BBA (1.4) B. Com. (1.

5)

Business Environment

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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 of
appropriate 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

CONTENTS
Sl. No.

LESSONS

Pg.No.

1.

Business Environment Concept and significance

2.

Factors of environment and their influence on business.

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

LESSON 1
BUSINESS 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 business
growth.
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 discuss
the concept of business environment and highlight the significance of environment and its interrelation with business.

MEANING OF BUSINESS AND ENVIRONMENT

The term business is usually described as the organized efforts of an individual or a group in
producing and / or exchanging goods and services to satisfy needs and wants of the people. But now
this 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 an
integral part of business.
Every business organization exists admits of its challenging competitors, changing consumer
attitudes, 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 of
conditions-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.
2.
3.
4.
5.

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

The social, political and economic settings of the society mainly constitute the business
environment.
The environment is dynamic and its changes influence the business decisions.
Study on environment will reveal the opportumities available to a business.
The threats or challenges could be predicted from environment, so that the firm can be
prepared to meet them.

SIGNIFICANCE OF BUSINESS ENVIRONMENT

The business environment can be divided into internal and external environment or as the micro and
macro 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 multidimensional. Therefore failure to understand them may result in un-repairable losses. So, the external
environment plays a significant role business decisions.
MACRO ENVIRONMENT
POLITICAL & LEGAL

NATURAL & ECOLOGICAL

CUSTOMERS
TECHNOLOGICAL

WORKERS
BUSINESS

INVESTORS
SUPPLIERS
SOCIO CULTURAL

ECONOMIC

INTER-MEDIARIES

DEMOGRAPHIC

COMPETITORS
MICRO ENVIRONMENT
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. By
studying this, the desired features in a product can be finalized. Without such product research the
consumers may not be satisfied by that product.

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, NIRMA
was 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 from
the 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, failing
which 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 create
innovative 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 massive
web 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 of
Government 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 of
Government to business decisions. The public spending of the government also provides facilities for
industrial 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

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 of
the hour.
Thus by the above analysis we can conclude that the business units survive and grow by studying its
environment. 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 the
economic activities, and offering public welfare measures to show their social responsibility. So both
are inter-dependent and we can say that business without society has no roots and society without
business units has no fruits.

Lesson 2
FACTORS OF ENVIRONMENT AND THEIR INFLUENCE ON
BUSINESS
The environment of business is classified in different ways. Philip Kotler divides it into Micro
environment 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 business
decisions.
The reactions of people while playing the roles of workers, consumers, suppliers and others are to be
studied. 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 know
that 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

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 for
agriculture, 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 of
workers, 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 on
business 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 and
improved goods, reduction in cost and variety in goods.
The term technology indicates macro level improvements in the method of production. A
technological 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 changing
fast. So, the scientific inventions, and the results of industrial research and development ( R & D ) are
converted 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. The
minerals, materials and also the climate, coil conditions, rainfall etc., help in this progress. On the
9

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 moral
duty 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, improved
products 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 as
opportunities. 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-to
the international standard.
The merit claimed for globalization is that our share in the world trade would increase due to
multilateral 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 with
international standards will also become a part of this game in the near future.

10

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. Ancient
people 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 cultural
heritage. 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 cultural
environment.
The term culture is defined as the art of living applicable to a group of people. It is also described
as 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 progresses
or 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 converted
into 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 of
their characteristic features.

FEATURES OF INDIAN CULTURE

1.

2.

3.

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. The
history 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 this
absorption and synthesis made India a unique mosaic of cultures.
Our culture is remarkable for its spirit of tolerance. The geographical features, which
helped the evolution of the composite culture of our country, also helped the development
of 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.
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 than
thousand years. In strict sense, the Hindu religion is the collection of cultural values of
11

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.
In Indian culture, there are plenty of moral and spiritual values. They speak the values of
simple 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.
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 parts
of 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.
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 our
culture. 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.

4.

5.

6.

INFLUENCE OF SOCIO-CULTURAL FACTORS ON BUSINESS

Through 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)

b)

c)

d)

e)
f)

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 some
products sold in sachets get good response due to the convenience and low cost.
The product features are designed by understanding the cultural background of
consumers. 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 foodstuffs also vary consumed by different groups.
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 and
importance of family relationships.
In developing human relations with workers, suppliers, middlemen and the public, it is
necessary to understand the culture and mental make-ups of those people. For example
workers in different regions behave differently. If this is understood conflicts with
workers may be reduced.
The trade practices and services are designed based on the customs and habits of the
people. This includes holidays, (Fridays, instead of Sundays in Muslim areas) working
hours, consumer service, sales retail-outlets, demonstrations etc.
In introducing varieties, improvements and innovations in products, care should be
taken to understand the social characteristics of people. Many products in cosmetics
12

g)

failed in Indian markets. We can also quote the hesitated acceptance of electric
appliances and gas stoves in rural markets.
The general attitude of people towards consumption, savigs and investment patterns
also 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

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 structure
and 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 the
worlds population. At present our population is nearing 100 crores and it may overtake Chinas
first 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 early
marriages 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
1951 60
1981 90

49.2%
41.7%
32.5%

42.6%
22.8%
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. But
in 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

CENSUS YEAR
1901
1931
1961
1981
1991

No. FEMALES/1000 MALES

972
950
941
934
927

Steps are taken to check the maternal mortality (death of women during childbirth) and female
infanticides 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%. These
data 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 this
increased 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 seeking
employment. 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 marketing
efforts 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 1000
persons in Trivandrum. In 1991 census west Bengal has 767 persons, Kerala has 749, Pondchery has
1642, 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

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 plan
for 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

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 these
divisions 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 have
any 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 contributed
many 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 have
absorbed 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. They
are
1.
Indo-Aryan
2.
Dravidian
3.
Austro-Asiatic and
4.
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
Hindi
Gujarathi
Malayalam
Kannada
Oriya
Punjabi
Assam

Speakers [in millions]

437
41
35
44
32
95
22

Mother tongue
Telugu
Bengali
Marathi
Tamil
Urdu
Nepali
Sindhi

Speakers [in millions]

74
200
70
71
102
16
18

There are other languages like Kashmiri, Santali etc., spoken by more than four million speakers.
17

2.
RELIGIOUS GROUPS
Regarding the religious groups in India, the Hindu religion forms the majority. The religious
tolerance 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 per
1991 census).
Total Population
Hindus
Muslim
Christians
Sikhs
Buddhists
Jains
Others
3.

100.00
82.72
11.21
2.60
1.89
0.70
0.47
0.41

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 within
the 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 pawnbroker 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 and
values.
In the joint-family system our people find it more convenient in running agricultural farms or
business 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 patience
provide mutual benefit in this system. But this system is weaning out now a days due to changed
occupational 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

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 socialcultural 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 and
employment, 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.
2.
3.
4.
5.
6.
7.

The trade and employment opportunities re given to family members and own caste group
members. This affects balanced economic development of the country. This may affect the
productivity also, as the merit is not the main consideration.
The seniors claim respect irrespective of their talents. Here the juniors are discouraged to
contribute to business development. This is so significant in joint-families.
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.
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.
The manual labourers are not respected and they are paid very low. This the result of
Varnasrama Dharma. Hence many educated youth desitate to do physical works.
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.
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

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. Despite
industrialization 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 wrongly
exploited 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 of
tolerance.
Disparities among caste groups, untouchbility, and other anti-social and anti-human practices are
spread 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 caste groups, 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.
2.
3.
4.
5.

Caste prejudices and feuds which lead the society to disunity affect national integration.
Caste decided by birth, decreases the human dignity and so it is undesirable.
Caste system checks the free association with other groups and with foreigners. As a result
people are reluctant to accept changes and modern knowledge.
Un-touchability and exploitation are the chief evil effects of caste system. They are strictly
anti-democratic.
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.
2.
3.
4.

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.
Traditional training: The group members are trained from the child-hood in a particular
trade. It gives social security and development of skills.
Competition is avoided: The same group members are involved in similar lines of
business. By maintaining trade secrets, unhealthy competitions are avoided.
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 in
groceries, Valayars in constructions, Aasaris in jewel making and so on.

20

CASTE SYSTEM IN MODERN SOCIETY

It is claimed that the traditional caste system has been considerably altered on account of
industrialization, 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 the
masses. 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

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 the
government 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 mixed
economy 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 welfare
measures.
Political environment is much related to legal environment also and they affect business as stated
below.
Every manager is encircled by massive web of laws, commission reports, official regulations and our
decisions. 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 experts
close 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 economic
power among few individuals and ensure equal distribution of wealth.
Government regulation on private enterprises is exercised with a view to directin the economy
maximum 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 utilize the
resource allocation more effectively. The economic activities are also planned by the National
Development 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 he
business units. Also the foreign investment in Indian business is allowed by our Govt., in this
globalization era.

22

2.

INDIRECT CONTROL MEASURES

The Govt., can indirectly stimulate or restrict business activities. For example, the Monetary policy
determines 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 or penalties 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 present
policy 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 Acts
for 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 commodities
through 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 areas
or 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

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 by
Govt. to protect workers. The public sector business units serve for the public and create healthy
competition 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

LESSON 8
DIRECTIVE PRINCIPLES OF STATE POLICY
The constitution of India adopted in January 26, 1950 contains the Directive principles of state
policy. 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, the
parliament 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 as
agents 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 article
38 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 shall
inform all the institutions of the national life.
The State shall in particular strive to minimize the in-equalities in income and endeavour
to 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.
The state shall, in particular, direct its policy towards securing-

2.

3.
i.
ii.
iii.

iv.
v.

That the citizens, men and women equally, have the right to an adequate means of
livelihood.
That the ownership and control of the material resource of the community are so
distributed as best to subserve the common hood;
That the operation of the economic system does not result in the concentration of
wealth and means of production to the common detriment;
That there is equal pay for equal work for both men and women;
That the health and strength of workers, men and women, and the tender age of
children are not abused and that citizens are not forced by economic necessity to enter
a vocation unsuited to their age or strength; and

25

vi.

4.

5.
6.

7.
8.

9.
10.

11.

12.
13.

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).
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 or
schemes 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)
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 selfgovernments (Article 40)
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 of
unemployment, old age, sickness and disablement, and in other cases of under served want
(Article 41)
The state shall make provision for securing just and humane conditions of work and for
maternity relief (Article 42)
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.
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.
The state shall promote with special care the educational and economic interests of the
weaker 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.
The state shall regard the raising of the level of nutrition and the standard of living of its
people 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, except
for medicinal purposes, of intoxicating drinks and of drugs which are injurious to health.
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.
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 42 nd
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 the
state 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

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 international
peace and security an so on.
The founding fathers of our constitution have anticipated all possible evils such as concentration of
wealth 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 into
the 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. This
resulted in nationalization of Railways, industries, insurance and banks etc.

27

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 the
central 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 are
coordinates 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 provided
in 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. Their
relations 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 for
setting 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, post
and 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 can
enact 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

2. ADMINISTRATIVE RELATIONS BETWEEN CENTRE AND STATES

The President can appoint State Government with the consent of the Prime Minister, without
consulting 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 relation
to inter state rivers. For other inter-state disputes also the central government may establish InterState 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 plan
effective 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)
b)

c)
d)

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.
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, terminal
taxes on goods and passengers, taxes on railway fares and freights, taxes on newspapers
and advertisements and so on.
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.
Taxes which are devised and collected by the union but whose proceeds may be
distributed 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 West
Bengal. 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

CONFLICTS BETWEEN CENTER AND STATES

While the congress party was ruling at the center and some opposition parties took over power in the
state 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 of
instances 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 biased
financial assistance and sanctioning power projects, development grants and so on.
The cry for State autonomy increased during the non-congress governments at the center. The
Srinagar 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 Article
356, 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

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 affect
production 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 properly
understood. 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, which
help economic development.
ECONOMIC FACTORS AND BUSINESS
1.

CAPITAL

Almost every kind of organization need capital in the form of machinery, building, inventories of
goods, 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, quality
and 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 Europe
and Western Asia. Therefore, the price, quality and availability of labour affect the production very
much.

31

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, productivity
also develops, that results in economic developments.
5.

ENTREPRENEURS AND MANAGERS

Another major economic input is the availability of high quality entrepreneurs and managers. An
entrepreneur 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 of
organizations. 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 by
managers 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 of
competition business units tend to keep prices, costs and profits low.
The output of business (products/services) is directed to satisfy the consumers. The purchasing
pattern 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 general
economic planning, controls, foreign trade, foreign debt etc., are also have indirect influence on
business units.

32

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 this
satisfaction. 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 economic
activity; 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.
2.
3.

capitalist economic system

communist economic system and
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 of
production 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, and
democratic government are associative parts of capitalism.
The chief characteristics of capitalist economy are a follows
a)
b)
c)
d)
e)
f)

Individuals and associations behave with economic motive of maximizing profits

with the least cost.
They have e right to acquire, keep, use and dispose of the tangible and tangible
properties.
There exists, rights of inheritance, which acts as a strong incentive for the
accumulation and conservation of wealth.
Individuals and associations exercise their own initiative freely in utilizing their
energies and resources.
Producers, consumers and employees compete among themselves, as the resources
ad opportunities are limited.
Price, his invisible hand, plays a predominant roe in the flow of the factors and
production 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

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 whomare 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 modern
world. 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 productive
resources 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 by
employers 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 pays
only the amount, which is just sufficient to keep the worker and his family alive. Further, this
exploitation is intensified by introducing machinery and other improved processes.
The chief economic features of full communism are as follows:
1.
2.

It comprises entirely of workers except those who are physically and mentally
incapacitated.
The society owns in common the natural and man-made instruments of production.
34

3.
4.
5.
6.
7.

The society is classless

The workers possess the entire product, which they have turned out as no surplus values
being received by any individual.
Each individual is motivated to perform his part according to his full ability.
The increased productivity of society assures each member of getting what he needs.
Private possessions in the form of capital or consumer goods are neither possible nor
necessary.

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 a
communist 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 by
the 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 in
capitalist 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 of
economic and social democracies.
As such, movements in the name of democratic socialism have been started with a view to control the
adverse 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 mixed
economic 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 with
in which the targets have to be achieved.

35

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 and
managed by private individuals. Public sector consists of industrial undertakings, which are owned
and 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 undertakings
through 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, which
would 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 economic
planning 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 through
direct 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 the
economy. 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 capitalist
economic system and mixed economic system allow private business with a few restrictions and
guidelines, 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

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 in
utilizing the economic resources; they are
1
2
3

Private sector
Joint sector
Public sector

the communist economy uses only the public sector business units whereas the capitalist economic
system 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 for
improving 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.
2.
3.

4.

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 of
production and supply and fix lower prices.
Since there is competition in most of the private business they are careful in giving
quality products at competitive rates. They achieve this by the extensive use of
efficiency and control.
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 modern Research and Development. Thus the consumers
get variety of goods and services for their choice.
Private sector functions with time bound programs and increases the turnover of
capital. This leads to increased money circulation and in come levels in the society.
37

5.
6.

7.
2.

Private sector uses efficient managers, staff and workers. They are assigned with
clear targets and controlled by close supervision and fixed responsibility.
The inefficient and weaker units are lost in the competitive market. Therefore the
most efficient firms alone survive and expand rapidly. They invest money in good
opportunities and utilize all the possible chances to convert into business
transactions. Hence they stimulate economic activities to a great extent.
The productivity is very high and the technological growth is fast in private sector
which are essential for economic advancement.

JOINT SECTOR

MEANING OF JOINT SECTORS

In simple terms, the joint sector is a form of partnership between the private sector and the
Government. J.R.D. Tata defines a joint sector as one that is intended to be a form of partnership
between the private sector and the Government in which state participation in capital will be not less
than 26 per cent, the day-to-day management will normally be in the hands of the private sector
exercised by a board of directors on which Government is adequately represented.
ORIGIN OF JOINT SECTOR ENTERPRISES
In pre-independence days, several industrial enterprises were set up in the princely states of Mysore
and Hyderabad with public participation in equity. Soon after Independence, the Tatas pioneered
government-private sector participation when they created Air India International jointly with the
Government of India. But the seeds of the joint sector are to be found in the concept of the mixed
economy envisaged by the Industrial Policy Resolution of 1956. Which classified all industries into
three categories as follows?
1.
Schedule A industries being the exclusive responsibility of the State;
2.
Schedule B industries being progressively state owned; and
3.
Schedule C industries left ordinarily for the initiative and enterprises of the
private
sector.
Soon after the policy resolution of 1956, a number of companies floated by the Govt., of India in
collaboration with the private sector by sharing management and control. Prominent examples are as
follows:
1.
2.
3.
4.

Cochin Refineries Limited

Madras Refineries Limited
Madras Fertilizers Limited, and
Gujarat Fertilizers Company limited.

The Industrial Licensing Policy Inquiry Committee popularly known as Dutt Committee (1969)
recommended the creation of the joint sector on the basis of the 1956 Resolution. Dutt Committee
Report appeared in 1969, a number of State Governments have procured licenses for industrial
projects for a wide range of products and have promoted companies with private participation in
ownership and management.

38

RATIONALE AND SCOPE OF THE JOINT SECTOR

It is important to understand the objectives and the basis reasons for the development of the joint
sector. They are stated below:
1.

SOCIAL CONTROL OVER INDUSTRIES

The joint sector is expected to acquire a lot of anto-monopoly role and control the expansion of the
leading industrial houses. Besides, the joint sector can be used to promote socio-economic objectives
of the Government, such as maintenance of reasonable prices, regional dispersal of industries,
development of exports etc. Joint sector could thus be viewed as a tool for social control over
industry, without resort to outright nationalization.
2.

FAILURE OF PRIVATE AND PUBLIC SECTORS

Both private a public sectors have shown certain limitations. Hence, a combination of the two sectors
in the form of joint sector is advocated. It is recognized that the private sector has built up a reservoir
of good technical and managerial talents. Only Government can contribute very huge financial
resources to set up large industries. The problem can be solved if there is a joint sector.
3.

ACCELERATION OF ECONOMIC GROWTH

Private investment is not coming in a big way in the basic and essential industries. By providing
public support and patronage, the joint sector may encourage small and medium entrepreneurs, help
them mobilize resources, to procure machinery and equipment and built up confidence to face the
uncertainties of modern business. This will help accelerate economic growth of the country.
4.

STATE-SPONSORED INDUSTRIALIZATION

The Government decides on the choice or projects, which are desirable from a social point of view,
and persuades private parties to join hand. So the joint sector may be regarded as a part of the strategy
of state-sponsored industrialization.
5.

EXTENSION OF PUBLIC CONTROL

The joint sector will enable the Government to enter the highly profitable lines of industrial activity,
reduce the dominant economic power of the large industrial houses and increase social control over
industries. It is a form of partial nationalization.
6.

MOBILIZATION OF TECHNO-MANAGERIAL RESOURCES

In the last few decades the private sector has expanded considerably. Just as the joint sector can be
used to mobilize financial resources, it can be used to mobilize scarce human resources as well.

39

PATTERN OF OWNERSHIP
The nature of ownership pattern will depend upon whether the project is planner and initiated by the
private sector partner, or government, weather the private sector partner is a leading industrial house
with large financial as well as managerial resources, whether technologically the project is highly
complex or not, whether it is highly profitable or not, etc. The Government may normally seek
partnership with an established company or with a large business house, whenever substantial amount
of capital and technological competence are required.
PATTERN OF MANAGEMENT
Management involves two major function : policy making and operational management. The role of
policy making in the joint sector rests generally with the board of directors, while the day-to-day
management rests with the managing director and his team of managers. There is considerable
difference of opinion on the management pattern of the joint sector enterprises.
There are three type of board of directs in the existing joint sector undertaking:
1.
2.
3.

Enterprises with a majority of non-official directors.

Enterprises with majority of Government nominated directors.
Enterprises with directors in proportion to the equity ownership of the participants.

Those who believe in the efficiency and dynamism of private sector management advocate that the
board of directors would consist of nominees in proportion to the equity ownership of the
participants. Further they would like as Government ot exercise its influence on the policy-making
role of management and leave the operational management to the private partner.
GOVERNMENT POSITION ON THE JOINT SECTOR
The joint sector concept was accepted by the Government of India, through its industrial licensing
policy, 1970. The Government reiterated its position in its Industrial Policy decision of February,
1973. Four prints emerge here :
1.
2.
3.
4.

Joint sector units would be created, but they have to conform to Governments social and
economic objectives.
The joint sector will be allowed in areas from which the private sector is excluded under
the existing policy.
The joint sector will be a promotional instrument in the case of new and medium
entrepreneurs.
In all the different kinds of joint sector units the Government will ensure for itself and
effective role in guiding policies, management and operations.

The concept of the joint sector is a compromise between the alternative of total nationalization and
free enterprise economy. The implementation of the joint sector will alone demonstrate whether the
State can use this instrument to further the professed goals of social policy.

40

3.

PUBLIC SECTOR

Though the scope of the state enterprise in the industrial economy of India was limited in the preIndependence period, it has increased very much in recent years. The philosophy and program of
action for the public sector are incorporated in the well-known Industrial Policy Resolutions of 1948
and 1956. The Directive Principles of State Policy contained in the Constitution also require the State
to ensure that the ownership and control of the material resources of the community are so distribute
at best to sub serve the common good; that the operation of the economic system does not result in
concentration of wealth and means of production to the common detriment. Hence, for achieving
planned and rapid economic development, industries in which the scale of investment is more, where
the investment is risky and uncertain and which are in the nature of basic and strategic importance
have been assigned to the public sector.
OBJECTIVES
The objectives for which the public sector has come into existence in this country are of two type
(I) the macro objectives and (II) the micro objectives.
The macro objectives are those, which public enterprises are to pursue each in its limited way. These
are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

To promote rapid economic development by filling critical gaps in the industrial structure ;
To provide basic infra-structural facilities for the growth of the economy;
To undertake economic activity strategically important for the growth of the country.
To achieve balanced regional development and dispersal of economic activity.
To reduce disparities in income;
To avoid concentration of economic power in a few hands;
To exercise social control and regulation of long-term finances through public financial
institutions;
to control over sensitive areas;
To attain self-reliance in different technologies;
To enhance the employment opportunities; and
To increase exports and earn foreign exchange.

There are also micro objectives the specific objectives for the functioning of individual public
enterprises.
GROWTH OF PUBLIC SECTOR IN INDIA
The growth in public sector investment over the years has not only widened the scope for increasing
employment and industrial output, but has laid greater stress on social welfare industrial activity.
Investment in the public sector in India is very large in magnitude. Investments are made for creating
the basis-infra-structure and also for running industrial concerns.
Public sector undertaking include a varied range of activities like mining and metallurgy, electrical
goods, machine tools chemicals, petroleum and oils, aviation and shipping, industrial financing etc.
The total investment as on 31st March, 1975 was at about Rs. 7261 cores in 129 undertakings besides
an amount of about Rs. 10,000 cores in departmental undertakings such as railways, posts and
41

telegraphs, overseas communication service and Kolar gold mines. The following table gives an idea
of growth in public sector investment.
Date

No. of enterprises

Investments (Rs. In cores)

6
21
74
101
129
157
160

29
81
2415
5052
7261
24817
29180

April 1951
April 1956
April 1966
April 1972
April 1975
April 1980 81
April 1981 - 82

Bakaro Steel Limited is the biggest company not only in the public sector, but in the country as a
whole and accounts for a accounts for a total investment of Rs. 1046 cores. Hindustan Steel Ltd.
Comes next with an investment of Rs. 1025.
PARLIAMENTARY CONTROL
The working of the public sector is subjected to Parliamentary control. The public sector is
accountable to the Parliament. In view of the sizable investment in the public sector enterprises, the
Parliament has greater duty and responsibility to see that the communitys funds are better realized.
PROBLEM OF PRICING IN PUBLIC SECTOR COMPANIES
The Price policy of a public corporation extends to (i) make neither a loss nor a profit after meeting
all capital charges; and (ii) the prices it charges for different services should correspond to relative
costs.
It should be agreed that there cant be only uniform pricing policy for all public sector enterprises.
Arriving at an uniform price policy for all public enterprises is neither practicable nor desirable. But
at the same time, it is necessary that public sector undertakings should adopt sound practice4s of
business management.
A public enterprise, even if it is departmentally run, should be treated as a separate entity. These
enterprises should be required by statute to set aside adequate provisions for depreciation. Most of the
public enterprises are seen in public utilities or producer goods industries, which yield a lower return
than in consumer goods industry. Theses public enterprises adopt a deliberate policy of lower prices.
The supply of electricity at low prices to industrial concerns, and supply of water for irrigation at no
profit no - loss basis and cheap credit by Industrial Finance Corporation may be cited as examples
of such policy.
While formulation the price policy, any public undertaking should keep in mind the following
principles:
1.

Prices should be fixed so as to enable the undertaking to recover the full cost of
production and also a reasonable return on the capital employed.

42

2.
3.
4.
5.

In the public utilities and services, importance to be given to output than to return on
investment: the former being extended up to a level at which marginal cost is equal to
price.
Prices should be such, which equate demand and supply.
The price structure should lead to most economical use of all scarce resources.
The enterprises should aim at making substantial amount of contribution to provide for
development out of their own earnings.

Some public enterprises hold the monopoly of the product or service Simply because they are in a
monopoly position they cant increase the prices of such commodities or services as the burden would
fall on the consumers who are already contributing by way of direct taxes.
MANAGERIAL PROBLEMS IN PUBLIC SECTOR
The productive efficiency of public undertakings will depend substantially on the ability of those who
are concerned with the management of these undertakings. By and large, the manager of a
government undertaking has to face the same set of problems that the manager of comparable private
unit has. Many committees and commissions have stressed the need to select the right men to run the
public sector undertakings.
Public companies have brought the rules, procedures, and methods of work and even attitudes of
mind from their parent organization, i.e., civil services. Most of the public sector units are suffering
from shortage of professional managers. The staff and chief executives for the public company have
been drawn from the Administrative service, but their abilities are dependent on their background
experience and managerial culture. We cannot blame these officers. Perhaps their preconditioning as
professional public servants make them more willing to try to work within the old procedures rather
than strive to get them changed.
Managers in the public enterprises should be given clear commercial targets to be achieved in timebound programs. After this they must be given the freedom of action, and must be judged by their
performance alone. In Yugoslavia, where public sector occupies almost the entire industrial scene, the
manager is given the necessary freedom to prove his worth. A similar managerial autonomy can be
introduced in India as well.
The use of the personnel in management is not to the optimum because of either worng placement or
inadequate utilization. In several units at an enormous cost they are put on the jobs which have
nothing to do with their specialization. As a result of this, talents are being wasted, or optimum use is
not being made of them.
Another obstacle to development of the personality of each public undertaking is its close relationship
with the parent ministry or undertaking. As the undertaking is responsible to the parliament, everyone
in the parliament begins to think it is the ministry or the department, which has to manage the
undertaking. In most cases, the public enterprises are denied the autonomy, which they need for
efficient management. Interference of the Ministers even in the day to day affairs of the
undertakings have been reported.
To ensure proper management of the concerns in the public sector, some changes have to be
implemented. Professional managers should be appointed on all managerial cadres. For sophisticated
positions, recruitment should not e confined to local people only. To Check the flight of talented
personnel salary structure and other monetary incentives need be revised. Promotions should strictly
43

be on the basis of merit and not seniority. Politicians should not interfere in all the matters of the
undertakings. Within the enterprise the divisional objectives and department. They should be assigned
to the divisional or departmental executives for implementation. Such managerial process will lead to
greater accountability of the individuals who are entrusted with specific responsibilities. It finally
results in improved management performance.
ARGUMENTS FOR THE PUBLIC SECTOR
The following are the arguments put forward by the supporters of public sector.
1.

SERVICES MOTIVE

The main idea behind the setting up to public companies is to serve public, the maximum extent. If
the key industries are given in the hands of the private people, they will exploit the resource to their
own advantages. Ultimately, the public will suffer.
2.

QUALITY OF THE PRODUCT

Government can invest huge amounts of money in Research and Development Projects and thus the
quality of the products can be improved.
3.

FAIR TREATMENT OF THE WORKERS

In the Government Industries, Workers are paid good wages and they are provided with good working
conditions unlike the private sector industries.
4.

PRICING POLICY

Public sector enterprises fix the prices for their commodities reasonably low unlike the private sector
industries. It is due to their policy of service motive.
5.

ASSETS OF THE PEOPLE

Government companies are the assets of the nation. The real owners of the Government companies
are people. When these assets grow, naturally the properties of the common people also grow.
6.

SOCIALISTIC PATTERN OF SOCIETY

The Socialistic Pattern of society underlines the need for public sector industries. To achieve this
objective, it is necessary that public sector enterprise show growth in number and size.
7.

SELFISH PRIVATE SECTORS

Limitations and Abuses of private Sector itself has been an important reason for the need to
encourage public sector.
ARGUMENTS AGAINST PUBLIC SECTOR
The following are the arguments put forward against public sector.
44

1. Lacks Personal Care: The officers of the government companies do not have much interest
in their work because there is no on to effectively supervise them. This not the case in private
sector.
2. Inefficiency: In government enterprises, incentives are not provided to those who are efficient
in their work, promotion is awarded on the basis of seniority and not by merit.
3. Mismanagement: The government enterprises, lacks in time-bound managerial goals and the
funds are misused. They lack responsibility and accountability.
4. Underutilization of capacity: the public sector does not make full use of its capacity. It
results in low production and high cost.
The government is very much conscious of the shortcomings of public enterprises. Some actions
have already been taken. It is needed to have a cost-conscious and serious thought about the
improvement of the working of the public sector enterprises.

45

LESSON 13
MULTINATIONAL CORPORATIONS
The present day is marked as the period of evolving global markets. Most of the developing countries
have opened their doors for this change with red carpets spread for foreign investment. Since 1990s
the globalization concept is accepted under the package of new economic policy Globalization
means allowing free trade among world countries, giving out restrictions. In this liberal foreign trade
scenario the multinational corporations play a dominant role.
CONCEPT OF MULTINATIONAL CORPORATIONS (MNCS)
Any business corporation in which ownership management, production and marketing extend over
several national jurisdictions is called a multinational Corporation. The term MNC is used to
identify an enterprise, which controls assets-factories, mines, sales and other offices in two or more
countries.
The multinational corporations are also called Trans national corporations (TNCs) or Cosmocorps.
The total value of the individual assets and turn-over of MNCs run into billions. Prod. Raymon
Venven says MNC is one whose total sales turnover is over 100 million dollars
MNCs have three basic characteristics: i) international operations ii) collective transfer of resources
and iii) ownership with control over the economic activities of the foreign affiliates.
ORIGIN OF MNCS
Inflow of foreign private capital in the colonies by Imperial Powers was and usual practice.
Originally many joint-stock companies like East-India company established their trade in number of
countries crossing continents. But later their object was not only trade but also to establish their rule
over the territories which very much helped their trade. Now the style of MNCs is different it is to
meet the local demand where the investment is made by their advanced technology and resources and
by widening markets to make profits. The MNCs grow by research and development and by
effectively competing with local products.
The growth of MNCs was rapid during 1920s and after 1990s. In the later phase, USA ventures
began to dominate among MNCs. The other MNCs mostly belong to U.K. France Germany, followed
by Japan. Among these countries, the top MNCs of USA alone occupies more than 50 percent share
in 1970s.
IMPORTANCE OF MNCS
The MNCs create internationalization of production by transforming htge raw materials produced in
one group of countries with the labour and plant facilities in other to manufacture goods and sell them
in different markets. The fruits of science in the form of instant communication, quick transport,
computers, modern managerial techniques etc., have been helping MNCs and also the hosing
countries to derive some benefits. The functioning of MNCs develop new jobs, new wealth and
higher standard of living in less developed nations. They facilitated speedy flow of capital with
technology. The economic and social conditions of hosting countries are also improved, by the
operation of MNCs

46

By signing the GATT (General Agreement on Tariffs and Trade), India agreed to introduct
Liberalization, privatization and Globalization in her economic policy. Consequently the MNCs
are welcomed to shoulder our economic growth by their major investment projects. This include
power projects major infrastructure industries like transport, communication & banking and large
manufacturing units. Hence our economic activities are geared up and out domestic business units
will enter into competition with MNCs by increasing productivity.
The importance of MNCs can also be understood from the following advantages of MNCs.
ADVANTAGES OF MNCS
1.

2.

3.
4.

5.

6.

The less developed countries are industrially and technologically backward. They cant
afford for Research and Development (R&D) activities. Therefore when MNCs are
allowed they can invest their large resources in R&D, which will help for the economic
growth of developing nations.
The MNCs with their brain and muscle can save the backward countries from
destruction, by transferring technology management skills, innovations and capital
resources. This will create more and more industries and employment opportunities in
backward economies.
MNCs internationalize production and marketing functions. They utilize cheaper raw
materials, labour and facilities of some countries and market in many other countries.
Thus the world trade and global economic activities are stimulated.
MNCs promote exports of developing countries and increase inflow of foreign exchange,
when they invest and establish large industries and increase volume of output through
improved technology. Also they plough back their profits in the host countries which will
again increase production.
The efficiency of domestic business units is increased by the competition from MNCs.
The inefficient units are driven out. By the Survival of the fittest concept every unit is
forced to increase its efficiency. This will improve the quality of economy and lead to
progress.
The social and economic conditions of less developed countries are improved by MNCs.
They develop entire infrastructure and also social amenities like schools, hospitals,
housing etc., for the conduct of their business.

DISADVANTAGES OF MNCS
The weaknesses of MNCs or the evil effects of allowing them in less developed economies are
discussed below; and the criticism of ruthless exploitation of MNCs and their effort to establish
economic imperialism, can not be neglected.
1.
2.
3.

Inspite of specific agreements on payment of royalties, dividends etc. the MNCs acquire
enormous power in host countries, which they use to ensure a free out flow of funds
across international borders.
The MNCs use their oligopolistic power only a few competitors) in maximizing their
profits and repatriate them to their home countries. The ooutflow of foreign exchange by
way of their profits is ever increasing in ratio of inflow by way of foreign investment.
The MNCs try to corrupt the workers through higher wages and incentives and the
officials and rules of host countries by bribery commission, lobbying etc.
47

4.
5.
6.
7.

8.

MNCs develop their economic dominance on host countries and also force their own
culture spoiling home cultures and brings down the moral values.
The governments of host countries can not check the activities of the MNCs especially
their malpractices in tax evasion, misuse of foreign exchange, corrupting the local public,
cut-throat competition advertisement wars and so on.
MNCs do not create large employments in practice. With advanced technology and
automation they utilize little labour force. Also when the small and medium industries are
thrown out by the competition of MNCs the unemployment become still vigorous.
In actual practice, the less developed nations realized that MNCs hesitate to transfer
advance technology needed for the host country and to train, local personnel. Also they
interfere in national and political affairs and even they influence and change the political
powers of the local governments to their favour.
MNCs drain off developing countries n the long run by way of monopolistic position
and profits. It is criticized that MNCs are the new form of exploiting tools of Imperial
powers. The top MNCs at present have sales turnovers more than the total GDPs (Gross
Domestic Products) of some developing countries.

MULTINATIONAL IN INDIA
India had better experiences with MNCs. They have started dominating in tobacco, toiletries,
pharmaceutical, cosmetics, foodstuffs, petrochemicals and many other manufacturing industries. The
governments policy on MNCs is not clear.
MNCs in India helped in capital t\fromation and in increasing efficiency of competing firms. But they
repatriated large profits (Rs 634 crores from 1965 to 1970). They did not show interest in increasing
our exports.
They have imported on fifth of total exports. They want to make use of our wide markets and make
huge profits. They never show their true balance sheets and they do not develop R & D here, as
expected.
The MNCs produce goods of less needed technology like vanaspathi, toothpaste, shampoo, soaps etc;
they hesitate to invest in basic industries, which require long gestation period.
In our country, the affiliates of multinationals like Bata, Pfizer, Siemens, Union carbide, Phillips
India, Hindustan lever, Colgate Palmolive, Dunlop etc., enjoy a highly protected market with high
profitability. At present, India have become much depending on MNCs and cannot restrict or control
foreign capital. We have the necessity of protecting home industries while admitting MNCs, to
protect our employment, self-reliance and economic growth. This will be a tough task for our
government in the full form of globalization in the days to come.

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LESSON 14
TECHNOLOGICAL ENVIRONMENT AND BUSINESS:
The modern society is living in an age of science and technology. Science is the body of knowledge
and technology is the application of knowledge in production. Basically technology refers to the
knowledge of how to do things, so the term know how is also used. A technological change is
usually defined as that results in a shift in the overall production function.
Technology is a macro level term used to denote the considerable changes in business activities and
in the economy to advance to the next phase. Examples for technological changes are invention of
steam engines, and electrically operated engines that resulted in industrial revolution; the electronic
field and now the computers that help the business activities to grow in a galloping speed.
So, the technology includes technical advancements, applications of inventions and innovative ideas.
It takes the form of new methods and procedures in productions function, entirely a new product or
improved product features drastic cut n production cost and so on,
Technology very much influences the growth of business and industries and ultimately economic
development. It also influences the society. Let us discuss the impacts of technology one by one.
IMPACT OF TECHNOLOGY ON SOCIETY
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Technology improves the standard of living by means of increased employment and

personal income.
It breaks joint family system through the easy mobility of labour. Due to technological
development more industrial employment emerged and the rural population migrated to
towns.
The hold on religions gets relaxed by the spared of technology. The mode of living
changed and many religious and superstitious beliefs vanished.
People adopt rational approach in continuing their socal practices and their outlook has
broadened.
Women get employment and due to their earning capacity their status, and independent
ness increased.
Materialism occupied the place of personal and moral values i.e. people become money
minded and even they could not spare much time for the brought up of their children.
Technology has widened the gap between the poor and rich and results in unemployment,
which is dangerous for the labour oriented countries like India.
Technology leads to rapid urban development, which results in congestion, pollution and
ecological problems.
It results in excess dependence of developing countries on advanced countries for the
import of technology.
Social, religious and cultural reforms took place quickly due to the wide contacts of the
people in work place and outside.

IMPACT OF TECHNOLOGY ON BUSINESS

1.

Technology facilitates large scale production, which economizes cost and improves
quality. Therefore the profit will be higher.
49

2.
3.
4.
5.
6.

Adoption of technology is necessary to meet or win competitive price and quality. When a
firm fails to adopt improved technologies it may be driven out from market.
It increases the efficiency of labourers through division of labour and specialization.
Sometimes it may result in many employer-employee disputes and wastage of energies.
This is due to the resistance to technological change by the working class.
Technological improvements help to improve the process, techniques and use of materials.
This reduces the time and energy of workers therefore their performance increases.
It is possible by modern technology for the business people to offer variety of goods that
could effectively satisfy the consumer needs.

IMPACT OF TECHNOLOGY ON ECONOMIC DEVELOPMENT

1.

Technology is inevitable for the economic progress of any country. By the use of
technological improvements, rapid industrialization and industrial output is possible: it
increases national income.
2.
Due to the expanding industrial employment opportunities the individual income and the
standard of living increases, which is the indication of economic progress.
3.
It develops the quantity and quality of skilled labourers which is the potential factor for
economic progress.
4.
It reduces the preponderance of agriculture and develops industrial sector. Normally the
agricultural productivity is affected by natural calamities and excess use of labour input.
Whereas industrial productivity could be increased by technology, and economic progress
could be fastly achieved.
5.
By improving technological applications a variety of new products could be offered to
consumers. By this a number of new business units could also emerge.
6.
By developing indigenous technology through research and development, import of
foreign technology could be reduced. This will reduce the use of foreign exchange
reserves, so the economy can prosper.
IMPORTANCE OF TECHNOLOGY TODAY
Joseph Schumpeter the renowned economist enlights the contribution of technology. He said that
industrial growth depends upon technological innovations and the ability to translate technology into
profits. By using modern technology, new and useful good and services are introduced and this
facilitates the progress of business in the dynamic world.
Based on the broad phases of technology civilization have been classified into five societies:
1)
2)
3)
4)
5)

Nomadic society
Agricultural society
Industrial society
Service society and
Knowledge society.

In the first three stages manual labour was used as the primary skill. In services society, the service
industries like retailing, banking, insurance, health care etc., use the manual, skilled and intellectual
labour. In knowledge society, knowledge and information as the new form of technology, play a vital
role in serving the human wants. That if why the computers and the information technology is
occupying a greater attention of business world today.
50

LESSON 15
CHOICE OF APPROPRIATE TECHNOLOGY
Todays business in any country as we have already discussed, is to compete in the world level. It is
actually, competition through technology. So, every country should develop its own technology or
atlas it should import from other countries for using in its production and economic growth.
Normally the underdeveloped economies for their industrial growth require import of technology
from the developed countries; They can not wait till their domestic technology is developed as rapid
promotion of industries is inevitable. Our country imports technology in the form of improved
machines, process, techniques, products and skills. In this process the importing countries have to be
careful in choosing the right technology.
CHOICE OF TECHNOLOGY
Choosing a technology is a critical decision. When we have to import a technology it should be a
relevant one to the domestic climate.
Foreign technology is a double-edged knife, unless we are careful it may retard our economic
development. An unfit technology, when imported also causes a great foreign exchange burden.
FACTORS TO BE CONSIDERED IN CHOOSING THE APPROPRIATE TECHNOLOGY
1.

POPULATION

The proposed technology is to be foully analyzed with relevance to the social and industrial needs of
the country. Such technology should develop industries without affecting employment opportunities
especially in a populous country like ours.
2.
ABILITY
Technical readiness of the country to accept the new technology is to be considered. If our technical
personnel are not skilled enough to use the technology properly, it will not cause the expected
development.
3.

FOREIGN EXCHANGE CRISES

Import of technology is a question of using the scarce foreign exchange reserves. It should not be
chosen based on kick-backs or narrow focused decisions. Also the out-dated technologies may be
cleverly sold by some advanced countries, for example some medicines that were banned for
pollution are exported by them.
4.

SELF RELIANCE

Choice should be made such that the technology does not make our country highly dependant on
some advanced countries. This will lead to exploitation of our resources through unscrupulous terms
and conditions of developed nations. Slowly our self-reliance may be corded, by their domination.

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5.

RESOURCE AVAILABILITY

The proposed technology should be aimed to utilize surplus resources within the country, and not the
scarce resources. It may be avoided if the raw materials are also to be imported.
6.

DEVELOPMENT STAGE

The appropriate technology may be chosen by analyzing the stage of domestic technology level. Too
much of advanced technology may not be suitable for a primitive or intermediated level of
technology climate. The importing country should be in a position to put into the effective use of
technology, for expediting economic development.
7.

POLLUTION

The technology that causes pollution may be carefully avoided. The developing nations usually fail
to think in the long run to preserve natural and ecological balance of the country. Apart from choosing
the right technology developing country should try to substitute the import of technology by way fo
research and development. Continuous import will ruin the economic self-reliance. So, very much
cautious approach is needed to choose the right technology keeping in mind the selfish motive of the
exporters and the specific needs of importing counties.

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LESSON 16
SOCIAL RESPONSIBILITY OF BUSINESS
There was a time when making of profit by the business unit was the sole objective. It is now
generally agreed that business should reformulate its objectives in such a way that social goals are put
on a par with economic goals. Some people may not realize the need for social involvement of
business. Today the operations of business enterprises affect a wide spectrum. The resources they
make use are not limited to their own of the proprieties but also to the contributions of shareholders,
suppliers, employees, local community and the society at large. These groups are also affected by the
way an enterprise functions.
George Goyder rightly points out that industry today can no longer be regarded as a private
arrangement for enriching shareholders it need to embrace many interests which go to make up
industry in a common purpose. Gandhiji had also stressed this view in his trusteeship concept of
business managers. Also, nationalization of business by government is possible under our
constitution. For example, banks, railways, insurance etc., were nationalized to serve better the
community. So prevention is better than cure and the business units may volunteer to solve social
problems.
MANAGEMENT EDUCATION
Spreading of business management education and the development of professional
managerial class has created a climate of socially responsive business units. They realize the need to
serve workers, consumers and the local public. The co-operate with government measures. So this
responsibility has become an accepted management philosophy.
MORAL STANDARDS
Teachings of the ideals of moral values and ethical standards among businessmen have increased the
importance of social involvement. Because when in a society the problems and disorders are
increasing a business unit cant just exist. For example in the great depression all business units had
to be closed due to social problems. Then only the businessmen started requesting the government to
intervene in business and industrial activities to control economic fluctuations.
Business units are the creations of the society; through the government regulations and the laws of the
parliament they are given the rights and good climate to continue their operations.
The Business enterprises therefore have to function by keeping in mind the interests of society while
at the same time they should justify themselves on economic performance. In other words, they have
to consider the interest of the consumers, shareholders, employees, employees, government and
society, while they try to earn profit. Further, as the business is an organ of society, it is required to
discharge its social obligations to the various interest groups of the society.
Let us now see the obligations in detail :
1. OBLIGATIONS TO CONSUMERS
A business enterprise has the basic responsibility to wards the consumers while offerings the
products. The responsibilities of the business towards the consumer may be listed as (1) reasonable
quality products, (2) fair and just process (3) good after sales service (4) Avoiding misleading
advertisements (5) Avoiding adulteration, hoarding black-marketing and other unfair practices and (6)
keeping un consumers long run welfare by giving consumer education, avoiding unwholesome
products etc..
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2. OBLIGATIONS TO WORKERS
Responsibilities of business enterprise towards workers are as follows :
1.
2.
3.
4.
5.

The workers must be given security of service along with fair wages.
Workers must be given equal opportunities for growth and development
There must be good schemes for employee welfare, health and safety and also social
security measures.
There must be profit-sharing schemes.
Opportunities must be provided to the workers to participate in management.

3.
OBLIGATIONS TO SHAREHOLDERS
The shareholders are the persons who provide the funds to the business enterprise and hence the
management has some responsibilities to the shareholders. The business should be managed
efficiently so as to provide a fair return on the investments and to ensure business growth to the
shareholders. Further the business enterprise should supply to its shareholders accurate and
comprehensive reports and accounts about its working.
4.

OBLIGATIONS TO SOCIETY

The business enterprise should produce wholesome goods and maintain economic well being of the
society. The gains of the improved production of the enterprise should be shared by all the
constituents of the society, viz. management, shareholders, workers, consumers and further, the
enterprise should take the responsibility for providing amenities in the locality where it is located. It
must behave as a good citizen and must not cause damage to law and order of the community. It
should take measures to remove effluents, fouling the air and conditions of slum, congestion,
ecological imbalance and other evils.
5.
OBLIGATIONS TO GOVERNMENT
Business community should extend full support to the government in implementing its policies and
programmers. It should help the Government in the equitable distribution of commodities which are
in scare supply in controlling prices and inflationary trend in the country. It should also respect
Governments social welfare measures. Business community should submit all the documents to the
Government as required by law. Business should pay all taxes in time.
The foregoing discussion of the social responsibilities of business indicates that a business unit has
social obligations to the various segments of society. The businges community must strive to provide
the greatest possible service to the masses of the society. Business enterprise being an unit of society
will have to justify the expectation of the community. Otherwise, the community may try to replace it
by some alternatie institution. Hence the business community, in its own interest of survival, has to
recognist and implement the concept of social responsibility.

54

BUSINESS ENVIRONMENT
MODEL QUESTION PAPER
Time : 3 hours

Max. Marks : 100

(5 X 8 = 40 Marks)

SECTION A
Answer any FIVE of the following question:
1.
Explain the meaning and importance of business environment.
2.
Define culture. What are the feature of Indian culture?
3.
What are the evils of caste system?
4.
Write examples for the intervention in business, by political polices and programs.
5.
What do you mean by Directive Principles of State Policy? Explain its nature.
6.
What are the merits and demerits of capitalist economic system?
7.
Describe the objectives of public sector in India.
8.
Explain the importance of choosing the appropriate technology.
SECTION B
( 4 X 15 = 60 Marks)
Answer any FOUR of the following question:
9.
Account for the various environmental factors and explain their impact on business.
10.
What are the features of demographic trend?
11.
Explain the important provisions of Directive Principles of State policy.
12.
Evaluate the issues in Center-State relations.
13.
Describe the different economic systems and the role of business units in each system.
14.
What are the relevance of multinational corporations in our new economic policy?
15.
Explain the different responsibilities of business to the society.

BUSINESS ENVIRONMENT
QUESTION PAPER - MAY 2004
1
2
3
4
5
6
7
8

9
10
11
12
13
14
15

Attempt any five (8 Marks each)

Mention the External and Internal factors influencing the Business Environment?
How a demographic variable affects the Business Environment?
Business and Communal system- Comment?
Explain about the significant role of political factors influencing the Business Environment?
Discuss about the economic environment role in business environment?
Highlights the mature and scope of multinational companies (MNC's)
Technology Environment and its impact on Business Environment? Explain?
How a Business Manager can maintain the social responsible?
Attempt any four (15 Marks each)
Discuss about the environment influences factors for a business?
Social environment- Comment?
Directive principles of state policy - it role in business Discuss?
Business Economy is a major contributor to the National Economy- Comment?]
Technology Environment and its impact on Business- Comment?
Technology Obsolence will bring down the economy growth. Do you agree or disagree?
Substantiate with suitable illustrations?
How a legislation governs the business social responsibility ? Mention some laws.?

55