Page 109 - DMGT401Business Environment

Business Environment

Notes (f) 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. 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.
(g) 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 reduced the interest rate in the market.
In the last 15 years interest rates have fallendrastically, which has lent more
purchasing power to the consumer. This has boosted the consumer goods industry
and the housing industry as well as. The government can also increase or decrease
the supply of money by increasing or decreasing income tax rate and interest rate on
savings. So any industry is to an extent dependent on the government for enhancing
demand.

(h) 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 the opportunity
to invest and simultaneously restricts investment in particular area.
(i) 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. 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.

2. 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. It is the government which
decides and implements the legal structure of the country. For instance, in the 1980s, the
famous NRI Swaraj Paul attempted to take over Excorts, the prevailing legal environment
of a period saved the company. A new law was enacted which stipulated that a
Non-resident Indian could not acquire any stake in an Indian company beyond a certain
limit.
The government has enacted many laws to regulate industry. As in the case of IDRA, the
MRTP Act was amended to the Competition Act to ensure fair competition among
organizations. The Essential Commodities Act, the Environment Act, the Companies Act,
the SEBI Act, the Consumer Protection Act, Labour Laws have been enacted protect human

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