UNIT – 2

CHAPTER – 3 - POLITICAL & LEGAL ENVIRONMENT

POLITICAL ENVIRONMENT:
The political environment can be one of the less predictable
elements in a business. Any business needs to monitor the
changing political environment because political change can
profoundly affect an organization. Political stability can be key
for market stability. The political system prevailing in a country
decides, promotes, fosters, encourages, shelters, directs and
controls the business activity of that country. The most
developed countries today, owed their success to the prevailing
political situation in their country.
Any political environment of a country can be either blessing
for some business or curse for other business. In other sense, it
provides opportunity to some business and threats to others. A
businessman has to adjust his business to the prevailing
political environment as he is left with no choice.
Government affects almost every aspect of business life in a
country. First, national politics affect business environments
directly, through changes in policies, regulations, and laws.
The government in each country determines which industries
will receive protection in the country and which will face open
competition. The government determines labor regulations and
property laws. It determines fiscal and monetary policies, which
then affect investment and returns.
Second, the political stability and mood in a country affect the
actions a government will take—actions that may have an
important impact on the viability of doing business in the
country. A political movement may change prevailing attitudes
toward foreign corporations and result in new regulations. An
economic shift may influence the government’s willingness to
endure the hardships of an austerity program. We will discuss
the strategic importance of understanding political risk in an
international business context.
In India, the political system is made up of three main
institutions:
a. Legislature
b. Executive
c. Judiciary
Legislature: Of the three organs of the government, the place
of primacy belongs to the Legislature. The function of
government begins by law-making and is followed up by law-
enforcement and adjudication functions. As such, the
legislature is the first organ of the government.
The term ‘legislature’ is a generic term meaning a body which
legislates (makes laws, bills etc). Legislature means a place for
law-making. Another term, which is used as a synonym of
Legislature, is ‘Parliament.’ This word stands derived from the
French word ‘Parley’ which means to ‘talk’ or to discuss and
deliberate.

The Parliament of India is the supreme legislative body of

the Republic of India. It is composed of the President of
India and the two houses: the Rajya Sabha (Council of States)
and the Lok Sabha (House of the People). The President in his
role as head of legislature has full powers to summon and
prorogue either house of Parliament or to dissolve Lok Sabha.
The president can exercise these powers only upon the advice
of the Prime Minister and his Union Council of Ministers.

In this way, we can say ‘Parliament’ means the place where

deliberations are held. Combining the two views, we can say
Legislature or Parliament is that branch of government which
performs the function of lawmaking through deliberations.

The legislature is that organ of the government which passes

the laws of the government. It is the agency which has the
responsibility to formulate the will of the state and vest it with
legal authority and force. In simple words, the legislature is that
organ of the government which formulates laws. Legislature
enjoys a very special and important in every democratic state. It
is the assembly of the elected representatives of the people
and represents national public opinion and power of the
people.
Executive:

The executive is responsible for the effective implementation of

the laws/ policies passed by the Legislature. The President,
Vice- President along with the Council of Ministers and the
Attorney General (highest ranking law officer of the nation –
whose job is to defend the government in any court of the land.
The Attorney General for India is the Indian government's chief
legal advisor, and its primary lawyer in the Supreme Court of
India. He can be said as the lawyer from government's side)
form the Executive branch of the Center, whereas Governor is
the Executive at the State level along with the council of
Ministers.
(https://www.google.com/search?
q=who+are+council+of+ministers+in+india&rlz=1C1CHBD_enIN
864IN864&oq=who+are+council+of+&aqs=chrome.1.0i512l2j69
i57j0i512l4j0i22i30l3.5394j0j15&sourceid=chrome&ie=UTF-8)
[The present Attorney general of India is N. V. Ramana]
The Bureaucrats and civil servants are also parts of the
executive as they are responsible for effective implementation
of the law and policies at local level.
The Judiciary: 

 It is the most important feature of democracy. It is

responsible for safeguarding the interests and the
fundamental rights of the people.
  Judiciary consists of the Hon’ble Supreme Court, Hon’ble
High Court and other lower courts.
 Judiciary keeps a tab on the activities of the government
and plays an important role in the event of violation of
Fundamental Rights of the people of the country.
 Judiciary also has the authority to examine the validity of
the Laws enacted by the Parliament on the constitutional
parameters.
 The main task of judiciary is to set the legal system of the
country in motion by giving justice to the people of the
country by disposal of grievances filed in the form of Civil
Petitions or Criminal Complaints in the court of law in the
most righteous manner.
 Judiciary also ensures that the rules framed by legislature
are in accordance with the constitution of India and if they
are not in accordance with the constitution than it nullifies
that rule as being unconstitutional.
 Sometimes, even though a complaint is not made the
judiciary takes action suo moto i.e. by itself on a particular
matter in order to bring about the justice in the country.

ROLE OF GOVERNMENT IN BUSINESS:

The role of government in any economic system depends upon

a number of factors, besides the type of economic system
adopted by economy. Government normally performs the
following functions:

a. Regulatory Role
 b. Promotion Role
c. Entrepreneurial role
d. Planning role
e. Reservation role (reservation of small scale industries,
reservation in the form of tariff)

a. Regulatory Role: The government regulates the activities

of business organizations through various direct and
indirect controls. Direct controls include nationalization,
reservation, licensing, etc. Indirect controls include various
monetary and fiscal incentives and disincentives. The
government reserves certain industries for public sector,
small-scale industries sector and co-operative sector and
prevents the entry of other players in these fields. For
example, core sectors like iron and steel, cement, coal,
power, telecommunication, etc. were reserved for the
public sector by the Indian government in the pre-
liberalization era. The government also provides monetary
and fiscal incentives to promote growth of certain
industries or regions.

b. Promotional Role: The government can promote as well as

discourage the promotion of business activities through its
various policies. The government develops necessary
infrastructure, such as roads, railways, power projects, water
supply, communication facilities, etc. for promoting business
activities. It lays down the policy framework and provides
incentives for the promotion and development of industries.
The government can also restrict the excessive growth of
business organisations.
c. Entrepreneurial Role: In the entrepreneurial role, the
government acts as an entrepreneur and participates in
economic activities through its own ownership in form of public
sector ventures like
 Transportation Indian Railway Catering and Tourism

Corporation Ltd, DMRC Ltd; 

 Communication MTNL, BSNL; 

 Electricity and Power BSES, NDPL;

 Companies like EPC BHEL, PGCIL, IRCON ltd

Sometimes private sector is unable to establish its venture in

some area due to constraints like lack of capital, lack of know
how or restrictions by government. For this, the government
has to perform the entrepreneurial role by entering the market
with its ownership through public sector. Entrepreneurial role
of government is encouraged owing to the following reasons:
 For social welfare 

 For balanced regional growth

 For capital intensive growth

As per the Industrial Policy Resolution Act (1948), it was

declared that monopoly of few of the sectors like
manufacturing of arms and ammunition, the production and
control of atomic energy, and the ownership and
management of railways would lie under Central Government
and six industries namely coal, iron and steel, aircraft
manufacture, ship building, manufacture of telephone and
wireless apparatus, and mineral ore, would be established by
Public sector solely. However, the amendments in The
Industrial Policy Resolution (1956) had liberalized these
policies. Moreover, under the current NDA government
According to the revised guidelines, Foreign Direct
Investment Cap is 100%. Foreign Direct Investment up to 49% is
allowed through automatic route and above 49% under
government route. However, Central Public Sector
Enterprises (CPSEs) are making losses due to no profit
motives, lack to proper operational function, inadequate
research, deficient technology enhancement and slow process
of bureaucracy. Hence, Government of India has favored
disinvestment of public sectors.
d. Planning Role: The Planning Commission was an institution
in the Government of India, which formulated India's Five-Year
Plans, among other functions. In his first Independence Day
speech in 2014, Prime Minister Narendra Modi announced his
intention to dissolve the Planning Commission. From 1947 to
2017, the Indian economy was premised on the concept
of planning. This was carried through the Five-Year Plans,
developed, executed, and monitored by the Planning
Commission (1951-2014). With the Planning Commission
dissolved, no more formal plans are made for the economy, but
Five-Year Defence Plans continue to be made. The latest is
2017-2022. There will be no Thirteenth Five-Year Plan.

The new government led by Narendra Modi, elected in 2014,

announced the dissolution of the Planning Commission, and its
replacement by a think tank called the NITI Aayog (an acronym
for National Institution for Transforming India).
e. Protective Role: It is the duty of the government to protect
and promote the development of infant and small-scale
industries in the country. There are two means by which the
government protects infact and small-scale industries in the
country:
 Reservation of products for small-scale industries
(domestic production).
 Extensive use of tariffs and quotas (foreign
protection).
The government reserves certain products to be manufactured
and marketed by only small-scale industries. It also makes use
of tariffs and quotas to protect domestic industries from
foreign competition. The government promotes the
development of small industries by providing them with
incentives and subsidies.
RESPONSIBILITIES OF GOVERNMENT TOWARDS BUSINESS:

1. Enacting and Enforcing Laws: Enacting and enforcing laws is

the prime responsibility of the Government of each country.
This is because laws and regulations only enable the businesses
to function smoothly. Further, Government provides a system
of court for adjudicating differences between firms, individual
or Government agencies.
2. Maintaining Law and Order: Maintaining law and order and
protecting persons and property is another responsibility of the
Government of the country. It would be impossible to carry on
business in the absence of a peaceful atmosphere.

3. Providing Monetary System: The Government has to provide

monetary system so that business transactions can be effected.
Further, it is also the responsibility of the Government to
regulate money and credit, and protect the money value of the
currency in terms of other currencies.

4. Balanced Regional Development and Growth: It is the

responsibility of the Government to make sure that there are
balanced regional developments and growth.

5. Provision of Basic Infrastructure: Government should

provide basic infrastructural facilities such as transportation,
power, finance, trained personnel and civic amenities, which
are indispensable for the effective functioning of business
concerns.

6. Supply of Information: It is the responsibility of the

Governments to provide information, which is useful to
businessmen in carrying out their business activities.
Government agencies publish and provide a large volume of
information, which is used extensively by business firms. This
information normally relates to economic and business activity,
specific lines of business, scientific and technological
developments, and many other things of interest to business
houses or business leaders.

7. Assistance to Small-scale Industries: It the responsibility of

the Government to provide the required facilities and
encourage the development of small-scale industries to
overcome the problem faced by them.

8. Transfer of Technology: It is the responsibility of the

Government to transfer to private industries whatever
discoveries are made by the Government – owned Research
Institutions so that they can be used for commercial
production.

9. Conducting Inspections: It is the responsibility of the

Government to inspect the private business concerns in order
to make sure that they produce quality products, and also to
prevent the production and sale of sub-standard goods.

LEGAL ENVIRONMENT:
Legal environment is the net result of various laws, rules
procedures and regulations made by the government in regard
to the formation and operation of business enterprises.

Legal environment in a country has a dominating position on all

decisions of organization. As all business policies are highly
influenced by government, the organization should have
thorough knowledge of these policies because non-
implementation of legal policies results in heavy fines, penalties
& punishment & therefore every organization must follow all
these regulations.

Following are some of the government Acts & government

policies relating to legal or regulatory environment for business
operations:-
 The Sale of Goods Act, 1930.
 Indian Companies Act, 1956.

 Income Tax Act, 1961.

 The Consumer Protection Act, 1986.

 The Weights & Measures Act, 1958.

 Environment Protection Act, 1986.

 Agricultural Policy.

 Industrial Policy.

 Foreign Investment Policy.

 Monetary Policy.

 The Factories Act, 1948.

 The Minimum Wages act, 1948.

Thus, legal (regulatory) environment means control or

supervise by means of rules. In simple words, regulatory
environment refers to frameworks of government
regulations/and legal provisions within which the business firms
have to conduct their activities.

What does it include: It includes government policies on

industrial growth, industrial licensing, foreign investment,
public sector, monopolies, pricing and distribution of goods,
imports and exports, small scale industries control of pollution
etc. All these policies together make-up total regulatory
environment and business firms have to conduct business
activities according to the limits set by these policies.

How does it influence business: Regulatory environment

creates a framework of regulations through various laws. It
imposes rules on what a business can do and what it cannot do.
Regulatory environment sets the limits within which the
business firms are expected to conduct their business. Legal
and regulatory system has a very great impact on business
firms. The business firms take important decisions relating to
working of business, investment, growth, expansion etc. by
keeping in mind the, regulatory environment.

Creates legal framework: The laws, rules, regulations, and

procedures made by the government control the planning and
functions of business activities. The government is given power
by the constitution to pass suitable laws so that there is
balanced economic development and concentration of
economic power is prevented in the hands of few people.
Constitution of India clearly states equal of opportunity for all.
So, the government according to the rights laid down in the
constitution of India and keeping in mind the welfare of the
society makes laws, policies, etc. This creates framework or
boundaries under which the business has to be managed.

Created by the Government: Government regulates business

activities. Rules and regulations of the government create
regulatory environment. It takes place due to government's
involvement to improve or control economic and business
areas.

Objectives of Regulatory environment: The main objectives are

to prevent exploitation of consumers, employees and investors
to make sure that the natural resources are used properly, to
control environmental pollution and preserve ecological
balance. Regulatory environment also protects firms by
preventing unfair competition and gives required legal rights to
the business.

Laws relating to business:

(i) The Companies Act, 1956: The Act provides regulations

to be followed by Joint Stock companies, in relation to
company meetings, share capital, appointment of
directors etc.

(ii) Competition Act, 2002: This Act has replaced the earlier
"Monopolies and Restrictive Trade Practices Act, 1969".
The main purpose of this Act is to encourage fair
competition and restrict factors that come in the way of
healthy competition.

(iii) Industries Development and Regulation Act, 1951

(IDRA): The most important being
the Industries (Development and
Regulation) Act, 1951 (IDRA) which was enacted in
pursuance of the Industrial Policy Resolution, 1948. The
main objective is to bring under state control the
development and regulation of a number of important
 industries which affect the economic development of
the country. Now, the government has removed
restrictions from a number of industries. Only 3
industries have been reserved rest all have been DE
reserved.

(iv) Foreign Exchange Management Act, 1999: The main

objective of this Act is to regulate foreign exchange in
India. Earlier this Act was known as Foreign Exchange
Regulation Act (FERA) 1973, FEMA came into existence
from June 1, 2000. This act consolidates and amends
the law relating to foreign exchange with the objective
of facilitating external trade and payments.

Laws Relating to Employer-Employee:

• The Trade Unions Act, 1926.

• The Factor 2S Act, 1948.

• The Payment of Wages Act, 1936.

• The Minimum Wages Act, 1948.

• The Payment of Bonus Act, 1965.

• The Industrial Disputes Act, 1947.

• The Employees' State Insurance Act, 1948.

• The Workmen's Compensation Act, 1923.

Laws Relating to Consumers:

• Essential commodities Act, 1955.

• Standard weights and Measures Act, 1956.

• The Drugs and Cosmetics Act, 1940.

The Consumer protection act, 1986.

Other laws affecting business:

 Environment protection act, 1986.

 Securities and Exchange Board of India act, 1992.

 Water and air act, 1974.

A manager should have good knowledge about all the

developments in the existing business environment especially,
about laws relating to production, distribution and
consumption of goods and services.

NOVEMBER 2018
1. Discuss the legal framework in India. (8)

APRIL 2018
1. Discuss in detail the political institutions in India. (8)

NOVEMBER 2017
1. Explain the role of government in business. (7)
2. Write short notes on the following
  Legal Environment

APRIL 2017
Explain the various types of political institutions in detail. (8)
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