Economic Environment in India

Economic environment definition

The economic environment relates to all the economic determinants that influence commercial and consumer compliance. The term economic environment indicates all the external economic circumstances that affect the purchasing practices of customers and markets. Hence, it influences the production of the business.

As a component of economic reformations, the government of India declared a new industrial system in July 1991. The extensive characteristics of this system were as follows:

  • The government decreased the number of enterprises below mandatory licensing to six.
  • Many of the businesses held for the public sector under the initial policy were justified. The purpose of the public sector was defined only to four industries of vital importance.
  • Disinvestment was conducted in case of many public sector industrial companies.
  • The policies towards foreign funds were expanded. The percentage of foreign equity partnerships was extended. In many ventures, 100 percent of foreign direct investment (FDI) was allowed.
  • The automatic approval was now given for technology transactions with foreign firms.
  • Foreign investment promotion board (FIPB) was established to support and channelise the foreign financing in India.


The economic reforms that were presented were directed at liberalising the Indian business and trade from all the redundant restrictions and limitations. They indicated the end of the licence-permit-quota raj. The liberalisation of the Indian business has taken place with respect to the following:

  • By eliminating the licensing terms in most of the industries, excluding a shortlist
  • By providing freedom in determining the range of marketing activities, i.e., no constraints on the development or consolidation of business pursuits
  • By dismissing the restraints on the transportation of commodities and services
  • By providing freedom in deciding the cost prices of commodities and services


The new set of economic changes intended at proffering a prominent position to the private sector in the nation-building rule and a diminished role to the public sector. This was a withdrawal of the growth policy attempted so far by the Indian directors. To accomplish this, the administration redefined the role of the public sector in the new industrial policy of 1991, approved the policy of proposed disinvestments of the public sector, and determined the loss-making and weak industries to the Board of Industrial and Financial Reconstruction (BIFR).

Also, check: What are the objectives of privatisation?


Globalisation implies the combination of different economies of the world heading towards the development of a united (closely-knitted) global marketplace. Till 1991, the government of India had followed a course of stringently controlling imports in terms of price and quantity. These laws were with respect to the following:

  • Licensing of imports
  • Tariff limitations
  • Quantitative constraints

The new economic reforms directed at business liberalisation were focused towards import liberalisation, export improvement through rationalisation of the tax structure, and changes with respect to the foreign exchange so that the nation does not remain separate from the rest of the world.

Also, read: What are the five elements of the business environment?

This article was all about the concept of economic environment in India for class 12 commerce students. To know more about such concepts, stay tuned to BYJU’S.

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