Political institutions

Political institutions are organizations which create, enforce, and apply laws;
that mediate conflict, make (governmental) policy on the economy and social
systems. Examples of such political institutions include political parties, trade
unions, and the (legal) courts. The term 'Political Institutions' may also refer
to the recognized structure of rules and principles within which the above
organizations operate, including such concepts as the right to vote,
responsible government, and accountability

The influence of political environment on business is enormous. The political

system prevailing in a country decides, promotes, fosters, encourages,
shelters, directs and controls the business activities of that country.

A political system which is stable, honest, efficient and dynamic and which
ensures political participation of the people and assures personal security to
the citizens, is a primary factor for economic development.

John Kenneth Galbraith viewed there is today, no country with a stable

and honest Government that does not have or has not had a
reasonably satisfactory state of economic progress

Basis for political institutions

The early emphasis was not on capital investment but on political and then
on cultural development which is the basis for political institutions.

Two basic political philosophies are in existence all over the world-

Democracy
Totalitarianism

Democracy
Democracy refers to a political arrangement in which supreme power is
vested in the people. Democracy may manifest itself in any of the two
fundamental manners. The right to equality before the law, often phrased as
equal protection of the law, is fundamental to any just and democratic
society. Rich or poor, majority or minority, political ally of the State or its
opponentall are entitled to equal protection before the law.
In a democratic State, no one is above the law. Democracy is for the
people, by the people and of the people, said Abraham Lincoln.

Totalitarianism
During the first and second world wars, authoritarian governments began to
appear in most mature economies. Totalitarianism was seen till first and
second world war. A totalitarian government is a country
run with only one political party, like China, or North Korea. The government
can prevent people from doing anything including leaving the country.

Totalitarianism can also mean that this country might be ruled by one
person.

From the word totalitarianism, it is obvious that this form of system

wants to have total control over their people. Unlike democratic rule,
under totalitarianism, people have no right to speak, form political
parties, or even choose their religion. Totalitarianism restricts what
people think and their wants.

There can only be one political party ruling the country

Legislature
Of the three, the Legislature is the most powerful political institution vested
with such powers as policy making, law-making, budget approving, executive
control and acting as a mirror of public opinion

POWER BRANCHES

POLITICAL POWER

LEGISLATIVE POWER JUDICIARY

POWER
(to create new laws) EXECUTIVE POWER (to interpret
laws

(to implement laws) and judge who dont

respect them)

Executive or Government
The executive is the primary and prominent organ of the government in
terms of its importance. It has been playing its role much before attempts
were made to organise the branches of government. Executive has been
the manifestation of government. It has been performing its functions of
executing the laws made by the legislature and also implementing the
policies of the state. The efficiency of the government depends on the
effective implementation of its policies by the executive

judiciary:
The third political institution is judiciary. Judiciary determines the manner
in which thework of the executive has been fulfilled. The Judiciary of India
is an independent body and is separate from the Executive and
Legislative bodies of the Indian Government. The judicial system of India
is stratified into various levels. At the apex is the Supreme Court, which is
followed by High Courts at the state level, District Courts at the district
level and Lok Adalats at the Village and Panchayat Level. The judiciary of
India takes care of maintenance of law and order in the country along with
solving problems related to civil and criminal offences

Role of Government in business

Government performs many different roles in an economy. Conventionally, it was presumed
that role of government is to sustain the law and order, protect a country from external
attacks, provide social security, take care of public utilities and maintain peace within a
nation. Government has command over all resources in an economy. Over time these roles
have taken a concrete shape to bring about development and growth of an economy as well
business. The vision has been to improve international competitiveness, rapid modernization
and sustainable growth. For this purpose the government of India decided to participate
actively in the regulation, promotion and planning of business activities. These roles are
essential to provide the platform to excel the competiveness of businesses domestically, to
ensure the balanced regional growth, constitutional framework, infrastructural improvement
and public utilities. The following roles are played by the government in business.
a. Regulatory Role

b. Entrepreneurial Role

c. Promotional Role

d. Planning Role

3.1. Regulatory Role:

Generally, the government attempts to measure and control the limits of Private Sector.
Listed below are the major objectives from the governments end to regulate the business
processing/ functioning:
In regulatory role, the government directs businesses for their actions. This is done by
standardizing the code of conduct, norms and regulations in domestic environment.
Government of India has the foremost objective of social welfare, hence they control the
business and economic activities in such a way that it benefits the society and buyers.
Regulating it involves ceiling the prices, rationing the goods, imposing taxation on excess
profits, allocation of foreign exchange, adding restrictions on foreign trade, industrial
licensing etc. It is mainly done by two ways:

Discretionary Measures

Non Discretionary Measures

Discretionary measures involve the direct measures by the discretion of administrative

authority. These include fixation of prices of commodities, quantitative restrictions on export
or import, rationing on supplies of goods, distribution of scare recourses for optimum
utilization of resources, licensing the goods like hazardous chemicals, defense and railways.
However, the current government of India has liberalized the restrictions on railways and
defense with 100 percent and 49 percent FDI respectively. In direct control government
majorly regulates the balance regional growth with optimum utilization of resources in a
nation as a whole. These discretionary measures are performed at micro level i.e. at the
firm level or industry level. While regulating government makes sure that interest of all
sections should be maintained. For example, no conflict among the management and labor
and labor laws should be preserved.

Non Discretionary Measures include the control without any administrative discretion of an
authority. These measures are exercised at macro level through fiscal and monetary
policies. For examples imposing different taxes on different products at different places,
amending customs tariffs, regulating the bank interest by changing repo rates or reverse
repo rates, regulating money supply and credit creation and granting subsidies to different
industries. Government of India is sponsoring and providing subsidies to solar and power
projects for sustainable development. Hence, non discretionary measures are achieved by
passing different laws. In India, the regulatory role is exercised in following manner:-

I. The Companies Act, 2013: It is an act to consolidate and amend the law relating to
companies. This act is related to companies in force before the Indian Companies Act, 1866;
the Indian Companies Act, 1882; the Indian Companies Act, 1913; the Registration of
Transferred Companies Ordinance, 1942 and the Companies Act, 1956 for better functioning
of business in legalized form.

II. The Banking Laws (Amendments) Act, 2012: This is an act to further amend the Banking
Regulation Act, 1949, the Banking Companies (Acquisitions and Transfer of Undertakings)
Act, 1970, the Banking Companies (Acquisitions and Transfer of Undertakings) Act, 1980
and to make consequential amendments in certain other enactments for better functioning
of banking sector to help businesses and other economic activities.

III. The Securities and Exchange Board of India (Amendment) Act, 2013: This is an Act
which further amends the Securities and Exchange Board of India Act, 1992 for directing the
functioning of SEBI.

IV. The National Food Security Act, 2013: This act provides for food and nutritional security
in human life cycle, by ensuring access to adequate quantity and quality of food at
affordable prices so that people can live a life with dignity. It is also concerned with matters
connected therewith or incidental thereto.

V. Consumer Protection Act, 1986: This is an act to protect the interest of consumers in
India by making provision for the establishment of consumer councils and other such
authorities for the settlement of consumers' disputes and for matters connected therewith.

VI. Industrial Policy: In India, Industrial Policies have been announced in 1948. 1956, 1973,
1977. 1980, 1990, and 1991. These the policies aimed at development of Industrial
Structure by Liberalization, Privation and Globalization and encouraging private sector to
start their venture in Indian economy.

VII. MRTP Act, 1969: The Monopolistic and Restrictive Trade Practices Act, 1969, was
enacted to make sure that the operation of the economic system does not result in
concentration of economic power in hands of few, to restrict the monopolies, and to forbid
monopolistic and restrictive trade practices. This Act was amended in 1982, 1984, 1985 and
1991.

VIII. Foreign Exchange Regulation Act, 1973: Foreign Exchange Management Act, 1973, as
amended by the Foreign Exchange Regulation (Amendment) Act, 1993. It is an Act to
consolidate and amend laws related to certain payments, dealings in foreign exchange and
securities, transactions indirectly affecting foreign exchange and the import and export of
currency, for the conservation of the foreign exchange resources of the country and the
proper utilization thereof in the interests of the economic development of the country. (As
Per RBI)

IX. Commercial Law: This act has been made with a view to order operational aspects of
trade and business. It includes acts like India Contract Act, Sales of Goods Act, Negotiable
Instruments Act, Arbitration Act, etc.

The regulation and control discussed above is aimed to encourage the trade and industrial
growth by monitoring the actions of private, public, joint and cooperative sector and limiting
them if required. It helps the economy with increased competitiveness at both the levels
nationally and internationally.

3.2. 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. For example in the steel sector, minerals, chemical
industry, engineering, irrigation, power and heavy industry government of India established
its business. Similarly, projects like Delhi Rail Metro Corporation Limited is initiated by Delhi
Government under company act, 1956 with GOI and GNCTD. After the DMRC project,
Mumbai Metro One Private Limited (MMOPL) project was initiated by Reliance Infra with
69% equity, Mumbai Metropolitan Region Development Authority with 26 % and Veolia
Transportation RATP Asia, France with 5% equity. Entrepreneurial role of government is
encouraged owing to the following reasons:

For social welfare

For balanced regional growth

For capital intensive growth

For providing consultancy to private sector

3.3. Promotional Role:

In promotion role, government does not regulate or control the activities of business,
however, supports the business activities by promoting the better environment, advanced
infrastructure, offering various incentives to endorse economic activities in the business.
This role includes arrangement of proper roads, transportation, communication, power
supply, financial institute, banking, capital markets for coordination among various sectors.

Figure 5: Functions under Promotional Role

The following are major functions performed in promotional role:-

To provide basic infrastructure for smooth functioning of business activities

To have coordination among public, private, joint and cooperative sectors

To have balance growth among all section Thus, the promotional role of Indian
government includes fiscal and monetary policies for development and growth of the
economy.

Figure : Promotional Role

Fiscal Policy:

The adjective fiscal' is derived from the noun "fisc" (from Latin fiscus) where fisc means
state Treasury. The word fiscal, therefore, refers to all matter pertaining to state treasury;
particularly it is a source of revenues and patterns of expenditures. Fiscal policy influences
consumption & investment expenditures and accordingly the income, output & employment
in the country. Fiscal policy deals with Government's power to tax & spend for the purpose
of achieving certain declared policy objectives which generally relate to prices, output &
employment. These policies of a country are directed towards four objectives:

Figure 7: Objectives of Fiscal Policy

These are achieved by two ways namely by direct tax and indirect tax. A Direct tax is a kind
of charge, which is imposed directly on the taxpayer and paid directly to the government by
the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be
shifted by the taxpayer to someone else. It includes Income Tax, Corporate Tax and
Property Tax. An indirect tax is a tax collected by an intermediary (such as a retail store)
from the person who bears the ultimate economic burden of the tax (such as the customer).
An indirect tax is one that can be shifted by the taxpayer to someone else. An indirect tax
may increase the price of a good so that consumers are actually paying the tax by paying
more for the products. It includes Customs Duty, Central Excise Duty, VAT and CST. Despite
the fact that, fiscal policy is also carries limitations i.e. the tax structure in developing
economy is narrow & rigid and lack of sound & reliable database in our country.

Monetary Policy:

Monetary policy is the deliberate exercise of the monetary authority's power to induce
expansions or contractions in the money supply with the objective of influencing investment,
income and employment and maintaining price stability in general within the broad
framework of economic policy objectives of government. There are two major instrument in
monetary policy namely Quantitative and Qualitative instrument. Quantitative instruments
are called 'quantitative' because they affect the total volume (or quantity) of money supply
and credit in the country. It takes account of Variations in reserve requirements, changes in
Bank rate and open market operations. Qualitative Instruments are also known as selective
instruments. Selective instruments are called selective because they are aimed at the
movement of credit towards selective sectors of the economy. It consists of Margin
requirements, Moral suasion, Ceilings on credit and Discriminatory rates of interests.

3.4. Planning Role:

Government of India acts as a planner to secure optimum utilization of resources. In 1950,

Planning Commission was set up by Government of India with an objective for mobilization
of resources and to formulate the plans for the development of the nation. The following
motives of planning commissions are:-

To increase the productivity and high GDP

To achieve high per capita income and national income

To generate employment

To reduce inequality among different sections

To achieve the laid objectives

To attain social justice

Figure 8: Types of Planning

Basically, there are two types of planning i.e. centralized and decentralized planning.

In Centralized planning, plans come from top (central level) and passed to state level. In
Decentralized planning, the plans are initiated from the bottom i.e. from individual unit say
panchayat level, sectoral level, regional level and national level. Moreover, there are short
term planning and long term planning like five years plan laid down by government of India.

MRTP ACT
The Monopolies And Restrictive Trade Practices Act, 1969 is an
important piece of economic legislation designed to ensure that the
operation of the economic system does not result in the concentration of
economic power to the common detriment.

The act came into force from 1st June, 1970, and has been amended in
1991

OBJECTIVES

Before Amendment in1991:-

Regulation of monopolies and prevention of concentration of economic

power.

Prohibit monopolistic, restrictive and unfair trade practices.

After Amendment in 1991:-

Controlling monopolistic trade practices.

Regulating restrictive and unfair trade practices.

MONOPOLISTIC TRADE PRACTICES

It means in order to maximize profit and to increase market power, certain

business firms unreasonably charge high prices to prevent competition in the
production & distribution of goods by adopting unfair trade practices.

It is a trade practice which represents the abuse of the market power by

charging unreasonably high prices.

REGULATION OF MTPs

Regulation of production and fixing the term of sale.

Prohibiting any action that restricts competition.
Fixing standards for goods produced.

RESTRICTIVE TRADE PRACTICES

A trade practice which restricts or reduces competition may be termed as
Restrictive Trade Practices and it harm the consumer interest.
Because of their adverse effect on the consumer and public interest, they
are sought to be regulated in almost every country of the world.

REGULATION OF RTPs
The practice shall not be repeated.
 The agreement shall be void and shall stand modified in such a
manner as may be specified in the order.

UNFAIR TRADE PRACTICES

Unfair trade practice means a trade practice which, for the purpose of
promoting the sale, use or supply of any goods or for the provision of any
service, adopts any unfair or deceptive practice.

REGULATION OF UTPs
The practice shall not be repeated.
Any agreement relating to such an UTP shall be void or shall stand
modified in such a manner as may be directed by the commission.

The MRTP Act, besides adversely affecting economic growth, blunted Indian
companies ability to grow, consolidate and improve competitiveness. This
has had a very dampening effect on their global competitiveness.

UNIT-3
Corporate Governance

Corporate Governance is the application of best management

practices, compliance of law in true letter and spirit and adherence to
ethical standards for effective management and distribution of wealth
and discharge of social responsibility for sustainable development of all
stakeholders.
Conduct of business in accordance with shareholders desires
(maximising wealth) while confirming to the basic rules of the society
embodied in the Law and Local Customs
Relationships among various participants in determining the direction
and performance of a corporation.
Effective management of relationships among
Shareholders
Managers
Board of directors
employees
Customers
Creditors
Suppliers
community
Why Corporate Governance?
Better access to external finance
 Lower costs of capital interest rates on loans
Improved company performance sustainability
Higher firm valuation and share performance
Reduced risk of corporate crisis and scandals

Principles of Corporate Governance

Sustainable development of all stake holders- to ensure growth
of all individuals associated with or effected by the enterprise on
sustainable basis
Effective management and distribution of wealth to ensue that
enterprise creates maximum wealth and judiciously uses the wealth so
created for providing maximum benefits to all stake holders and
enhancing its wealth creation capabilities to maintain sustainability
Discharge of social responsibility- to ensure that enterprise is
acceptable to the society in which it is functioning
Application of best management practices- to ensure excellence
in functioning of enterprise and optimum creation of wealth on
sustainable basis
Compliance of law in letter & spirit- to ensure value enhancement
for all stakeholders guaranteed by the law for maintaining socio-
economic balance
Adherence to ethical standards- to ensure integrity, transparency,
independence and accountability in dealings with all stakeholders

Four Pillars of Corporate Governance

Accountability
Fairness
Transparency
Independence

Accountability
Ensure that management is accountable to the Board
Ensure that the Board is accountable to shareholders

Fairness
Protect Shareholders rights
Treat all shareholders including minorities, equitably
Provide effective redress for violations

Transparency
Ensure timely, accurate disclosure on all material matters, including
the financial situation, performance, ownership and corporate governance
Independence
Procedures and structures are in place so as to minimise, or avoid
completely conflicts of interest
Independent Directors and Advisers i.e. free from the influence of
others

Corporate governance in India

The Indian corporate scenario was more or less stagnant till the early
90s.
The position and goals of the Indian corporate sector has changed a lot
after the liberalisation of 90s.
Indias economic reform programme made a steady progress in 1994.
India with its 20 million shareholders, is one of the largest emerging
markets in terms of the market capitalization.
Social Responsibility of Business
Social responsibility is an ethical or ideological theory that an entity
whether it is a government, corporation, organization or individual has a
responsibility to society.
While primarily associated with business and governmental practices,
activist groups and local communities can also be associated with social
responsibility, not only business or governmental entities.
Corporate social responsibility (CSR, also called corporate responsibility,
corporate citizenship, and responsible business) is a concept whereby
organizations consider the interests of society by taking responsibility for the
impact of their activities on customers, suppliers, employees, shareholders,
communities and other stakeholders, as well as the environment
Social responsibility is voluntary; it is about going above and beyond
what is called for by the law (legal responsibility).
Social responsibility means eliminating corrupt, irresponsible or unethical
behavior that might bring harm to the community, its people, or the
environment before the behavior happens.
The shareholders, suppliers of resources, the consumers, the local
community and society at large are affected by the way an enterprise
functions. Thus a business enterprise should be able to strike a balance
between these divergent groups.

Business Ethics
Ethics is a set of rules that define right and wrong conduct.
Business ethics can be defined as written and unwritten codes of principles
and values that govern decisions and actions within a company. In the
business world, the organizations culture sets standards for determining the
difference between good and bad decision making and behavior.

The characteristics or features of business ethics are:-

1.
Code of conduct : Business ethics is a code of conduct. It tells what
to do and what not to do for the welfare of the society. All businessmen
must follow this code of conduct.
2. Based on moral and social values : Business ethics is based on
moral and social values. It contains moral and social principles (rules)
for doing business. This includes self-control, consumer protection and
welfare, service to society, fair treatment to social groups, not to
exploit others, etc.
3. Gives protection to social groups : Business ethics give protection
to different social groups such as consumers, employees, small
businessmen, government, shareholders, creditors, etc.
4. Provides basic framework : Business ethics provide a basic
framework for doing business. It gives the social cultural, economic,
legal and other limits of business. Business must be conducted within
these limits.
5. Voluntary : Business ethics must be voluntary. The businessmen must
accept business ethics on their own. Business ethics must be like self-
discipline. It must not be enforced by law.
6. Requires education and guidance : Businessmen must be given
proper education and guidance before introducing business ethics. The
businessmen must be motivated to use business ethics. They must be
informed about the advantages of using business ethics. Trade
Associations and Chambers of Commerce must also play an active role
in this matter.
7. Relative Term : Business ethics is a relative term. That is, it changes
from one business to another. It also changes from one country to
another. What is considered as good in one country may be taboo in
another country.
8. New concept : Business ethics is a newer concept. It is strictly
followed only in developed countries. It is not followed properly in poor
and developing countries.

Competitive Environment
A competitive environment is the dynamic external system in which a
business competes and functions. The more sellers of a similar product or
service, the more competitive the environment in which you compete. Look
at fast food restaurants - there are so many to choose from; the competition
is high

Porters Five Forces Model of Competition

Michael Porter (Harvard Business School Management Researcher) designed various vital frameworks
for developing an organizations strategy. One of the most renowned among managers making strategic
decisions is the five competitive forces model that determines industry structure. According to Porter, the
nature of competition in any industry is personified in the following five forces:

i. Threat of new potential entrants

ii. Threat of substitute product/services

iii. Bargaining power of suppliers

iv. Bargaining power of buyers

v. Rivalry among current competitors

The five forces mentioned above are very significant from point of view of strategy
formulation. The potential of these forces differs from industry to industry. These forces
jointly determine the profitability of industry because they shape the prices which can be
charged, the costs which can be borne, and the investment required to compete in the
industry. Before making strategic decisions, the managers should use the five forces
framework to determine the competitive structure of industry.
Lets discuss the five factors of Porters model in detail:
1. Risk of entry by potential competitors: Potential competitors refer to the firms
which are not currently competing in the industry but have the potential to do so if
given a choice. Entry of new players increases the industry capacity, begins a
competition for market share and lowers the current costs. The threat of entry by
potential competitors is partially a function of extent of barriers to entry. The
various barriers to entry are-
Economies of scale

Brand loyalty

Government Regulation

Customer Switching Costs

Absolute Cost Advantage

Ease in distribution

Strong Capital base

2. Rivalry among current competitors: Rivalry refers to the competitive struggle
for market share between firms in an industry. Extreme rivalry among established
firms poses a strong threat to profitability. The strength of rivalry among
established firms within an industry is a function of following factors:
Extent of exit barriers

Amount of fixed cost

Competitive structure of industry

Presence of global customers

Absence of switching costs

Growth Rate of industry

Demand conditions
3. Bargaining Power of Buyers: Buyers refer to the customers who finally
consume the product or the firms who distribute the industrys product to the final
consumers. Bargaining power of buyers refer to the potential of buyers to bargain
 down the prices charged by the firms in the industry or to increase the firms cost
in the industry by demanding better quality and service of product. Strong buyers
can extract profits out of an industry by lowering the prices and increasing the
costs. They purchase in large quantities. They have full information about the
product and the market. They emphasize upon quality products. They pose
credible threat of backward integration. In this way, they are regarded as a threat.
4. Bargaining Power of Suppliers: Suppliers refer to the firms that provide inputs
to the industry. Bargaining power of the suppliers refer to the potential of the
suppliers to increase the prices of inputs( labour, raw materials, services, etc) or
the costs of industry in other ways. Strong suppliers can extract profits out of an
industry by increasing costs of firms in the industry. Suppliers products have a
few substitutes. Strong suppliers products are unique. They have high switching
cost. Their product is an important input to buyers product. They pose credible
threat of forward integration. Buyers are not significant to strong suppliers. In this
way, they are regarded as a threat.
5. Threat of Substitute products: Substitute products refer to the products having
ability of satisfying customers needs effectively. Substitutes pose a ceiling (upper
limit) on the potential returns of an industry by putting a setting a limit on the price
that firms can charge for their product in an industry. Lesser the number of close
substitutes a product has, greater is the opportunity for the firms in industry to
raise their product prices and earn greater profits (other things being equal).
The power of Porters five forces varies from industry to industry. Whatever be the
industry, these five forces influence the profitability as they affect the prices, the costs,
and the capital investment essential for survival and competition in industry. This five
forces model also help in making strategic decisions as it is used by the managers to
determine industrys competitive structure.