Government is a very powerful institution which can create a favourable business environment. We can study its role under the following heads:
1. Government: Regulator of Business:
The entire regulatory legislations and policies stand covered under this segment. On the one hand, there is a very large indirect area of government control over the functioning of private sector business through budgetary and monetary policies.
But against this there is also a fast expanding area of direct administrative or physical controls through which the government seeks to ensure that private investment and production in industry and the use of scarce resources conform to government’s basic socio-economic objectives.
They have become necessary tools in a system which seeks to avoid total nationalisation of resources.
Government’s regulatory functions with regard to trade, business and industry aim at laying down the limits for the private enterprise. The regulatory functions of the Government include (i) restraints on private activities, (ii) control of monopoly and big business, (iii) development of public enterprises as an alternative to private enterprises to ensure competitive dualism, (iv) maintenance of a proper socioeconomic infrastructure.
2. Government: Promoter of Business:
The promotional role of the government in relation to industries can be seen as providing finance to industry, in granting various incentives and in creating infrastructure facilities for industrial growth and investment.
For example, our government has identified certain backward areas as ‘No Industry Districts’. To promote development of such areas, Government provides subsidies and tax holiday to attract investment in backward areas.
In this way the government will help the process of balanced development and thereby remove regional disparities. The government is assisting the development of small scale industries.
The District Industrial Centers are assisting the development of small industries. The government is actively helping the industrial development of the country by providing finance to them through the development banks.
3. Government as an Entrepreneur:
The impressive growth of the public sector in India from a small beginning bears testimony to the role of the government as an entrepreneur.
Private investors are solely guided by private profit motive and hence they are not interested in developing products of common public use and social services which yield relatively lower returns. But as a “social entrepreneur” the government does not hesitate to take them up.
4. Government as the Planner:
In its role as a planner, the government indicates various priorities in the Five Year Plans and also the sectoral allocation of resources. Mixed economies are democratically planned economies.
The government tries to manage the economy and its business activities through the exercise of planning. Planning is the most important activity in a modern mixed economy. The idea of economic planning can be traced to three different sources: Rationalism, Socialism and Nationalism.
Economists advocate a planned economy on the ground that it can be a rational economy which can utilise the available resources in an optimal manner.
In other words, the planned economy is a rational economy which attempts to secure the maximum return with minimum wastage of productive resources.
The socialists advocate a planned economy because it helps to achieve some desirable social ends like economic equality. An unplanned economy, left to it, is incapable of attaining the social ends.
The nationalists advocate a planned economy because a planned economy is a powerful economy.
The nationalists want to use planning as a weapon to strengthen the military power of the country. Hitler in Germany and Mussolini in Italy resorted to planning to achieve political motive.
Planning operation involves a number of steps. The first stage in planning is the formulation of socio-economic objectives of the plan and their definition in quantitative terms.
Such objectives include growth, justice, eradication of poverty, price stability etc. In the second stage, the plan lays down the physical and financial targets.
The third stage is concerned with execution. The Planning Commission is only an advisory body and it has no power to execute the plan.
The various government departments take necessary measures to execute the plan. Executing a plan is more difficult than making it.
The execution of our Five Year Plans is not satisfactory. Prof. Lewis has observed that Indians are better planners than doers. The gap between promise and performance has got to be narrowed down.
Typically, businessmen have held that national planning is incompatible with free enterprise and that a “free economy” is the antithesis of a planned economy.
Planning by business is good but planning by government for the whole society is, in the eyes of most businessmen, ‘bad’ (perhaps because government planning has come to be identified with communist countries).