Government & Legal

Environment

Mrs. Shruti V. Kachvimath

Legal Factors Affecting Business
Operations:
• Provisions of the Constitution
• Judicial Decisions
• Law Administrators

Impact of Legal Environment on

Business:
• Deregulation
• Globalization
• Environment protection norms
Various laws affecting Indian
Business:
• Companies Act, 1956
• Foreign Exchange Market Act, 1999 (FEMA)
• Factories Act, 1948
• Industrial Dispute Act, 1972
• Industries (Development & Regulation) Act, 1951
• Monopolies & Restrictive Trade Practices Act, 1969
• Bureau of Indian Standards Act, 1986
• Consumer Protection Act, 1986
• Environment Protection Act, 1986
• Competition Act of 2002
Government control over
Business in India:

Government Control over Business in India

Economic Planning Industrial Policy

Industrial Licensing Labour Laws

Regulation of Foreign Trade

Role of Govt. in Business:
• To Pass and Execute proper laws
• Maintenance of Law and Order
• Providing Money and Credit
• Building Infrastructure
• Research
• Providing Information
• Controlling the growth of Monopolies & preserving
competition
• Awarding Patent rights and Copyrights
Economic Roles of Govt. of India

Economic Roles of Government of India

Planning Role of Government Regulatory Role of Government

Promotional Role of Entrepreneurial Role of

Government Government
State Intervention & the market
• Basic Functions
• Intermediate Functions
• Activist Functions

Types of State Intervention

• Formal & Informal Controls
• Coercive & Inductive Controls
• Direct & Indirect Controls
• Effect on Competition
• Promotional Controls
• Regulatory Controls
 Reasons for state Intervention in
Business:
• Providing legal structure
Without lawful and authorized structure, free market operations cannot occur.
• Ensuring free market operations
No hurdles exist in entry and exit to the market.
• Providing goods through other sources
Public services including water and sewage services, park, national defense etc., are not provided
by private sectors.
• Identifying Socio-economic objectives
It includes occupation, education, income, wealth and where someone lives.
• Re-Distribution of Income
Adjustments in the distribution of wealth and Income involves maintenance of public services,
changing attitudes, ensuring full employment, controlling fluctuations etc.,
• Promoting and Maintaining high level of economic activities
State interventions are integral & essential component.
• Act as Sources of Income and Expenditure
Under various developed market economies, both Income and expenditure surpass 1/3rd of their GDP.
• Vital for National production
The national product is the product of citizens and permanent residents, including production abroad
• Free enterprise economies
That means that individuals and not the government own most of our country's resources.
Economy is driven by demand and supply.
• Regulating private sector
Regulatory bodies that monitor and regulate are RBI, SEBI and TRAI.
Extent of State Intervention:
Under Laissez-faire policy, govt. functions are limited to:

1. Protection from external aggression (Wars, terrorist attacks

etc.,)
2. Maintenance of law and order within the nation
3. Protection from corporate frauds and forgery
4. Control and protection of property rights and
5. Control over issue of money.
Monetary Policy:
• It is defined as the policy of Central Bank where the cost,
availability and use of money are controlled by using
monetary methods so as to attain predetermined objectives.
Objectives of Monetary Policy in
India:
• To support economic growth
By regulating interest rates and investment through designing monetary
policy, RBI regulates the economic growth in the country.

• To maintain price stability

It is characterized by Inflation and Deflation.

• To maintain Exchange rate stability

Stabilization of Exchange rate attracts foreign investment.

• To achieve Balance of Payments (BOP) equilibrium

To regulate the supply of money in the market through effective monetary
policy.

• To achieve full employment

Everybody requiring a job gets a job.

• To reduce economic inequalities

Focuses on designing policies for agriculture, village businesses, small
Types of Monetary Policy:
• Expansionary Monetary policy
Reduction in the policy rates (bank rate, repo rate), reserve ratios an
procurement of government securities.

• Contractionary (Tight) Monetary policy

Prime objective of this policy is to control inflationary conditions
by contracting the supply of money.

• Countercyclical Monetary Policy

Combines implementation of Expansionary and Contractionary
monetary policy.

• Rule based Monetary policy

Certain Predefined set of laws, principles and regulations have
to be followed by the Central bank of India.
• Discretionary Monetary policy
The freedom of what decision to be taken under which condition is
given to the Central bank. Accordingly they can alter the rules and
regulations regarding the money supply.
 Instruments (Tools) of Monetary Policy:
1. Quantitative Instruments
Bank Rate
The rate charged by the central bank for lending funds
to commercial banks. Current bank rate being 5.15%.
Open market operations
The process of selling/buying of various assets of a
company by the RBI like govt. securities, gold, foreign
exchange, shares and bonds etc.,
Variations in the reserve requirements
Cash reserve ratio
Statutory Liquidity ratio
Repo rate & Reverse Repo rate
Liquidity adjustment facility
Here repurchase agreements are used to borrow money
from the banks
2. Qualitative Instruments

Credit Rationing
It is a tool used by the commercial bank to maintain and regulate
the rationale for providing credit to the public.

Margin Requirement
The difference between the market value and maximum loan value
of a particular security is called as margin.

Publicity

Regulation of consumer credit

Personal debt taken on the goods/services.

Moral suasion
Persuasion and request combine to form moral suasion.
Direct Action
Central bank reserves the right to take any action against
commercial banks which violate the guidelines of Banking regulation Act.
Impact of Monetary Policy on Business/Significance of
Monetary Policy:

• Control Inflation/Deflation
• Availability of the Supply of Money and Credit
• Integrated Interest rate structure
• Effective central banking
• Long-term loans for industrial development
• Creation of Financial institutions
Fiscal Policy
• It represents the government policy related to tax and
expenditure. It is a type of economic policy which controls and
regulates the tax system, expenditure, borrowings and public
debt management within a country.
• Private sector uses taxation as a channel for diverting funds to
govt.
• Another important concern in Fiscal policy is public debt
management. Ex: Government loans.
• Role: Under developed countries- Economic growth
Developed countries- Employment & Economic stability
Objectives of Fiscal policy
• Effective Mobilization of Resources for Development
For the mobilisation of financial resources, fiscal policies are being
used by both central & state Indian govt.
• Taxation
Direct and Indirect taxes are used by govt. for mobilisation of
resources with the help of fiscal policies.
• Public savings
By controlling the public expenditures and giving a push to the
surpluses of public sector firms, resource mobilization takes place.
• Private savings
Savings done by the households and the private businesses.
• Effective allocation of Financial resources
Allocation of these activities takes place for both development and
non development activities.
• Reducing inequalities of Income and Wealth
Higher taxes are applied on rich segment of population, while
lower tax rates are imposed on weaker sections of the society.
• Price stability & Inflation control
Tax saving schemes, proper utilisation of the resources
• Employment generation
Encouraging Small scale industries (SSI) by offering lower taxes and
duties which results in better employment chances.
• Balanced regional development
Concessions in tax and duties, subsidies, finance at lower interest rates etc.,
are some provisions given so that the investments can be directed towards
backward areas of society.

• Controlling the Deficit in Balance of payment

Exemption of central excise duties, income tax exemption on export earnings
etc., are provided by fiscal policies to promote more exports.

• Capital formation
Capital = Economic development
Spending can be reduced for improving the rate of capital formation.

• Increasing National income

By increasing national and per capita income.

• Infrastructural development
Taxation helps the govt. to help develop the infrastructure.

• Foreign exchange earnings

Exports are highly encouraged and import substitute industries are given
different fiscal advantages are provided.
Types of Fiscal Policy
1. Expansionary Fiscal Policy
Here government spending is increased and taxes are
lowered. In case of a ‘Recessionary gap’, this expansionary
fiscal policy can help in removing this gap by increased
spending allowed by the government.
Aggregate demand curve represents the total quantity
of all goods (services) demanded by the economy at
different price level.
Recessionary gap is removed and economic growth is
achieved by shifting the aggregate demand curve towards the
right direction through this Fiscal policy.
2. Contractionary Fiscal Policy:

It is used in a situation of Inflation.

Inflationary Gap is formed if the economy is expanding
rapidly, this can be controlled by reducing the government
spending and increasing taxes.
Instruments of Fiscal Policy:
• Taxation: A well-designed taxation system facilitates or restricts
level of consumption and investment.
Direct taxes: Taxes which are directly charged from the
income or wealth of an individual.
Indirect taxes: Taxes which are charged from individual’s
expenditure or outlay.
• Public Expenditure: It is that instrument of fiscal policy which
deals with govt. spending for public welfare.
• Public Borrowings: It is the money borrowed by the govt.
from the public to manage the surplus liquidity
available with the public. Through this diversion of
resources from unproductive to productive, economic growth
can be achieved. (Modernization of IRCTC, Power generation,
Introducing irrigation schemes etc.)
Impact of Fiscal Policy on Business/Significance of Fiscal Policy:

• Full employment
• Economic Stabilization
• Economic Growth
• Social Justice
Exim Policy
Sale of goods and services across national boundaries is known
as export whereas purchasing of goods from other nations is
called import.
EXIM (Export Import) Policy or Trade policy outlines the set of
laws and regulations for export and import of a country.
Due to Globalization, economies of the world are connected to
each other.
Emergence of Global institutions has resulted in rapid growth of
world trade like WTO, ASEAN etc.
EXIM Policy has removed quantitative restrictions and licensing,
this in turn has liberalized the exports/imports.
Objectives of Export-Import Policy

• By aiding sustainable growth in exports we can achieve larger percentage

shares in the worldwide merchandise trade.
• To provide essential raw materials, components and consumables to
encourage sustainable economic growth.
• To attain international quality standards by boosting technological ability
and level of India.
• To offer high quality products/services and positioning domestic
goods/services in international market.

Impact of EXIM policy on Business

• Implications on Agriculture
• Implications on Handlooms & Handicrafts
• Implications on Gem & Jewellery sector
• Implications on Leather & Footwear Industry
• Implications on service Industry
India’s Recent Foreign Trade Policy (2021-
2026)
Foreign Trade Policy is also known as Export-Import Policy, regulated
by the Foreign Trade Development and Regulation Act, 1992.
India establishes a set of measures called as new foreign trade
policy every five years to attain economic development.
The principal goal is to make India a global trade leader in the next
five years, from 2021 to 2026.

Aim of New Foreign Trade Policy:

• Increase both Service and Product exports.
• Assist the districts in realizing their full potential as an export hub.
• Improve the infrastructure for domestic services and industrial
sectors to improve India’s trade.
• Regular meetings will be conducted for their feedbacks.
Expectations from NFTP (2021-2016):

• WTO Complaint Tax incentives: Remission of Duties or taxes on

Export Products (RoDTEP) is based on the principal that only goods
should be exported and not taxes and duties.
• Infrastructure Improvements: The govt. recognizes the need to
improve trade infrastructure and it has launched a program to do so
for the export industry (TIES -Trade Infrastructure for Export Scheme).
• Digitization: To make the whole import/export process paperless and
online. Increases transparency in global trade.
• Easy access to credits: Due to lack of suitable collaterals, there is a
long-standing issue with lending money to MSME’s. EXIM Bank of
India’s borrowing limitations be increased.
• Tax Breaks: To ease and cut tax rates. It is advised to simplify import
tariff system.
• Import Wish List: Importers wish-list includes permission to import
capital goods on a self-certification basis and to import restricted
commodities with the permission of the Central Govt.
• Export Awareness: Seminars and initiatives to educate exporters
about foreign laws, global markets etc.,
Industrial Policy
• Industrial Policy of a nation or economy is a declared and
official plan with the strategic attempt to influence the growth
of various sectors.

Objectives of Industrial Policy:

• To Correct Imbalances
• To Regulate Flow of Resources
• To Ensure Maximum Utilization of Resources
• To Monitor Private Industry
• To Define Industrial Areas
• To Ensure Equal Wealth Distribution
• To Control Foreign Capital
Importance of Industrial Policy:

• Establishes Co-ordination
• Direct National Resources
• Helps in Industrial Development
• Prevents Economic Power Concentration
• Promote Export
• Prevents Duplication of Economic Resources
Industrial Policy Resolution:

1. Industrial Policy Resolution 1948:Partition of India-

Scarcity of Food, loss of land and property, reformation
of states, etc.
2. Industrial Policy Resolution 1956: Socialist oriented-
helped the public sector to wider their scope.
3. Industrial Policy Resolution 1973: Large & Heavy
enterprises were favoured and also small-scale and
cottage industries.
4. Industrial Policy Resolution 1977: Prevention of
economic power concentration, monopoly, production
of consumer goods at maximum level and respond to
the needs of the society.
New Industrial Policy 1991:

On July 24, 1991, New Industrial Policy was introduced by Mr. P

V Narasimha Rao under Congress Govt.
Liberalization & Globalisation of Indian Industries was the main
objective of this policy.

Salient features:
1. Abolition of Industrial Licensing.
2. Diminishing the role of Public sector.
3. Incentives & Concessions for Foreign investment.
4. Drastic amendments to Monopolies and restrictive trade
practices (MRTP) Act.
5. Removal of Compulsory convertibility clause.
Implications of New Industrial policy in India:

• Growth of New Economy companies

• Economy bailed out
• New Breed of Entrepreneurs
• Foreign direct investment and new technologies
• Greater competitive strength
• Healthy competition
• Sustained economic growth
Thank You