Chapter 3 — Business Environment

Chapter 3 covers the meaning and features of business environment, the importance of understanding it, its five dimensions (economic, social, technological, political, and legal), India's economic environment from Independence onwards, the 1991 New Industrial Policy with liberalisation, privatisation, and globalisation, and the demonetisation of November 2016.

Business environment means the sum total of all individuals, institutions, and other forces that are outside the control of a business enterprise but that may affect its performance. It includes economic, social, political, technological, and other forces operating outside the enterprise.

Business environment has seven features: totality of external forces, specific and general forces, inter-relatedness, dynamic nature, uncertainty, complexity, and relativity. For example, it is dynamic because it keeps changing through technological improvements, shifts in consumer preferences, or entry of new competition.

Understanding business environment helps a firm identify opportunities for first mover advantage (for example, Maruti Udyog became the leader in the small car market by recognising the need for small cars early), identify threats as early warning signals, tap useful resources, cope with rapid changes, assist in planning and policy formulation, and improve performance.

The five dimensions are economic (interest rates, inflation, disposable income, stock market indices, value of rupee), social (traditions, values, social trends, society's expectations), technological (scientific improvements and innovations), political (stability, peace, attitudes of elected government representatives), and legal (legislations, administrative orders, court judgments, and decisions by commissions and agencies at every level of government).

Specific forces such as investors, customers, competitors, and suppliers affect individual enterprises directly and immediately in their day-to-day working. General forces such as social, political, legal, and technological conditions have an impact on all business enterprises and may affect an individual firm only indirectly.

Liberalisation refers to the economic reforms aimed at freeing Indian business and industry from unnecessary controls and restrictions, signalling the end of the licence-permit-quota raj. It involved abolishing licensing requirements in most industries, giving freedom in deciding the scale of business, removing restrictions on movement of goods and services, allowing freedom in fixing prices, reducing tax rates, and simplifying procedures for imports and exports.

Privatisation means giving a greater role to the private sector in the nation-building process and a reduced role to the public sector. Under the New Industrial Policy of 1991, the government carried out planned disinvestment of public sector enterprises and referred loss-making sick enterprises to the Board of Industrial and Financial Reconstruction. If government ownership was diluted beyond 51 per cent, it resulted in transfer of ownership and management to the private sector.

Globalisation means the integration of various economies of the world leading towards the emergence of a cohesive global economy. Till 1991, India strictly regulated imports in value and volume terms. The New Industrial Policy of 1991 aimed at trade liberalisation through import liberalisation, export promotion through rationalisation of the tariff structure, and reforms in foreign exchange, moving India towards a globalisation pattern.

On November 8, 2016, the Government of India demonetised Rs 500 and Rs 1,000 notes, making them cease to be legal tender and rendering 86 per cent of money in circulation invalid. Its key features included being a tax administration measure that forced declaration of black money, signalling that tax evasion would not be tolerated, channelising savings into the formal financial system, and creating a less-cash economy to improve tax compliance.

The 1991 crisis involved a fiscal deficit of 6.6 per cent of GDP in 1990-91, heavy internal debt rising to about 50 per cent of GDP, GNP growth falling to 1.4 per cent from a peak of 10.5 per cent in 1988-89, soaring inflation at 13-14 per cent, and foreign exchange reserves falling so low they were barely adequate to meet import requirements for a few weeks. India was on the verge of defaulting on international financial obligations.

According to the Economic Survey 2016-17, demonetisation led to a decline in cash transactions, an increase in bank deposits and financial savings, a decline in private wealth (as some demonetised notes were not returned and real estate prices fell), an increase in digital transactions among new users through RuPay and AEPS, and a rise in income tax collection due to increased disclosure.

The New Industrial Policy of July 1991 reduced the number of industries under compulsory licensing to six, dereserved many industries earlier reserved for the public sector (limiting public sector to four industries of strategic importance), carried out disinvestment in public sector enterprises, liberalised policy towards foreign capital (permitting 100 per cent FDI in many activities), granted automatic permission for technology agreements with foreign companies, and set up the Foreign Investment Promotion Board (FIPB).

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