Introduction to

Economic
Environment
ECONOMIC ENVIRONMENT
P R O F. R U D R A S E N S A R M A
INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE

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Learning objectives
oOverview of the course

oContemporary Macroeconomic Issues

oEvolution of the World Economy

oStructural Transformation of the Indian Economy

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Course contact
Faculty:
◦ Dr. Rudra Sensarma
◦ Office: room #3, faculty block 3
◦ Email: rsensarma@iimk.ac.in
◦ Web: www.iimk.ac.in/faculty/rsensarma; www.rudrasensarma.info
◦ @RudraSensarma

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How this course will be delivered
8 sessions x 2.5 hrs per session = 20 hours
• Go through the previous day’s material and the scheduled
reading before coming to class
• Classroom learning will go beyond the textbook so read widely

Exams, quizzes
• 4 quizzes (best 2 x 10% = 20%)*
• 1 end-term exam (50%)
*
Subject to unfolding public health situation

Project (30%)
• Group submission – a report & a reflective log
• Groups and topics (see vc)

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The whole of science is nothing more than the
refinement of everyday thinking.

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Macroeconomics & business
management
Macroeconomic
policy objective
Sustained
growth in Price
GDP stability
Macroeconomic
policy tools

Fiscal Monetary
policy policy

Government
expenditure, Policy rates,
taxes Liquidity
Demand, Inflation, Costs,
Interest rates, Exchange rates,
Wages etc.

BUSINESS
Economic Environment
MANAGEMENT

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 Why should you care?

oFinance: equity analysis, banking

oHR: learning & development, performance
management
oIT & Systems: product management, business
analysis
oMarketing: product marketing, market research
oOperations: project management, SCM
oStrategy: business planning, consulting
oEntrepreneurship

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What is this course about?
Macro-
economic
theory

Economic
Environment
Current
issues of the
Indian
economy
 Contemporary issues in
macroeconomics
Macroeconomics, the study of the economy as a whole, addresses
many topical issues
• What government policies
might help to bring a
country out of a recession?
• What is the implication of
periodically released GDP,
IIP, CPI etc. data?
• How do the union budget
announcements affect
output & employment?
• What is the impact of
monetary policy decisions on
the economy & business?
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 Contemporary issues in
macroeconomics
Macroeconomics, the study of the economy as a whole, addresses
many topical issues
• Why are some countries
rich & others poor?
• Can the poor countries catch
up with the rich countries?
• What policies can make
India a developed nation?

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Course Contents
Session Module Topic
1 Introduction to India’s Economic Environment: Past, Present
Economic and Emerging Challenges
Environment

2 National Income Measurement of GDP, Real Versus Nominal

Accounting GDP, Limitations of GDP
3 Tracking the Cost CPI, WPI, Purchasing Power Parity,
of Living Unemployment
4 Fiscal Policy Aggregate Expenditure Model, Aggregate
Demand and Aggregate Supply, Fiscal Policy
in India

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 Course Contents (contd..)
Session Module Topic

5 Money and Money, Monetary and Financial System,

Financial Services Commercial Banks
6 Monetary Policy RBI, Monetary Policy Transmission, Tackling
Inflation
7 International Trade, Trade and Balance of Payments, Fixed and
Capital Flows & Flexible Exchange Rate Systems,
Exchange Rate Macroeconomic Policy and Exchange Rate

8 Sectoral Issues in India’s Agriculture, Industry, Services Sectors;

Indian Economy Future Economic Challenges

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Evolution of the World Economy

oGDP – measures total output/ expenditure/

income in a year/ quarter
oPPP – adjusts the GDP numbers for cost of
living differences across countries

oTop 20 Countries GDP (PPP) History &

Projection (1800-2040)
ohttps://www.youtube.com/watch?v=4-2nqd6-Z
Xg

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Gandhian Economics
oVillage economy 
oEach village should be self-reliant in all
necessities of life
oFood, clothing, clean water, sanitation,
housing, education etc.
o Elinor Ostrom (1990): Governing the Commons

oNo heavy industry, but only village artisan M K Gandhi (1869-1948)

level enterprise

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•A substantial public
sector with state
interventions and
regulations in order to
protect indigenous
industries.

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‘Nehruvian Model’ (1947-1991)

oModern industrialised socialist republic

oPlanning Commission & 5-Year Plans
oMixed economy: public sector & private
sector
oLicense for private industry
oTrade restrictions: Import substitution
and self-sufficiency J L Nehru (1889 – 1964)

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First and Second Five Year Plans
(1951-61)
First Five Year Plan (1951-56) Second Five Year Plan (1956-61)
Harrod-Domar Model P C Mahalanobis Model

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1961-1991
•Food Crisis
• Neglect of agriculture
• Famines
• Wars with China and Pakistan
•Green revolution (M S Swaminathan)
•White revolution (Operation flood)
•Bank nationalization (1969, 1980)
•Light reforms in 1980s

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 Economic Crisis and Reforms
(1990-91)
•Stabilization policy (IMF): fiscal correction, liberalization of trade &
exchange rate
•Structural reforms (World Bank): reforms of industrial policy, public sector
•Liberalisation: Industrial delicensing
•Privatisation: Divestment of public sector units
•Globalisation: Trade reforms, floating exchange rate, FDI
P. V. Narasimha Rao & Manmohan Singh

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Significant policy decisions in the
post reforms era
•Statutory status to SEBI in 1992
•Liberalization of FDI caps in retail, insurance, defence, infrastructure
•Strategic sale of PSUs
•NREGS, 2006
•Insolvency & Bankruptcy Code, 2016
•Demonetization, 2016
•Goods & Services Tax, 2017

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 Indian Economy at a Glance
•GDP is $2.9 trillion
•GDP growth rate 5%
•Inflation = 7.6%
•2% share in world exports
•19th largest exporter and 13th
largest importer
•Current Account Deficit = 1% of GDP
•Central bank reserves = $470 bn
Population = 1.3 billion, Workforce
= 500 million
Largest employers are agriculture
and textiles
Retail market worth $600 billion
growing at 12%
Fiscal deficit = 3.8%, Public debt =
70% of GDP
Market capitalisation = 70% of GDP
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Why is India’s growth slowing?

https://www.youtube.com/watch?v=tboPF8w-554

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Next…
National Income Accounting
◦ Measurement of GDP
◦ Real Versus Nominal GDP
◦ Limitations of GDP

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