Ours is a changing world where economic, political and social environments are chang­ing faster than ever before, particularly with the onset of the information revolution that begun in the last quarter of the last century.

Business success or failure depends largely on how these changes are accommodated by the decision-makers.

The ever-changing environ­ment forces businesses to regularly review their operations and their business strategies so as to achieve their predetermined as well as well-defined goals and objectives. If busi­ness take no notice of the changing environ­ment then they will be left behind by their rivals and competitors both internal and external.

Since macroeconomic environment is a multi-faceted concept, its components are very wide and large. For analysis’ sake, we group them into two: domestic environment of busi­ness, and international environment of busi­ness. Hitherto (1947 to 1991) largely insulated from the global economy, the Indian economy had been successfully married to the global economy in mid-1991.


Since then all the three key sectors fiscal, financial and external had been experiencing a series of structural reforms and macroeconomic adjustments. Indian economy is more open and free from a web of controls and regulations. These struc­tural reforms represented a departure or rather a U-turn in the general direction of policy that had been pursued since the 1950s to the early years of 1990s.

With the large growth of international business following deregulation, privatisation and globalisation, our country’s macroeco­nomic environment has assumed greater sig­nificance. Domestic economy has been inte­grated with the global economy so that India becomes a prospective economic power in the world. Therefore, macroeconomic environ­ment of an economy cannot afford the luxury of ignoring developments at the global level.

Components of Macro- Economic Environment:

Before we move to the economic reforms that are being made since mid-1991, we would like to present, in brief, the crucial components or building blocks of India’s macroeconomic environment under the following headings so that we can understand the departure from once controlled and regulated economy to a more open, global and competitive economy: (i) economic system; (ii) national economic planning, (iii) economic policy instruments (such as fiscal policy, financial policy, trade policy, employment policy, rules and regula­tions governing business and trade, etc.)

(i) Economic System:

Economic system with which we started our journey was of the ‘mixed economy’ variety. The Indian economy indeed started its journey in 1951 when the first Five Year Plan (1951-56) was launched. She then accepted the socialistic path not the socialist path of development with state playing the major role.


Against this frame­work, five year plans were implemented un­der a strong interventionist state. ‘Market fail­ure’ was the rule of the day. That does not mean that private sector in India in businesses was utterly insignificant. In fact, private sec­tor was given adequate space to operate in keeping with the concept of the mixed economy. Growth of India’s private sector was subject to serious controls and regulations.

India’s mixed economy was, thus, charac­terised by a mixture of planning and market- determined price mechanism. It is an admix­ture of plan stimulus and control and market efficiency. However, after 1991, there occurred a dilution in the mixed economy philosophy. Now market principles predominate.

Mixed economy of the Indian variety is a planned economy in which public sector has to have an economic plan. In this planning process, the state allocates resources for the development of industry, agriculture, infras­tructure (both economic and social), etc. Indian planning strategy of the early years came to be known as Nehru-Mahalanobis strategy that continued till mid-1991.

Such planning strat­egies had been dethroned in July 1991. When (P.V. Narasimha) Rao-(Manmohan) Singh model of planning strategy was introduced against the backdrop of unprecedented cri­ses—an IMF-World Bank model based on the free market philosophy.

(ii) National Economic Planning:


Economic planning is often regarded as a technique of managing an economy. The First Five Year Plan was launched in April 1951 to realise the aspirations and hopes of the newly independ­ent second-most populous country in the world having a low level of per capita income.

While the concept of mixed economy was accepted, democratic planning became an in­tegral part of action. Meanwhile, ‘government failure’ in our economic functioning became a great source of anxiety. The days of classical capitalism and classical socialism are over. The situation in the late 1980s was then crying for a change in the nature of state intervention, nature of the mixed economy of Indian vari­ety.

The Eighth Plan (1992-97), in this sense, was unique as it attempted to manage the tran­sition from the so-called (centrally) planned economy to a market-oriented economy. Globalisation-liberalisation-decontrol of the Indian economy brought changes in the na­ture of Indian planning. Now, market func­tions in a more larger space but the state has been assigned special responsibilities.

As market forces are believed to be cata­lysts for economic activities, the role and rel­evance of planning is being diluted. Today, an integrative approach that considers both planning and market mechanism has been adopted. It is because of the change in thought that India’s Eighth Plan may be described more as an indicative planning, rather than the conventional central planning variety.

Under indicative planning, markets function but the areas of government or state action of planning are earmarked. For instance, human resource development urgently calls for gov­ernment initiative. It is argued that the most important function of planning is to ‘lobby for the poor in economic policy-making’.

Although planning, as understood in the 1950- 1980s in India, is dead. Development planning continues; only the content of planning has changed. The Eighth Plan was a pace-setter in this direction. We are now in the midst of the Eleventh Plan (2007-12) of indicative variety.

(iii) Economic Policy Instruments:

Macro- economic management calls for adjustment of existing economic policies of the government in the light of changing environment both in the domestic and international plane. Macro- economic policies that the country had been pursuing since 1951 to mid-1991 were influ­enced by the then economic philosophy of ‘state-sponsored development’ as opposed to ‘market-oriented development’.

During 1950s, Nehru’s perception of the problems of the Indian economy centred on industrialisation, self-reliance and import substitution and socialism—or the so-called Nehruvian socialism. Indian policymakers placed great emphasis on the policy of import substituting industrialisation in the years of planning.

This policy aims at reducing de­pendence on imports as far as practicable through the supplies of local needs by domes­tic manufacturing. Nehru had not been averse to foreign capital or foreign aid but he pleaded for self-reliance, i.e., free from aid. MNCs and aid-giving countries were not to be given any entry, as such.


However, in 1991, this strategy of indus­trialisation was given a good-bye, and in its place a new economic policy based on market principles known as import liberalisation cou­pled with export-led industrialisation for achieving rapid economic development was introduced.

Against these two divergent broad policy measures introduced first in the 1950s (pre- reform era) and later changed in the 1990s (re­form era), Indian policymakers charted out the following sub-set of policies from time to time. Most important among them are: industrial policy, agricultural policy, national population policy, fiscal policy, monetary policy, trade policy or export-import policy (EXIM), em­ployment policy, labour policy, etc.


In the late 1970s, the whole world became impatient to have a change as crises gripped not only the major capitalist economies but also the socialist world. Thatcherism (after the then British Prime Min­ister Mrs. Margaret Thatcher) and Reaganomics (after the then US President Ronald Reagan) of the early 1980s sounded the death-knell to the planning mechanism and sounded the incoming of the so-called market principles to the limelight.

Even in the Republic of China, erstwhile Soviet Union, East European countries where centralised planning had been practiced hitherto we heard of changes in their economic policy in­struments. These countries then opted for market principles and the policies of liberali­sation, privatisation and globalisation (LPC). India, too, brought changes in her economic policies in mid-1991 as a part of the overall global process.


Such switchover could be at­tributed to India’s home-made domestic cri­ses created over the years. Marketisation, lib­eralisation, privatisation, decentralisation and outward orientation of the economy are the essential ingredients of the new economic policy measures introduced by Narasimha Rao-Monmohan Singh in July 1991.