BUSINESS

ENVIRONMENT
What is Business?
• It is a continuous production and
distribution of goods and services with
the aim of earning profits under
uncertain market conditions.
• It is a form of regular activity conducted
with an objective of earning
profits for the benefit of those
on whose behalf the activity is
conducted.
Objectives of
Business
• Profit
• Growth
• Customer Satisfaction
• Employee Satisfaction
• Quality products and
services
• Market Leadership
• Employment creation
• Service to Society...
BUSINESS ENVIRONMENT
• Business environment consists of
individuals, institutions and other
forces which are outside the control of
a business but that potentially
affect is performance.
Characteristics of Business
Environment
• Business environment is complex in
nature.
• It is constantly changingprocess.
• It is different fordifferent business
units.
• It has both long term and short term
impact.
• Unlimited influence of
externalenvironment factors.
• It is very uncertain.
• Inter-related components.
•
 Types of Business
• Environment
Mainly Business Environment divided
into two types. These are:
1. Internal Environment
2. External Environment
Components of Business
Environment
 Internal
• The Environment
factors which can be
controlled by company or
• Primary factors which directly
affect the growth of
organization….. men, material,
money, machines and
management.
Types of Internal
Environment
[Link] System
[Link] & Objectives
[Link] Structure and
Nature
[Link] Power relationship
[Link] Resources
[Link] Image & Brand
Equity …..
 External
• ThoseEnvironment
factors which are beyond the
control of business enterprise are
included in external environment.
• External Environment is divided into two
parts
1. Micro Environment: The environment
which is close to business and affects
its capacity to work is known as Micro
Environment.
2. Macro Environment: It includes
factors that create opportunities and
Micro
Environment
• Suppliers
• Customers
– Wholesalers
– Retailers
– Industries
– Government and Other
Institutions
– Foreigners
• Market Intermediaries
– Middleman
– Marketing Agencies
– Financial Intermediaries
– Physical Intermediaries
• Competitors
• Public
 Macro
Environment
• Economic Environment: It is very
complex and dynamic in nature that
keeps on changing with the
change in policies or political
situations. It has three elements:
– Economic Conditions of Public
– Economic Policies of the country
– Economic System
– Other Economic Factors: Infrastructural Facilities,
Banking,
Insurance companies, money markets, capital
Economic Environment
• Relative role of Private and Public
sectors
• Rate of savings and investments
• Volume of imports and exports
• Money supply in the economy
• Balance of payments and changes in
foreign exchange reserves
• Agricultural and industrial production
trends
• Growth rate of GNP and Per Capita
ECONOMIC ENVIRONMENT IN
INDIA
• Privatisatio
n

• Globalisatio
n

• Liberalisati
on
Privatisatio
n
• Means giving greater role to private
sector in nation building process and
reducing the role of public sector.
• Planned disinvestment
• Dilution of stake of govt. in public sector.
• If dilution of govt. ownership beyond
51% , it would result in transfer of
ownership and management to
private sector.
Globalisation
• Means integrating the various
economies of the world, leading
towards emergence of a cohesive
global economy. Implies a boundary-less
world where:
▫ Free flow of goods and services across
nations.
▫ Free flow of capital across nations.
▫ Free flow of information and
technology across nations.
▫ Free movement of people across borders.
Liberalisatio
n•
Means freeing the Indian business and industry
from all
unnecessary controls and restrictions.
• Abolishing licensing.
• No restrictions on expanding or contraction of
business
restrictions.
• Removal of restrictions on movement of goods and
services.
• Freedom in fixing prices of goods and services.
• Reduction in tax rates.
• Lifting of unnecessary controls on economy.
• Simplifying procedures for import and export.
 Macro
Environment
• Non-Economic
Environment:Following are
included in non-economic
environment:
1. Political Environment: It affects
different
business units extensively. Components are
• Political Belief of Government
• Political Strength of the Country
• Relation with othercountries
• Defense and Military Policies
• Centre State Relationship in the Country
Political Environment
• Constitution of the country
• Prevailing political system
• Political ideology of ruling party
• Extent and nature of Government
intervention in business.
• Nature of relationship of our
country with foreign countries.
• Nature and profile of political
leadership
 Macro
Environment
2. Socio-Cultural Environment
– Influence exercised by social and cultural factors, not
within
the
control of business, is known as Socio-Cultural
Environment.
– These factors include: attitude of
people to work, family
system, caste system, religion, education, marriage
etc.
3. Technological Environment
– A systematic application of scientific knowledge to
practical
task is known as technology.
– Everyday there has been vast changes in products,
 Social Environment
• Concern with quality of life
• Life expectancy, birth and death
rates
• Expectations from the
workforce
• Education system and literacy
rates
• Consumption habits
• Consumer preference
• Festivals, religious beliefs
Technological Environment
• Research and development activities
• Innovations in products and processes
• Import and export of technology
• New equipments
• Innovations in scientific and
engineering fields
• New ways of communication
 Macro
[Link]
Natural Environment
– It includes natural resources, weather, climatic
conditions, port facilities, topographical factors
such as soil, sea, rivers, rainfall etc.
– Every business unit must look for these factors
before choosing the location for
theirbusiness.
5. Demographic Environment
– It is a study of perspective of population i.e.
its size, standard of living, growth rate, age-
sex composition, family size, income level
(upper level, middle level and lower level),
education level etc.
–
Macro
Environment
6. International Environment
– It is particularly important for industries
directly depending on import or
exports.
– The factors that affect the businessare
• Globalization
• Liberalization
• Foreign business policies
• Cultural exchange
 Legal Environment
• Legislations passed
by:
▫ Parliament
▫ Court
▫ State

• Rules or laws of a
country
Evaluating the Environment

Potenti
al
Entrant
s

Existing
Supplie Competitio Buye
r ns r

Substitut
es
Fiscal Policy
• Fiscal policy refers the use of government
spending and tax policy to influence the path of
the economy over time.
• It means the use of taxation and public
expenditure by the government for stabilization
or growth of the economy
• Budgetary policy of the government, which
involves the government controlling its level of
spending and taxation within the economy
• Fiscal Policy is a key tool used by governments
to regulate and influence the economy.
• It refers to the use of government spending
and tax policy to influence economic growth
and stabilization.
• Fiscal policy is the sister strategy to monetary
Fiscal Policy

It refers to the Revenue and Expenditure

policy of the Govt. which is generally
used to cure recession and maintain
economic stability in the country.

Fiscal policy involves changing government spending and

taxation. It involves a shift in the governments budget position.

e.g. Expansionary fiscal policy involves tax cuts, higher government

spending and a bigger budget deficit.
Fiscal policy, also known as Budgetary
policy relates to two important issues.
These are:

• The items on which the government

should spend
• How the government should raise
resources to finance its expenditure?
Difference between fiscal and monetary
policy
Instruments of Fiscal Policy

1. Reduction of Govt. Expenditure

2. Increase in Taxation
3. Imposition of new Taxes
4. Wage Control
[Link]
6. Public Debt
7. Increase in savings
8. Maintaining Surplus Budget
Types of Fiscal Policy

Neutral Fiscal Policy

Government spending = tax revenue (economy in equilibrium).
No impact on economic activity.
Discretionary (flexible) Fiscal Policy
Alters government spending/taxes.
Sub-types:Types of fiscal policy

(i) Expansionary: Increases spending during recessions.

(ii) Contractionary: Reduces spending to control inflation and pay debt.
Objectives of Fiscal Policy
• Full Employment: Government spending to create
jobs.
• Price Stability: Controlling inflation/deflation via
taxes/subsidies.
• Economic Growth: Fiscal tools for higher national
and per capita income.
• Resource Allocation: Tax incentives and subsidies
to direct resources.
• Equitable Income Distribution: Progressive
taxation for social justice.
• Economic Stability: Maintaining stable prices and
full employment.
• Capital Formation: Encouraging savings and
investment.
Components of Fiscal Policy

• Taxation Policy: Controls prices via

direct/indirect taxes.
• Expenditure Policy: Allocates
revenue and capital expenditures.
• Investment/Disinvestment: Deals
with FDI, FII, and privatization.
• Debt/Surplus Management:
Balances government spending and
revenue.
Role of Fiscal Policy in Developing
Economies
• Resource Mobilization: Boosts capital
formation through taxes and borrowing.
• Private Sector Development: Supports
productivity via tax relief and subsidies.
• Resource Allocation: Directs investments into
key industries.
• Infrastructure Development: Invests in social
and economic infrastructure.
• Regional Development: Encourages growth in
backward regions.
• Economic Stability: Controls inflationary and
deflationary cycles.
• Reducing Inequality: Uses taxation and
subsidies to balance income distribution.
Fiscal Policy vs. Monetary
Policy
• Fiscal Policy: Government-driven
spending and taxation.
• Monetary Policy: Central bank
controls money supply.
• Fiscal Adjustments: Stimulates
aggregate demand through spending.
• Monetary Adjustments: Controls
interest rates and bank lending.
Monetary Policy?
•The Monetary and Credit Policy is the policy statement,
traditionally announced twice a year, through which the
Reserve Bank of India seeks to ensure price stability for the
economy.

These factors include - money supply, interest rates and the

inflation. In banking and economic terms money supply which
indicates the level (stock) of legal currency in the economy.

Besides, the RBI also announces norms for the banking and
financial sector and the institutions which are governed by it.

Monetary policy involves influencing the demand and supply

of money, primarily through the use of interest rates.
Objectives of the Monetary Policy?
INSTRUMENTS OF MONETARY
POLICY
1. Bank Rate of Interest
2. Cash Reserve Ratio
3. Statutory Liquidity Ratio
4. Open market Operations
5. Margin Requirements
6. Deficit Financing
7. Issue of New Currency
8. Credit Control
Bank Rate of Interest

It is the interest rate which is fixed by the RBI to control the

lending capacity of Commercial banks . During Inflation , RBI
increases the bank rate of interest due to which borrowing power
of commercial banks reduces which thereby reduces the supply of
money or credit in the economy .When Money supply Reduces it
reduces the purchasing power and thereby curtailing Consumption
and lowering Prices.
Cash Reserve Ratio

CRR, or cash reserve ratio, refers to a

portion of deposits (as cash) which banks have
to keep/maintain with the RBI. During Inflation
RBI increases the CRR due to which
commercial banks have to keep a greater
portion of their deposits with the RBI . This
serves two purposes. It ensures that a portion of
bank deposits is totally risk-free and secondly it
enables that RBI control liquidity in the system,
and thereby, inflation.
Statutory Liquidity Ratio

Banks are required to invest a portion of

their deposits in government securities as a
part of their statutory liquidity ratio (SLR)
requirements . If SLR increases the lending
capacity of commercial banks decreases
thereby regulating the supply of money in
the economy.
Open market Operations

It refers to the buying and selling of

Govt. securities in the open market .
During inflation RBI sells securities in the
open market which leads to transfer of
money to [Link] money supply is
controlled in the economy.
Margin Requirements

During Inflation RBI fixes a high rate of

margin on the securities kept by the
public for loans .If the margin increases
the commercial banks will give less
amount of credit on the securities kept by
the public thereby controlling inflation.
Deficit Financing

It means printing of new currency notes

by Reserve Bank of India .If more new
notes are printed it will increase the
supply of money thereby increasing
demand and prices.
Thus during Inflation, RBI will stop
printing new currency notes thereby
controlling inflation.
Issue of New Currency

During Inflation the RBI will issue new

currency notes replacing many old notes.
This will reduce the supply of money in
the economy.
 Private sector
The private sector is the part of the economy
run by individuals and companies for profit and
is not state-controlled.
Therefore, it encompasses all for-profit
businesses not owned or operated by the
government.
Features of the private sector
• Profit motive: The primary goal of private sector
companies is to make a profit.
• Private ownership and control: Private entrepreneurs
own, control, and manage the private sector.
• Limited state regulation: Private sector entities have
little government interference, which allows them to
set prices and create products according to their
standards.
• Independent management: The management of the
private sector is entirely dependent on the actions of
its owners.
• Competitive work culture: Private sector companies
aim to provide their employees with the greatest
possible working environment.
• Career advancement opportunities: Private
companies offer better career advancement
Growth of private sector
• Gross fixed capital formation
• In 2022, the private sector's gross fixed capital
formation was 26.7% of India's GDP.
• Private consumption
• In the decade leading up to 2022, India's private
consumption grew at an average rate of 6.2%. In
2022, private consumption grew by 7.5%.
• Private corporate sector sales
• In 2023-24, the annual sales growth of listed
private non-financial companies was 4.7%, down
from 19.8% in 2022-23.
• Exports
• In the fourth quarter of 2024, India's exports
increased by 8.1% year-on-year, which was the
highest for the fiscal year.
 Role of Govt. in private sector
•growth
Research and development :The government has established a
financing pool of ₹1 lakh crore to support private sector-driven
research and innovation. The government has also operationalized
the Anusandhan National Research Fund (ANRF) for basic research
and prototype development.
• Production Linked Incentives (PLI) :The government has provided
PLIs to firms to attract domestic and foreign investments.
• Strategic sectors: The government has opened up strategic sectors,
such as defense, mining, and space, to enhance business
opportunities for the private sector.
• Ease of doing business:The government has taken steps to reduce
policy uncertainty, including decriminalizing minor economic offenses
and relaxing the Angel tax.
• Infrastructure: The government has launched PM GatiShakti to
create multimodal and last-mile connectivity infrastructure.
• Internships: The government has launched a scheme to provide
internship opportunities in 500 top companies to 1 crore youth in 5
years.
Private sector role in economic
development
• Creating jobs: The private sector is a major source of employment
opportunities.
• Providing goods and services: Private companies produce goods
and services that meet consumer demand.
• Generating tax revenue: Businesses pay taxes that help fund
public services, infrastructure, and other projects.
• Driving innovation: Private companies invest in research and
development to create new products and services.
• Promoting sustainable development: The private sector can help
solve development challenges and combat climate change.
• Collaborating with the public sector: Private companies can work
with the government to access resources and develop new
products.
• Promoting diversification: The lack of regulation in the private
sector allows new companies to enter the market, which can
create more choices for consumers and inspire innovation.
Limitations
• Economic downturns :The private sector may be more susceptible to
economic downturns than the public sector, which tends to be more
stable. During economic downturns, the private sector faces increased
competition and market volatility.
• Limited access to capital : Private limited companies (PLCs) have
limited access to capital because they cannot offer shares to the
general public.
• Legal and regulatory requirements: PLCs are subject to various legal
and regulatory requirements, including annual filings and other
reporting obligations.
• Limited ability to transfer ownership: Shares in a PLC cannot be freely
bought or sold.
• Motivating and controlling workers:It can be harder to motivate and
control workers who do not hold shares in a company because profits
are only shared with shareholders.
• Data privacy: Digital platforms can have potential negatives, such as
data privacy issues, where the platforms set the terms of engagement
with workers or sellers.
Significance of SMEs
• Employment: SMEs are a major source of employment,
especially for young people, older workers, and less-skilled
workers.
• Economic growth: SMEs are engines of economic growth,
contributing more than 50% of GDP in most OECD
countries.
• Innovation: SMEs are often more innovative and adaptive
than large corporations, driving technology development.
• Regional development: SMEs are essential for the growth
and development of regional economies, especially in rural
areas.
• Community: SMEs provide a place for people to gather,
socialize, and support each other.
• Competition: SMEs stimulate competition for product
design, prices, and efficiency.
• Supply chain: SMEs can supply raw materials and
distribute finished goods more efficiently.
Problems and Challenges of
SMEs