UNIT 3

Political Environment:

How changes in government policy might affect the business

Political Environment:

How changes in government policy might affect the business

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?

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 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 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

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Political system should beStableHonestEfficientdynamic

Factors affecting political instabilityCivil warDeclaration of emergency in the countryChanges in the form or structure of

administration of Govt

Economic systemsMarket economyCommunist economyMixed economy

State and GovernmentState, 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 FunctionsMinimal Functions Intermediate Functions

Activist Functions

1. Providing pure public goods

2. Defense, Law and order

3. Macroeconomic management

4. Public health

5. Protecting the poor

1. Addressing externalities

2. Education, environmentRegulating Monopoly

3. Overcoming imperfect education

4. Insurance, financial regulationSocial Insurance (pension)

1. Industrial policy

2. Wealth redistribution

Economic roles of GovernmentRegulatory rolePromotionEntrepreneurial rolePlanning role

Role of Political Institutions

Legislature-makes laws, approves budgets,controls executive and acts as a mirror of public opinion.

Executive or Government.

Judiciary.

LegislatureMost powerful institutionRole is to make the lawPowers- Policy making- Law making- Approval of budgets

ExecutiveReferred to as governmentResponsible for implementing the lawTo shape, direct and control the business

activities

JudiciaryResponsible for interpreting and applying lawIt 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:1.Islamic law: It is derived from the interpretation of the Quran and practiced in Muslim majority countries.2.Common law: It is prevalent in countries which are under British influence.3.Marxists law: It has takers in communists countries.

Relationship between business and governmentResponsibilityAccountabilityDuty

Responsibilities of business towards governmentRegular payment of taxesVoluntary programs- Sponsoring social welfare programes- Environmental preservation- Promoting education- Assistance in drought, flood etc.Government contractsProviding service to the government through

becoming member in advisory boardsCorporate 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 IndiaMost 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 constitutionThe PreambleThe Fundamental RightsThe Directive Principles of State Policy

The PreambleThe 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 Justice

Liberty of Thought, Expression, Belief, Faith

and Worship

Equality of Status and of Opportunity

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Fundamental Rights and Business

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

Fundamental RightsRight to equalityRight 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 businessRight against exploitationRight to freedom of religionRight to cultural and educational freedomRight 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 ReligionFreedom 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 rightsRight to protect language,script

and culture- Article 29.

Right to establish and administer educational institutions- Article 30.

Right against ExploitationProhibition 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 interventionDelayed 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 InterventionOn the basis of nature - formal and informalOn the basis of approach

- coercive and induciveOn the basis of spread

- direct and indirectOn the basis of effect

- promotional and regulatoryOn 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

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

Economic Importance

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(a) To provide adequate means of livelihood for all the citizens.

(b) To secure equal pay for work to both men and women.

(c) To protect the workers, especially children.

(d) 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 DPSPDPSP 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.

BasisBasis Fundamental RightsFundamental Rights Directive Principles of Directive Principles of state policystate policy

InjunctionsInjunctions Fundamental rights are Fundamental rights are negative injunctionsnegative injunctions

DPSP are positive DPSP are positive injunctions.injunctions.

JusticeableJusticeable Are justiceable.Are justiceable. Are not justiceable.Are not justiceable.

SuperioritySuperiority Are legally superior to Are legally superior to DPSP,as they are DPSP,as they are enforceable.enforceable.

DPSP are non DPSP are non enforceable.enforceable.

AttainmentAttainment Have already been Have already been attained.attained.

Yet to be attained.Yet to be attained.

BackingBacking Are backed by Law.Are backed by Law. Are backed by Public Are backed by Public Opinion.Opinion.

SuspensionSuspension Can be suspended Can be suspended during emergency during emergency under article 352.under article 352.

DPSP unless DPSP unless implemented are in a implemented are in a state of permanent state of permanent suspended animation.suspended animation.

Type of Type of democracydemocracy

Provide for political Provide for political democracy.democracy.

Aim at socio-economic Aim at socio-economic democracy.democracy.

Directive principles of state policyA unique feature of our Constitution.Instruments of instructions to the legislature

and the executive.

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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 urbanizationPoor transportation infrastructureConsumer habit of buying fresh foodsAdministered 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

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High Cost ofRealEstate

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

ComplexTaxationSystem

Differential sales tax rates across statesMulti-point octroiSales tax avoidance by smaller stores

Added cost and complexity of distribution.

Cost advantage for smaller stores through taxevasion

MultipleLegislations

Stringent labor laws governing hours ofwork, minimum wage payments

Multiple licenses/clearances required

Limits flexibility in operations

Irritant value in establishing chain operations;adds to overall costs