UNIT 1

EVOLUTION AND FUNDAMENTALS OF BUSINESS

SYLLABUS
1. History of Trade and Commerce in India: Indigenous Banking System, Rise of Intermediaries,
Transport, Trading Communities: Merchant Corporations, Major Trade Centres, Major Imports
and Exports, Position of Indian Sub-Continent in the World Economy
2. Business – concept (with special reference to economic and non-economic activities. )
3. Business, profession and employment – Concept
4. Differentiate between business, profession and employment.
5. Objectives of business (economic and social objectives of business, role of profit in business)
6. Classification of business activities - Industry and Commerce
7. Industry-types: primary, secondary, tertiary Meaning and subgroups
8. Commerce, Trade, Auxiliaries to Trade – meaning
9. Types of Trade-internal, external; wholesale and retail
10. Types of Auxiliaries to Trade - banking, insurance, transportation, warehousing,
communication, and advertising)
11. Role of commerce, trade and auxiliaries to trade
12. Business risk-Concept
13. Causes of business risks.

HISTORY OF TRADE AND COMMERCE IN INDIA

India had a golden past and the trading activities had a significant contribution to its prosperity
and gains.
People were engaged in various economic activities such as agriculture and domestication of
animals, weaving cotton, dyeing fabrics, making clay pots, utensils and handicrafts, sculpting,
cottage industries, masonry, etc. Family based workshops [karkhanas], for manufacturing, were
important components of economic life.
With the active contribution of Indian traders and other merchant communities, the Indian sub-
continent was popularly called ‘Swaran Bhoomi and Swaran Deep’.
 INDIGENOUS BANKING SYSTEM
Money was channelised into further investment, and led to the dominant growth of indigenous
banking system to finance the trading activities.
Hundi (literal meaning is ‘to collect’)and Chitties (used in southern region) were used as
documents to facilitate transfer of money from one hand to another for trading activities.
It was so because travelling long distances either by land or sea involved risk of theft and robbery
and these documents facilitated the safe transfer of money between parties and helped
promotion of trading activities.
The emergence of credit transactions and availability of loans and advances enhanced
commercial operations.
Indigenous banking system benefitted the manufacturers, traders and merchants with additional
capital funds for expansion and development.
Commercial and Industrial banks later evolved to finance trade and commerce and agricultural
banks to provide both short and long-term loans to finance agriculturists.

TRANSPORT
The archaeological evidences have shown that trading activities were the mainstay of the
economy in ancient times which were carried out by both water and land routes.
Silk route and maritime trade were quite prominent in transporting goods and commodities for
trading purposes.

MAJOR TRADE CENTRES

Many leading trade centres were developed in ancient times for the import and export of goods,
some of them being Patliputra, Peshawar, Taxila, Indraprastha, Mithila, Maduram, Surat, Ujjain,
Kanchi, Mithila.
There were all kinds of towns— port towns, manufacturing towns, mercantile towns, the sacred
centres, and pilgrimage towns.
Their existence is an index of prosperity of merchant communities and professional classes.

MAJOR IMPORTS AND EXPORTS

Indian subcontinent enjoyed the fruits of FAVOURABLE BALANCE OF TRADE, where exports
exceeded imports with large margins.
Major exports items were Spices, wheat, sugar, indigo, opium, sesame oil, cotton, parrot, live
animals and animal products, etc.
Major imports were Horses, animal products, Chinese silks, linen, wine, gold, silver, copper, etc.
 POSITION OF INDIAN SUB-CONTINENT IN THE
WORLD ECONOMY
With the emergence of the British Empire roots in India, the East India Company used revenues
generated by the provinces under its rule for purchasing Indian raw materials, spices and goods.
This changed the condition of the Indian economy from being an exporter of processed goods to
the exporter of raw materials and buyer of manufactured goods.
After independence the process of rebuilding the economy started and India embarked on
planned development with the objective of achieving a self-reliant socialistic pattern of society.
The measures taken towards the same was characterised by centralised economic planning and
emphasis on public investment in basic and key industries.
Due importance was given to the establishment of modern industries, modern technological and
scientific institutes, space and nuclear programmes.
But lack of capital formation, rise in population, weak financial system, inadequate infrastructure
and high huge expenditure on defence, high fiscal deficits and continuous deficits in balance of
payments were evident and international community’s confidence in India’s ability to manage
its economy was severely affected.
The balance of payment situation was precarious.
As a result, India agreed to economic liberalisation in 1991. A three pronged approach of
stabilisation, restructuring and globalisation of Indian economy was adopted to address the
changes in economic and business scenario and its integration with global economy.
Government of India announced major economic reform packages aimed at restoring the growth
momentum in the economy. Major policy changes were effected since 1991 w.r.t., fiscal,
monetary, trade, industry, agriculture, infrastructure, foreign exchange and foreign investment
since 1991.

The Indian economy is emerging as one of the faster growing economies in the world today and
a preferred FDI destination.
Rising incomes, savings, investment opportunities, increased domestic consumption and
younger population ensures growth for decades to come.
The high growth sectors have been identified, which are likely to grow at a rapid pace and the
recent initiatives of the Government of India such as ‘Make in India’, Skill India’, ‘Digital India’
is expected to help the economy in terms of exports and imports with steady and sustainable
trade balance.
 BUSINESS – MEANING
The term business is derived from the word ‘busy’.

Business refers to an occupation in which

people regularly engage in activities related to
purchase, production and/or sale of
goods and services
with a view to earning profits.

BUSINESS – CHARACTERISTICS
1. AN ECONOMIC ACTIVITY: Business is undertaken with the objective of earning money or
livelihood and not out of love, affection, sympathy or any other emotion.
2. PRODUCTION OR PROCUREMENT OF GOODS AND SERVICES: Before goods are offered to
people for consumption, these must be either produced or procured by business enterprises.
3. SALE OR EXCHANGE OF GOODS AND SERVICES: Goods are produced not for the purpose of
sale but for personal consumption, it cannot be called a business activity.
4. DEALINGS IN GOODS AND SERVICES ON A REGULAR BASIS: One single transaction of sale or
purchase does not constitute business.
5. PROFIT EARNING: Businessmen make all possible efforts to maximise profits, by increasing the
volume of sales or reducing costs.
6. UNCERTAINTY OF RETURN: There is always a possibility of losses being incurred, despite the
best efforts put into the business.
7. ELEMENT OF RISK: Risk is caused by some unfavourable or undesirable events like changes in
consumer taste and fashion, changes in method of production, strike or lockout at workplace,
increased competition in market, fire, theft, accidents, natural calamities, etc.

BUSINESS, PROFESSION AND EMPLOYMENT

S.NO. BASIS BUSINESS PROFESSION EMPLOYMENT

1 Mode of Entrepreneur’s Membership of a Appointment letter

establishment decision and other professional body and service
legal formalities, if and certificate of agreement
necessary practice

2 Nature of Provision of goods Rendering of Performing work as

work and services to the personalised, expert per service contract
public services or rules of service

3 Qualification No minimum Qualifications, Qualification and

qualification is expertise and training as
necessary training in specific prescribed by the
field as prescribed by employer
the professional body
is a must

4 Reward or Profit earned Professional fee Salary or wages

return

5 Capital Capital investment Limited capital No capital required

investment required as per size needed for
and nature of establishment
business

6 Risk Profits are uncertain Fee is generally Fixed and regular

and irregular; risk is regular and certain; pay; no or little risk
present some risk

7 Transfer of Transfer possible Not possible Not possible

interest with some
formalities

8 Code of No code of conduct is Professional code of Norms of behaviour

conduct prescribed conduct is to be laid down by the
followed employer are to be
followed

9 Examples Shop, factory Legal, medical Jobs in banks,

profession, chartered insurance companies,
accountancy government
departments
 OBJECTIVES OF BUSINESS
Every business is said to be an attempt on the part of business people to get more than what has been
spent or invested, or in other words, to earn profit which is the excess of revenue over cost.
Profit is found to be a leading objective but not the only one.
With too much emphasis on profit, business managers may neglect all other responsibilities towards
customers, employees, investors and society at large. They may even be inclined to exploit various
sections of society to earn immediate profit.
This may result in the non-cooperation or even opposition from the affected people against the
malpractices of business enterprises. The enterprises might lose business and may be unable to earn
profit. This is essential for its own survival and prosperity.
Since a business has to balance a number of needs and goals, it requires multiple objectives. It cannot
follow only one objective and expect to achieve excellence.
Following are the objectives of business:
1. MARKET STANDING: Marinating goodwill and reputation of ones’ business is paramount to
succeed and prosper. It helps in forming a distinct identity in the market and is referred to as
market standing in relation to its competitors. A business enterprise must aim at standing on
stronger footing in terms of offering competitive products at reasonable prices to its customers
and serving them to their satisfaction.
2. INNOVATION: Innovation is central to the growth of any business enterprise. It helps business
to scale up and give competitive edge to the enterprise in the market. Innovation is defined as
an introduction of new ideas or methods in the way something is done or made. However, it
does not imply that a new product is to be manufactured. Any modification in the existing
product to enhance its operation also denotes innovativeness.
There are two kinds of innovation in every business, i.e.,
i) innovation in product or services; and
ii) innovation in various skills and activities needed to supply products and services.
3. PRODUCTIVITY: Productivity is ascertained by comparing the value of output with the value
of inputs. It is used as a measure of efficiency. In order to ensure continuous survival and
progress, every enterprise must aim at greater productivity through the best use of available
resources.

4. PHYSICAL AND FINANCIAL RESOURCES: Any business requires physical resources, like
plants, machines, offices, etc., and financial resources, i.e., funds to be able to produce and
supply goods and services to its customers. The business enterprise must aim at acquiring
these resources according to their requirements and use them efficiently.

5. EARNING PROFITS: One of the objectives of business is to earn profits on the capital employed.
Profitability refers to profit in relation to capital investment. Every business must earn a
reasonable profit which is so important for its survival and growth.

6. SOCIAL RESPONSIBILITY: Social responsibility refers to the obligation of business firms to

contribute resources for solving social problems and work in a socially desirable manner.
 ROLE OF PROFIT IN BUSINESS
Profit may be regarded as an essential objective of business for various reasons:
1. It is a source of income for business persons,
2. It can be a source of finance for meeting expansion requirements of business,
3. It indicates the efficient working of business,
4. It can be taken as the society’s approval of the utility of business, and
5. It builds the reputation of a business enterprise.

INDUSTRY
Industry refers to economic activities, which are connected with conversion of resources into useful
goods.
These include activities relating to producing or processing of goods, as well as, breeding and raising
of animals.
The term industry is also used to mean groups of firms producing similar or related goods.

INDUSTRY TYPES
PRIMARY INDUSTRIES
These include all those activities which are concerned with the extraction and production of natural
resources and reproduction and development of living organisms, plants, etc..
i. Extractive industries: These industries extract or draw products from natural sources.
Extractive industries supply some basic raw materials that are mostly products of geographical
or natural environment. Products of these industries are usually transformed into many other
useful goods by manufacturing industries. Examples Farming, Lumbering, Fishing, Mining,
Housing
ii. Genetic industries: These industries are engaged in breeding plants and animals for their use
in further reproduction. are typical examples of genetic industries. Examples Cattle Breeding
Farms, Pisciculture, Nurseries, Poultry Farms, Sericulture

SECONDARY INDUSTRIES
These industries process materials, which have already been extracted at the primary industries, to
produce goods for final consumption or for further processing by other industrial units. For
example, mining of iron ore is a primary industry, but manufacturing of steel by way of further
processing of raw irons is a secondary industry.
i. Manufacturing industries: These industries are engaged in producing goods through
processing of raw materials and, thus, creating form utilities.
a. Analytical industry which analyses and separates different elements from the same
materials, as in the case of oil refinery.
b. Synthetical industry which combines various ingredients into a new product, as in the
case of cement.
c. Processing industry which involves successive stages for manufacturing finished
products, as in the case of sugar and paper.
d. Assembling industry which assembles different component parts to make a new
product, as in the case of television, car, computer, etc.
ii. Construction industries: These industries are involved in the construction of buildings,
dams, bridges, roads as well as tunnels and canals. Engineering and architectural skills are
an important part in construction industries.

TERTIARY INDUSTRIES
These are concerned with providing support services to primary and secondary industries as well as
activities relating to trade.
These industries provide service facilities.
As business activities, these may be considered part of commerce because as auxiliaries to trade these
activities assist trade.
Included in this category are transport, banking, insurance, warehousing, communication, packaging
and advertising.
 COMMERCE, TRADE, AUXILIARIES TO TRADE
Commerce includes two types of activities, viz.,
(i) trade and
(ii) auxiliaries to trade.
Buying and selling of goods is termed as trade. It refers to sale, transfer or exchange of goods either
physical or virtual. It helps in making the goods produced available to the consumers or users.
In the absence of trade, it would not be possible to undertake production activities on a large scale.
Activities that are required to facilitate the purchase and sale of goods are called services or auxiliaries
to trade and include transport, banking, insurance, communication, advertisement, packaging and
warehousing.

Commerce provides the necessary link between producers and consumers. It embraces all those
activities, which are necessary for maintaining a free flow of goods and services. Thus, all activities
involving the removal of hindrances in the process of exchange are included in commerce.
TRADE removes the hindrance of persons, thereby, making goods available to consumers from the
possession or ownership producers.
TRANSPORT removes the hindrances of place by moving goods from the place of production to the
markets for sale.
STORAGE AND WAREHOUSING remove the hindrance of time by facilitating holding of stocks of
goods to be sold as and when required.
INSURANCE removes hindrance of risks by providing protection for goods held in stock, as well as,
goods in course of transport for loss or damage due to theft, fire, accidents, etc.
BANKING AND FINANCING removes hindrance of finance required to undertake the above activities.
ADVERTISING removes hindrance of information for producers and traders by notifying consumers
about the goods and services available in the market.
Hence, commerce is said to consist of activities of removing the hindrances of persons, place, time,
risk, finance and information in the process of exchange of goods and services.
 BUSINESS RISK – CONCEPT
The term ‘business risk’ refers to the possibility of inadequate profits or even losses due to
uncertainties or unexpected events.
For example, demand for a particular product may decline due to change in tastes and preferences of
consumers or due to increased competition from other producers.
Also, the shortage of raw materials in the market may shoot up its price. The firm using these raw
materials will have to pay more for buying them. As a result, cost of production may increase which, in
turn, may reduce profits.

BUSINESS RISK – TYPES

 SPECULATIVE RISK PURE RISK
It involves both the possibility of gain, as It involves only the possibility of loss or
well as, the possibility of loss. no loss.

Speculative risks arise due to changes in The chance of fire, theft or strike are
market conditions, including fluctuations examples of pure risks.
in demand and supply, changes in prices Their occurrence may result in loss,
or changes in fashion and tastes of whereas, non-occurrence may explain
customers. Favourable market conditions absence of loss, instead of gain.
are likely to result in losses.

CAUSES OF BUSINESS RISKS

1. NATURAL CAUSES: Human beings have little control over natural calamities, like flood,
earthquake, lightning, heavy rains, famine, etc., property and income in business.
2. HUMAN CAUSES: Human causes include such unexpected events, like dishonesty, carelessness
or negligence of employees, stoppage of work due to power failure, strikes, riots, management
inefficiency, etc.
3. ECONOMIC CAUSES: These include uncertainties relating to demand for goods, competition,
price, collection of dues from customers, change of technology or method of production, etc.
Financial problems, like rise in interest rate for borrowing, levy of higher taxes, etc., also come
under these type of causes as they result in higher unexpected cost of operation or business.
4. OTHER CAUSES: These are unforeseen events, like political disturbances, mechanical failures,
such as the bursting of boiler, fluctuations in exchange rates, etc., which lead to the possibility
of business risks.