INTRODUCTIONGOVERENMENT INTERVENTION-DEFINITIONRegulatory actions taken by a government in order to affect or interferewith decisions made by individuals ,groups or organizations regardingeconomic and social matters.One of the features of modern business is the increasing involvement ofthe government in business activities.As of today ,there is no country in the world where the government ofthe land does not interfere, in one form or the other ,in its economicactivities.
GOVERENMENT INVOVEMENT IN BUSINESS- HISTORICAL PERSPECTIVEState intervention in business seems to be as old as business itself.Even in days of laissez –faire,which apparently shunned stateintervention ,the governments role in the economy was almost incapable.The laissez faire doctrine ignored the fact that industrialization hadalways operated in an economy whose orderliness are guaranteed by thegovernment.Entrepreneur always may have considered his property as belonging tohim by virtue of divine right, or as reward for his virtue ,or as theoutcome of a natural economic law, but it was only the governmentwhich could guarantee him continued possession and use of his property.
As years went by .state intervention became a historical necessity particularly after theindustrial revolution of the late 18th and early 19th centuries.The era of industrial revolution witnessed in humanity of man to man and brutalizationof human nature in those very countries, and in those very societies where the greatestadvances were being made in the fields of science ,technology and organizations.Affluence and poverty ,distress and luxury ,and exploitation and helplessness becameso juxtaposed that the need of state intervention began to be felt much more than evenbefore.Then came the first world war, which confirmed the inevitability of state intervention ineconomic activities.In 1944,when the world war was still in progress, the department of planning anddevelopment was set up.A new industrial policy was announced by the government and the viceroy ,lordwavell,declared in 1945:”government has decided to take positive steps to encourageand promote industrialization of the country to the fullest extent possible.”Positive steps were taken such as industries like iron and steel, machine tools, heavychemicals and the like, which would lay the foundation for future economicdevelpoment,were set up.
REASONS FOR STATE INTERVENTION•Modern economy should be a planned economy. Government is the only agency which can plan and execute.•Our constitution binds the government to take an active part in economic activities.•What the people and the country need can only be understood and provided by government and not by privatization.•State participation is necessary to lay a strong base for the future development of industry and commerce.
REASONS CONT….……..• State intervention is necessary to eliminate poverty.• Finally, the failure of market invites governments intervention in an economy. Market fails because of three reasons: 1)Externalities 2)Public goods 3)Information problems
EXTERNALITIES-Externalities are costs or benefits that themarket transactor imposes on third parties without there consent.The most frequently used example of a negative externality ispollution, resulting from either the manufacturer or use of someproduct ,which impose costs on the individuals who neither producenor consume the product in question. PUBLIC GOODS- Pure public goods such as defense ,law andorder and environmental protection cannot be provided by privatesector alone, because everybody shares their benefits automatically,no one willing to pay them individually. But government canprovide them and impose their cost on tax payers.INFORMATION PROBLEM- Imperfect information on the part ofeither consumers or providers may make markets fail.
TYPES OF CONTROLNATURE APPROACH SPREAD EFFECT ON EFFECT COMPETITIONFORMAL COERCIVE DIRECT MAKE PROMOTIONAL COMPETITION WORKINFORMAL INDUCIVE INDIRECT SET STANDARDS REGULATORY FOR COMPETITION SUPPLEMENTARY COPMETITION
FORMAL AND INFORMAL CONTROLSFORMAL CONTROLS: Formal controls are usually emanating fromlegislation, for example: The FEMA,The Companies Act1956 andCompetition Act 2002.INFORMAL CONTROLS: Informal controls refer to the controls whichvarious groups impose upon themselves out of need and custom.COERCIVE AND INDUCIVE CONTROLSCOERCIVE CONTROLS : Coercive regulation require performance ofcertain actions or refraining from others in order to avoid penalties.For example: taxes must be paid or imprisonment may result.INDUCIVE CONTROLS :Inducive controls hold out a promise of reward forcompliance with desired line of action.For example: subsidies may be granted to stimulate certain activities.
DIRECT AND INDIRECT CONTROLSDIRECT CONTROLS: When government fixes prices of certainproducts or service it is a direct controlFor example :The administered price policy of the government of India isa direct control measure.INDIRECT CONTROL: The variation of corporate income tax toinfluence economic activity is an indirect control measure.PROMOTIONAL AND REGULATORY CONTROLSPROMOTIONAL CONTROLS: promotional measures are of a positivein nature, and includes such activities as expansion of public sectorestablishment and operation of development banks, encouragement tosmall scale units, provision of incentives etc.REGULATORY CONTROLS: Regulatory measures ensure orderlydevelopment of industries with least wastage of resources.
A GOOD CONTROL SYSTEM1)It must be democratic. This means that it must be exercised in theinterest of the governed as they see their interest.2)It should know what it wants.3)It must be efficient ,and at the same time it must not destroy theefficiency of the thing it is regulating .4)Control must be guided by experience or by wise experiment.5)It must have a wider vision and canvas to develop. It must look beyondthe immediate effect of leading people to expect it in the future.6)And lastly, the duties imposed must be simple enough to beunderstood. ….
DISADVANTAGES OF INTERVENTION1) One of the major areas in which the government intervenes is in the agriculturalsector of the economy. The government has three ways it can intervene and help itsproducers. These ways include price policies, direct payments, and input policies.Price policies have the largest effect on producers. Tariffs, quotas, and taxes are justa few examples of price policies. While these policies bring revenue into thegovernment, in the end they hurt consumers. Each of these policies raise the pricesof both imported and native goods. They are designed to help stabilize prices andgive the native producers a chance to compete with foreign goods.2) The use of taxes is one of the government‟s favourite ways to make its presenceknown in the economy. While this method seems blatantly obvious, many of theways the government uses the money collected by taxation is not. Some of themoney it takes is used to fund other programs designed to “protect” consumers andto “create” jobs. Because of the money taken away from the consumer throughtaxes, there is less money movement in the economy. This money movement is whatcreates jobs in the economy. “So, each person‟s money lost to taxes helps fail tocreate their part of a job”.
3) The use of tariffs is another way that government intervenes in the business sector.They help inefficient domestic producers by forcing consumers to pay unnecessarilyhigh prices for imported goods. The use of tariffs forces people to pay higher prices forcertain goods and thus resulting in less money the consumer has to spend on othergoods and services. This results in less employment in the industries that produce suchgoods and services.4) Small and big businesses are guilty of inviting government intervention in the freemarket. They continually ask the government to step in and “protect” them. Smallbusinesses ask for less regulation on small business and more regulation on bigbusiness. Fair-pricing laws are a way both large and small businesses keep thegovernment involved and hurt the consumer. These laws keep prices high and hurtefficient competitors.
WHAT SHOULD BE THE FORM OF STATE INTERVENTION?There are many ways in which intervention can take place – someexamples are given below:Government Legislation and RegulationParliament can pass laws that for example prohibit the sale of cigarettesto children, or ban smoking in the workplace.The economy operates with a huge and growing amount of regulation.The government appointed regulators who can impose price controls inmost of the main utilities such as telecommunications, electricity, gas andrail transport.
Intervention designed to close the information gapOften market failure results from consumers suffering from a lack ofinformation about the costs and benefits of the products available in themarket place. Government action can have a role in improvinginformation to help consumers and producers value the „true‟ cost and/orbenefit of a good or service. Examples might include:•Compulsory labelling on cigarette packages with health warnings toreduce smoking•Improved nutritional information on foods to counter the risks ofgrowing obesity•Anti speeding television advertising to reduce road accidents andadvertising campaigns to raise awareness of the risks of drink-driving•Advertising health screening programmes / information campaigns onthe dangers of addiction
Public goodsPure public goods such as defence ,law and order and environmentalprotection cannot be provided by private sector alone. becauseeverybody shares their benefits automatically, no one willing to paythem individually. But government can provide them and impose theircost on tax payers.ExternalitiesGood with positive externalities benefits, are worth more to societythan to any one consumer. Public health and education for example,reduce infection rates, raise productivity etc.markets tend toundersupply these goods ,and complementary funding or provision cantherefore improve efficiency,Simalarly markets ignore negativeexternalities ,such as industrial pollution ,regulation to curb or clean upthe activity causing the pollution can improve social welfare.
CONCLUSIONIt may be stated that the role of government in future must be redefinedbut not ended.The redefinition must be in the direction of improving quality ofintervention.John Maynard Keynes once said. the important thing for governmentis not to do things which individuals are doing already and to do themlittle better or a little worse :but to do things which at present are notdone at all.”What is not done till now is the improvement of the social sector:primary education, health ,housing, nutrition and the like.Let the government concentrate on these areas.