The regulatory role of government involves regulation of business and economic activities by directing the businesses with set of controls, with an aim to prevent concentration of power in few hands and localisation of business in few areas. The government also intervenes and settles disputes between management and workers. Government controls include general norms and standards as set by the government like ceilings on dividends, public utility profits, imposition of duties and other taxes. By regulating the business, the government aims at:
- Developing small scale industries and promote entrepreneurship.
- Prevent monopolistic activities.
- Promote interests of the weaker sections of society.
Government regulation can be direct or indirect. Direct controls are drastic and discretionary measures taken by the government which affect the firm/industry at micro-level. These measures are necessary to control the activities of business which are at times imperfect in terms, for example, industrial licensing system was introduced by the government based on the rationale that in free market resources are not fairly allocated and hence must be regulated.
On the other hand, indirect regulations are made at macro-level and can be in form of monetary incentives, duties, penalties, rewards, grants, bail etc which indirectly affect the interests of industry. For example, to promote export-oriented units government gives various grants, cheap funds, tax-relief, duty exemptions, duty-cuts etc.
In India government regulates the way the firms conduct their business through various Acts, like:
- Industrial Development and Regulation Act, 1951,
- Securities Contract (Regulation) Act, 1956,
- Foreign Exchange Regulation Act (FERA), 1973,
- Foreign Trade (Development and Regulation) Act , 1992,
- Monopolistic and Restrictive Trade Practices Act, 1969,
- Companies Act, 1956 to name a few.
The government has passed several legislations to safeguard the interests of workers like:
- Minimum Wages Act, 1948,
- Factories Act, 1948,
- Payment of Wages Act, 1936,
- Payment of Bonus Act, 1965,
- Equal Remuneration Act, 1976,
- Employees State Insurance Act, 1948,
- Employee Deposit Linked Insurance Scheme, 1976,
- Employees Provident Funds and Miscellaneous Act, 1952,
- Industrial Dispute Act, 1947,
- Employees Pension Scheme, 1995,
- The payment of Gratuity Act, 1972,
- The industrial Employment (Standing Orders) Act, 1946 etc.
However, there are two important practical aspects of government regulations, firstly, regulation should not be excessive and secondly, regulation should be done efficiently.
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