Major Economic Reforms in India

Economic Reforms of 1991 can broadly be classified into two groups: stabilisation measures and structural reform measures.

Stabilisation Measures

A key element in the stabilisation measures was the effort to restore fiscal discipline. In this regard following measures were adopted:

(i) Devaluation of the rupee,

(ii) Increase in interest rates,

(iii) Reduction in fiscal deficits,

(iv) Exchange rate adjustments,

(v) Partial convertibility of the rupee on the current account,

(vi) A rapid build-up of foreign exchange reserves.

Structural Reform Measures

Major structural reform measures initiated in 1991 are as follows:

1. Industrial Policy Reforms
Objectives. New Industrial Policy was announced on 24th July, 1991. The main objectives of this policy are as under:
(i) To build on the past industrial achievements,
(ii) To maintain sustained growth in productivity and gainful employment,
(iii) To further encourage growth of entrepreneurship and upgrade technology in order to attain international competitiveness,
(iv) To correct the distortions or weaknesses of the industrial sector,
(v) To encourage all industries belonging to public, private and cooperative sectors to grow and improve on their performance.

Main Industrial Reforms

The process of reforms has been continuous. The main reforms are as under
(i) Reduction in Industrial Licensing. Industrial licensing has abolished for all items except a short list of 7 industries related to sec strategic and environmental concerns.
(ii) Removal of Investment Controls on Large Business Monopolies and Restrictive Trade Practice Act (MRTP Act) has been amended to eliminate the need for prior approval by large companies for capacity expansion or diversification.
(iii) De-reservation of Industries for Public Sector Areas reserved for the public sector are narrowed down (to only 4) and greater participation by private sector is permitted.
(iv) Reforms in Regulations Concerning Foreign Investment and Foreign Technology. A number of important steps are taken and concessions are given to facilitate the inflow of foreign direct investment and foreign technology in the Indian industrial sector.
(v) Other Measures.

(a) Government clearance for the location of projects is dispensed with except in the case of cities with a population of more than one million.
(b) The investment ceiling on plant and machinery for small undertakings has been enhanced

Trade Policy Reforms

New initiatives were taken in trade policy to create an environment which would provide a stimulus to export while at the same time reducing the degree of regulation and licensing control on foreign trade. In this regard many barriers to imports have been removed and import duties are curtailed

Public Sector Reforms

To increase the efficiency and accountability of the public sector, its units had been given greater autonomy in their operation and a scheme of disinvestment was initiated.

Economic Liberalisation and Reforms in India

Pre-reform Scenario

Since the early days of independence, we were accustomed to a highly protected economy. The main instruments of our protected economic policy were:

(i) Trade and exchange controls,

(ii) Selective access to foreign investment,

(iii) Discretionary control on industrial investment and capacity expansion,

(iv) Dominance of public sector in industrial activity, and

(v) Public ownership and regulation of the financial sector.

In this way, we protected our economic enterprises, our investment, our currency, our commodity and capital markets, and our trade. The consequences were recurrent fiscal deficits, heavy external/internal debt burden, low capital formation, self perpetuating subsidies, low inflows of technologies, low competitiveness and low productivity levels. The Indian economic scenario in 1991 was very much depressing as the economy was on the brink of collapse. Inflation was out of control, exports were declining, foreign exchange reserves had declined to no more than two weeks’ imports and industry was virtually crippled. The sum total picture which had emerged, after the four decades of planning, was of a stagnant and sick India.

Objectives and Thrust of Economic Reforms

In response to the emerging crisis, the government took a series of corrective measures starting in July 1991. This is termed as New Economic Policy (NEP) or the policy of Economic Liberalisation and Reforms. The main objectives of this policy are as follows
(i) To reduce the domestic inflation rate;
(ii) To improve the balance of payment situation
(iii) To improve efficiency and productivity; and
(iv) To put the economy back on the path of growth with justice.

Thus, the basic objective of the economic reforms is to transform the country into a strong, stable, attractive, efficient, competitive and vibrant economy.

The broad thrust of these economic reforms was in the following directions:

(i) Increasing the role of the private sector,
(ii) Redirecting scarce public sector resources to areas where the private sector is unlikely to enter, and
(iii) Opening up of the economy to trade and investment and thus integrating it with the global economy.

Why is Economic Planning a Difficult Task in India

Planning—A Difficult Task

Planning in a developing country like India is not an easy task rather it is a formidable one. It is formidable mainly because of two reasons. First, when we plan for an economic change, it hurts a so far privileged group in the society. These people, therefore, tend to resist such change and create hurdles in its way. Both the planning and its implementation, thus, become difficult social and political questions and not merely difficult technical questions. In the process of planning for economic growth with social justice government has to manipulate the free play of the forces of demand and supply with a view of social interest. It will definitely hurt the life-style of the rich people. For example, rich people can have greater claim on scarce goods in a free market. But when we make plans for equal distribution or provision of essential goods and amenities such as sugar, clothes, water supply, electricity, sanitation etc. for the common people, it will cut the shares of rich section. For this government has to take hard political decisions which is really a very difficult task in a democratic setup like that of India.

The second reason which makes the planning a formidable task arises from the necessity of rapid economic growth. We know rapid economic growth requires large capital base or expansion of the economy’s productive capacity. Capital formation demands curb on consumption. For this we have to save and invest. It means we have to sacrifice our today’s comforts for tomorrow’s goods. It is a basic question of today versus tomorrow before the country. If we want to have more goods tomorrow we have to consume less today. But in a poor country like India it is very difficult to prepare people for such sacrifices.

Objectives of Indian Economic Planning

Planning in India derives its objectives from the Directive Principles of state policy set forth in the Constitution. It is perhaps because of this reason that immediately after the adoption of new Constitution on 26 January, 1950, the Planning Commission came into existence. The Government of India constituted Planning Commission in March, 1950 under the Chairmanship of Pandit Jawaharlal Nehru, to prepare a plan for the most effective and balanced utilisation of the country’s resources. This Planning Commission prepared country’s First Five Year Plan covering the period of 1951 to 1956. It was further followed by a series of Five Year Plans.

Our First Five Year Plan states that “Economic planning is an a way of organising and utilising resources to the maximum advantage in terms of defined social ends.” What are those social ends? In a way they will act as objectives for our economic planning. In view of the directive Principles of the Constitution and requirements of the Indian economy, our development plans have set following long-term objectives:

1.High Rate of Growth. The improvement in the levels of living by raising the national and per capita income has been the first and foremost objective for all the plans in the country. Raising the per capita income implies that the growth rate of national income should be higher than the population growth. This aim of higher rate of growth has also been expressed as the goal of removal of poverty. We want to speed up this rate of growth so that we can come out from the clutches of abject poverty.

2.Social and Economic Justice. As we have already studied in the last chapter that the Directive Principles of our Constitution have proclaimed justice as a basic national commitment. Hence, one of the objectives of economic planning in India is to ensure economic and social justice. This objective has three main dimensions (a) reducing inequalities in the distribution of income and wealth, (b) curbing concentration of economic power, and (c) uplifting the weaker section of the society

High rate of growth and social justice have been regarded as the two primary objectives of India’s economic planning. Some argue that there is a certain amount of conflict between these two objectives. For example, high rate of growth requires high rates of saving and capital formation. And this can be provided only by the rich section of the society. Similarly, a too vigorous pursuit of equality can injure economic incentives and bring down the level of national production. But if we look deeply we find that these two objectives are not contrary to each other rather complementary. One task of economic planning in India is, therefore, to strike a judicious balance between these two primary objectives. To stress this line of thinking, they are now not considered as two separate objectives but One single objective ‘Development with Social Justice’. This is the first and foremost objective of Indian planning.

3.Increase in Employment Opportunities. Unemployment and underemployment ar& important reasons for poverty in the country. Hence, the creation of additional employment opportunities has been an important objective in India’s plans right from the beginning. There may be investment plans which may increase production without increasing employment. But this does not suit to the Indian environment. In India where population and labour force are rising fast, we require employment-oriented investment plans. Accordingly, India’s plans have stressed on employment objective and have taken into consideration the impact of different types of development programmes on the employment situation. The device of employment creation, specially for the poor, could also combine the increase in production with social justice.

4.Self-reliance. In the early stage of her development, a country is forced to depend upon foreign aid. But foreign aid has its own difficulties and problems. In view of this, India’s plans have been emphasising the objective of self-reliance. Self-reliance implies eliminating dependence on concessional foreign aid, in other words meeting external payments obligations out of our own earnings. This objective has many aspects such as expansion of exports, substitution of imports and increase in the domestic production of food grains etc.

Thus, the major long-term objectives of Indian planning are four-fold; increasing national and per capita income; reducing inequalities, creating employment opportunities and achieving self-reliance.

For economic planning India has started Five-Year Plans. Our First Five-Year Plan began in 1951 and Eighth Five-Year Plan was completed in 1997. Currently Ninth Five-Year Plan (1997-2002) is in operation.

Need and Importance of Planning in India

When India became free, it got a poor, backward and stagnant economy in inheritance. The partition of the country made the situation worse. Hence the utmost task before the country was its economic development. Then came the question how can this goal be achieved? Can this task be performed by individual incentives and initiatives alone? Should it be left on the market forces of demand and supply? We have studied in the last chapter that market forces are inadequate, insufficient and incapable of meeting the challenges and problems of the Indian Economy. It was, thus, realized that the solution of the problem would require an active state role in economic development. It was from this view that independent India chose the path of economic planning for her development.

Why India has regarded the process of economic planning important and essential for her development? The main reasons for this are as follows:

(i) To Break the Vicious Circle of Poverty and Stagnation. We know that India was entangled in a sort of vicious circle of poverty and stagnation at the time of independence. The vicious circle can be broken only through centralised economic planning.

(ii) Priority to the Social-interest. Private entrepreneurs give more importance to individual interest than the social interest. But this is not good from the country’s point of view. It is through economic planning that we can compel individual interest also to work under social interest. Hence to augment and promote social interest India adopted economic planning.

(iii) Fair Balance between the Present and the Future. Private producers interested in profits in the short run are generally apt to ignore the future interests of the community. Therefore, it becomes all the more essential for the government to strike a fair balance between the claims of the present and those of the future through planning.

(iv) To Build Social and Economic Infrastructure. Private entrepreneurs are not much interested to undertake those types of investments which are not remunerative—directly and immediately. For example, under private enterprise there is nothing to induce an industrialist to invest money in creating health, education, transport or communication facilities. But building of these infrastructural facilities are essential for the development of the country. That is why this work is undertaken by the government through planning.

(v) To Increase Capital Formation. Being an underdeveloped economy at the time of independence Indian economy had a very low level of saving, investment and capital formation. There was not only an extremely small capital-stock at the time but the rate of capital formation was also very low. This deficiency of capital was one of the prominent causes for its backwardness and underdevelopment. Since capital formation and mobilisation of savings require deliberate state attempts via planning process, India preferred to adopt economic planning.

(vi) The Success of Economic Planning in the USSR. The initial success of economic planning in the USSR also played an important part in adopting and popularising the concept of planning in India.

In brief, the main problem in a country like India was the inability or unwillingness of private enterprise to put the available natural and human resources to their most effective use. Hence, a scheme for economic planning was required to deal with these all important problems. And that is why India has accepted the process of economic planning for its economic development.

Rationing and Public Distribution System in India

In the field of distribution government exercises its control through rationing and public distribution system. Sometimes the forces of demand and supply in the market create situations which cannot be regarded good from the point of view of the society. In our country the glaring example of subtype of situation can be seen in the field of essential goods such as food, fuel and cloth.

From the point of view of supply, there is scarcity of essential goods in our country. There are three main reasons for this scarcity. (a) There is inadequacy of production. (b) There is lack of storage and marketing facilities in our country. (c) Hoarding with a view to speculation and black- marketing creates artificial scarcity of these commodities in the market. It makes the problem of supply much more complicated.
From the point of view of demand, the main problem is of poverty and lack of purchasing power. Since the purchasing power of the poor class is very low, they are unable to purchase these commodities at higher prices.

If the forces of demand and supply are allowed to act freely in the market, the prices of essential commodities will be determined at a very high rate. At these prices poor people would not be able to get goods. Thus, on the one hand poor people would be forced to live in starvation and miseries while on the other, rich people would indulge in wastages and extravagancies. Hence it becomes the bounden duty of the state to intervene in the economy to avoid such an unhealthy situation. The government takes the responsibility of price determination and distribution of such commodities with a view to fair distribution to all the persons in the country. Government, generally, adopts three types of measures for this work.

  1. The government provides the guarantee of fair price to the producers for their product, for this, the government announces the minimum support price of many agricultural commodities. The government announces these support prices on the recommendations of the Agricultural Price Commission. The Indian government announces the support price of agricultural commodities such as rice, wheat, coarse grains, cotton, jute, and sugarcane etc. The advantage of this support price is that if there is excess of production of any commodity in any year, the price of that commodity cannot go down below the level of this support price. The government is always ready to purchase any amount of that commodity on that support price. Thus with this scheme of guarantee of a minimum price the confidence and incentive of farmers have increased.
  2. In our country the government has increased storage facilities and created buffer stocks. The government maintains its buffer stocks, especially of rice and wheat, by procuring these commodities from the market. When the prices of these commodities start to increase in the market the government releases these commodities from its buffer stock, this results in reduction in prices. In India this buffer stock has helped a lot in controlling the prices of food grains in the market.
  3. Government supply essential commodities through fair price shops and ration cards. Supply of key essential commodities at reasonable prices to the public through fair price shops is known as public distribution system. It is an important instrument of government policy to moderate open market prices. Currently government is supplying through PDS six essential commodities, viz, wheat, rice, sugar, imported edible oil, kerosene and soft coke. These commodities are distributed to the consumers through the network of fair price shops. At present there are more than 4.40 lakh fair price shops in our country. Now more stress is given on the expansion of public distribution system in rural, vanvasi and far off areas of our country. Mobile shops are being deployed in these areas.

Consumer cooperative societies are also playing important role in providing goods to the common people at reasonable rates. These cooperative societies are working as an ancillary to the public distribution system. Super Bazars are also making important contribution in the work of public distribution.

Monetary policy, Fiscal policy and Physical control over production and distribution in India

To control the forces of demand and supply state intervention is essential in developing countries like India. For the proper development of the country this becomes an important function with the government. Now the question is, how and in what ways should government intervene? There are generally three main ways in which government can intervene.

They are Monetary policy, Fiscal policy, and Physical control over production and distribution.

Monetary Policy

Monetary policy refers to those measures which help control the supply of money and credit in the economy. The main objectives of monetary policy in India have been economic growth, price stability and deployment of credit among different sectors of the economy.
The monetary policy is formulated and operated by the central bank of the country. In our country this work of monetary and credit control is performed by the Reserve Bank of India. For this the Reserve Bank generally adopts following five measures

Measures of Monetary and Credit Control

  1. Issue of Currency Notes. In our country RBI has the monopoly to issue currency notes. Government’s deficit in budget is financed by the credit from the Reserve Bank. Consequently it increases the money supply in the country. The increase in money supply increases purchasing power of the people and the demand in the market. If this increase in demand is not matched by an increase in supply of goods, it results in price-rise. That is why the RBI has to keep control on the circulation of currency notes. Besides the control on currency, the RBI also keeps control on the bank credit.
  2. Bank Rate Policy. The rate at which the RBI gives loans to the commercial banks is known as bank rate. On the other, the rate at which commercial banks gives credit to their customers is interest rate. Bank rate and interest rate have a very close relation. If the RBI wants to expand credit creation, it decreases the bank rate and if it wants to contract credit creation, it increases the bank rate.
  3. Open Market Operations. Activities related with the sale and purchase of securities by the central bank in an open market are known as open market operations. If the Reserve Bank wants to expand credit, it starts to purchase the securities in the open market and if it wants to contract credit, it starts to sell securities.
  4. Changes in the Cash-reserve Ratio. We know that every bank has to keep a certain minimum proportion of its total deposits in the form of cash. This minimum cash reserve is determined by the Reserve Bank. The Reserve Bank can increase credit creation by reducing this cash-reserve ratio and it can decrease credit creation by enhancing the rate of cash reserve ratio.
  5. Selective Credit Control. In developing countries like India it is not sufficient to have control merely on the total volume of credit in the country. Here it is also essential to see that credit should be available in sufficient quantity and at concessional rates to the socially desirable activities and on the other, the flow of credit should be checked to the undesirable or unessential activities. For this the Reserve Bank adopts many measures such as credit rationing, direct action or preventing credit for certain purposes, consumer credit control, changes in margin requirements etc. These are the measures which are known as selective credit control. In the Indian situation selective credit control measures are more important.
    Fiscal Policy

Fiscal policy means the policy related with public expenditure, taxation and public debt. In short, it is the budgetary policy of the government.
The main objectives of fiscal policy for underdeveloped countries like India are as follows
(i) Economic growth, (ii) Increase in rate of investment and capital formation, (iii) Diversion of investments into socially desirable channels (iv) Social justice or equity in the distribution of income and wealth, and (v) Price stability.
There are two main constituents of the budget: public revenue and public expenditure. Public revenue can further be divided into two parts; non-tax revenue and tax-revenue.

Taxation. Taxation is a very important instrument with the government with which it can intervene in the economy to control the forces of demand and supply. Taxes are of two types; direct taxes and indirect taxes.

A tax which is paid by a person on whom it is imposed and the burden of which cannot be shifted on others is called a direct tax. Examples of direct tax are : income tax, wealth tax, estate duty, gift tax, expenditure tax etc. The central aim of direct tax is to reduce inequalities between the rich and the poor. That is why we should extract more from a richer man’s income.

The tax which is ultimately paid by some other person than the person on whom it is imposed, is called indirect tax. The burden of this tax can be shifted to some other person. For example, sales tax is imposed on the sellers by the government but sellers realise it from the buyers. Sales tax, excise duty, stamp duty, custom duty etc. are all examples of indirect taxes.

There are two main differences between direct tax and indirect tax (i) The burden of direct tax cannot be shifted to others while the burden of indirect tax can be shifted to others. (ii) Direct tax is imposed on persons while indirect tax is imposed on transactions.

The aim of indirect taxes is two-fold: (a) Indirect taxes can be used, to a certain extent, in reducing inequalities. (b) Through them we can either encourage production and the use of certain goods or discourage the production and the use of some other goods.

Thus, taxation can be used to achieve following objectives

(i) To earn revenue;

(ii) To reduce inequalities;

(iii) To influence the allocation of resources;

(iv) To influence saving and investment.

Public Expenditure

To influence economy, public expenditure is also an important instrument with the government. As we know that the purchasing power of the poor people is low. Hence, private entrepreneurs do not want to produce goods for them. Therefore, government should prepare its public expenditure programme in such a way so that it can provide more facilities to the general public. For example, schools, hospitals, public parks, buses, railways, supply of drinking water etc. are examples of such. Besides this, the total volume of public expenditure also influences the economy. When there is inflation in the country, government should curtail its non-essential and non-developmental expenditure.

Thus, government can make changes in the economy through taxation and public expenditure policy. Here in the Indian context w must bear in mind one more important point. We know that ours is a federal country. Here we have central government as well as state governments. It is, therefore, essential to have complete harmony in the policies of central and state governments with regard to taxation and public expenditure.

III. Physical Control Over Production and Distribution

Government exercises physical control mainly in two ways (i) Industrial licensing, and (ii) Rationing and Public Distribution System.

Industrial Licensing

In the field of production government exercises its physical control through the policy of industrial licensing. The main objectives of industrial licensing policy in India have been as follows

(i) To check the concentration of economic power and monopoly in the industrial sector;

(ii) To reduce regional economic disparities;

(iii) To encourage Cottage and Small Scale Industries;

(iv) To give direction to the industrial investment,

Industrial licensing is governed by the Industries (Development an Regulation) Act, 1951. Over the years, keeping in view the changing industrial scene in the country, the industrial licensing policy has undergone modifications. Accordingly a new industrial policy was announced in July 1991. In this policy industrial licensing has been abolished for all industries except for 7 specified groups. Compulsory licensing has been considered necessary for security and strategic considerations, safety reasons and over riding environmental concerns and the need to regulate production of articles of elitist consumption. The theme of the policy is continuity with change.

The Need for State Intervention in the Indian Economy

Why is state intervention required in the Indian Economy? We must understand this question more clearly and minutely. We know that the main objective of a developing country like India is economic development with stability and social justice. Now the question arises can this work be left on the mercy of the forces of demand and supply in India. The general experience of developing countries suggests that the forces of demand and supply neither lead to rapid economic development nor bring social justice. They are not successful in this mission. Hence, state intervention is required. Following grounds justify the state intervention in the economy.

(i) Direction to the Forces of Demand and Supply. In developing countries like India the forces of demand and supply do not properly represent the needs and aspiration of the people. It means if the level of demand and supply of a particular commodity is high in these countries, it does not necessarily indicate the demand and supply of the whole country. We know that it is the purchasing power which determines the demand and supply in the market. Those who have more purchasing power, their demand for goods and services will also be high in the market and producers will also supply goods to them. it means rich people have greater share in the demand and supply of the market than the poor masses. In this situation rich man’s luxury goods will be produced more than the poor man’s necessities. For a producer it will be more profitable to produce a car than a bus for the general public. In this situation it may happen that instead of schools and civil hospitals, five star hotels and cinema houses may be built; in place of medicines for the masses, cosmetics for the rich are produced; instead of small rural houses, big buildings in the big cities may be constructed and so on. Thus the forces of market demand and supply are broadly weighed in favour of rich community. But this cannot be regarded good in social interest. And that is why the interference of state is required.

(ii) Safeguard of Social Interest. The second reason for the failure of market forces is that they simply represent consumer self interest. It means when we operate in the market as consumer, our main aim remains our own interest. For example, we would like to have goods on cheaper rates, no tax on the commodity which we purchase, minimum income tax on the income bracket to which we belong and so on. But it is not at all essential which suits the private interests may also suit the interests of the whole society. Private interests and social interests may differ. As consumer or producer we would like to undoubtedly safeguard our own individual interests in the market. But if we have to work as government representative we would never recommend that all commodities should be taxed except the commodity to which we want to purchase or there should be lower tax rate for our income-bracket than others. In that capacity one has to recommend more taxes on the rich man’s commodities such as cars, refrigerators and less taxes on the poor man’s commodities such as bicycle. Similarly, in the case of income tax also higher rates for higher income and lower rates for lower income will be recommended. It indicates that when a man operates under the guidance of market forces he always tries to safeguard his self-interest but when the same person works as a representative of the society he then works with a view to social interests. The Government has to interfere to safeguard this very social interests.

(iii) Development of Infrastructure Facilities. There is one more reason which necessitates the interference of the government into the market forces. This reason is the need for the development of infrastructure in a country like India. We know that the infrastructure (For example, roads, railways, dams, canals, electricity, education, health, communication facilities etc.) in India are in a rudimentary state. Private entrepreneurs are not prepared to invest in these lines; because this requires heavy investments while rates of return are very low. Besides this, there are so many things for which it is difficult to determine the price. For example, on what basis a private investor should charge the price from road users and from the persons who enjoy public parks. There cannot be any criterion for it. They are actually the goods of collective consumption. Hence a private producer who operates on the direction of market forces does not take interest in the production of such goods. But such type of infrastructure is very essential for the development of a country. In this situation government has to take the responsibility for the development of these infrastructures. That is why the Government of India has done a remarkable work in the direction of the development of these infrastructures in the country.

(iv) Control Over Economic Fluctuations. Market forces fail to strike a proper balance between demand and supply. Since different entrepreneurs take decisions separately, hence their total supply sometimes becomes more than the total demand and sometimes it falls short. When the supply becomes more than the demand, it creates problem of recession in the country. When the supply remains less than the demand, it creates the process of inflation.

Frequent occurring of recession and inflation in the Economy give birth to the problems of economic fluctuation and instability. This creates hurdles in the way of development and common man has to face hardships. In the days of inflation the poor people can’t purchase even basic necessities of life. On the other, in the days of recession, we have to face the problem of unemployment. Therefore, for the smooth functioning of the Economy it becomes imperative that economic fluctuations are controlled by balancing the forces of demand and supply. Thus in the developing countries along with development economic stability is also essential. And this economic stability can be achieved only through government intervention.

Guidelines, Preamble and Directive Principles of Indian Consitution


After independence India has accepted some broad social and economic objectives for her. Later on these objectives were included in our written Constitution. In India this Constitution was enforced on January 26, 1950. Since then in the operation of the Economy these objectives provide guidelines to our government. These objectives are spelt out in the preamble and directive principles of our Constitution.


Indian Constitution starts with a preamble. This preamble briefly but explicitly declares the objectives which we seek to achieve. Some amendments were made in this preamble in 1976. The preamble reads:

We, the people of India solemnly resolve to constitute India into a Sovereign Socialist Secular Democratic Republic and to secure to all its citizens: Justice, social,economic and political; Equality of status and of opportunity; and to promote among them all Fraternity assuring the dignity of the individual and the unity and integrity of the nation.

Thus the preamble of the Constitution outlines the following main objectives
(a) Justice—political, social and economic;
(b) Liberty of thought, expression, belief, faith and worship;
(c) Equality of status and opportunity; and.
(d) Fraternity based on ‘dignity of individual and unity of nation.
In other words, our main aim is to establish a socialistic society within the framework of democracy and secularism.


One of the important features of our Constitution is its directive principles. These principles are a sort of directive to the government to keep the welfare of the people in mind while formulating its policies. Though government is not bound to observe them yet it is expected that she will take guidance from them. Now we shall mention some of the important directive principles related with .the economic field of our country.

These principles direct the state
(i) To provide adequate means of livelihood for all citizens;
(ii) To ensure proper distribution of material resources of the community for the common good;
(iii) To secure equal pay for equal work to both men and women;
(iv) To protect the strength and health of workers;
(v) To make provision fOr securing right to work, to education and to public assistance in cases of unemployment, old age, sickness and similar other cases;
(vi) To prevent the concentration of wealth and means of production;
(vii) To ensure a decent standard of living and facilities of leisure for all workers;
(viii) To provide opportunities and facilities for the proper development of children and to protect them from exploitation;
(ix) To protect the economic interests of the weaker section of the society, especially the Scheduled Castes and Scheduled Tribes;
(x) To promote cottage industries in the rural areas;
(xi) To organise agriculture and animal husbandry on modern and scientific lines; and
(xii) To protect and improve the environment.

Thus, on the basis of Preamble and Directive Principles of the Constitution we can determine what is in social interest and what is not. The basic objective of the state is to promote economic development with social justice and environment quality. Hence the main role of the state in our country is to see that both sectors should work in, the direction of these objectives. Whenever there is any hurdle in the fulfillment of these objectives or if they are neglected, it becomes the bounden duty of the government to interfere in that situation.

Role of State in the Indian Economy

Today almost everybody accepts that state has an important role in the economy of a country. But state cannot play the same role in all the countries of the world. The role of the state in an economy depends, largely, on the character of that economy. For example, in a socialistic economy the main responsibility lies with the state for all sorts of economic decisions. That is why state has a dominant role in these economies. On the other hand, in free capitalistic countries economic decisions are taken mainly by buyers and sellers. They take these decisions through market mechanism operated by the forces of demand and supply. Here the role of the state is merely to maintain the framework of the economy so that the market mechanism may work smoothly. But it is not easy to take decisions regarding the role of the state in an economy like India as ours is a mixed economy.

Here in India we have both the sectors—private sector as well as public sector. As far as public sector is concerned the decisions are taken mainly by the government. Government takes these decisions on the basis of social interest rather than private gains. Thus, in this sector decisions are taken on the same pattern as in the socialist countries. On the other hand, we have a very large private sector also in our country. In this sector economic decisions are taken mainly by the forces of demand and supply through market mechanism. But in this private sector decisions are not taken on the same pattern as in the capitalistic countries.

There are two main problems before us : (a) How can we judge whether the decisions taken in these two sectors (private and public sectors) are right or wrong? (b) How and on what basis can we establish the coordination between these two sectors? Now people are no longer prepared to accept the age-old principle that private sector should take all decisions only with a view to private profit. Rather they demand that private sector should also be regulated in such a way that it should work for social interest. As far as public sector is concerned it should definitely work for social interest. Thus, the role of the state in Indian Economy becomes very important as well as delicate. Here the question arises that—how can we decide what is in social interest? In other words, on what basis we can say what is socially desirable and what is not? Really it is a delicate question. But fortunately our Constitution-makers have tried to answer this question in our Constitution. Our Constitution includes some very important broad goals which may’ serve as guidelines for our Economy. Hence the role of the state in our Economy is to regulate both the sectors—private, as well as public sector—in such a way that they may work for the fulfillment of these objectives of our Economy. It is, therefore, essential for us to know the objectives set forth by our Constitution-makers for the Economy.