 1970's was very low at 3% andGDP growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that ofIndia. Though India's average annual growth rate almost doubled in the eighties to 5.9% it wasstill lower than the growth rate in China, Korea and Indonesia. The pick up in GDP growth hashelped improve India's global position. Consequently India's position in the global economy has
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improved from the 8th position in 1991 to 4th place in 2001. When GDP is calculated on apurchasing power parity basis.Globalisation and Poverty:Globalisation in the form of increased integration though trade and investment is an importantreason why much progress has been made in reducing poverty and global inequality over recent
decades. But it is not the only reason for this often unrecognised progress, good national polices ,sound institutions and domestic political stability also matter.Despite this progress, poverty remains one of the most serious international challenges we faceup to 1.2 billion of the developing world 4.8 billion people still live in extreme poverty.But the proportion of the world population living in poverty has been steadily declining andsince 1980 the absolute number of poor people has stopped rising and appears to have fallen inrecent years despite strong population growth in poor countries. If the proportion living inpoverty had not fallen since 1987 alone a further 215million people would be living in extremepoverty today.India has to concentrate on five important areas or things to follow to achieve this goal. Theareas like technological entrepreneurship, new business openings for small and medium
enterprises, importance of quality management, new prospects in rural areas and privatisation offinancial institutions. The manufacturing of technology and management of technology are twodifferent significant areas in the country.There will be new prospects in rural India. The growth of Indian economy very much dependsupon rural participation in the global race. After implementing the new economic policy the roleof villages got its own significance because of its unique outlook and branding methods. Forexample food processing and packaging are the one of the area where new entrepreneurs canenter into a big way. It may be organised in a collective way with the help of co-operatives tomeet the global demand.Understanding the current status of globalisation is necessary for setting course for future. For allnations to reap the full benefits of globalisation it is essential to create a level playing field.President Bush's recent proposal to eliminate all tariffs on all manufactured goods by 2015 willdo it. In fact it may exacerbate the prevalent inequalities. According to this proposal, tariffs of5% or less on all manufactured goods will be eliminated by 2005 and higher than 5% will belowered to 8%. Starting 2010 the 8% tariffs will be lowered each year until they are eliminatedby 2015.GDP Growth rate:The Indian economy is passing through a difficult phase caused by several unfavourabledomestic and external developments; Domestic output and Demand conditions were adverselyaffected by poor performance in agriculture in the past two years. The global economyexperienced an overall deceleration and recorded an output growth of 2.4% during the past yeargrowth in real GDP in 2001-02 was 5.4% as per the Economic Survey in 2000-01. Theperformance in the first quarter of the financial year is5.8% and second quarter is 6.1%.Export and Import:
India's Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362million respectively. Many Indian companies have started becoming respectable players in theInternational scene. Agriculture exports account for about 13 to 18% of total annual of annualexport of the country. In 2000-01 Agricultural products valued at more than US $ 6million wereexported from the country 23% of which was contributed by the marine products alone. Marineproducts in recent years have emerged as the single largest contributor to the total agricultural
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export from the country accounting for over one fifth of the total agricultural exports. Cereals(mostly basmati rice and non-basmati rice), oil seeds, tea and coffee are the other prominentproducts each of which accounts fro nearly 5 to 10% of the countries total agricultural exports.Where does Indian stand in terms of Global Integration?India clearly lags in globalisation. Number of countries have a clear lead among them China,
large part of east and far east Asia and eastern Europe. Lets look at a few indicators how muchwe lag.
yOver the past decade FDI flows into India have averaged around 0.5% of GDPagainst 5% for China 5.5% for Brazil. Whereas FDI inflows into China nowexceeds US $ 50 billion annually. It is only US $ 4billion in the case of India
yConsider global trade - India's share of world merchandise exports increased from.05% to .07% over the pat 20 years. Over the same period China's share hastripled to almost 4%.
yIndia's share of global trade is similar to that of the Philippines an economy 6 timessmaller according to IMF estimates. India under trades by 70-80% given its size,proximity to markets and labour cost advantages.
yIt is interesting to note the remark made last year by Mr. Bimal Jalan, Governor ofRBI. Despite all the talk, we are now where ever close being globalised in termsof any commonly used indicator of globalisation. In fact we are one of the leastglobalised among the major countries - however we look at it.
yAs Amartya Sen and many other have pointed out that India, as a geographical,politico-cultural entity has been interacting with the outside world throughouthistory and still continues to do so. It has to adapt, assimilate and contribute. Thisgoes without saying even as we move into what is called a globalised worldwhich is distinguished from previous eras from by faster travel andcommunication, greater trade linkages, denting of political and economicsovereignty and greater acceptance of democracy as a way of life.
Consequences:The implications of globalisation for a national economy are many. Globalisation has intensified
interdependence and competition between economies in the world market. This is reflected in
Interdependence in regard to trading in goods and services and in movement of capital. As a
result domestic economic developments are not determined entirely by domestic policies and
market conditions. Rather, they are influenced by both domestic and international policies and
economic conditions. It is thus clear that a globalising economy, while formulating and
evaluating its domestic policy cannot afford to ignore the possible actions and reactions of
policies and developments in the rest of the world. This constrained the policy option available to
the government which implies loss of policy autonomy to some extent, in decision-making at the
national level.
ntroduction:-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.
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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 Conditions:- 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
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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 MarketsXI. Size of Market
Economic Systems:- 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.
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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 customduty 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
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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.
Asia-Pacific Development Journal Vol. 12, No. 2, December 2005
81
ECONOMIC DEVELOPMENT IN INDIA:
THE ROLE OF INDIVIDUAL ENTERPRISE
(AND ENTREPRENEURIAL SPIRIT)
Anil K. Lal* and Ronald W. Clement**
T h e I n d i a n e c o n omy p r o v i d e s a r e v e a l i n g c o n t r a s t b e twe e n h ow
individuals react under a government-controlled environment and how
they respond to a market-based environment. Evidence suggests that
recent market reforms that encouraged individual enterprise have led
to higher economic growth in that country.
I n d i a c a n g e n e r a t e a d d i t i o n a l e c o n o m i c g r o w t h b y f o s t e r i n g
ent repreneur ial act ivi ty wi thin i ts borders. To pursue fur ther the
entrepreneurial approach to economic growth, India must now provide
opportunities for (1) education directed specifically at entrepreneurial
skills, (2) financing of entrepreneurial efforts, and (3) networking among
potential entrepreneurs and their experienced counterparts. Further,
although the Indian government should establish policies supportive of
entrepreneurial efforts, its role overall should be minimized so that the
influence of the free market and individual self-interest can be fully
realized.
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Economic development, achieved largely through productivity growth, is
very important to both developed and developing nations. However, even though
we know that higher productivity leads to improved economic outcomes (for
example, higher income, more choices to the consumers, better quality products,
etc.), there has been no consensus among researchers about either the desired
path of development or the role of state in economic development. Concerning
the path of development, Lall (2001) says that the appropriate strategy for any
country depends not only on its objective economic situation but also on its
government policies and national views regarding the appropriate role of the state.
* Associate Professor of Economics, Pittsburg State University, Pittsburg, Kansas, U.S.A.
** Professor of Management, Pittsburg State University, Pittsburg, Kansas, U.S.A.Asia-Pacific
Development Journal Vol. 12, No. 2, December 2005
82
Regarding the appropriate role of the state, it seems that for every argument in
favour of a smaller government role one can find a counter argument in favour of
a more active government role.
The role of the state in economic development began to change dramatically
w i t h t h e a d v e n t o f t h e I n d u s t r i a l R e v o l u t i o n . I n t h e We s t , t h e re s u l
t i n g
industrialization and economic development were based on the establishment of
individual property rights that encouraged the growth of private capital. Competition
and individual enterprise thrive in this environment because individuals pursue their
self-interest of survival and wealth accumulation. The instinct to survive under
competitive pressures yields innovation and productivity increases, which eventually
lead to both increased profits for business and lower prices to consumers.
1
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However, the rise and spread of capitalism led a number of thinkers to
examine the consequences of the market -based approach to development .
Socialists argued that capitalism (or private ownership of capital) can lead to greater
inequalities of income and wealth, while developmental economists argued that
private decisions may not always lead to socially desirable outcomes (particularly
in the case of market imperfections). Indeed, many policymakers at the time saw
market failures as quite common and therefore assumed that only appropriate
government interventions could guide an economy to a path of sustained economic
development (Krueger, 1993).
In the early 20
th
century, the former Soviet Union attempted a bold
experiment of improving individual well-being without sacrificing the objective of
greater equality of income and wealth through total ownership of capital by the
government. Initially, the Soviet Government was able to raise productivity through
directed industrialization and, within a span of 25 years (by the end of World War
II), emerged as a superpower. It was around this time that a substantial number of
colonized nations were gaining their independence (for example, India, Pakistan
and Burma). Unfortunately, during their time as colonies to the Western nations,
these countries, for the most part, had been deprived of the industrialization that
had engulfed those same Western nations. Based on the successful experience of
the former Soviet Union, many economists and policymakers concluded that,
particularly in a poor country, planning was essential for the efficient allocation of
an economys resources (Panagariya, 1994, p. 194).
1
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The history of U.S. business has shown how the pursuit of self-interest by individual economic
agents has led to benefits for the larger society. Consider the well-known example of Henry Fords
introduction of assembly line production. This technological advancement led to a significant increase
in productivity at Ford Motor Company. Indeed, despite paying higher wages to his workers, Ford
could still produce automobiles at a much lower cost and pass on part of that lower cost to consumers
in terms of lower prices.Asia-Pacific Development Journal Vol. 12, No. 2, December 2005
83
The governments in these newly independent nations assumed a significant
role in economic development. They sought to quickly and substantially raise the
standard of living through directed and controlled economic development. Apart
from everything else, these developing countries invested heavily in education to
promote literacy and to ensure an adequate supply of technical manpower to meet
their growing needs. Further, these previously colonized nations did not want to
subject their poor and weak economies to international economic fluctuations and
thus sought to industrialize through import substituting industrialization, where
imports were expected to be increasingly replaced by domestic production.
In this paper we examine economic development in India, a former British
colony that became one of the most closed economies in the world, to contrast
the roles of government intervention and individual enterprise in that countrys
economic growth. In particular, we demonstrate that, given recent economic reforms
in India, along with the evidence for the role that individual enterprise can play in
a countrys economic growth, the Indian government should devise policies that
rely more on individual enterprise, with its emphasis upon individual initiative and
self-interest, to spur economic development. Further, we describe the special role
that can be played in the economic development of India by a greater emphasis
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upon entrepreneurship.
The plan of the paper is as follows. Section I summarizes the strategy of
economic development and the overall economic environment that has prevailed in
India since its independence from the United Kingdom. Section II analyses the
consequences of regulated economic development in India, with particular emphasis
on the implications of the microeconomic aspects of Indias approach to its
economic environment. Section III assesses the results of Indias economic reforms
since the countrys economic crisis of 1990, and highlights the role that individual
enterprise has played and can continue to play in that countrys economic fortunes.
Section IV describes the special role that entrepreneurship can play in Indias efforts
at economic growth. Finally, section V summarizes the main findings and concludes
the paper.
I. INDIAS STRATEGY OF ECONOMIC DEVELOPMENT
Indias economic development strategy immediately after Independence
was based primarily on the Mahalanobis model, which gave preference to the
investment goods industries sector, with secondary importance accorded to the
services and household goods sector (Nayar, 2001). For example, the Mahalanobis
model placed strong emphasis on mining and manufacturing (for the production of
capital goods) and infrastructural development (including electricity generation andAsia-Pacific
Development Journal Vol. 12, No. 2, December 2005
84
transportation). The model downplayed the role of the factory goods sector because
it was more capital intensive and therefore would not address the problem of high
unemployment in India. Any increase in planned investments in India required
a higher level of savings than existed in the country. Because of the low average
incomes in India, the needed higher levels of savings had to be generated mainly
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by restrictions on the growth of consumption expenditures. Therefore, the Indian
government implemented a progressive tax system not only to generate the higher
levels of savings
2
but also to restrict increases in income and wealth inequalities.
3
Among other things, this strategy involved canalization of resources into
their most productive uses.
4
Investments were carried out both by the government
and the private sector, with the government investing in strategic sectors (such as
national defense) and also those sectors in which private capital would not be
f o r t h c omi n g b e c a u s e o f l a g s o r t h e s i z e o f i n v e s tme n t re q u i re d ( s u c h
a s
infrastructure). The private sector was required to contribute to Indias economic
growth in ways envisaged by the government planners. Not only did the government
determine where businesses could invest in terms of location, but it also identified
what businesses could produce, what they could sell, and what prices they could
charge.
Thus the strategy of economic development in India meant (1) direct
participation of the government in economic activities such as production and
selling and (2) regulation of private sector economic activities through a complex
system of controls. In addition, the Indian economy was sheltered from foreign
competition through use of both the infant industry argument and a binding foreign
exchange constraint. Imports were limited to goods considered essential either to
the development of the economy (such as raw materials and machines) or to the
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maintenance of minimal living standards (such as crude oil and food items). It was
further decided that exports should play a limited role in economic development,
thereby minimizing the need to compete in the global market place. As a result,
India became a relatively closed economy, permitting only limited economic
transactions with other countries. Domestic producers were sheltered from foreign
competition not only from abroad but also from within India itself.
2
The huge savings-investments gap could not be filled by the amount of foreign aid that was both
sought and available. Further, additional foreign investments (both direct and portfolio) were never
seriously considered as a way to close this savings-investment gap.
3
Higher levels of income and wealth were taxed at much higher rates relative to lower income and
wealth. Further, as Rao (2000) notes, the marginal rate of taxation including a tax surcharge was
93.5 per cent in early 1970s.
4
In India, this meant transfer of savings from the private to the public sector.Asia-Pacific Development
Journal Vol. 12, No. 2, December 2005
85
Over time, India created a large number of government institutions to meet
the objective of growth with equity. The size of the government grew substantially
as it played an increasingly larger role in the economy in such areas as investment,
production, retailing, and regulation of the private sector. For example, in the late
1950s and 1960s, the government established public sector enterprises in such
areas as production and distribution of electricity, petroleum products, steel, coal,
and engineering goods. In the late 1960s, it nationalized the banking and insurance
sectors. To alleviate the shortages of food and other agricultural outputs, it provided
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modern agricultural inputs (for example farm machinery, irrigation, high yielding
varieties of seeds, chemical fertilizers) to farmers at highly subsidized prices (World
Economic Indicators, 2001). In 1970, to increase foreign exchange earnings, it
designated exports as a priority sector for active government help and established,
among other things, a duty drawback system, programmes of assistance for market
development, and 100 per cent export-oriented entities to help producers export
(Government of India, 1984). Finally, from the late 1970s through the mid-1980s,
India liberalized imports such that those not subject to licensing as a proportion
to total imports grew from five per cent in 1980-1981 to about 30 per cent in
1987-1988 (Pursell, 1992). However, this partial removal of quantitative restrictions
was accompanied by a steep rise in tariff rates.
This active and dominant participation by the government in economic
a c t i v i t i e s re s u l t e d i n t h e c re a t i o n o f a p ro t e c t e d , h i g h l y - re g u l a t e d , p
u b l i c
sector-dominated economic environment. Along with this government domination
of the economy, India soon faced not only some major problems in its overall
approach to development, particularly in the area of industrialization (Ahluwalia,
1985), but also a dramatic increase in corruption in its economy. Finally, like any
other growing economy, the Indian economy faced a number of serious sectoral
imbalances, with shortages in some sectors and surpluses in others. These
consequences of Indias government-controlled economy are discussed in depth
in the next section.
II. THE CONSEQUENCES OF INDIAS REGULATED
ECONOMIC DEVELOPMENT
I n d i as e n v i ro nme n t o f re g u l a t e d e c o n omi c d e v e l o pme n t l e d t o t h e
formulat ion of pol icies that were concer ned wi th both macroeconomic and
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microeconomic aspects. Whereas much attention in the literature has been devoted
to the macroeconomic issues, we focus primarily on the microeconomic aspects of
Indian economic policies. In particular, we examine how individuals guided by
their self-interests of survival and wealth accumulation will act in a regulated
environment, which in fact discourages the pursuit of those self-interests. To doAsia-Pacific
Development Journal Vol. 12, No. 2, December 2005
86
so, we describe the consequences of Indias use of price ceilings, in which prices
are set below their equilibrium level to make products and services affordable to
relatively poorer sections of the society.
Figure 1 illustrates how price ceilings can influence a nations economy.
Specifically, when prices are kept artificially low, demand outstrips supply. To
alleviate the resulting shortage of products and services, the government can either
help to increase the supply or help to decrease demand for those products and
services. Considering the supply side options first, the government had the following
choices: (1) increase the price of the product; (2) subsidize production of existing
suppliers so they will produce and sell more; (3) encourage new businesses to
enter the line of production and selling; or (4) permit imports to reduce or eliminate
the shortage. In India, none of these options was seen as satisfactory. First, the
government certainly did not wish to increase prices, because price ceilings
appealed to a majority of the vote bank. Second, although the government did
subsidize production in several sectors considered essential, the resulting increased
production was not sufficient to eliminate the large shortages. Third, the government
decided to restrict rather than increase the entry of new producers under the
pretext of directing scarce resources into their efficient uses. Finally, it allowed
only limited recourse to imports, in order to protect Indian producers, unless the
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shortage reached a stage of crisis. The overall result was that inadequate amounts
of products and services were supplied to the market.
Figure 1. Price ceiling
Rs per unit
Quantity (million of units)
Equi l ibr ium Pr ice
Gover nment Pr ice
Shor tage
Gover nment
Pr ice
Supply
Demand
0
1
2
3
4
5
6
1 2 3 4 5 6 7Asia-Pacific Development Journal Vol. 12, No. 2, December 2005
87
In contrast to the supply side options just considered, if the government
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had decided instead to limit demand, it could have done so by increasing taxes or
by regulating the level of demand itself, usually by restricting how much an individual
or a family could consume. To ensure the availability of the scarce products and
services to Indian consumers, albei t at less than desi red levels, the Indian
government in fact resorted to large-scale rationing. This rationing was undertaken
by government agencies themselves or by licensed private retailers. As might be
expected, the rationing regulations required those licensed private retailers to follow
government stipulations in their sale of the scarce products and services.
The policy of price ceilings, along with the quantitative restrictions on
production and consumption, led to an economic environment ripe for corruption.
Specifically, because of the general scarcity of products and services, individuals
competed to receive the privilege of economic rights to produce or consume. The
implementing authority responsible for allocating these economic rights politicians,
government officials and businesses enjoyed monopoly power in this situation
and, as might be expected, were susceptible to bribes and other illegal favours.
The result was an informal and illegal market in which the desired economic rights
could be traded. Also, the lure of higher profits led producers and sellers (1) to
have little concern for quality such that many deliberately produced and sold inferior
quality products, and (2) to resort to the creation of artificial shortages by not
releasing to the market all of the products that were available for selling.
Bardhan (1997) defines corruption as the use of public office for private
gain, in which an official entrusted with the responsibility for certain public duties
engages in malfeasance for personal enrichment that is not easy to monitor. He
says that corruption has multiple effects on economic development. For example,
it diminishes the efficiency of economic transactions, because corrupt officials will
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delay or otherwise obstruct those transactions until they receive their expected
favours. Also, the payment of a bribe to receive an investment license tends to
reduce the incentive to in vest. Honest investors will see the futility of competing
with dishonest investors who are guaranteed, through their bribes, to receive the
privilege of investment rights.
To fully understand the widespread nature of the corruption that existed in
India at this time, it is necessary to consider the roles played by the many
participants. For example, business people bribed government officials not only
for the right to enter a particular line of business, but also to prevent others from
entering that same line of business. Government officials made payoffs to politicians
to receive the premium government positions that would allow them to easily contact
businesses to seek illegal income and wealth. Indeed, as Wade (1985) indicates,
those officials could earn far more through bribes and other corrupt behaviour thanAsia-Pacific
Development Journal Vol. 12, No. 2, December 2005
88
they could earn in salary. Consumers bribed government officials, politicians, and
business people to receive a particular amount of a scarce good or a higher quality
version of the good. Even individuals and organizations outside India took part in
the corruption. Some bribed both officials and politicians, particularly those
connected with the revenue and police departments, to smuggle scarce goods into
India at a high profit.
The complex system of government controls, including price ceilings, along
with the resultant corruption, meant that decision making was arbitrary and the
transactions non-transparent. The result was an increase in transaction costs. For
example, businesses had to spend more to stay connected with appropriate
government officials and politicians. And consumers, in addition to waiting in line
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to purchase needed products and services, also made illegal payments for what
they should have received at a reasonable price in the first place. It has already
been explained how Indias government grew in size as it played an increasing role
in controlling the economy. It grew even further in trying to be appropriately
vigilant in dealing with the increased corruption among government officials,
businesses, and other participants.
P r i c e c o n t ro l s w e re o n l y o n e e x a m p l e o f t h e re g u l a t e d e c o n o m i c
environment. Another example of a harmful policy was the control of ownership of
private capital (both income and wealth) by Indian nationals in India and also by
foreign nationals doing business in India. Such policies, coupled with high individual
and corporate income tax rates and high customs and excise duties, led to
outcomes similar to those resulting from price ceilings namely, increased corruption
and higher transaction costs.
In conclusion, this section has shown how individuals guided by their selfinterests, will act in a regulated
environment. Government controls based on
arbitrary and ad hoc administrative decisions lead not only to greater concealed
income and wealth but also to diminished productivity, particularly due to the
resulting higher transaction costs.
III. ECONOMIC REFORMS: THE MIXED RESULTS FOR INDIA
Due to government intervention, particularly the high levels of government
subsidies, it was clear by 1990 that India was living beyond its means. The result
was a severe payments crisis in which, for the first time, the government physically
transported gold overseas to prevent defaulting on foreign commitments. To meet
its immediate balance of payments crisis, India also entered into a structural loan
adjustment agreement with the International Monetary Fund (IMF). However, oneAsia-Pacific
Development Journal Vol. 12, No. 2, December 2005
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89
condition of this loan required India to undertake economic reforms to move from
a centrally-planned development strategy to one based on market-based resource
allocations. As a result, the government of India undertook a package of economic
reforms between 1991 and 1993, with the intent of placing the market in place of
government controls as the prime mover in the economic development process.
As one might expect, macroeconomic policy played a major role in Indias
economic progress in the 1990s. For example, Acharya (2001) concludes that
Indias devaluation of the rupee and its decision to increase the level of allowable
foreign investment helped it to make considerable economic progress. Joshi (2001)
and Karunaratne (2001) both say that Indias policy of selective capital account
liberalization helped it to achieve important economic objectives (and still avoided
the crises faced by the East Asian countries). Gupta (1999) highlights the important
role played by Indias prudent management of exchange rate policy and its tight
monetary policy. Bhalla (2000) notes both the privatization of the public sector
enterprises and the gradual dismantling of the government planning process in
favour of market forces.
Overall, there can be no doubt that the reforms implemented since 1991
h a v e l e d t o c o n s i d e r a b l e e c o n omi c p ro g re s s i n I n d i a . F o r e x amp l e , f
rom
1992-1993 through 2000-2001, economic growth averaged an unprecedented
6.3 per cent per year (Acharya, 2001). Further, as Bhalla (2000) indicates, the rate
of inflation and the fiscal deficit have both decreased substantially. He also says
that Indias improved exchange rate management has restored the confidence of
foreign investors, which in turn has led to improved financing of the current account
deficit and higher levels of foreign exchange reserves.
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However, even though India has made substantial economic progress in
recent years, it still has several areas in need of major market-based reforms.
5
Below, we identify three examples from Indias economy that reveal a restriction of
the pursuit of individual self-interest and a diversion of resources away from their
most efficient use. The first example concerns the obstacle still presented by the
Indian tax system, the second highlights the inefficiencies of the Indian civil service,
and the third describes the need for further land reform in India.
5
A study undertaken by McKinsey Global Institute found that the Indian product markets are still
over-regulated; government still owns about 43 per cent of total capital stock; and the real estate
market is still substantially distorted. This study concluded that this over-regulation is still the major
barrier to economic growth in India (see Lewis (2001).Asia-Pacific Development Journal Vol. 12, No. 2,
December 2005
90
1. In spite of recent tax reforms in India, the present tax system still
works against the individual self-interest to survive and accumulate
wealth and, as a result, still leads to the hiding of income, wealth
and expenditures. Indeed, whereas in the United States and the
Republic of Korea, the highest tax rate applies to an income level
of $250,000 and $66,000, respectively, in India that same tax rate
applies to an income of only $3,400. Simply reforming its tax
system to bring it in line with comparable nations should yield
several substantial benefits to the Indian economy.
6
2. The Indian civil service provides attractive career choices for young
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job seekers due mainly to the excellent job security, non-monetary
compensation, and opportunities for influence available in those
careers. For example, despite minimal salaries for individuals
holding top-tier positions in such areas as administration, police,
revenue and railways,
7
these civil servants are entitled to high job
security and heavily subsidized housing, transport, medical services,
telephone privileges, and at times domestic help. We believe that
the policies underlying compensation to government employees
should be reformed such that they are based primarily on market
p r i n c i p l e s . T h e a d v a n t a g e s o f d o i n g s o i n c l u d e e l imi n a t i n g
departments known for corrupt practices, making explicit the
true cost of a government employees performance, and giving
government employees a good sense of their market worth.
3. Finally, considerable reform is needed in the Indian real estate
sector. A large proportion of the land is owned by the government,
and any land made available for private use is governed by archaic
ownership, zoning, tenancy, and rent laws. Further, this government
control of land has reduced the amount of land available for trading
purposes. The result is that Indian land prices are the highest
among all Asian nations relative to average income (Lewis, 2001).
6
Most of the illegal income is concealed by people at higher income brackets trying to avoid
paying higher taxes. Consider the following illustration: suppose the extent of unreported income is
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100 per cent of reported income. Since the tax on income, profits, and capital gains was about three
per cent of GDP, we can assume that unreported income, once reported, should yield at least three
per cent of GDP (or around $13.42 billion in 1999). This total should be enough to cover more than
67 per cent of the overall budget deficit of the Indian Central Government (World Economic Indicators,
2001).
7
The starting salaries for these positions are in the range of $1,800 to $2,200 per year, with the
highest salary at about $10,000 per year.Asia-Pacific Development Journal Vol. 12, No. 2, December
2005
91
Further, the officially assessed values of real estate are low, while
the true market price is very high.
8
This situation leads, among
other things, to higher levels of corruption as individuals use real
estate as a major hiding place for investments of illegally acquired
income (DiLodovico, Lewis, Palmade and Sankhe, 2001).
Examples such as these indicate that there are still a large number of
areas where the individual self-interests of survival and wealth accumulation are
not respected. In the next section, we examine how one fairly new approach to
microeconomic policy the encouragement of entrepreneurship can help India to
continue its recent economic growth.
IV. THE ROLE OF ENTREPRENEURSHIP IN INDIAS
FUTURE ECONOMIC DEVELOPMENT
The progress of Indian economic development from 1947 to the present
provides further evidence that individuals do respond to incentives in their pursuit
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of self-survival and accumulation of wealth. Further, the nature of this response
depends on the economic climate, particularly the role of the government. Indias
economy struggled as long as it was based in a system of government regulation
with little interaction with economic forces outside the country. The economic
reforms of the early 1990s set the stage for substantial improvements in the Indian
economy. As was stated earlier, Indias economy grew at an average of 6.3 per
cent from 1992-1993 to 2000-2001 (Acharya, 2001). Further, its rate of inflation
and fiscal deficit both decreased substantially (Bhalla, 2000). Improved exchange
rate management led to improved financing of the current account deficit and
higher foreign exchange reserves. Finally, Indias GDP and per capita income both
increased substantially from 1990-1991 to 1998-1999.
India can do more, however, to further advance its economic development.
Indeed, one of the more recent microeconomic approaches to economic growth is
the promotion of entrepreneurial activities. Entrepreneurial efforts have been found
to generate a wide range of economic benefits, including new businesses, new
jobs, innovative products and services, and increased wealth for future community
investment (Kayne, 1999). The following narrative explains in considerable depth
how entrepreneurial activities have succeeded in several countries and how it can
now be used to further Indias economic development.
8
It is entirely possible that the officially assessed value may be 5 to 10 per cent of the actual
market price of the dwelling of the plot of land.Asia-Pacific Development Journal Vol. 12, No. 2,
December 2005
92
Following an extensive study of entrepreneurship in 21 countries, Reynolds,
Hay, Bygrave, Camp and Autio (2000) concluded that successful entrepreneurial
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activity is strongly associated with economic growth. Their research was subsumed
under the Global Entrepreneurship Monitor (GEM), a joint research initiative
conducted by Babson College and London Business School and supported by the
Kauffman Center for Entrepreneurial Leadership. Their findings, based on surveys
of the adul t populat ion of each count ry, in-depth interviews of exper ts on
entrepreneurship in each country, and the use of standardized national data,
supported their conceptual model depicting the role of the entrepreneurial process
in a countrys economic development (see figure 2).
Figure 2. The GEM Conceptual Model
The GEM Conceptual Model suggests that the social-cultural-political
c o n t e x t wi t h i n a c o u n t r y mu s t f o s t e r c e r t a i n Ge n e r a l Na t i o n a l F r amewo
r k
Conditions, which can generate not only the opportunities for entrepreneurship
but also the capacity for entrepreneurship in particular, the skills and motivation
necessary to succeed. Together, the entrepreneurship opportunities, on the one
hand, and the skills and motivation, on the other, lead to business dynamics that
yield creative destruction, a process in which new firms are created and older, less
efficient firms are destroyed. The overall result for a country is economic growth.
Of the eight General National Framework Conditions listed in figure 2,
the three that Reynolds, et al. (2000) highlighted as especially important are the
availability of financing for new entrepreneurs, the need for government policies
which are supportive of entrepreneurial efforts, and the opportunities for education
and training in entrepreneurship.
Social,
cultural,
political
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context
Entrepreneurial
Framework Conditions
Availability of financing
Supportive government policies
Education and training
Cultural & social norms
R & D transfer
Commercial & legal infrastructure
Internal market openness
Access to physical infrastructure
Entrepreneurial
opportunities
Entrepreneurial
capacity
Skills
Motivation
Business
dynamics
National
economic
growth
Source: Reynolds, Paul D., Michael Hay, William D. Bygrave, S. Michael Camp, and Erkko Autio, 2000.
Global Entrepreneurship Monitor: 2000 Executive Report (Kansas City, Kauffman Center for
Entrepreneurial
Leadership), p. 6.Asia-Pacific Development Journal Vol. 12, No. 2, December 2005
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93
Given Indias economic progress in recent years, the country may now
be ready for the implementat ion of microeconomic pol icies that wi l l foster
entrepreneurial activities. Fortunately, in addition to the macroeconomic reforms
mentioned earlier, India has taken other steps to lay the foundation for the type of
economic growth that can be fostered only by entrepreneurial activities and
appropriate economic policies that reflect individual rights and responsibilities. For
example, in recent years India has made several important structural changes,
including the construction of telecommunications networks and the implementation
of a nationwide road-construction programme (Solomon, 2003). Further, several
thousand new economy businesses the types of businesses especially suited
for entrepreneurship efforts-were started in 2000 alone.
However, more than just opportunities should lead India to consider
entrepreneurial activities as a way to economic growth. At least one major threat,
a growing population, also should motivate it to consider entrepreneurial effort as
an economic policy. Specifically, the countrys population is expected to increase
by 110 to 130 million people over the next 10 years, with approximately 80 to 100
million of those new citizens seeking jobs that do not currently exist (Gupta, 2001).
Entrepreneurial efforts can help to provide those jobs.
Recent research on entrepreneurship around the world indicates that the
cultural characteristics that can foster successful entrepreneurial activities and its
related economic benefits are a strong education base, the necessary financial
support, opportunities for networking among entrepreneurs, and a well-defined,
minimal role for the government. In the case of India specifically, an emphasis
upon entrepreneurial activities in the information technology sector also seems
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relevant.
Consider first the need for a strong education base. The study of 21
nations by Reynolds, et al. (2000) found that providing opportunities for education
in entrepreneurship was critical to success in new entrepreneurship efforts. For
example, experts interviewed in the 21 nations felt strongly that new entrepreneurs
n e e d e d t r a i n i n g i n t h e s k i l l s n e e d e d t o c o n v e r t a ma r k e t o p p o r t u n i t y
i n t o
a commercial enterprise. Gupta (2001) says that India now has an extraordinary
talent pool suited to entrepreneurship. However, he also says that the government
must ensure that new entrepreneurs have access to both the functional and
entrepreneurial skills needed for success in business startups. He sees both sets
of skills as still somewhat lacking in India. The functional skills include abilities in
such areas as marketing, finance and product development. The entrepreneurial
skills include managing risk, building an effective team and raising funds. Gupta
says that Indias educational institutions can play a major role in the development
of these skills. For example, the Indian School of Business (ISB) at HyderabadAsia-Pacific Development
Journal Vol. 12, No. 2, December 2005
94
has already produced a curriculum suited to the development of entrepreneurial
leaders. It will soon have a new Entrepreneurship Centre that will be founded, led
and managed by several leading Silicon Valley entrepreneurs.
Lall (2001) says that the structure of a countrys exports affects its prospects
for economic growth. He claims that a technology-intensive structure is desirable
for a country that has a substantial industrial base. Although India has such an
industrial base, its export structure is still dominated by low-technology products.
Lall says that a low-technology export structure is based in such products as
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textiles, garments, simple metal and plastics products, and furniture. However,
these types of products are produced by low-skilled labour and are undifferentiated,
so they do not yield the competitive advantages necessary for broad economic
growth. A high-technology export structure, on the other hand, relies upon such
products as complex electronic machinery, precision instruments and fine chemicals.
This type of structure, based in complex skills and fast-changing technologies,
g e n e r a l l y d o e s y i e l d c o m p e t i t i v e a d v a n t a g e s a n d e x p o r t - b a s e d e c o n
o m i c
development. Given Indias extraordinary talent pool (Gupta, 2001), it would seem
that the country is poised to take advantage of a high-technology export structure.
Consider next the f inancial suppor t requi red to produce successful
entrepreneurial efforts. On the one hand, as Solomon (2003) indicates, foreign
capital has been pouring into India recently, with one of its aims being to tap the
count rys emergence as a center for sof tware development and informat ion
technology services. However, much remains to be done, and the government can
play a major role in this area. Among other things, India must ensure that its new
entrepreneurs will have access to venture capital. Gupta (2001) suggests the
establishment of a global support network of venture capitalists and other funding
sources (also known as angels) who would be willing to support the new
entrepreneurs. He also says that India must create areas of excellence breeding
grounds where ideas grow into new businesses similar to those created in Silicon
Valley in the United States. They can attract the ideas, the venture capital, and the
management talent often found to succeed in other entrepreneurial efforts around
the world. India can begin to create these areas of excellence by drawing upon
the resources of its universities and other educational institutions, including the
Indian Institutes of Technology.
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Providing opportunities for networking among entrepreneurs themselves
also can help new businesses get started on the right foot. In particular, Gupta
(2001) says that India needs to foster networking and exchange among both new
and established entrepreneurs. The obvious reason is that entrepreneurs can learn
not only through their own experience but also through that of others. An effective
approach to encouraging this type of networking might be to follow the academicAsia-Pacific
Development Journal Vol. 12, No. 2, December 2005
95
model and begin to schedule conferences throughout India at which these individuals
could interact. At these conferences, experienced entrepreneurs could present
their ideas on what has worked for them (and what has not). Entrepreneurs just
getting started could describe what they hope to achieve in their new businesses
and get feedback on their plans from other entrepreneurs present. Obviously,
newer entrepreneurs will want to be careful not to divulge important company
secrets. The Indian government might have to provide small grants to subsidize
the travel and lodging expenses of individuals lacking the resources to attend such
conferences. However, just as in the academic setting, those grants could be
awarded based on the merits of an individuals ideas for a startup business.
T h e ro l e t h a t t h e g o v e r n m e n t c a n p l a y i n t h e e n c o u r a g e m e n t o f
entrepreneurial efforts has already been noted in the above narrative. Clearly, the
government can develop policies concerning educational and financial support.
Government policies on taxing and regulation of business also are relevant here,
given that such policies can either promote or hamper entrepreneurial efforts. And
the government can certainly help to provide networking opportunities among new
and experienced entrepreneurs.
Kayne (1999) identifies additional actions that the Indian government can
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take to provide a solid foundation for entrepreneurial efforts. He says that, in any
c o u n t r y, t h e a d v o c a t e s o f a n e n t re p re n e u r i a l e c o n omy mu s t p romo t e a n
d
communicate policies that will provide a clear link between entrepreneurial efforts
and overall economic prosperity. That is, voters and taxpayers must understand
t h e r e a s o n s w h y t h e i r g o v e r n m e n t i s i n v e s t i n g i n a n y t h i n g a s n e w a
s
entrepreneurship. Rodrik (1996) also addressed this issue by concluding that
reforms will be resisted if they are seen as being primarily redistributive (i.e., zerosum) in nature. He
further says that, while most economists prefer speedy economic
reforms administered from above (i.e. the state), the best approach might be
a gradual approach that considers the political economy of the situation (and
involves relevant powerful groups). Panagariya (1994) further addressed this issue
when he said that, especially in a democratic society like India, the government
must mobilize public opinion in favour of new economic policies. He says that one
reason for the relative success of the economic reforms beginning in 1991 was
that the Rao government moved quickly to announce major economic reforms.
Finally, Reynolds, et al. (2000) also found that the perceived social legitimacy of
entrepreneurship can be a critical factor in its success. Specifically, they found
that respect for individuals starting new firms was an important cultural factor for
countries with high levels of entrepreneurial activities. In short, uncertainty within
the culture can lead to resistance.Asia-Pacific Development Journal Vol. 12, No. 2, December 2005
96
However, as Reynolds et al. (2000) concluded, the role of government
beyond laying the foundation for entrepreneurship through tax and regulatory
pol icies, suppor t for educat ion in ent repreneurship, and so for th should be
minimized. Specifically, they found that a reduced government role in the economy
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including a low tax burden on both firms and individuals could yield substantially
higher levels of entrepreneurial activity. They also found that, in India, excessive
government regulations and related bureaucratic complexities did indeed handicap
entrepreneurs. As was reported extensively earlier in this paper, India has for
decades been saddled with a government that is far too involved in its economy.
V. CONCLUSION
The Indian economy provides a revealing contrast between how individuals
react under a gover nment -cont rol led envi ronment and how they respond to
a market-based environment. The evidence presented here suggests that recent
market reforms encouraging individual enterprise have led to higher economic growth
in that country. The reasoning here is not new, although it is refreshing to discover
that this tried-and-true reasoning applies to developing as well as to developed
nations. Specifically, reliance upon a free market, with its emphasis upon individual
self-interest in survival and wealth accumulation, can yield a wide range of economic
benefits. In India those benefits have included, among other things, increased
economic growth, reduced inflation, a smaller fiscal deficit, and higher inflows of
the foreign capital needed for investment.
We further conclude that India can generate additional economic growth
by fostering entrepreneurial activities within its borders, particularly within its
burgeoning middle class. Not only has entrepreneurship been found to yield
significant economic benefits in a wide variety of nations, but India specifically has
reached a point in its development where it can achieve similar results through
entrepreneurial efforts. Among other things, India is poised to generate new
business startups in the high technology area that can help it become a major
competitor in the world economy. For example, it has a strong education base
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suited to entrepreneurial activities, increased inflows of foreign capital aimed at its
growing information technology services sector, and a host of successful new
business startups. To pursue further the entrepreneurial approach to economic
growth, India must now provide opportunities for (1) education directed specifically
at developing entrepreneurial skills, (2) financing of entrepreneurial efforts, and
(3) networking among potential entrepreneurs and their experienced counterparts.
Obviously, the government can play a substantial role in helping to provide these
types of opportu
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