Study Notes on Role of Political environment in business for UGC NET

By BYJU'S Exam Prep

Updated on: September 13th, 2023


Political Environment

  • Political Environment plays a very crucial role in the regulation of business.
  • The political environment majorly affects the way in which a business operates. But many a time it becomes an obstacle in the working of the businesses.
  • The political environment with respect to Business Environment includes all the rules and regulations, laws and the role of the government in the day to day functioning of the organisations.

Political factors that affect Business Environment:

1. Political Stability:

  • The political scenario of a country greatly impacts the operations of a business.
  • If there is a lack of political stability, there are always disruptions, and uneven working patterns are observed.
  • The government keeps on imposing restrictions in different sectors which in turn affects the business on a large scale.

2. Taxation and Economic Policies:

  • The tax regime of a country directly impacts the operations of a business. The tax rates vary from business to business and activity to activity. Therefore, the role of government as a regulator here becomes very vital.
  • The economic policies of the government like monetary policy controls the money supply in an economy which in turn affects the working capital requirements of the business on a day to day basis.
  • Various components like fiscal policy, monetary policy, tax laws, rules and notifications are used by the government to affect the business activities directly and indirectly.

3. Foreign Trade Regulations:

  • The expansionary policies of the management of the companies enable the firm to operate on a global scale where the role of the government comes into the picture.
  • Government sets various rules and regulations (EXIM Policy, Forex Policy, etc.) in order to enable the firm to function in the international market and so as to keep up the competitiveness in the global market.
  • The Government of India follows the model code of conduct based on UNCITRAL MODEL in order to resolve the disputes that occur while operating businesses globally.

How the government affects the business environment?

There are a huge variety of instruments available with the government with which it regulates the Business Environment. Some of which are :

  • Many a time, the government itself starts producing economic goods like electricity and public transport services in order to keep control and check on the practices of the private players.
  • The government uses its taxation tools and subsidies in order to promote the production process. It provides subsidies and tax concessions for production of those goods that promote social welfare, and higher taxes may be imposed on goods like alcohol and cigarettes.
  • Government frames and keeps on updating the labour laws of the country so as to keep a check on the injustices done to the working class.
  • The Government of India has framed many regulations that keep strict vigilance on the activities like money laundering and investment of the companies in Tax Haven

Thus, the role of government and its policies play a very decisive role in the business environment of an economy. The policies of the government are either promotive or restrictive. For example,

  • In the case of promotive policies, the government brings out various schemes to promote small businesses and enterprises. It lowers down the interest on loans taken by small farmers, so as to boost the agriculture sector and small enterprises.
  • In case of restrictive policies, the government imposes a ban on the practices of various players in the market, which may be detrimental to the society as a whole like a ban on plastic bags, etc.

Thank you


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