UNIT 3

Political and Legal

Environment

THE CONSTITUTIONAL ENVIRONMENT

The Constitution of a country is an

important document. It describes the
aspirations of the people, lays down
their fights and states the political and
socio-economic
objectives
of
governance. It outlines economic and
political powers of the government and
its
duties
towards
the
people.
Distribution of powers between the
different layers of government are also
specified. In this section, we shall focus

THE CONSTITUTIONAL ENVIRONMENT

The Constitution of India was adopted by

the Constituent Assembly on November
26, 1949 and came into force on January
26, 1950. The Constitution which
envisages
parliamentary
form
of
government is Federal in character with
Unitary features. It distributes legislative
power between Parliament and State
legislatures and provides for vesting of
residual powers in Parliament. Power to
amend the Constitution also vests in

The Preamble

The Preamble to the Indian Constitution states that "WE,

THE PEOPLE OF INDIA, having solemnly resolved to
constitute India into a SOVEREIGN, SOCIALIST, SECULAR,
DEMOCRATIC, REPUBLIC and to secure to all its citizens:
JUSTICE, social, economic and political;
LIBERTY of thought, expression, belief, faith and worship;
EQUALITY of status and of opportunity; and to promote
among them all
FRATERNITY assuring the dignity of the individual and
the unity and integrity of the nation;
IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of
November 1949, do HEREBY, ADOPT, ENACT AND GIVE
TO OURSELVES THIS CONSTITUTION."

Fundamental Rights

The Constitution of India offers all citizens,

individually and collectively, some basic
freedoms. These are guaranteed in the
Constitution in the form of six broad
categories of Fundamental Rights
which are Justicable. Articles 12 to 35
contained in Part III of the Constitution deal
with Fundamental Rights. These are:

Fundamental Rights

Right to equality including equality before law,

prohibition of discrimination on grounds of
religion, race, caste, sex or place of birth and
equality
of
opportunity
in
matters
of
employment.
Right to freedom of speech and expression;
assembly; association or union; movement;
residence; and right to practice any profession
or occupation (some of these rights are subject
to security of the State, friendly relations with
foreign countries, public order, decency or
morality).

Fundamental Rights

Right against exploitation, prohibiting all forms

of forced labor, child labor and traffic in human
beings.
Right to freedom of conscience and free
profession, practice and propagation of religion.
Right of any section of citizens to conserve their
culture, language or script and right of
minorities
to
establish
and
administer
educational institutions of their choice.
Right to constitutional remedies for enforcement
of Fundamental Rights.

Fundamental Rights

While the fundamental rights enshrined in

the Constitution provide a number of
freedoms to the citizens and ensure :
number of economic rights, the State has
the
power
to
impose
reasonable
restrictions on them in the public interest,
is has enabled the State to impose a
number of statutory controls over the
business and start a number of industrial
and siness activities on its own

Directive Principles of State Policy

The Directive Principles of State Policy are

a unique feature of the Indian Constitution.
Although
not
justiciable,
'
are
'fundamental in governance of the
country' and it is the duty of the State to
apply these principles in making vs. No
ruling party can ignore them and must
devise its policy keeping them in view. The
Directive Principles that are important from
the economic point of view are as follows:

Directive Principles of State Policy

The State shall strive to promote the welfare of

people by securing and protecting as effectively as it
may a social order in which justice - social, economic
and political - shall inform all institutions of national
life.
The State shall strive to minimise inequalities in
income, and eliminate inequalities in status, facilities
and opportunities, not only among individuals but
also among group of people.
The State shall direct its policy in such a manner as
to secure the right of all men and women to an
adequate means of livelihood and equal pay for
equal work.

Directive Principles of State Policy

Within limits of its economic capacity and development, the

State shall try to make effective provision for securing the
right to work, education and to public assistance in the event
of unemployment, old age, sickness and disablement or
other cases of undeserved want.
The State shall endeavour to secure to workers a living wage,
human conditions of work, a decent standard of life and full
involvement of workers in management of industries.
The State is to direct its policy in such a manner as to secure
distribution of ownership and control of material resources of
community to subserve the common good and to ensure that
operation of economic system does not result in
concentration of wealth and means of production to common
detriment.

Directive Principles of State Policy

Some of the other important directives relate to provision of

opportunities and facilities for children to develop in a r
manner, free and compulsory education for all children up
to the age of 14; promotion of education and economic sts
of scheduled castes, scheduled tribes and other weaker
sections; organisation of village panchayats; separation
Fjudiciary from executive; promulgation of a uniform civil
code for whole country; protection of national monuments;
ation of justice on a basis of equal opportunity, provision of
free legal aid; protection and improvement of environment
safeguarding of forests and wildlife of the country; and
promotion of international peace and security, just and
jrable relations between nations, respect for international
law, treaty obligations and settlement of international Jtes
by arbitration.

LEGAL ENVIRONMENT OF BUSINESS

The governments set the legal framework

within which business firms operate. The main
sources of law in India
are
the
Constitution,
statutes
(legislation),
customary law and case law. Statutes are enacted
by Parliament, State legislatures and Union
Territory legislatures. Besides,- there is a vast body
of laws known as subordinate legislation in the
form of rules, regulations as well as bye-laws made
by Central/State governments, and local authorities
like municipal corporations, municipalities, gram
panchayats and other local bodies.

LEGAL ENVIRONMENT OF BUSINESS

From the point of view of business, not all legislations are

important. Legislations defining property and business
organisations, laws of contracts and bankruptcy,
mutual obligations of labour and management, and a
multitude of laws and regulations constraining the
way business activities are carried out, are important
from the point of view of business. Accordingly, these
Legislations constitute the legal environment of
business. Economic laws (or legislations) have a direct
bearing on the business. Broadly, economic legislations can
be classified into two categories: (i) Legislations which have
a facilitatory role in business, and (ii) Legislations which are
restrictive in their nature. The important economic laws in
India are as follows:

LEGAL ENVIRONMENT OF BUSINESS

Company Law. The Companies Act, 1956 in India

presents the whole body of the company law. The
Act provides for the formation of company, and
states powers and responsibilities of the directors
and managers. The Companies Act also provides
for
raising
of
capital,
management
and
administration of company, holding company
meetings, maintenance and audit of company
accounts, powers of inspection and investigation of
company affairs, and regulating and winding up of
companies in India. For a detailed discussion on the
Companies Act, 1956, please refer to Chapter 39.

LEGAL ENVIRONMENT OF BUSINESS

Industries (Development and Regulation) Act,

1951. Regulation of industrial development was
considered necessary in India to ensure that such
development takes place according to the plan priorities
and in accordance with the directions laid down in the
industrial policy resolution. For this purpose, an Act was
passed by the Parliament in October 1951. Known as
the 'Industries (Development and Regulation) Act,
1951', this Act came into force on May 8, 1952. The
government assumed powers under the Act to issue
licenses for the establishment of new industries, for the
expansion of old industries, production of new items by
existing industries, and for changing the location of an
existing undertaking.

LEGAL ENVIRONMENT OF BUSINESS

MRTP Act and Competition Act. The Monopolies and

Restrictive Trade Practices (MRTP) Act was adopted by the
Government of India and the MRTP Commission was set up in
1970. The Act extended to the whole of India excepting Jammu
and Kashmir. It sought to achieve the following principal
objectives: (1) prevention of concentration of economic power
to the common detriment and control of monopolies, and (2)
prohibition of monopolistic and restrictive and unfair trade
practices. In line with the new liberalised economic scenario in
the post-reform period (i.e., the post-1991 period) a need was
felt to considerably modify the MRTP Act. Accordingly, the
government adopted the Competition Act, 2002. While the
focus of MRTP Act, 1969 was on controlling the concentration
of economic power, the focus of Competition Act, 2002 is on
ensuring free and fair competition in the markets.

LEGAL ENVIRONMENT OF BUSINESS

FERA, 1973 and FEMA, 1999. Foreign

Exchange
Regulation
Act
(FERA)
was
promulgated in 1973 and it came into force on
January 1, 1974. The Act aimed a regulating
foreign exchange. Frequent complaints were
heard from the tage corporate sector and the
foreign investors that this Act was excessively
restrictive. Accordingly, FEMA (Foreign Exchange
Management Act), was passed in 1999 to take,
the place of FERA. The emphasis under FEMA is
on 'exchange management' whereas under FERA
the emphasis was on 'exchange regulation'.

LEGAL ENVIRONMENT OF BUSINESS

Consumer
Protection
Act,
1986.
Consumer Protection Act was enacted in
1986. The objective of the Act is "to
provide for the better protection of the
interest of consumers and for that purpose
to make provision for the establishment of
consumer councils and other authorities
for the settlement of consumers' disputes
and for matters connected thereto."

LEGAL ENVIRONMENT OF BUSINESS

The Securities Contracts (Regulation) Act, 1956.

With a view to regulating the functions of the stock
exchanges le country, the government passed the
Securities Contracts (Regulation) Act in 1956. The main
objectives of the Act : (1) to empower the Central
government to regulate dealings and control the
functioning of the stock exchanges in the antry, (2) to
promote healthy and orderly development of stock
exchanges in the country, (3) to ensure reasonable
armity regarding rules and bye-laws of different stock
exchanges in the country, (4) to prevent unhealthy
speculation other undesirable practices in the stock
exchanges, and (5) to protect the interests of the
investors.

LEGAL ENVIRONMENT OF BUSINESS

SICA, 1985 and Companies (Amendment)

Act, 2002. Sick Industrial Companies (Special
Provisions) Act, 1985, defined a sick industrial
company in clear terms for the first time.
Companies
(Amendment)
Act,
2002
changedthe definition somewhat. Companies
(Amendment) Act, 2002 also provides for the
Constitution of a National Company Law
Tribunal (NCLT) to solve disputes, provide for
revival and rehabilitation of sick companies,
and recommend winding up of companies in
certain cases.

LEGAL ENVIRONMENT OF BUSINESS

SEBI. Prior to the setting up of SEBI (Securities and

Exchange Board of India), capital issues in India
were lated by the Capital Issues (Control) Act,
1947. The main objectives of this Act were to
promote private corporate on sound lines, ensure
that investment in the private corporate sector
does not violate priorities and objectives laid i in
the Five-Year Plans or flow into unproductive lines,
and to distribute capital issues time-wise in such a
manner there is no overcrowding in a particular
period. The Act was repealed in 1992. The SEBI Act
now empowers SEBI ilate the securities market.

LEGAL ENVIRONMENT OF BUSINESS

Labour Laws. A large number of labour laws govern

the relationship between business and labour. A first
step rds the prevention and peaceful settlement of
industrial disputes was taken in 1947 itself with the
passing of the strial Disputes Act, 1947. The Act
provides for the settlement of industrial disputes
through conciliation, arbitration adjudication. Other laws
relating to industrial labour include Minimum Wage Act,
1948; Industrial Employment iding Orders) Act, 1948;
Equal
Remuneration
Act,
1976;
Workmen's
Compensation Act, 1923; Employees' State ance Act,
1948; Employees' Provident Fund Act and Miscellaneous
Provisions Act, 1952; Maternity Benefit Act, :!: The
Payment of Gratuity Act, 1972; etc.

LEGAL ENVIRONMENT OF BUSINESS

Environment Protection Act, 1986. This Act grants

power to the Central government to take measures to
protect improve the environment. Chapter III of the Act
relates to 'Prevention, Control and Abatement of
Environmental ion.' It says that persons carrying on
industry, operation etc. shall not allow emission or
discharge of environmental ants in excess of prescribed
standards and persons handling hazardous substances
shall comply with prescribed iural safeguards. In addition,
the discharge of any environmental pollutant in excess of
the prescribed standards the person responsible for this
discharge shall take steps to prevent and mitigate such
discharge, and also inform : authorities about this fact.
Further, a person empowered by the Central government
can inspect the premises of any arise and take samples of
air, water, soil or other substance for testing in

LEGAL ENVIRONMENT OF BUSINESS

Patents (Amendment) Bill 2005. Patent

policies in all countries involve finding a
balance between protecting the rights of
innovators and ensuring access to resources at
reasonable prices. In India, the patent policy as
formulated in the Patents Act of 1970,
emphasized public interest over monopoly
rights. This policy was based on granting
process patents rather than product patents.
With the passing of Patents (Amendment) Bill
2005, the country has now ushered in a
product patent regime.

THE THREE INSTITUTIONS OF THE

GOVERNMENT

Government is normally regarded as

consisting of three distinct sets of powers,
each with its assigned role. One is the
legislature, whose role is to make the law.
The second is the executive which is
responsible for implementing the law. The
third is the judiciary which is responsible
for interpreting and applying the law.

ContLegislature (Parliament)

Legislature of the Union is called

Parliament. In India it consists of President
and two Houses, known as Council of States
(Rajya Sabha) and House of the People (Lok
Sabha).
As
in
other
parliamentary
democracies, the Parliament in India has
the cardinal functions of legislation,
overseeing of administration, passing of the
Budget, ventilation of public grievances and
discussing
various
subjects
like
development plans, national policies and

ContLegislature (Parliament)

Parliamentary Committes. The functions of

Parliament are both varied in nature and
considerable in volume while the time at its disposal
is limited. Therefore, a good deal of Parliamentary
business is transacted in the committees. Broadly,
Parliamentary Committees are of two kinds Standing Committees and ad hoc Committees. The
former are elected or appointed every year or
periodically and their work goes on, more or less, on
a continuous basis. The latter are appointed on an
ad hoc basis as need arises and they cease to exist
as soon as they complete the task assigned to
them.

ContLegislature (Parliament)
Standing Committees: Among the Standing Committees, the three
Financial Committees - Committees on Estimates, Public Accounts and
Public Undertakings - constitute a distinct group as they keep an
unremitting vigil over government expenditure and performance. The
Estimates Committee reports on 'what economies, improvement in
organisation, efficiency or administrative reforms consistent with policy
underlying
the
estimates'
may be effected. It also examines whether the money is well laid out
within limits of the policy implied in the estimates and suggests the form
in which estimates shall be presented to Parliament. The Public
Accounts Committee scrutinises appropriation and finance accounts of
government and reports of the Comptroller and Auditor General. It
ensures that public money is spent in accordance with Parliament's
decision and calls attention to cases of waste, extravagance, loss or
nugatory expenditure. The Committee on Public Undertakings
examines reports of the Comptroller and Auditor General, if any. It also
examines whether public undertakings are being run efficiently and
managed in accordance with sound business principles and prudent
commercial practices.

ContLegislature (Parliament)
Adhoc Committees: Such Committees may be
broadly classified under two heads:
(1) Committees which are constituted from time to
time either by the two Houses on a motion adopted in
that behalf or by Speaker Chairman to enquire into and
report on specific subjects, and
(ii) Select or Joint Committees which are appointed to
consider and report on a particular Bill.

ContThe Executive or Government

The Union Executive in India consists of the

President, the Vice-President and the Council of
Ministers with the Prime Minister as the head to aid
and advise the President. The Council of Ministers
comprises Ministers who are members of Cabinet,
Ministers of State (Independent charge), Ministers of
State and Deputy Ministers.
In chapter 4 on 'Economic Roles of State and
Government', we have already discussed in detail
the role of the government in regulating, promoting
and guiding business activities. Here we provide an
illustrative list of government's role:

ContThe Executive or Government

Implementation of laws. The laws passed by

Parliament are implemented by the government.
These provide the overall framework in which the
business is carried out in a country.
Maintaining law and order. No business activity
can prosper if the political environment is not
peaceful and orderly conditions prevail in the
economy. It is the responsibility of the government to
ensure a peaceful and orderly political environment
by maintaining law and order.
Development of infrastructure. The private
sector is guided by the profit motive. Therefore, it
tends to invest in quick profit-yielding enterprises

ContThe Executive or Government

Strengthening the industrial base. Investment in

basic capital goods industries is of the same nature
as the investment in infrastructure. For instance, the
setting up of iron and steel industry, heavy
engineering industry, heavy chemicals industry,
machine tools industry, fertilizer industry etc. all
requires huge investment resources and the returns
accrue after a long time. The private sector does not
have the resources and the willingness to invest in
these industries. Therefore, the responsibility of
developing them has to be borne by government.

ContThe Executive or Government

Guiding industrial development according to Plan

priorities. In India, the industrial policy has focused on guiding
industrial development according to Plan priorities. With this
end in view, a number of initiatives have been taken. Some of
these initiatives are as follows:

(i) Industrial licensing to guide the setting up of capacities in

industries which are more important from the point of view of
economic development and denying licenses for the production
of inessential goods.

(ii) Implementation of laws like MRTP (Monopolies and

Restrictive Trade Practices) Act to control large corporates and
FERA (Foreign Exchange Regulation Act) to control foreign firms
- the objective being to restrict concentration of economic
power in a few hands.

(iii) Reorienting industrial location policy to promote the

development of backward areas (frequently through providing

ContThe Executive or Government

Strengthening the capital market. Large scale business

activities can only be undertaken if ample and easy financial
resources are available. Therefore, a vibrant and strong capital
market is a sine qua non of industrial activity. The Government
of India has undertaken a number of steps to strengthen the
capital market - setting up of SEBI (Securities and Exchange
Board of India) and NSE (National Stock Exchange) being the
most important ones.

Setting up of industrial financing institutions.

Commercial banks are generally reluctant to provide long-term
funds for industrial development. However, unless such funds
are available, industrial activity cannot pick up. Keeping this
consideration in view, the Government of India set up a number
of industrial financing institutions in the post-Independence
period (these institutions are known as development banks).

ContThe Executive or Government

Assistance to small-scale industries. The Government of

India has provided a number of concessions to the small scalesector in the post Independence period. These include (i)
reserving certain items for exclusive production in the smallscale sector, (ii) providing credit on concessional rates of
interest at easy terms of repayment, (Hi) buying stocks of
certain items exclusively from the small-scale sector, (iv)
providing marketing assistance, (v) providing subsidies of
various kinds, (vi) providing export assistance, etc.

Providing assistance to exports. Government of India has

introduced a number of export promotion measures to push up
earnings from exports. A detailed discussion of these measures
can be found in chapter 30 on 'Export-Import Policy and Trade
Liberalization'.

ContThe Executive or Government

Government's role as planner. The government sometimes

plays an important role as a planner, especially in the developing
countries. During the post World War II period, many developing
countries (including India) adopted economic planning for
achieving higher growth rate and better standard of living.

Promoting agricultural development. As we shall discuss in

detail in Chapter 26 on 'Agriculture and Business', there is a close
relationship between agriculture and industrial development.
Agriculture provides raw materials to various industries and at
the same time, it provides a market for industrial products. The
governments of the developing countries have undertaken a
large number of measures to promote agricultural development.
These measures can be divided into two categories: (i)
technological and (ii) institutional. The former include measures
which aim at changing the traditional techniques of production
like adoption of new high-yielding varieties of seeds, increased
use of fertilizers, persticides and insecticides, farm

ContThe Executive or Government

Providing employment opportunities. The

governments of the developing countries have
introduced measures for general employment and
measures for specific employment for trained and
skilled personnel. As far as the former is concerned,
generally three types of measures are introduced: (i)
measures to increase wage employment. (ii) measures
to promote self - employment, and (iii) measures to
increase employment in the rural sector through the
provision of credit, marketing facilities and agricultural
inputs to the farmers. The governments also
undertake special public works programmes to provide
direct employment to people. More employment
means more income and a larger potential market for
business.

ContThe Judiciary

The third political institution is the judiciary. As stated

earlier, judiciary is responsible for interpreting and
applying the law. In India, at the apex of the entire
judicial system exists Supreme Court of India. There is
a High Court for each State or a group of States.
Under High Courts, there is a hierarchy of subordinate
courts. Panchayat courts also function in some States
under various names like Nyaya Panchayat, Panchayat
Adalat, Gram Kachihri, etc. to decide civil and criminal
disputes of petty and local nature. Different State laws
provide for jurisdiction of these courts.

CENTRE-STATE
RELATIONSHIPS

Introduction

The Constitution of India, unlike many other

Constitutions is both a political and a financial
document. Constitution deals in detail in issues like
the finances of the Union and State. The Constitution
also provides an elaborate framework through which
legislation is possible for laws to regulate various
types of business. The public law in India clearly
contemplates and in many cases sets out in elaborate
terms the legal strategy in relation to various aspects
of finance, trade, commerce and business. It is
important to study the division of powers between the
Centre and State to understand the true nature of
business laws.

Thus the Indian constitutional framework gives precedence

to the laws passed by Parliament over those of the states.
This is clearly even more the case with subjects that are in
the Central list, like foreign affairs, admission into and
expulsion from India, among others.
On around 100 occasions since Independence, and mostly
till the late 1980s, the Central Government dismissed
incumbent State Governments and took over their powers
under Article 356 of the Constitution. The Centre exercised
great power over the states, also made possible because
the Congress ruled at the Centre and in most States. State
chief ministers, however powerful, were subservient to the
Prime Minister who was also the most powerful person in
the party.

Relations between the Union and

States
Legislative Relations: The Constitution divides
legislative authority between the Union and the States
in three lists - the Union List, the State List and the
Concurrent List. The Union list consists of 99
items. The Union Parliament has exclusive authority to
frame laws on subjects enumerated in the list.
These include foreign affairs, defence, armed forces,
communications, posts and telegraph, foreign
trade, etc. The State list consists if 61 subjects on which
ordinarily the States alone can make laws.
These include public order, police, administration of
justice, prison, local governments, agriculture,
etc. The Concurrent list comprises of 52 items including
criminal and civil procedure, marriage and
divorce, economic and special planning trade unions,
electricity, newspapers, books, education,
population control and family planning, etc.

Administrative Relations

The Indian Constitution is based on the

principle that the executive power is coextensive with legislative power, which
means that the Union executive/the State
executive can deal with
all matters on which Parliament/State
legislature can legislate. The executive power
over subjects in the
Concurrent list is also exercised by the states
unless the Union Government decides to do
so.

Financial Relations

Both the Union Government and the States have been

provided with independent sources of revenue by the
Constitution. Parliament can levy taxes on the subjects
included in the Union list. The states can levy taxes on the
subjects in the State list. Ordinarily, there are no taxes on
the subjects in the Concurrent list. In the financial sphere
also the States are greatly dependent on the Centre for
finances. The Centre can exercise control over state
finances through the Comptroller and Auditor General of
India and grants. But during financial emergency the
President has the power to suspend the provision regarding
division of taxes between the Centre and the States.

Freedom of Trade and Commerce

The economic unity of India is not broken up by internal barriers. In

doing so, the Article imposes a limit on the exercise of legislative
power of the Union/State. If freedom of trade and commerce is
restricted directly and immediately by taxes, it would then be
violation of the Constitution. The validity of the claim of such an
offence will depend on the movement of goods. If the tax which is
imposed solely on the basis that the goods are transported or
carried, it would directly affect the freedom of trade, commerce
and intercourse. Trade, commerce and intercourse must pay for the
facilities provided by the State by way of constructing, maintaining
and regulating roads, bridges and other means of transportation
necessary for such trade, commerce on intercourse. As long as
there is correlation between the tax recovered and the cost
incurred by the State, the tax cannot be challenged as
expropriatory though there may be a marginal excess over the
cost.

Parliamentary Restrictions

A law restricting freedom of trade and

commerce can be made only by
Parliament strictly in public interest.
However such law made by the Union
should not be discriminatory between
different states unless the situation
warrants. The Parliament or any of the
State Legislatures does not have the right
to give preference to one state over
another in respect of trade and commerce.

Freedom of State

State Legislatures have powers,

to impose taxes on goods from other states

provided similar goods produced within the
state are also subjected to the same taxes.
to impose reasonable restrictions on the
freedom of trade, commerce or intercourse
with another or within that state as may be
required in public interest.

Role of Government in Business

We have seen how the slightest change in government policy
can change the whole scenario of business, governments can
influene business in the following manner :

REGULATORY ROLE

Governments regulate the business. They not only decide the

rules of the game but also looks after the implementation of
those rules.

Enactment of laws : The Parliament is the law making

authority and it is the council of ministers that presents the
proposed law on the table of Parliament. It is the government
which decides and implements the legal structure of the
country.

The government has enacted many laws to regulate industry.

The MRTP Act as amended to the Competition Act is in place
to ensure fair competition among organizations. Labor Laws
have been enacted to protect human resources from
exploitation. The Essential Commodities Act, The Environment
Act, the Companies Act, the SEBI Act, the Consumer
Protection Act have also been enacted. While doing business,
enterprises have to adide by the law. This not only ensures

REGULATORY ROLE

Industrial licensing : Licensing is an effective tool in

the hands of the government to regulate business.
Earlier, for almost every new venture a licence was
required from the government, which used to keep a
tight control on production in the private sector. But
now only investment in a few industries requires
licences. Though in some cases industry may have to
acquire license from other authorities like pollution
control, ISI, Ministry of Environment and Forests, Food
& Drug Administration, etc.

REGULATORY ROLE
Reservation : The government limits the spheres of investment by
reserving the industry for small scale, public and the co-operative
sector.
For
instance,
before
liberalisation,
petroleum,
telecommunication, coal, power, etc. were the monopoly of the public
sector. But liberalisation brought new investment opportunities for
the private sector. Now only three sectors, i.e., railways, atomic
energy and extraction of minerals used in atomic energy are reserved
for the public sector.

Some indsutries are still reserved for the small scale sector. Because
of this policy we have seen a boom in many industries over the last
fifteen years. As of now, along with telecom services, Reliance has
established one of the largest grassroots refineries of the world.
Other big telecom players like Bharti Telecom and TATA have also
invested heavily in telecommunication.

New power projects have been established by the private sector.

Aviation is no more a government monoply as dozen of private

REGULATORY ROLE
Approval for Expansion: The government can both
provide
business
house, the opportunity to expand as well as restrict their
expansion
activities. Earlier, through the MRTP Act the govt.
restricted the expansion of big houses, besides which
various rest tin Ions were imposed on increasing
production rapacity or launching new Variants. Restriction
existed even on the advertisement budget of big business
houses or on their investments abroad. After liberalization
of the economy since 1991, Indian companies have
achieved amendable economies of scale and consumers
have a wider choice available from big product portfolios
of companies.

REGULATORY ROLE

Foreign Direct Investment : It is the government that

decides whether MNCs can invest in a country or not.
Because of these government policies there were very
few MNCs in India till 1991. Even companies like IBM
and Coca Cola had to leave India in the past because of
government policies. Today MNCs are present in sectors
like insurance, petroleum, banks and publications, but
they are still not present in the retail sector as the
government does not allow foreign participation in the
multibrand retail sector.

REGULATORY ROLE

Import and Export Policy: With a small declaration

the government can open and close various avenues for
export and import. As a matter of policy the
government can use various tools to impose restrictions
on import such as quota, tariffs, cumbersome import
process, import licenses, etc. Till 1991 India followed a
protectionist policy to keep the industry from imports
that were deemed harmful. But now the policy has been
amended and imports are easy which has increased
foreign competition for domestic forms. Due to this, the
Indian toy industry was very badly affected and many
had to shut down operations. Thus it is the government
which decides what can be imported or exported and
what cannot.

REGULATORY ROLE

Taxes and Subsidies : Through taxes too the

government regulates industry. The government usually
imposes a high rate of tax on the industry which it does
not want to encourage. For instance after independence
a very high excise was imposed on products like
airconditioners, automobiles, etc. whereas there was
virtually no tax on production of products reserved for
the small scale industry. Also, to increase the use of
certain products, the government provides subsidy on
items such as fertilizers, tractors and other farm
equipment. The. government also tries to influence the
location of the industry by permitting tax breaks for
establishing industry in a particular region.

REGULATORY ROLE

Supply of Money : Demand depends upon the

purchasing power of the consumer which, in turn,
depends upon supply of money and the supply of
money is decided by the government (RBI). There are
many ways through which the government regulates
the supply of money. The RBI can increase the supply of
money in the market by decreasing the CRR, SLR etc.
which reduces the interest rate in the market. In the
last 15 years interest rates had fallen drastically, which
has lent more purchasing power to the consumer. This
boosted the consumer goods industry and the housing
industry as well. In recent years however, due to rising
inflation, interest rates have been raised by RBI which
has dampered the demand in the economy. The

REGULATORY ROLE

Supply of Foreign Exchange (FOREX) : The

government not only regulates import and export
through its policy decisions, but also controls it through
control of the supply of foreign exchange. Before
liberalisation, it was the government which used to
decide the exchange rate. To restrict import it restricts
the supply of Forex whereas to boost export and
discourage import, it devaluates the currency. Even
after liberalisation, when the Rupee was convertible,
the RBI controlled supply and exchange rate through
open market operations. Besides all these, the
government regulates business through administrative
and physical controls. So we see that the government
regulates almost every aspect of business. It provides

REGULATORY ROLE

Incentives : The government also regulates the

industry by providing incentives in the key thrust area.
For instance, it gives tax breaks if an industrial unit is
established in a backward area. It also grants subsidies
under various schemes to the small scale sector. To
support export, it establishes special zones like SEZs, it
grants subsidies and tax relaxations on exports, import
licenses and less import duty for exporters, and easy
financing through banks. To support a particular
industry in the national interest, it also directs financial
institutions to give liberal loans to that sector at easy
terms. To provide a boost to the housing industry, the
government has given exemption to housing loans from
income tax.

PROMOTIONAL/DEVELOPMENT ROLE

Infrastructure Development: In developing nations

the growth of infrastructure is imperative and the
government plays a critical role in this. Well-established
infrastructure is the basic requirement for the
establishment and growth of industry. In a developing
nation where infrastructure is in a poor state, the
government has to take steps to develop the same, i.
e., construction of roads, development of railways,
supply of power, transport, finance sector, training and
guidance, research and development, etc.

PROMOTIONAL/DEVELOPMENT ROLE
Human Resource Development: Today, it is not the
raw material or geographical proximity to the market
which decides the location of a unit, but the availability of
human resources which now-a-days play a decisive role in
settling down on the location of any establishment. Today,
when research, new product development, economies of
scale, low production cost are essential for success,
trained and skilled human resource have become the
critical success factors for every industry. But in
developing nations like India, the state plays a critical role
in developing human resources as at the time of
independence, the private sector was not in a position to
invest in higher and technical education. Unlike
developed nations, the masses of India were and still are

ENTREPRENEURIAL ROLE

The State also plays the role of an entrepreneur by

investing in business. The Govt. )f India has been one of
the biggest investors in business and industry since
ndependence. Through its investment, the government
considerably influences the ausiness environment. In
India after independecne the government reserved
some industries for only the Public Sector where the
private sector cannot invest. But the government has
invested in other areas, which were not reserved for the
private sector. In a developing nation, investment by
the government helps the private sector a lot.

ENTREPRENEURIAL ROLE

After independence the Indian government heavily

invested in capital intensive industry where gestation
period is high and private entrepreneurs are not
interestedsuch as Steel (SAIL), Aluminum (Indal),
Railways, Power (NTPC), Heavy Machines, Earth Moving
Machines, Heavy Electrical Machinery (BHEL),
Petroleum, Telecommunication etc. All these
investments promoted the private industry by making
available raw material and machines.

PLANNING ROLE

Government is an architect of the industrial scenario in

a country. It is truer for a country like India where the
state also performs the tasks of a planner. India has
followed a policy of five year planning system. It is the
planning commission which plans the direction of
investment for the following five years. This
significantly influences the business environment. The
planning commission declares the key areas where the
state is going to invest and support in the coming five
years. All this even influences the investment decision
of the private sector, as they get support from the
government when they invest in a priority sector.

PLANNING ROLE

So we see that the state/government play a vital role in

deciding and influencing business environment. It in
fact makes the rule of the game and also acts as an
umpire and referee. Besides al! this, the political
stability of a country also plays a critical role in
generating a conducive environment for business.
Today, India is attracting foreign investment only
because most of the political parties have a consensus
of foreign investment except some issues like foreign
investment in retail or more than 50% investment in the
print media.

The Evolving Role of the State Economic

Roles of the State/Government

State is generally defined "as a set of institutions

that possess the means of legitimate coercion,
exercised over a defined territory and its
population referred to as society. The State
monopolizes rule making within its territory
through
the
medium
of
an
organized
government."1 Government often refers to the system
of governing in the society. Thus it means the structure
and arrangement of offices and also the people who
hold the positions of authority in a State. However, in
discussion and writing, the terms State and government
are often used interchangeably and we may also follow
this common practice.

THE EVOLVING ROLE OF THE STATE

Adam Smith who wrote An Enquiry into the

Nature and Causes of Wealth of Nations in
the late eighteenth century it was generally
agreed that the market was the most
appropriate
instrument
for
realising
economic growth and improving human
welfare. The State's role was thus to be
restricted to certain core functionsproviding
public goods such as defence and
highways, maintaining law and order to
ensure security of persons and property,
enforcing contracts and providing primary

THE EVOLVING ROLE OF THE STATE

Adam Smith who wrote An Enquiry into the

Nature and Causes of Wealth of Nations in
the late eighteenth century it was generally
agreed that the market was the most
appropriate
instrument
for
realising
economic growth and improving human
welfare. The State's role was thus to be
restricted to certain core functionsproviding
public goods such as defence and
highways, maintaining law and order to
ensure security of persons and property,
enforcing contracts and providing primary

THE EVOLVING ROLE OF THE STATE