POLITICAL ENVIRONMENT
Business, though by its very nature is an economic activity, but the business
managers, in order to stay effective, have to consider the non-economic environment of the
business too. In this direction, we have understood the socio-cultural environmental component
in the previous part of this unit. Here, we would understand another important component i.e. the
politico-legal environment of business.
A political system is assumed to be having the qualitative prerequisites such as being stable,
honest, efficient and dynamic. Democracy brings in the political participation of the citizens
thereby providing them personal security which in-turn contributes for growth of any business in
a country. In a political system the role of Government as a political institution is to formulate
social policies aimed to deliver on high social benefits at minimum social costs. The government
thus facilitates business by making decisions and supporting the economic activity in form of
health, infrastructure, education, law and order etc. implemented on different levels like local,
regional, national or international.
The political environment comprises of many political factors which effect the business activities
at various times and impact, like the bureaucracy levels, corruption, freedom of media and press,
tariffs and related measures of trade control, employment regulation, environmental and
pollution control laws, health and social safety laws, Competition regulation and cartelization,
Tax policy (tax rates and incentives), Trade unionism and related laws, consumerism, e-commerce and related laws about the quality and quantity of the product, Intellectual property
law (Copyright, patents etc.). All this is done based on the ideology of the political party forming the government which attains it by formulating and executing them under a set of policies and
programmes. This is attained through legislations and enactments, rules and regulations, systems
and procedures, policies and plans, statements and announcements, directives and guidelines by
the Government, which is the essence of the politico-legal environment.
Political environment of a country comprises of three elements viz. legislature, executive and
judiciary. Political scenario of a country decides the economic policies and trade regulations.
Hence, political environment of a country can be crucial for the business operations. Most of the
economic reforms are the reason of some political decisions. For instance, prior to 1991
economic reforms, India followed a socialist economic policy approach which was driven by
public sector dominated development strategies. However, 1991 economic reforms introduced
the concept of private players in the market. In the recent times, the government has allowed
100% FDIs in most of the sectors which has resulted in foreign companies investing more in
India markets.
ELEMENTS OF POLITICAL ENVIRONMENT
Political Ideologies
Political ideologies are the mix of multifaceted ideas, philosophies and objectives which is the
foundation of the political parties. Most of the political organisations are politically diverse due
to the members of organisation having diverse backgrounds. Political ideologies can differ due to
multi-culture environment in the country. People belonging to different social groups, ethnicities,
communities, economic class or religion can have different ideologies. These variations impact
people to join or support different political parties. Harmony among different political ideologies
is necessary to maintain peace and stability within a country.
Democracy
Democracy has been a fundamental part of India’s progress and growth story and has helped in
binding people from different cultural background and regions. A democratic environment
ensures equal political and legal rights to each and every citizen of a nation. It ensures freedom
of speech, expression and opinion. Since every citizen cannot decide for himself / herself
therefore, countries practice a system of elected representatives. The elected representatives
formulate laws for a nation. These representatives are elected by the people of the nation.
Democracy also ensures a fair and independent judiciary.
Civil Liberties
Civil liberties ensure the provision of freedom and fundamental rights to every citizen. These
include freedom to press, equality before law, personal and social freedom and freedom from
biased government policies. Countries with high civil liberties are considered to be free and are
more preferred by companies for investments. More liberal countries ensure fair judicial trials in
case of disputes and hence are preferred by business organisations.
International Political Relations
Political relations and diplomacy with foreign nations results in more avenues for trade and
business which in turn creates multi-lateral or bilateral trade opportunities. For example, trade
pacts between USA and India have resulted in several development opportunities for both the
nations. Political friendship among different nations creates a favourable environment for
international trade and commerce.
Political Stability
Political stability is crucial for growth and development of any economy. Political instability can
hinder the flow of foreign capital and adversely affects foreign investment in the country. For
instance, clashes between two groups in a region can cause adverse effects on the economic
activities in that area.
Government Policy
Stable policies are better for planning corporate strategies and building-up confidence in the
industry. Policies formulated with clear directions can support better economic development.
LEGAL ENVIRONMENT
Legal environment of any country deals with rules, regulations, policies and the law of the land
as whole. These laws are made for the protection of consumers, investors, environment and
national interest. For example, there are several organisations like SEBI, Consumer
Commissions or National Green Tribunal (NGT) in India for the enforcement of such laws.
Further, the legal environment of a country also includes taxation laws and annual budgets.
The changes in government policies such as trade policies, industrial policies, fiscal and
monetary policies can have a great effect on the business. For example, by increasing the limits
of permissible FDIs in the retail sector has led to the emergence of global e-commerce
companies. While at the same time, it has been seen as the threat to local vendors with increasing
markets for e-commerce.
ELEMENTS OF LEGAL ENVIRONMENT
Elements of the legal systems include the laws, rules and regulations applicable in the country.
As per Rao (2008) it includes the following:
• Common law – Law is implemented according to the situation and the prevailing
customs, traditions, culture, etc.
• Civil Law – They are the detail set of laws formulated, discussed and passed by the
parliament e.g., contract act, company law and civil codes.
• Theoretical law – These are the laws derived out of the religious laws in the country.
• Property rights
• Intellectual property rights
• Labour laws and codes
• Fiscal and monetary policy
• Competition Law
• Foreign exchange laws – FEMA and FERA Act
Evaluation of Politico-Legal Environment
Political and legal environment plays an integral role in the economy. A favourable politico-legal
environment is crucial for growth and survival of business. These factors govern the entry of
foreign firms in the domestic market of the country. Government and allied agencies act as a
regulator of foreign companies where government policies are considered to be gatekeepers.
Political ideologies of the ruling party are also important for creating a favourable business
environment. A pro-business ideology will lead to more opportunities for foreign investment in
the country. Likewise, legal environment draws the perimeter of the permissible trade and
commerce activities within the geographical boundaries of a country.
Business organisations are required to operate within the legal framework. Due to the rapid
increase in globalization and flexible FDI policies, several laws are created to protect the interest
of domestic traders in India. Business organisations are required to have full knowledge about
the trade laws, rules and related policies. Moreover, the increasing complexity of legal
environment can cause difficulties in the business operations. Increased concern about the
environmental protection and sustainability has led to creation of environmental protection laws.
Failure of implementing these laws will not only lead to governmental actions but will also
effects the image of the business adversely. Hence, favourable politico-legal environment is
necessary for a stable economic growth and development. Political instability can create social
unrest which in turn can hamper local businesses in the area. For example, roadways, being
blocked as protest-sites can hamper the supply chains.
Current Scenario of Politico-Legal Environment
Boost to Manufacturing
Government has given a boost to manufacturing activities in the country through ‘Make in India’
campaign. Under this campaign, government created conducive environment for doing business.
In order to boost manufacturing in India, government has set up panels to fast-track investment
proposals, addressing problems in investment process and creating an investor-friendly
environment in the country. Efforts are being made to make India a manufacturing hub and
crating more employment opportunities for the locals. In the recent times, several multinational
companies have setup production facilities in India.
Changes in Industrial Policies
Several policy changes have been made in the recent past to ease the entry of foreign investments
in the country. Department of Industrial Policy and Promotions (DIPP) has made efforts to make
policies more flexible and simplified including infusing technology into various processes for
effective and efficient governance. For instance, application for industrial licenses has been made
online which has made it more accessible.
Business Reforms
Several reforms are being undertaken at state as well as centre level to make significant
improvements in way business operates in India. The government has introduced various
initiatives to ease doing business in India. India has been placed at 63rd position on World Bank’s
Doing Business 2020. For instance, Government of India has increased the limits of FDIs in
insurance and defense sectors and thereby attracting more foreign capital in the country. This
will lead to creation of employment and overall economic development (“Doing Business in
India”, 2020).
Bank Mergers
In the past few years, government has decided to merge certain public sector banks to reduce the
number of nationalized banks and improve the quality of governance. The number of national
banks has been reduced from 27 banks to 12 public sector banks (Singh, 2019).
Infrastructure Development
The current government has taken several steps for the modernization and development of
infrastructure in the country. The focus is not only on the urban cities but several tier I and tier II
cities have also been developed as the part of a scheme named as ‘Smart Cities’. The government
has announced to develop 100 cities as smart cities under which many industrial corridors are to
build. Several other projects in different sectors like green energy, transportation and real estate
have been planned. These planed projects will create future business opportunities and foreign
collaborations (Yadav, 2015).
Skill Development Programmes
Indian government launched ‘Skill India’ movement in 2015 with an aim to provide skill based
education to the youth of the country. The programme focussed at imparting vocational training
with a vision to empower workforce suitable for skill-based jobs. For example,
‘Seekho aur Kamao’ was scheme launched for the youth of union territories of Jammu and
Kashmir and Ladakh under which they were trained according to their qualifications and given
employment opportunities in the state (NSDC, 2017). Such initiatives were planned to reduce the
dependency white collar jobs and encourage skill-based employment.
GOVERNMENT FRAMEWORK FOR PROMOTING BUSINESS
In the role of the government to support business and related economic activity, a robust
supportive mechanism is required to be provided in promoting a sustainable institutional
structure.
The Ministry of commerce and Industry
The Ministry of Commerce and Industry has the responsibility to manage and promote the
industrial and commercial activity in the country. It formulates Industrial policy which provides
with the planned framework of promoting industrial development in sync with the economic
goals of the nation. The Niti Aayog, Ministry of Micro, Small and Medium Enterprises, Ministry
of Skill development and Entrepreneurship all contribute in the attainment of their individual
(promotional regulatory, technical and advisory) goals.
The Department for Promotion of Industry and Internal Trade (DPIIT)
The department was earlier called Department of Industrial Policy & Promotion and was
renamed as DPIIT in January, 2019.The Department functions on matters related to Internal
Trade, welfare of traders and their employees and start-ups. The role of DPIIT is to
promote/accelerate industrial development of the country by facilitating investment in new and
upcoming technology, foreign direct investment and support balanced development of industries.
The Department for Promotion of Industry and Internal Trade (DPIIT) spearheads ‘the Ease of
doing business’ initiative which provides a ‘carpet welcome’ to the foreign investments to India.
This involved providing time-based and ‘single window clearances’ towards establishing
business in our country. The department also promotes Startup India Initiative and Production
Linked Incentive (PLI) Scheme.
The Department of Commerce regulates the following:
I. International Trade: Policy related matters involving various tariff and non-tariff barriers,
issues related to the WTO, their interpretation and implementation besides the dispute
settlement/redressal mechanism. This further involves strengthening the bilateral and
multilateral trade by International Commodity Agreements.
II. Foreign Trade (Goods & Services): tasks related to external trade and relevant matters
import and export of feature films, as well as unexposed cine-films. This also involves
establishing Agricultural Export Zone (AEZ) and 100% Export Oriented Units (EOUs)
for boosting manufacturing and promoting external trade by suitably amending the
related policy and regulatory framework from time to time.
Aimed at promoting international trade relations it attains the objective through bodies like
Export Promotion Board, Board of Trade and International Trade Advisory Committee and
Export Promotion Councils/Export Promotion Organisations. State Trading Corporation (STC)
also facilitates the said objective of trade promotion.
III. Special Economic Zones (SEZs): Fostering economic development with SEZs is a
relatively new way of attaining industrial as well as foreign trade growth. This includes
providing a favourable policy environment, further comprising a conducive foreign trade
policy, a supportive fiscal regime, and an attractive investment policy, etc. This is
achieved by an organised structure and subordinate offices under this Department1. Directorate General of Anti-Dumping and Allied Duties (DGAD).
2. Directorate General of Foreign Trade (DGFT).
3. Directorate General of Supplies and Disposals (DGS&D).
IV. Statutory/Autonomous Bodies/Public Sector Undertakings/Other Organisations:
Agricultural & Processed Food Products Export Development Authority (APEDA),
Coffee Board, Export Inspection Council of India (EIC), Rubber Board, Spices
Board, Tea Board, The Marine Products Export Development Authority (MPEDA),
Tobacco Board. Public Sector Undertakings include: ECGC (Export Credit Guarantee
Corporation of India Limited), ITPO (India Trade Promotion Organisation), MMTC
Limited (formerly Minerals and Metals Trading Corporation of India Limited), PEC Limited (formerly The Projects and Equipment Corporation of India Limited), STC
Limited (State Trading Corporation of India Ltd.), STCL Limited (formerly Spices
Trading Corporation Ltd.).
Of the many acts applicable under the Ministry of Commerce and Industry regime, ‘Special
Economic Zones Act, 2005’, carries a mention here.
The Tariff Commission
Tariff Commission in India got created by the union of the Tariff Board, Tariff Commission
(old) and Bureau of Industrial Costs & Prices (BICP). BICP got combined with it for better
functioning with effect from 1st April, 1999.
NITI AAYOG (NATIONAL INSTITUTION FOR TRANSFORMING INDIA)
It was in 2014, that the NITI Aayog (National Institution for Transforming India) got constituted
by transforming the earlier existing ‘Planning Commission’ for enhancing the developmental
process; nurture an overall business enabling environment extending from the realms of Public
Sector and Government of India. This involved more coordinated role with the state governments
thereby strategically fostering good governance, best practices, providing strategic expertise and
coordination with all levels of government (central as well as the state) for the collective
attainment of developmental goals.
Public Private Participation (PPP)
The PPP Vertical is assigned with the various activities involving the policy formulation for
ensuring that the desired objectives for timely creating the infrastructure to promulgate the
economic growth and development. Such projects being capital intensive in nature requires
regular capital infusion and management thus the PPP becomes the choice for Construction,
Operations and Management of the infrastructure projects. For Niti Aayog, the PPP remains
evolutionary, in terms that it remains reform-oriented by suggesting institutional, regulatory and
procedural changes. By process and document standardization, the subsequent appraisal of PPP
projects becomes easy thus resulting in higher FDI in such developmental projects.
The Ministry of Finance
It was re-organized in the year 1949 in two departments namely, the Department of Revenue and
Expenditure; and Department of Economic Affairs. Presently, the Ministry of Finance has the
following five Departments: –
a) Department of Economic Affairs
b) Department of Expenditure
c) Department of Revenue
d) Department of Financial Services
e) Department of Investment and Public Asset Management
f) Department of Public Enterprises
The Department of Economic Affairs, assists the Central Government in maintaining sound
public finances through efficient use of the nation’s economic resources, promoting conditions
that accelerate sustainable economic growth through developing sound economic policies and
preparing for future economic challenges and opportunities, and leading India’s bilateral and
multilateral economic and financial engagements. It manages the matters with its institutions
like:
i. Security Printing and Minting Corporation of India Ltd.
ii. National Savings Institute.
iii. Securities and Exchange Board of India.
iv. Securities Appellate Tribunal.
v. Specified Undertaking of the Unit Trust of India/National Financial Holding Company
Ltd.
vi. National Skill Development Corporation.
vii. National Skill Development Fund/Trust.
viii. National Skill Development Agency.
ix. Delhi Mumbai Industrial Corridor Trust.
x. Forward Markets Commission
FISCAL AND MONETARY POLICY
These two policies formulate the financial framework of the nation. Monetary and Credit
Policy, is formulated by the Reserve Bank of India by which it aims at bringing in price
stability, control inflation and regulate liquidity of the nation’s economy. This is achieved
through various instruments like managing the money supply and other policy matter changes
from time to time. Through the banking system it regulates liquidity and interest rates and
loan off takes for spurring industrial growth. With the Monetary Policy, the RBI strikes the
balance between maintaining liquidity and credit/ loan off take by regulating between lending
and borrowing rates of interest for the commercial banks. This is achieved through careful
assessment of the business environment and then attaining the objectives with deployment of
its instruments like Bank Rate of Interest, Cash Reserve Ratio, Statutory Liquidity Ratio,
Open market Operations, Margin Requirements, Deficit Financing and printing of currency
and credit regulation. It strives for establishing a price stability to overcome the fluctuations
which may deter the market sentiments, especially in the foreign trade. This generates
national economic growth and aids in employment generation too.
The fiscal policy is the nation’s revenue and expenditure policy by which it plans to strike the
balance between the ever growing needs and the limited resources availability in the country.
It indicates the prioritization in the several governmental purchases and taxes. It is done by
virtue of its ‘thrifty nature’ by promoting saving and investments in order to maximize the
demand which stands important in not only providing economic stability but also aids in the
time of recession. This is achieved through careful assessment, budget provisioning and
limiting the Govt. expenditure, Tax management (Direct, indirect and new taxes), Wage
Control, Public Debt and maintaining surplus budget etc.
On one side the Monetary policy acts by altering money supply and the interest rates; the
fiscal policy aims for bringing in much needed price stability by carefully and continuously
managing between the incomes and the expenditures of the country in order to provide a
conducive and stable environment for providing economic growth, overcoming recession and
generating opportunities for employment, infrastructure building, law and order, education,
etc.
