Business Trade and Commerce

HISTORY OF TRADE AND COMMERCE

❖ Indigenous banking system in Indian Subcontinent

• Metals as Money: Initially, the metals were used as money due to the high durability and
divisibility.
• Use of Hundi and Chitti: Hundi and Chitti were financial instruments which were used for
carrying out trade and credit transactions during the Medieval period in India. A Hundi is
primarily an unconditional contract or order which warrantees a monetary payment which
can be transferred by valid negotiation.
• Development of banks: With the use of currency and letter of credit, the Indian banking
system started lending money and financing the domestic and foreign trade in India. Along
with this, the development of banking system also encouraged people to deposit precious
metals with the lending authorities such as bankers, Seths, etc.
• Agriculture and livelihood opportunities: In the Indian subcontinent, agriculture and
the domestication of animals were important sources of livelihood. Along with this, people
also relied on other sources of earning a livelihood such as weaving cotton, dyeing fabrics,
making clay pots, etc.
• Role of Intermediaries: The intermediaries and other institutions such as Jagat Seths,
played an important role in the promotion of trade, commerce and banking in India.
• Credit transactions: With the development of credit facilities and availability of loans
and advances, the commercial activities and operations enhanced and the Indian
subcontinent started enjoying the benefits from a favourable balance of trade.
• Evolvement of indigenous banking: The indigenous banking system not only benefitted
the manufacturers or traders by facilitating trade but they also helped those merchants
with additional funds who were looking for expansion and development. Later on, with the
evolvement of commercial and industrial banks, the banking system also started providing
both short term and long term loans to finance the agricultural projects in India.

❖ Different types of Hundi used by traders

a. Dhani-jog: This type of Hundi is payable to any person without putting any liability over
the person who receives the payment. The broader function of Hundi is Darshani.
b. Sah-jog: This type of Hundi is payable to a specific person, especially someone who is
deemed as respectable while putting a liability over the person who receives the payment.
The broader function of Hundi is Darshani.
c. Firman-jog: This type of Hundi is payable on order. The broader function
of Hundi is Darshani.
d. Dekhan-har: This type of Hundi is payable to the presenter or the bearer. The broader
function of Hundi is Darshani.
e. Dhani-jog: This type of Hundi is payable to a person (called Dhani, who purchases it)
without putting any liability over who receives the payment. However, the payment is done
over a fixed time period. The broader function of Hundi is Muddati.
f. Firman-jog: This type of Hundi payable to order following a fixed term. The broader
function of Hundi is Muddati.
g. Jokhmi: This type of Hundi is drawn against dispatched goods. Herein, in case the goods
are lost during the transit, then the drawer bears all the costs without putting any liability
on the Drawee. The broader function of Hundi is Muddati.

❖ Intermediaries:
• Middlemen who promotes trade
• Provide security to the manufacturers by assuming risks involved
• Comprise of commission agents, brokers and distributors

❖ Transport
• Roads: Important for inland trade and trade over land. Trade routes were structurally
wide and suitable for speed and safety
• Maritime: Malabar Coast, Calicut and Pulicat are major emporiums that were used to
trade various items including spices, pepper, diamonds, pearls and cotton, etc. from India.

❖ Different communities dominated Indian trade

• Punjabi & Multani merchants: Handled business in the northern region
• Bhats: Managed trade in the states of Gujarat and Rajasthan
• Mahajan: These were traders in western India
• Chatt: These were important traders from the South
• Nagarseth: In urban centres, such as Ahmedabad the Mahajan community collectively
represented by their chief called Nagarseth
• Other urban groups: Included professional classes, such as hakim and vaid (physician),
wakil (Lawyer), pundit or mulla (teachers), painters, musicians, calligraphers, etc.

❖ Merchant Corporations
• Derived power and prestige from guilds formed to protect interests of traders
• Had their own rules of membership and professional code of conduct
• Trade and industry taxes (like Octroi, custom duty, tariffs and ferry tax) were major
source of revenue
• Guild chief dealt with kings and tax collectors and settled the market toll on behalf of
others
• Guild merchants acted as custodians of religious interests
• Various commercial activities enabled the merchants to gain power in the society

❖ Major Trade Centres

• Pataliputra: Patna, a commercial town as well as a major centre for export of stones.
• Peshawar: Important centre for exporting wool and importing horses. Contributed in
commercial transactions between India,China and Rome.
• Taxila: Major land route between India and Central Asia and a city of financial and
commercial banks.
• Indraprastha: Commercial junction where routes leading to the east, west, south and
north converged
• Mathura: Emporium of trade and commerce where routes from South touched Mathura
and Broach
• Varanasi: Major centre of textile; famous for gold silk and sandalwood.
• Mithila: Traders of Mithila established trading colonies in South China and traded at
ports of various islands
• Ujjain: Exported agate, carnelian, muslin and mallow cloth.
• Surat: Emporium of western trade, famous for their gold bordered textiles (zari).
• Kanchi: Major trade centre for pearls, glass and rare stones
• Madura: Attracted foreign merchants, for carrying out overseas trade
• Broach: greatest seat of commerce in Western India.
• Kaveripatta: Provided loading, unloading and other facilities of merchandise.
Headquarters for many foreign traders as it was a convenient place for trade with various
countries such as Malaysia, Indonesia, China and far East. Major centre for perfumes,
cosmetics, scents, silk, wool, cotton, corals, pearls, gold, etc.
• Tamralipti: One of the greatest ports connecting with West and far East; linked with
Banaras and Taxila as well.

❖ Exports and Imports in India

In ancient India the exports majorly consisted of spices, wheat, indigo, opium, sugar,
sesame live animals oil, cotton, and animal products such as hides, skin, furs, horns,
tortoise shells, pearls, sapphires, crystal, lapis, lazuli, granites, turquoise and copper etc. On
the other hand, the imports mainly included animal products, Chinese silk, horses, flax and
linen, gold, silver, tin, copper, lead, rubies, coral, glass, amber, etc.

❖ Position of Indian Subcontinent in World Economy

• During ancient and medieval world, India approximately controlled about 1/3rd and
1/4th of the world’s wealth
• Megasthenes, Faxian (Fa Hien), Xuanzang (Huen Tsang), Al Beruni (11th century), Ibn
Batuta (11th century), Frenchman Francois (17th century), often referred India as
‘Swaranbhumi’ and ‘Swarndweep’
• Pre-colonial period was an age of prosperity for Indian economy and made the Europeans
embark great voyage of discovery
• The control of East India Co. resulted in lack of freedom, no agricultural and scientific
revolution, limited reach of education to the masses, population growth, etc. which made
India a poor country
• Under the British empire, Indian economy was reduced to a mere exporter of raw
materials

❖ Reindustrialisation in India
After independence the government of India adopted Central Planning by setting up
Planning Commission which formed Five-year plans for aiming at India’s growth. However,
despite the efforts the Indian economy could not grow at the required pace. The major
reasons behind the lack of growth included lack of capital formation, constant rise in
population, huge expenditure on defence and inadequate infrastructure. Gradually as a
result, India started relying heavily on borrowings from foreign sources, lastly agreeing to
economic liberalisation in 1991.

❖ Current Scenario
• India is one of the fastest growing economies in the world
• Preferred FDI destination
• Rising incomes, savings, investment, domestic consumption and younger population
• High growth in sectors
• Initiatives by Government such as ‘Make in India’, Skill India’, ‘Digital India’ and
• Foreign Trade Policy adding to growth

❖ Human Activities
Humans carry out various activities to satisfy their different kinds of needs including
livelihood, psychological and financial needs. These activities are known as human
activities.
Human activities can be classified into two main categories: economic activities and non-
economic activities.

➢ Non-Economic Activities
These activities are carried out by an individual to fulfil psychological needs; these
activities are undertaken for self-satisfaction rather than for earning income or profit—for
example, contributing to charity, cooking food for the family, etc.
➢ Economic Activities
As against non-economic activities, these activities are carried out with the basic objective
of earning income or profit—for example, a teacher teaching in a school, a worker working
in a factory, etc. Economic activities can further be classified into three categories:
business, profession and employment.

❖ Business
➢ Meaning/Concept of Business
• The word ‘business’ has been derived from the word ‘busy’, which means engaged in an
activity.
• A person engaged in a business deals with the trading of goods or services on a regular
basis.
• The sole motive of carrying out a business is to earn profit.

➢ Features of Business

i. Economic activity: As a business is carried out with the sole objective of earning profit, it
is characterised as an economic activity.

ii. Procurement of raw materials : Business involves procurement of raw materials and
semi-finished goods, which are then processed into final goods. These final goods are then
sold to the end consumers at higher prices. (It must be noted that the resale of goods and
services on a regular basis also constitutes a business.)

iii. Profit motive: Earning profit is the sole and the most important objective of all
business activities.

iv. Exchange of goods and services: Business basically involves an exchange of goods and
services for money.

v. Regular basis: The exchange of goods and services (as mentioned in the point above) is
done on a regular basis. A single or only a few transactions of exchange do not constitute a
business.
vi. Business risk: Every business, irrespective of its size (large or small) and the types of
goods it deals in, faces business risks (in the form of loss).

vii. Customer satisfaction: Besides the profit motive, a business also aims at satisfying
consumers’ wants. A business must produce goods and services considering consumers’
needs.

❖ Role of Profit in Business

Earning adequate profit (excess of income over costs incurred) is the sole motive of any
business. Without sufficient profits it would not be possible for a business to sustain itself
for a long time. Profit forms the source of reinvestment in a business and thus enables the
growth of the business. The following diagram depicts the role of profit in a business.

i. Source of income: To every businessman, profit from the business forms the source of
income and livelihood.

ii. Source of finance for future growth: A part of the profits earned is reinvested by the
businessman into the business to facilitate its growth.

iii. Indicator of efficiency: Profits earned by a business can be considered an indicator of

the efficiency or performance of the business. In other words, higher profits indicate
greater success of a business and vice versa.

iv. Enhances the business’s standing in the market: Over a period of time, if a business
earns sufficient profits, it gains market standing and reputation in the public eye.

v. Reward for risk taking: Profit is said to be the reward or compensation for the risks
taken in the business.

vi. Return to investors: As a business earns profits, it gains reputation and goodwill in the
market; this, in turn, increases the market price of its shares. In this way, profits also
increase the return for the investors.
➢ Can profit be the sole motive of a business?
Although conventionally a business is carried-out with the sole aim of earning profit,
however, now-a-days, with the growing diversities, business has expanded its definition in
terms of its objectives. It is no more limited to just earning profits but has grown beyond
that. Therefore, a business needs to have multiple objectives.

❖ Multiple Objectives of Business

Business objectives are the results that every business aims at achieving. The following
diagram depicts various objectives of a business.

Following are the multiple objectives of a business:

i. Innovation: Business calls for developing new and sophisticated techniques by
incorporating new thoughts and ideas so as to meet the growing demands of consumers; it
is a never-ending process.

ii. Profit maximisation: Earning maximum possible profit is the basic motive of every
business.

iii. Market share: Every business enterprise aims at capturing maximum market share.

iv. Workers’ performance and their attitude: The productivity and profitability of a
business are dependent on its workers’ performance and their attitude. In this regard,
every business aims at maximising the efficiency and productivity of its workers.

v. Social responsibility: Because a business uses the resources of the society, it has certain
responsibilities towards it. These responsibilities are called social responsibilities.

vi. Performance and development of manager: A business enterprise tends to conduct

various programmes to improve the performance of its managers. This is because efficient
managers help in improving the performance of the workers and increasing the profits of
the business.

vii. Resources: Every business requires physical and financial resources to produce goods
and services. These resources must be put to optimum use by the business.

viii. Productivity: Every business should aim at greater productivity through the effective
utilisation of available resources.

❖ Economic Objectives
i. Earning profits: Earning profits is the main objective of every business. Profit forms the
income for the businessman and is reward for his risk-bearing ability.

ii. Survival: Every business must aim to survive in the market in the long run by giving due
regard to forces such as competition, consumer needs, sources of finance, government
regulations, etc.

iii. Growth and development: Businesses must grow and develop so as to capture
maximum market share and earn maximum profits.

❖ Social objectives of Business

Following are the social objectives of a business:
i. Supply of desired products at fair prices: A business should produce and sell products
of the desired quality to live up to the expectations of its customers.

ii. Employment generation: Every business should create employment opportunities so

that many people can get employment without any discrimination on grounds of caste and
creed.

iii. Welfare of the employees: Business enterprises should provide good working
conditions to their employees. They should also pay fair wages to their employees for their
work.

iv. Environment protection: Business enterprises should adopt adequate measures to

protect the environment; they should use environment-friendly techniques of production.

v. Community service: Business organisations should actively participate in community

services; they can open schools, orphanages, hospitals, etc., for the overall welfare of the
society.

❖ Profession
A profession is an occupation that requires highly specific and in-depth knowledge of the
relevant field. Every profession is different from the other in terms of the knowledge and
skills required to practise it.
➢ Features of Profession

Following are some of the main features of a profession:

i. Professional degree and knowledge: A profession requires an individual to possess in-
depth knowledge of the field.
ii. Code of conduct: Every profession follows an ethical code of conduct as prescribed by
the concerned professional associations.

iii. Limited capital investment: Practising a profession requires limited capital

investment.

iv. Professional association: Every profession is associated with a professional

association/body that provides guidelines for the behaviour/code of conduct of the
members.

v. Restricted entry: Entry in a profession is restricted through some requirements such as

possession of a specific degree, knowledge of a specialised skill and membership of some
professional association.

vi. Service motto: Every professional aims at giving prime importance to client servicing.

❖ Employment
In this type of economic activity, individuals are hired by an organisation to work on a
regular basis and are paid in exchange of their services.
➢ Features of Employment

Following are some of the basic features of employment:

 i. Easy commencement: Employment commences as soon as the appointment letter and
the service agreement is signed by the employee.

ii. No capital required: No capital is required to enter into a service or employment.

iii. Code of conduct: It is mandatory for every employee to follow the rules and regulations
prescribed by the employer of the company.

iv. No job transfer: Employment cannot be transferred from one person to another or from
one organisation to another.

v. Performance: An employee needs to perform the tasks and duties assigned by the
employer.

vi. Wages: Employees are given wages or salaries by the employer as remuneration for
their services.

❖ Comparison between Business, Profession and Employment

Basis of
Business Profession Employment
Difference
Commences as soon as the
Can be started by an Can be practiced only after
appointment letter and the
entrepreneur depending successful completion of a
Commencement service agreement is signed
on his or her decision to (professional) degree or a
by the employer and the
do so certificate course.
employee.
It varies as per the size
Investment
and nature of the Limited Nil
required
business.
The degree of risk
involved depends on the
nature of goods produced
Risk involved Comparatively low Nil
dealt in by the business
and the scale of business
operations.
Ownership cannot be
It is possible and
transferred, as the
Transfer of subjected to the fulfilment Ownership cannot be
professional himself/herself
ownership of certain legal transferred.
procures the required
formalities.
degree and skills.
Reward or
Profit Fees Wages/salary
remuneration
 The code of conduct is
The code of conduct is
A business does not prescribed in the form of
Code of conduct prescribed by professional
require a code of conduct. terms and conditions laid
associations.
down by the organisation.
No minimum qualification Prescribed professional It depends upon the nature
Qualification
is required. qualification is required. of the job.

❖ Classification of Business Activities

Business activities can be classified into two broad categories: industry and commerce.

❖ Industry
➢ Definition: Industry refers to those economic activities wherein raw materials are
processed and converted into final products.
During the process, value addition to the raw materials takes place. The final products have
the higher value compared to the raw materials.

➢ Classification of Industries
Industries are further classified into three categories: primary, secondary and tertiary.
➢ Primary Industries
These industries undertake activities related to the extraction and processing of natural
resources. Based on the nature of activities performed, primary industries can further be
classified into extractive and genetic industries.
i. Extractive industries: These industries deal with the extraction and refinement of
natural resources.

ii. Genetic industries: These industries undertake activities related to the breeding of
plants and animals that are then used for further reproduction.

➢ Secondary Industries
These industries acquire raw materials (the final products of primary industries) and
further process them into final goods. These industries can further be classified in two
categories:

i. Manufacturing industries: These industries process raw materials or semi-finished

goods into finished products, which can readily be used by the final consumer.
Manufacturing industries can further be classified in four categories:
a. Analytical industries: These industries analyse a single product (raw material) and then
refine and separate different elements from it to prepare the final product.
b. Synthetic industries: These industries combine different raw materials, which serve as
ingredients, to produce a new product.
c. Processing industries: In these industries, the raw material is processed and refined in
various stages and converted into the final product.
d. Assembling industries: These types of industries combine various smaller components
to form a new final product.

ii. Construction industries: These industries are concerned with the construction and
development of infrastructure such as buildings, bridges, dams and roads.

➢ Tertiary industries
These industries constitute the service providers that facilitate the operations of primary
and secondary industries.
Some of the major services provided by tertiary industries are banking and credit facilities,
communication and transportation.

❖ Commerce
➢ Definition: It involves the trade/exchange of goods and services. Unlike industry,
commerce does not involve production.

➢ Functions/Role of Commerce
Commerce bridges the gap between the producers and the sellers and removes the
hindrances in the process of exchange. Following are the ways in which hindrances in the
process of exchange can be overcome by commerce:

i. Trade: It involves the exchange of goods between producers and consumers, which, in
turn, helps in making the goods available to consumers easily. As traders serve as a link
between the producers and the customers, they overcome the hindrance of person.

ii. Insurance: It helps in recovering the losses incurred in case of any damage. Thus,
insurance acts as a shield against the risks and overcomes the hindrance of risk.

iii. Transportation: Transportation enables the producers to move their goods to the
market in order to sell them to the consumers. This helps in overcoming the hindrance of
place.

iv. Banking: Efficient banking facilities easy and ready availability of cheap credit to
businessmen and traders. This helps in overcoming the hindrance of finance.

v. Storage and warehousing: Modern technology has facilitated the production of goods in
large quantities. Warehousing helps the producers in storing goods until they are sold to
the final consumers, thus overcoming the hindrance of storage.

➢ Classification of Commerce
Commerce can be classified into two categories: trade and auxiliaries to trade.

❖ Trade
Meaning: Trade refers to the buying and selling of goods and services.

➢ Classification
Trade can further be classified into two categories: external trade and internal trade.

➢ External trade
The trade that takes place between two or more countries is known as external trade.
Following are the various forms of external trade:
i. Import trade: It refers to the purchase of goods and services from foreign countries in
order to consume them in the native country.

ii. Export trade: It refers to the selling of goods and services from the native country to the
foreign countries.

iii. Entrepot trade: It involves importing goods from a foreign country with the purpose of
exporting them to another country at a higher price.

➢ Internal trade
The trade that takes place within the boundaries of a country is known as internal trade.
Following are the two forms of internal trade:

i. Wholesale trade: It refers to the buying and selling of goods in large quantities for the
purpose of resale or intermediate usage. These goods are purchased in bulk from the
manufacturers and are later sold to retailers in relatively small quantities.

ii. Retail trade: It refers to the buying of goods and services in relatively less quantities
unlike that practised in the wholesale trade. These goods and services are then sold
directly to the customers.
❖ Auxiliaries to trade

➢ Definition: It comprises all trade-related activities that facilitate the exchange of goods
and services.

➢ Types of Auxiliaries to Trade

Following are the various types of auxiliaries to trade:

i. Banking and finance: An efficient banking facility ensures easy and ready availability of
cheap credit to businessmen and traders.

ii. Advertising: Advertisements enable businessmen to reach to a large number of

potential buyers. This helps them in increasing their sales.

iii. Warehousing: It refers to storing or preserving goods until they are sold for final
consumption. It helps businesses to store goods and facilitates the availability of goods
when required.

iv. Insurance: It acts as a shield against various business risks. By paying a nominal
premium at regular intervals, the loss suffered by a business (in case of any accident or
mishap) can be recovered from the concerned insurance company.

v. Transportation: It widens the geographical boundaries of a business and enables the

sale and purchase of goods across different regions.

❖ Business Risks
Definition: Business risk refers to the possibility that the business may fail to earn
sufficient profits or incurs losses due to certain unforeseen circumstances which are
beyond its control.

➢ Types of Business Risks

Business risks can be classified in two broad categories: speculative business risk and pure
business risk.

i. Speculative business risk: It refers to an equal chance of earning profits and incurring
losses. It arises because of changes in external forces.

ii. Pure business risk: It refers to the chance of incurring either only losses or no loss at all.

❖ Nature of Business Risks

Following are some features of a business risk:

i. Part and parcel of business: Risk is an essential feature of every business. Every
business, irrespective of its size and nature, faces a certain amount of risk.

ii. Result of unforeseen circumstances: Risk usually emerges because of unforeseen

circumstances. These uncertainties may occur in the following forms:
a. Human uncertainties such as strikes and thefts
b. Business uncertainties such as price change and changes in the government policies
c. Natural uncertainties such as earthquake and floods
d. Other uncertainties such as political disturbances and fluctuations in the exchange rate

iii. Directly related to profit: Profit is directly related to risk as profit is said to be the
reward for undertaking risks.
Higher risk → Higher profits

iv. Degree of risk: The degree of the risk involved varies from business to business
depending upon the nature of the business and the size of its operations.

❖ Causes of Business Risks

Following are the various causes of business risks:
i. Natural causes: Unforeseen natural calamities, such as earthquake, flood and famine,
cause heavy and irreplaceable losses to a business. The business risk that comes from
natural elements is beyond the control of any business.

ii. Economic causes: These causes are related to the uncertainties associated with changes
in competitors’ policies and change in price and consumer preferences.

iii. Human causes: These causes are directly related to the actions of human beings.
Carelessness, strikes and riots are some of the human causes.

iv. Other causes: Besides the causes mentioned above, there are a few unpredictable
events that cause a business risk—for example, political disturbances, exchange rate and
interest rate fluctuations and budget amendments.

❖ Factors to be considered before starting a business

Following are some of the important factors that must be taken into consideration before
starting a business:
i. Selecting the line of business: This is the foremost decision that involves choosing the
kind of product that is to be produced, analysing its existing and future market demand,
considering profit margin and determining the level of technical know-how possessed by
the entrepreneur.

ii. Scale of the business: Once the line of business is selected, the entrepreneur needs to
decide whether he wants to operate his business on a large or small scale.

iii. Location: An appropriate location must be selected based on factors such as easy and
cheap availability of raw materials and labour, transportation, power and other
infrastructural facilities.

iv. Finance: As finance is required for every aspect of business; therefore, before starting a
business, the feasibility of various fund-raising alternatives (as against the requirement)
must be carefully analysed.

v. Physical requirements: These requirements include machinery, equipment, tools and

technology that add to the efficiency of a business.

vi. Plant layout: After the physical facilities have been taken care of, the layout of the plant
needs to be finalised.

vii. Efficient and dedicated manpower: A competent and trained workforce is required to
start the business operations.

viii. Tax planning: Tax planning as per various tax laws in the country must be done
carefully.

ix. Starting the enterprise: After considering the above mentioned factors and accordingly
taking a suitable decision, a businessman can commence the operations of his enterprise.