Business Government Environment

01. Overview of Business Environment

Question: How can government decisions about policies affect business organizations?
Explain with illustration.
Political environment includes government actions, laws, government
agencies, and pressure group that affect the operations of the business.
Knowledge of political system, processes, and institutions is important to
make general observations related to political change, uncertainty, and its
influence on the functioning of an organization. Government economic policy
and market regulations have an influence on the competitiveness and
profitability of businesses. Governments create the rules and frameworks in
which businesses are able to compete against each other, from time to time
forcing businesses to change the way they operate. Sometimes the impacts
of government policy are intentional. Profit is the most direct answer to how
government regulations affect business. They can also make it more or less
difficult for new companies to enter into an already established industry,
reducing or creating competition in the process.

Demonetization impact on business organizations

Demonetization has its supporters. While industrialists and corporate chiefs

like Ratan Tata, Mukesh Ambani, K.V. Kamath and Deepak Parekh, to mention
a few favour the move, economists (including Nobel laureates Amaryta Sen
and Paul Krugman, among others) are critical.

Regarded as a 'game-changer', GST is likely to revolutionize the way India does business, setting
it on a path to become one of world's most evolved and business-friendly countries. The Goods
and Service Tax is premised on the agenda of creating a unified economy that facilitates seamless
movement of goods throughout. It promises to remove the existing barriers around investment
and entrepreneurship. Reduction in tax burden, logistics and inventory costs, and distribution of
goods in reduced time will have a positive, lasting impact on the sales and profitability of
companies operating in diverse industries. By bringing businesses of varied sizes and DNA under
a uniform tax structure, which in turn would facilitate reduction in price gaps, GST will lead to a
level-playing field for both the organized and unorganized where growth opportunities will be
ample and fair. The eventual outcome will rationalise costs at all doors, increase employment,
improve efficiency and put India on a vertical growth trajectory in the coming future. The
magnitude of this reform will impact all sections of the society.
The 'Make in India' initiative was introduced to market India as a
manufacturing hub and create jobs for its people. Under the 'make in India'
initiative, 25 sectors were identified for focussed intervention and FDI policy
was liberalized. As per ratings agency Moody's, FDI has hit an all-time high in
early 2016, highlighting the success of 'Make in India' initiative. Several big
wigs such as Xiaomi, Boeing, Foxconn and Hitachi have caught the make in
India wave. While 'Make in India' initiative may not have garnered overnight
success, its true potential can only be discerned in the long run depending
on the consistency and degree to which the Government continues to
facilitate businesses.

Government acts as a Market Catalyst

The government can implement a policy that changes the social behaviour in the business
environment. For example, the government can levy taxes on the use of carbon-based fuels and
grant subsidies for businesses that use renewable energy. The government can underwrite the
development of new technology that will bring the necessary change. Imposing on a particular
sector more taxes or duties than are necessary will make the investors lose interest in that sector.
Similarly, tax and duty exemptions on a particular sector trigger investment in it and may
generate growth. For example, a high tax rate on imported goods may encourage local
production of the same goods. On the other hand, a high tax rate for raw materials hampers
domestic production.

Government Spending

Governments get money to spend from taxation. Increased spending requires increases in taxes
or borrowing. Any tax increase will discourage investment, especially among entrepreneurs, who
take the risks of starting and managing businesses. Increased spending also eats into the limited
pool of savings, leaving less money for private investment. Reduction in private investments
shrinks production of goods and services. That, in turn, may lead to the elimination of jobs.

Interest Rates

Government policy can influence interest rates, a rise in which increases the cost of borrowing in
the business community. Higher rates also lead to decreased consumer spending. Lower interest
rates attract investment as businesses increase production. The government can influence interest
rates in the short run by printing more money, which might eventually lead to inflation.
Businesses do not thrive when there is a high level of inflation.

One of the biggest methods of government influence on businesses is its

control over fiscal and monetary policy. By controlling interest rates, the
government can make money for capital investments or loans more or less
available. The government can also exercise direct control over the
import/export industries through the implementation of quotas and tariffs.
Regulations
Trade regulations, the federal minimum wage, and the requirements for permits or licenses have
effects on business. For example, periodic health inspections must be carried out in all
restaurants. Businesses might spend a lot of money and time to comply with regulations that
ultimately prove to be ineffective and unnecessary. Fair and effective regulations, however,
promote business growth.

Key areas of government policy that affect business are:

Economic policy

Taxation policy affects business costs. For example, a rise in corporation tax (on business profits)
has the same effect as an increase in costs. Businesses can pass some of this tax on to consumers
in higher prices, but it will also affect the bottom line. Other business taxes are environmental
taxes (e.g. landfill tax), and VAT (value added tax). VAT is actually passed down the line to the
final consumer but the administration of the VAT system is a cost for business.

Legal changes

The government regularly changes laws in line with its political policies. As a result, businesses
are continually having to respond to changes in the legal framework.

Examples of legal changes include:

i. The creation of a National Minimum Wage which has recently been extended to under-18's.
ii. Providing increasingly tighter protection for consumers to protect them against unscrupulous
business practice.

iii. Creating tighter rules on what constitutes fair competition between businesses.

iv. The government has increased the maternity leave from 3 months to 6 months,

Political Stability

For example, an aggressive takeover could overthrow a government. This could lead to riots,
looting and general disorder in the environment. These disrupt business operations

Public policy in India thus plays a major role in shaping interest group
behaviour, determining the channels of access, and conditioning the style of
interest articulation. Government controls are pervasive, and government
policy tools for managing the economy are so plentiful that business is totally
dependent on government. Government in India has the power to intervene
in a variety of major business decisions, including the choice and size of
projects undertaken, the location of the factory, the form and remuneration
of top management, the companys capital structure, and even the selling
price of the product. These decisions affect individual firms, entire industries,
and the business community in general.