A government is the main agent which takes major economic decisions and enacts laws, create situations, institutions, bodies to promote and control business. The government is run through constitutional provisions.
So any analysis of business environment must be addressed to constitutional provisions which affect or have bearing on government action to take business decisions. Before we throw light on constitutional provisions let us briefly describe the role of government in various economic activities.
Government’s active role in economic activity came after great depression of 1930s when laissez faire (non-interference) principles were discarded by the government world over. The success of planning in the initial years of Soviet Russia also acted as an inspiration for many countries including India to to give state an effective economic role. In the freedom struggle it was decided that government will have a pro-active role in economic development.
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There is an age old philosophical debate, to what extent government is to take part in economic development or how far government would intervene in business policy determination, According to many economists, there should be well defined limit to what extent government would intervene or what should be the size of public sector.
It is true that government mobilises a substantial part of national income through taxation or by other means and spend those revenues through various outlets. Government spends for defence, home policy and in some countries for railways, public transport, road sector, and other infrastructural services.
Thus apart from its direct role as an entrepreneur in every economic system the government has a minimum role in the economy of the country because it controls and wields a large part of resources in the economy.
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As a part of its regulatory role in the economy the government may reserve the sectors for private enterprise, small scale sector, regulate investment limit, ownership of resources, ceiling on land holdings, taxing the corporate, earmarking the areas of investment, determining the principles of pricing policy, specifying the range of production and distribution needed by the society.
The fiscal and monetary policy may also have a regulatory role to stop expansion of business in undesirable direction. Fiscal policy may discourage production of drugs and narcotics, monetary policy may not encourage speculative activities by business community. Exim policy may put a bar on commodities which may harm domestic economy (here the role is regulatory as well as promotional).
As a part of its entrepreneurial role, government builds factories, run business enterprises involving risks and having long gestation period of investment. Government also develop business creating corporation. Indian Oil Corporation, Gas Authority of India is the largest corporate monoliths. IOL has figured into the list of Fortune 500 companies.
The government has to play entrepreneurial role to speed up industrialisation of the country and attain a satisfactory level of economic growth. Here the government acts not only as a pace setter but also as a morale booster.
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The government of India had to foray into various new areas for investment as there were no investment efforts in those areas by private entrepreneurs in our country. They had to cover a wide spectrum of strategic industries as well as basic industries. Public sector has to open their enterprises in many new areas where private sector does not want to take part.
After the Great Depression and Second World War governments, in many countries had to take a lead role in promoting investment and engaging themselves in entrepreneurial activities for boosting demand, employment and output. These trends continued upto mid-seventies when oil shock gave rise to inflationary pressure.
Governments in the west began to privatise or sell out their enterprises to the private sector to get rid of stagflation and fiscal burden. The situation was further accentuated by the globalisation that has been flowing in last two decades.
India started privatisation and reduced the size of public sector after mid nineties in a big way. Here the role of state as entrepreneur changed its character.
Presently, in the wake of liberalisation and globalisation the Government’s role has changed though their effort stands as a promoter but the role as an entrepreneur has been little marginalised. They are promoter in the sense they are creating the situation and setting the tune and creating atmosphere where activities related with privatisation and globalisation are taking shape.
The government’s major role is mainly manifested in economic environment through its participation in planning process. It is the Government which decides the philosophy, goals, objectives and targets of planning.
Planning ensures rationally optimal allocation of resources and to attain a permissible level of economic growth-in a suitable time horizon. The government has to decide the areas and sectors that would get priority for the purpose of growth. The objective and necessity of planning in a masterly language is Pundit Jawahar Lal Nehru.
“In underdeveloped countries like ours, which have to develop fairly rapidly, the question is how to use our resources to the best advantage. If resources are abundant, it will not matter how they are used. Where one’s resources are limited, one has to see that they are directed to the right purpose so as to help to build up whatever one is aiming at.”
In India Planning Commission was set up in 1950, vide the resolution of union cabinet, with Prime Minister Nehru himself as chairman. The Planning Commission would act as an advisory body to the union government.
The commission was set up with definite objectives, but activities have been gradually extended over entire sphere of administration excluding only defence and foreign affairs. The commission has extended its level of activities and built up a bureaucratic organisation.
Pandit Nehru himself observed “the commission which was a small body of serious thinkers had turned into a government department complete with a crowd of secretaries, directors and of course a big building.”
The working of Planning Commission gave rise to setting up another body called National Development Council. The council was formed in 1952 “as adjunct” of Planning Commission, to associate the states in the process.
The major functions of council are “to strengthen and mobilise the efforts and resources of the nation in support of the plans; to promote common economic policies in all vital spheres and to ensure the balanced and rapid development of all parts of the country.”
Since 1967, all members of union cabinet, chief ministers of states, the Administrators of union territories and members of the planning commission have become members of National Development Council.
Critics have pointed out Planning Commission is a monolithic structure and has encroached upon autonomy of states. But the function of the commission is just to prepare a plan for the development of the country. The role of the commission is advisory in nature.
The planning exercise done by the commission is ultimate deciding authority for planned economic environment.
Recently in the wake of liberalisation Planning Commission has changed the philosophy of planning but the planning process and the mechanism has remained more or less unaltered. The same bureaucracy prevails; also there are overestimated unrealiable targets. (A detailed discussion has been given in the planning chapter). The targets which are fixed sometimes appear to be highly unrealistic.
A point should be mentioned here about the government is ultimate decision making and supreme authority in formulation of country’s economic policy. The policy is basically reflected in the budget exercise undertaken by the government. This exercise is done by the norms and rules stated in Indian constitution.
At the beginning of every financial year, the President Lays copies of the budgets (estimated statement of receipts and expenditure) of the government before both the houses of parliament. It is also called annual financial statement. The budget gives not only the estimates of revenue and expenditure it also states the various economic programmes and policy initiatives and imperative of the government.
The budget also includes actual receipt and expenditure of closing year, quantum of deficit or surplus of that year, the prospects of revenue and deficit in the coming year is also indicated in the budget. The budget gives an opportunity to discuss various aspects of economic policy.
The presentation of Annual Financial statement is followed by a general discussion in both the houses of the parliament. The estimates of expenditure (are placed in Loksabha in the form of “demand for grants”) other than those which are “charged expenditure”.
The budget statement shows (a) the sums required to meet expenditure described by the constitution as expenses charged upon the consolidated fund of India (b) the sums required to meet other expenses proposed to be made from the Consolidated Fund of India. If any expenditure is charged on the Consolidated Fund of India, that shall not be submitted to the vote of parliament (D. Basu, Introduction to the Constitution of India).
After the grants are voted by the House of the People (Loksabha) and expenditure charged on Consolidated Fund of India these are incorporated in Appropriation Bill. It provides legal authority for the withdrawal of these sums from the consolidated fund of India. Similarly, taxing proposal of the budget is embodied in another Bill known as Finance Bill.
The Budget rules and policies indicate that government’s role is rampant and supreme all through and is crucial whatever the government’s involvement in business be. In this era of globalisation and liberalisation government’s role has been reduced to a significant extent. In India there is no exception and the crucial role of the government as a pace setter in economic activity remains.
We may mention here World Development Report which stressed the government’s proposed role in economic activity in the new economic paradigm. The report suggested the need for government’s role in production and distribution should reduce.
Government’s role should be restricted to defence, primary education, rural infrastructure special types of insurance (age old pension, allowance for unemployment insurance). Government should not take any major steps in controlling private commercial activity; they should keep themselves away from banking sector. Every government should establish a legal framework for smooth running of business and economic activities. The World Bank is of the opinion that government should take care of interests only of vulnerable section of the community.