State Intervention in Business! Read this article to learn about:- 1. Meaning of State Intervention in Business, 2. Forms of State Intervention in Different Economic System, 3. What is the Need of State Intervention in Business. 4. State Intervention in Business – Rationale, 5. Objectives of State Intervention in Business.
State Intervention in Business in India: Meaning, Types, Objectives, Forms, Examples and Objectives
What is the Meaning of State Intervention in Business?
Development of capitalism during 17th and 18th centuries and during the early 19th century emphasized that the role of state should be restricted to formulation and enactments of laws, rules and regulations and maintenance of law and order in the country. There should be least state intervention in areas of industry and business.
According to Adam Smith and his supporters of laissez faire policy, personal freedom and optimum utilisation of economic resources ensure accelerated pace of economic development. Thus, in the initial stage of economic development, the only function of the state was to protect the life, wealth and property of the society. But, gradually the doctrine of laissez faire started losing its shine and the state capitalism was born.
Due to changing conditions, state control on economy started becoming an important part of the system. With the changed circumstances, there was a change in the thinking of economists also and they started arguing strongly in favour of state interference in economic activities of the country. They were of the opinion that it is not always safe to leave business to its own devices.
Therefore, till the last phase of the 19th century, there was continuous increase in the role of state. Now, state is not a silent spectator of the economic process. It has been assigned to work as patron, guardian, and controller of individuals and industries. Today, state is expected to take care from womb to graveyard. There was growing mentality that vote will be casted in favour of those political parties whose Government is ready to believe in work.
Thus, on the basis of above analysis we can easily visualize two types of thinking. First thinking supports the free market system and private sector believed to be the best mode to ensure efficient distribution of economic resources. It develops a base for economic development.
Arguments were also given in favour of private sector that state capitalism is relatively weak, less efficient, plagued by political intervention; and oftenly webbed with corruption. Second thinking argued that the private sector is quite weak, and its survival is based on Government support system. It is affected by shortsightness, conventional approach, cautious behaviour, narrow objective etc.
So, the private sector is unable to fulfill the gigantic task of economic development. Market system on which private sector is based does not give any importance to the public interest. Thus, it is necessary that state should play its role in those areas where it deems fit to act Centralised planning is governed by these rationale and state intervention is necessary to make the planning process possible and more sustainable.
In practice, both approaches are individualistic in nature and their rationale cannot be justified. Government and private sector both are required to play their roles in a coordinated manner. The Government should review its policies and programmes from time to time to give a qualitative dimension to state intervention which is desirable in the interest of public at large.
An important part of the external environment of a business organisation is governed by the various Government regulatory mechanisms. In other words, central, state and local Governments formulate and develop legal framework for intervention which affects the operations and business policies of the firms.
These acts and regulations improve or reduce the business opportunities. For India, having mixed economy, the scope and impact of these enactments and regulations are quite wide and important. So it is necessary for the business organisations to understand the reference and contexts of these interventions and formulate their policies under prevailing environment.
It is important to note that the modern so called capitalist economies are infact mixed economies. The only difference is the level of intensity of capitalism or socialism orientation. New economic policy formulated in 1991 and currently going in the country is an effective indicator that private sector has now been assigned a crucial role to play in the economic development of the country.
Thus, the mixed economy of India is characterized by the co-existence of public, private, joint and co-operative sectors. However, the level of intensity of participation of these sectors is quite dynamic and governed by various factors. Moreover, nature and dimension of state intervention in business become more regulatory in nature. Besides, state is still active in its promotional and participative behaviour in business.
State Intervention in Different Economic System – Forms:
The Government intervenes in different economic system is following form:
Form # 1. Role of Government in Capitalism:
Under capitalism, all factories and other productive resources are controlled by individuals and private firms. The main objective of investment is to earn profit. What to produce, how to produce and for whom to produce etc. are determined by the demand and supply and market mechanism.
Some special features of capitalist economy are as follows:
(i) Every individual has a right to maintain private property and sell the owned property.
(ii) Every individual has a right to select any profession or business as per his likings. Similarly, any individual can enter into contract for profit with others.
(iii) Main purpose of entrepreneurial activities is to earn profit.
(iv) Society is divided into haves and a have not and there is also conflict of interest between the two.
(v) Economic system lacks coordination as there is no Government regulation in economic activities.
Capitalism is governed by the price mechanism and it experiences high level of competition.
Level of Intervention under Capitalist Economy:
Under capitalist economy the regulation of business by the Government is quite negligible. There are some areas or limitations under which Government is generally forced to intervene in business activities. This level of intervention is necessary to maintain continuity and dynamism in defence for protecting the existence of the country and economic system.
Thus, rationales of capitalist economy are as follows:
(i) Regulatory and controlling framework is necessary to establish coordination in industrial development process.
(ii) Government ownership over industries under defence sector is necessary as these industries are directly related with safety and sovereignty of the country.
(iii) Government intervention is needed to ensure maximum and profitable utilisation of economic resources for the economic development of the country.
(iv) Government always try to control the ownership of public utilities and industries of monopolisting nature as to avoid exploitation of public at large. Besides, it also ensures judicious distribution of economic power and wealth of the country.
Form # 2. Role of Government in Socialism:
Under socialism, public ownership is ensured on physical resources of production. Under this type of economy, industries are not required to earn profit by sale or purchase but these industries are meant for public service which directly controls the lever of political power. A socialist system is one where main portion of the productive resources is invested in socialist industries.
Following are some important features of socialist economy:
(i) State is empowered for production and distribution of goods and services. Distribution of productive resources of the society is undertaken under the guidance of central authority.
(ii) Abolition of private ownership in terms of production units and nationalization of productive resources are the main features of the socialist economy.
(iii) State works as an entrepreneur, landlord and capitalist. State also undertakes the implementation of production and residual income after paying wages and other costs if any, are rest with the Government.
(iv) Classless society is created by abolishing the gaps exist in rich and poor and haves and haves not.
(v) Socialist economy does not give guarantee of equality but it guarantees the equality of opportunities.
(vi) Main objective of economic activities is the social welfare but not the private profit. Under capitalist system working behaviour is guided by the market mechanism. Whereas in socialistic economy operational behaviour is controlled by the centralised economic authority.
Types of Socialist Economy:
Socialistic economies are generally categorized into two categories:
(a) Role of Government in Democratic Socialism:
Under this type of socialism, Government does not own all the productive resources but only important segments of the national economy are controlled by the Government. This form of socialism is based on the assumption that development of the economy should not be left at the mercy of the private sector. The Government must take initiative for the accelerated pace of the development in the national economy.
In practice, the role of the Government is deigned in the following way:
(i) The Government owns and controls important and key productive resources of the country. The Government makes it possible for the direction and use of these resources.
(ii) Distribution and exchange resources or other mechanism are also under the control of the Government. Domestic and international business, banking and insurance, transport and communication etc., are all under the control of the Government.
(iii) The Government establishes control on those industries which are responsible for promoting concentration of centralization of economic power. Similarly, Government also controls industries where possibility of gaps exists in the demand and supply of the products being produced by them.
(b) Role of Government in Authoritarian Socialism:
Authoritarian Socialism also includes communism which is also in existence in Russia and China. However, it is the toughest form of the socialism. Under this type of socialistic system, the role of central authority is quite important one. The central authority determines the economic targets and ensures ownership on all productive resources of the country. It also directs and controls the distribution system as per the economic targets.
Under this type of socialism, the role of the Government is designed in the following way:
(i) Generally, private enterprises are not in existence. Direction and implementation of production process are exercised by the state or public enterprises. With the help of public enterprises, Government ensures social benefits by paying wages and other costs. There is no problem of payment for interest and rent to capitalists and landowners respectively. The state acts as a capitalist, landlord and entrepreneur and makes the production process possible through the public enterprises.
(ii) Public enterprises are as a powerful agency of the state and are responsible for maintaining effective control on production and distribution. Distribution of productive resources of the society is generally guided by the dictates of central authority.
(iii) Social welfare and social security are relatively given more importance. The objectives and targets of economic process are the social welfare. But in capitalistic system, individual profit is the most objective of the production system. Thus, under this type of socialism control authority directs all economic activities towards social welfare and security in place of market system. The central authority or Planning Commission gives utmost importance to social welfare at the time of formulating and fixing economic priorities and targets.
Form # 3. Role of Government in Mixed Economy:
The mixed economy is a middle path between capitalistic economy and socialistic economy. It includes important features of capitalism and socialism. Under the mixed economy, ownership of productive resources is rest with the private entrepreneurs. The Government directly control and regulate the working of the economy through the monetary and fiscal policies.
Besides, public enterprises have also been assigned crucial role in production and distribution of goods and services. The ownership and management of basic and important industries are under the control of the Government.
Important roles assigned to the Government under mixed economy are as follows:
(i) Under this type of economy, public and private sectors both are in existence. The industries are categorized in two parts. First part includes those industries where Government is responsible for the development and it also keeps their ownership and management under own control. The private sector is responsible for the development of other industries but Government reserves’ it’s right to intervene in the development and working of these industries.
(ii) The operation of the economy, pricing mechanism and distribution etc. are under the direction of the state. The Government takes necessary decision with regard to production, pricing and investment etc. in public sector.
(iii) The private sector is expected to keep the nation’s interest along with its own interest. The Government regulates and affects the smooth working of the private sector with suitable mechanism.
(iv) The Government controls and regulates the investment and industrial production through industrial licensing. The Government also regulates the privates sector through monetary and fiscal policies.
(v) The consumer is free to buy goods and services as per his choice and private entrepreneurs produce the goods and services as per the consumers demand and expectations. However, Government regulates the pricing system through suitable means so that producers cannot exploit the consumers.
(vi) The Government protects the weaker section of the society especially labour from the exploitation. It also determines the minimum wage and rates and also the hours for minimum work. It also prohibits the employment of children.
(vii) The Government controls and regulates the monopolistic practices. Necessary steps are taken to ensure equal distribution of wealth and income. The government establishes public enterprises to control the demerits of private sector and monopolistic practices. The Government develops the industries in a way to facilitate timely achievements of plan targets.
Thus, under mixed economy, scope of working of public and private sector is clearly defined and both are required to co-operate with balancing efforts for the achievements of desired economic growth. Generally, basic industries, defence industries, atomic energy, mining and minerals are under the control of the Government for necessary development.
On the other side, heavy industries, consumer goods industries, micro, small and medium enterprises, agriculture development are in privates sector. The Government also provides necessary incentives and support system for the development of private sector.
Market pricing mechanism and Government policies and programmes are the guiding factors for the distribution of productive resources. Since 1991, economic policies have been formulated to give more freedom and access to the private sector in the Indian economy. Besides, efforts have been made to strengthen the public sector for better performance.
What is the Need of State Intervention in Business?
State intervention in business is needed due to following reasons:
Need # 1. Need for Contractual Management and Exchange:
Contractual management and exchange are required for effective market arrangement. If legal support and protection are not available for the enforcement of contractual obligations among the parties then there be problem of mutual trust. The Government establishes the status of the business unit grants the privilege of incorporation and makes the laws for controlling insolvency and regulating mergers and takeovers.
It defines and maintains the rights of ownership, enforces private controls and provides for the adjudication of disputes. It coins money, issues currency, controls credit and regulate banking thus freeing business from unnecessary control and providing it with a medium of exchange.
Thus, business needs effective Government intervention and support. With the help of this approach, market mechanism enforces effective utilisation of production resources. With few exceptions there should be no control on the entry and exit of units in the market.
Need # 2. Need for Full Knowledge of the Market:
The Government is required to control the monopolistic trends in the economy through regulatory mechanism. To regulate the arrangement, Government should provide legal protection for well-developed market system. These measures will enable the producers and consumers both to understand the prevailing marketing practices.
Need # 3. External Problems:
There are certain inherent features available in the process of production and consumption of goods and services, all competitive barriers are removed even then acceptability of the market is not available to all these goods and services. Due to these inherent problems, there is possibility of market failure.
These problems can be solved only by establishing the public utilities system. For example, confidentiality in the production of defence related goods, supply of power, water and rail facilities in the public interest etc. Thus, there is need for Government intervention in the context of these goods and services.
Need # 4. Free Market Programmes:
A free market system generally fails to ensure higher level of employment, price stability and socially desirable growth rate in the economy. Government interaction and guidelines are necessary from time to time for availability of all these requirements. There is need to operationalise and ensure dynamism in market system with the help of Government policies and certain other instruments.
These can be done by effecting mutual coordination between income and saving policy, production and consumption policy and monetary policy etc. So it is needed that the Government should intervene or issue necessary guidelines for all these things.
Need # 5. Maintenance of Social Value:
Inequality generally exists between income and wealth due to market system and lacks of inheritance etc. To maintain social value, there is need of coordinated approach by removing inequality existed between income and wealth. In equal distribution of income or wealth degrades social values. So, efforts are made to maintain social values by formulating an effective public policy in the system.
State Intervention in Business – Rationale:
In modern economic system, Government is treated as a very powerful institution and it can create a favourable business environment.
Government generally plays following roles in an economy:
Rationale # 1. Regulatory Role:
In practice, Government regulates each and every segment of the economy. These regulations include legal as well as economic legislations, policies and programmes. It covers broad spectrum extending from entry into business, working, selection of resources and their uses to the performance of a business.
The Government plays following roles under the regulatory role:
(i) Determining Areas:
Government determines the areas and conditions under which a person or an organization is expected to undertake business activities. Under this process, business enterprise is required to take prior permission or license from the government to start a business operation and also to take consent of the Government to use public facilities and resources.
(ii) Regulation of Practices of Economic Unit:
When a business enterprise starts its operation, Government generally extends all legal helps and supports to expedite the process of operations. In case of need, it also regulates the working of business units. Regulatory framework includes all controls which are directly concerned with general working procedures and restrictions. Similarly, from time to time, Government also regulates and directs the management practices to enable the enterprise to achieve its goal in proper perspective.
(iii) Regulating Results of Business Activities:
Government regulations are also necessary to enforce and regulate the results of business operations. For example, government has every power to limit the profit, mergers, dividend distribution and managerial remuneration, etc. Regulation of wages and bonus for employees and level of corporate tax etc., also can be ensured by the Government.
(iv) Regulating Relationship among Various Segments of Economy:
Government enforces control as mutual relationship of different segments of the economy is quite necessary. This type of relationships control mutual conflict of interest, concentration of economic power in few hands or to control contractual imbalances. These include inter-corporate investments, interlocking of directorship, dissolution of different types of holding companies and regulation of labour laws etc.
Classification of State Regulation:
Government regulation can be divided into two categories:
(a) Legal and Economic Control.
(b) Direct and Indirect Control.
(a) Legal and Economic Control:
Legal controls affecting business are based on statutes or ordinances enacted by the legislative bodies – Parliament and state assemblies. Government and business units are under obligation to fulfill certain responsibilities under the Constitution and other acts. Development of the economy is undertaken under the goals and mission of these legal provisions.
Indian Constitution, Directive Principles of State Policy, Labour laws have been enacted to regulate the economic activities of business enterprises. Similarly, Indian Companies Act, Partnership Act, Competition Commission of India, SEBI, other regulatory authorities, Foreign Exchange Control Act etc. have also been there to regulate the organisational framework and activities of business organisations.
Under economic control, Government formulates guidelines to regulate the pace of economic activities undertaken by business organisations. Business organisations are expected to follow these guidelines in their actual operations.
The Government is expected to formulate policies and programmes and economic units are required to implement these policies and programme through their business behaviour. For example, Planning Commission and National Development Council set the priorities for the development of the economy as a whole and provide basis for the investment of resources and development strategies.
But private sectors as well as public sector both are required to achieve these targets and priorities. The Government formulates Financial policy, Monetary policy, Commercial policy, Industrial policy, Licensing policy and Pricing, Wage and Income policy and behaviour of business units are regulated by the Government under these policies.
(b) Direct and Indirect Control:
Direct controls are discretionary in nature. They can be in the forms of administrative and physical control and in practice they sure quite drastic in their effect. They can be applied selectively from firm to firm and industry to industry at the discretion of the Government. Most economic justification of direct and indirect control is based on a variety of reasons like market failures, imperfections and high risk aversion on the part of individual entrepreneurs.
Indirect controls involve encouragement to entrepreneurs with regard to subsidies and incentives. These controls are usually exercised through various fiscal and monetary incentives and disincentives or penalties. Certain economic activities may be encouraged or discouraged through monetary and fiscal incentives, subsidies and disincentives or high level of taxation.
For example backward areas may be developed with the help of incentives and subsidies and development of few sectors like alcohol may be discouraged with the imposition of high excise duties. Similarly, a high import duty discourages imports and fiscal and monetary incentives may encourage the export performance of certain sectors.
Rationale # 2. Promotional Role:
In developing economies like India, where pace of development is quite slow due to poor infra-structural facilities, the only option before the Government is to undertake promotional activities. The entrepreneurs and industrial houses are not interested in the development of infrastructural facilities as these activities are capital intensive and having a long gestation period. Thus, the Government generally assumes promotional role to ensure speedy provisions of different types of social and economic endowments.
These roles are as follows:
(i) Arrangement of Education, Health and Social Welfare:
Adequate education, health and social welfare facilities are highly desirable to strengthen the social system of the country. These endowments are also required to accelerate the pace of industrial development in the country. Private industrialists are not inclined to invest in these endowments as the rates of return available from them are quite low. Thus, the Government promotes these endowments in the country.
(ii) Encouraging Entrepreneurial Skill:
Government develops training centres to improve entrepreneurial skill. Entrepreneurial development programmes have assumed increasing significance for first generation entrepreneurs. In this context Government sponsored financial institutions like SIDBI and IFCI etc., are trying to establish entrepreneurial development institutes in different parts of the country. Development of joint sector in India is another effort of the Government to improve entrepreneurial skill in the country.
(iii) Promotion of Science & Technology and Management:
Government takes steps to develop and popularise science, technology and management knowledge as their availability is essential for accelerated pace of economic development. The Government of India has already established Indian Institute of Technology at Kanpur, Madras, Delhi, Bombay, Khadagpur and Guwahati and seven other IITs for the development of Science and Technology.
Similarly, Science and Technology Institutes and centres have also been developed in different universities and engineering colleges to arrange technical education at regional levels. For the development of management skill Government has also taken positive steps and established Indian Institute of Management at Ahmedabad, Calcutta, Bangalore, Lucknow, Indore and Kozhikode, Raipur, Rohtak, Udaipur etc. These developments are impossible without the active support of the Government of India.
(iv) Providing Facilities of Transport and Communication:
Adequate transport and communication facilities are necessary to accelerate the pace of industrial development. The Government has monopoly over the Post, Railways and it indicates the seriousness of the Government to development these sectors in right direction. Private sector faces resource crunch to invest in these sectors as the sector require huge capital and long gestation period. However, due to liberalisation process, private sector companies are also coming in telecommunications and transport sectors.
(v) Establishment of Financial and Banking Institutions:
Supply of adequate financial facilities is a pre-requisite condition for agriculture and industrial development in the country. So, Government has taken initiative to establish banking and specialised financial institutions. Small Industrial Development Bank of India, Industrial Finance Corporation of India, NABARD, and State Financial Corporations has been developed to ensure adequate supply of financial assistance to agriculture and industrial sector. Public sector banks are ensuring adequate supply of credit facilities to the formers and entrepreneurs as private sector banks are not inclined to extend financial assistance to these people.
Rationale # 3. Entrepreneurial Role:
Private entrepreneurs are solely guided by profit motive and hence they are not inclined in developing products of common public use and social services which yield relatively lower returns. Thus, there are some areas, products and services which have to be developed by the Government itself. In India Government does not hesitate to undertake this participative or entrepreneurial role.
Entrepreneurial roles include the following:
(i) Practical Needs:
In a free society public ownership is needed due to its practical utilities like electricity supply company, water and sewerage system board. They are needed to improve the well-being of the society at large. As a monopolist, a single undertaking can ensure successful operation of these segments.
Large number of entities in one segment or assigning the responsibility to the private sector may hamper the effective supply of electricity or water supply to the common public. So it would be better for the Government itself to control services in the interest of society at large.
(ii) To Face National Emergency and War:
Industrial units engaged in the production of arms and ammunition or supplies of services essential to the defence of the country have always been considered fit to be set up by the Government. Private entrepreneurs cannot possibly be depended upon from the point of view of the national security and safety. Besides, there is a need for utmost secrecy which could be secured only when the unit is under state ownership and control.
(iii) Controlling Economic Instability:
Government is required to play its entrepreneurial role to face the economic crisis like depression. In the period of economic crisis, private entrepreneurs are unable to assume risk or additional risk and economy urgently requires Government support or intervention for taking effective steps to activate the process. Thus, the Government tries to maintain adjustment in the economy by controlling instability inherent in the system and adopt remedial measures to boost economy in desired way.
(iv) For Rapid Economic Development:
To accelerate the pace of economic development in the country Government has to play its entrepreneurial role by providing proper infrastructural facilities. Provision of infrastructural facilities is a basic requisite for economic development. Railway, telecommunication, power generation, shipping, postal and banking facilities have to be developed for the rapid advancement of the country.
(v) For Effective Utilisation of National Resources:
Private entrepreneurs are guided by the profit motive regardless of social benefit. They have always tried to establish industries in those areas where they expect a high rate of profit and security and safety of their investment. Due to this strategy of private entrepreneurs, most of the areas are remain untouched by the process of development.
Poor exploitation of natural resources is also responsible for the regional imbalances. These things forced the Government to intervene in die economic activities to design the investment pattern in such a direction which ensure effective utilisation of national resources.
What are the Objectives of State Intervention in Business?
Objectives behind Government intervention in business are as follows:
Objective # (i) Minimising Effects of Wealth and Economic Power:
Poverty anywhere is a source of danger to the prosperity everywhere. It is duty of the state to remove the inequality of income and wealth prevailing in the society. In India, the magnitude of the problem can be judged by the fact that more than 90% of the wealth is concentrated in the hands of less than 30% of the population.
The fiscal measures such as progressive taxation system, excess profit tax, high death duties, wealth tax, expenditure tax, could achieve less unless the economic pattern is so changed to effectively control the accumulation of wealth in a few hands. This objective can be achieved by state participation in business satisfactorily.
Objective # (ii) Fulfilling the Basic Needs:
One of the objectives of state intervention is to plan the economic resources in such a way which guarantee the basic necessities of public at large. These basic necessities include fooding, clothing and housing. In the absence of state intervention it is possible that some people may misuse these facilities or resources and some people may he left without availing these facilities. State intervention enables the society to avail these opportunities on equal basis. In other words, state intervention ensures distributable justice to the society.
Objective # (iii) Encouraging Decentralized Industrial Development:
Private entrepreneurs are guided mainly by profit motive. They establish industries in those areas where they expect a high rate of profit and security of their investment. They are also unable to exploit the natural resources effectively. These things have forced the government to intervene in the economic activities through a planned dispersal of industries which will ensure decentralised growth of the country. It is only through the state that the development of relatively backward areas can be effected.
Objective # (iv) Profitable Exploitation of Scare National Resources:
State intervention in business creates conductive environment for profitable utilisation of scarce resources, Centralised Planning Authority or Planning Commission assesses the availability of resources and allot these resources for balanced regional development. Private entrepreneurs use these resources only for those products and services which can fetch maximum price for them.
Objective # (v) Safeguarding National Interest from Foreign Investors:
Indigenous industrial units are unable to face the competition inflicted by the foreign capitalists and multinational corporations. Indian entrepreneurs lack latest technical know-how and management skill. With the result, indigenous industrial units failed to move in, right direction.
So the objective of state intervention is to protect these units from the undesirable competition of foreign companies. Besides, state intervention is also required to control the domination of foreign companies in the domestic market.
Objective # (vi) Saving Valuable Foreign Exchange:
State intervention tries to formulate economic policies which in turn promote more export drives to earn valuable foreign exchange. Similarly, state intervention also encourages import substitution to save foreign exchange, required for further imports. Thus, state intervention discourages undesirable imports through import substitution and encourages export promotion to increase the volume of foreign exchange in the country.