Tag: Corporate Social Responsibility

Governments exert influence over business organizations by establishing regulations, laws, and rules that dictate their operations. These regulations are enforced through specialized agencies tasked with monitoring compliance in various aspects of business activity. For example, agencies like the Environmental Protection Agency, the Central Bank, the Food and Drug Administration, the Labour Commission, and the Securities and Exchange Commission oversee specific areas and ensure adherence to relevant laws.

In addition to direct regulation, governments also employ indirect methods to shape business behavior. Tax codes, for instance, are used to incentivize certain practices or discourage others. For instance, companies may receive tax benefits for implementing environmentally friendly waste management systems in their facilities. These indirect approaches, while not compulsory, serve as potent tools for influencing organizational policies and behaviors.

Responsibilities of Business towards Government:

• Compliance with Laws and Regulations:

Businesses must adhere to all laws, regulations, and policies set forth by the government pertaining to their operations, such as taxation, labor laws, environmental regulations, and safety standards.

• Payment of Taxes:

Businesses are responsible for accurately reporting their income and paying taxes to the government in a timely manner. This includes income tax, sales tax, property tax, and other applicable taxes.

• Regulatory Compliance:

Businesses must ensure compliance with regulatory bodies and agencies relevant to their industry. This may involve obtaining licenses, permits, certifications, and adhering to industry-specific standards and guidelines.

• Transparency and Accountability:

Businesses should maintain transparency in their dealings with the government, including providing accurate financial reports, disclosures, and information as required by regulatory authorities.

• Cooperation with Government Initiatives:

Businesses may be called upon to collaborate with the government on various initiatives, such as economic development projects, infrastructure improvements, or public-private partnerships.

• Corporate Social Responsibility (CSR):

Businesses should contribute positively to society and the community in which they operate. This includes initiatives related to philanthropy, environmental sustainability, ethical business practices, and social welfare programs.

• Support for Public Policy:

Businesses may engage in advocacy efforts or provide input to government policymakers on issues relevant to their industry or the broader business environment.

Responsibilities of Government towards Business:

• Policy Formation and Regulation:

One of the primary responsibilities of government towards business is the formulation of policies and regulations that govern economic activities. These policies cover areas such as taxation, trade, labor, environment, and industry standards. Governments establish regulations to ensure fair competition, protect consumer rights, maintain market stability, and promote sustainable business practices.

• Legal Framework and Enforcement:

Governments create and enforce the legal framework within which businesses operate. This includes contract law, property rights, intellectual property protection, and corporate governance regulations. By providing a stable legal environment, governments help businesses mitigate risks and safeguard their investments.

• Infrastructure Development:

Governments invest in infrastructure development, including transportation networks, communication systems, energy facilities, and public utilities. A well-developed infrastructure is essential for businesses to operate efficiently, access markets, and distribute goods and services effectively. Infrastructure investments also stimulate economic activity and attract private investment.

• Access to Finance and Capital:

Governments facilitate access to finance and capital for businesses through various means, such as establishing banking regulations, providing loan guarantees, supporting venture capital initiatives, and promoting capital markets. Access to finance is critical for businesses to fund their operations, invest in expansion, and innovate.

• Support for Small and Medium Enterprises (SMEs):

Governments often provide targeted support and incentives to small and medium-sized enterprises (SMEs), recognizing their role as engines of economic growth and job creation. This support may include access to financing, technical assistance, business development services, and preferential treatment in government procurement.

• Trade and Investment Promotion:

Governments engage in trade and investment promotion activities to facilitate international business transactions and attract foreign investment. This includes negotiating trade agreements, reducing trade barriers, providing export incentives, and promoting foreign direct investment through investment promotion agencies.

• Research and Development (R&D) Support:

Governments invest in research and development initiatives to promote innovation and technological advancement. This may involve funding research institutions, providing tax incentives for R&D activities, and supporting collaborative R&D projects between businesses, universities, and government agencies.

• Workforce Development and Education:

Governments invest in education and workforce development programs to ensure a skilled and adaptable labor force that meets the needs of businesses. This includes funding education and vocational training programs, promoting lifelong learning initiatives, and facilitating partnerships between businesses and educational institutions.

• Consumer Protection and Product Safety:

Governments enact laws and regulations to protect consumers from unfair business practices, ensure product safety and quality standards, and provide mechanisms for redress in case of disputes. Consumer protection regulations build trust and confidence in the marketplace, benefiting businesses in the long run.

• Environmental and Social Responsibility:

Governments promote environmental sustainability and corporate social responsibility (CSR) by setting environmental standards, implementing pollution control measures, and encouraging businesses to adopt sustainable practices. Government regulations and incentives play a crucial role in driving businesses towards responsible and sustainable behavior.

The term ‘Monetary Policy’ is the Reserve Bank of India’s policy pertaining to the deployment of monetary resources under its control for the purpose of achieving GDP growth and lowering the inflation rate. The Reserve Bank of India Act 1934 empowers the RBI to make the monetary policy. We can say that the monetary policy stands for the control measures adopted by the Central Bank of a nation.

The Monetary Policy Committee is responsible for fixing the benchmark interest rate in India. The meetings of the Monetary Policy Committee are held at least 4 times a year (specifically, at least once every quarter) and it publishes its decisions after each such meeting.

Monetary Policy Committee (MPC) has been instituted by the Central Government of India under Section 45ZB of the RBI Act that was amended in 1934. MPC had its first meeting for two days on October 3 and October 4, 2016. The MPC is entrusted with the responsibility of deciding the different policy rates including MSF, Repo Rate, Reverse Repo Rate, and Liquidity Adjustment Facility. Monetary Policy Committee (MPC) has six members and the main objective of this body is to maintain the price stability and boosting up the growth rate of the country’s economy.

The committee comprises six members, three officials of the Reserve Bank of India and three external members nominated by the Government of India. They need to observe a “silent period” seven days before and after the rate decision for “utmost confidentiality”. The Governor of Reserve Bank of India is the chairperson ex officio of the committee. Decisions are taken by majority with the Governor having the casting vote in case of a tie. The current mandate of the committee is to maintain 4% annual inflation until 31 March 2021 with an upper tolerance of 6% and a lower tolerance of 2%.

The Reserve Bank of India Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC which will bring more transparency and accountability in fixing India’s Monetary Policy. The monetary policy are published after every meeting with each member explaining his opinions. The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive quarters.

Functions:

The MPC is entrusted with the responsibility of deciding the different policy rates including MSF, Repo Rate, Reverse Repo Rate, and Liquidity Adjustment Facility.

Composition of MPC:

The committee will have six members. Of the six members, the government will nominate three. No government official will be nominated to the MPC.

The other three members would be from the RBI with the governor being the ex-officio chairperson. Deputy governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank.

Objectives of the Monetary Policy:

The Chakravarty committee has emphasized that price stability, economic growth, equity, social justice, promoting and nurturing the new monetary and financial institutions have been important objectives of the monetary policy in India.

RBI tries always tries to reduce rate of inflation or keep it within a sustainable limit while on the other hand government of India focus to accelerate the GDP growth of the country.

Monetary Policy Objectives

As per the suggestions made by Chakravarty Committee, aspects such as price stability, economic growth, equity, social justice, and encouraging the growth of new financial enterprises are some crucial roles connected to the monetary policy of India.

• While the Government of India tries to accelerate the GDP growth rate of India, the RBI keeps trying to bring down the rate of inflation within a sustainable limit.
• In order to achieve its main objectives, the Monetary Policy Committee determines the ideal policy interest rate that will help achieve the inflation target in front of the country.

Fiscal Policy refers to government actions concerning taxation and spending to influence a nation’s economy. It aims to stabilize economic fluctuations, foster growth, and manage inflation. Through fiscal policy, governments adjust tax rates and spending levels to achieve macroeconomic goals like controlling unemployment, stimulating demand, or curbing inflation. Expansionary fiscal policies involve cutting taxes or increasing government spending to boost economic activity during downturns, while contractionary policies involve raising taxes or reducing spending to cool down an overheated economy. Fiscal policy operates alongside monetary policy (controlled by central banks) as a crucial tool for managing economic conditions and promoting stability and growth.

• Contra cyclical Budgetary Policy:

The policy of managed budgets implies changing expenditures with constant tax rates or changing tax rates with constant expenditures or a combination of the two. Budget management may be used to tackle depression and inflationary situations. Deliberate attempts are made under this policy to adjust revenues, expenditures and public debt to eliminate unemployment during depression and to achieve price stability in inflation.

Contra cyclical policy implies unbalanced budgets. An unbalanced budget during depression implies deficit spending. To make it more effective, the government may finance its deficits by borrowing from the banks. During periods of inflation, the policy is to have a budget surplus by curtailing government outlays.

The government may partly utilize the budget surplus to retire the outstanding government debt. The belief is that a surplus budget has deflationary effect on national income while a deficit budget tends to be expansionary. During depression when we need an increase in the flow of income, deficit budgets are desired. Conversely, in inflation when we need to check the overflow of income, surplus budgets are favoured.

However, following a contra cyclical budgetary policy is not an easy task. Predicting a recession or an inflationary boom is a difficult job. Adjusting the budget to the fast changing economic conditions is still more difficult especially when budget is a political decision to be taken after a good deal of delay and discussion. Therefore, emphasis has also to be laid on adjustment of individual items of the budget in order to make it more effective as a contra cyclical fiscal policy weapon.

• Public Expenditure:

Public expenditure can be used to stimulate production, income and employment. Government expenditure forms a highly significant part of the total expenditure in the economy. A reduction or expansion in it causes significant variations in the total income. It can be instrumental in adjusting consumption and investment to achieve full employment.

During inflation, the best policy is to reduce government expenditure in order to control inflation by giving up such schemes as are justified only during deflation. While expenditures are reduced, attempts are made to increase public revenues to generate a budget surplus.

Though it is true that there is a limit beyond which it may not be possible to reduce government spending (say on account of political, and military considerations), yet the government can vary its expenditure to some extent to reduce inflationary pressures.

It is during depression that public spending assumes greater importance. A distinction is made between the concepts of public spending during depression, that is, the concepts of pump priming and the ‘compensatory spending’. Pump priming means that a certain volume of public spending will help to revive the economy which will gradually reach satisfactory levels of employment and output. What this volume of spending may be is not specific. The idea is that, when private spending becomes deficient, then a small dose of public spending may prove to be a good starter.

Compensatory spending, on the other hand, means that public spending is undertaken with the clear view to compensating for the decline in private investment. The idea is that when private investment declines, public expenditure should expand and as long as private investment is below normal, public compensatory spending should go on. These expenditures will have multiplier effects of raising the level of income, output and employment.

The compensatory public expenditure may take the forms of relief expenditure, subsidies, social insurance payments, public works etc.

Essential requisites of compensatory public spending are:

(1) It must have the maximum possible leverage effects;

(2) It must not be mutually offsetting;

(3) It must create economically and socially desirable assets. But pump priming expenditures are of limited relevance in advanced economies where the deficiency of investment is not merely cyclical but also secular.

• Built-in-Stabilizers:

The fact that both taxes and transfer payments automatically vary with changes in income level is the basis of the belief in built-in-stabilizers. The term ‘stabilizers’ is used because they operate in a manner as counteracts fluctuations in economic activity. They are called ‘built-in’, because these come into play automatically as the income-level changes.

Taxes may act as a stabilizing influence upon the economic system if the tax structure is such that the amount of taxes collected by the government rises automatically with increases in national income, for in this case the effect will be to reduce the expansion of disposable income. From the stabilizing point of view, it means a slower rise in induced consumptions.

If the tax system is such that only the absolute amount of tax revenue but also the percentage of income paid in taxes increases with an increase in income, its stabilizing impact will be greater. That will happen if the rate structure of the tax system is progressive, that is, the effective rates rise as the level of income increases.

Similarly, the various forms of transfer payments also operate in a countercyclical fashion. Only such transfer payments have a stabilising effect as decrease in amount when income increases and increase when income declines.

For example, when employment is falling, payments to the unemployed automatically increase, thereby increasing the disposable income and vice-versa. It would be too much to presume that these stabilizers by themselves can smoothen fluctuations in income but most would agree that these are effective complements to discretionary actions aimed at stabilising the economy.

• Taxation Policy:

The structure of tax rates has to be varied in the context of conditions prevailing in an economy. Taxes determine the size of disposable income in the hands of general public and therefore, the quantum of inflationary and deflationary gaps. During depression tax policy has to be such as to encourage private consumption and investment; while during inflation, tax policy must curtail consumption and investment.

During depression, a general reduction in corporate and income taxation has been favoured by economists like Prof. A H. Hansen, M. Kalecki, and R.A. Musgrave on the ground that this leaves higher disposable incomes with people inducing higher consumption while low corporate taxation encourages ‘venture capital’, thereby promoting more investment.

But there are others who express grave doubts about the supposed stimulating effect of taxation reliefs on investment. It has been argued that even a heavy reduction in taxes does not alter an entrepreneur’s decisions.

Mr. Kalecki expressed the view that the policy of reducing taxes for increasing consumption and stimulating private investment is not a practical solution of the unemployment problem because income-tax cannot be changed so often. The government will have to evolve a long-term fiscal policy.

• Built-in-Flexibility:

One practical difficulty of public finance is of making the fiscal tools flexible enough for prompt and effective use. For example, the tempo of business activity may change suddenly manifesting itself in booms and slumps but fiscal tools cannot be geared all at once to meet such situations. To overcome such practical difficulties, built-in-flexibility has to be ensured in the fiscal tools.

A fiscal system has built-in-flexibility if a change in employment in the economy brings about a marked compensating change in the government’s revenues and expenditures. Unemployment insurance schemes have built-in-flexibility on both the spending and taxing sides.

As employment increases, the money spent on dolls is automatically reduced. Price support programmes, some kinds of excise duties, especially those levied on luxuries, also have built-in-flexibility to some extent.

However, built-in-flexibility may prove inadequate to cope with strong deflationary and inflationary pressures. Therefore, formula flexibility (or flexibility by way of executive discretion) is required.

A system of formula flexibility provides for specific changes in the tax structure and the volume of government spending as necessitated by certain clearly-recognised problems in business activity. It requires decision making on the part of the administration about the necessary changes which must be given effect to without delay.

Executive discretion implies the delegation to the chief executive the authority to order whatever changes he thinks fit in government spending and tax structure. These measures are required to supplement the built-in-flexibility of some schemes.

• Public Works:

Public expenditures meant for stabilisation are classified into two types:

(i) Expenditures on public works such as roads, schools, parks, buildings, airports, post-offices, hospitals, canals and other projects.

(ii) Transfer payments, such as interest on public debt, pensions, subsidies, relief payment, unemployment insurance, social security benefits etc.

The expenditure on building up of capital assets is called capital expenditure and transfer payments are called current expenditure. It has been recommended that governments should keep ready with them a list of public works which may be taken up when the economy shows signs of recession.

Such a programme of public investment will tone up the general morale of businessmen for investing. The primary employment in public works programmes will induce secondary and tertiary employment. As soon as the economy is put on the expansion track, such programmes may be slackened and may be given up completely so that at any time public investment does not compete with private investment.

Public works programmes suffer from a few limitations and practical difficulties. It is unrealistic to expect that public works will fill all the investment gaps of the private sector of the economy. To be genuinely effective in promoting investment during depression, public works require proper timing, proper financing and general approval of business and investing opportunities.

• Public Debt:

A sound programme of public borrowing and debt repayment is a potent weapon to fight inflation and deflation. Government borrowing can be in the form of borrowing from non-bank financial intermediaries, borrowing from commercial banking system, drawings from the central bank or printing of new money.

Borrowing from the public through the sale of bonds and securities which curtails consumption and private investment is anti-inflationary in effect. Borrowing from the banking system is effective during depression if banks have got excess cash reserves.

Thus, if unused cash lying with banks can be lent to the government, it will cause a net addition to the national income stream. Withdrawals of balances from treasury are inflationary in nature but these balances are likely to be so small as to be of little importance in the economic system. However, the printing of new money is highly inflationary.

During war, borrowing becomes necessary when inflationary pressures become strong. In a period of inflation, therefore, public debt has to be managed in such a way as reduces the money supply in the economy and curtails credit. The government will do well to retire debt through a budget surplus.

During depression, on the opposite, taxes are reduced and public expenditures are increased. Deficits are financed by borrowings from the public, commercial banks or the central bank of the country. The public borrowing of otherwise idle funds will have no adverse effect on consumption or on investment. When budgets are deficit, it is very difficult to retire debts.

Actually, it pays to accumulate debt during depression and redeem it during a period of expansion. Along with this, the monetary authority (the central bank) must aim at a low bank rate to keep the burden of debt low. Thus, ‘public debt becomes an important tool of anti-cyclical policy.

Economists believe that very high rates of inflation and hyperinflation are harmful, and are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long-sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity, allowing the central bank more leeway in carrying out monetary policy, encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation.

Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or aver­age of prices. In other words, inflation is a state of rising prices, but not high prices.

It is not high prices but rising price level that con­stitute inflation. It constitutes, thus, an over­all increase in price level. It can, thus, be viewed as the devaluing of the worth of money. In other words, inflation reduces the purchasing power of money. A unit of money now buys less. Inflation can also be seen as a recurring phenomenon.

While measuring inflation, we take into ac­count a large number of goods and services used by the people of a country and then cal­culate average increase in the prices of those goods and services over a period of time. A small rise in prices or a sudden rise in prices is not inflation since they may reflect the short-term workings of the market.

It is to be pointed out here that inflation is a state of disequilib­rium when there occurs a sustained rise in price level. It is inflation if the prices of most goods go up. Such rate of increases in prices may be both slow and rapid. However, it is difficult to detect whether there is an upward trend in prices and whether this trend is sus­tained. That is why inflation is difficult to define in an unambiguous sense.

Types of Inflation:

On the Basis of Causes:

• Currency inflation:

This type of infla­tion is caused by the printing of cur­rency notes.

• Credit inflation:

Being profit-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs. Such credit expansion leads to a rise in price level.

• Deficit-induced inflation:

The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget deficit, any price rise may the be called the deficit-induced inflation.

• Demand-pull inflation:

An increase in aggregate demand over the available output leads to a rise in the price level. Such inflation is called demand-pull in­flation (henceforth DPI). But why does aggregate demand rise? Classical economists attribute this rise in aggre­gate demand to money supply. If the supply of money in an economy ex­ceeds the available goods and services, DPI appears. It has been described by Coulborn as a situation of “too much money chasing too few goods.”

Keynesians hold a different argu­ment. They argue that there can be an autonomous increase in aggregate de­mand or spending, such as a rise in con­sumption demand or investment or government spending or a tax cut or a net increase in exports (i.e., C + I + G + X – M) with no increase in money sup­ply. This would prompt upward adjust­ment in price. Thus, DPI is caused by monetary factors (classical adjustment) and non-monetary factors (Keynesian argument).

• Cost-push inflation:

Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation (henceforth CPI). Cost of pro­duction may rise due to an increase in the prices of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not completely market-determinded. Higher wage means high cost of production. Prices of commodities are thereby increased.

A wage-price spiral comes into opera­tion. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Thus, we have two im­portant variants of CPI wage-push in­flation and profit-push inflation.

On the Basis of Speed or Intensity:

• Creeping or Mild Inflation:

If the speed of upward thrust in prices is slow but small then we have creeping inflation. What speed of annual price rise is a creeping one has not been stated by the economists? To some, a creeping or mild inflation is one when annual price rise varies between 2 p.c. and 3 p.c. If a rate of price rise is kept at this level, it is con­sidered to be helpful for economic development. Others argue that if annual price rise goes slightly beyond 3 p.c. mark, still then it is considered to be of no danger.

• Walking Inflation:

If the rate of annual price increase lies between 3 p.c. and 4 p.c., then we have a situation of walking inflation. When mild inflation is allowed to fan out, walking inflation appears. These two types of inflation may be described as ‘moderate inflation’.

Often, one-digit inflation rate is called ‘moder­ate inflation’ which is not only predict­able, but also keep people’s faith on the monetary system of the country. Peoples’ confidence get lost once moderately maintained rate of inflation goes out of control and the economy is then caught with the galloping inflation.

• Galloping and Hyperinflation:

Walking inflation may be converted into running inflation. Running inflation is danger­ous. If it is not controlled, it may ulti­mately be converted to galloping or hyperinflation. It is an extreme form of inflation when an economy gets shatter­ed.” Inflation in the double or triple digit range of 20, 100 or 200 p.c. a year is labelled “galloping inflation”.

• Government’s Reaction to Inflation:

In­flationary situation may be open or suppressed. Because of anti-infla­tionary policies pursued by the govern­ment, inflation may not be an embar­rassing one. For instance, increase in income leads to an increase in con­sumption spending which pulls the price level up.

If the consumption spending is countered by the govern­ment via price control and rationing device, the inflationary situation may be called a suppressed one. Once the government curbs are lifted, the sup­pressed inflation becomes open infla­tion. Open inflation may then result in hyperinflation.

Main Causes of inflation

• Inflation can arise from internal and external events
• Some inflationary pressures direct from the domestic economy, for example the decisions of utility businesses providing electricity or gas or water on their tariffs for the year ahead, or the pricing strategies of the food retailers based on the strength of demand and competitive pressure in their markets.
• A rise in the rate of VAT would also be a cause of increased domestic inflation in the short term because it increases a firm’s production costs.
• Inflation can also come from external sources, for example a sustained rise in the price of crude oil or other imported commodities, foodstuffs and beverages.
• Fluctuations in the exchange rate can also affect inflation, for example a fall in the value of the pound against other currencies might cause higher import prices for items such as foodstuffs from Western Europe or technology supplies from the United States, which feeds through directly or indirectly into the consumer price index.