Business Environment: Role of Government in Business -The Commerce subject detailed notes with practice tests are very useful for Assistant Professor / UGC NET / JRF and other competitive exams preparation.
During 17th and 18th centuries and early nineteenth century there was the doctrine of laissez-faire where the role of the government in the sphere of business was virtually zero. The government was supposed to take care of law and order only.
Thereafter, the scene shifted towards capitalism, the role of government was to run, control and regulate the business activities. These economies, in fact function as ‘mixed economies’. Even socialist economies have role for private sector.
Role of Government in Business
There were changes in traditional role of ‘law and order’ after Russian revolution (1917), Great Depression (1929), Second World War (1939–44) and this period saw emergence of planned economies. The main objective of accelerating and maintaining the pace of economic development with social justice was the foremost consideration. Government’s role changed from passive to active.
There are basically four roles for the government:
1. Regulatory role
2. Promotional role
3. Entrepreneurial role
4. Planning role
The state intervenes in providing direct assistance to business and industries to help businesses to face international competition, financial crisis, and technical complications. Direct assistance can be in the form of providing protection, financial help, technical advice, assistance for research and development, industrial training, and tax incentives. The idea behind these types of direct assistance is to create favourable industrial climate.
Regulatory Role
The basic objective of regulating business is to:
(i) Prevent the market structure from becoming monopolistic.
(ii) Developing the small and new entrepreneurs.
(iii) Promoting welfare of weaker sections of the society.
Regulation means directing with the objectives of assisting the conduct of business. It includes controls through which general norms and standards are laid down by the government. First, the legal regulation should not be excessive, and second, the regulation should be done with efficiency.
The government regulation over business can be in two forms: direct and indirect.
Direct Controls are drastic in nature and discretionary in contents. The government at its discretion directly controls business at the micro level from firm to firm or from industry to industry.
Indirect Controls are indirect in nature and are exercised at macro level through fiscal and monetary incentives, disincentives, penalties and rewards.
Regulatory control may achieve its objective only if such control is not excessive and at the same time it is done effectively.
To illustrate, in India regulatory control is/was exercised in the following ways:
1. Industries (Development and Regulation) Act, 1951
2. Industrial Licensing system—diluted with time
3. Capital Control Issue (1947–1991)—was replaced with Security and Exchange Board of India
4. Price control
5. Distribution mechanism
6. MRTP Act (1969)—now replaced with Competition Commission (enacted in 2002 and established in 2003)
7. Foreign Exchange Regulation Act (1973) has now been replaced with Foreign Exchange Management Act (FEMA) in 1999.
The regulatory aspects bearing on business environment in the emerging context may be thus said to consist of:
1. Government Policies regulating the macro-economic environment, product markets, service sector, rural development, public sector reforms, international trade and foreign investment. Liberalization, Privatization and globalization have underlined the policy framework.
2. Institutional Agencies regulating economic and business activities at the national and sectoral level. These agencies have been set up either by Parliament or State Assemblies or under provisions of the legislative enactments.
3. Laws regulating business activities in general, in specific areas, and with respect to certain operations. There are a large number of such laws aimed at governing industry, trade and commerce. The government policies and institutional agencies regulating various business activities in India have already been enumerated.
Entrepreneurial Role
This role means that the government itself becomes entrepreneur. This leads to the emergence of public sector. Heavy and basic industries involve high risk industries were initially ignored by the private sector as they needed heavy investment and did not yield attractive returns.
The Industrial Policy Resolution of 1948 had very clearly provided that the manufacture of arms and ammunition, the production and control of atomic energy, and the ownership arid management of railway transport would be the exclusive monopoly of the central government. The Industrial Policy Resolution of 1956 had further enlarged this role of the government. Government invested money in Public Sector Units. Nationalization of Banks in 1969 and 1980 are also examples of it.
The entrepreneurial role of the government needs closer scrutiny. In India a large number of public sector entrepreneurial units have been making huge losses, there were operational inefficiencies, many became sick.
The New Industrial Policy which was announced in July 1993 redefined the entrepreneurial role of the government. As per this new policy, the priority areas for the public sector were:
1. Essential infrastructure of goods and services,
2. Exploration and exploitation of oil and mineral resources,
3. Technological development and building of manufacturing capabilities in those areas which are crucial in the long-term development of the economy and where the private sector investment is not adequate, and
4. Manufacture of production areas where strategic considerations are of paramount importance.
In the new policies, the emphasis has been shifted towards performance improvement and it is clear that the government has to ensure that public enterprises are made to run on the business lines. Reorientation of approach towards economic reforms / LPG changed the whole approach.
Promotional Role
This kind of role played by the government is indirect. Here the government neither interferes in the functioning of the business nor makes any attempt to regulate. But instead of playing as a member of the team it aims at promoting the business by providing adequate infrastructure, providing suitable environment and by offering various incentives so as to boost the morale and operational activities of business.
There are various functions of the government in promoting the business operations. These are:
1. To maintain public utilities.
2. To encourage the development including various sectors.
3. To make economic resources productive and progressive.
4. To affect the effective utilization of various resources.
5. To ensure equitable distribution of wealth and income.
6. To bring about equitable balance between various regions.
7. To control the quantity of money available in terms of developmental needs.
8. To promote investment climate in the country.
9. To provide incentives for the promotion of foreign trade.
The promotional role of the government thus encompasses fiscal, monetary and budgetary incentives for the fast expansion and development of priority sectors of the economy.
Planning Role
Planning implies that the government has to plan so that limited resources are directed to right objects with a view to achieve the defined objectives in the interests of the people.
Planning is otherwise universal, whether at micro level or macro level. Every economic unit at the micro level has to plan its activities. The planning role of the government means setting by the government the outer limits or the broader limits within which micro level operations will be planned and executed.
Some characteristics of the planning role are:
1. The planning role can be comprehensive or piecemeal.
(a) Comprehensive planning involves a series of activities over a given period for the economy as a whole. For example, our five-year plans.
(b) Piecemeal planning on the other hand is temporary or ad-hoc having the objective of meeting some contingent or temporary situation
2. Centralized planning comes from the top that flows downwards. DeCentralized planning starts from the bottom, i.e., from individual unit say Panchayat Level, Sectoral level, regional level and then national level.
3. Planning can be short-term or long-term.
4. The objectives of planning could be economic growth, social justice, full employment, stability and ecological balance. The policy mix consists of monetary, physical and fiscal policies. Performance of the process of planning has to be appraised periodically with a view to get a feedback over the performance. The planning and role of the government has to be balanced and optimal.
Now, Planning Commission and five-year plans have been replaced with NITI Aayog that is broad based and under the spirits of cooperative federalism, with more active involvement of the states.
Business Environment: Political Environment