economic environment of business session-1

7/29/2019 Economic Environment of Business Session-1

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Economic Environment

ofBusiness

PGDM (PT) 2008-2011

Biswa Swarup Misra


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Fundamental Macroeconomic Identity

Output = Income = Expenditure

At an individual level income may not equalexpenditure because some of it gets taxed andthen some of it gets saved and only then do weget to spend on goods.

Yet in the aggregate income always equalsexpenditure. For instance, from your income whatyou pay as taxes is what the government spends.

When you put your savings in a bank it is lent tosomeone else who plans to spend it on some item ofexpenditure.


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Y = C + I + G + (X M)

(X - M): Exports less imports of goods and netreceipts from non-factor serviceincomes.

Macro economic view of GDP

GDP Income =Expenditure


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Components of Net Exports

Balance of Merchandise Trade -

Current Account -

Broader measure which includes -

Non-factor incomes - such as travel, transport, insurance& software exports.

Net factor incomes from abroad - compensation ofemployees and investment income

Transfers - Official transfers between governments +private transfers such as remittances (99.2% ofTransfers)


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= Balance of merchandiseTrade

+ Net receipts from NonFactor Incomes

+ Net receipts from Netfactor income fromabroad

+ Net receipts fromTransfers

The sum of these 3components isreferred to as

Invisibles

Current Account Balance



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(X-M) : + Net receipts from NonFactor Incomes

+ Net receipts from Netfactor income fromabroad

NFI:

+ Net receipts from

transfers

Transfers from abroad

= Balance of merchandiseTrade




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GDP , Income = Expenditure

(XM) : Exports less imports of goods and net receipts from non-factor

service incomes.

Our focus is on savings from all sources of incomes and so we expand

the above identity to include net factor incomes from abroad (NFI) and

transfers from abroad.

Y = C + I + G + (XM)

Y + NFI + Transfers from abroad

= C + I + G + (XM) + NFI + Transfers from abroad

Taking terms in C, G, on the left hand side,

Y + NFI + Transfers from abroadCG = I + (XM + NFI + Transfersfrom abroad)

And, (XM + NFI + Transfers from abroad) = CA


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We now connect private and public savings to this identity.

We may then write as

Y + NFI + Transfers from abroadCG = I + CA

Private disposable income is the amount of income the privatesector has available to spend.

Private Disposable Income = GDP + Net Factor Incomes abroad

+ Transfers from abroad

+ Transfers received fromGovernment

- TaxesThen, private savings is given by -

Private Savings = Spvt = Private Disposable Income - Consumption


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Transfers from government include subsidies and interest payments on

government borrowings.

Transfers from abroad are mainly remittances by Indian working abroad.

Net factor Incomes from abroad are the incomes paid to domestic

factors of production by the international economy less income paid to

foreign factors of production by the domestic economy.

Income of the government is the taxes paid by the private sector to thegovernment. From this it makes transfer expenditures to the privatesector so that in the net,

Net Public Sector Income = Taxes - Transfers (to private sector) bygovt.


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Government savings then is Net public sector income less governmentpurchases of goods and services

Government Saving = Sgovt = Net Government Income - GovernmentExpenditure

= (Taxes - Transfers by government) -Government Expenditure

National saving is equal to private saving plus government saving.

National Saving = Spvt + Sgovt

= (GDP + Net Factor Incomes abroad+ Transfers from abroad+ Transfers from government

- Taxes- Consumption)

+ (Taxes - Transfers by government - GovernmentExpenditure)

We may then write as

Recall that , Y + NFI + Transfers from abroadCG = I + CA


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National Saving = I + CA

or,

or, Spvt + Sgovt - CA = I

Thus investment expenditure in the economy is financedthrough three sources:

1.Private savings

2. Government savings

3. Foreign savings = - CA

Spvt + Sgovt = I + CA


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What foreigners receive from us as monetary paymentwhen we import goods and services from them is morethan the amount that we receive as payments to us onthe Indian goods and services they demand (Indian

exports) and from non factor incomes and transfers.

Thus money coming into Indian financial systemfrom abroad is insufficient to pay for imports.

Country requires to borrow from abroad to financethe excess imports it demands.

Current account deficit thus implies utilization offoreigners savings.

(XM + NFI + Transfers from abroad) = CA deficit, implies that

M > X + NFI + Transfers from abroad


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Spvt+SgovtCA = I

This identity that investment is financed through 3 sourcesof savings is always true by definition.

As the identity is always true a reduction in governmentsavings - an increase in the government deficitrequires

(a) private savings to rise,(b) Investment to decrease, and/or(c) The current account balance to deteriorate.


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Figure 2.1: Sources of Savings and Investment

35

30

25

20

15

10

5

0

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

-5

YearSource: CSO

Aggregate Investment Private Savings Government Savings Current Account Deficit


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Prior to 2002-03 government dis-saved. This was accompanied by a

current account surplus and private savings were larger thanInvestment

Indian savings were used by the rest of the world to finance its deficit

with India.

After 2002-03 public sector savings improved and private savings also

increased. This rise in national savings was insufficient to finance the

sharp rise in investment and the economy resorted to foreign savings

to fill the gap. The current account thus went into deficit from 2002-03.


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Balance of Payments

This is an accounting record of the market value of goods,services, and financial assets that domestic residentsexchange with foreigners from other nations during anaccounting period.

There are three balance of payments concepts Current Account balance

Capital Account balance

Overall balance


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Business Environment

PGDM (PT) 2008-2011


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All external forces that influence functioning of abusiness.

Environment refers to conditioning variables

It provides the context in which business has tofunction

External forces can pose threat or opportunity


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The same change in the environment may affectdifferent unit in a industry differently.

Success in business depends on predicting changes

and responding accordingly. The relation between environment and business is

not a one way traffic.

Economic environment is just one facet of thebusiness environment.


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Understanding the Environment

Understanding the environment is not a one shotaffair.

Adhoc measure Vs Systematic approach to

understand the environment. Environment scanning is a pre requisite for

Success in business requires

Environment scanning involves studying trends,

events, issues and expectations


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Types of Environment

Internal Environment Environment of the firm on which the firm has some

control

Macro Environment Forces external to the industry that may have a bearing

on the forms strategies.

Micro Environment The business environment specific to the industry thefirm belongs to


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Internal Environment

Culture and value system

Management structure

Human resource

Internal Environment


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Macro Environment

Political environment Political philosophy of the government of the day.

Legal and regulatory environment Political environment

Demographic environment

Socio Cultural environment

Technological environment

Rate of obsolesce and environmental effects

Global environment

Economic environment


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What Explains Clustering?

Porters International competitiveness model

Four attributes of country environment that

explain global competitiveness of a company

Factor endowments

Demand conditions

Supporting industries for input

Rules governing business


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Industry Life Cycle Analysis

Embryonic Stage - low demand PC industry in India in the 1980s

Growth Telecom and Internet services

Shakeout stage - replacement demand Bulb industry

Mature Airlines industry

Declining Audio CD industry


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The Six Forces of Competition

1. Threat of competitors

2. Threat of New Entrants

3. Threat of Substitutes

4. Bargaining power of suppliers

5. Bargaining power of Buyers

6. Availability of complementary products

The sixth force - Andrew Groove


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Rank Doing Business 2008

Ease of Doing Business 120Starting of Business 111

Dealing with Licenses 134

Employing Workers 85

Registering Property 112

Getting Credit 36

Protecting Investors 33

Paying Taxes 165Trading Across Borders 79

Enforcing Contracts 177

Closing a Business 137

Indias Ranking in Doing Business 2008

Positive


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PositiveReform

NegativeReform

Economy

Total numberof reforms

1 Egypt 5

2 Crotia 4

3 Ghana 5

4 Macedonia 3

5 Colombia 3

6 Georgia 6

7SaudiArabia X 3

8 Kenya 4

9 China 3

R

ank

Startinga

Bus

iness

Dealingwitn

Licenses

Em

ploying

Wo

rkers

Tra

dingAcross

Borders

PayingTaxes

Clo

singa

Business

Enforcing

Co

ntractors

Pro

tecting

Investors

GettingCredit

Re

gistering

Property

Positive


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PositiveReform

NegativeReform

Economy

Total numberof reforms

10 Bulgaria 3

11 India 2

12 Brazil 213 Japan 0

14 Mexico 2

15 Pakistan 2

16 Russia X

0

R

ank

Startinga

Bus

iness

Dealingwitn

Licenses

Em

ploying

Wo

rkers

Tra

dingAcross

Borders

PayingTaxes

Clo

singa

Business

Enforcing

Co

ntractors

Pro

tecting

Investors

GettingCredit

Re

gistering

Property

Note: Economies are ranked on the number and impact of reforms. Doing Business

selects the economies that reformed in 3 or more of the Doing Business topics.

Second, it ranks these economies of the increase in rank in Ease of Doing Business

from the previous year. The larger the improvement, the higher the ranking as a

reformer.


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Starting a Business

Procedures (number) 13

Duration (days) 33

Cost (% GNI Per capita) 74.6

Paid in Min. Capital (% of GNI per capita) 0.0

Dealing with Licenses


Duration (days) 224

Cost (% of income per capita) 519.4

Employing Workers

Difficulty of Hiring Index 0

Rigidity of Hours Index 20

Difficulty of Firing Index 70

Rigidity of Employment Index 30

Nonwage labor cost (% of salary) 17

Firing costs (weeks of wages) 56

Registering Property


Duration (days) 62

Cost (% of property value) 7.7

Summary of Indicators-India

Summary of Indicators India


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Getting Credit

Legal Rights Index 6

Credit Information Index 4

Public registry coverage (% adults) 0.0

Private bureau coverage (% adults) 10.8

Protecting Investors

Disclosure Index 7

Director liability Index 4

Shareholder Suits Index 7

Investor Protection Index 6.0

Paying Taxes

Payments (number) 60

Time (hours) 271Profit tax (%) 19.6

Labor tax and contributions (%) 18.4

Other taxes (%) 32.5

Total tax rate (% profit) 70.6



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Trading Across Borders

Documents for export (number) 8

Time for export (days) 18Cost to export (US$ per container 820

Documents for import (number) 9

Time for import (days) 21

Cost to import (US$ per container) 910

Enforcing Contracts


Duration (days) 1420

Cost (% of claim) 39.6

Closing a BusinessTime (years) 10.0Cost (% of estate) 9

Recovery rate (cents on the dollar) 11.6



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Historical data: Starting a Business in India

Starting a Business data Doing Business2006 Doing Business2007 Doing Business2008

Rank 93 111

Procedure (number) 11 11 13

Duration (days) 71 35 33

Cost (% GNI per capita) 62.0 78.4 74.6

Paid in Min. Capital (% of

GNI per capita)

0.0 0.0 0.0


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Procedures to Start a Business -

Registration and Incorporation

1.Obtain DIN2. Obtain electronic signature

3. Reserve company name

4. Stamp the Memorandum and Articles of Association

5. File for registration

6. Make a seal

7. Obtain PAN

8. Obtain TAN

9. Register with Mumbai Shops and Establishment Act

10. File for sales tax

11. Register for Profession Tax

12. File for EPF

13. File for ESIC


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Li t f P d Aft R i t ti


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List of Procedures: After Registration

to Begin Operation

Starting a Business data Doing Business

2006

Doing Business

2007

Doing Business

2008

Rank 133 134

Procedure (number) 20 20 20


Cost (% GNI percapita)

670.7 606.0 519.4


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List of Procedures1. Obtain construction drawing plan approval

2. Obtain approval of construction from the Area Development Authorities

3. Notify the Municipal Corporation of the construction foundation

4. Receive on-site inspection by Chief Engineer of the MunicipalCorporation

5. Receive inspection from the concerned Sub Engineer of the MunicipalCorporation

6. Receive on-site inspection midway through construction from theconcerned Sub Engineer of the Municipal Corporation

7. Receive inspection midway through construction from the FireDepartment

8. Apply for occupancy permit at the Municipal Corporation

9. Receive final inspection of the construction by the Municipal Corporation10. Apply for approval of completed construction from the fire department

11. Receive inspection of the completed construction by the fire department

12. Apply for permanent water and sewerage connection


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Labour Regulations

Three measures are presented: a rigidity ofemployment index, a nonwage labor cost measure anda firing cost measure.

The rigidity of employment index is the average of

three sub indices: difficulty of hiring,

rigidity of hours and

difficulty of firing.

Each index takes values between 0 and 100, withhigher values indicating more rigid regulation.


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Rigidity of Employment Index

The difficulty of hiring index measures the flexibility ofcontracts and the ratio of the minimum wage to the valueadded per worker.

The rigidity of hours index covers restrictions on weekendand night work, requirements relating to working time andthe workweek, and mandated days of annual leave with

pay.

The difficulty of firing index covers workers legalprotections against dismissal, including the grounds

permitted for dismissal and procedures for dismissal(individual and collective).


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Employment Index

The nonwage labor cost covers all social securitypayments and payroll taxes associated with hiring anemployee, expressed as a percentage of the workerssalary.

The firing cost indicator measures the cost ofadvance notice requirements, severance paymentsand penalties due when terminating a redundantworker, expressed in weeks of salary.


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Best Practice Economies in

Employment

The following economies are also best practiceeconomies for :

Rigidity of Employment Index: Singapore,United States

Nonwage labor cost (% of salary): Botswana,Ethiopia, Maldives

Firing costs (weeks of wages): New Zealand,United States


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List of Procedures to Register Property

1. Check for encumbrances at the office of Sub-Registrar ofAssurance

2. Preparation and execution of Agreement andMemorandum at the Stamp Duty Office

3. The final sale deed is prepared by the purchaser or hisadvocate

4. Stamp, execute and register final sale deed in the presenceof two witnesses

5. Submit documents to the local office of the Sub Registrarof Assurances

6. Apply to Municipality for mutation of the title of theproperty

Getting Credit in India: Legal Rights


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Getting Credit in India: Legal Rights

and Credit Information

Firms consistently rate access to credit as among thegreatest barriers to their operation and growth.

Doing Business constructs two sets of indicators of how

well credit markets function-one on credit registries and

the other on legal rights of borrowers and lenders.

Credit registries - institutions that collect and distribute

credit information on borrowers

Registries can greatly expand access to credit.

By sharing credit information, they help lenders assess

risk and allocate credit more efficiently.

Sh i f C dit I f ti


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Sharing of Credit Information -

Indicators

Public registry coverage, which reports the number ofindividuals and firms covered by a public credit registryas a percentage of the adult population.

Private bureau coverage, which reports the number ofindividuals and firms covered by a private credit bureauas a percentage of the adult population.

Depth of credit information index, which measures theextent to which the rules of a credit information systemfacilitate lending based on the scope of information

distributed, the ease of access to information and thequality of information.

The data are from surveys of public registries and thelargest private credit bureau in the country.


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Hi t i l d t E l i W k i I di


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Historical data: Employing Workers in India

Employing

Workers data

Doing Business

2006

Doing Business

2007

Doing Business

2008

Rank83 85

Rigidity ofEmployment

Index

30 30 30

Nonwage

labour cost (%of salary)

17 17 17

Firing costs

9weeks of

wages)

56 56 56


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Registering Propertydata

DoingBusiness

2006

DoingBusiness 2006

DoingBusiness

2006

Rank

108 112

Procedure (number)6 6 6


Cost (% of property)8.0 7.8 7.7

Historical data: Registering Property in India


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Getting Credit in India DoingBusiness

2006

DoingBusiness

2006

DoingBusiness

2006

Rank62 36

Legal Rights Index4 5 6

Public registry coverage

(% adults) 0.0 0.0 0.0

Private Bureau coverage

(% adults)1.7 6.1 10.8

Historical data: Getting Credit in India

Historical Data Protecting Investors in India


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Historical Data Protecting Investors in India

Protecting Investors

data

Doing

Business2006

Doing

Business2006

Doing

Business2006

Rank

32 33

Investor ProtectionIndex

6.0 6.0 6.0

1 Hi t i l d t P i T i I di


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1. Historical data: Paying Taxes in India

Paying taxes data Doing

Business2006

Doing

Business2007

Doing

Business2008

Rank 158 165

Time (hours 264 264 271

Total tax rate (% profit) 71.9 71.9 70.6

Payments (number) 59 59 60

1. Historical data: Trading Across Borders in India


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Trading across Bordersdata

DoingBusiness

2006

DoingBusiness

2007

DoingBusiness

2008

Rank 142 79

Documents for export(number)

10 10 8

Time for export (days) 36 27 18

Cost to export (US$ percontainer)

864 864 820

Documents for import

(number)

15 15 9

Time for import (days) 43 41 21

Cost to import (US$ percontainer)

1244 1244 910

Historical data: Enforcing Contracts in India


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Enforcing Contracts

data

Doing

Business2006

Doing

Business2006

Doing

Business2006

Rank 177 177

Procedures (number) 46 46 46


Cost (% of claim)

39.6 39.6 39.6

Historical data: Enforcing Contracts in India


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GDP and Economic Well-Being

Real GDP per capita is the main indicator of

the average persons standard of living.

But GDP is not a perfect measure of

well-being.

Robert Kennedy issued a very eloquentyet harsh criticism of GDP:

Gross Domestic Product


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Gross Domestic Product does not allow for the health of our

children, the quality of their education,

or the joy of their play. It does not

include the beauty of our poetry or

the strength of our marriages, the

intelligence of our public debate orthe integrity of our public officials.

It measures neither our courage, nor our wisdom,

nor our devotion to our country. It measures everything,

in short, except that which makes life worthwhile, and itcan tell us everything about America except why we are

proud that we are Americans.

- Senator Robert Kennedy, 1968


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GDP Does Not Value:

the quality of the environment

leisure time

non-market activity, such as the child care

a parent provides his or her child at home

an equitable distribution of income

Why Do We Care About GDP


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Why Do We Care About GDP

Growth?

Having a large GDP enables a country to

afford better schools, a cleaner environment,

health care, etc.

Many indicators of the quality of life are

positively correlated with GDP. For

example

GDP and Life Expectancy in 12 Countries


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GDP and Life Expectancy in 12 Countries

50

55

60

65

70

75

80

85

90

$0 $10,000 $20,000 $30,000 $40,000

Life

expectancy (in

years)

Real GDP per capita, 2002

U.S.

Germany

Japan

Nigeria

Mexico

Russia

Brazil

China

Pakistan

Bangladesh

India

Indonesia

GDP and Adult Literacy in 12 Countries


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GDP and Adult Literacy in 12 Countries

30

40

50

60

70

80

90

100

$0 $10,000 $20,000 $30,000 $40,000

Adult Literacy

(% of

population)

Real GDP per capita, 2002

U.S.

GermanyJapan

Russia

Nigeria

Mexico

Brazil

China

Pakistan

Bangladesh

India

Indonesia

GDP and Internet Usage in 12 Countries


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GDP and Internet Usage in 12 Countries

0

10

20

30

40

50

60

$0 $10,000 $20,000 $30,000 $40,000

Internet Usage

(% of

population)

Real GDP per capita 2002

U.S.

Germany

Japan

Mexico

Russia

Brazil

China