political environment and buisness

POLITICAL ENVIRONMENT

The political environment includes factors such as the characteristics and policies of political parties, the nature of the constitution and govt. system and the govt. environment encompassing the economic and business policies and regulations. Important economic policies such as industrial policy, fiscal policy, export-import policy etc. are often political decisions. Many political decisions have serious economic and business implications.

Government and Business

            The form and structure of govt. is a very important decisive factor for business activities. State intervention is necessary for the growth of market economy and certain core functions like maintenance of law and order, defense, enforcement of contract etc.

Functions and role of State

The functions of the state vary from basic requirements to active participation in several sectors. Thus the functions of the state include:

a)       Basic Functions

These include providing pure public goods such as water, electricity, transport and communication, ensuring property rights, macro economic stability, healthcare,social welfare etc.

b)       Intermediary Functions

These include matters such as management of externalities, eg. Pollution control, protection of environment, regulation of monopolies, provision of social insurance like pensions, unemployment benefits etc.

c)       Active Functions

These include active measures and interventions by the state to stabilize and promote markets and to redistribute assets/ income. (eg. Progressive taxation)

The economic roles of govt. may be classified into four categories:

a)   Regulatory role

The regulatory role of the govt. includes restraints on private investments, control on monopolies, control on price, income, production, distribution, trade, regulatory legislations, fiscal and monetary control etc.

b)   Entrepreneurial role

Govt. must come forward to invest in projects which involve lower rates of yield of which the private sector may not be interested in. such projects involve high overhead costs and long gestation periods, govt. does so as a social entrepreneur by investing in socially desirable projects.

c)   Planning role

The govt. is required to plan, direct and control the scarce resources for better management of the national economy. It is necessary to determine priority of development objectives and fix physical and financial targets so as to achieve these objectives.

d)   Promotional role

The govt. is expected to promote business by providing finance, granting incentives, and creating infrastructural facilities. Govt. may promote the development of small scale industry, tiny and ancillary units. It can also promote indigenous technology, R&D, modernization and up gradation of technology through adoption of appropriate technology from abroad.

Reasons for State Intervention in Business

Involvement of govts. in business activities is widely practiced in almost all economies of the world. The important reasons for state intervention in business are:

1.   State Sponsored Growth

It is noted that the later a country moves towards economic development, the greater has to be the role of the state. Late growth has to be sponsored growth and the govt. has to be the sponsor. Private sector may not take the initiative to develop infrastructure for growth.

2.   Planned economy

Modern economy must be a planned economy. Planning is necessary for determining priorities, directing scarce resources for balanced economic development and facing business cycles. It is the state which assumes responsibility for preparing and implementing plans.

3.   State as Entrepreneur

In a socialist society state has a major role in owning and operating means of production. It is necessary for the state to participate in industrial and business activities for achieving social and economic justice, redistribution of income and balanced regional development.

4.   Revenue for the State

State receives substantial revenue from undertaking industrial activities. Taxation can no longer be depended upon for raising revenue for financing multifarious activities of the state. Therefore, the state has sought to tap industry and commerce for making profits by active participation in business.

5.   Infrastructure for Growth

State participation is necessary to lay a strong base for future development of the economy. State must assume responsibility for the growth of core industries like power, fuel, iron and steel, atomic energy, transport and communication etc.

6.   Control of Monopolies

The evils of market conditions like monopoly or competition invite govt. intervention in business. While monopoly leads to wastage of resources and exploitation of consumers, competition brings conspicuous consumption and promotion of unwanted products.

7.   Policy Formulation

Govt. has to formulate policies for achieving economic and social objectives such as growth in GDP, standard of living, industrial growth etc. it is necessary for the state to intervene in business activities for evolving incentives, subsidies, price controls, demand creation etc.

Types of Interventions

       State controls or govt. intervention in business include the following forms:

1.       Formal and Informal Controls

Formal controls are in the form of legislations by state eg. The Industries (Development and Regulation) Act, 1951, the Cos. Act, 1956, MRTP Act, 1969 (Competition Act, 2002)

Informal controls refer to controls which various groups impose upon themselves out of need and custom. Business firms develop their own conventions, principles and informal agreements that have important regulative implications. (NASSCOM, IBA, AMFI etc.)

2.       Coercive and Inducive Controls

    Coercive regulations are in the form of fines and penalties for non compliances of requirements. Eg. Non payment of tax attracts fine or imprisonment.

Inducive controls are in the form of incentives or subsidies for certain types of activities.  The objective of inducive controls is promotion of desired lines of actions.

3.       Direct and Indirect Controls

 Direct controls involve direct intervention by state like administered price policy of Govt., public distribution etc.  Indirect controls influence economic activities indirectly eg. variation of corporate tax has indirect influence on economic activity.

4.       Promotional and Regulatory Controls

Promotional measures are of positive nature and include such activities as expansion of public sector undertakings, revival of sick units; encouragement of small scale units etc.

Regulatory measures ensure orderly development of industries with the least wastage of resources.  These are measures like legislation, price and distribution controls, monetary and fiscal policies etc.

Problems of control/ Arguments against State Control

State intervention in business is necessary for balanced economic development and greater economic justice.  However, excessive control by state may have many negative consequences.  Some of these are

1. State intervention in business leads to considerable waste of national resources.
2. Administration of state controls requires expansion of the bureaucracy at all levels throughout the country, which leads to increased Govt. expenditure.
3. State ownership of business leads to promotion of inefficiency and corruption.
4. Excessive state control prevents capital formation and economic development.
5. Decision making may be based on political considerations.  There is also delay in decision making due to the strangle hold of policies and procedures

Qualities of Good control System

State control on business economic and business activities must be proactive and avoid negative consequences.  The qualities of good control system are:

1. It must be democratic i.e., it must be exercised in the interest of the public.
2. It must be objective and purposeful.
3. It must be powerful enough to make an unwilling minority to obey the will of the majority.
4. It must be efficient.
5. It must economise coercion.
6. It must be adaptable.
7. Control must be guided by experience or by wise experiment.
8. It must look beyond the immediate effect of doing a given thing.
9. Lastly, control must be capable of progressively raising the level of mankind.

Copyrights©Dr.A.M.Viswambharan