14 Business Environment

7/30/2019 14 Business Environment

1/55

BBA (1.4) B. Com. (1.5)

Business Environment

Copy Right Reserved for Private use only

1


2/55

PAPER 1.5: BUSINESS ENVIRONMENT

Business environment Concept and significance Factors of environment and their influence on

business social and cultural environment Impact of socio cultural factors on business

Demographic trend-Structure and systems of Indian society-Caste and communal systems-Role of

social groups in business development.

Political environment and business-Relevance of political decisions to business Directive principles

of state policy Center State relations.

Economic environment and business- Role of economic systems in promoting business activities.

Kinds of business sectors and their places in economic systems.

Multinational corporations- Technological environment- Impact of technology on business-Choice ofappropriate technology Social responsibilities of business.

TEXT AND REFERENCE BOOKS

1. Essentials of business environment K. Aswathappa

2. Business and society- Lokananthan and Lakshmi Rathan

3. Economic environment of business M. Adikary.

4. Business and Government - Francis cherunilam.

5. Economic environment of Business Sampath mukerji.

6. Business environment and public policy Rogene A Buchholz

7. Indian Economy Ruddar Datt and K.P.N. Sundaram

2


3/55

CONTENTS

Sl. No. LESSONS Pg.No.

1. Business Environment Concept and significance 4

2. Factors of environment and their influence on business. 8

3. Social and cultural environment 11

4. Demographic trend 14

5. Structure and systems of Indian society. 17

6. Caste and communal systems. 20

7. Political environment and business 22

8. Directive Principles of State Policy 25

9. Center State relations 28

10. Economic environment and business 31

11. Economic systems and business 33

12. Business sectors and economic systems 37

13. Multi-national corporations 46

14. Technologies environment and business 49

15. Choice of appropriate technology 51

16. Social responsibilities of business. 53

3


4/55

LESSON 1BUSINESS EVNIRONMENT CONCEPT AND SIGNIFICANCE

The social life of man lies mainly in his interaction with the environment. The people, the material

resources, the climatic conditions or any other things around him constitute his environment. These

are important and un avoidable factors to him. Similarly for a business unit, it is very much necessary

to respond, understand and react with its environment for the survival in the market and businessgrowth.

Particularly the modern business world has become so dynamic and complex in nature. This is

because its environment is changing day by day. Any lacuna in understanding these changes will

result in failure and total withdrawal from the market due to the stiff competition. So, let us discussthe concept of business environment and highlight the significance of environment and its inter-

relation with business.

MEANING OF BUSINESS AND ENVIRONMENT

The term business is usually described as the organized efforts of an individual or a group inproducing and / or exchanging goods and services to satisfy needs and wants of the people. But nowthis term encircles (other than production and exchange of products) study on consumer behaviors,

brand positioning among competitive goods, sales promotion techniques market share and goodwill,

innovations through product research and so, on. Therefore, the environment study becomes anintegral part of business.

Every business organization exists admits of its challenging competitors, changing consumerattitudes, technological changes, varying economic trends, political policies and controls and many

other influencing factors. These surroundings are called as environment of business.

In the words of Arthur K. Weimer, Business environment encompasses the climate or set ofconditions-economic, social, political or institutional in which the business operations are on ducted

According to Willliam F. Gluceck, the environment means the economic, governmental or legal,market or competitive, supplier, technological, geographic and social settings monitored by the

business executives to determine opportunities and threats to their firms.

The renowned marketing scholar, Philip Kotler explains the organizations environment as the set of

interacting institutions and forces, that affect the organizations ability to serve its markets.

From the above conceptual descriptions we can summarize the following points.

1. The surrounding conditions or forces of business are known as its environment.

2. The social, political and economic settings of the society mainly constitute the businessenvironment.

3. The environment is dynamic and its changes influence the business decisions.

4. Study on environment will reveal the opportumities available to a business.5. The threats or challenges could be predicted from environment, so that the firm can be

prepared to meet them.

4


5/55

SIGNIFICANCE OF BUSINESS ENVIRONMENT

The business environment can be divided into internal and external environment or as the micro andmacro environment. These classifications are not final and airtight. It is divided into many types as

convenient to the analysts. The internal environment is the organizations internal climate such

climate such as machineries, technical know-how, skills of workers, supplies of raw material etc. So,they are controllable factors. Whereas the external environment is uncontrollable. This includes

political decisions, economic trend, socio-cultural factors, technological changes, competitive

strategies and so on. These uncontrollable factors make the business so turbulent and multi-dimensional. Therefore failure to understand them may result in un-repairable losses. So, the external

environment plays a significant role business decisions.

POLITICAL & LEGAL NATURAL & ECOLOGICAL ECONOMIC

CUSTOMERS WORKERS

TECHNOLOGICAL BUSINESS

INVESTORS

SUPPLIERSINTER-MEDIARIES

DEMOGRAPHIC

SOCIO CULTURAL COMPETITORS

INTERNATIONAL

The significance of the environmental factors can be clearly understood from the following

advantages, which are the results of environmental analysis.

1. DEMAND FORECASTING

A businessman can estimate the future demand for a product by analyzing demographic features,

competitors market share, consumer behaviour and their purchasing power and the general economic

and political conditions. This is the basic function before producing a product.

2. PRODUCT FEATURE

The attitude and preferences of consumers differ based on their socio-cultural back ground. Bystudying this, the desired features in a product can be finalized. Without such product research the

consumers may not be satisfied by that product.

5

Macro environment

MICRO ENVIRONMENT


6/55

3. BRAND POSITIONING

Every competing brand is placed in a particular position in the market. This is done through pricing

policy and distinct product features or quality. This position for a product is strategically planned to

gain a particular market share after considering the competitors strategies. For example, NIRMAwas priced one-forth price or SURF at the time of introduction and gained a major share.

4. PROMOTION STRATEGY

For the sales promotion techniques the knowledge of cultural environment is essential. The

advertisement themes, personal selling strategies and special campaigns require good response fromthe audience. Only if the attitudes and values of the people are understood the promotion efforts will

e successful. Many marketers have corrected their strategies after knowing the response from

consumers, and made effective. We can quote the examples of ad themes based on family relations,

that is why they are popular among people of Indian social set-up.

5. MEETING OUT THE COMPETITION

The manufacturer of a product of any nature has to keenly watch the major changes in science and

technology. There are many avenues to improve the performance of his product and to reduce cost

through new methods of production. He must at-least follow the competitors in this respect, failingwhich they will over take his product. Even a popular brand is often modified or improved to meet

out the tastes of consumers. Usually innovations, that are the new concepts, new products or new

methods of offering goods, gain greater preferences of consumers. Technology helps to createinnovative products.

6. FULFILLING LEGAL REQUIREMENT

There are many legislations passed in our country related to business units, and they should be

observed. For example the Acts regarding Factory workers, consumer protection, social security,

public welfare etc. are to be followed by businessmen. Todays business is encircled by a massiveweb of laws. That is why large firms employ legal experts as advisers. The failure to adhere legal

provisions will be met with penalty.

7. PLANNING THE INVESTMENT DECISION

The planning and policies of Government affect business in general. Some measures or programs ofGovernment are directly related to specified sectors of industries. The industrial policy, tax policy,

foreign trade policy and many controls on private business units are the important interventions ofGovernment to business decisions. The public spending of the government also provides facilities forindustrial and business development. By understanding all these aspects a businessman has to

carefully decide the investment of the future production.

8. ECONOMIC CONDITION AND COST ESTIMATES

The Standard of living of the people determines their purchasing power and consumption pattern. On

the other side the cost of factors of production will determine prices of goods. Therefore, by

6


7/55

understanding the price trend and economic climate, a businessman can estimate his cost and fix

prices. Now the international trade and global markets are also widening the business opportunities,

and also opening up for global competition. So cost-wise and quality wise efficiency is the need ofthe hour.

Thus by the above analysis we can conclude that the business units survive and grow by studying itsenvironment. It interacts with its surroundings by utilizing various sections of people ad favorable

conditions in the society. Also they contribute in turn, to the society by means of increasing theeconomic activities, and offering public welfare measures to show their social responsibility. So bothare inter-dependent and we can say that business without society has no roots and society without

business units has no fruits.

7


8/55

Lesson 2

FACTORS OF ENVIRONMENT AND THEIR INFLUENCE ON

BUSINESS

The environment of business is classified in different ways. Philip Kotler divides it into Microenvironment and macro environment as diagrammatically represented in the previous chapter. Here is

another classification given in the following figure.

ORGANIZATION ENVIRONMENT

(MANUFACTURING, FINANCE, MARKETING ETC. )

TASK ENVIRONMENT

(SUPPLIERS, CONSUMERS, INTERMEDIARIES ETC. )

COMPETITIVE ENVIRONMENT

(MARKET SHARE, PRICING STRATEGIES, INNOVATION ETC.)

PUBLIC ENVIRONMENT(MEDIA PUBLIC, INVESTORS, GOVT. LOCAL PUBLIC & OTHERS)

MACRO ENVIRONMENT

(NATURAL RESOURCES, ECONOMIC TREND, INTERNATIONAL, TRADE,SOCIAL EXPECTATIONS ETC)

These environmental factors can simply be grouped into sicio-cultural environment, economic

environment, political and legal environments, demographic, technological geographical or natural,

competitive and international environments. This will help to discuss these factors one by one.

1. SOCIO-CULTURAL ENVIRONMENT

A business can not exist without the contributions of society. To interact efficiently with the society,we have to know its cultural background and social practices. Because the behaviour and

expectations of the surrounding people are determined by this environment.

Our country follows traditional culture. It is transmitted through numerous generations to us. So we

have different set of social systems and practices. The customs, habits, ceremonies, attitudes, values,

beliefs, tastes and preferences etc., of or people are to be understood to take the right businessdecisions.

The reactions of people while playing the roles of workers, consumers, suppliers and others are to bestudied. Then only the positive relations with them could be developed by businessmen.

2. ECONOMIC ENVIRONMENT.

It means the total climate that affect the human activities related to production of wealth. We knowthat the basic economic activity is producing and exchanging commodities to satisfy the people. The

business process involves some inputs namely the factors of production. The cost and their

availability are the important economic factors, which will finally determine price of commodities.

8


9/55

On the other side the output of business is the goods or services that reach consumers. Here also the

economic phenomenon namely the purchasing power of people will determine the demand level.

There are also some general economic conditions that affect volume of trade domestically and in

foreign markets. Hence a businessman should analyze carefully the trend and changes in the

economy, to know his opportunities and challenges.

3. POLITICAL AND LEGAL ENVIRONMENT

This means and includes the various controls, programs and activities of the government. In the

mixed economy like India the role of government is considerable in promoting industries and

controlling private business enterprises.

In the economic planning the sources of funds and its allocation to various sectors are decided by the

govt. In the fiscal policy, government d3ecides the tax revenue, public expenditure and public debt.

That is, it reallocates the funds of the society. Moreover, the industrial development, assistance foragriculture, employment generation, public welfare measures etc. are made by the government. All

these activities affect business units directly or indirectly.

The government as the regulatory organ of the society, takes a number of control measures on the

business units. Such regulations include registration under the Acts, licensing, control on investment

and location, control on prices and trade practices and so, on. Much legislation for the welfare ofworkers, consumers and the public.

The governments policies on foreign exchanges, international trade, public sector industries, banking

regulations public utility services etc. indicate that the political climate has numerous influences onbusiness sector.

4. TECHNOLOGICAL ENVIRONMENT

This factor may be considered as a part of economic environment. But its impact on business and

industries is quite large. The technological changes helps business to grow by means of new andimproved goods, reduction in cost and variety in goods.

The term technology indicates macro level improvements in the method of production. Atechnological change in a country results in a total change of atmosphere in industry. For example,

electronic industry, computer industry, space research and satellites, resulted in mushroom growth of

industries and wide application of these facilities for the development of business.

Therefore, every unit tries to cope up with the technological changes, other wise it can not produce

improved goods to compete in the market. The consumers tastes and preferences are also changingfast. So, the scientific inventions, and the results of industrial research and development ( R & D ) areconverted into innovative products and services. We have to remember here, that some countries that

could imp[rove the technologies more effectively, have become economic giants in the world.

5. NATURAL ENVIRONMENT

The natural resources are the gifts to a country by which economic activities could be developed. Theminerals, materials and also the climate, coil conditions, rainfall etc., help in this progress. On the

9


10/55

other side, the people, especially the businessmen, should take care I preserving natural and

ecological balance of the earth.

There are many challenges to the natural environment, which will affect the society in the long run.

For example, air, water and atmospheric pollution, soil erosion, holes in ozone layer, green house

effect on sea levels, climatic disorders, acid-rains and so on. Finding solutions is not only the moralduty of the businessmen but also for their future business growth.

6. COMPETITIVE AND GLOBAL ENVIRONMENT

To meet out the competition is the routine task for business. This is because the producers of goods

and services become unlimited. Hence close watch on the competitive strategies on prices, improvedproducts and promotion appeals will help a businessman to take right decisions. This is so important,

as it is a question of survival and growth in the market.

The globalization concept has opened up the market for international competition as well asopportunities. Now, our businessmen have to face the challenges from the multinational corporations

(MNCs) and trans national corporations, other than the local competitors. The technology and

resources of MNCs are very much improved and our businessmen should increase their ability up-tothe international standard.

The merit claimed for globalization is that our share in the world trade would increase due tomultilateral agreements. For this, we have to increase our productivity. Also there is a danger of

excess reliance of developing nations on the developed countries.

Thus leading the competitors or following them is unavoidable for business, challenging withinternational standards will also become a part of this game in the near future.

10


11/55

LESSON 3

SOCIAL AND CULTURAL ENVIRONMENT

The social environment means the forces arising out of the structure and characteristics of the society.

These forces vary from society to society. They are the results of interactions of the people. Ancientpeople started living as groups and they transmitted their experiences, beliefs and habits to their

generations. This process resulted as culture. Particularly traditional countries has rich culturalheritage. It is reflected in the attitudes and behaviour of people. Hence the social forces arise out of

the particular cultural background of the society and that is why they are called as socio culturalenvironment.

The term culture is defined as the art of living applicable to a group of people. It is also describedas the intellectual development made or the physical and mental training received in the course of

ages. That is, culture is composed of teachings of our forefathers, passed through so many

generations.

E.B. Taylor defines culture as The complex whole of civilasation that includes knowledge, beliefs,

art, morals, law, custom and other capabilities and habits acquired by man as a member of society.According to Francis Merill, it is the characteristically human product of social interaction and the

total repertoire of human action, which is socially transmitted.

Thus culture is not developed by an individual but by social inheritance. It is not static. It progressesor declines with or without contact with other cultures. By trial and error method the society earns

experiences and better practices of other cultures are also adopted in the process of civilization, so

culture becomes a composite package of experiences. Some countries like Egypt have been convertedinto a society of entirely new culture foregetting their ancient civilizations. In case of countries like

India and China the cultural link continues without break.

As we have discussed, socio-cultural forces of India are traditional and distinct. Let us see some oftheir characteristic features.

FEATURES OF INDIAN CULTURE

1. Indian cultural history is very ancient. A great civilization flourished in India when Rome

and Greece did not exist, and when people in Europe were still in the hunting stage. Thehistory of India dates back to many centuries before the birth of Christ. So our society has

a traditional culture consuming the essence of good value from foreign cultures, when

they migrated to India or invaded our lands. As descried by Jawaharlal Nehru thisabsorption and synthesis made India a unique mosaic of cultures.

2. Our culture is remarkable for its spirit of tolerance. The geographical features, whichhelped the evolution of the composite culture of our country, also helped the developmentof sprit of tolerance. The existence of various types of people in the country created a

spirit of tolerance of differences among them. So we uphold the noble principle of Unity

in diversity we all are integrated in-spite of the varied physical features, different

climates, and diversified racial, religious and linguistic differences.3. Role of Hindu religion in he development of our culture in noteworthy. Max Muller

pointed out the feature of Indian Society as that there is an unbroken continuity between

the most modern and the most ancient phases of Hindu thought extending over more thanthousand years. In strict sense, the Hindu religion is the collection of cultural values of

11


12/55

the society. It is not evolved by anyone as that of all other religions. Hence the Hindu

religious principles and our cultural set-up were developed side by side.

4. In Indian culture, there are plenty of moral and spiritual values. They speak the values ofsimple and self-contented life. They were preached through Vedas and epics, by the kings

and saints and in the centers of learning like Nalanda, Banaras, Taxila, Madhura, Kanchi

etc.5. There is an cultural uniformity found in the lives of different sects of people in our

country. The philosophies, literatures, conventions, ceremonies, festivals of various partsof India reflect the same basic principles. Idols worship is common but in different forms.The moral and cultural values taught thro the stories and epics prevalent in our society

are almost the same.

6. The structure and characteristics of or social groups and family system are unique. The

Aryan society was divided originally on the basis of division of labor such as Brahamnas,Kshatriyas, Vishyas and Sudras. Later it was made as by birth by selfish people and

called as castes. Vast differences including untouchability were created among the caste

groups subsequently. In the course of time many superstitious beliefs erupt into ourculture. The joint family system, restrictions to women and male-domination, importance

to marriages and ritual ceremonies, etc., become the distinct features of our socio-cultural

system.

INFLUENCE OF SOCIO-CULTURAL FACTORS ON BUSINESSThrough the social and cultural aspects do not influence the business directly; many business policies

and decisions are taken by thoroughly understanding the socio-cultural background of the people.

This is because; based on the culture a particular group of people behave and react in a particular

way. Here are some instances.

a) In estimating the demand for a product the consumer behaviour and their consumption

pattern are to be understood apart from their purchasing power. Some latent needs of

people, if understood properly, can be converted into demand. For example someproducts sold in sachets get good response due to the convenience and low cost.

b) The product features are designed by understanding the cultural background ofconsumers. The tastes and preference differ due to this aspect. For instances, products

containing vegetable fats than animal fats are preferred by some groups, natural

ingredients than chemical or artifical goods, are preferred by somebody, the food-stuffs also vary consumed by different groups.

c) The sales promotion techniques based on the understanding of cultural values of

people usually become successful. The appeals are selected best suited to the attitude

of people. We could see a number or advertisements based on the affection andimportance of family relationships.

d) In developing human relations with workers, suppliers, middlemen and the public, it isnecessary to understand the culture and mental make-ups of those people. For exampleworkers in different regions behave differently. If this is understood conflicts with

workers may be reduced.

e) The trade practices and services are designed based on the customs and habits of thepeople. This includes holidays, (Fridays, instead of Sundays in Muslim areas) working

hours, consumer service, sales retail-outlets, demonstrations etc.

f) In introducing varieties, improvements and innovations in products, care should be

taken to understand the social characteristics of people. Many products in cosmetics

12


13/55

failed in Indian markets. We can also quote the hesitated acceptance of electric

appliances and gas stoves in rural markets.

g) The general attitude of people towards consumption, savigs and investment patternsalso affect the overall business growth. Indian people usually dont prefer use and

throw goods. They prefer investing in gold than in shares and bonds.

Thus, as a unit of the society, the business can not alienate itself from the society to gain and grow.

Also the businessmen need to satisfy the expectations of the society.

13


14/55

LESSON 4

DEMOGRAPHIC TREND

The population of a country serves as the human resources in the economic development. Also people

are the ends in economic activities. Therefore study of demography becomes necessary for the rulers,

economists and businessmen.

The term Demography means the study of population characteristics. It is mainly the physical

phenomenon, whereas the culture is the psychological phenomenon. This stydy deals with structureand composition, distribution, rate of growth and other feature of population. It becomes so important

in a populous country like India. We are the second largest in the world in population and we have to

know the trend to plan for the future prospects and problems of the business.

CHARACTERISTICS OF DEMOGRAPHIC PATTERN IN INDIA

1. SIZE AND GROWTH OF POPULATION

Our country has 2.4% of the total land area of the world but has to support about 15% of theworlds population. At present our population is nearing 100 crores and it may overtake Chinasfirst place if we fail to control it. Its growth rate was around 1% annually till 1951. Then it

increased to 2% in the recent decades.

In 1911 the population was 251 million and we added 100 million in the next 40 years. From

1951 to 1991 this number increased by 500 million and reached 846 million, in 1991 (UN

estimates it as 975.8 million in 1998)

2. BIRTH RATE AND DEATH RATE

The growth rate is the function of birth and death rate. The birth rate increased due to the earlymarriages and the long reproductive stage of the Indian couples. Whereas the death rate is

controlled due to medical and health measures. The infant mortaility rate (death) has considerably

been lowered.

Decade Birth rate Death rate

1901 10 49.2% 42.6%

1951 60 41.7% 22.8%1981 90 32.5% 11.4%

The annual growth rate at present is slightly lower than 2.11% whereas in 1981 it was 2.46%.

3. SEX COMPOSITION

The ratio of male population is to female population is almost adverse to female in the average. Butin Kerla and Dadra nagar Haveli the ration is in favour of female population. It is important for a

businessman to know this ratio and the number of males and females to calculate demand of products

suitable for the particular sex.

14


15/55

CENSUS YEAR No. FEMALES/1000 MALES

1901 9721931 950

1961 941

1981 9341991 927

Steps are taken to check the maternal mortality (death of women during childbirth) and femaleinfanticides to correct this trend adverse to females.

4. AGE STRUCTURE

More than half of the countrys population (49%) belongs to juvenile group i.e. below 19 years of

age. The people of 20-30 years constitute 15% and middle aged are (30-50 years) about 30%. The

aged people above 60 years are about 6%. So the working group constitutes about 45-46%. Thesedata are useful in calculating demand.

5. LIFE EXPECTANCY

The average life span of the people in a country is known as the life expectancy. It was very low in

India in 1901, just 21 years and substantially increased to 54.7 years in 1981. In the 1991 census thisincreased to 60 years. (It is 62.8 years as on 1994).

This was achieved through increased medical facilities. However it is still very low compared to the

advanced countries.

6. RURAL URBAN RATIO

Due to industrialization and urbanization the rural mass slowly migrate to towns seekingemployment. This could be understood from the data tht shows; in 1971, 80:20 was the rural urban

ration; in 1981 it was 76:24 and in 1991 it was 74:26. This information helps planning the marketingefforts for the towns and separately for villages.

7. DENSITY OF POPULATION

This is the number of persons living in on Sq. Km area. Naturally towns have more density than

Villages. The average density in India in 1971 was 177 person per Sq. Km. compared to 1951 when it

was 117 only. In the year 1981 it went upto 216 and in 1991 it is 267.

In Ladakh (Jammu & Kashmir) the density of population is just 2 persons per sq. km. nd it is 1000persons in Trivandrum. In 1991 census west Bengal has 767 persons, Kerala has 749, Pondchery has1642, Chandigarh has 5632 and Delhi has 6352, Andaman has lowest of 34 and J&K has 76 persons

per sq. km.

Apart from the above factors the literacy level, standard of living, employment pattern etc., are

analysed under study of demographic pattern. In 1991 census he General literacy level was 52.1%.

Among males it was 63.8% and among females 39.1% only. In 1901-1931 literate was only 5% to

10%.

15


16/55

As per 1991 census 65% of population is engaged in agriculture and mining (In Advanced countries it

is 2 to 5% only), 14% in factories and 21% in service sector.

The large population provides a potential market for goods and the foreign companies are also

interested to utilize this. But increasing population is a challenge to our government as it has to planfor the provision of employment, education, sanitation, housing and all other facilities. Therefore

Government of India has developed a national population policy, which provides for

Rising the age of marriage to 18 years for woman and 21 years for men.

Raising the monitory compensation for permanent family planning measures.

Increasing the propaganda to educate people.

Leaving the compulsory sterilization to the option of Sttes and increasing group incentives to

medical professionals and local bodies.

16


17/55

LESSON 5

STRUCTURE AND SYSTEMS OF INDIAN SOCIETY

Indian society possesses and organized civic life right from the days of the Indus valley culture to the

present day. The early Indian society has various divisions and the harmonious functioning of thesedivisions was possible as the life of the people was governed by Dharmshastras, the work of great

sages. But these codes of ethics later created wide discriminations among Aryans and non-Aryans.When the number of occupations in the society multiplied, and the castes were determined by birth

the dominating and suppressed groups and treated as slaves [panchamas].These people did not haveany civil right. The sudras among the Aryans society were also treated much inferior and they had to

serve the other superior communities.

The Aryan and non-aryan races mingled with each other and become a mixed group; also there are

many foreign invaders and migrators mingled with these groups. Now no single race could be

detected from our society. Buddhism, Jainism and Sikhism originated form India and had contributedmany reforms in the Varnasrams Dharms. Many superstitious rituals and beliefs were seriously

opposed by Buddha and Mahavira. The British rule in India, which lasted for about two countries

also, provided its contributions in reforming Indian social systems. Like this our society haveabsorbed and assimilated the best available in other cultures.

CLASSIFICATIONS OF OUR SOCIETY

1. LINGUISTIC GROUPS

Indian society is divided into many groups based on religions, castes and language. The linguistic

study classifies the lingual groups into four based on the origins of presently spoken languages. Theyare

1. Indo-Aryan

2. Dravidian

3. Austro-Asiatic and4. Tibeto-Burman.

The four Dravidian languates are Tamil, Telugu, Malayalam and Kannadam. Sanskrit was the

original Aryan language, which is not in vogue now. This language took the from of Hindi and then

developed to many forms as Assamese, Bengali, Gujarathi, Marathi, Oriya, Punjabi, and Sindhi. The

Urdu language was used by Muslim relers which is the mixed form of Persian, Arabic and Turkish.There are about 179 languages spoken in India and also 544 dialects [modified forms of a language

but without grammar and literature. The following table shows the position of languages as in 1995.

Mother tongue Speakers [in millions] Mother tongue Speakers [in millions]

Hindi 437 Telugu 74Gujarathi 41 Bengali 200

Malayalam 35 Marathi 70

Kannada 44 Tamil 71

Oriya 32 Urdu 102Punjabi 95 Nepali 16

Assam 22 Sindhi 18

There are other languages like Kashmiri, Santali etc., spoken by more than four million speakers.

17


18/55

2. RELIGIOUS GROUPS

Regarding the religious groups in India, the Hindu religion forms the majority. The religioustolerance is the peculiar feature of out society and that is why India could emerge as a secular state.

All the religious groups co-operate with each other and live peacefully despite some religions

conflicts. The major religions in India are given below with their share in the total population (as per1991 census).

Total Population 100.00

Hindus 82.72

Muslim 11.21

Christians 2.60Sikhs 1.89

Buddhists 0.70

Jains 0.47Others 0.41

3. CASTE GROUPS

The other important class of the Indian society namely, the caste groups are discussed in detail in the

following chapter.

The people forming groups among themselves took part in he social and economic activities. We

could see many examples for the business or occupation developed by a particular lingual, religious

or caste group. This becomes possible by the mutual help and close co-ordination and control withinthe group members. This also acts as s means of social security.

To quote some instances the Christian groups run man hospitals and educational institutions, the

Muslim in leather processing and hardwares the Sourashtras in handloom and the Marwaris in pawn-broker business.

SYSTEMS OF OUR SOCIETY

The joint-family system, caste, system, marriage system, traditional occupation system and the

religious oriented ethical system are considered as the most common social systems of India. They

reflect our art of living, and our people attach more weightage in maintaining these systems andvalues.

In the joint-family system our people find it more convenient in running agricultural farms orbusiness and it is considered as prestige symbol in the society. The sons after marriage live with their

parents and with their children or even their grand children. Mutual co-operation and patienceprovide mutual benefit in this system. But this system is weaning out now a days due to changedoccupational structure.

Marriage system and its related rituals and ceremonies are considered as important social aspects.High standards are prescribed for women and they have to be get married at the early stage. Their life

is mostly dependent on men. Also our people are expected to give respect for elders, to follow

spiritual ideas, to show nepotism [favour or preference] to their relatives, and to adhere fatherly

18


19/55

affection and respect to their employers. Traditional occupations took important role till the recent

past. As this system was insisted by birth based on castes, people attach low dignity to manual labour.

All these features of our social structure and systems interplay with each other to form our social-

cultural set up. They are also modified from time to time along with economic and technological

developments. This may be understood from improved status of women through education andemployment, reservations for suppressed classes, reforms in ceremonies and so on.

IMPACT OF SOCIAL SYSTEMS ON BUSINESS

The peculiar social system of India has its impact on business as pointed out below.

1. The trade and employment opportunities re given to family members and own caste groupmembers. This affects balanced economic development of the country. This may affect the

productivity also, as the merit is not the main consideration.

2. The seniors claim respect irrespective of their talents. Here the juniors are discouraged tocontribute to business development. This is so significant in joint-families.

3. The womens role in economic development is underestimated, while they constitute fifty

percent of population. Their skills are yet to be utilized in many fields.4. Due to the impact of feudal setup the employers expect greater respect and intimacy from

employees which is not suitable for the scientific management approach.

5. The manual labourers are not respected and they are paid very low. This the result ofVarnasrama Dharma. Hence many educated youth desitate to do physical works.

6. People spend a lot of money on unproductive ceremonies. This takes the whole lot of their

life-time savings. Hence, they could not spend on necessary & convenient goods and

hesitate to invest their saving in business.7. The people are more sensitive than rational. So they get emotional easily and involve in

inter-caste or inter-religious clashes. Out off superstitious beliefs the hesitate to get

education and to know their role in economic development.

19


20/55

LESSON 6

CASTE AND COMMUNAL SYSTEMS

Caste ad communal systems are ancient and deeply rooted in Indian society. The communalism and

casteism become the great hindrances to the democracy and economy of the country. Despiteindustrialization and urbanization these communal and caste systems play their role in or society esp.,

in marriages and diet habits. By this system people are closely knitted but their emotions are wronglyexploited by selfish politicians and communal leaders.

Communal groups are based on religions. This is a dominant factor in minority religions. Some

extremists in these groups develop communal clashes and tensions. Also in he majority religious

groups, some may stimulate violence on minorities when they give up the traditional sprit oftolerance.

Disparities among caste groups, untouchbility, and other anti-social and anti-human practices arespread by casteism. Caste is defined by Dr. Gokhale as Varna and Jati which mean complexion

and birth. Invasions of foreign religions and spread of new religions within our country made the

castes more regid. It gives some social security and at the same time was use3d by upper castegroups, to exploit lower groups. There are as many as 3000 castes in India. No other country has such

micro classification. This helps to uphold traditional values and at the same time they develop social

evils and superstitions, and hence affects development.

THE ILL-EFFECTS OF CASTE SYSTEM INCLUDE

1. Caste prejudices and feuds which lead the society to disunity affect national integration.2. Caste decided by birth, decreases the human dignity and so it is undesirable.

3. Caste system checks the free association with other groups and with foreigners. As a result

people are reluctant to accept changes and modern knowledge.

4. Un-touchability and exploitation are the chief evil effects of caste system. They are strictlyanti-democratic.

5. Communalism and casteism are unscientific practice. The clashes among people very

much affect our country.

The role of caste system in business development could be observed from the Indian history. Though

this role is not much suitable in the modern days the caste system was used in the following ways:

1. Division of labour: A particular group in the society concentrated in the development of a

particular occupation or trade. This helped smooth functioning of the society.2. Traditional training: The group members are trained from the child-hood in a particular

trade. It gives social security and development of skills.3. Competition is avoided: The same group members are involved in similar lines ofbusiness. By maintaining trade secrets, unhealthy competitions are avoided.

4. Sprit of cooperation: The business organization run by caste groups claim that it develops

cooperation among members and a sense of belongingness-we can quote examples of

trade or business developed by some caste groups. The Chettiars in banking, Nadars ingroceries, Valayars in constructions, Aasaris in jewel making and so on.

20


21/55

CASTE SYSTEM IN MODERN SOCIETY

It is claimed that the traditional caste system has been considerably altered on account ofindustrialization, urbanization, scientific education, information network, social awakening, new

legislations and political regulation. However our rural social structure makes the caste system

survive and it continued to prosper as long as there is lack of education and awareness among themasses. The influence of caste in politics is noticeable during the elections. The role of government

and social service originations is to be enlarged to educate the evils of the caste system.

21


22/55

LESSON 7

POLITICAL ENVIRONMENT AND BUSINESS

Political environment is one of the important and inevital forces for a business. It influences day

today decisions and is mostly uncontrollable. Political environment means the set of activities of thegovernment which include plans policies, programs and controls which directly or indirectly

intervene the business.

The government is the regulatory organ of the society. Therefore it interferes especially in a mixedeconomy like ours, in the business activities. It has to ensure optimum utilization of national

resources, maintaining conducive and stable economic climate, promoting business and industries,

controlling the administration ad trade practices of business and implementation of social welfaremeasures.

Political environment is much related to legal environment also and they affect business as statedbelow.

Every manager is encircled by massive web of laws, commission reports, official regulations and ourdecisions. Some of them are to protect labourers, consumers or general public. Some are to regulate

contractual rights and property rights. Some others are to regulate management affairs, trade

practices, utilization of foreign exchange reserves and so on. The managers are expected to know the

legal restrictions and requirements connected with their actions. That is why they have legal expertsclose at their hands. They should know all the political regulations and should also predict future

government actions. The managers could not control these political actions but they can represent and

sometimes influence on government decisions (that is called lobbying).

Political environment is very much important in out country. We follow socialistic pattern and mixed

economy and for this the Govt. imposes many restrictions over the private sector. These controls

affect the interest of private business people but on the other hand avoid concentration of economicpower among few individuals and ensure equal distribution of wealth.

Government regulation on private enterprises is exercised with a view to directin the economymaximum social good in this socialistic pattern of society. Our political setup allows private sector to

attain repid economic growth and at the same time regulated it to reduce inequality of income and

concentration of economic resources, in the society.

Political intervention in private business in enforced in India in the following ways:

1. ECONOMIC CONTROL MEASURES

The planning commission headed by the Prime Minister f India prepares Five Year Plans to utilizethe resource allocation more effectively. The economic activities are also planned by the NationalDevelopment council (NDC). The general economic conditions in he country are monitored by the

government agencies.

The Import ad Export policy of the Govt. is affecting the production and marketing decisions of hebusiness units. Also the foreign investment in Indian business is allowed by our Govt., in this

globalization era.

22


23/55

2. INDIRECT CONTROL MEASURES

The Govt., can indirectly stimulate or restrict business activities. For example, the Monetary policydetermines the volume of money in circulation and the bank rate that will affect capital availability to

business. The Fiscal policy, namely Taxation and public expenditure (Budget) and public debt,

affects the level of business activities. Govt. may also provide financial and physical incentives orpenalties t promote/control a business. Control on capital issues, stock exchange dealing and

money/capital markets is another important measure to regulate business investment.

The following categories denote various types of direct regulatory measures.

3. INDUSTRIAL REGULATIONS

The Industrial policy resolution of the Govt. is enforced to allow private business house into selected

industries. It further regulates investment, location, size and expansion of industrial units. The

Industrial Licensing policy is also an effective control for this purpose. (e.g. According to he presentpolicy a new industry cannot be started in a city having a population of 5 lakhs or more.

4. CONTROL ON TRADE PRACTICES

The unfair trade practices of business are restricted by MRTP Act t protect public. The Foreign

Exchange regulations Act Controls the utilization of foreign exchange reserves. There are many Actsfor Prevention of Black-marketing, supplies of essential commodities, prevention of smuggling,

Adulteration etc.

5. LABOUR LEGISLATIONS

The Gov. regulates business in order to safeguard the interests of workers also. For example the

Factories Act, Industrial. Disputes Act, Workmen Compensation Act, ESI (Employees State

Insurance) Act, etc. to promote working conditions, employer-employee relations and loabur welfare.

6. REGULATION OF COMPANY MANAGEMENT

The companies Act specially regulates he compulsory registration of companies, and the procedures

and functioning of company management. This Act protects the rights of share holders and

creditors.

7. PRICE AND DISTRIBUTION CONTROLS

The government ensures maintenance of stable and reasonable prices for essential commoditiesthrough price ceilings, administered pricing (cement, steel etc.,) and dual pricing (sugar, rice) The

government also procure some commodities (i.e. levy) and distribute them to the needy people(Public Distribution System) ad permit system helps either to move commodities to the scarce areasor to check unnecessary flow of commodities.

8. CONSUMER PROTECTION CONTROLS

Govt. ensures prevention of hoarding, adulteration and artificial scarcity by specific Acts. The

Consumes Protection Act, and other legislations protect consumers from suppliers unfair practices.

23


24/55

The co-operative to realize their rights. Govt. also ensures that consumers are adequately informed

about weight, contents, price, date of expiry etc. about the goods.

9. NATIONALIZATION

Govt. undertakes he management and ownership of business units when required to serve the public.For example banks were nationalized (14 banks in 1969 and 6 in 1980) to serve the public. LIC,

Railways and a part of road transport were also nationalized. Many sick units were undertaken byGovt. to protect workers. The public sector business units serve for the public and create healthycompetition with private sector and also fulfil social objectives of Govt.

10. CONTROL ON SPECIAL ACTIVITIES

The government is regulation to check some gambling activities on shares and commodities, forward

contrasts etc. to protect the public from inflationary pressure. Form the above discussion we can

understand the close relationship of political forces with the business units.

24


25/55

LESSON 8

DIRECTIVE PRINCIPLES OF STATE POLICY

The constitution of India adopted in January 26, 1950 contains the Directive principles of statepolicy. The constitution in any country is known s the body of rules which allocates various powers

of government has over the people.

The Constitution of our country proclaims the sovereignty of the people in its preamble which says.

We the people if India, having solemnly resolved to constitute India into a sovereign Socialist,

Democratic Republic

The constitution provides fundamental rights to the citizens and later the fundamental duties were

also incorporated. Our constitution defines the composition and the powers of the cabinet, theparliament and the courts of law. For the functioning of the government and the legislature in making

public policies, there are also some guidelines given in our constitution. They are known as

Directive Principles of state policy.

It shall be the duty of the government and legislators to apply these principles in making laws. More

over they are the codes of conduct for the administrators while they discharge their responsibilities asagents of sovereign power of the nation. Although these directives or guidelines are not justifiable in

the courts of law, the judiciary may interpret the law based on the sprit of these principles.

The directive principles of state policy are provided in sixteen articles of the constitution from article38 to 51. Those directions are significant to the socio-economics field and are given below.

1. The State (rulers) shall strive to promote welfare of the people by securing and protecting

as effectively as it may, a social order in which justice, social, economic and political shallinform all the institutions of the national life.

2. The State shall in particular strive to minimize the in-equalities in income and endeavourto eliminate in-equalities in status, facilities and opportunities, not only among individuals

but also amongst groups of people residing in different areas or engaged in different

vocations.

3. The state shall, in particular, direct its policy towards securing-

i. That the citizens, men and women equally, have the right to an adequate means of

livelihood.ii. That the ownership and control of the material resource of the community are so

distributed as best to subserve the common hood;iii. That the operation of the economic system does not result in the concentration of

wealth and means of production to the common detriment;

iv. That there is equal pay for equal work for both men and women;

v. That the health and strength of workers, men and women, and the tender age ofchildren are not abused and that citizens are not forced by economic necessity to enter

a vocation unsuited to their age or strength; and

25


26/55

vi. Those children are given opportunities and facilities to develop in a healthy manner

and in conditions of freedom and dignity and that childhood and youth are protected

against moral and material abandonment (Article 39).

4. The state shall secure that the operation of the legal system promotes justice, on a basis of

equal opportunity, and shall, in particular provide for legal aid, by suitable legislation orschemes or in any other way, to ensure that opportunities for securing justice are not

denied to any citizen by reason of economic or other disabilities (Article 39-A)5. The state shall take steps to organize village panchayats and endow them with such

powers and authority as may be necessary to enable them to function as units of self-

governments (Article 40)

6. The state, within the limits of its economic capacity and development, make effective

provision for securing the right to work, to education and to public assistance in cases ofunemployment, old age, sickness and disablement, and in other cases of under served want

(Article 41)

7. The state shall make provision for securing just and humane conditions of work and formaternity relief (Article 42)

8. The state shall endeavour to secure, y suitable legislation or economic organization or in

any other way, to all workers, agricultural, industrial or otherwise, a living wage,conditions of work ensuring a decent standard of life and full enjoyment of leisure and

social and cultural opportunities and, in particular, the State shall endeavour to promote

cottage industries on an individual or co-operative basis in rural areas.9. The State shall take steps, by suitable legislation or in any other way, to secure the

participation of workers in the management of undertakings, establishments or other

orgnisations engaged I any industry.

10. The state shall promote with special care the educational and economic interests of theweaker sections of the people, and in particular, of the Scheduled Castes and the

Scheduled Tribes, and shall protect them from social injustice and all forms of

exploitation.

11. The state shall regard the raising of the level of nutrition and the standard of living of itspeople and the improvement of public health as among its primary duties and, in

particular, the state shall endeavour to bring about prohibition of the consumption, exceptfor medicinal purposes, of intoxicating drinks and of drugs which are injurious to health.

12. The State shall endevavour to organize agriculture and animal jusbandry on modern and

scientific lines and shall, in particular, take steps for preserving and improving the breeds,

and prohibiting the slaughter of cows and calves and other milch and draught cattle.13. The state shall endeavour to protect and improve the environment and to safeguard the

forest and wild life of the country. Added to article 38 a new clause contains a directive to

strive minimize the in-equalities in status, facilities and opportunities. The 42nd

amendment directs the state to take steps for securing workers participation in

management.

It is pointed out already that these directives cannot be inforced by courts like that of fundamental

rights. But it is declared by he then P.M., Jawaharlal Nehru that the fundamental rights should

subserve he directive principles. This is supported by the argument that the existence of men in thestate comes first then there can be fundamental rights.

There fore the directives are the ideological guidelines for any social and economic policy and

legislations and they enshrine the basis for the realization of principals of which the states in India

26


27/55

stands. For instance some of the directives relate to the free and compulsory education for all children

up to the age of fifteen; separation of the judiciary from the executive; protection of national

monuments; promotion of equal opportunities; provision of legal aid; promotion of internationalpeace and security an so on.

The founding fathers of our constitution have anticipated all possible evils such as concentration ofwealth and the means of production in hands of a few persons , gross inequalities of income, child

labour, exploitation of weaker sections and consumption of intoxication drinks that might creep intothe society. In Directive principles they have suggested the guidelines for correcting the evils.

Thus these Directives provide ample scope for the regulatory role, the promotional role, the

entrepreneurial role and the planning role of the government. That is why in 1954 it was amended and

the objective of or socio-economic policy was described as the Socialistic pattern of society. Thisresulted in nationalization of Railways, industries, insurance and banks etc.

27


28/55

LESSON 9

CENTER STATE RELATIONS

The constitution of a country provides for the government to exercise authority over a territory. For

better control over the large territory it if constituted of smaller units. The relationship between thecentral government having jurisdiction over the territory and the smaller units namely states may be

unitary or federal. In unitary form, the states are subordinates where as in federal form they arecoordinates to the central government. Another form is confederation where the central is a

subordinate to regional government.

Our constitution provides for a federal system-the Central Government as the unifying force and the

State Governments as its coordinates. The division of powers between these two forms are providedin the constitution and also decided by the tradition. At present we have twenty-five states and they

are regionally divided based on languages spoken, for the sake of administrative convenience.

The federal system involves the setting up of dual governments and division of powers. The strength

and success of the system depends upon the maximum of cooperation and coordination between the

two powers. Hence the Centre State relations assumed greater importance and discussion. Theirrelations reflect in the distribution of powers in the legislative, executive or administrative and

financial spheres. These powers are provided in the constitution.

1. LEGISLATIVE RELATIONS BETWEEN THE UNION AND THE STATES

Our Constitution, under the system of Federation, provide for he division of powers, between he

central and state governments. The other salient feature of our constitution is that it provides forsetting up of a separate judiciary, the Supreme Court which interprets the constitution.

The Constitution divides the subjects into three lists the union list, the state list and the concurrent

list. The union list contains 97 topics including Defense, External Affairs, currency a coinage, postand telegraph, commutation, Railways, Insurance, war and peace, Banking, telephones, broadcasting,

foreign loans etc., the union parliament has exclusive right to make laws on these subjects.

The concurrent list contains 47 subjects for example power, civil procedures, criminal laws,

economic and Social planning, Education, Marriage and Divorce, Newspapers and Press, Statistics

and Registrations of births and deaths, Factories, Price Control, Legal Medical and other professions,food stuffs etc., for these subjects both Union Parliament and the State Legislative Assemblies can

frame laws. But incase of contradiction of laws of these two systems, the laws of Parliament in final.

The State list contains 66 subjects which are of regional importance. It includes police, local

administration, Agriculture, Land revenue Jail Administration and so on. The stae legislatures canenact laws subject to the limitations of the constitution and the laws of parliament.

Constitution provides that the President can declare Emergency in a state based on the reports of its

Governor. The union government can enforce trade agreements with any other country; it can

encroach upon state list when supported by two third of parliament members.

Residuary powers are given to Union to all the subjects not included in any of the three lists. Thus

the union is made stronger than the states.

28


29/55

2. ADMINISTRATIVE RELATIONS BETWEEN CENTRE AND STATES

The President can appoint State Government with the consent of the Prime Minister, withoutconsulting State Legislature. The Union can give directions to a State regarding the laws of

parliament, the construction and maintenance of communications to be of national or military

importance, and do on.

Union Government by the law of Parliament may provide for the adjudication of any dispute relationto inter state rivers. For other inter-state disputes also the central government may establish Inter-State Councils on the public interest. The parliament is empowered to constitute an Inter-State

Commission to ensuer freedom of trade \-but so for no such commission is constituted in India. The

President will appoint Electon Commissioner to supervise elections in states. State High court Judges

are also appointer by him.

The Comptroller and Auditor General of India shall control financial accounts of the State. The

Planning Commission was set up in 1950 as an extra-constitutional and non-statutory body to planeffective and balanced utilization of countrys resources. (This is criticized that it encroaches upon

state autonomy). To support this body another council is fo0rmed namely, National Development

Council.

3. FINANCIAL RELATIONS BETWEEN THE CENTER AND STATES

Financial Sources are needed for he functioning of the States. The distribution of the sources of

revenue between the Center and States is as follows :

a) Taxes lived by the Union Govt. but collected and wholly retained by the State include:Stamp duties on Negotiable Instruments, latter of credit, insurance, transfer of shares and

excise duty on medicine and toilet preparations containing alcohol.

b) Taxes lived and collected by the Union but whose precedes are given over toe the States

include: Estate duty and succession duty on property, other than agricultural land, terminaltaxes on goods and passengers, taxes on railway fares and freights, taxes on newspapers

and advertisements and so on.c) Taxes lived on and collected by the Center but whose proceeds are shared between the

union and states include : the income tax alone; the ratio of sharing is decided by the

President of India, considering the report of the Finance Commission.

d) Taxes which are devised and collected by the union but whose proceeds may bedistributed among the states as per the union law include : the excise duties, other than on

medicine and toilet preparations.

Grants-in-aid: other than the above distribution of revenue, Union also provides Grants-in-aid. For

example, out of export duty on jute, grant-in-aid is given to states of Assam, Bihar, Orissa and WestBengal. The union may further provide financial assistance from Consolidated Fund of India.

There is a control over States as to their borrowing powers A state can borrow only within India

and cannot raise a new loan without the consent of central government.

29


30/55

CONFLICTS BETWEEN CENTER AND STATES

While the congress party was ruling at the center and some opposition parties took over power in thestate governments some conflicts and issues in the center-state relations were raised by them. They

include Govt. of Tamilnadu, West Bengal. Punjab Karnataka and Kerala and they demanded

autonomy to states.

The main issued were :i. Use of para military forces in the states by the center when it is not warranted by states.

ii. Encroachment of center even in the state list matters.

iii. Inadequate funds allotted by center and the encroachment of planning commission in states

revenue.

iv. Arbitrary use of article 356 by the Union Govt. on the state governments. There are number ofinstances for the center toppling the state governments without valid reasons.

v. General complaints are also there on center on the matters of hostile attitude and political

dishonesty on states development and share of foreign exchange to states, unequal and biasedfinancial assistance and sanctioning power projects, development grants and so on.

The cry for State autonomy increased during the non-congress governments at the center. TheSrinagar conclave and Calcutta conclave of opposition parties ruling in states (non-congress

parties) put forth eleven-point resolution at the center. The Sarkaria commission report in 1988 also

have provided many measures to harmonize the center-state relations, include amendment of Article356, proper selection of Governors to states by consulting ht estate cabinet, appointment and transfer

of judges of high courts, grants and aid to states and so on. Accordingly, the Inter-State Council set

up in 1990 is a milestone in improving the center-state relations. Yet, there are many improvements

demanded by states and by the experts in this center-state relationship.

30


31/55

LESSON 10

ECONOMIC ENVIRONMENT AND BUSINESS

Any external force is almost uncontrollable. This is true, particularly in case of economic

environment. This affects business and also every section of the society. The business growth and

economic development go hand by hand. Let us explore this relationship.

The economic environment, as far as a business unit is concerned, means the price level of factors of

productions and their availability, purchasing power of consumers ad the general forces that affectproduction and exchange activities. In short it is micro a well as micro economic factors related to

business decisions.

The economic conditions include nature and conditions in the national and international levels such

as natural resources, income distribution among population, state of technology, Govt.s economic

policy, entrepreneurial ability, level of import / export etc.

Rapid changes are taking place in the technological sand economic environments. Adapting these

changes is needed for the survival and growth of a firm. Analyzing the risks in production quantity

and realizing he profit are rather difficult tasks of the economic conditions are not properlyunderstood. In this process, getting consumers acceptance, winning competitive strategies and

developing new products n terms of cost are the vital issues.

Economy is a complex and dynamic environment and it affects various business decisions. In turn,

the economic growth takes place when more and more business opportunities are effectively utilized

in a society. That is the productivity and ability in technological adaptation of business units, whichhelp economic development.

ECONOMIC FACTORS AND BUSINESS

1. CAPITAL

Almost every kind of organization need capital in the form of machinery, building, inventories ofgoods, office equipments, tools of all kinds, and cash. Cash resources may be generated within an

organization out f profits, but organized enterprises are usually dependent for capital requirements on

various outside sources.

2. LABOUR

Another important element of the input side of the economic environment is the availability, qualityand price of labour of all kinds. In some societies, untrained / unskilled labour may be plentiful, while

highly trained labor is in short supply. Engineers may be scarce at one place and plenty at another.

The price of labour is also an important factor. The rise of wages in the United States has often

caused cost problems for the American producer who could sell in many foreign countries. In India,

the ware rates are very low when compared toe h United States and the countries of Western Europeand Western Asia. Therefore, the price, quality and availability of labour affect the production very

much.

31


32/55

3. PRICE LEVELS

The input side of an enterprise is clearly affected by price level changes. If prices go up rapidly, the

problems created in the economic environment on both input and output sides are more. Inflation to

some extent helps business but has highly disturb in effects on organizations when they are galloping.

4. PRODUCTIVITY

Productivity means the ratio of input and output. Productivity increases when input is decreased and

output is increased. When productivity is high, the price can be low. Actually the reason that Japan

and the United States are able to compete in the world market has been its productivity. However,

productivity is partly dependent on the state of technology. Then technology improves, productivityalso develops, that results in economic developments.

5. ENTREPRENEURS AND MANAGERS

Another major economic input is the availability of high quality entrepreneurs and managers. Anentrepreneur is a person who sees business opportunity, obtains the needed capital, knows how to put

together an operation successfully and has the willingness to take a personal risk of success or failure.

The availability of intelligent and able managers has considerable effect on economy. This

availability and that of entrepreneurs, is correlated with the social environment, particularly in the

areas of education, and cultural development.

6. GOVERNMENT FISCAL POLICY

Likewise, another important element on the economic input side is the nature of government

polici3es. These aspects of the political environment have their economic impacts on all kinds oforganizations. Governments fiscal policy for example has impact on business and non-business

operations, as the tax affects every segment of our society. It must be taken into consideration bymanagers that all he decisions, policies, programs and laws of government are influencing the

business decision.

7. CUSTOMERS

On the output side of any enterprise, there are customers. Without customers, of course, a business

cold not exist. To succeed in winning customers acceptance and in overcoming the forces ofcompetition business units tend to keep prices, costs and profits low.

The output of business (products/services) is directed to satisfy the consumers. The purchasingpattern of those consumers depends upon income level, standard of living, level of savings and

buying capacity of money which are determined by the economic conciliations of the country. Thus,

there are economic factors affecting both input and output side of business, moreover, the generaleconomic planning, controls, foreign trade, foreign debt etc., are also have indirect influence on

business units.

32


33/55

LESSON 11

ECONOMIC SYSTEMS AND BUSINESS

The fundamental objective of economic system is to obtain the possible amount of human satisfaction

to its member from the available resources. But there are differences in the method of achieving thissatisfaction. the differences can be understood by examining the agencies which are permitted to own

and utilize the productive resources; extent of individuals initiative permitted in the economicactivity; and by examining the process of price determination. All these will determine the nature of

economic system.

The basic economic systems are known as

1. capitalist economic system

2. communist economic system and

3. mixed economic system

The institutional structure, the manner of functioning and the problems in each of the above

economic systems are different. Let us discuss them.

1. CAPITALIST ECONOMIC SYSTEM

The capitalist economy represents a system of economic organization in which the instruments ofproduction are owned by individuals and associations. They are used for making profit. Thus, the

essence of the capitalist economy is the private ownership of capital and the owner to utilize it for

various purposes. Other social aspects like freedom of religion, freedom of speech, free press, anddemocratic government are associative parts of capitalism.

The chief characteristics of capitalist economy are a follows

a) Individuals and associations behave with economic motive of maximizing profits

with the least cost.b) They have e right to acquire, keep, use and dispose of the tangible and tangible

properties.

c) There exists, rights of inheritance, which acts as a strong incentive for theaccumulation and conservation of wealth.

d) Individuals and associations exercise their own initiative freely in utilizing their

energies and resources.e) Producers, consumers and employees compete among themselves, as the resources

ad opportunities are limited.f) Price, his invisible hand, plays a predominant roe in the flow of the factors andproduction and consumption.

CAPITALIST SYSTEM AND BUSINESS

In a purely capitalist economy Government never interferes in the activities of businessmen. It offer

very good environment for the development and growth of business. Individuals ability ad skills are

suitably rewarded and it gives a good incentive to initiative and creativity of an individual. The

33


34/55

number of sellers and manufacturers are unlimited. The entry and exit of manufacturers and sellers

are decided by he success or failure of their business.

In basis economic decisions-what to produce, how much to produce, by what methods and for whom-

are made by producers through the price mechanism, and with the advantage of their freedom. They

may make those decisions that will yield profit.

But in practice, many controls, and compulsions are imposed in the capitalist economic of the modernworld. The governments of capitalist economics restrict the freedom of individuals by way of taxes,restrictions on production of certain commodities etc.

AN ILLUSTRATION AMERICAN ECONOMY

The American economic system, although modified by forces like law, custom, practice, etc. consists

of all he capitalist institutions described above. American people preserve capitalism as their form of

economic organization. Every individual is free to utilize his services, income and other productiveresources as he chooses. But this freedom is restricted by some social problems.

Contrary to expectations that capitalism helps to maintain the level of full employment,unemployment to some extent has become a permanent feature of US economy. The Government ha

to step in to solve this problem by creating additional employment opportunities in its own sector and

regulate the activities of private enterprise.

The American economic system has been criticized for three reasons, namely

a) Inequality in the distribution of income and wealth,b) Growth of monopolistic tendencies, and

c) Susceptibility of the economy to depression and inflation.

2. COMMUNIST ECONOMIC SYSTEM

This is a contrary system to the capitalist economy. In capitalism, working class is exploited byemployers but communism in turn rests on the labor theory of value, and establishment of

dictatorship of working class, communism is a revolutionary method of attaining Socialism which

means common owner ship of all factors of production.

According to Marxs labor theory of value, the exchange value of different commodities is

determined not by conditions of demand and supply, but by the amount of abstract human labor

contained in them. But the laborers are paid only the value of the means of their minimum livelihood.This is known as the Surplus valu8e of labor. The surplus value is appropriated by the capitalist

who hires labor power. In other words, the capitalist extracts the full value of the labor, but the paysonly the amount, which is just sufficient to keep the worker and his family alive. Further, thisexploitation is intensified by introducing machinery and other improved processes.

The chief economic features of full communism are as follows:

1. It comprises entirely of workers except those who are physically and mentally

incapacitated.

2. The society owns in common the natural and man-made instruments of production.

34


35/55

3. The society is classless

4. The workers possess the entire product, which they have turned out as no surplus values

being received by any individual.5. Each individual is motivated to perform his part according to his full ability.

6. The increased productivity of society assures each member of getting what he needs.

7. Private possessions in the form of capital or consumer goods are neither possible nornecessary.

COMMUNISM AND BUSINESS

Individuals are not permitted to won profit-making private property or to engage in commercial

private enterprise. But they are allowed to own durable consumer goods such as automobiles, horses,

furniture, small tools and equipment, etc. So, there is no scope for private sector industries in acommunist nation. All manufacturing industries are owned and managed directly by the Government

except the producers cooperative which are significant only in respect of small scale consumers

goods industries and handicrafts.

AN ILLUSTRATION CHINESE ECONOMY

In China, all manufacturing industries are owned and managed directly by the Government. But the

producers cooperatives are exempted from this rule. The second important feature is economic

planning. All major economic decisions regarding production and distribution are all determined bythe Central Planning Authority. The prices of commodities and services are determined by the

planning authority, and they are not left to the free play of market forces.

Another important feature of this economy is the absence of competition as it is understood incapitalist economies. The Government has virtual monopoly in almost every sector of the economy.

The state has guaranteed the right to a job. It ha also undertaken to promote the collective welfare of

the society by providing free of charge medical, educational and other social security measures.

3. MIXED ECONOMIC SYSTEM

The wide disparities in the distribution of income and wealth in a capitalist economy had led to

demand for more Government intervention. The people are of the opinion that capitalism might be

able to establish the political democracy, but it cannot establish true democracy consisting ofeconomic and social democracies.

As such, movements in the name of democratic socialism have been started with a view to control theadverse effects of capitalism and without going for cent percent nationalization. The countries, which

have implemented the principles of democratic socialism, have come to be known as having mixedeconomic system.

The most important decision in the mixed economic system is planning. Every sector of the economy

is planned with regard to the allotment of resources, targets, methods to be employed and period within which the targets have to be achieved.

35


36/55

Another important feature is social security. In fact, in the countries having mixed economic system,

efforts are being made to introduce a comprehensive scheme of social security measures to provide

greater economic security to the individuals.

MIXED ECONOMY AND BUSINESS

In a country having mixed economic system as their way of life, there are two sectors in business,

viz., private and public. Private sector consists of industrial undertakings, which are owned andmanaged by private individuals. Public sector consists of industrial undertakings, which are ownedand managed by the Government. There is also Joint Sectors in which both the Govt. and private join

their hands.

However, Government will have its own control over the private sector industrial undertakingsthrough many laws and directives. For example, industries in the private sector will not be allowed to

grow, very large in size, which will hamper the growth of other small industrial undertakings in the

same industry. It is only in the interest of the general industrial development of the nation, whichwould ultimately result in the equitable distribution of income and wealth.

AN ILLUSTRATION INDIAN ECONOMY

The fundamental objective of economic planning in India is raising living standards and opening up

to the people new opportunities for a richer and more varied life. The objectives of economicplanning have been given shape and color by the Industrial Policy Resolutions of 1948 and 1956. The

underlying idea in the Industrial policy, 1948 was a desire to control the capitalistic form of industrial

organization and to introduce a socialistic form of industrial frame work.

The policy laid down that the distinction between the public and private sectors is one of relative

emphasis and these two sectors are to be viewed as parts of single mechanism. However, private

enterprise functions within the conditions created largely by the State. Government policy would

influence private decisions through fiscal measures, licensing and, to the extent necessary throughdirect physical allocation so as to promote and facilitate the realization of the targets proposed in the

national plans.

It can be noted from the recent experience that phased program of nationalization is undertaken since

independence. After Independence, many commercial banks, general insurance business, coal mines

etc., were nationalized. Beside nationalization, the public sector has been enlarging its role in theeconomy. In the joint sector enterprises, controlling interest is usually with the Govt. Wealth Tax, gift

tax, estate duty; curbing restrictive trade practices of Managing Agencies are prominent among the

means used to contain inequalities in the economy.

The above discussion of economic systems and their impact on business reveals that capitalisteconomic system and mixed economic system allow private business with a few restrictions andguidelines, whereas communist economic system does not permit any scope for them. The

restrictions on the business in the capitalist economic system are much less in number than the mixed

economic system.

36


37/55

LESSON 12

BUSINESS SECTORS AND ECONOMIC SYSTEM

We have discussed, in the earlier chapters; the meaning of economic environment and the types of

economics system can be easily identified by the extent of using the following business sectors inutilizing the economic resources; they are

1 Private sector

2 Joint sector 3 Public sector

the communist economy uses only the public sector business units whereas the capitalist economicsystem uses mostly the private sectors units ;the mixed economy; as the compromise of the above two

systems ;used both private and public sectors and in addition joint sector business unit ;we can now

analyze the nature and role of these sectors in economy;

1 PRIVATE SECTOR

The democratic countries like U.S.A. and west Germany; which adopt capitalist economic system;

achieved remarkable economic development through the great efficiency of private sector; the mixed

economies too believe and allow the private sectors accelerating economic growth;

Private sector means the industries completely owned and managed by private individuals; they

exploit the natural resources to produce the goods and services for the consumers stimulated by profit

motive. The individual entrepreneurs who have to skill, interest, initiatives and ability to organize,start the private sector units. Mostly they get success because they efficiently and economically use

the resources for increasing their profits and private property. Their decisions are influenced by

competitions, price mechanism and marker economy.

Role of profit sector in economic development: Most of the capitalist countries have reached

economic advancement by the extensive use of private sector. The mixed economies like India retain

selected industries with the public sector and let other business units in the hands of capitalists forimproving economy. The recent Indian Govt. Policies aim at liberalizing controls on private sector to

expedite economic growth. The private sector helps rapid economic development in the following

ways :

1. As the private businessmen are mainly aimed at profits, they manage and use the

resources in the most economic way. They efficiently control the cost ofproduction and supply and fix lower prices.

2. Since there is competition in most of the private business they are careful in givingquality products at competitive rates. They achieve this by the extensive use ofefficiency and control.

3. The survivals of the private units depend upon the consumers acceptance of their

products. Therefore they find out exact needs, wants and tastes of consumers and

try to satisfy them with mode

14 Business Environment

Documents

Transcript of 14 Business Environment