EXTERNAL TRADE 1

PART I

Foundations of Business
 CHAPTER 1

Nature and Purpose of Business

LEARNING OBJECTIVES

After studying this chapter, you should be able to :

• state the different types of economic activities;

• explain the concept and characteristics of business;

• analyse the objectives of business;

• appreciate the role of profit in business;

• explain the evolution of business activities in India.

4 BUSINESS STUDIES

1.1 Introduction of human beings is earning money by

satisfying the increasing demand for
All human beings, wherever they are, goods and services.
require different types of goods and In this chapter, we shall first
services to satisfy their needs. One or discuss the nature of economic
two members of every family have to activities, and then explain the concept
engage in some activities to earn money and definition of business, its
and provide for the needs of all characteristics, objectives of business,
members. Thus, people pursue the nature and causes of business
different occupations to earn their risks, and role of profit in business. We
livelihood and, depending on their shall also describe briefly, the evolution
income, have different standards of of business activities in India.
living. In modern times, a large variety
of goods and services are available in 1.2 Economic Activities
the market. Also there is increasing
demand for goods and services due to In every society people are found to
the desire of people to raise their undertake various activities to satisfy
standard of living. On the one hand, their physical or material needs like
people engage in different activities so food, clothing, and other articles of use.
as to earn as much as possible and These activities may be connected with
fulfill their increasing needs. On the production or distribution of goods
other hand, the necessity of supplying such as cultivating land, running a
goods and services has led to certain factory or working in the factory,
activities being undertaken by people driving a truck to transport goods, etc.
to produce and sell what are needed by These are undertaken by people to
others. Thus, we find a large number earn income to meet their needs.
of people earning their livelihood as People may also be working in
agricultural labour, or working in offices where they offer their services
offices, factories or mines. At the same for a salary. Thus, economic
time, there are people who produce and activities are based on economic
sell goods and services so as to earn considerations for transfer or exchange
income from these activities. Farmers of goods and services. The purpose of
may produce agricultural crops to be economic activities should be
sold in the market. People set up expectation of money income which is
factories to produce goods which may used for further creation of wealth or
sold in retail shops. Trucks are assets.
manufactured and used to carry goods Sometimes, people also undertake
from one place to another. Supply of or engage in certain activities for
electric power, gas and water is deriving psychological satisfaction, as
arranged for use in factories as well as a social duty, or in discharge of a moral
for domestic consumption. The obligation. These are non-economic
purpose behind most of these activities activities. People may take part in
EXTERNAL TRADE 5

games and sports, engage in recrea- activities which require special

tional activities, pursue gardening as a knowledge and skill to be applied by
hobby, find time for social service or individuals in their occupation. Such
volunteer to work for a humanitarian activities are generally, subject to
cause. Such activities are non-economic guidelines or codes of conduct laid
activities as their purpose is not to earn down by professional bodies. Those
money or to satisfy material needs. engaged in professions are known as
Economic activities may be professionals. For example, doctors
pursued by individuals on a small are professionals who are in the
scale, or by groups of people on a large Medical profession and are subject to
scale. Thus, a hawker selling toys for the regulations of the Medical Council
children, and person repairing bicycles of India, the concerned professional
and scooters on the roadside, or a retail body. Lawyers are engaged in the Legal
shopkeeper selling stationery are profession governed by the Bar Council
examples or individuals pursuing of India. Accountants belong to the
Accounting profession and are subject
economic activities on a small scale.
to the regulations of the Institute of
On the other hand, factories set up for
Chartered Accountants of India.
mass production of goods, or crops
Employment refers to the
raised for sale in big agricultural farms
occupation in which people work for
are large scale economic activities in others regularly and get remunerated
which groups of people are engaged. in return. Those who are employed by
When a person individually or as others are known as employees. Thus,
member of any group is regularly people who work in factories and
engaged in any economic activity, it is receive wages and salaries are in the
said to be her/his occupation. employment of factory owners and are
employees of the factory. Similarly,
1.3 Types of Economic Activities people who work in the offices of
Broadly speaking, the occupation of banks, insurance companies or
people or economic activities may government departments are in
be divided into three categories: employment, may be as managers,
(i) Business; (ii) Profession; and assistants, clerks, peons or security
(iii) Employment. guards.
Business refers to those economic
activities which are connected with the 1.4 Concept and Characteristics
production or purchase and sale of of Business
goods or supply of services with the 1.4.1 Concept of Business
main object of earning profit. People
engaged in business earn income in the The term business is derived from the
form of profit. word busy. Thus, business means
Profession includes those being busy. However, in a specific
6 BUSINESS STUDIES

sense, business refers to any occupation thus converting economic resources

in which people regularly engage in into wealth and things into goods. The
activities with a view to earning profit. business may produce what it wants
The activity may consist of production but unless the customer buys it and is
or purchase of goods for sale, or satisfied it will not contribute to it’s
exchange of goods or supply of services future success. No business can exist
to satisfy the needs of other people. Since without a customer.
the main objective of business is to earn We have stated that business in
income or profit through business terms of creating a customer is the only
dealings, it is an economic activity. purpose of business. To fulfill this
Business may thus, be defined as purpose, business enterprises should
any economic activity on a continuous concentrate on two basic functions —
basis which involves production or marketing and innovation.
purchase of goods for sale, transfer Marketing is a specialised activity
or exchange of goods, or supply of which encompasses the entire
services, at a profit. business. The business gears itself to
In modern times, as we all know, marketing by producing what the
business does not merely deal with market needs and planning all
goods and services and cannot be activities accordingly. These activities
defined or explained in terms of profit would include identifying needs,
only. Business by dealing in goods and planning the product or service and
services does not necessarily become a then ultimately selling it at a price
business unless it has a customer. A which satisfies the customer. The
business therefore, needs to be defined whole business is seen from the
in terms of purpose of the business. customer’s point of view and
Business is an integral part of marketing is made the concern and
society, produces goods and services responsibility of all the managers in the
for society and offers them for sale to business organisation.
people in that society. Unless the goods The second function which a
are satisfactory and preferred by business must perform is to innovate.
people, they will not buy the goods. Unless the business aims at producing
Therefore, the business first has to something new or improving the
create a customer for itself from the existing product it cannot expand it’s
society in which it exists. Economic market. Business is an instrument of
forces also play an important role in growth and change and change cannot
creating markets but it is basically the be ushered in unless business
business which has to identify needs innovates. Innovation may lead to
and satisfy customers. The customer technological upgradation of
determines what a business is. The production processes. It may take the
customer by paying for a good or form of lower price, new and better
service provides revenue and profit, products (at a higher price), a new
EXTERNAL TRADE 7

convenience or creation of a new want. (ii) Dealings in goods and

Technology helps business to innovate services on a regular basis : Another
in design, in product and in marketing distinct feature of business is that it
techniques. Business has to invest in involves dealings in goods or services
technology which will ultimately help in on a regular basis. Goods may consist
meeting competition. But innovation is of consumable items of daily use or
not restricted to engineering or capital goods like machinery used in
research but extends to all parts of factories. Services may include
business. Innovation may be in facilities offered to consumers in the
distribution methods, advertising and form of transportation, banking,
selling techniques or new instruments storage space, supply of electricity, etc.
of finance. Business therefore, is not Whatever their nature, dealing in goods
restricted to only dealing with goods and services must be on a regular basis
and services for a profit. There are to be called business activity. One
other more important aspects to single transaction of sale or purchase
business, viz., creating a customer, does not constitute business. Thus, for
marketing and innovation. example, if a person sells her/his
domestic radio set even at a profit, it
1.4.2 Characteristics of Business will not be considered as a business
Business activities are distinct from activity. But if she/he sells radio sets
other economic activities in certain regularly either through a shop or from
respects which will be clear from the her/his residence, it will be regarded as
following main characteristics of a business activity.
business : (iii) Profit earning : The main
(i) Sale or exchange of goods and purpose of business is that of earning
services for the satisfaction of income by way of profit. No business
human needs : Directly or indirectly can survive for long without earning
business involves transfer or exchange profit. That is why businessmen make
of goods and services for value. If goods all possible efforts to earn satisfactory
are produced or purchased to be profits by increasing the volume of
consumed by the producer or buyer, it sales or reducing costs.
cannot be called a business activity. Or, (iv) Uncertainty of return and
if goods are purchased by one to be business risk : Every business requires
presented as gift to someone else, it is some amount of money (capital) to be
not business. Cooking food at home for invested to run the activities. Profits are
the family is not business, but cooking expected to be earned in proportion to
food and selling it to others in a the amount of investment in the
restaurant is business. Thus, one business. But it is not certain that
essential characteristic of business is adequate profit will be earned. There is
that there should be sale or exchange always a possibility of losses being
of goods or services. incurred in spite of best efforts. This is
8 BUSINESS STUDIES

competition in the market, fire, theft,

Risky Business accidents, natural calamities, etc. No
business can altogether do away with
Risk is a term rarely used in Indian
risks. Hence, uncertainty of return on
business and analytical writing, and
common understanding reflects that investment may be regarded as a
neglect. In simple terms, risk involves significant characteristic of business
events not turning out in line with implying risks.
expectations. Statistically, it is
measured by volatility metrics, like 1.5 Objectives of Business
standard deviation.
The objectives of a business should be
For a layman, it implies that if sales well defined and must leave no scope
and profits turn out less than expected, for ambiguity. Since a business has to
you’ll lose money. As the proprietor of
balance a number of needs and goals
a unlimited liability business, you will
immediately notice the hole in your
it requires multiple objectives. It
bank account. An investor in a listed cannot follow only one objective
company is hit by a fall in share price and expect to achieve excellence.
as market revises its view of the Objectives have to be very specific and
company’s business. are needed in every area and sphere of
business. Foe example, sales figures
Share prices are inversely proportional
have to be set, the amount of capital to
to risk perception. Even employees and
other stakeholders — like franchises be raised has to be estimated and the
— can be hurt by a wrong under - target number of units to be produced
standing of risk. A company facing an should be defined. The objectives
unforeseen sharp slowdown will lay off define what the business is going to do
employees. The franchises will in concrete terms and enable the
suddenly see their economics looking business to analyse their own
very different. experience and as a result improve
their performance.
Source : The Economic Times All objectives are equally
important at some time or the other
because market conditions may change depending on a number of internal and
leading to a decline in production or external factors. How much time, effort
sales and reduced profits. Also there and energy should go in pursuing a
may be unexpected situations beyond particular objective is to be decided by
the control of businessmen resulting in the business itself. This is where
losses. These possibilities are known as business acumen and judgement play
risks of business. The risks are related an important role in balancing of
with certain factors like changes in objectives.
consumer tastes and fashions, changes Business objectives may be
in methods of production, strike or classified broadly into economic
lockout in work place, increased objectives and social objectives.
EXTERNAL TRADE 9

1.5.1 Economic Objectives have to be taken into consideration —

market potential and competition. The
Since business is a type of economic
business has to determine in
activity, it’s main objectives are
quantifiable terms the present and
economic objectives which include the
prospective customers and what share
following :
of the market it has been able to
(i) Earning profit;
(ii) Market standing; capture. Accordingly an objective has
(iii) Innovation; and to be set for sales figures, the size of the
(iv) Best possible use of scarce market and the share in the market.
resources. The business also has to see itself
(i) Earning profit : Business in the light of competition. Sales may
activities are undertaken primarily to be increasing every year but competing
earn profit, which is the excess of products may have a larger share of the
income over expenses. A business market and may have new and
cannot survive without making profits. improved features. Therefore, the
Indeed, profit is a measure of the strength of a competitor must never be
success in business. Profits not only underestimated. The objective, of a
help businessmen to earn their living, business must therefore be to establish
it also helps to expand their business a place in the market and protect itself
activities. Growth of business largely from competition.
depends on its ability to earn profits (iii) Innovation : To innovate
and reinvest a part of it for expansion. means to explore and discover ways
Besides, it is on the basis of its profit and means of making products more
earning capacity built upon efficiency useful. It also includes improving
of performance that a business can methods of production, exploring new
gain in prestige and have a good image. markets, and use of better methods of
Thereby it can attract competent distribution. Making lap-top computers
employees and secure customer besides desk computers is an example
loyalty. Thus, earning profit is an of product innovation. Using power
economic objective which governs all loom instead of handloom for weaving
business operations. cloth is an example of process
(ii) Market standing : Business innovation. Manufacturers setting up
activity can be sustained only if it has retail shops of their own instead selling
any standing in the market. It is not their products through wholesalers or
enough for the business to fulfil the dealers may be regarded as an example
purpose of creating a customer. The of innovation of distribution method. In
business has to be more specific and a competitive market, every business
analyse the market and find out where must be on the look out for introducing
it stands. The market consists of new products or making the existing
customers as well as competitors. To products more useful. It may be
measure market standing two things possible to do so by creative thinking
10 BUSINESS STUDIES

on product designs or by adopting new cannot be pursued in isolation from the

methods or processes of production. rest of the society. For instance,
Also sale of goods may need to be manufacture or sale of adulterated
arranged by improved methods so as to goods is always against the interest of
reach customers in new markets. In society. No business can be successful
the absence of these efforts it may not in the long run if such practices are
be possible for business to be adopted for the sake of profits. Thus,
continued. Thus, an important social objectives should form a part of
economic objective pursued by every business objectives in its long run
business is an innovation. interest. The social objectives of
(iv) Best possible use of scarce business should include the following :
resources : Every business is expected (i) Supply of desired quality of
to aim at making the best use of men, products;
money, machinery and materials (ii) Avoidance of anti-social or unfair
which are scarce resources, that is, do trade practices;
not have unlimited availability. This (iii) Generation of employment;
objective can be achieved by employing (iv) Welfare of employees; and
efficient people to work, maintaining (v) Community service.
and making full use of machines, (i) Supply of desired quality of
reducing wastage of materials, and products : People in every society
allocating as well as spending money expect that businessmen will supply
with due regard to the benefits to be goods of the right quality at the right
derived. Natural resources which are price. Quality may mean durability as
not easily replaceable or renewable, in the case of radio, TV, refrigerator,
like forests which provide timber, etc., or purity as in the case of
minerals, cooking coal, etc., are not to medicine, or safety as in the case of
be used indiscriminately or for non- pressure cooker, gas cylinder, etc.
essential purposes. Wherever possible, Consumers prefer to buy products only
ways and means should also be found
if they are of satisfactory quality and are
to make use of waste products, which
available at a reasonable price. Indeed,
may be commercially beneficial.
consumers have become increasingly
quality conscious and they want value
1.5.2 Social Objectives
for money. Hence, an important social
Besides, pursuing economic objectives, objective of business is to produce and
it is necessary that business, in its own sell goods of proper quality to satisfy
interest, should also pursue certain consumer expectations.
objectives conforming to the expecta- (ii) Avoidance of anti-social
tions of society, i.e. objectives and unfair trade practices : Hoarding,
considered desirable by the people. black-marketing, and over-charging
This is because business is an integral buyers are examples of anti-social
part of society and business activities practices which are highly
EXTERNAL TRADE 11

objectionable in every society. Besides, maintain and improve the efficiency of

businessmen often advertise products employees and thereby raise the
making false claims about their profitability of business.
quality, thereby misleading people and (v) Community service : Large
exploiting them for the purpose of business units sometimes undertake
making money. Such unfair practices community services like setting up
not only earn a bad name for the training centres for the unemployed,
business but are also punishable charitable dispensaries and schools,
under law. It may be in the form of fine and making donations for social and
or imprisonment or both. Thus, religious functions, games and sports
business must have the social objective activities, etc. Pursued as social
of avoiding such means of earning objectives, community service also
profit. adds to the reputation and public
(iii) Generation of employment : image of the business.
People are employed in business for
different types of work. This leads to 1.6 Business Risks
generation of employment and income
We have already noted that uncertainty
in society. Besides, people who are
of return on investment or possibility
handicapped or poor may be given
of incurring loss is a characteristic
special consideration at the time of
feature of all business activities. This
recruitment. Where necessary,
is mainly because the success of a
employees are imparted training to
business depends not only on the
make them more efficient. This
efforts of those who run it, but also on
practice helps poor families to increase
the existence of favourable conditions.
their earning, and also helps the At any time, if the business conditions
handicapped to be useful in society. are not really favourable, there is
Business units which pursue these always a possibility of setback.
objectives improve their public image. Business risks refer to the probability
(iv) Welfare of employees : of inadequate profits or even losses due
Employees are valuable resources who to uncertainties or unexpected events,
contribute significantly to the success which are beyond control. For
in business. To take care of their instance, the demand for particular
welfare is another social objective products may decline due to change in
which business needs to pursue by tastes and preferences of consumers,
providing good working conditions, or due to increased competition of
payment of satisfactory wages and other producers selling similar
salaries. Large business firms products. Profits are likely to decline if
generally, provide for housing and there is a fall in demand, for goods are
medical facilities for the employees and generally, produced and held in stock
their family members. This is because in anticipation of demand. Losses may
welfare amenities are expected to also be caused thereby. Sometimes,
12 BUSINESS STUDIES

unforeseen events may lead to losses. collection of dues from customers,

For example, the cost of agricultural change of technology or method of
raw material may go up due to failure production.
of crops. As a result, cost of production (ii) Unforeseen losses arising out of
may increase and, in turn, reduce fire, theft, or natural calamities
profits. None of these events is easily like flood or earthquake.
predictable, nor can they be fully (iii) Unexpected events like stoppage
controlled by a business unit. That is of work due to power failure or
why business activities become risky. workers being on strike, loss or
The more important causes of damage to goods in transit.
business risks are the following : (iv) Financial problems like rise in
(i) Uncertainties relating to demand interest rate for borrowing, levy of
for goods, competition, prices, higher taxes, etc.

Wealth is Created During Periods of Uncertainty

Everything bad that has happened during the past year — the dotcom implosion,
the recession, the terror, the war — destroyed the illusion that we operate in a
world that is continuously prosperous. As it turns out, our world is nothing like
that. Our lives are routinely disrupted, our work dislocated. This is how Professor
Yoram Jerry Wind of University of Pennsylvania’s Wharton School sees it.
The only risk that leads to profit is unique uncertainty. Making money depends
on identifying opportunities in a turbulent market place. Wind proposes three
essential characteristics of organisations that flourish in times of turmoil.
• Disciplined opportunities : There are huge opportunities to buy cheap assets.
You can buy technology or talent for less now and build assets in future. But
you need to be careful and disciplined about it. You might get a failing
technology for half its book value or an asset that adds to your company’s
strategic strengths.
• Continuous learning and unlearning : The fundamental challenge is to ask,
why do we do it. The usual answer is because they’ve worked in the past. But
they may not work in future. In a fast changing market place, the assumptions
driving your current vision and strategy won’t stay the same for long. We
must realise we have to unlearn the things that might be a constraint. Balancing
the two, learning and unlearning must be a dynamic process.
• Adaptive experimentation : In a turbulent environment, no strategy is optimal,
so you have to create an environment to continuous experimentation — a way
to design projects that allows you to learn, adapt and change. Radical
experimentation forces everyone to innovate. And it is a competitive weapon.
If you are experimenting a lot, other companies can’t figure out what you’re
doing. Experiment, measure, modify and react — it’s a powerful way to learning.

Source : The Economic Times

EXTERNAL TRADE 13

To a large extent, business risks more dependable source of

arising out of certain factors are financing than external sources
unavoidable. But losses arising out of like banks, financial institutions,
certain risks can be recovered if the or individual investors.
risks are insured for which a small (iii) Profits indicate whether a business
amount has to be paid as premium for is being managed efficiently or not.
insurance. When goods are transported Thus, profit is invariably regarded
by rail, road or sea transport, the risk as an indicator of the quality of
of loss or damage in transit can be performance of those who manage
insured. Similarly, machinery, goods in the business. The success of a
stock, etc. can be insured against risks business can be judged by its
of loss due to fire or theft. Besides, ability to earn profits.
certain losses arising out of risk can also (iv) Besides, it is because of profits
be shared. Manufacturers and whole- that taking risk becomes
salers may have an agreement to share worthwhile in business. Indeed,
any loss which may be caused by falling profits are also regarded as a
prices. However, the risk remains reward for risk bearing. It is in the
though the loss is shared. hope of earning sufficient profits
that a businessman invests
1.7 Role of Profit in Business money in business in spite of the
Although earning profit cannot be the risks and uncertainties and the
only objective of business, its possibility of incurring losses.
importance cannot be ignored. It may (v) Finally, with increasing profits over
be regarded as an essential objective of time a business earns reputation.
business for various reasons. It is able to raise loans and obtain
(i) As a source of income for credit more easily. It is in a better
businessmen, profits provide the position to offer higher wages and
means of livelihood for them. No salaries so as to attract trained and
one is expected to undertake experienced employees. Existing
business activities without earning employees can also be provided
profit to satisfy her/his needs.
(ii) Profits earned can also be a source Role of Profits
of finance for expansion of
business activities. When profits • Means of livelihood for
are large, a reasonable part of it businessmen.
can always be reinvested for • Source of funds for business
expansion or diversification of growth.
production, or to create new • Index of performance.
facilities for more efficient • Reward for risk taking.
• Better employee remuneration
operation. Retention of profits as
and amenities.
an internal source of funds is a
14 BUSINESS STUDIES

with better working conditions and family centred and village communities
more amenities if the business is were by and large self-sufficient. They
profitable. produced what they needed.
Cultivation of land, grazing of domestic
1.8 Evolution of Business animals, fishing and hunting were the
Activities in India main occupation of people. There were
Business activities as we find around artisans like carpenters and
us today evolved over a long period of blacksmiths who provided their
time since the dawn of civilisation. Let services to farmers and their families.
us see how. Weaving was a traditional skill which
(i) Family centred village took care of the village needs of
communities : In the early days of clothing. Exchange of goods for goods
civilisation, human life in India was (barter) was required to satisfy the

Historical Events That Shaped Business

1025 Cholas like today, it was the Southerners powering economic growth then.
Rajendra Chola’s (1016-44) navy conquered Maldives and defeated Sri Vijaya.
Chola and Company gained access to the east Asian markets. And like Coke, the
Cholas too had their own brand of cultural colonisation.
1498 Vasco de Gama’s boss, the King, wanted the global economy expert to find
new markets. Indians welcomed the sailors, selling spice to them at double the
price. Thus, began India’s contact with the world’s fastest growing economy. De
Gama went home to sell the spices for a 3000 per cent margin and soon after, the
first Portuguese settlement had started at Kozhikode.
1540 Sher Shah Suri had figured out that a long stretch of road would help him
both militarily and commercially. The Grand Trunk Road stretched from the Indus
River in the west to Sonargoan (Bangladesh). Trade boomed on this freeway with
qasbas (market places) opening up. This 1500-mile road is still the arterial link
that connects six Indian states.
1556 It was Akbar who introduced silver rupee of high purity, which became the
standard coin here and abroad. This marked the start of the monetisation of the
economy. He set up a system of land records and revenues. Since the bureaucracy
was also well paid, Akbar’s rule ushered in the first spate of conspicuous
consumption.
1599 East India Company : A bunch of seafarers formed Merchant Adventurers,
which soon renamed itself the East India Company. The Queen granted it exclusive
privileges to trade in the east and the East India Company headed towards India.
Soon, it started trading here and then put together a bunch of expatriates who
would kick off political domination. The rest, as they say, is history.

Source : Business World

EXTERNAL TRADE 15

difference in needs of people. But the as a medium of exchange, like shells,

difficulties of barter as a mode of conches, and even salt or specified
exchange were increasingly felt. It quantities of foodgrain. This was an
required double coincidence of wants improvement over the exchange
and possession of surplus which process.
created problems. Besides there was no (ii) Growth of bazaars : Since
common measure of value. It was Thus, people with surplus goods desired that
difficult to fix the exchange value of one others in need of those goods should be
commodity for another. Moreover, the easily identified, selected places were
absence of any medium of exchange decided for them to come together.
required physical transfer of goods Thus, in course of time, bazaars and
everytime exchange took place. ‘mandis’ developed as market places in
This involved trouble and villages. In this process, some people
inconvenience. For a certain period, emerged in these weekly bazaars as
these problems were solved by using traders or merchants to help others in
some commonly acceptable commodity exchanging goods conveniently.

Historical Events That Shaped Business

1609 First Factory: The MNCs start arriving with the Dutch and the English following
in Vasco de Gama’s wake. A British factory set up shop in Surat in 1612. Trade
booms, and the Industrial Revolution gets underway in British and Indian business
embraces the opportunity. Corporate India changes forever.
1757 Battle of Plassey: The first leveraged buyout of its kind, the East India
Company’s army and its council is to receive £ 2.75 lakh each, Calcutta’s Hindus
£ 2.2 lakh Europeans £ 5.50 lakh and Armenians £ 77000 if Lt-Colonel Robert
Cilve defeats Siraj-ud-daula. Superior tactics ensured that Clive won the day. For
the East India Company, this removed all barriers to consolidation of its powers
and India would remain a subsidiary for another century.
1834 Dwarkanath Tagore forms Carr Tagore and Company: Between 1834 and
1847, seventeen companies come up in Calcutta, mostly set up by people hailing
from non-business communities. New economic opportunities shake up for the
first time the equilibrium that has always existed between social class and
occupational choice. It is democratisation, round one.
1835 First Rupee: The East India Company introduces the rupee and brings about
unification of currency. Before this, there are some 1000 currencies in circulation.
Since these many currencies devalue frequently, there are no standard rates of
exchange and moneylenders charge arbitrary rates of interest. This hampers trade
and commerce. But the introduction of the East Indian rupee changes it all.

Source : Business World

16 BUSINESS STUDIES

(iii) Middle Ages, town economy work, weaving of fine textiles with
and emergence of money : During embroidery, fine gold and silver ware,
the middle ages (5th to 15th century AD) stone, ivory and wood carving and
the towns which were the seat of a other artistic handicrafts reached a
court or capital of a province started high state of excellence in towns.
attracting people from the villages. Metallic currency was introduced at
Artisans engaged in wire and tinsel this time by kings under the Royal seal

Development of Indian Business

1830-1870 Infrastructure : Business finds a platform with the formation of the

Bombay Chamber of Commerce & Industry in 1836. The Great Indian Peninsula
Railway start the first 21-mile railway line from Bombay to Thane. The Suez Canal
is inaugurated in 1869, reducing the distance between Britain and India by 5000
miles.
1854 Cowasjee Nanabhoy Davar, a Parsi, sets up the first textile mill, the Bombay
Spinning Mill. He imports technology from Lancashire and recoups costs in three
years. Davar’s success encourages others like Jamshet ji N.Tata, the founder of
the Tata Group, to jump into the fray.
1875-1920 Bombay Stock Exchange: Share brokers find a place under a tree to
meet at fixed hours and trade in shares. In 1875, the Bombay Stock Exchange is
set up. With industry firmly entrenched, a period of economic nationalism (1890-
1920) emerges. Lokmanya Tilak goes from village to village, asking farmers to
contribute a paisa to the Paisa Fund, the first mutual fund (used to fund local
entrepreneurs).
1911 Tisco set up with a plant capacity of 10000 ingots annually, the first Indian
steel company, the Tata Iron and Steel Company kicks off production. Jamshet
ji’s spending his time lobbying with the British to allow him to set up a steel mill.
And though Tata Steel comes up seven years after his death, it takes Indian industry
to new heights.
1914-18, 1939-45 The World Wars, Industry thrives due to fall in imports and
industrialisation powered by import substitution. The sales of Kasturbhai
Lalabhai’s Raipur Mills rise from Rs 25000 (1913) to Rs 4 lakh (1917). Most firms
do well during WWII except Scindia Steamship; 16 of its 19 steamers are
requisitioned for war effort.
1940 Sumati Morarjee becomes the first Indian woman to become Director on
the board of company. When her father-in-law, Narottam Morarjee, Head of
Narottam Morarjee and Company dies in 1926, she jockeys for power successfully
with the other partners.

Source : Business World

EXTERNAL TRADE 17

which circulated as money. This were also transformed due to the

facilitated trade and exchange to an invention of locomotives and
increasing extent between villages and other equipments including Bell’s
towns from 10th century onwards. telephone.
(iv) Trading across the seas : The (vi) Decline of cottage industries
discovery of sea routes by Columbus and handicrafts : Indian cottage
and Vasco de Gama led to an extension industries and handicrafts were
of business activities between far off adversely affected by the flow of textiles
countries. Indian handicrafts and goods and other machine made goods from
produced in cottage industries were abroad and the process of decay
readily sold in Asia and Egypt even in continued from 19th century onwards.
earlier times. With the opening of sea (vii) Growth of business : The
routes, European, traders extended British rule having been firmly
their range of activities in India established in India by the middle of
purchasing textiles, spices, precious the 19th century, industry and trade as
stones, etc., in large quantities. well as railway transport on modern
During the 16 th and 17 th lines started growing in India. Cotton
centuries, trading companies were and jute industry, coal mining and
formed in European countries to avail plantation industries (tea and coffee)
of the greater scope of trade across the led the way for factory industries to
seas and oceans. Among them, the follow. Because of the extension of
East India Company was granted a railways, engineering workshops and
charter by England for exclusive trade iron and brass foundries were
in India. As a result India became a established quite early. Over the years,
supplier of essential raw materials and trading and manufacturing activities
ready market for British products. were undertaken in a more organised
(v) Machine Age/Industrial and systematic way, and by the first
Revolution : Between 1760 and 1820, quarter of the 20 th century, modern
the methods of producing goods industrial establishments had come up
started changing fundamentally in the in different parts of India. The
technical sense first in England and enterprising spirit and pioneering
then in other European countries. The efforts of Indian business leaders laid
changes started with the invention of the foundation of large scale
mechanical methods of spinning and manufacture of iron and steel, cement,
weaving and the invention of steam chemical, automobile, shipbuilding,
power in 1776. The period which light and heavy engineering, minerals
followed is known as the Machine Age and metal products, besides rice mills,
and often referred to as the period of oil mills, sugar and textile industries
‘Industrial Revolution’. By the (cotton, silk, jute, woollen). The growth
beginning of the 19 th century, the of road transport, railways and
transport and communication systems waterways and the consequent
18 BUSINESS STUDIES

Landmarks in Indian Business

1947 Independence, India receives independence from British domination.

Until now it was one economic unit : At the time of indepence this was partitioned
and two nations India and Pakistan as two independent econonic units were
created. Many British business establisments withdraw from India leaving
space for Indian businessmen and public sector enterprises to participate on
a large scale.
1948 IFCI to provide avenues for raising funds to industry, the Centre sets up
the Industrial Finance Corporation of India. It’s the beginning of state intervention
in the creation of wealth. The Industrial Credit and Investment Corporation of
India is formed in 1955 to underwrite new issues. Over the years, other
development finance institutes are established to take up the slack in bank
financing of long-term industrial projects.
1961 Prakash Tandon becomes the first Indian Chairman of Hindustan Lever.
Tandon’s elevation indicates the growing importance of Indian mangers. Ajit Haksar
takes charge at ITC and the Indian management cadre doesn’t look back. Today,
MNCs like McKinsey and Company are headed by Indians.
1965-? India’s scientific and technological manpower heads for the land of
opportunity where universities seduce India’s best and the brightest with tip-dollar
scholarships and a better life. After the economic drain under British rule, this is
the biggest example of one-way capital flow out of the country. Decades later, people
like Vinod Khosla and Kanwal Rekhi, create a dominant presence in Sillicon Valley
and establish Indian supremacy in the knowledge of economy.

Source : Business World

development of towns and industrial most important segment of business

cities and trade centres contributed to activities. We thus, find now small
the growth of trade and related retail shops in cities, towns and rural
activities including banking, insurance areas as well as large stores and super
and warehousing, along with ports, bazaars in cities, besides small
harbours and dock facilities along the workshops and medium scale factories
eastern and western coasts of India. along with large manufacturing plants
Simultaneously, there has been like the integrated steel plants, heavy
expansion of economic activities in engineering, heavy electricals and
different forms of organisation, sole heavy chemical industries.
proprietorship, partnership, coopera- (viii) Growth of public and
tive societies, and joint Hindu family private enterprises after
business. But in terms of the amount independence : Since independence,
of capital invested, the company form the nature and scope of business
of organisation has developed as the enlarged in many ways. A number of
EXTERNAL TRADE 19

large scale industries were developed in banking, insurance, and financial

the public sector by the central and sectors. Private enterprises have also
state governments. These included developed on a large scale in trade,
integrated steel plants, heavy industry and service sectors covering a
engineering industries, exploration of wide range of consumer goods
oil and natural gas, and refining of fuel industries — cotton and synthetic
oil, capital goods industries — fabrics, soap, detergents, toiletry, skin-
machines tools, aluminum, cement, care products, processed food items,
locomotives, aircraft, shipping, ready made garments, drugs and
telecommunication equipments — medicines as well as durable consumer
besides dominant undertakings in the goods industries like automobiles,

Licensing and Liberalisation Era

1965-73 Licensing era: Indira Gandhi imprisons corporate India. The aim —
regulate private sector investments and give them a socialist orientation. The
attempt to direct investments to desirable industries binds businessmen in realms
of red tape. The MRTPC (1969) and draconian laws like Fera (1973) tackled the
symptoms, not the problem.

1977 First Reliance issue three days after Christmas the cult of retail shareholding
is born. The prospectus shows how its net fixed assets grew by 49 times in 10 years
and gross profits 28 times in nine years etc. the issue opens at Rs 12.25 per share.
In the process, a legend is born.

1986 Sam Pitroda PCOs calling all Indians, everywhere, black-on-yellow PCOs
connect rural areas to the rest of the country. The booths boost employment. As
Rajiv Gandhi’s chief technology advisor, Pitroda masterminds the transition to digital
switching systems. Pitroda’s telecom revolution is also an indication of how things
could change.

1991-99 Liberalisation and Nasdaq listings put an end to the country’s control regime
and integrates the country with the rest of the global economy. The changeover creates
a huge discontinuity with the past which coupled with the evolution of the knowledge
economy, kicks off the process of democratisation of capital. By end of the decade,
the transformation is almost complete in 1999; the Bangalore-head quartered Infosys
Technologies becomes the first Indian company to be listed on Nasdaq – the world’s
largest stock exchange for tech companies. Ranbaxy sells its developed-at-home drug
delivery system for a king’s ransom, an internet entrepreneur in India sells his four-
year-old company for a stunning sum of Rs 499 Crore.

Source : Business World

20 BUSINESS STUDIES

scooters, bikes, TV, washing machines, outlets. Multinational corporations on

refrigerators, air -conditioners, their own and through joint ventures
electrical and electronic gadgets for with Indian corporates have made
domestic use. In the service industries, business activities more diversified and
private sector participation has competitive.
increased fast in recent times, Along with the growth in volume of
particularly in road transport, domestic trade, India’s exports and
telecommunication, energy supply, imports have also registered
banking and insurance as also impressive growth in recent years due
financial services. to the liberal import-export policy of the
Besides, Indian enterprises, government. The value of exports have
foreign investment in industries — increased at an average rate of
automobiles, white goods, garments, 10 per cent per annum and imports at
computer engineering and fast food 13.2 per cent per annum during the
have widened the range of products nineties. However, the share of India
manufactured and their distribution in world trade is still very small.

SUMMARY

Economic activities: In every society people are found to undertake various

activities to satisfy their physical or material needs like food, clothing, and
other articles of use. These are known as economic activities. Sometimes people
also undertake or engage in certain activities for deriving psychological
satisfaction, as a social duty, or in discharging of a moral obligation. These are
non-economic activities. Economic activities may be pursued by individuals on
a small scale, or by groups of people on a large scale. When a person individually
or as member of any group is regularly engaged in any economic activity, it is
said to be his or her occupation.
Types of economic activities: Business refers to those economic activities
which are connected with the production or purchase and sale of goods or
supply of services with the main object of earning profit.
Profession includes those activities which require special knowledge and skill
to be applied by individuals in their occupation.
Employment refers to the occupation in which people work for others regularly
and get remunerated in return.
Concept of business: The term business is derived from the word busy. Business
may thus, be defined as any economic activity on a continuous basis which
involves production or purchase of goods for sale, transfer or exchange of goods,
or supply of services, at a profit.
EXTERNAL TRADE 21

Characteristics of business: Sale or exchange of goods and services for the

satisfaction of human needs; dealings in goods and services on a regular basis;
profit earning; uncertainty of return and business risk.
Objectives of business: These may be classified broadly into economic objectives
and social objectives.
(i) Economic objectives: Earning profit; market standing; innovation; and best
possible use of scarce resources.
(ii) Social objectives: Besides pursuing economic objectives, it is necessary
that business, in its own interest, should also pursue certain objectives
conforming to the expectations of society. These are supply of desired
quality of products; avoidance of anti-social or unfair trade practices;
generation of employment; welfare of employees; and community service.
Business risks: Business risks refer to the probability of inadequate profits or
even losses due to uncertainties or unexpected events, which are beyond control.
None of these events is easily predictable, nor can they be fully controlled by a
business unit. That is why business activities become risky. The more important
causes of business risks are — uncertainties relating to demand, unforeseen
losses, unexpected events, financial problems. To a large extent, business risks
arising out of certain factors are unavoidable. But losses arising out of certain
risks can be recovered if the risks are insured for which a small amount has to
be paid as premium for insurance.
Role of profit in business: It may be regarded as an essential objective of
business for various reasons. As a source of income for businessmen, profits
earned can also be a source of finance for expansion of business activities.
Profits indicate whether a business is being managed efficiently or not. Besides,
it is because of profits that taking risk becomes worthwhile in business. Finally,
with increasing profits over time a business earns reputation.
Evolution of business activities in India: Business activities as we find around
us today evolved over a long period of time since the dawn of civilisation. Let us
see how. Family centred village communities, in the early days of civilisation,
human life in India was family centred and village communities were by and
large self-sufficient. Exchange of goods for goods (barter) was required to satisfy
the difference in needs of people.
Growth of bazaars: Since people with surplus goods desired that others in
need of those goods should be easily identified, selected places were decided for
them to come together.
Middle ages, town economy and emergence of money: During the middle
ages (5th to 15th century AD) the towns which were the seat of a court or capital
of a province started attracting people from the villages. Metallic currency was
introduced at this time by Kings under the Royal seal which circulated as money.
Trading across the seas and oceans: The discovery of sea routes by Columbus
22 BUSINESS STUDIES

and Vasco de Gama led to an extension of business activities between far off
countries. During the 16th and 17th centuries, trading companies were formed
in European countries to avail of the greater scope of trade across the seas and
oceans.
Machine age/industrial revolution: Between 1760 and 1820, the methods of
producing goods started changing fundamentally in the technical sense first in
England and then in other European countries. The period which followed is
known as the Machine Age and often referred to as the period of Industrial
Revolution.
Decline of cottage industries and handicrafts: Indian cottage industries and
handicrafts were adversely affected.
Growth of modern industries, transport, banking and insurance: The British
rule having been firmly established in India by the middle of the 19th century,
industry and trade as well as railway transport on modern lines started growing
in India. The enterprising spirit and pioneering efforts of Indian business leaders
laid the foundation of large scale manufacture of iron and steel, cement,
chemical, auto mobile, ship-building, light and heavy engineering, minerals
and metal products. There has been expansion of economic activities in different
forms of organisation, sole proprietorship, partnership, cooperative societies,
and joint Hindu family business. But in terms of the amount of capital invested,
the company form of organisation has developed as the most important segment
of business activities.
Growth of public and private enterprises after independence: A number of
large scale industries were developed in the public sector by the central and
state governments. Private enterprises have also developed on a large scale in
trade, industry and service sectors covering a wide range of consumer goods
industries — cotton and synthetic fabrics, soap, detergents, toiletry, skin-care
products, processed food items, ready made garments, drugs and medicines as
well as durable consumer goods industries. In the service industries, private
sector participation has increased fast in recent times particularly in road
transport, telecommunication, energy supply, banking and insurance as also
financial services. Multinational corporations on their own and through joint
ventures with Indian corporates have made business activities more diversified
and competitive. Along with the growth in volume of domestic trade, India’s
exports and imports have also registered impressive growth in recent years due
to the liberal import-export policy of the government.

EXERCISES

Short Answer Type Questions

1. State the different types of economic activities.
EXTERNAL TRADE 23

2. Why is business considered an economic activity?

3. Explain the concept of business.
4. Why should a business pursue social objectives?
5. What is the role of profit in business?
6. What was the impact of the emergence of money on trade and business?
7. How has the discovery of sea routes facilitated trade?

Long Answer Type Questions

1. Explain the characteristics of business.
2. First earning profits the only objective of business? Discuss.
3. Explain the concept of business risk and its causes.
4. How did the growth of transport and banking contribute to the growth of
modern industries?
5. Discuss the role of the public and private enterprises in business after
independence.

Project Work
1. Find out from local business units the various objectives they pursue. Do
they actually pursue any social objectives? Try and make them aware of
other objectives.
2. Study any business unit (trading or manufacturing) and find out the kind
of risks they face in business. How do they overcome these risks?