Business and Government

MPSM 105 – Sandip Ghosh (SG)

As a manager, explain the significance of the linkages between the business and government. Why
do you think it is necessary in the modern context of globalisation and open market?

Business and Government go hand in hand. They are inseparable. They are complementary to each
other. In fact, it is the ‘business’ of the government to help firms do business. The government is a
tool of business; while business firms are the bottom line thinkers and doers. Governments across
the globe are trying their best to attract industries to be set up in their countries.

In the modern world today, the state-run public sector and private sector companies are competing
against each other to get a pie of the market share. It is the very base of Mixed Economic Policy that
India follows, taking the best of both the worlds of Capitalism and Socialism. At the time of
independence, the onus of setting up an industrial base of the country fell on government’s
shoulders, as private sector neither had the expertise nor the bandwidth. Sixty years from then, the
private sector is competent enough to execute projects of any capacity. After the Liberalisation,
Privatisation and Globalisation LPG reforms of the 1990’s, government assumed the role of a
facilitator-cum-regulator, by assisting industrial houses and new entrepreneurs in setting up
businesses. For the past two decades, government’s interference in business may seem to be less
direct. Paradoxically, it has increased government’s importance in business.

In the light of the statement given the Government is an important stakeholder because it
represents the general public and it has to cater to the welfare of the country. Hence government is
needed to act as a watchdog of the business by private sectors. Nevertheless Government wants a
Public-Private Partnership in building the economy. The derivatives of this strategy are rapid
economic growth, full employment and reducing the inequalities in the distribution of wealth.

In the current scenario, governments and central banks worldwide, are trying their best to boost the
economy by providing stimulus and bail-out packages. Increasingly, protectionist measures such as
subsidies and import duties are being imposed by the governments to protect domestic businesses.
No government wants to see a business fail, which leaves thousands of employees jobless and
reduces the contribution to the exchequer.

Political Stability is very important to create an environment for setting up businesses. It is one of
the key factors that foreign investors look forward to. Less than a week after Union finance minister
P Chidambaram assumed office, the Sensex index moved north, investors and the overall market
regained their confidence in the government. The three key issues that the Finance minister
highlighted were better coordination between the monetary and fiscal policies, a return to fiscal
consolidation, and clarity in tax laws and a “non-adversarial” tax regime in the country.

India’s economic growth has come about in a big way mainly because of government intervention.
From 1991 onwards, reforms became a continuous process encompassing almost all sectors of the
economy.
 Delicensing ensured the number of industries that required licenses was reduced. The
number of industries reserved for the public sector was reduced. Rest were opened to the
private sector. Public sector units were given more autonomy. Disinvestment of sick public
sector units was sanctioned, but there were few takers. That ended up in the government
divesting its stake in profit-making public sector companies.
 Securities Exchange Board of India (SEBI) was established to regulate the Capital Markets.
Mutual funds were opened to the private sector, apart from the state owned Unit Trust of
India (UTI).

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 Business and Government

MPSM 105 – Sandip Ghosh (SG)

 Export Processing Zone (EPZ) scheme and 100% EOU schemes were introduced to provide
for duty free enclaves. Foreign Exchange Regulation Act (FERA) was replaced by Foreign
Exchange Management Act (FEMA).
 Insurance Regulatory Development Authority (IRDA) was set up to regulate the Insurance
sector. New Generation Bank formats were allowed in the private sector.
 Maximum marginal rate of personal income tax (56% in 1990) and corporate tax (51.75% in
1990) was reduced in successive budgets to touch 30% by early 2000s.
 Peak customs duty (300% in 1990) was reduced in successive budgets. With such absurd
levels of protection, domestic producers were under zero pressure to perform competitively
in the market. Presently, excluding a small list consisting of liquor, used cars, etc. the peak
customs duty stands at 10%.
 Service Tax was introduced for the first time in India and currently stands at 12%, up from
10% last year.

The importance of Business and Government link stands true even in the global village dominated by
the major economies like the United States and the European Union.US lose AAA Credit rating – a
peculiar case wherein the US Government was downgraded by the industry. At the brink of an EU
crisis; Governments, Central Banks, and bodies like the International Monetary Fund (IMF) are trying
their best to avoid a double dip. Unemployment numbers is as high as 24% in Spain, and supporting
businesses that provide jobs holds the key to bringing an economic revival.

An economy cannot thrive without a minimum degree of policy, predictability and direction, the
government has to offer up at least the basics of a business friendly environment. History is replete
with the success stories of the economies that have risen from their lowest phase of growth mainly
due to the role played by the government. The government has put in place the pro-business
policies that allowed the private sector to accelerate the economic growth of the country. For
instance the government of Singapore, Dubai, South Korea and Taiwan provided the much needed
education system, infrastructure facility, and stable macroeconomic and policy environments crucial
for supporting economic advancement. The Indian growth story is not different either. Despite all its
shortcomings, global firms are interested to invest in India. Owing to the recent government’s
business friendly initiatives several economic hubs were set up in Gurgaon, Bangalore - the Silicon
Valley of India, Sector V in Kolkata.

As per the 2010-2011 data on GDP, the capital formation rate was 35.1% of GDP, while the saving
rate was 32.3%.This led to a shortfall of capital for investment to the amount -2.8% of GDP. This
shortfall has to be met through foreign savings for example FDI, External Commercial Borrowing,
aids and grants.

With the inflow of FDI, India not only benefits from the availability of capital but also the from the
advanced technical knowhow that the foreign firms bring; for example if FDI is allowed in the retail
sector then giant retail players like Walmart, Carrefore can bring about massive improvements in the
supply chain system of the Indian retail sector.
CABOTAGE - a protective measure for the Indian ship owners; if this law could be repealed then it
would open doors for foreign investors eager to explore the Indian shipping industry.
A move of the government machinery towards protecting the interests of people can result in
certain businesses being wound up. Supreme Court has banned the use of Endosulfan, a generic off-
patent pesticide, which is very cost effective.

The role of the private sector has been of immense support to the government. It has helped the
government by providing capital for infrastructure development, generated employment for the

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MPSM 105 – Sandip Ghosh (SG)

growing population for example the business process outsourcing sectors employs a major section of
the youth population. With rise in incomes and increase in the purchasing power, the society at large
has been able to improve their standard of living.

It is no doubt that the key to a successful economy would be to embrace the opportunities that
promises to spearhead the country’s growth and do away with rigidity ( red tapism and bureaucracy)
that interrupts the normal cycle of growth. Despite the off late corruptions and scams, India can still
be a powerful nation in the making if there is harmony in the amalgamation of the public and
private sector for instance the implementation of Goods and Service Tax, Land acquisition,
environmental clearances and speedy execution of infrastructure projects. These hold the key to the
success of the nation.