Jun 26, 2013|
Evolution of Indian Business- II
The British occupation of India triggered radical transformations in the business sphere. In the previous article of the series, we discussed some of the most significant effects of the British rule on Indian business. In this article, we will continue to discuss some other major changes in the business climate of India during the colonial period.
- Influence of British promoters
The British regime saw the entry of a large number of British business promoters in India. The foreign entrepreneurs entered areas that had been largely ignored by native Indian businessmen. The influence of their initiatives, as well as the access to the developed West for technology and expertise, opened up entirely new avenues for Indian businesses. In a country where the business landscape was largely dominated by traders and moneylenders, new areas of investments began to unfold.
- Rise of the managing agency system
Unlike the traditional business initiatives, the industrial ventures were a different ball game altogether. They not only required larger investments but also entailed huge risks. The traditional joint family business structure was, therefore, deficient to deal with these new dynamics. This led to the emergence of an entity called 'company'. Herein, an industrial or trading family joined hands with other individuals or families to create a new business entity. In such a set up, the originator of the idea would usually also provide a significant share of the seed capital. The sizeable stake would also give him a correspondingly significant control in the management of the company.
In 1850, this practice received legal sanction post the enactment of company law. The incorporation of the principle of limited liability seven years later provided a further boost to this type of business structure, which evolved further to be called the 'managing agency system'. The nomenclature derives from the fact that the promoting family, which held a controlling stake in the company, also assumed the role of 'managing agents' through formal shareholder resolutions. As a result, the promoting family enjoyed substantial control over the business while the company assumed a separate legal entity. Given that this new corporate structure was in many ways similar to the joint family structure, it became a very popular form of business structure in India.
- Indian industrial ventures
First of all, it is important to note that the factory system of production was a very new experience for Indians back then. The reliance on imported machinery and technical expertise was substantial. As such, Indians largely stuck to areas that required fairly less capital and were capable of generating quick returns. Among industrial ventures in India, cotton textile was the most popular space. In due course, Indian businesses did venture into larger, capital intensive industries such as iron and steel, hydroelectric power and shipping, but these ventures were not always quite successful.
- Hostile policies of alien masters
While the British rule did usher in a new era for Indian businesses, one must not forgot that the colonial rulers were by no means willing to encourage and safeguard the interests of native businesses at the cost of their own economic interests. As such, it is no surprise that the policies adopted by the British were often indifferent and hostile to Indian businesses. Moreover, Indian businesses lacked the skill and scale to compete with British counterparts. As such, they were quite cautious with their industrial ventures.
We have broadly discussed how the seeds of the industrial economy in India were laid during the British rule. Though the industrial undertakings were still at a very nascent stage of development and limited to just a few fields, these early ventures did lay the necessary foundation for the future. The growth of modern industries led to the emergence of chambers of commerce across various regions of India including the apex business organisation called Federation of Indian Chambers of Commerce and Industry (FICCI) . It is worth noting that FICCI was founded in 1927 by noted industrialists G D Birla and Purushottam Das Thakurdas, at the behest of Mahatma Gandhi.
In the next article of the series, we will move forward in time and discuss Indian business dynamics at the time of Independence.
||Ankit Shah (Research Analyst) is the editor for Equitymaster Insider and Vivek Kaul's Inner Circle. A journalism graduate turned Research Analyst, Ankit joined Equitymaster when he was just 23 years old, right after getting his MBA from NMIMS, Mumbai. Having been an avid reader of Equitymaster's research through his college years, Ankit knew he would fit right in!
In his seven years with Equitymsater, Ankit rose quickly, leaving his mark on almost everything from: Travelling thousands of miles to find the next small cap stock, as part of the Hidden Treasure team... Designing Equitymaster's Secrets, an online value investing course based on the company's 20-year journey... Bringing global investing ideas to Indian readers through Vivek Kaul's Inner Circle... Right to launching his brand-new service, Equitymaster Insider.
Ankit is a firm believer in Charlie Munger's multidisciplinary approach on juggling between various disciplines...He is not just a research analyst, but also a voracious reader and an avid traveler...Born and brought up in Mumbai, he now prefers to keep away from the noisy megapolis as much as possible. In any given month, you could find him exploring the ancient ruins of South America, the beaches of South East Asia, or the organic cafes of Pondicherry.
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