ByDr. Kiran Kumar Thoti

Module 4

Economic system

An economic system  of production and exchange of goods and services as well as allocation of resources in a society.

It includes the combination of the various institutions, agencies, entities (or even sectors as described by some authors) and consumers that comprise the economic structure of a given community.

A related concept is the mode of production.

The study of economic systems includes how these various agencies and institutions are linked to one another, how information flows between them, and the social relations within the system (including property rights and the structure of management).

Contd..

planning, coordination, and reform

productive enterprises; factor and product markets; prices; population

public economics; financial economics

national income, product, and expenditure; money; inflation

international trade, finance, investment, and aid

consumer economics; welfare and poverty

performance and prospects

natural resources; energy; environment; regional studies

political economy; legal institutions; property rights.

The role of government in economic developmentThe Government as Prime Mover Phase: In

the first phase, lasting from 1940 to 1979, government was assigned a primary, entrepreneurial role.

The Government as a Problem Phase: This second phase, lasting from 1979 to about 1996, was a continuation of the neoclassical "getting prices right" line of thought. Neo-classical trade theorists (Krueger, and Bhagwati), who came to dominate the field of economic development, emphasized that international trade can provide a substitute for low domestic aggregate demand.

Indian economic planning

The planning is nothing but to make decisions with respect to the use of available resources.

The Economic planning is nothing but the long term plans of government to co-ordinate and develop the economy

In India the economic planning was started in the year 1950.

The first Prime Minister, Pt. Jawaharlal Nehru was also its first chairman.

The Finance Minister and the Minister for planning were its essential members amongst other ministers in different capacities linked to economic development.

Planning in India needed proper channeling of resources into different developmental activities in accordance with accepted national priorities.

While short-term developmental objectives have varied from plan to plan, the planning process was in some ways inspired by certain long-term goals.

Objectives of Economic Planning

Economic Growth

To reduce the economic inequalities

Balanced regional development

Modernization

Reduction of Unemployment

To improve national income and raise the standard of living in the country

To attain rapid industrialization with an emphasis on basic and heavy industries

Five Year Plans

1st Five Year Plan (1951-56)- Agriculture

2nd Five Year Plan (1956-61)- Industries Sector

3rd Five year Plan (1961-66)- Self Reliance

4th Five Year Plan (1969-74)- Removal of Poverty, Growth with justice

5th Five Year Plan (1974-79)- Removal of Poverty and Self reliance

6th Five Year Plan (1980-85)- The emphasis same as 5th Plan

Contd..

8th Five Year Plan (1985-90)- Food Production, Employment, Productivity

9th Five Year Plan (1992-97)- Employment Generation, Control of population

10th Five year Plan (1997-02)- Growth Rate of 7%

11th Five year Plan (2002-07)- Comprehensive and Faster growth

12th Five Year Plan (2012-17)- Improvement of Health, Education and Sanitation

Industrial policy

The Industrial Policy plan of a country, sometimes shortened IP, is its official strategic effort to encourage the development and growth of the manufacturing sector of the economy.

The government takes measures "aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation.“

A country's infrastructure (transportation, telecommunications and energy industry) is a major part of the manufacturing sector that usually has a key role in IP.

It is also the case that industries fail dismally to add to such a growing body of manufacturing industries

LPG

The economy of India had undergone significant policy shifts in the beginning of the 1990s.

This new model of economic reforms is commonly known as the LPG or Liberalization, Privatization and Globalization model.

The primary objective of this model was to make the economy of India the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world.

Highlights of the LPG Policy

Foreign Technology Agreements

Foreign Investment

MRTP Act, 1969 (Amended)

Industrial Licensing

Deregulation

Beginning of privatization

Opportunities for overseas trade

Steps to regulate inflation

Tax reforms

Abolition of License -Permit Raj

Liberalization

Liberalization was introduced to put an end to these restrictions and open up various sectors of the economy.

Liberalization measures were introduced in 1980s in areas of industrial licensing, export- import policy, technology up gradation, fiscal policy and foreign investment, reform policies initiated in 1991 were more comprehensive

Liberalization with..

Deregulation of Industrial Sector (Industrial licensing)

Financial Sector Reforms (Investment banks, stock exchange)

Tax Reforms (government’s taxation and public expenditure)

Foreign Exchange Reforms (Foreign exchange market, payments crisis, Rupee values)

Trade & Investment Policy Reforms (international competitiveness of industrial production)

Privatization

Privatization, also spelled privatization, may have several meanings.

Primarily, it is the process of transferring ownership of a business, enterprise, agency, public service, or public property from the public sector (a government) to the private sector, either to a business that operates for a profit or to a nonprofit organization.

It may also mean government outsourcing of services or functions to private firms, e.g. revenue collection, law enforcement, and prison management

Contd..

Privatization has also been used to describe two unrelated transactions.

The first is the buying of all outstanding shares of a publicly traded company by a single entity, making the company privately owned.

This is often described as private equity.

The second is a demutualization of a mutual organization or cooperative to form a joint-stock company

Forms of privatization

There are four main methods of privatization:

Share issue privatization (SIP) - selling shares on the stock market

Asset sale privatization - selling an entire organization (or part of it) to a strategic investor, usually by auction or by using the Treuhand model

Voucher privatization - distributing shares of ownership to all citizens, usually for free or at a very low price.

Privatization from below - Start-up of new private businesses in formerly socialist countries.

Globalization

Globalization is the process of international integration arising from the interchange of world views, products, ideas and other aspects of culture.

Advances in transportation and telecommunications infrastructure, including the rise of the telegraph and its posterity the Internet, are major factors in globalization, generating further interdependence of economic and cultural activities.

Contd..

The term globalization has been increasingly used since the mid-1980s and especially since the mid-1990s.

In 2000, the International Monetary Fund (IMF) identified four basic aspects of globalization: trade and transactions, capital and investment movements, migration and movement of people, and the dissemination of knowledge.

Further, environmental challenges such as climate change, cross-boundary water and air pollution, and over-fishing of the ocean are linked with globalization.

Globalizing processes affect and are affected by business and work organization, economics, socio-cultural resources, and the natural environment.

Public, Private, Joint and Co-operative Sectors

A vast percentage of population was extremely poor. There existed considerable inequalities in income, low level of employment opportunities, serious regional imbalances in economic attainments and lack of trained man-power in various fields of management.

It was, thus, obvious that if the country was to speed up its economic growth and maintain it in the long run at a steady level, a big push was required.

As such, State’s intervention in all the sectors of the economy, was inevitable because private sector had neither the necessary resources in terms of funds, managerial and scientific skill, nor the will to undertake risks involved in large long-gestation investments.

Among the imperatives were removal of regional, imbalances, accelerated growth of agricultural and industrial production, better utilisation of natural resources and a wider ownership of economic power to prevent its concentration in a few hands.

Given the type and range of problems faced by the country on its

Objectives of Public Sector

1) To help in the rapid economic growth and industrialisation of the country and create the necessary infrastructure for economic development.

2) To earn return on investment and thus then generate resources for development.

3) To promote redistribution of income and wealth.

4) To create employment opportunities.

5) To promote balanced regional development.

6) To assist the development of small scale and ancilliary industries.

7) To promote import substitution, save and earn foreign exchange for the economy.

Growth and Performance of Public Enterprises

They are :

1) IOCL – Indian Oil Corporation Limited (It was ranked 135 in Fortune’s global 500A (2007),

2) BPCL - Bharat Petroleum Corporation Limited

3) HPCL – Hindusthan Petroleum Corporation Limited

4) ONGC – Oil and Natural Gas Corporation Limited (Oil exploration and crude oil producing company)

5) SAIL – Steel Authority of India Limited (India’s largest integrated steel producer)

6) IPCL – Indian Petrochemicals Corporation Limited

7) BHEL – Bharat Heavy Electricals Limited (Biggest power equipment manufacturer in India)

8) NTPC – National Thermal Power Corporation (which produces about 1/4th of power generated in India

9) VSNL – Videsh Sanchar Nigam Limited (Sole provider of International Telephone Services in India)

Private Sector

In a mixed economy, the private sector too has an important role to play.

The Industrial policy resolution 1956 had made it very clear that private sector will also have the opportunity to development and expand.

The policy of the state was to encourage the development of industries in the private sector in accordance with the programs formulated in successive five year plans.

By ensuring the development of transport, power and other services. And by appropriate budget allotment.

Government decided that for both private and publicly owned units, it would continue to give its support which is fair and non-discriminatory to both of them.

Joint Sectors

The term joint sectors refers to the enterprise owned and managed jointly by the private sector and government (public undertakings).

The main objectives of joint sectors are:

1) To decrease the concentration of economic power.

2) Social control of industry,

3) Acceleration of economic development

4) Promotion of mixed economy

5) Broad base of entrepreneurship.

Industry Analysis

A market assessment tool designed to provide a business with an idea of the complexity of a particular industry.

Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops.

Major factors can include the power wielded by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants.

Issues in Defining an Industry

What part of the industry corresponds to our firm’s goals?

What are the key ingredients of success in that part of the industry?

Does our firm have the skills needed to compete in that part of the industry?

Will the skills enable us to seize emerging opportunities and deal with future threats?

Is our definition of the industry flexible enough to allow necessary adjustments to our business concept as the industry grows?

Characteristics of Industry Structure

Structural attributes – Enduring characteristics giving an industry its distinctive character

Variations among industries involves examining• Concentration – Extent to which industry sales are

dominated by only a few firms

• Economies of Scale – Savings firms within an industry achieve due to increased volume

• Product Differentiation – Extent to which customers perceive products of firms in industry as different

• Barriers to Entry – Obstacles a firm must overcome to enter an industry

Sector Analysis

Sector analysis is typically employed by investors who are practicing a sector-rotation strategy, or by those who are using a top-down approach to selecting stock to invest in.

In the top-down approach to investing, the most promising sectors are identified first, and then the investor reviews the companies within that sector to determine which individual stocks will ultimately be purchased.

Indian Agri Sector

The written history of agriculture in India dates back to the Rig-Veda, written about 1100 BC.

Today, India ranks second worldwide in farm output.

Agriculture and allied sectors like forestry and fisheries accounted for 13.7% of the GDP(Gross Domestic Product) in 2013, about 50% of the total workforce.

The economic contribution of agriculture to India's GDP is steadily declining with the country's broad-based economic growth. Still, agriculture is demographically the broadest economic sector and plays a significant role in the overall socio-economic fabric of India.

Export of Agro Products 2004-05

Agri Export 2012

Industrial development and regulationGrowth of the industrial sector at a

higher rate and on a sustained basis is a major determinant of a country's overall economic development.

In this regard, the Government of India has issued industrial policies, from time to time, to facilitate and foster the growth of Indian industry and maintain its productivity and competitiveness in the world market.

In order to provide the Central Government with the means to implement its industrial policies, several legislations have been enacted and amended in response to the changing environment.

The most important being the Industries (Development and Regulation) Act, 1951 (IDRA) which was enacted in pursuance of the Industrial Policy Resolution, 1948. The Act was formulated for the purpose of development and regulation of industries in India by the Central Government.

Contd..

The main objectives of the Act is to empower the Government:-

(i) to take necessary steps for the development of industries;

(ii) to regulate the pattern and direction of industrial development;

(iii) to control the activities, performance and results of industrial undertakings in the public interest.

The Act applies to the 'Scheduled Industries' listed in the First Schedule of the Act.

However, small scale industrial undertakings and ancillary units are exempted from the provisions of this Act.