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Regulatory actions taken by a government in order to affect or interfere
with decisions made by individuals ,groups or organizations regarding
economic and social matters.
One of the features of modern business is the increasing involvement of
the government in business activities.
As of today ,there is no country in the world where the government of
the land does not interfere, in one form or the other ,in its economic
GOVERENMENT INVOVEMENT IN BUSINESS-
State intervention in business seems to be as old as business itself.
Even in days of laissez –faire,which apparently shunned state
intervention ,the governments role in the economy was almost incapable.
The laissez faire doctrine ignored the fact that industrialization had
always operated in an economy whose orderliness are guaranteed by the
Entrepreneur always may have considered his property as belonging to
him by virtue of divine right, or as reward for his virtue ,or as the
outcome of a natural economic law, but it was only the government
which could guarantee him continued possession and use of his property.
As years went by .state intervention became a historical necessity particularly after the
industrial revolution of the late 18th and early 19th centuries.
The era of industrial revolution witnessed in humanity of man to man and brutalization
of human nature in those very countries, and in those very societies where the greatest
advances were being made in the fields of science ,technology and organizations.
Affluence and poverty ,distress and luxury ,and exploitation and helplessness became
so juxtaposed that the need of state intervention began to be felt much more than even
Then came the first world war, which confirmed the inevitability of state intervention in
In 1944,when the world war was still in progress, the department of planning and
development was set up.
A new industrial policy was announced by the government and the viceroy ,lord
wavell,declared in 1945:”government has decided to take positive steps to encourage
and promote industrialization of the country to the fullest extent possible.”
Positive steps were taken such as industries like iron and steel, machine tools, heavy
chemicals and the like, which would lay the foundation for future economic
develpoment,were set up.
REASONS FOR STATE INTERVENTION
•Modern economy should be a planned economy.
Government is the only agency which can plan and execute.
•Our constitution binds the government to take an active part
in economic activities.
•What the people and the country need can only be
understood and provided by government and not by
•State participation is necessary to lay a strong base for the
future development of industry and commerce.
•State intervention is necessary to eliminate poverty.
•Finally, the failure of market invites governments
intervention in an economy.
Market fails because of three reasons:
TYPES OF CONTROL
NATURE APPROACH SPREAD EFFECT ON
Formal and Informal controls
FORMAL CONTROLS: Formal controls are usually emanating from legislation,
for example: The FEMA,The Companies Act1956 and Competition Act 2002.
INFORMAL CONTROLS: Informal controls refer to the controls which various
groups impose upon themselves out of need and custom.
Coercive and Inducive controls
COERCIVE CONTROLS : Coercive regulation require performance of certain
actions or refraining from others in order to avoid penalties.
For example: taxes must be paid or imprisonment may result.
INDUCIVE CONTROLS :Inducive controls hold out a promise of reward for
compliance with desired line of action.
For example: subsidies may be granted to stimulate certain activities.
Direct and Indirect controls
DIRECT CONTROLS: When government fixes prices of certain products or
service it is a direct control
For example :The administered price policy of the government of India is a direct
INDIRECT CONTROL: The variation of corporate income tax to influence
EFFECT ON COMPETITION
Depending on the relationship to competition, regulations may be-
a)Government regulations designed to make competition work, the
b)Government competition with business firms as a means of setting
standards of competition
C)direct government ownership and operation to supplement competition
Promotional and regulatory controls
PROMOTIONAL CONTROLS: promotional measures are of a positive
in nature, and includes such activities as expansion of public sector
establishment and operation of development banks, encouragement to
small scale units, provision of incentives etc.
REGULATORY CONTROLS: Regulatory measures ensure orderly
development of industries with least wastage of resources.
A GOOD CONTROL SYSTEM
1)It must be democratic. This means that it must be exercised in the
interest of the governed as they see their interest.
2)It should know what it wants.
3)It must be efficient ,and at the same time it must not destroy the
efficiency of the thing it is regulating .
4)Control must be guided by experience or by wise experiment.
5)It must have a wider vision and canvas to develop. It must look beyond
the immediate effect of leading people to expect it in the future.
6)And lastly, the duties imposed must be simple enough to be
DISADVANTAGES OF INTERVENTION
1)One of the major areas in which the government intervenes is in the agricultural
sector of the economy. The government has three ways it can intervene and help its
producers. These ways include price policies, direct payments, and input policies.
Price policies have the largest effect on producers. Tariffs, quotas, and taxes are just
a few examples of price policies. While these policies bring revenue into the
government, in the end they hurt consumers. Each of these policies raise the prices
of both imported and native goods. They are designed to help stabilize prices and
give the native producers a chance to compete with foreign goods.
2) The use of taxes is one of the government’s favourite ways to make its presence
known in the economy. While this method seems blatantly obvious, many of the
ways the government uses the money collected by taxation is not. Some of the
money it takes is used to fund other programs designed to “protect” consumers and
to “create” jobs. Because of the money taken away from the consumer through
taxes, there is less money movement in the economy. This money movement is what
creates jobs in the economy. “So, each person’s money lost to taxes helps fail to
create their part of a job”.
3) The use of tariffs is another way that government intervenes in the business sector.
They help inefficient domestic producers by forcing consumers to pay unnecessarily
high prices for imported goods. The use of tariffs forces people to pay higher prices for
certain goods and thus resulting in less money the consumer has to spend on other
goods and services. This results in less employment in the industries that produce such
goods and services.
4) Small and big businesses are guilty of inviting government intervention in the free
market. They continually ask the government to step in and “protect” them. Small
businesses ask for less regulation on small business and more regulation on big
business. Fair-pricing laws are a way both large and small businesses keep the
government involved and hurt the consumer. These laws keep prices high and hurt
WHAT SHOULD BE THE FORM OF STATE
1)One aspect of the intervention in future relates to the quality
2)The other aspect of the new intervention strategy that
deserves careful attention is the selectivity (in terms of
strategic sectors, products and processes in different stages of
3)The third aspect of the new intervention relates to its
primary orientation goals.
4) Pure public goods such as defence ,law and order and environmental protection
cannot be provided by private sector alone. because everybody shares their benefits
automatically, no one willing to pay them individually. But government can provide
them and impose their cost on tax payers.
5)Good with positive externalities benefits, are worth more to society than to any one
consumer.publlic health and education for example ,reduce infection rates, raise
productivity etc.markets tend to undersupply these goods ,and complementary
funding or provision can therefore improve efficiency.simalrly markets ignore
negative externalities ,such as industrial pollution ,regulation to curb or clean up the
activity causing the pollution can improve social welfare.
6)Imperfect information on the part of either consumers or providers may make
markets fail. For example-private commercial insurance cannot efficiently insure
against risks like unemployment ,longevity and death deteriorating heath in old age,
because these risks are influenced by characteristics and behavior of the insured that
the insurer cannot observe along with the government policy and they affect large
parts of the population equally and simultaneously.
It may be stated that the role of government in future must be redefined
but not ended.
The redefinition must be in the direction of improving quality of
John Maynard Keynes once said. 'the important thing for government
is not to do things which individuals are doing already and to do them
little better or a little worse :but to do things which at present are not
done at all.”
What is not done till now is the improvement of the social sector
:primary education, health ,housing, nutrition and the like.
Let the government concentrate on these areas.