BUSINESS ENVIRONMENT

UNIT – I: Business - Scope - Characteristics - Goals - Criticisms - Business Environment - Objectives and
types.

UNIT – II: Economic Environment- Concept –Factors-Basic Economic System - Economic Planning- Privatization
– Nature and objectives.

UNIT – III: Political Environment- Political Institutions-Legislature, Executives and Judiciary - Government in
Business-Regulatory, Intervention and Participatory roles.

UNIT – IV: Financial Environment - Financial System -RBI - Commercial banks– International Economic Institu-
tions - World Bank – IMF– WTO.

UNIT – V: Social and Cultural Environment-Impact of Culture on Business - People's Attitude to Business and
Work-Business and Society - Social responsibility of Business – CSR.

TEXT BOOK RECOMMENDED: K. Aswthappa- Essentials of Business Environment-Himalaya Publishing House.

BOOKS FOR REFERENCE: 1. George Steiner & JohnF.Steiner- Business, Government and Society-Tata McGraw Hill
2. Adikari - Economic Environment in Business- Himalaya PublishingHouse
3. Francis Cherunilam - Business Environment
4. IshwarC.Dhingara.-Indian Economy-Sultan Chand &Company
5. RuddanDatt and K.P.M. Sundharam -Indian Economy
6. Sundaram& Black - The International Business Environment - Prentice Hall, New Delhi.
7. Cherunilam, Francis - Business Environment - Text and Cases, Himalaya Publishing House.

Business:

Old Concept: Business may be defined as human activity directed towards producing or acquiring wealth through
buying or selling goods.

Business may be defined as an activity in which different persons exchange something of value, whether goods or
services for mutual goods or profits.

Modern concepts: Business means to create customers and expand market shares – Peter F. Drucker.

 Business includes all those legal activities, which are related with earning profit.
 Business includes all the economic activities which are related with earning wealth.

Every human activity which is engaged in for the sake of earning profit may be called business.
- James Stephenson.
Human activity directed towards producing and acquiring wealth through buying and selling goods.
- L.H Haney.

Environment: Environment means surroundings. (The culture that an individual lives in, and the people and insti-
tutions with whom they interact)

A business, also known as an enterprise or a firm, is an organization involved in the trade of goods, services, or both
to consumers. Businesses are prevalent in capitalist economies, where most of them are privately owned and provide
goods and services to customers for profit. Businesses may also be not-for-profit or state-owned.

The business activities may be grouped under two broad headings, viz., (1) Industry and (2) Commerce. A business
undertaking, which deals with growing, extracting, manufacturing, or construction, is called an industrial enterprise.
On the other hand, a business undertaking, which is concerned with exchange (buying and selling) of goods and ser-
vices, or with activities that are incidental to trade, like transport, warehousing, banking, insurance and advertising, is
called a commercial enterprise.

Nature and characteristics of Business: (goal)

1) Business is an economic activity.

2) It includes the activities of production or purchase and distribution/exchange.
3) Dealings in Goods and Services.
4) It implies regularity of transactions
5) It aims at earning profits through the satisfaction of human wants.(Profit motive)
6) It involves risk; it is not certain that adequate profit will be earned.
7) It serves a social purpose by improving people’s standard of living.
8) Creation of form, time and place utility.
9) Regularity and Continuity in Dealings.
10) Innovation and research.
11) Business is both science and art.
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Objectives of Business:

Profit is not the only objective of business. Every work is started with an objective. The objective is a goal. The
achievement of which is a necessity and all efforts are concentrated for the fulfilment of the objective, according to
the Peter-Drucker, objectives are needed in every area where performance an results directly and vitally affect surviv-
al and prosperity of the business.

1. Organic Objectives.
a. Objectives of Survival.
b. Objectives of Growth.
c. Objective of maintaining prestige.
2. Economic Objectives.
a. Profit.
b. Creating of more customers.
c. Innovation for better stability and income.
3. Social Objectives.
a. Supply of Quality goods.(produce and market)
b. Providing employment.
c. Avoidance of anti-social practices.
4. Human objectives.
a. Fair deal.
b. Participation
c. Job satisfaction.
5. National Objectives.

Significance of Business in Modern Society:

1. Improvement in standard of living: Business helps people in general to improve their standard of living.
2. Proper utilization of resources: It leads to effective utilization of the scarce resources of society. It provides fa-
cility of mass production.
3. Better quality and large variety of goods and services: It involves production, purchase and sale of goods and
services for price. Customer’ satisfaction is the backbone of modern business. Services such as supply of water,
electricity etc. may be considered highly significant for the community.
4. Creates utilities: Business makes goods more useful to satisfy human wants. It adds to products the utilities of
person, time, place, form, knowledge etc. Thus, people are able to satisfy their wants effectively and economi-
cally.
5. Employment opportunities: It provides employment opportunities to large number of people in society.
6. Workers' welfare: Business organisations these days take care of various welfare activities for workers. They
provide safer and healthier work environment for employees.

Classification of Business Activities

Business activities are undertaken to satisfy human wants by producing goods or rendering services. Business activi-
ties on the basis of functions into two broad categories: (a) Industry & (b) Commerce.
Industry is concerned with the production and processing of goods. This type of business units is called ‘industrial en-
terprises’ which produce consumer goods as well as machinery and equipment’s. On the other hand, ‘commerce’ in-
cludes all those activities which are necessary for the storage and distribution of goods. Such units are called ‘com-
mercial enterprises’ which include trading and service activities like transport, banking, insurance and warehousing.

Industry: Industry means production of goods for sale by the application of human or mechanical power. In
other words, industry refers to economic activities which are connected with raising, producing and processing of
goods and services.

Characteristics of Industry

1. Industry refers to the productive aspect of business.

2. Production is done by the application of human or mechanical power.
3. It creates form utility to natural or partly processed goods.
4. It is concerned with the production of both producer and consumer goods.
5. Industrial activities are regulated by different laws.
6. It involves continuous operation.

Types of Industries

1. Primary industries include all those activities which are connected with extraction, producing and processing
of natural resources.
a. Extractive Industries: Extractive industries are concerned with the extraction of materials from the earth,
sea and air such as mining, farming, fishing and hunting etc. Products of these industries are used either
directly for consumption such as food grains, fruits and vegetables or as raw materials such as cotton,
sugar-cane, etc.
b. Genetic Industries: Genetic industries include activities connected with rearing and breeding of animals
and birds and growing plants. Reproduction and multiplication is the main activity in these industries,
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such as, agriculture, animal husbandry, dairy, poultry, etc. Main products are milk, wool, butter, cheese,
meat, egg, fish, seeds of plants, etc.
 2. Secondary industries are concerned with the materials which have already been produced at the primary
stage.
a. Manufacturing Industries: Industries engaged in the conversion of raw materials or semi-finished prod-
ucts into finished product are called manufacturing industries. Cotton is converted onto textiles and iron
one is converted into in these industries. It creates a form utility of the product.
b. Construction Industries: The activities of Construction industries include erection of buildings, bridges,
roads, railways canals etc. Their output do not consists of movable goods. It makes use of the output of
other industries like brick, cement, steel etc.

Commerce: Commerce is the sum total of all the activities connected with the placing of the product before the
ultimate consumer. It provides the necessary link between the producer and the consumer of goods.
Commerce is defined ‘as activities involving the removal of hindrances in the process of exchange’. Commerce in-
cludes all those business activities which are undertaken for the sale or exchange of goods and services and facilitates
their availability for consumption and use - through trade, transport, banking, insurance, and warehousing. Thus
commerce includes trade and auxiliaries to trade, that is transport, banking, insurance and warehousing.

The main characteristics of commerce are as follows:

1) Commerce is the sum total of activities which facilitate the availability of goods to consumers from different
producers.
2) It aims at ensuring proper distribution of goods.
3) It adds different type of utilities to the goods by making goods available at the right time and the right place to
the people who need them.
4) It includes trade and auxiliary to trade.

Trade: Trade is an integral part of commerce and refers to sale and transfer of goods. It involves actual buying and
selling of goods. It means exchange of goods and services for cash or credit. Traders help in directing the flow of
goods to the most profitable market. They also bring about equitable distribution of goods on a national and interna-
tional scale. It is because goods are produced on a large scale and it is difficult for producers to reach individual cus-
tomers, that trade is said to remove the hindrance of persons through traders. Goods acquire place utility through
trade.

Characteristics of Trade

 Trade is regarded as the primary activity in commerce;

 It means exchange of goods and services for price;
 It helps in directing the flow of goods to the most profitable market;
 It helps to equalise the supply of and demand for goods in different markets both national and international.

Classification of Trade

1) Home Trade or Internal trade: Home Trade means trade carried on within the boundaries of a country.
The primary object of home trade is to bring about proper distribution of goods within the country. It may be
divided into two types
a. Wholesale Trade: Wholesale trade involves buying goods from producers and selling them in small quan-
tities to retailers. The wholesaler generally deals in large quantities of goods of a limited number of vari-
eties. He serves as a connecting link between the producer and the retail dealer.
b. Retail Trade: A retail trade consists of selling goods directly to the consumers in small quantities. A re-
tailer usually purchases goods from wholesalers or manufacturers and deals in a variety of goods of dif-
ferent manufacturers.
2) Foreign trade or External Trade: External trade refers to trade between two countries. It implies buying and
selling of goods by traders of two different countries. It creates a very wide market for goods produced in dif-
ferent countries. External trade involves
a. Export is concerned with the sale of goods to foreign countries.
b. Import trade relates to the purchasing of goods from other countries.

Transport:

It is one of the most important auxiliaries to trade. Transportation helps trade by facilitating the movement of goods
and passengers from one place to another. Transport creates ‘place utility’ of the goods and remove the problem of
distance. All kinds of goods can be transported in large quantities over long distances. A business can depend upon a
number of modes of transportation – land transport (road, railways, and pipeline), water transport (inland waterways,
coastal and sea) and air transport (domestic and international).

Communication:

Now-a-days it is not possible to have business without communication. Communication implies transmission of infor-
mation, ideas, opinions, etc between two or more persons. It is a systematic and continuing process of telling, listen-
ing and understanding. Communication may be of two types - (i) internal and (ii) external. Internal communication
refers to transmission of information by a person to another of the same organisation. External communication refers
to transmission of information by persons to others outside the organisation. Methods of communication may include
face to face, by telephone, postal mail, etc. On the basis of means of communication, there are two types of commu-
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nication –oral and written.

Banking and Finance:

Banking provides safe, efficient and convenient mode of payment for goods in inland trade as well as in foreign trade.
Banking helps business firms to overcome the problem of finance by lending money as and when required. Banks ac-
cept deposits and lend money. The other services of banks are: discounting of bills, collection of cheques, acting as
agent. A bank accepts deposits on various accounts such as fixed deposit, savings, recurring deposit, and current.
Loans are granted through over-draft, cash credit, loans and advances, discounting of bills. Other services of banks
include collection of payments on cheques, bills, drafts etc., sending money from one place to another, buying and
selling securities, payment of insurance premium, issuing travellers’ cheques, providing locker system, and providing
information on credit worthiness. Banks are of various types: commercial, agricultural, indigenous, rural, cooperative,
exchange, central, etc. In fact banking is the lifeline of business.

Finance:

Finance is the life blood of business. It implies provision of money at the time it is required by business. Provision of
funds is essential for every type of trade. Finance needed by business is called “Business Finance”. It means arrange-
ment of cash and credit to carry out business activities. Types of finance required by business are long–term, medi-
um–term and short–term. Long–term finance (more than 10 years) is required for buying fixed assets; medium–term
finance (one to 10 years) is required for modernization and expansion of business, and short-term finance (upto one
year) is needed for working capital. Sources of finance may be owned funds and borrowed funds. Special financial
institutions which provide finance to business are IFCI, SFCs, ICICI, IDBI, SIDBI, and IRBI. They provide long-term
and medium-term finance.

Warehousing:

Refers to storage of goods which are generally produced on a large scale in anticipation of demand. Goods have to be
stored for some time before transportation by manufacturers, wholesalers and retailers. Thus warehousing creates
‘time utility’.

Insurance:

Insurance occupies a prominent and valuable place as an aid to business and commerce. Insurance provides security
against risks. It makes trade and business secure by making provision against all probable losses. Insurance is based
on the principle of ‘pooling of risks’. Insurance helps the businessman to conduct his business with confidence and
peace of mind. There are two major types of insurance coverage - (i) insurance of life of people and (ii) insurance of
property

Distinction between industry, commerce and trade

Basis of Differ- Industry Commerce Trade

ence
Meaning Production of goods & services for sale. Sum total of activities connected Exchange of goods for price
with transfer of goods from pro- through buying and selling.
ducers to consumers.
Utility Creates form utility Creates time and place utility Creates time and place utility
and removes hindrance of per-
sons
Broad Four types Two types Two types
classification  Genetic.  Trade.  Internal.
 Extractive.  Auxiliaries to trade.  External.
 Manufacturing.
 Construction.

Business Criticisms (meet)

 Sufficient cash flow to meet business.

 Delivery of service to customers. (marketing, sales or distributional and operational)
 Health and safety of employees and social ware.
 Meet regulatory requirements.
 Creditors.
 Suppliers and customers.
 Management oversight.
 Requirements findings.
 Lawsuit action.
 Retain customers and stakeholders confidence.

Business Environment:

The combination of internal and external factors that influence a company's operating situation. The business envi-
ronment can include factors such as: clients and suppliers; its competition and owners; improvements in technology;
laws and government activities; and market, social and economic trends. William F. Glucck defines business environ-
ment “as the process by which strategists monitor the economic, governmental, market, supplier, technological, geo-
graphic, and social settings to determine opportunities and threats to their firms.
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“The total of all things external to firms and industries which affect their organisation and operation are called busi-
ness environment”. – Bayard O. Wheeler.
Features of Business Environment:

a) Is the sum total of all factors external to the business firm and that greatly influence their functioning.
b) It covers factors and forces like customers, competitors, suppliers, government and the social cultural politi-
cal, technological and legal conditions.
c) Is dynamic in nature that means it keeps on changing.
d) The changes in business environment are unpredictable. It is very difficult to predict the exact nature of fu-
ture happenings and the changes in economic and social environment.
e) It differs from place to place, region to region and country to country.

Importance of Business environment:

a) Determining opportunities and threats: The interaction between the business and its environment would
identify opportunities for and threats to the business. It helps the business enterprises for meeting the chal-
lenges successfully.
b) Giving direction for growth: the interaction with the environment leads to opening up new frontiers of growth
for the business firms. It enables the business to identify the areas for growth and expansion of their activi-
ties.
c) Continuous learning: environmental analysis makes the task of managers easier to dealing with challenges.
The managers are motivated to continuously update their knowledge, understanding and skills to meet the
predicted changes in realm of business.
d) Image building: environmental understanding helps the business organisations in improving their image by
showing their sensitivity to the environment within which they are working.
e) Meeting competition: it helps the firms to analyse the competitor’s strategies and formulate their own strat-
egies accordingly.
f) Identifying firm’s strength and weakness: business environment helps identify the individual strengths and
weaknesses in view of the technological and global developments.

Objectives of Business Environment

1) Knowledge of information: By studying the business environment, we can know the changes of business.
This information is very useful for our business. Every businessman should aware current environment of
business. With this, he can think the future of his business in such environment.
2) Basis of decisions: one of main objective of the study of business environment that it can provide all the in-
formation which is needed for taking good decisions. Suppose, you completed your internal business envi-
ronment study. With this study, you can take decision relating to purchase, sale, salary and price because
you know your competitor, you know your suppliers and you know your customers.
3) Helpful in making of policies: for making good business policies, we need to know and scan business through
business environment.
4) Technological planning: today, technology is changing very-fastly. You study you can make better techno-
logical planning of your business.
5) Survive in the business: Sometime industry may face recession. Production may be unlimited but sales will
be limited. Only that business will survive who estimate these full situations in advance through environment
study.

Characteristics of Business Environment

1. Business environment is complex: (Combination of political, economic, legal, social, cultural technological
etc.,)
2. Business Environment is dynamic: (keep on change business plans based on environment changes.)
3. Business environment affects different firms differently.
4. Business environment has both short-term and long-term impact.
5. Unlimited effect of external environmental factors.
6. Uncertain.
7. Interdependent components.
8. Includes both internal and external environment.

Significance of the study of business environment (need)

a. To frame policies.
b. To ensure optimum utilisation of resources.
c. To analyse competitors strategies and formulate counter measures.
d. To keep business dynamic and innovative.
e. To provide input and for decision making.
f. To find out the strengths of business.
g. To identify weakness of business.
h. To find out the opportunities available to business.
i. To identify threats posed to business.
j. To know the internal environment.
k. To understand market conditions.
l. To adjust with technological advancements.
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m. To understand international events and their impact on business.

n. To understand economic policies of government and their impact on business.
 o. To understand political situation and its effect on business.
p. To foresee the impact of social cultural factors.

Types of Business Environment

Business Environment

Internal Environment External Environment

• Human Resources & Internal Relation-
ships. Micro Environ- Macro Environment
• Company Image. ment
• Management Structure. • Consumers. • Economics Factors.
• Physical Assets. • Suppliers. • Political & Legal Factors.
• R & D Technological Capabilities. • Competitors. • Demographic Factors.
• Marketing Resources. • Middlemen. • Socio-Cultural Factors.
• Financial Factors. • Publics. • International Factors.
• Geographical and Ecological Fac-
tors.
• Technological Factors.

Internal Environment:

It includes internal factors of the business which can be controlled by business. It refers to environment within the
organisation. It includes;

1. Business objectives.
2. Managerial policies.
3. Departmental objectives.
4. Management and employees of the organisation.
5. Labour management relationship.
6. Brand image and corporate image.
7. Physical resources including infrastructure available with the business.
8. Vision and thinking of top management.
9. Research and development activities of organisation.
10. Working conditions of the organisation.
11. Morale and commitment of human resources, and etc.,

External environment:

Business environment may be defined as the set of external factors such as the economic factors, social-cultural facts,
government and legal factors, demographic factors, geo-physical factors which are uncontrollable in the nature and
affect the business decisions of a firm or company. It may two types;
q. Micro / Operating Environment.
r. Macro / General environment.

Micro environment:

The micro environment consists of factors in the company’s immediate environment which affect the performance of
the business unit. These include suppliers, marketing intermediaries, competitors, customers and the public. – Philip
Kotler.

It includes the following:

i) Suppliers.
a. Reliability.
b. Multiple suppliers.
ii) Customers.
a. Wholesale customers.
b. Retail customers.
c. Government and other institutions.
d. Industrial customers.
e. Foreign customers.
iii) Market intermediaries.
a. Middlemen.
b. Marketing agencies.
c. Financial intermediaries.
d. Physical intermediaries.
iv) Competitors.
v) Public.
a. Media public.
b. Local public.

Macro Environment:
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It includes forces that create opportunities and pose threat to the business units. It includes economic demographic,
natural, technological, political and cultural environments. – Philip Kotler.

The followings:

1. Economic Environment: it refers to those economic factors which have impact on the working of business –
viz., economic system, economic policy, nature of economy, trade cycles, economic resources, level of in-
come, distribution of income and wealth, statutory provisions, etc.,
a. Economic conditions. (style and quality of life)
i. Income level.
ii. Distribution of income.
iii. Demand and supply trends.
iv. Various phases of trade cycles.
b. Economic policies.
i. Monetary policy.
ii. Foreign investment policy.
iii. Fiscal policy.
iv. Industrial policy.
v. Export import policy. (EXIM)
vi. Industrial licensing policy.
In India the main legislations
1. Industrial Dispute Act – 1947.
2. Factories Act – 1948.
3. Industries Development and Regulation Act – 1951.
4. Companies Act – 1956 and Companies Bill – 2009.
5. Consumer Protection Act – 1986.
6. Depositories Act – 1996.
7. Foreign Exchange Management Act – 1999.
8. Securities and Exchange Board of India Guidelines – 2000 (SEBI guidelines)
9. Competition Act – 2002.
10. Limited liability Partnership Act – 2008.
c. Economic System.
i. Capitalism.
ii. Socialism.
iii. Mixed Economy.
d. Other economic Factors. (infrastructure, transport, power, communication, financial market, etc.,)

2. Political Environment. (Stable and dynamic political environment is indispensable for business growth)
a. Political ideology of government.
b. Political stability in the country.
c. Relations of our nation with other countries.
d. Defence and military policy.
e. Welfare activities of government.
f. Centre state relationship.
g. Approach of opposition parties towards business.

3. Socio Cultural Environment. – refers to influence exercised by certain social and cultural factors which are
beyond the control of business unit. Such factors as follows;
a. Attitude of people to work.
b. Family system.
c. Caste system.
d. Religion.
e. Education.
f. Marriage.
g. Habits and preference.
h. Languages.
i. Urbanisation.
j. Customs and traditions.
k. Value system.
l. Business ethics.
m. Social trends.
n. Social responsibility of business and etc.,

4. Technological Environment.

5. Natural Environment – it includes geographical ecological factors such as natural resources, weather and cli-
matic conditions, port facilities, topographical factors such as soil, landforms, sea, rivers, rainfall, environ-
mental pollution, etc.,

Ecological: environmental pollution in the form of air pollution, water pollution and noise pollution have
caused disturbances in ecological balance.
i. Climatic and weather conditions.
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ii. Availability of natural resources.

iii. Topographical factors; physical features of a place.
 iv. Pollution control.
v. Location aspects.
vi. Port facilities.

6. Demographic environment: is the study of features of population viz., its size, its growth rate, age composi-
tion, sex composition, income level, education level, family size, family structure etc., its affects demand,
tastes, fashion, likes preference and others.,
a. Population size and growth – urban and rural.
b. Age composition.
c. Sex composition.
d. Educational level.
e. Family size and structure.

7. International Environment - Import and Export and foreign exchange and also global crisis. Following factors
affect business.
a. Globalisation.
b. Global financial crisis.
c. International agreements and declarations.
d. International terrorism.
e. Cultural exchange.

8. Ethical Environment and others - The term business ethics refers to the system of moral principles and rules
of conduct applied to business. This means that the business should be conducted according to certain self-
recognized moral standards. Business, being a social organ, shall not conduct itself in a way detrimental to
the interests of society and the business sector itself. A profession is bound by certain ethical principles and
rules of conduct which reflect its responsibility, authority and dignity. The professionalization of business
management, should therefore, be reflected in the increasing acceptance of business ethics.

Business Environmental Scanning:

“Environmental analysis is the process by when strategies monitor the environmental factors to determine opportuni-
ties for the threats to their firms. Environment analysis also consists of managerial decisions made by assessing the
significance of the data (opportunities and threats) of the environmental analysis”.

Need To Scan Environment (business)

 Effective utilization of resources.

 Constant monitoring of the environment.
 Strategy formulation.
 Identification of threats and opportunities.
 Useful for the managers.
 Prediction of future.

Limitations of Environmental Analysis:

 Unexpected and unanticipated events.

 Not a sufficient guarantor.
 Uncritical faith.
 Too much information.
 Overcautious approach.

Economic Environment

Economic environment refers to the overall economic factors like economic philosophy of the country, economic struc-
ture, planning, economic policies, controls and regulations, etc. All these have a serious impact on the functioning of
business organizations in a country.

“It refers to the nature of economic system, economic policies of the country, organization of capital & money mar-
kets, GDP, income level, growth rate, inflation rate, interest rates, money supply, and unemployment rate”.

Economic Concept

1) Nature of the Economy: The general level of development of the economy has lot of implication for business –
it has significant bearing on the nature and size demand, govt. policies affecting business. The widely used
method of classification of the economies is on the basis of per capita income. Accordingly the low income, mid-
dle and high income economies. Low income economies are economies with very low per capita income. High
income economies are economies with very rich income per capita. Middle income economies are sub divided in-
to lower middle and upper middle income where income per capita is neither very high nor low.
2) Structure of the economy: Factors such as contribution of different structure like primary (agricultural), second-
ary (industrial) & tertiary (secondary) sectors, large, medicine, small sectors to economy. These factors and the
nature of each sector have business implication. For example, India is one of the largest producers of agricul-
tural products, because of the small and fragmented nature of land holdings, efficient collection and processing
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of products become difficult. The land holding pattern also makes productivity improvements difficult.
 3) Economic policies: There are several economic policies which can have very great impact on business. Im-
portant economic policies are

a. Industrial Policy: It defines the scope and role of different sectors like private, public, joint and cooperative.
It may influence the location of industrial undertakings. Choice of technology, state of operation, product
mixes etc.
b. Trade Policy: It can affect the fortunes of firms. For example a policy of protecting the home industry may
greatly help the import competing industries, while liberation of the impart policy may create difficulties for
such industries. This mean the firm should come up with quality, cost, and marketing and after sales service
etc.
c. Foreign exchange policy: Exchange rate policy and policy in respect of cross border movement of capita are
important for business.
d. Foreign Investment and Technology Policy: Foreign investment and technology policy will increase domestic
competition at the same time it would benefit many domestic firms – by permitting global sourcing of capital
and technology, by increasing the quantity and quality of domestic supply of many goods and services.
e. Fiscal Policy: Govt. strategy in respect of public expenditure and revenue can have significant impact on
business. The pattern of public expenditure may affect the develop of industries. Such as govt. often use tax
incentives or disincentives to encourage or discourage certain activities. For ex: when industry suffers from
recession, a reduction of taxes like excise duty or sales tax may help improve the demand.
f. Monetary Policy: The central bank, by its policy towards the cost and availability of credit, can significantly
influence savings, investments and consumer spending in economy. For example – 1% reduction in cash re-
serve ratio will significantly increase loan able funds with commercial banking systems.

Business and Economic Factors:

These are the factors which have considerable influence the business activities.

 Growth Strategy.
 Economic System.
 Economic Planning.
 Industry.
 Agriculture.
 Human Resources.
 Infrastructure.
 Financial and Fiscal Sector.
 Removal of Regional Imbalances.
 Price and Distribution Control.
 Economic Reforms.
 Per Capita Income and National Income.

Out of the above said factors, two are of prime importance:

 Economic system
 Industry

Economic System:

Is an organisation created for the purpose of satisfying human wants through the utilisation of national resources.

An economic system consists of those institutions which a given people or nation or group of nations has chosen or
accepted as the means through which their resources are utilised for the satisfaction of human wants.

Economic system features

 Institution.
 A group of people.
 Scarcity of resources.
 Satisfaction of wants.
 Interdependence of institutions and their dynamic nature.

Economic system characteristic:

 The economic system always functions with scarcity of resources. How the system effectively and efficiently us-
es the resources will determine the extent to which the needs of the people are met.
 An economic system comprises people. That is, a society of human beings alone can constitute economic sys-
tem.
 A set of institutions are created and used for the purpose of smooth functioning of an economic system. For ex-
ample, banks, money, technology, government, price mechanism, planning etc., are all institutions through
which the systems operate.
 The basic objective with which an economic system functions is to satisfy the wants of the people. Unless there
is want for a commodity or service, nothing can be produced. Hence, the economic system allocates the re-
sources in such a way that the wants of the people are satisfied.
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  On the basis of the above characteristics of an economic system, it should be clear that the economic system is
very dynamic in nature. That is, the economic system undergoes changes with every change in the institutions,
though the rate of change would differ from institution to institution.

Functions of an economic system (Problems of an economy)

The primary function of an economic system is to secure maximum satisfaction for the people of the country. (How to
reach)
 What goods should be produced? (problem of choice)
 How should they be produced? (Problem of technology)
 For whom should they be produced? (problem of distribution)

Type of Economic System

1. Capitalism
2. Socialism & Communism.
3. Mixed Economy.

Capitalism:

Capitalism is a system of economic organisation characterised by private ownership of the means of production and
distribution (land, factories, roads, etc.,) and their operation for profit under predominantly competitive conditions.

Characteristic of Capitalism

1) Freedom of enterprise.
2) Private ownership.
3) Profit Motive.
4) The market system or mechanism.
5) Consumer’s sovereignty.
6) Competition.
7) Freedom of contracts.
8) Limited rate of government.
9) Absence of a central plan.

Merits and Demerits of Capitalism

Merits Demerits
• Efficient utilization of resources. • Wastage and misallocation of resources.
• Democratic. • Economic instability.
• Automatic balance in the system. • Consumer’s sovereignty is a myth.
• Efficiency properly rewarded. • Inequality of wealth.
• Incentives for risks and uncertainties. • No freedom.
• Economic growth. • Class struggle.
• Encourage capital formation. • Unemployment and corruption.
• Inflation.

Socialism & Communism:

Socialism: Is an economic system in which the means of production are owned by the state and operated by the gov-
ernment or community and in which production is based on the welfare of community and not for the profit of a few
individuals.

“Socialism is an economic organisation of society in which the material means of production are owned by the whole
community according to a general economic plan, all members being entitled to benefit from the results of such so-
cialised planned production on the basis of equal rights” – Dickinson.

Aim of socialism

 Replacement of capitalism by socialism.

 Means of production should be owned by the state or state created organisation like corporation or boards or
authority.
 Production should be for the welfare of the community and not for the profit of few individuals or companies.
 There should be equitable distribution.

Features of socialism

1. Collective ownership.
2. Central economic planning.
3. Well defined social and economic objectives.
4. Economic equality.
5. Equal opportunity.
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Merits and Demerits of Socialism

Merits Demerits
• Better allocation and utilization of resources. • Bureaucratization.
• Elimination of unemployment. • Lack of incentives.
• No cyclic fluctuations. • Concentration of economic power in the hands of state.
• No class struggle. • Promotes corruption.
• Reduction in inequality of income. • Misallocation of resources.
• No consumer sovereignty.

Mixed Economy:

It is a system in which the public sector and the private sector are allotted their respective roles in promoting the eco-
nomic welfare of all sections of the community.

The economy may have

 Completely private sector in some areas of production.

 Completely public sector in some areas of production.
 Composite sector where both government and private enterprise will have equal areas.
 Co-operative sector where co-operative methods of production and distribution will be encouraged.

Characteristics of mixed economy

 Co-existence of public and private sectors.

 State participation in economic development.
 Distribution of ownership and control of re-sources.
 Directing the investment in socially desirable projects and channels.
 Scope for achieving balanced economic development.
 Ultimate control and regulation in the hands of government.
 Co-operation in the field of economic development.

Economic Planning

Economic planning is a resource allocation mechanism that is contrasted with the market mechanism. As a coordinat-
ing mechanism for socialist economics, economic planning substitutes factor markets and is defined as a direct alloca-
tion of resources. This is contrasted with the indirect allocation mechanism of a market economy. There are various
types that economic planning procedures and forms planning can take.

Economic planning is the making of major economic decision by a determinate authority on the basis of comprehen-
sive survey of the economy as a whole. Such decisions include what and how much to produce, how when and where
it is produced, and to whom it is to be allocated. – Dickinson.

The following characteristic features of economic planning:

a) Fixation of definite socio-economic targets.

b) Prudent efforts to achieve these targets within a given time period.
c) Existence of a central planning authority.
d) Complete knowledge about the economic resources of the country.
e) Efficient utilization of limited resources to get maximum output and welfare.

Essentials of Economic Planning:

1. Survey of current economic conditions.

2. List of proposed public expenditure.
3. Discussion of likely development in private sector.
4. Macro-economic projections of the economy.
5. Review of government policies.

Importance/Objectives of Economic planning (mixed economy)

1. Efficient utilisation of resources.

2. Market imperfections of price distortions.
3. Greater opportunities.
4. Scare resources.
5. Maximisation of national income and raising living standard.
6. Public oriented goals.
7. Full employment.
8. Equitable distribution of income.
9. Price stability.
10. Larger savings and investment.
11. Provision of social services. (rural/urban areas)
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12. Aid to victims of catastrophe.

Limitation of Economic planning:

 Measurement of labour force.

 Statistical data.
 Unused natural resources.
 Populations and real income.
 Economic repercussions of social institutions.
 Implications of restrictive tendencies.
 Wages rates and unemployment.
 Monopsony the labour market.
 Uneven distribution of entrepreneurial faculties.
 Low level of capital.
 Method of production.
 International demonstration of effect.
 Political instability.

Economic Planning in India:

“To promote the welfare of the people by securing and protecting as effectively as it may a social order in which jus-
tice, social, economic and political, shall inform all the institutions of national life.”

Rationale of Planning in India

a) Rapid Economic Development.

b) Quick Improvement in the Standard of Living.
c) Removal of Poverty.
 Increase in the employment opportunities.
 Mass production and distribution to consumption.
 Fulfilment of minimum needs programme by providing essential facilities (e.g., housing, roads,
drinking water, public health, primary education, slum improvement, etc.), and,
d) Rational Allocation and Efficient Utilization of Resources.
e) Increasing the Rate of Capital Formation.
f) Reduction in Unequal Distribution of Income and Wealth.
g) Reduction of Unemployment and Increase in Employment Opportunities.
h) Reorganization of Foreign Trade.
i) Regional Balanced Development.
j) Other Considerations.

Objectives of planning in India

In India, the First Five year plan began in the year 1951-52. Although the objectives of these plans were different, we
can identify some of the basic long-term and broad objectives of Indian planning. These are:
1. Raising the growth rate.
2. Raising the investment-income ratio.
3. Achieving self-reliance.
4. Removing unemployment.
5. Reducing the incidence of poverty.
6. Reducing income inequalities.

Privatisation

Privatization can refer to the act of transferring ownership of specified property or business operations from a gov-
ernment organization to a privately owned entity, as well as the transition of ownership from a publicly traded, or
owned, company to a privately owned company.

Methods of privatisation

1) Public Sale of Shares (Share issue privatization (SIP) - selling shares on the stock market)
2) Public Auction. (Asset sale privatization - selling an entire organization (or part of it) to a strategic investor)
3) Public Tender. ( Voucher privatization - distributing shares of ownership to all citizens, usually for free or at a
very low price)
4) Direct Negotiations. (the privatisation of properties with specific or unique features that may limit the number
of potential interested purchasers)
5) Privatization from below - Start-up of new private businesses in formerly socialist countries.
6) Management buyout or Employee Buyout (MEBO) - distributing shares for free or at a very low price to work-
ers or management in the organization.
7) Transfer of control of State or municipally controlled enterprises
8) Lease with Option to Purchase
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Merits and Demerits of Privatisation

Merits Demerits
 Improved efficiency.  Natural monopoly.
 Lack of political interference.  Public interest.
 Short Term view.  Government loses out on potential dividends.
 Shareholders.  Problem of regulating private monopolies.
 Increased competition.  Fragmentation of industries.
 Government will raise revenue from the sale.  Short-termism of firms.

Objectives and nature

1. Privatisation increases the (private sector and hence) economic growth.

2. Privatisation reinforces technological development and innovative capacity.
3. Private enterprises are efficient and profitable.
4. Privatisation gives a budgetary advantage.
5. Privatisation investments from both national and foreign sources
6. Privatisation leads to higher costs.
7. Privatisation leads to reduction of employment.
8. Privatisation leads to quality loss.
9. Privatisation equals geographical growth.
10. Privatisation more competition. (more goods and services)
11. Privatisation easy to distribution all over the country.
12. Privatisation increase productive.

Privatization Opinion

Support Opposition
o Performance • Performance
o Increased efficiency • Improvements
o Specialization • Corruption
o Improvements • Accountability
o Corruption • Civil-liberty concerns
o Accountability • Goals
o Civil-liberty concerns • Capital
o Goals • Strategic and Sensitive areas
o Capital • Cuts in essential services
o Security • Natural monopolies
o Lack of market discipline • Concentration of wealth
o Natural monopolies • Political influence
o Concentration of wealth • Profit
o Political influence • Privatization and Poverty
o Profits • Job Loss
o Job gains

Political Environment

Political environment is the government actions which affects the operations of a company or business. These actions
may be on local, regional national or international level. Business owners and managers pay close attention to the
political environment to gauge how government actions will affect their company.

The political environment is the state, government and its institutions and legislations and the public and private
stakeholders who operate and interact with or influence that system. (Economic system)

Political environment includes factors such as ideology and policies of the government nature and type of economic
system relation with other nations, political stability etc., it has significant impact on the economic development of
the nation. A stable and dynamic political environment is indispensable for business growth. Economic policy of rul-
ing party has serious economic and business implications political environment mainly includes the following compo-
nents.

 Political ideology of government.

 Political stability in the country.
 Relation of government with other countries.
 Defence and military policy.
 Welfare activities of government.
 Centre and state relationship.
 Approach of opposition parties towards business.

Political Systems:

A political system is a system of politics and government. It is usually compared to the legal system, economic sys-
Page13

tem, cultural system, and other social systems.

The importance of monitoring the political environment

 The stability of the political system affects the attractiveness of a particular national market.
 Governments pass legislation that directly affects the relationship between the firm and its customers, its
suppliers and other firms.
 Governments see business organisations as an important vehicle for social reform.
 The government is additionally responsible for protecting the public interest at large.
 The economic environment is influenced by the actions of government.
 Government is itself a major consumer of goods and services.
 Government policies can influence the dominant social and cultural values of a country.
Organisations have to not only monitor the political environment – they also contribute to it.

Functions of a Political System

a) To maintain integration of society by determining norms.

b) To adapt and change elements of social, economic, religious systems necessary for achieving collective (polit-
ical) goals.
c) To protect the integrity of the political system from outside threats.

Types of Political Systems:

Totalitarian (one party) system: A system in which the state controls and regulates all phases of life considered
essential for perpetuating its power and for carrying out programmes arbitrarily. It is the most extreme form of au-
thoritarianism. Unlike democracies, where a variety of groups struggle for a voice in government, the government
dictates the society’s values, ideology, rules and form of government.

Oligarchic system: Any form of government in which there is a ‘rule by a few’, for example, by members of a
self-regulating elite having domination over a large society is known as an oligarchic political system. It is a system in
which a small group (elites) rules and holds supreme power over a larger society.

Democratic system: In its broadest sense, democracy is a way of life in which an individual feels free to act
within accepted boundaries of norms and also equal in respects of his/her rights. In the narrower sense, it is a form of
government, a power structure in which people govern themselves.

Political Institutions:

a. Legislature – Whose role is to make the laws.

b. Executive – responsible for implementing the laws.
c. Judiciary – responsible for interpreting the laws and settling disputes.

In India these are the three important political institutions

1. Parliament/Legislative: The prime minister and the cabinet ministers that take all important policy decisions.
2. Executive: The civil servants, working together, are responsible for taking steps to implement the minister’s
decisions.
3. Judiciary: Supreme Court in an institution where disputes between citizens and the government are finally
settled.

Parliament: In all democracies, an assembly of elected representatives’ exercise supreme political authority on behalf
of people. In India such as such as national assembly called parliament. it consists of two houses Rajya sabha
(Council of states) and Lok Sabha (House of the people), the President of india is a part of the parliament.

Significance:

 Final authority for making law.

 Control over the country.
 Control the money matters.
 Discussion and debate on public issues and national policy.

Different types of council of ministers

 Cabinet Ministers. [major ministries and take decision in the name of the council of ministers]
 Ministers of State with Independent Charge. [smaller ministries / they only participate specially invited the
cabinet meetings]
 Ministers of State. [assist cabinet ministers]

Every minister has secretaries, who are civil servants. The secretaries provide the necessary background information
to the ministers to take decisions.

Legislature:

The body of elected representatives at the state level is called legislature or legislative assembly.
Page14

It is the policy making body of India. Each and every bill proposed by the executive has to be initiated, discussed,
reviewed, amended and voted upon in the legislature. So ultimately it is the legislature that decides which bills should
be passed. The Executive can bypass the legislature through Ordinance. But the validity of this ordinance is six
months only and it has to be ratified by the legislature.

Executive:

Prime Minister along with his council of ministers is called the Temporary Executives. They implement the policies
framed by the legislature. They are elected for every five years and hence called as Temporary Executives. These ex-
ecutives are drawn from the legislature. Civil servants and other officers’ staffs working under the government of
India is called the Permanent Executives. They are assigned the task of policy implementation.

The judiciary:

An independent and powerful judiciary is considered essential for democracies. India has an integrated judiciary which
is composed of the Supreme Court, High Courts, District Courts and various local level courts. The Supreme Court is
the apex court in the country and hence its decision cannot be challenged. Its decision is binding on all other courts of
the country.

The Supreme Court can take up any dispute which is as follows:

1. Settle the Disputes.

 Between citizens of the country.
 Between citizens and government.
 Between two or more state governments.
 Between the Union Government and the state government.
2. Free form legislature and judiciary.
 The judges do not act on the direction of the government or according to the wishes of the party in
powers. That is why all the modern democracies have courts that are independent of the legislature
and the executive.
3. Interpret the constitution of the country.
 The Supreme Court and the high court have the power to interpret the constitution of the country.
4. Judicial review.
 They can declare invalid any law of the legislature or the actions of the executive, whether at the
union level or at the state level, if they find such a law or action is against the constitution. Thus
they can determine the constitutional validity of any legislation or action of the executive in the
country, when it is challenged before them. This is known as judicial review. If the court finds that
a law or an order of the executive disobeys the provisions of the constitution, it declares such law or
order null and void.
5. Guardian of fundamental rights.
 The powers and the independence of the Indian judiciary allow it to act as the guardian of the fun-
damental rights. That is why, the judiciary enjoys a high of confidence among the people.
6. Public interest litigation.
 Anyone can approach the courts if public interest is hurt by the actions of the government.
7. Prevent the misuse of government power.
 The courts intervene to prevent the misuse of the government’s power to make decisions. They
check malpractices on the part of the public officials. That’s why the judiciary enjoys a high level of
confidence among the people.

The independent judiciary's main role is in protecting the Fundamental Rights as enshrined in the Constitution of In-
dia. If any law is passed by the Government (at centre or state); which is viewed as overlooking the fundamental ten-
ets of the Constitution, the Supreme Court has the right to revoke the law. There are many cases in which litigations
have been filed on behalf of public against laws enacted by the government. The independence of the judiciary en-
sures that no government can behave in an autocratic way.

Appointment and removal judges:

The Judges of the Supreme Court and High Court are appointed by the President on the advice of the Prime Minister
and the consultation with the Chief Justice of the Supreme Court, mostly Judge appointed by senior most judges.
Once appointed as judge nearly impossible to remove him or her from that position. Judge removed only by an im-
peachment motion passed separately by two thirds members of the two houses of the parliament.

Role of government towards business

a. Enacting and enforcing laws.

b. Maintenance of law and order.
c. Provision of infrastructure.
d. Provision of money and credit.
e. Transfer of technology.
f. Licensing and inspection.
g. Assistance to micro and small enterprises.
h. Production from foreign competition.
i. Market support.
j. Support to backward regions.
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k. Provision of information.
Government Role in business in India

a) Regulatory role.
a. Direct control.
b. Indirect control.
In India there two types of roles where adopted before after 1991[LPG –Liberalisation, Privatisation and
Globalisation]; before government very strict in its regulatory roles. Now government has given many relax-
ations in licences, quotas, permits, etc., Government is now following liberal approach towards domestic pri-
vate sector and foreign enterprises, so regulatory role of the government has reduced.

b) Promotional role.
a. Generation and distribution of power and energy.
b. Development of transport and communication facilities.
c. Development of social overhead capital like health, education, training institutes, etc.,
d. Development of money and credit system like banks, stock exchange, etc.,
e. Providing incentive in the form of tax concessions, subsides, concessional loans etc.,
Now a day the government has expanded its promotional role. It spending more on infrastructure like
transport, power, and health education, etc., so promotion role of government has increased.

c) Entrepreneurial/ Participative role: In this role, government directly participates in economic activities by set-
ting up public enterprises. Indian government has set up various public sector enterprises like railways,
power generations plants, steel plants, etc., this role is of special importance as all economic activities can-
not be left to the private sector due to following reasons.
a. To promote social welfare by providing essential items at a price even below cost of production.
b. To promote areas where private sector has no interest, because these areas are less profitable and
require huge capital.
c. To protect customers from the monopoly like situation created by private sector.
d. To take over sick private sector units in the interest of employees.
Government has reduced its participative role over the period of time, initially government had reserved 17
industries for public sector but now this number has been reduced to 3 in a phased manner. Now govern-
ment sets up lesser public enterprises and promotes privatisation. Many public sector units have been disin-
vested.

d) Planning role. [in India – Planning commission – five years plans]

Now the government of has to thing to change the planning role to framing plans to promote economic de-
velopment and social welfare.

Responsibility of business towards government

1. Regular payment of taxes.

2. Providing information.
3. Contribution in social programmes.
4. Providing advisory services to government.
5. Not to misuse government machinery.
6. Not to pollute environment.
7. Development of backward regions.
8. To control social unrest.

Financial Environment

Finance System: Is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial
systems operate at national, global, and firm-specific levels. They consist of complex, closely related services, mar-
kets, and institutions intended to provide an efficient and regular linkage between investors and depositors

Money, credit, and finance are used as media of exchange in financial systems. They serve as a medium of known
value for which goods and services can be exchanged as an alternative to bartering. A modern financial system may
include banks (operated by the government or private sector), financial markets, financial instruments, and financial
services. Financial systems allow funds to be allocated, invested, or moved between economic sectors. They enable
individuals and companies to share the associated risks.

The financial system is to "supply funds to various sectors and activities of the economy in ways that promote the
fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary
interference with individual desires."

1) Financial institutions.
a. Banks.
b. Non-bank financial institutions.
2) Financial markets.
a. Primary markets.
b. Secondary markets.
3) Financial instruments.
a. Cash instruments.
Page16

b. Derivative instruments.
4) Financial services
Financial institutions: Financial institutions provide financial services for members and clients.

 Banks: Banks are financial intermediaries that lend money to borrowers to generate revenue. They are typi-
cally regulated heavily, as they provide market stability and consumer protection. Banks include;
o Public banks.
o Commercial banks.
o Central banks.
o Cooperative banks.
o State-managed cooperative banks.
o State-managed land development banks.

 Non-bank financial institutions: Non-bank financial institutions facilitate financial services like investment,
risk pooling, and market brokering. They generally do not have full banking licenses or are not supervised by
a bank regulation agency. Non-bank financial institutions include:
o Casinos and card rooms.
o Finance and loan companies.
o Insurance companies.
o Mutual funds.
o Commodity traders.

Financial markets:

Financial markets are markets in which securities, commodities, and fungible items are traded at prices representing
supply and demand. The term "market" typically means the institution of aggregate exchanges of possible buyers and
sellers of such items.

 Primary markets: The primary market (or initial market) generally refers to new issues of stocks,
bonds, or other financial instruments.
 Secondary markets: The secondary market refers to transactions in financial instruments that were
previously issued.

Financial instruments:

Financial instruments are tradable financial assets of any kind. They include money, evidence of ownership interest in
an entity, and contracts.

 Cash instruments: A cash instrument's value is determined directly by markets. They may include se-
curities, loans, and deposits.
 Derivative instruments: A derivative instrument is a contract that derives its value from one or more un-
derlying entities (including an asset, index, or interest rate).

Financial services:

Financial services are offered by a large number of businesses that encompass the finance industry. These include
credit unions, banks, credit card companies, insurance companies, stock brokerages, and investment funds.

The Indian financial system is broadly classified into two broad groups:

1) Organised sector.
a. Banking system
b. Cooperative system
c. Development Banking system
i. Public sector
ii. Private sector
d. Money markets and
e. Financial companies/institutions.
2) Unorganised sector.
The unorganised financial system comprises of relatively less controlled moneylenders, indigenous bankers, lending
pawn brokers, landlords, traders etc. This part of the financial system is not directly amenable to control by the Re-
serve Bank of India (RBI).

Reserve Bank of India (RBI)

The Reserve Bank of India as the central bank of the country is at the head of this group. Commercial banks them-
selves may be divided into two groups, the scheduled and the non-scheduled.

RBI helps economy:

a. It should assist in the mobilisation of savings in the economy and promote capital formation.
b. It should promote the spread of monetisation through the development of banking system.
c. It should make adequate provision of credit for fulfilment of the targets of production and trade.
Page17

d. It should extend monetary support to the authorities in the task of allocating resources among different sec-
tors of the economy.
 e. It should help in maintaining general price stability and prevent inflationary tendencies.

Organisation of management RBI

a) A governor and three deputy governors appointed by the central government.

b) Four directors nominated by the central government.
c) Ten other directors.
d) One government official nominated by the central government.

Function of RBI

1) Bank of issue.
2) Control of credit.
3) Banker’s bank and lender of the last resort.
4) Banker to government.
5) Supervision and regulation of banking.
6) Regulation of foreign exchange.
7) Cleaning house functions.
8) Compilation of statistics.

The commercial banking system may be distinguished into:

a. Public sector banks

1. State Bank of India. State bank group
2. Associate Bank
3. 14 Nationalized Banks (1969) Nationalised
4. 6 Nationalized Banks (1980)
5. Regional Rural Banks by Public Mainly sponsored sector banks
b. Private Sector Banks
1) Other private banks.
2) New sophisticated private banks.
3) Cooperative banks included in the second schedule.
4) Foreign banks in India, representative offices,
5) One non-scheduled banks.

Commercial banking

Bank: A bank is an establishment which makes to individuals such advances of money as may be required and safely
made, and to which individuals entrust money when not required by them for use.

The role of commercial banks in India remained confined to providing vehicle for the community's savings and attend-
ing to the credit needs of only certain selected and limited segments of the economy.

Function of Commercial banks

1) Banking functions.
a. Attraction of deposits.
i. Time deposits. (fixed deposit)
ii. Demand deposit.
iii. Saving deposit.
b. Advancing of loans.
i. Cash credit.
ii. Overdraft.
iii. Discount of bills of exchange.
c. Creation of money or credit.
d. Clearing of cheques.
e. Financing industries and trade.
2) Subsidiary functions.
a. Agency functions. [behalf of customers]
b. General utility services.
i. Safe deposit.
ii. Issue of personal and commercial letters of credit.
iii. Underwriting loans.
iv. Collection and distribution of information.

Scheduled and non-scheduled banks: commercial banks are classification.

I. Scheduled bank. (schedule of RBI 1934)

a. Nationalised scheduled commercial banks.
b. Foreign banks.
c. Other non-nationalised scheduled banks.
II. Non-scheduled bank. (keep them business itself)
Page18
Objectives of nationalised banks:

 Concentration of economic power.

 Power abuse.
 Neglect of backward sectors.
 Credit channelization to undesirable activities.
 To make planning successful.
 Lopsided banking development

International Economic Institutions

The end of the second world war several international monetary and economic institutions were started under the
aegis of United Nations organisation (UNO) for the benefits of international peace, and also reconstruct in of several
war torn economies, besides helping backward nations of the world in their attempt to build up economically.

UNCTAD: United Nation Conference on Trade and Development (1964)- The purpose to solve the problems connected
with developing countries of the world in increasing their export. Objectives to Reduction of barriers and restrictions
which would seriously limited trade with developing nations.

Achievement of UNCTAD

 Tariff reclassification.
 Integrated programme on commodities.
 Reducing debt burden.

IMF (International Monetary Fund) 1947

Objectives of IMF

 Promoting international cooperation’s.

 Facilitating the expansion and balanced growth of international trade for promoting and maintenance of high
levels of employment and real incomes.
 Promoting exchange stability and orderly exchange arrangements and to avoid devaluation.
 Helping to re-establish a multinational system of trade and payments and to eliminate foreign exchange re-
strictions.
 Providing means for international adjustment by making available increased international reserves.

Functions:

a. Regulatory functions.
b. Financial functions.
c. Consultative functions.

World Bank (IBRD – International Bank for Reconstruction and Development 1945)

Objectives:

a. To assist in the reconstruction and development of its member countries.

b. To promote private foreign investment.
c. To make loans for productive purposes.

Financing:

 Direct lending.
 Guarantee.
 Loans to member countries.

WTO [World Trade Organization]

EMERGENCE OF WTO: After the Second World War, many countries got down together to work on ways and
means to promote international trade. The result was signing of General Agreement on Tariffs and Trade (GATT) by 23
countries in 1947. India was one of the founder members of GATT.

GATT was created to reduce global depression and to liberalise and regulate the world trade by reducing tariff barri-
ers. GATT has been replaced by WTO in 1995. WTO is wider in scope as it regulates world trade in goods, as well as in
services intellectual property rights, and investment. In January 2010, the membership of WTO was 153 countries. Its
rules and policies are the outcome of negotiations among WTO members. Thus WTO is a member driven, consensus
based organisation.

The WTO deals with regulation of trade between participating countries by providing a framework for negotiating trade
agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which
are signed by representatives of member governments
Page19
Principal Objectives of WTO

a. Trade Without Discrimination: Trade without discrimination through the application of Most Favoured Nation
(MFN) Principle. As per MFN clause, a member nation of WTO must accord (give) the same preferential
treatment to other member nations which it gives to any other member nation.
b. Raising The Standard Of Living: Raising the standard of living and incomes and ensuring full employment of
the citizens of its member nations.
c. Optimum Use of World's Resources: Ensuring optimum use of world's resources and, thereby, expanding
world production and trade of goods as well as services.
d. Settlement Of Disputes: Settlement of disputes among members through consultation, conciliation, and as a
last resort through dispute settlement procedures.
e. Growth Of Less Developed Countries (LDCs): It recognises the need for positive efforts designed to ensure
that developing countries especially the LDCs, secure a better share of growth in international trade.
f. Protection Of Environment: Preserving and protecting the environment of the world so as to benefit all the
nations of the world.
g. Enlargement of Production and Trade: WTO aims to enlarge production and trade of goods as well as ser-
vices.
h. Employment: WTO aims at generating full employment and increase in effective demand.

Functions of WTO

 Implementation of Reduction In Trade Barriers: WTO shall check the implementation of tariff cuts and reduction
of non-tariff measures agreed upon the member nations at the conclusion of Uruguay Round.
 Forum for Negotiation: WTO shall provide the forum of negotiations among its members concerning their multi-
lateral trade relations.
 Settlement of Disputes: WTO shall administer the understanding on rules and procedures governing the settle-
ment of disputes.
 Assistance to IMF and IBRD: WTO shall co-operate with IMF, IBRD and its affiliated agencies to achieve greater
coherence in global economic policy.
 Administration Of Agreements: WTO shall look after the administration of 29 agreements (signed at the conclu-
sion of Uruguay Round in 1994), plus a number of other agreements, entered into after Uruguay Round.
 Examination Of Trade Policies: WTO shall regularly examine the foreign trade policies of member nations, to see
that such policies are in line with WTO’s guidelines.
 Consultancy Services: WTO shall keep a watch on the developments in the world economy and it provides con-
sultancy services to its member nations.
 Collection Of Foreign Trade Information: WTO shall collect information on import - export trade and on various
trade measures and other trade statistics of member nations.

Social and cultural Environment

It refers to influence exercised by certain social and cultural factors which are beyond the control of business unit.

Culture: Is a part of civilisation which includes knowledge, belief, art, morals, law, custom and other capabilities and
habits acquired by man as a member of society.

According to Kluckhohn – “Cultural is the total lifestyle of people”. Thus culture has following main features.
6. It develops from interaction among human beings in society.
7. It passes from generation to generation.
8. It is learnt by human beings right from childhood. It is learnt by the human beings in the
course of development.
9. It is influenced by family system and society in which one lives.
10. It does not change in short run.
11. It shapes human beliefs, preferences, lifestyle. It also shapes human values, i.e. what is
right and what is wrong, what type of behaviour is rewarding and what type of behaviour
is punishing.
12. Cultural determines personality. It shapes the way we think, act and perceive others.
13. It is learned behaviour. Hence education also shapes culture.
14. It is very complex in nature.

Components of Social Environment:

a) Social institutions and systems.

b) Social groups.
c) Social value and attitudes.

Social Institutions and Systems: refers to network of social relationships which are created among human beings
when they interact with each other’s.

1. Family system: the process of socialisation begins within the family with the birth of a child. Family shapes,
character, personality, morality, values etc., Family is an institution that is responsible for child rearing, care
of sick and ages, transmission of cultural values, property rights protection etc., Family ties have been very
strong in our culture.
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a. Joint family. (more than 5)

b. Small family. (less than 5)
 c. Nuclear family. (maximum of 3)
2. Caste system.
3. Religion. (beliefs, sentiments, customs, rituals and festival in social system)
4. Marriage.
5. Education.

Social Groups: human being is a social animal. He/she cannot live in isolation. He/she wants to share to share his
joys and sorrows with others. So he/she develops relation with other members of society to satisfy his social needs.
These social interactions lead to formation of social groups. These social groups may be formed on basis of

- Caste.
- Religion.
- Family.
- Nationality.
- Age.
- Income.
- Occupation.
- Sex., and etc.,

Factors affecting Social Environment:

a) Education.
b) Culture.
c) Urbanisation.
d) Business ethics.
e) Social organisation.
f) Development of rural areas.
g) Customs and traditions.
h) Family size and systems
i) Caste and religions system.

Effect of Social Environment on business: (Impact of cultural on business)

1. Culture determines goods and services to be produced.

2. Culture determines attitude to work.
3. Culture and global business.
4. Education and business.
5. Religion and business.
6. Ethics and business.
7. Marriage and business.
8. Family system and business.
9. Casteism and business.
10. Consumers’ preference, habits and beliefs.
11. Language and business.

Social Responsibility of Business and Business Ethics:

“In real sense, social responsibility implies recognition and understanding of the aspirations of society and determina-
tion to contribute towards their achievements” – George A. steiner.

“Social responsibility of business means responsibilities of business towards customers, workers, shareholders and the
community”

Need of Social Responsibility

1. Good public image.

2. Avoidance of government interference.
3. Moral justification.
4. To avoid class conflicts.
5. Consumer’s awareness.
6. Business is a part of society.
7. Long term interest of business.

Limitation of social responsibility

a. Increase in price.
b. Lack of skill to solve social problems.
c. Meeting social responsibility deviates from main objectives.
d. Shortage of time.
e. Regular burden.
f. Opposition by other firms in the same industry.
g. Excessive concentration of power.
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Corporate Social Responsibility

Corporate social responsibility, often abbreviated "CSR," is a corporation's initiatives to assess and take responsibility
for the company's effects on environmental and social wellbeing. The term generally applies to efforts that go beyond
what may be required by regulators or environmental protection groups.

 Responsibility to shareholders.
 Responsibility to employees.
 Responsibility to consumers.
 Responsibility to community.

Business ethics: it is the study of good and evil, right and wrong just and unjust action of business man.

Ethical Unethical
To charge fair prices from customers. To give false and deceptive advertisement.
To make truthful and fair claims in advertisement. To evade taxes.
To pay taxes honestly. To exploit consumers by providing adulterated goods.
To earn reasonable profits. To offer bribe to government officials to get favours.
To pay fair wages and give equitable treatment to the employees. To pollute environment by not using pollution control equip-
To control industrial pollution by installing pollution control ment’s.
equipment’s. To exploit employees by not providing fair wages.
To produce good quality goods.

Characteristics of business ethics

1. Good intention. (good and bad/ right or wrong)

2. Can protect society.
3. Study of human aspect.
4. Self-imposed discipline.
5. Honesty.
6. Equality.
7. Guiding force.

Significance of business ethics:

1. Long term interest.

2. Protect society.
3. Avoid government intervention.
4. Avoid confrontation with different interest groups.
5. Satisfaction.
6. Business ethics create credibility with the public.
7. Ethics help better decision making.

List of Important Ethical Principles That a Business Should Follow:

- Do not deceive or cheat customers by selling substandard or defective products by under meas-urements or
by any other means.
- Do not resort to hoarding, black marketing or profiteering.
- Do not destroy or distort competition
- Ensure sincerity and accuracy in advertising, labeling and packaging.
- Do not tarnish the image of competitors by unfair practices.
- Make accurate business records available to all authorized persons.
- Pay taxes and discharge other obligation promptly
- Do not farm cartel agreements, even informal, to control production, price etc, to the common detriment.
- Refrain from secret kickbacks on payoffs to customers, suppliers, administrators, politicians etc.
- Ensure payment of fair wages to and fair treatment of employees.

Three Factors that influence business ethics

Individual Stand- Managers’ and Opportunity: codes and com- Ethical/unethical choices
+ + =
ards and Values Cookers’ influence pliance requirements in business

Issues in Corporate Governance: Corporate governance is defined as the process and structures
by which business and affairs of corporate sector is directed and managed. The concept of corporate governance pri-
marily hinges on complete transparency, integrity and accountability of the management. Corporate governance is
concerned with the values, vision and visibility. It is about the value orientation of organization, ethical norms its per-
formances, the direction of development and visibility of its performances and practices.

Objectives

- To build up an environment of trust and confidence amongst those having completing and conflicting interest.
- To enhance shareholders value and protect the interest of other shareholders by enhancing the corporate
performances and accountability.
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o Transparency.
o Accountability.
 o Investor protection.
o Societal needs.
o Value creation for stakeholders.

There are good business reasons for a strong commitment to ethical values:

 Ethical companies have been shown to be more profitable.

 Making ethical choices results in lower stress for corporate managers and other employees.
 Our reputation, good or bad, endures.
 Ethical behaviour enhances leadership.
 The alternative to voluntary ethical behaviour is demanding and costly regulation.

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