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BUSINESS
It is a typical economic activity with the object of
earning income :
Income may be in the form of Profit, accumulation
of wealth or purchasing power
Collectively business means the total business
activities in the country in the industry and
commerce
The activity may be profit or loss in carrying out
production or distribution or providing service
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DIFFERENTKINDOFBUSINESS
ORGANIZATIONS
Proprietary concerns :
Here the business operation is started and
operated by an individual
He is also called as a sole trader or proprietor He starts, organizes manages and bears the risk
and controls the business himself .
The capital contributed may be his own or borrowed
He bears the losses and enjoys all the profits
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Advantages of sole trading :
1. Single ownership run by individual enjoy all profitshimself and also incurs losses if any
2. Easy to form legal formalities are minimum
3. Business decisions can be taken quickly takeadvantage of business s Opportunities for gains
4. Can provide personalized service - to achievepersonal rapport with customers
5. He enjoys the benefit of hard work in the form ofprofits motivate for hard work
6. He can maintain secrecy of business7. Cost of operation is less as he himself is managing it
8. This system encourages self employment
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LIMITATIONSOFSOLETRADING
1. Limited capital only is available own orborrowed cannot expand
2. Single person managerial or organizing ability islimited
3. Suffer from the deficiency in the form of unlimitedliability
4. Risk assumption would be huge wrongdecisions can create lot of damage
5. It is not suitable for big business6. He has to take care of many things cannot pay
equal attention to all aspects some importantaspects suffer can land him in problems
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PARTNERSHIPFIRM
It is a business enterprise formed by two or more
persons called partners
Collectively they are called as a partnership firm
There would be pooling of capital ,skill , organizingtalent and managerial ability.
The capital is contributed by the partners
They also share the business risks
In short : it is a business enterprise which is formedby the association of two or more persons who
carry on a business jointly with the intention of
sharing profits and losses is called partnership
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ADVANTAGESOF PARTNERSHIP
1. More capital can be mobilized two or more personscontribute for capital
2. Formation of the firm is relatively easier
3. They can maintain secrecy
4. Ideas and opinions can be heard and right decisionscan be taken
5. Risk is shared as it is shared by two or more persons
6. Partners come from diverse fields can form expertviews in decision making
7. It is more stable and more continuity in existencecompared to sole trading
8. Dynamic management is possible
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JOINTSTOCKCOMPANIES
Term registered company means a companyincorporated under the companies act 1956-orother cos acts
Definition: a voluntary association of personsassociation of individuals formed for some commonpurpose has capital divisible into parts called asshares
It is an artificial person created by process of lawit has perpetual succession & common seal
It is regarded as a person by law human beinglike Ram or Shyam
It is an artificial person has no body or soul notvisible except to the eye of law
It can sue and be sued
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Decide whether pvt or public , start new or takeoverold, - by promoters
7 or more persors if public co 2 or more cos incase of pvt co associated persons subscribe the
names It may be company ltd by shares 2. co ltd by
guarantee, 3. unlimited co
Documents to be filed:
Ascertain from registrar whether Name is available
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ADVANTAGESOFALIMITEDCOMPANY
1. Huge amount of capital can be mobilized2. Expansion of business is easier can capitalize
reserves3. Can continue for a long period of time4. It can enjoy the economies of scale5. Services of specializes personnel can be availed
6. It encourages savings, motivation
createsemployment and capital formation7. limited liability :limited to the nominal value 8. No. of members: Public co :unlimited 9. Transferability of shares without consent of other
members10. Separate Legal entity for cos: In partnership if partners
die
firm dissolves11. Control: can be obtained by buying shares
partnership shares cant be transferred12. Management of cos can be easily transferred to
employees etc.. But cant be in partnership13. Members and company can sue each other
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LIMITATIONOF JOINTSTOCKCOMPANIES
1. Formation involves lot of legal formalities and alsoexpensive
2. Trade secrecy cannot be maintained
3. Decisions are taken on the basis of majority minorityshare holders are affected by it
4. The directors should act honestly otherwise seriousdamages may result
5. Transfer of shares facilitates speculation businesspublic are unduly influenced by speculative activities
6. Democratic management is only in theory many
share holders do not even attend meetings onlyinfluential share holders exercise powers and manageco
7. Procedural formalities are more urgent actionscannot be taken
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COMPANYV/S PARTNERSHIP
1. Mode of creation: come after regn under cos act vsregn not compulsory
2. Legal status: legal personality v/s partners not distinctfrom firm
3. Liability of members: limited v/s unlimited
4. Management: members cannot manage v/s partnersshould mange5. Transferability: freely transferable v/s consent of all
partners necessary6. Agency: members are not agents of co v/s partners are
agents of firm
7. Objectives : limited to M/A v/s unlimited8. Insolvency: members are not insolvent if co is
insolventv/s if firm insolvent all partners are insolvent9. No of members not limited v/s limited
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HINDU UNDIVIDED FAMILY -HUF
It is carried on by Hindu undivided family
It is managed by senior male member called Karta
Other male members of the family are called Co-
parceners The firm can be the joint property or an ancestral
Property
The liability of the Karta is unlimited
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CO- OPERATIVESOCIETY
It is formed to fulfil the objectives of a section of the
society
It is managed by applying the rule of democracy
It is intended to serve both its members andenvironment or community as a whole
Co-operative societies carry on business for mutual
benefit and work with service motive
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MERITSOF CO-OPERATIVES
1. It provides self help for lower and middle class
people
2. It removes the evils of capitalism
3. Economic problems faced by poorer populationsare solved through co-operatives
4. Formation of co-operative society is easier
members with common interest come together
5. Democratically elected members manage it6. It is not with profit objective but for promoting
public welfare
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LIMITATIONOFCO-OPERATIVES
Management is with controversies educated and richtake advantage of ignorant people
They are subjected to Govt control and interference - itsfreedom is curbed
Timely decisions cannot be taken
There will be domination on of the majority interests It is serving the political purpose of politicians
Corruption is rampant
It cannot raise huge capital as the members themselvesare not rich
Management is not in the hands of experts hencemanagement is always a problem
Due to limitations of capital and organizational abilitycannot undertake business in large scale
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TRUSTS :
Here the person who holds the legal tittle to theproperty manage it for the benefit of some one else
It is established by transferring the assets to anindividual /s , who will manage these assets for the
designated beneficiaries Such individuals who manage are called trustees
Normally trust is formalized through a trust deednot compulsory
The trust deed should be executed on a stamppaper and registered
Only responsible trustees should be appointed tomanage the trust property prudently
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NONGOVERNMENTORGANIZATION - NGO
They are registered bodies which provide services likeeducation, health, social reforms
The members provide free service to the beneficiaries
Funds are raised through public grants from govt or
international bodies also They supplement efforts of govt in development
They have good contact with people to convey theirproblems to govt
They quickly respond to the needs of the poor
They strive to build self-reliant communities
They work to eliminate poverty
They help to mobilize funds for the development of thecommunity
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TYPESOFGOVTAGENCIES
1. departmental undertakings :
These undertakings are managed by separate
departments of Govt attached to a Ministry
Eg. Railways, defense, broadcasting, P & T etc., It will be under the control of the ministry in charge,
Capital is contributed by the govt - expenditure is
out of the annual appropriations from budget
Any income earned is paid into the treasury of thegovt
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Public Corporation :
These govt undertakings are established under the
statute passed by the parliament or legislature
It is an autonomous body - its powers and rightsand functioning are laid down in the statute
It enjoys independence in respect of capital
structure and day to day management
There will not be much interference from govt butthey are accountable
Eg. RBI, SBI, LIC etc.,
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GOVT COMPANIES
Here more than 51% of the share capital is held by
the central govt or state govt or jointly by both.
Such companies enjoy the status of corporate body
under companies act
It also enjoys legal status under the law
It also enjoys a greater operational flexibility
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TRADEASSOCIATIONS
It is a voluntary association of business units
It operates in a certain field for promotion of their
common economic interests
It is a non-profit organization - it does not enter intoany business transaction
The main objective of the association is to protect
the common interest
Trade associations may or may not have sharecapital
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-=-=-=-=-=-=-===-==-==-===--=-
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BUSINESS SYSTEM
It is a combination of policies, personnel, equipment and
computer facilities to co-ordinate activities of business
It establishes rules and procedures of the business
organization
Business environment :
It refers to all external forces which have a bearing on
the functioning of the business
Some of the Environment includes factors such as
socio-economic , technological, suppliers, competitorsand government, political system etc.,
These factors may give opportunities and pose threats
to the firm
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OBJECTIVESOFBUSINESS : ECONOMIC
OBJECTIVES :
Earning adequate profit - reward for taking risk it ismeasuring rod of success needed for stability andprosperity - source of finance
Creation of Customers : it can succeed only if it hascustomrs for its goods - produce as per want of
consumer Innovation : adopt to changing conditions viz new
techniques, new process, new designs etc.,
Socio economic objectives :
To supply goods and services of std., quality wanted by
the societyAvoid anti-social practices like hoarding, black marketing
etc.,
Provide employment opportunity to the people
Pay fair wages and benefits to the employees
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SOCIALOBJECTIVES OFBUSINESS
Payment of timely and regular payment of taxes
Promote social welfare activities
Take steps /avoid polluting the environment
Promote balanced regional development
Human objectives :
Promote humane treatment to employees
Should provide fair deal to employees
Provide job satisfaction to employees
Encourage employees in decision making
National Objectives :
Produce as per national priorities
Promote exports and import substitutes
Help small scale industries
Give necessary training to make them skilled
Achive and create socialistic pattern of society
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SCOPEOFBUSINESS
1. Production : produce goods for selling
2. Purchase : purchase goods for production or for sale
3. Storing : to bridge the time lag between productionand sale
4. Transportation : move the goods from suppliers toproduction site - and move the finished goods toconsumers
5. Advertising : provide information about goods topromote sales
6. Banking : provide funds to finance business7. Insurance : to reduce the risks associated with
business
8. Appoint agents : to promote business activity
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FACTORSAFFECTINGSELECTIONOF
BUSINESSORGANIZATION
Size of the business unit : depends upon the level ofproduction eg. Small level proprietary is enough forlarge scale joint stock co is needed
Capital employment : if capital needed is smallproprietary concern is enough if huge capital is
needed there is need to set up Joint stock co Integration : if owner wants to manage and control all
activities he can manage himself - in large undertakingsneed to create distinction between ownership andmanagement
Stability : need to create stability to be successful
Flexible : the business organization should be flexible tochanging scenario
Tax liability : the tax liability is different andconcessional for certain line of activity select suchactivity as far as possible
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NATUREANDSCOPEOFENVIRONMENTAL
SCANNING
Environmental scanning involves internal and externalenvironments
Scanning is important in the following ways :
Enables management to forecast the trends that affectfortunes of business
Gives information regarding products needed,positioning in market (competition), marketsegmentation, types of services to be provided,businesses to be acquired or sold
Once the opportunities and threats are identified firm
can formulate the strategies to achieve target It can help the device the value chain
Firm can assess the need for physical and personnelcompetencies needed
Make a through SWOT analysis of the company
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BUSINESS ENVIRONMENT
According to Kieth Davis : Business environment is theaggregate of all conditions, events that influences and surroundsand affect it.
A business firm gets resources from the environment andsupplies its goods and services to the environment
There are internal and external forces
The environmental forces provide opportunities and threats to thebusiness community
Business and environment are interrelated
Business can expand if the environment is favorable
Eg. Produce more if govt gives subsidy
Business faces challenges and problems if the environment isnot favorable
eg. Recession cut down the rate of production , if competition ismore they can go for massive advertisement
It is dynamic ever changing economic political, culturaltechnological factors
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TWOTYPESOFENVIRONMENT : INTERNAL &
EXTERNAL FACTORS
Internal Environment : they exist within business firm -generally controllable
eg. Marketing mix, physical facilities, personnel , R & Dcapabilities , financial policies , capital structure etc., etc
External environment : These factors exist outside the business firm
They are beyond the control of a companysuccess ofthe firm depends upon the adaptability of the firm to thefirm to the environment
The factors are : government policies, demographicfactors, legal factors etc.,
Elements of external environment are :
1. Micro environment 2. Macro environment
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MICROENVIRONMENT
1 suppliers: uncertainty of supply is a constraint - maintain highinventories increase cost
2. Customers: choice of the customers may change - it has itsrelevance to profitability
3. Competitors : - in case of severe competition take upvigorous advertisement
Marketing intermediaries : effectiveness of marketing agents whobring sales of a product
Macro environment : Uncontrollable factors
1. Economic environment : policy of the government - eg.Restrictive import policy or policy to protect home industries
2. Political environment : the kind of political system has animpact on the business : eg. There is a different kind of policies incommunist countries
3/ Legal environment : govt bring in laws regarding wages,employment opportunities, health at work, emission of air, etc
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MACRO EXTERNALENVIRONMENT - CONTD
Social environment : some of the examples are buying andconsumption habits of people , customs and traditions ,education etc.,
Demographic environment : size, growth rate, agecomposition , gender of the population etc., - demand for
goods get affected by these factors Natural environment : certain climatic conditions are useful for
certain industries eg. More demand for jeeps in hilly areasthan cars
Technological environment : a firm which cannot cope with the
technological changes may not be able to survive eg.Advent of TV , VCP, VCR have affected cinema theatres
International environment : this affects exports and imports :
eg. In case of recession in foreign markets adoption ofprotection policies by foreign nations may create problems
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BUSINESSETHICS :
Ethos - Greek word - means character
It is a set of standards and code or value system
Business ethics refers to the application of ethics tobusiness
It is the study of good and evil , right and wrong actionsof businessman
It is the moral standards which are expected to befollowed by the people who manage the business
business is a part of the society - it has to contribute to
the welfare of the society To excel and develop business needs the patronage of
the society - eg. Customers, suppliers etc.,
Even a wealthy strong co cannot exist in the long run if itis run on unethical means
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SOMEOFTHEBUSINESSETHICSARE :
Giving fair and equitable treatment to employees
Charge fair prices from the customers
Provideing correct information in advertisement
Use fair weights and measures of commodities
Pay taxes to the govt and other bodies
Earn reasonable profit
Be a good corporate citizen
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IMPORTANCEOFETHICSINBUSINESS
Ethical attitude towards employees Manager shouldknow that his decision affects lives of thousands ofemployees
Good and skilled labor can be attracted to theorganization - as it is employee friendly
Customers get a good feeling that they are getting valuefor their money
Firm with Ethical standards make better decisionswhich are in the interest of the public
Ethics and profit ethics go together a company withethics is sure to be successful in the long run
Law cannot protect society but ethics can protect eg.Measures taken for workers health and pollution controleven before law is passed
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FACTORSWHICHGOVERNBUSINESSETHICS
Value derived from institutions like family, religion, school,government - prescribe what is good or bad - Right behavior isrewarded and vice versa
Some times organizations goals do not match with individualethical goals such cases individual has to show leadership andintegrity
Superiors : leaders should serve as models and mentors andnot otherwise
some times employees succumbs to pressure from superiors andbecome un ethical
eg. Secretary may say Boss is out even though he is in asinstructed by boss
Peers and colleagues create significant influence - a personjustify his wrong action telling that others are doing so
Professional codes : these days the organizations andgoverning institutions prescribe code of conduct eg. Institute ofChartered accountants of India, ICWA, or AIMA
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FACTORSINFLUENCING ETHICS
Corporate culture :
it should have ethical culture in the areas of
leadership, reward systems, fairness , care for
employees and community
Environment :
The actions of the organization has to be
environmental friendly understand nature - take
note of droughts, heat waves, forest fire polluted air,
etc.,
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ETHICALISSUESIN INDIANBUSINESS
After 1990 harshad mehta scam created moreof awreness in india
There are issues regarding corruption, insidertrading, misappropriation of accounts, misleading
advertisements, exploitation of child labour ,exploitation of women in work place, safty in workplace etc.,
These are some of the areas where govtregulations and watch dog bodies are needed to
monitor business activitis Ethical business can be classified under these
basic groups : equity, rights, honesty, corporategovernance, corporate power
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BASICGROUPS
1. Equity : it means fairness apart from legal andhuman rights - like equal wages to women
employees, exploitation of child labour etc.,
2. Rights : it refers to the Just claim of a person
The claim may be legal or behaviroral
Employee rights: in work place not to exlploit
women and children in work place, long hours of
work, unhealthy working conditions etc.,
Employer rights : like action against inefficient
employyees, take action after due process,
evaluate performance, demand efficiency, no work
no pay etc.,
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3. Honesty : business man should not cheat, seal, lie,bribe,
Some of the examples : insider trading, helping acompetitor, inappropriate gifts, wrong claims inadvertisement, etc.,
4. Corporate governance : it is to encourage the use ofresources and at the same time be accountable of theseresources
The aim is to protect the interests of individuals, corpns,and society
It is the relationship between the directors,shareholders, society etc
5. corporate power : take care of the issues like, saftyof work place, product safty, merger or downsizeingetc.,
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VALUES
Values are global beliefs that guide actions and
judgments
Values represent basic convictions of what is good
and what is bad desirable and undesirable in
ones conduct
Values form the bed rock of culture
It defines the societys norms which are justifiable
It includes freedom, democracy, truth, justice,
honesty loyalty, collective responsibility
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SOURCESOFVALUESYSTEMINDIVIDUAL
VALUESAREAFFECTEDBY:
1. family background : parents imbibe moral valuesin children by reward and punishment system
2. society factors; schooling and teachers has amajor role to play in molding the value system
3. personal factors : persons intelligence, ability,educational determine his values
4. cultural values : it is passed on from generationto generation - eg. A person is friendly, hostiledepends upon the culture he belongs
5. religious factors : religion gives a of values toimbibe
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6. life experiences : learn from own and others
experiences individuals form logical decisions on
this
Role demands : it is associated with the particular
position in organization :
Eg. If the informal code demands that the manager
has to be social with employees he has to
cultivate that habit to come up in ladder , even if he
does not wish so
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CORPORATEGOVERNANCE
According to Milton Friedman:
corporate governance is to conduct the business in
accordance with the owner or shareholders desires,
- to make as much money as possible while
conforming to the basic rules of the society , lawand customs
Corporate governance is the set of mechanisms
used to manage the relationship among
stakeholders , to control directions andperformance of organisation
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CHARACTERISTICSOFCORPORATE
GOVERNANCE
1. Discipline : it is a commitment by a companys
senior management to adhere to behavior that is
universally recognized and accepted as proper
Have commitment to adhere to procedures,
processes of the organization
2. Transparency: actions should be such that the
outsider is able to make meaningful analysis of
companys actions
3. Accountability : management should beaccountable of their actions and decisions
4. Responsibility : the management should act
responsibly to the organisation and stake holders
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5. Fairness : rights of various groups have to be
respected - eg. Minority share holders interest
should be protected
6. social responsibility : should place high priority to
ethical standards - should be a good corporatecitizen it should be non-discriminatory and non-
exploitative
7. This can bring lot of reputation to the company
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SCOPEOFTHECORPORATEGOVERNANCE
Preparation of companys financial statements Internal control independence of auditors
Compensation arrangements of top management
Way of nominating the individuals to board
Resources made available to the directors
Code of conduct for corporate governance : aspects to be keptin mind :
Universally acceptable ethical values
Board function in an impartial manner
Transparency in functioning
Encourage discipline
Ensuring confidentiality
Incentive for efficient and effective functioning
Loyalty to the organization
Providing motivation
Etc., etc.,
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End of Module 1
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KEYINDICATORSOFECONOMIC
PERSPECTIVES
Gross Domestic Product _ GDP:
It is the basic measure of a countrys economic
performance
It is the market value of all final goods andservices made within the borders of the countryin a year
Within the borders include : political front airs ,
territorial waters and ships and aircrafts operated
by residents of the country , fishing vessels and oil& natural gas rigs , embassies and military
establishments of the country situated abroad
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CHARACTERISTICSOF GDP
Gross indicates domestic product inclusive of
depreciation
It includes only value of final goods and services
Value of second hand goods is excluded only new
goods are taken into account
GDP is confined to only domestic territory of a
country
It does not include :
A. transfer payments
B. capital gains and income earned through illegal
activities
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TYPESOF GDP
Nominal GDP :
it is the value of total flow of goods and services produced inan economy over a specified period of time at current marketprices
The GDP is Distorted by inflation if there is no adjustment
This unadjusted GDP is known as nominal GDP
Real GDP :
it is physical quantity of goods and services produced
In an inflationary environment , the nominal DGP is greaterthan the real GDP
GDP Deflators :
Cost of purchasing the items included in GDP during theperiod , relative to the cost of purchasing the same itemsduring the base year is termed as DGP Deflator
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APPROACHESTOMEASURE GDP
1. Expenditure approach :
Consumption goods and services + gross investments+Govt Purchases + (exports imports )
2. Income approach : it is arrived by adding up thefactor incomes to the factors of production in the society- this include:
Employee compensation + corporate profits+proprietor's income +rental income + net interest
3. value added approach:
Ie . The value of sale of goods minus purchase ofintermediate goods to produce the goods sold
Note: GDP s of different countries may be compared byconverting their value in notional currency
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ADVANTAGESOF GDP
1. it is an indicator of standard of living of the
people in a country comparable between
countries
2. comparison of productivity and economic health
can be done between countries
3. it is a easier parameter to measure - other
parameters like output per worker etc is not so
effective
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DISADVANTAGE OF GDP
1. wealth distribution : it does not take into account
the disparity of income between the rich and poor
2. Non-market transactions are excluded house
hold production or unpaid services are not
considered for calculation
3. illegal activities or tax avoiding activities are
unreported so GDP is underestimated
4. quality of goods cheap goods are bought more
and more by people high durability goods arepurchased less here higher GDP is resulting from
inefficiency and waste
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SECTORALSHARES
Sectoral shares refer to the contribution of each sector to theGDP of the nation
The three sectors in any economy are :
Agricultural sector, : it is process of producing food, feed, fiberand other goods by the systematic raising of plants and animals
It contributes 18.5% to the GDP
industrial sector : it is concerned with the production of goods
It contributes 26.4% to the GDP
service sector : it is the non-material equivalent of goods
It contributes 55.1% to the GDP- more than half of ur GDP
It is due to liberalization after 90s more exports in services
sector took place Service is the economic activity that does not result in ownership
- main difference /distinction from that of physical goods
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AGRICULTURAL OUTPUT :
Agricultural out put has been defined as consisting of thoseproducts which are not consumed in further processing withinagriculture but are available for consumption
Its share to GDP is an indication of economic development
But all is not well with agricultural sector
Agriculture is impt for eco development
It provides food for population and raw material for industries lapses in food production cause serious question about food
security dependence on imports for food - drain on foreignexchange resources
Shortage of food may result in mal-nutrition , hunger poverty and a poor image of the economy
internationally Agriculture has contributed 16.6%on GDP in 2007
despite of deploying 70% of the population in agriculture Emphasis is given in our 5 year plans to improve agriculture
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CAUSESOFLOWPRODUCTIVITYIN
AGRICULTURE :
Greater pressure of population on land : 70% of our populationDepend on agriculture - industry cannot absorb raisingpopulation
Small and fragmented land holding : Average holding in India isvery low - i.e. 2.6Hectaes it is also fragmented land holding isuneconomical
Defective land tenure zamindari system agl. Laborer has the fear of loosing job always
Conservatism in farmers : they are illiterate, ignorant andsuperstitious - they dont change to improved method of farming
Inadequate irrigation facilities: farmers are gambling withmonsoon uncertain rainfall
Lack of finance and marketing facilities : dependence on moneylenders , exploitation by middlemen and Brokers
Lack of agriculture Inputs : like seeds and fertilizers
Poor techniques of production : old plough and spade andanimals are used not modern equipments
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MEASURESTOIMPROVEAGRICULTURAL
PRODUCTIVITY
Improve volume of cultivable land : presently outof 84 crore acres , only 32 acres are used
Develop irrigation facilities : by govt
Improvement in land tenure system : - ownership
rights should be given to farmers to improve Increase credit facilities cheap credit through
banks and co-operatives
Fixation of economic holding - consolidation ofland holding should take place
Encourage co-operative farming
Provide proper price to the agricultural produce
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INFLATION
It refers to a situation when there is a general rise inprices and a corresponding fall in the value of money
It causes a decline in the purchasing power or value of
money
Prices keep on rising due to excess supply or due toexcess supply of money and lower production of
exchangeable goods
Crowther : defines it as state in which the value of
money is falling and prices are rising
Every increase in price cannot be treated as inflation
There should be a persistent upward rise in the general
price level at a substantial rate for a prolonged period of
time
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FACTORSCAUSINGANINCREASEINDEMAND
1. Increase in public expenditure : eg. Eg. During a time of war or in developmental planning there
will be increase in demand for goods and services in aneconomy - this results in increase in prices of goods andservices
2. Increase in private expenditure - eg. When business
conditions are good entrepreneurs invest more funds in newbusinesses causing increase in demand
3. Increase in exports : higher demand for product fromabroad increase exports less available for domesticconsumption increase price
Reduction in Taxes : leads to increase in purchasing power
due to availability of money in the hands of people Repayment of public debt by govt : this increases money in
the hands of public leading to increase in demand for goods
Rapid growth of population : increase the demand for goods
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EFFECTSOF HIGH INFLATION
People with fixed income suffer as the prices arehigher but their income is same as before
Trade union demand higher wages - this can again fuelinflation more of strikes and unrest
If inflation is higher the exports become more expensiveto other countries creates deficit
Encourage speculation : create uncertainty amongproducers create speculative tendency
Reduction in savings : reduced savings adversely
affects capital formation hinders production Hoarding and black marketing rises expecting prices
to go up
Continuous raise in prices creates sellers marketmakes producers
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EFFECTSOFINFLATIONCONTD
Debtors and creditors : it is gain to debtors and lossto creditors value of money at the time of lending
is more and at the time of repayment is it is lower
Investors in fixed income Securities lose due to fall
in value of money
Farmers are benefited as the value for their
produce goes up
When the prices rise in home country than in
foreign country the value of the home currencyfalls
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INFLATIONANDDEFLATION
During inflationary cycle business men startinvesting with optimism
During deflation industries experience slackness in
demand for industrial goods, banks face crisis in
recovery , prices fall, incomes and wages go down
During inflation productive resources are in full
employment
In deflation unemployment gradually spreads to all
sectors
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CALCULATIONOFTHEINFLATIONRATE
Inflation rate =
= P1- PO x100
PO
P1 is price index for current year
Po is the price index for the previous year
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PRICEINDICIESIN INDIA
Whole sale price Index (WPI) :
It is the most frequently estimated measurement of price
in India
It is computed at aggregate level of major and sub
groups of individual commodities on weekly basis This index is used for measuring inflation in India
Consumer Price Index : it is available for only 4categories of consumers ie. Industrial workers, urban
employees, agricultural laborers and rural laborers The coverage is not as wide as WPI
Used only for wages and dearness allowance
calculations
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DEMANDPUSHINFLATION
It is a situation where the aggregate demand for goods andservices exceeds the available supply of output
COST PUSH INFLATION ; :
it occurs due to supply side factors like
increase in wage rates Increase on price of raw materials
STAGFLATION : it is a situation where the inflation and
stagnation of economic activity exists side by side
There will be recessionary tendency in certain industries
Arises due to continuous inflation leading to fall in demand
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MONEYSUPPLY
Money supply referes to the total supply of moneyin circulation in a given gountrys economy at agiven time
RBI has classified supply of money in four
components as follows: M1 = Currency with public + Demand deposit with
Banks + othr deposits with RBI
M2 = M1 + Post office savings Bank deposits
M3 = M1 + time deposits with Banks
M4 = M3 + total post office deposits
Money supply includes: currency with Public ,deposits with banks, Deposits with RBI, Depositswith post office
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FACTORSAFFECTINGMONEYSUPPLYIN INDIA
Deficit financing in budget : if expn is more thanincome - Govet takes loan from banks
CRR : if CRR is more Banks can only create lesscredit
Rate of Interest : if rate of int is more banks getmore deposits the banks can lend it
Sale and purchase of securities by RBI if RBIsells securities money supply contracts - vice vrsa
If RBI purchases more FX or public converts moreof FX to rupee - supply of money increases
Banking habits if people keep more depositsbanks can grant more loans
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FOREIGN TRADE
No country is self sufficient - need for internationaltrade
Export and import of goods and services is calledForeign trade
NEED FOR FOREIGN TRADE :
large scale production ;: there is scope t cater to foreignmarkets
Degree of self sufficiency : every country cannotproduce every thing there is need for FX Trade
Geographic factors : different countries are endowedwith different natural resources eg. Petrol , diesel etc.,
Occupational distribution : People in different countriesspecialize in different areas
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FOREX RESERVES
Fx reserves prtain to the stock of foreign currency,gold holdings of the central Bank it includes SDR
( Special drawing rights from IMF)
A country holds a basket of foreign currencies and
the total of these in one denomination usually dollargives the forex reserves level
Forex reserves indicate its ability to :
Pay for imports
Discharge its external debt liabilities
Raise fresh borrowings in international market
Intervention to stabilize rate of exchange
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EXCHANGE RATES
Exchange rates between two currencies is the ratesat which they are exchanged or sold against each
other
Eg. If The exchange rate for Indian rupee is Rs. 52,
this means that 1 American dollar can beexchanged for Rs. 52.
The foreign exchange market is one of the largest
markets in the world
Foreign exchange rate is the price of one currencyquoted in terms of another currency
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FIXEDANDFLEXIBLEEXCHANGERATS
Fixed exchange rate system : Countries following the fixed exchange rate system agree to keep
their currencies at a fixed , pegged rate and the change in theirvalue only at fairly infrequent intervals -
Changes only when the economic situation forces them to do so
Advantages /merits :
1. easy to attract foreign capital - as foreigners are not interestedto invest in an unstable currency
2. it eliminates speculation in FX market
3. unstable exchange rates may encourage flight of capital
4. helps developing countries which have persistent balance ofpayment deficits prevent continuous depn in value
5. if exchange stability is not assured , exporters and importerswill not be knowing how much they will receive/pay
6 it results in economic stabilization
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DEMERITSOFFIXEDEXCHANGERATESYSTEM
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CONTD. BUSINESSPERSPECTIVESCONTD
Demerits of fixed exchange rate : The countries which are liberalized and globalised prefers flexible
exchange system
It increases the BOP of most of the countries
It will not work where fx policies and economic policies are not properlyco-ordinated
FLEXIBLE EXCHANGE RATE SYSTEM : Under this system exchange rates are freely determined in an open
market
The rates are determined by market forces like demand and supply offoreign exchange
Merits :
1. It is simple to operate - adjustments in rate are a continuous process
2. It reinforces the effectiveness of monetary policy
3. It permits free trade and convertible currencies on continuous basis
4. It gives more independence to govt on domestic policies
DEMERITS OF FLEXIBLE EXCHANGE RATE
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DEMERITSOFFLEXIBLEEXCHANGERATE
SYSTEM
1. It is impossible for the exporters and importers onthe price they will receive or pay for foreign
exchange
2. It gives inflationary bias to an economy eg.
When the currecy depreciates , we have to paymore for imports (costlier )- this increases inflation
3. Speculation adversely influence fluctuations in
supply and demand for foreign exchange
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ECONOMICINFRASTRUCTURE
Development of infrastructure is important to theeconomic development of a nation
Until recently providing infrastructure was the prime
responsibility of public monopolies
Now government is encouraging private participation This is giving rise t better risk sharing, accountability,
monitoring and manage infrastructure
Economic infrastructure includes :
1. Energy, 2. Water,
3. Transport
4. communication
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ENERGY
It plays a crucial role in eco development of a nation It is created through conventional and non-conventional
sources
Conventional sources are : firewood, agricultural waste,animal dung, coal, oil natural gas, electricity, uranium
etc.,
Non conventional sources include : solar, wind, tidalwaves,
It important to increase generation and conserve it
It is important to design buildings to have naturalventilation, natural cooling
It is also important to educate the masses to conserveenergy
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2. WATER
Water is a very valuable infrastructure There is a need to apply eco-friendly concept to water
infrastructure development
Measures in this regard can include:
1. reducing water demand by increasing public
awareness2. Integrate water resource management
3. Bring in water recycling
4. Minimize water loss
Need to make rain water harvesting measures - which
is cheapest source of water GOI has formed many authorities like central water
commission, central ground water board, etc.forefficient water resources management
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TRANSPORTINFRASTRUCTURE
This Infrastructure creates most valuable place utility for theproducts
There is a need to promote eco-efficient transport sector -protect environment also
Transport system in India includes railways, roads, shipping, civil
aviation . Indian railways is the second largest in the world
Rail ways are run on ideological grounds and not on commercialterms
National highways development programme is taken up in a bigway in India
India has an extensive coastline to provide cheaptransportation But India is loosing an estimated 10 billionbecause of lack of efficient shipping services
Competition in the airline industry is also heating up - howeverhigh cost of operation has become a serious problem withairlines industry
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COMMUNICATION
Telecom sector has witnessed a revolutionary change Many private operators have entered this sector
Telephone is no more a luxury item - it is used even bylower income groups
There are many Internet providers in the country
Many innovations have taken place in business due tothis infrastructure - ie internet
Business has also grown leaps and bounds due tointernet - E commerce, E governance , YouTube , facebook and many social networks have become order ofthe day
Government is planning to improve the net-work to ruralareas in a big way so that the IT industry can spread torural areas and improve the working conditions there
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SOCIALINDICATORS :
Social indicators define the social problems , social trends toguide social planning
Examples are :
1. No. of health problems related to environmental pollutants
2. No. of students enrolled to study environment
3. No of people using community space like parks, greenwaysetc.,
4. No. of people working on environmental issues
Indias high economic growth will be unacceptable if 35% of itspeople continue to merely subsist on less than a dollar a dayand children are denied basic education
It should take steps to educate masses
Provide health for all
The number of Indians with higher education is a mere7%compared to 50% in Britain and 47% in G8 countries
Without education and healthcare there is no chance ofproductivity going up
INDIAN GOVTS ROLE IN IMPROVING SOCIAL
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INDIANGOVT SROLEINIMPROVINGSOCIAL
INDICATORS
Set up extensive social welfare system
eg. Supplementary nutrition for expectant mothers
and children below 7 years , immunization and
health programmes, vacation camps for low income
groups There are also support for blind, deaf, mentally
retarded etc.,
Women education and working women hostels
setup Rehabilitate prostitutes, and convicts ,- begging at
public plaaces is forbidden by law , -drought and
earthquake rehabilitation steps are taken up
GOVT STEPS TO IMPROVE SOCIAL INDICATORS
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GOVTSTEPSTOIMPROVESOCIALINDICATORS
- CONTD
Old age and disability benefits are covered byprovident fund and pension schemes, employes
insurance schemes in vogue - many labour laws
are brought in to improve the living conditions
Prohibit discrimination in workplace - equal pay forsame job no discrimination for women etc. are
brought in
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CONCEPTSOFFOREIGNEXCHANGERATE
Cross rate : It is the exchange rate between thecurrencies of 2 countries that are not quoted againsteach other - but are quoted against a common currency
The cross rates of currencies that are not quotedagainst each other can be quoted in terms of dollar
2. spot exchange rate : it is the rate at which a currencycan be bought or sold for immediate delivery which iswithin 2 business days after the date of trade
3. bid and ask spread: it is the difference between thebid and ask rate of currency
4 Forward exchange rate : it is the rate that is currently
paid for delivery of currency in future date In Forward market currencies are traded for future
delivery
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EXAMPLE - COVERINGEXCHANGERISKA domestic co has taken a loan which is repayable in
foreign currency 6 months later
The rates of fx may undergo a change
Hence there is an exchange rate risk
If the local currency suffers against the foreign currency -
the business has to write off a loss To cover against this risk the business enters into a
forward contract - i.e., it agrees today to buy the foreigncurrency 6 months later at the price prevailing today at aprefixed premium
Perceptions of buyer and seller differ they get into win-win situation
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FUNCTIONSOFFOREIGNEXCHANGE MARKET
It facilitates quick and easy conversion of currencies
Eg. If an indian exporter sells to and American importer
- the exporter bills in Indian rupees . Then the American
importer must convert his currency into indian currency
or rupees - FX market facilitates easy conversion 2 Provision of credit or international credit
Eg. In case of trade it provides Bankers acceptance and
LC for international trade
3. forex market provides facility for minimising foreign
exchange risk
Eg. It provides hedging facilities to absorb FX risk
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PARTICIPANTSINTHEFOREXMARKET
1. Traders/ brokers : are mostly commercial banks who buyand sell FX. - transactions include spot or forwardtransactions .
Traders normally deal in Fx based on the customers orders
2. speculators : Speculator is one who takes a open position
The speculator may have foreign currency on hand called aLong position - bull
Or he may have promised to deliver FX in a future date -called a short position - bear
Hedgers : are those who limit their potential losses by lockingin a guaranteed foreign exchange positions
Arbitrageurs: engage in simultaneously buying and sellingcurrency in two or more markets and thus make profit
Governments : to maintain the price of their currencies theforex markets govt buy or sell Foreign currencies in forexmarket