Political and Government Environment UNIT 3

What goods and services does a government want to provide What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Political Environment: How changes in government policy might affect the business

Post-independence concerns over external exploitation resulted in the Nehru government adopting an import substitution. This resulted in the Indian economy being closed to imports and Indian exports being kept away from the world markets for several decades Economic reforms brought foreign competition, led to privatization of certain public sector industries, opened up sector hitherto reserved for the public sector and led to an expansion in the production of fast-moving consumer goods.

Political factors can be Stability of the government Fair-trade laws Antitrust laws Tax laws Minimum wage legislation and Economic policy of the government pollution laws Defense and military policy Diplomatic events in surrounding countries These factors can be restrictive or beneficial. Restrictive factors are those factors that limit profits

Political system should be Stable Honest Efficient dynamic

Factors affecting political instability Civil war Declaration of emergency in the country Changes in the form or structure of administration of Govt

Economic systems Market economy Communist economy Mixed economy

State and Government State, in its wider sense, refers to a set of institutions that possess the means of legitimate coercion, exercised over a defined territory and its population referred to as society. The term government refers to the process of governing, to the exercise of power. It also means the people who fill the positions of authority in a state.

The Scope of State Functions Minimal Functions Intermediate Functions Providing pure public goods Defense, Law and order Macroeconomic management Public health Protecting the poor Addressing externalities Education, environment Regulating Monopoly Overcoming imperfect education Insurance, financial regulation Social Insurance (pension) Activist Functions Industrial policy Wealth redistribution

Economic roles of Government Regulatory role Promotion Entrepreneurial role Planning role

Role of Political Institutions Legislature-makes laws, approves budgets,controls executive and acts as a mirror of public opinion. Executive or Government. Judiciary.

Legislature Most powerful institution Role is to make the law Powers Policy making Law making Approval of budgets

Executive Referred to as government Responsible for implementing the law To shape, direct and control the business activities

Judiciary Responsible for interpreting and applying law It ensures that the exercise of executive authority confirms to general rules laid down by Legislature. It settles the relationship between private citizens and the government. It has to look into the exercise of authority by the executives is according to the general rules laid down by the legislature. To settle legal disputes that affects business considerably. Disputes between employers and employees Disputes between two companies Disputes between employees Disputes between employers and the public Disputes between employers and the government

Judicial powers The authority of the court to settle legal disputes. Judicial review-the authority of the court to rule on the constitutionality of legislation.

LEGAL ENVIRONMENT: It refers to the legal systems obtaining in the country. It refers to the rules and laws that regulate behavior of individuals & organization. There are basic legal systems prevailing around the world: Islamic law: It is derived from the interpretation of the Quran and practiced in Muslim majority countries. Common law: It is prevalent in countries which are under British influence. Marxists law: It has takers in communists countries.

Relationship between business and government Responsibility Accountability Duty

Responsibilities of business towards government Regular payment of taxes Voluntary programs - Sponsoring social welfare programes - Environmental preservation - Promoting education - Assistance in drought, flood etc. Government contracts Providing service to the government through becoming member in advisory boards Corporate contributions to the political activities

Responsibilities of Government towards business Political institutions Provision of peaceful atmosphere Provision of a system of money and credit Balanced development and growth Provision of basic infrastructure Provision of information To assist small scale industries Competition with private sector Protection from foreign competition Establishment and enforcement of law Maintenance of order. Orderly growth. Infrastructure. Assistance to small industries. Government competition. Inspections & licenses.

The Constitution of India Most significant document which is fundamental to the governance of the State. The constitution of Indian Republic is the product of not political revolution, but of the research and deliberations of a body of eminent representatives.

Three parts of the constitution The Preamble The Fundamental Rights The Directive Principles of State Policy

The Preamble The Indian Constitution starts with a preamble, which outlines the main objectives of the Constitution. It may be noted that though the preamble is not a part of the Constitution and is not justifiable, yet its significance cannot be denied. It servers as a key to the Constitution. An introduction to the Constitution and contains its basic philosophy. It states that “We the people of India having solemnly resolved to constitute ourselves into a Sovereign, Socialist, Secular, Democratic Republic and to secure to all citizens………..adopt, enact and give to ourselves this Constitution.

Economic Importance Economic Justice Liberty of Thought, Expression, Belief, Faith and Worship Equality of Status and of Opportunity

Fundamental Rights and Business The Indian Constitution incorporates a list of Fundamental Rights and guarantees their inviolability by executive and legislative authorities. Part III (Articles 12-35) deals with the Fundamental Rights granted to individuals. These rights were finalized by the committees of the Constituent Assembly headed by Sardar Vallabhai Patel. The fundamental rights are superior to ordinary laws.

Fundamental Rights Right to equality Right to freedom - Freedom of speech and expression - Freedom to assemble peacefully and without arms - Freedom to form associations or unions - Freedom to move freely throughout the territory of India - Freedom to reside and settle anywhere in India - Freedom to practice any profession or to carry on trade or business Right against exploitation Right to freedom of religion Right to cultural and educational freedom Right to constitutional remedies

Right to Equality Equality before law- Article 14. Prohibition of discrimination- Article 15. Equality of opportunity- Article 16. Abolition of Untouchability- Article 17. Abolition of Titles- Article 18.

Freedom of Religion Freedom to manage religious affairs-Article 26. Freedom for paying taxes for the promotion of religion-Article 27. No religious instructions in government educational institutions-Article 28.

Cultural & Educational rights Right to protect language,script and culture- Article 29. Right to establish and administer educational institutions- Article 30.

Right against Exploitation Prohibition of traffic in human beings and forced labour- Article 23. Prohibition of employment of children- Article 24.

Right to Freedom Rights under Article 19- - speech and expression. - to assemble peacefully and without arms. - to form associations or unions. - to move freely throughout the territory of India. - to reside and settle anywhere in India. - to practise any profession or to carry on any occupation,trade or business. Protection in respect of conviction of an offence-Article 20. Protection of life and personal liberty- Article 21. Protection against arrest & detention- Article 22.

Right to constitutional remedies Citizen can approach the Supreme Court for implementation of fundamental rights- Article 32(1). The Indian Parliament can power any court to issue notice within its jurisdiction without infringing or influencing the powers of the Supreme Court- Article 32(3). The State cannot suspend the right to constitutional remedies except in cases provided by the Constitution- Article 32(4).

Reasons for state intervention Delayed growth must be sponsored. Modern economy must be planned. Government is bound to enter into industrial & commercial activities in a socialist economy. Government policies decide what undertakings should be established,how it should be run etc. For economic & social well being of people money can be generated by active participation of government in business. For a strong base for future development government must assume responsibility at least in relation to core industries & facilities. Government intervention is necessitated by the failure of markets.

Types of State Intervention On the basis of nature - formal and informal On the basis of approach - coercive and inducive On the basis of spread - direct and indirect On the basis of effect - promotional and regulatory On the basis of effect on competition - make competition work - set standards for competition - supplement competition

Role of Government Regulation. Promotion. Entrepreneurship. Planning.

Directive Principles of State Policy The Directive Principles of State Policy which have been enshrined in Part IV of the Constitution aim at realizing the high ideals of justice, liberty, equality an fraternity as outlined in the preamble to the constitution. There are ideas which are to inspire the state to work for the common good of the people and establish social and economic democracy in the country.

Economic Importance To provide adequate means of livelihood for all the citizens. To secure equal pay for work to both men and women. To protect the workers, especially children. To regulate the economic system of the country that is does not lead to concentration of wealth an means of production.

Directive principles of state policy Provisions dealing with welfare (Art. 38, 42, 45, 47) Provisions dealing with social justice/ (Art. 39, 41, 43, 46) Provisions promoting democracy (Art. 40, 44, 45) Miscellaneous provisions relating to environment etc., (Art. 48, 49, 50, 51)

Significance of DPSP DPSP are backed by public opinion. Provide for a welfare state. Importance as Moral Ideals. Directives constitute a Guide for the State. Source of continuity in policies. Are supplementary to fundamental rights. Yardstick for measuring the Worth of the Government. Helpful in interpretation of the Constitution. Ambiguity of Directive Principles is useful.

Basis Fundamental Rights Directive Principles of state policy Injunctions Fundamental rights are negative injunctions DPSP are positive injunctions. Justiceable Are justiceable. Are not justiceable. Superiority Are legally superior to DPSP,as they are enforceable. DPSP are non enforceable. Attainment Have already been attained. Yet to be attained. Backing Are backed by Law. Are backed by Public Opinion. Suspension Can be suspended during emergency under article 352. DPSP unless implemented are in a state of permanent suspended animation. Type of democracy Provide for political democracy. Aim at socio-economic democracy.

Directive principles of state policy A unique feature of our Constitution. Instruments of instructions to the legislature and the executive.

Factors Description Implications Barriers to FDI FDI not permitted in pure retailing Franchisee arrangement allowed Absence of global players Limited exposure to best practices Lack of Industry Status Government does not recognize the industry Restricted availability of finance Restricts growth and scaling up Structural Impediments Lack of urbanization Poor transportation infrastructure Consumer habit of buying fresh foods Administered pricing Lack of awareness of Indian consumers Restricted retail growth Growth of small, one-store formats, with unmatchable cost structure Wastage of almost 20%-25% of farm produce

High Cost of Real Estate Pro-tenant rent laws Non-availability of government land, zoning restrictions Lack of clear ownership titles, high stamp Difficult to find good real estate in terms of location and size High land cost owing to constrained supply Disorganized nature of transactions Complex Taxation System Differential sales tax rates across states Multi-point octroi Sales tax avoidance by smaller stores Added cost and complexity of distribution. Cost advantage for smaller stores through tax evasion Multiple Legislations Stringent labor laws governing hours of work, minimum wage payments Multiple licenses/clearances required Limits flexibility in operations Irritant value in establishing chain operations; adds to overall costs