BPA

Unit -1

State Intervention in Business

State Intervention in Business

State in wider sense refers to a set of institutions that possess the means of legitimate coercion, exercised over a definite territory and its population referred to as society. The state monopolizes rule making within its territory. State intervention or economic intervention or economic statism is an economic policy perspective favoring government intervention in the market process to correct market failures and promote the general welfare of the people. State intervention in India- History

During capitalism, in the early 19th century, it was emphasized that the role of the state should be restricted to the formation and enactment of laws, rules and regulations and maintenance of law and order in a country. According to the supporters of the Laissez faire policy, personal freedom and optimum utilization of resources ensure accelerated pace of economic development. So in the initial stage of economic development, the only function of the state was to protect the life, wealth and property of the society. But gradually the doctrine of laissez faire stared losing its shine and the state capitalism was born. With the changed circumstances, economist started arguing strongly in favour of state interference in economic activities of the country. Till the last phase of the 19th century, there was a continuous increase I the role of the state and it has been assigned to work as patron, guardian and controller of individuals and industries. Gradually two types of thinking was evolved. The first thinking supported the free market system and private sector was believed to be the best mode to ensure efficient distribution of economic resources. Second thinking argued that private sector is quite weak and its survival is based on Government support system. It is affected by short sightedness, conventional approach and cautious behavior. Therefore the private sector is unable to ful fill the gigantic task of economic development. Thus, it became necessary that state should play its role in the areas where it deems sil lu aci.

Centralized planning is governed by this rationale and state intervention is necessary to make the planning process possible and more sustainable. Both approaches are individualistic in nature and their rationale cannot be justified. Government and private sector both are required to play their roles in a coordinated manner. The Government should review its policies and programmes from time to time to give a qualitative dimension to state intervention which is desirable in the interest of public at large. An important part of external environment of a business organization is governed by various Government regulatory mechanisms. In order words, the Central, State and local Governments formulate and develop legal framework for intervention which affects the operations and business policies of the firms. These acts and regulations improve or reduce the business opportunities. For India, having a mixed economy, the scope and impact of these enactments and regulations are quite wide and important. Hence the business organizations are required to understand the reference and contexts of these interventions and formulate their prevailing environment. India is a mixed economy and it's characterized by the co-existence of public, private, joint and co-operative sectors. However the level of intensity of participation of these sectors is quite dynamic and governed by various factors. Moreover the nature and dimension of state intervention in business became more regulatory in nature and state is still active in its promotional and participative behavior in business.

Objectives of State Intervention in business :

The objectives behind state intervention in business are as follows:

1. Minimizing effects of wealth and economic power: Poverty is source of danger to te prosperity everywhere. It is the duty of the state to remove the inequality of income and wealth prevailing in the society. In India the magnitude of the problem can be judged by the fact that more than 90% of the wealth is concentrated I the hands of less than 30% of the population. The fiscal measures such as progressive taxation system, excess profit tax, high death duties, wealth tax, expenditure tax could achieved less unless the economic pattern is changed effectively to control the accumulation of wealth in a few hands. This objective can be achieved by state participation in business satisfactorily. 

2. Fulfilling the basic needs: One of the objectives of state intervention is to plan the economic resources in such a way which guarantee the basic necessities of public at large. These basic necessities include fooding, clothing and housing. In the absence of state intervention it is possible that some people may misuse these facilities or resources and some people may be left without availing these facilities. State intervention enables the society to avail these opportunities on equal basis. 

3. Encouraging decentralized industrial development: private entrepreneurs are guided mainly by profit motive. They establish industries in those areas where they expect a high rate of profit and security of their investment. They are also unable to exploit the natural resources effectively. These things have forced the Government to intervene in the economic activities through a planned dispersal of industries which will ensure decentralized growth of the country. It is only through the state that the development of relatively backward area can be affected.

4.Profitable exploitation of scarce natural resources: State intervention in business creates conducive environment for profitable utilization of scarce resources, Centralized Planning Authority or Planning Commission assesses the availability of resources and allot these resources for balanced regional development. Private entrepreneurs use these resources only for those products and services which can fetch maximum price for them. 

5. Safeguarding national Interest from Foreign Investors: Indigenous industrial units are unable to face the competition inflicted by the foreign capitalists and MNCs. Indian entrepreneurs lack latest technical know-how and management skill. As a result the indigenous units have failed to move in right direction. So the objective of state intervention is to protect these units from undesirable competition of foreign companies. Besides, state intervention is also required to control the domination of foreign companies in the domestic market.

6. Saving valuable foreign exchange: State intervention tries to formulate economic policies which in turn promote more export drives to earn valuable foreign exchange. Similarly state intervention also encourages import substitution to save foreign exchange required for further imports. Thus, state undesirable imports through import substitution and encourages export promotion to increase the volume of foreign exchange in the country.

Reasons for state intervention in business:

1. Equality: In a free market, there is likely to be significant inequality and poverty. This is not due to a meritocracy, but it could be due to unfair advantages of circumstances (inherited wealth, superior education). Governments can intervene to provide a basic security net - unemployment benefit, minimum income for those who are sick and disabled. This increases net economic welfare and enables individuals to escape the worst poverty. This government intervention can also prevent social unrest from extremes of inequality.

2. Public goods: Public goods tend not to be provided in a free market because there is no financial incentive for firms to provide goods that people can enjoy for free. Governments can provide national defense, law and order and pay for it out of general taxation. Looking after the environment is also a public good, there are an increasing number of areas, where a government is needed to deal with issues such as forest fires, rising sea levels and pressure on water supplies. 

3. Education: Merit goods are under-consumed in free-market because people underestimate the personal benefits and/or ignore the external benefits. This leads to an under provision of health care and education.