Distinguish between Direct and Indirect control.
Direct and Indirect Controls:
These controls are also called discretionary controls. Such controls are said to be measures that are applied at the discretion of government authorities. In order to promote, restrict or limit the activities of private organizations or categories, direct control may be used.
In these controls, discretion’s to be made by concerned government officials are involved. For example control over distribution of commodities by rationing, grant of subsidies for industrial growth, import and export control with the help of direct prohibition or quota restriction, incentives for export promotion such as credit facilities, subsidy etc, fixing maximum or minimum prices for particular commodities, control over issue of shares, debentures by companies in order to raise capital and licensing of new enterprises of expansion of existing large enterprises.
Private business firms are affected by these controls in an indirect manner. Such controls are also called non-discretionary controls. No discretionary power lies in the hands of government authorities with which they can apply the measures to particular firms and others in the same category. For example:
Changes in interest rates on bank loans: Changes can be made in the monetary policy by the government with a view to control the prices. Banks can reduce the interest rates on loans in order to induce business firms to borrow and expand their business activities. In the same way, banks can even increase the interest rates on loans and raise the credit with a view to prevent excessive borrowing and expenditure by business enterprises and to reduce new investment by business firms.
Changes in tax rates: Tax rates can either be reduced in order to encourage the business or increased with a view to discourage the business.
Changes in import and export duties: In order to increase the prices of certain goods, import duties may be raised. Because of this, imports of those goods can be discouraged and domestic industries can be protected from foreign competition. With a view to increase large imports of certain products, import duties may be reduced.
Export duties may be increased or lowered in order to influence the domestic supply and demand. If export duties are reduced, exports may rise. If export duties are increased, exports may not take place very frequently and supply may increase with a view to meet higher domestic demand.