Indian Economic Environment Essay Example

Indian Economic Environment Essay Example Indian Economic Environment Essay Indian Economic Environment Essay Companies and their suppliers, marketing intermediaries, customers, competitors, and publics all operate in a macro environment of forces and trends, increasingly global, which shape opportunities and pose threats. These forces represent â€Å"non-controllables†, which the company must monitor and to which it must respond. The beginning of the new century brought a series of new challenges: the steep decline of the stock market, which affected savings, investment, and retirement funds; increasing unemployment; corporate scandals; and of course, the rise of terrorism. These dramatic events were accompanied by the continuation of existing trends that have already influenced the global landscape. Within the rapidly changing global picture, the firm must monitor six major forces: demographic, economic, socio-cultural, natural, technological, and political-legal. Economic Environment- The available purchasing power in an economy depends on current income, prices, saving, debt, and credit availability. Marketers must pay careful attention to trends affecting purchasing power, because they can have a strong impact on business, especially for companies whose products are geared to high income and price-sensitive consumers. India’s economy has been showing vibrancy of growth from 1991 ever since the government initiated programs to ease control on industry and commerce. In 1998-1999, the GDP of the country was estimated to be Rs. 17,410 billion, at current prices. By the year 2006-2007, the GDP was estimated to be Rs. 41,000 billion. By applying the purchasing power parity (PPP) method, India’s GDP is estimated to be about $3. 319 trillion, making India the fourth largest economy in the world. GDP has also been growing at more than 7% per annum. The per capita income is also estimated to be increasing at the same rate. In addition, India has healthy foreign exchange reserves to cover the county’s imports for nearly one and a half year. Inflation has also been showing a healthy trend of less than 5%. These figures indicate that India has strong economic fundamentals that suggest a positive climate for business growth. India was under social democratic-based policies from 1947 to 1991. The economy was characterized by extensive regulations, protectionism, public ownership, corruption and slow growth. Since 1991, continuing economic liberalization has moved the country toward a market-based economy. A revival of economic reforms and better economic policy in 2000s accelerated Indias economic growth rate. In recent years, Indian cities have continued to liberalize business regulations. By 2008, India had established itself as the worlds second-fastest growing major economy. Indias large service industry accounts for 55% of the countrys Gross Domestic Product (GDP) while the industrial and agricultural sector contribute 28% and 17% respectively. Agriculture is the predominant occupation in India, accounting for about 52% of employment. The service sector makes up a further 34% and industrial sector around 14%. Previously a closed economy, Indias trade has grown fast. The Economic Survey for 2009-10 presented by Finance Minister Pranab Mukherjee in Parliament on Thursday has revealed Indias share in world merchandise exports after remaining unchanged at 1. 1 per cent between 2007 and 2008, reached 1. per cent in 2009 (Jan-June) mainly due to the relatively greater fall in world export growth than India. Income Distribution- Macro economic indicators of the country provide the overall health of the economy as well as direction of economic growth. A marketer needs to understand the distribution of income to reach more meaningful conclusions about taking spe cific decisions. In India, we see that 77. 7% of urban households in India have a monthly income of up to Rs. 3000. Urban households with a monthly income between Rs. 3001 and 6000 are estimated to be about 16. 2% and another 4% with a monthly household income of Rs. 001-10,000. Only about 2. 1% of urban households have a monthly income over Rs. 10,000. Income distribution of households in India has been changing significantly over time. Households belonging to the lower income segment have been steadily declining over the years, and the middle income households have been showing an increase. These are the results of economic growth. The NCAER (_) has classified Indian consumers into five categories destitute (annual household income of Rs. 16,000; not active participants in market exchange for a wide range of goods), aspirants (annual household income of Rs. 6,000-22,000; new entrants into the consumption systems due to increase in their real income), climbers (annual household in come of Rs. 22,000-45,000; have desire and willingness to buy, but have limited cash at hand), consuming class (annual household income of Rs. 45,000-215,000; households that form the majority of consumers; have money and are willing to spend), and the rich (those who have money and own a wide range of products). The patterns of income distribution in urban and rural areas also vary. SECTORS- Industry and services Industry accounts for 28% of the GDP and employ 14% of the total workforce. However, about one-third of the industrial labour force is engaged in simple household manufacturing only. Economic reforms brought foreign competition, led to privatization of certain public sector industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the production of fast-moving consumer goods. Post-liberalization, the Indian private sector, which was usually run by oligopolies of old family firms and required political connections to prosper was faced with foreign competition, including the threat of cheaper Chinese imports. Business services (information technology, information technology enabled services, business process outsourcing) are among the fastest growing sectors contributing to one third of the total output of services in 2000. The growth in the IT sector is attributed to increased specialization, and an availability of a large pool of low cost, but highly skilled, educated and fluent English-speaking workers, matched on the demand side by an increased demand from foreign consumers interested in Indias service exports, or those looking to outsource their operations. In 2009, seven Indian firms were listed among the top 15 technology outsourcing companies in the world. Agriculture India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 17% of the GDP in 2009, employed 52% of the total workforce and despite a steady decline of its share in the GDP, is still the largest economic sector and plays a significant role in the overall socio-economic development of India. Yields per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since Green revolution in India. Banking and finance Prime Minister Indira Gandhi nationalized 14 banks in 1969, followed by six others in 1980, and made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. o ensure that the banks fulfill their social and developmental goals. Since then, the number of banks has been increasing in the country and the population covered by each branch has decreased. Since liberalization, the government has approved significant banking reforms. While some of these relate to nationalized banks (like encouraging mergers, reducing government interference and increasing profitability and competitiveness), other reforms have opened up the banking and insurance sectors to private and foreign players. Natural resource Indias major mineral resources include coal, iron, manganese, mica, bauxite, titanium, chromite, limestone and thorium. India meets most of its domestic energy demand through its 92 billion tonnes of coal reserves (about 10% of worlds coal reserves). Indias oil reserves, found in Mumbai High, parts of Gujarat, Rajasthan and eastern Assam, meet 25% of the countrys domestic oil demand. Indias total proven oil reserves stand at 11 billion barrels. In 2009, India imported 2. 56 million barrels of oil per day, making it one of largest buyers of crude oil in the world. The petroleum industry in India mostly consists of public sector companies such as Oil and Natural Gas Corporation (ONGC), Hindustan Petroleum Corporation Limited (HPCL) and Indian Oil Corporation Limited (IOCL). There are some major private Indian companies in oil sector such as Reliance Industries Limited (RIL) which operates the worlds largest oil refining complex. Pharmaceuticals India has a self reliant Pharmaceuticals industry. The majority of its medical consumables are produced domestically. Pharmaceutical Industry in India is dotted with companies like Ranbaxy Pharmaceutical, Dr. Reddys Laboratories, and Cipla which have created a niche for themselves at world level. India including China, Brazil, Turkey, Mexico, Russia and South Korea are called â€Å"pharmerging† countries. Today, India is an exporter to countries like the United States and Russia. In terms of the global market, India currently holds a modest 1-2% share, but it has been growing at approximately 10% per year. External trade and investment ? Global Trade Relations Indias economy is mostly dependent on its large internal market with external trade accounting for just 20% of the countrys GDP. Until the liberalization of 1991, India was largely and intentionally isolated from the world markets, to protect its economy and to achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while foreign direct investment (FDI) was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals. Indias exports were stagnant for the first 15 years after independence, due to the predominance of tea, jute and cotton manufactures, demand for which was generally inelastic. Imports in the same period consisted predominantly of machinery, equipment and raw materials, due to nascent industrialization. The Indian export has grown by 22. 5 per cent at $16. 64 billion in August 2010. India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947 and its successor, the WTO. While participating actively in its general council meetings, India has been crucial in voicing the concerns of the developing world. For instance, India has continued its opposition to the inclusion of such matters as labour and environment issues and other non-tariff barriers into the WTO policies. ? Balance of payments Since independence, Indias balance of payments on its current account has been negative. Since liberalization in the 1990s (precipitated by a balance of payment crisis), Indias exports have been consistently rising, covering 80. % of its imports in 2002–03, up from 66. 2% in 1990–91. Indias growing oil import bill is seen as the main driver behind the large current account deficit. Although India is still a net importer, since 1996–97 its overall balance of payments (i. e. , including the capital account balance) has been positive, largely on account of increased foreign direct investment and deposits from non-resident Indians; until this time, the overall balance was only occasionally positive on account of external assistance and commercial borrowings. As a result, Indias foreign currency reserves stood at USD 283. 5 billion at the end of December 2009. [pic] Due to the global late-2000s recession, both Indian exports and imports declined by 29. 2% and 39. 2% respectively in June 2009. The steep decline was because countries hit hardest by the global recession, such as United States and members of the European Union, account for more than 60% of Indian exports. However, since the decline in imports was much sharper compared to the decline in exports, Indias trade deficit reduced to 252. 5 billion rupee. Indias reliance on external assistance and commercial borrowings has decreased since 1991–92, and since 2002–03, it has gradually been repaying these debts. Declining interest rates and reduced borrowings decreased Indias debt service ratio to 4. 5% in 2007. In India, External Commercial Borrowings (ECBs) are being permitted by the Government for providing an additional source of funds to Indian corporates. The Ministry of Finance monitors and regulates these borrowings (ECBs) through ECB policy guidelines. ? Foreign Direct Investment In India As the fourth-largest economy in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI); India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewelry. Despite a surge in foreign investments, rigid FDI policies resulted in a significant hindrance. However, due to some positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 300 million and represents a growing consumer market. Indias recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In March 2005, the government amended the rules to allow 100 per cent FDI in the construction business. This automatic route has been permitted in townships, housing, built-up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city- and regional-level infrastructure. A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields which require relaxation in FDI restrictions include civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining. India has been ranked at the third place in global foreign direct investments in 2009 and will continue to remain among the top five attractive destinations for international investors during 2010-11, according to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment prospects titled, World Investment Prospects Survey 2009-2011 released in July 2009. India attracted FDI equity inflows of US$ 2,214 million in April 2010. The cumulative amount of FDI equity inflows from August 1991 to April 2010 stood at US$ 134,642 million, according to the data released by the Department of Industrial Policy and Promotion (DIPP). The Indian rupee is the only legal tender accepted in India. The exchange rate as on 23 March 2010 is 45. 40 INR the USD, 61. 45 to a EUR, and 68. 19 to a GBP (British pound). The Indian rupee is accepted as legal tender in the neighboring Nepal and Bhutan, both of which peg their currency to that of the Indian rupee. The Rupee hit a record low during early 2009 on account of global recession. However, due to a strong domestic market, India managed to bounce back sooner than the western countries. Since September 2009 there has been a constant appreciation in Rupee versus most Tier 1 currencies. On 11 January 2010 Rupee went as high as 45. 50 to a USD and on 10 January 2010 as high as Rs. 73. 93 to a British Pound. The RBI, the countrys central bank was established on 1 April 1935. It serves as the nations monetary authority, regulator and supervisor of the financial system, manager of exchange control and as an issuer of currency. The RBI is governed by a central board, headed by a governor who is appointed by the Central government of India. According to The Times of India, a majority of Indians have per capita space equivalent to or less than a 10  feet x 10  feet room for their living, sleeping, cooking, washing and toilet needs. and one in every three urban Indians lives in homes too cramped to exceed even the minimum requirements of a prison cell in the US. The average is 103  sq  ft (9. 6 m2) per person in rural areas and 117  sq  ft (10. m2) per person in urban areas. Around half of Indian children are malnourished. However, India has not had famines since the Green Revolution in the early 1970s. While poverty in India has reduced significantly, a 2007 report by the state-run National Commission for Enterprises in the Unorganized Sector (NCEUS) found that 65% of Indians, or 750 million people, lived on less than 20 rupees per day with most working in informal labour sector with no job or s ocial security, living in abject poverty. Since the early 1950s, successive governments have implemented various schemes, under planning, to alleviate poverty that have met with partial success. All these programs have relied upon the strategies of the Food for work program and National Rural Employment Program of the 1980s, which attempted to use the unemployed to generate productive assets and build rural infrastructure. In August 2005, the Indian parliament passed the Rural Employment Guarantee Bill, the largest program of this type in terms of cost and coverage, which promises 100 days of minimum wage employment to every rural household in all he Indias 600 districts. Recent statistics in 2010 point out that the numbers of high income households have crossed lower income households. Agricultural and allied sectors accounted for about 60% of the total workforce in 2003 same as in 1993–94. While agriculture has faced stagnation in growth, services have seen a steady growth . Of the total workforce, 8% is in the organized sector, two-thirds of which are in the public sector. From 1983 until 2000, Indias Unemployment Rate averaged 7. 0 percent reaching an historical high of 8. 30 percent in December of 1983 and a record low of 5. 99 percent in December of 1994. The labour force is defined as the number of people employed plus the number unemployed but seeking work. The non-labour force includes those who are not looking for work, those who are institutionalized and those serving in the military. [pic] Indias labor force is growing by 2. 5% annually, but employment only at 2. 3% a year. Unemployment in India is characterized by chronic or disguised unemployment. Government schemes that target eradication of both poverty and unemployment (which in recent decades has sent millions of poor and unskilled people into urban areas in search of livelihoods) attempt to solve the problem, by providing financial assistance for setting up businesses, skill honing, setting up public sector enterprises, reservations in governments, etc. Child labor is a complex problem that is basically rooted in poverty. The Indian government is implementing the worlds largest child labor elimination program, with primary education targeted for ~250 million. Numerous non-governmental and voluntary organizations are also involved. Special investigation cells have been set up in states to enforce existing laws banning employment of children (under 14) in hazardous industries. In spite of the high growth rate in India, the country still continues to be a low-income country since decades. Though it is believed the country could be a â€Å"motor to the world economy† if it fulfills its growth potential. In order to achieve its growth potential, things needed to be done are: o Improve Governance Raise Educational Achievement o Increase Quality and Quantity of Universities o Control Inflation o Introduce a Credible Fiscal Policy o Liberalize Financial Markets o Increase Trade with Neighbors o Increase Agricultural Productivity o Improve Infrastructure o Improve Environmental Quality. ? Agriculture The low productivity in India is a result of the following factors: o According to India: Priorities for Agriculture and Rural Development by World Bank, Indias large agricultural subsidies are hampering productivity-enhancing investment. Overregulation of agriculture has increased costs, price risks and uncertainty. Government interventions in labor, land, and credit markets are hurting the market. Infrastructure and services are inadequate. o Illiteracy, slow progress in implementing land reforms and inadequate or inefficient finance and marketing services for farm produce. o The average size of land holdings is very small (less than 20,000  m? ) and is subject to fragmentation, due to land ceiling acts and in some cases, family disputes. Such small holdings are often over-manned, resulting in disguised unemployment and low productivity of labour. o Adoption of modern agricultural practices and use of technology is inadequate, hampered by ignorance of such practices, high costs and impracticality in the case of small land holdings. o World Bank says that the allocation of water is inefficient, unsustainable and inequitable. The irrigation infrastructure is deteriorating. Irrigation facilities are inadequate, which result in farmers still being dependent on rainfall, specifically the Monsoon season. A good monsoon results in a robust growth for the economy as a whole, while a poor monsoon leads to a sluggish growth. Farm credit is regulated by NABARD, which is the statutory apex agent for rural development in the subcontinent. Indias population is growing faster than its ability to produce rice and wheat. The most important structural reform for self-sufficiency is the ITC Limited plan to connect 20,000 villages to the Internet by 2013. This will provide farmers with up to date crop prices for the first time, which should minimize losses incurred from neighboring producers selling early and in turn facilitate investment in rural areas. ? Corruption Corruption has been one of the pervasive problems affecting India. The economic reforms of 1991 reduced the red tape, bureaucracy and the License Raj that had strangled private enterprise. Yet, a 2005 study by Transparency International (TI) India found that more than half of those surveyed had firsthand experience of paying bribe or peddling influence to get a job done in a public office. The Right to Information Act (2005) and equivalent acts in the Indian states that require government officials to furnish information requested by citizens or face punitive action, computerization of services and various central and state government acts that established vigilance commissions have considerably reduced corruption or at least have opened up avenues to redress grievances. The 2009 report by Transparency International ranks India at 84th place in terms of corruption and states that significant improvements were made by India in reducing corruption. Education India has made huge progress in terms of increasing primary education attendance rate and expanding literacy to approximately two thirds of the population. The right to education at elementary level has been made one of the fundamental rights under the Eighty-Sixth Amendment of 2002. However, the literacy rate of 65% is still lower than the worldwide average and the country suffers from a high dropout rate. ? Infrast ructure In the past, development of infrastructure was completely in the hands of he public sector and was plagued by corruption, bureaucratic inefficiencies, urban-bias and an inability to scale investment. Indias low spending on power, construction, transportation, telecommunications and real estate, at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher growth rates. This has prompted the government to partially open up infrastructure to the private sector allowing foreign investment which has helped in a sustained growth rate of close to 9% for the past six quarters. Some 600 million Indians have no mains electricity at all. While 80% of Indian villages have at least an electricity line, just 44% of rural households have access to electricity. India has the worlds third largest road network in the world. Container traffic is growing at 15% a year. Some 60% of India’s container traffic is handled by the Jawaharlal Nehru Port Trust in Navi Mumbai. Internet use is rare; there were only 7. 57 million broadband lines in India in November 2009, however it is still growing but at a slower rate. Most urban cities have good water supply water 24 hours a day, while some smaller cities face water shortages in summer season. A World Bank report says it is an institutional problem in water agencies, or how the agency is embedded in the relationships between politics and the citizens who are the consumers. ? Labour laws India’s labor regulations  - among the most restrictive and complex in the world  - have constrained the growth of the formal manufacturing sector where these laws have their widest application. Better designed labor regulations can attract more labor- intensive investment and create jobs for India’s unemployed millions and those trapped in poor quality jobs. Given the country’s momentum of growth, the window of opportunity must not be lost for improving the job prospects for the 80 million new entrants who are expected to join the work force over the next decade. ? Economic disparities One of the critical problems facing Indias economy is the sharp and growing regional variations among Indias different states and territories in terms of per capita income, poverty, availability of infrastructure and socio-economic development. Six low-income states Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa and Uttar Pradesh are home to more than one third of Indias population.