Wednesday, 4 March 2020

Political Environment

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Political Environment


There exists a close relationship between the political and economic environment of a country.
The governing body of the State regulates and influences every aspect of the business. It is true
not only in socialist economies but also of capitalist economies. The government performs
various functions, which directly influence the business as it is the government which is a
regulatory authority in the state. As a regulator of the economy it decides the policy by which it
Notes limits the spheres of investment by the industry for small scale, public and co-operative sector.
It decides the licensing and expansion policy through which it restricts entry and exit in business.
Through its Foreign Direct Investment policy the govt. decides the extent an the avenues where
the FDI can be invested. Through its Import and Export Policy it can increase or lower the trade
barrier. Through the taxation and monetary policy the government can influence the disposable
income of people, interest rate and availability of funds for the industry, thus influencing both
the supply and demand. Not only this, it is the government which influences business by
investing in infrastructure projects, thus creating a conducive environment for business. It also
invests in the development of HRD that provides trained and skilled HR to the industry. It is the
government that makes laws for the smooth functioning of business. So we see that the
government influences every aspect of business.


Expansion: The govt. can both provide business house, the opportunity to expand as well as
restrict their expansion activities. Earlier, through the MRTP Act the government restricted the
expansion of big houses, besides which various restrictions were imposed on increasing
production capacity or launching new variants.
Foreign Direct Investment: It is the government that decides whether MNCs can invest in a
country or not. Because of these government policies there are very few MNCs in India.
Incentives: The government also regulates the industry by providing incentives in the key
thrust areas. For instance, it gives tax beaks if an industrial unit is established in a backward
area. It also grants subsidies under various schemes to the small scale sector.
Legal Role: The Parliament is the law making authority and it is the council of ministers that
presents the proposed law on the table of parliament.
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.
SEZ: 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.
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.
Taxes: Through taxes too the government regulates industry. The Government usually imposes
a high rate of tax on the industry which it doesn't want to encourage.

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