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.

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.

Nature or Basic Feature of Indian Economy

Indian economy has dualism. On the one side there is a subsistence sector while on the other is a modernized developing sector. Thus Indian economy is an under-developed economy leaning towards economic development. The nature of Indian economy can be explained by its following characteristics:

1. Indian economy is an under-developed economy. The per capita income of certain countries like America, England, Japan, Germany etc. is much higher than that of some countries like India, Pakistan, Ceylon, Bangladesh etc. The economies of the former are known as Developed Economies and that of the latter are known as Under-developed Economies.

The main features of Indian Economy as an under-developed economy are as follows: (1) Per capita income is less as compared to almost all countries of the world. (2) The standard of living, level of consumption and efficiency of the people is very low. (3) On the one hand there is low per capita income and on the other there is inequality in the distribution of income and wealth. (4) There is too much dependence on agriculture but agriculture is backward. (5) There is slow growth of industries and also paucity of some important industries. (6) There is a shortage of banking and credit facilities, specially in rural areas. (7) In a vast country like India, the means of transport like rail, road, water and air are insufficient. (8) About 15 per cent of the world population lives here. Thus, there is a much pressure of population here. (9) There is lot of unemployment and under-employment here. (10) The rate of capital formation is low and it is about 20 per cent as compared to 39 per cent of Japan. (11) There is a scarcity of able and efficient entrepreneurs. (12) The social institutions like caste system, joint family system, law of inheritance, customs, religious systems are a hindrance in the economic development of the country.
According to Prof. Reddaway, “The main characteristic of Indian economy is its poverty. It is also a main indicator of its under-development.”

2. Indian Economy is a mixed economy. Just after independence the industrial policy of 1948 was adopted after the First Five-Year Plan. The industrial policies of 1956, 1977, 1980 and 1991 aimed at economic development of the country on the basis of a mixed economy. The main features of Indian economy as a mixed economy are: (1) Existence of Public sector, (2) Joint or National sector where both – the public and private sectors work together, (3) Existence of private sector, (4) Existence of cooperative sector for the economic development of the poor and middle class, (5) Special encouragement to the establishment of small and cottage industries reducing the inequality in the distribution of income and wealth and unemployment.

The public sector has done a commendable job to establish basic industries like iron and steel, machine building, chemical etc. on the basis of the policy-framework of a mixed economy for economic development. The transport services like railways, airlines and roadways are in the public sector while the road transport (particularly the goods transport) is run by the private sector. Though these services serve both the urban and rural areas yet they are largely urban based.

According to Dr. K.N. Raj, “Although Indian economy has been a mixed economy yet the element 0/this mixture has still framed it like a capitalist economy, not like a socialist economy.” The reason for this is that still the significance attached to the private sector in the economy is more than the public sector.

3. Indian economy as a planned developing economy. Indian economy has a large traditional rural sector and a small modern urban sector. In rural India, the economic activities are mainly agricultural while the main industries are in the urban part. After independence, India has adopted the path of economic planning to achieve the objective of economic growth. This was done under the leadership of Late Prime Minister Pt. Jawaharlal Nehru after surveying physical, capital and human resources of the country India’s First Five-Year Plan was adopted in 1951, Second Five-Year Plan in 1956, Third Five- Year Plan in 1961, Three One-Year Plans in 1966, Fourth Five-Year Plan in 1969, Fifth Five-Year Plan in 1974, Sixth Five-Year Plan In 1980 and Seventh Five-Year Plan in 1985, One-Year Plans in 1990, Eighth Five-Year Plan In 1992 and in 1997, Ninth Five-Year Plan in 1997 and In 2002 Tenth Five-Year Plan has been adopted which is to be terminated in 2007.

There has been an improvement in the economic condition of the country than before, after the adoption of Five-Year Plans. That is why Indian economy is called as Developing Economy.

4. Federal Economy: Besides the above three characteristic features of Indian economy, it has also a federal character provided by the Indian Constitution. As per the constitution, the power to regulate the economic life of the people is distributed between the Centre and the States. The Centre owns the full responsibility of guiding and controlling most of the major economic activities (if necessary) of the country. But a large part of the important economic activities have been assigned to the States. For example, power generation is mostly in the hands of State Electricity Boards under the State governments, even though the Central Government has a large say so far as the installation of power plants is concerned. Thus, there are two types of the government institutions dealing with the economic activities of the country viz. one at the Centre and the other at the State level.

Institutional Set-up of Indian Economy

Our economy was producing agricultural goods since long and now production is being done on a much larger scale and is becoming more complex. Thus, modern economy not only produces goods from agriculture and industry but also produces services like transport, banking, insurance, communication, storage of goods etc. Thus, the aggregate of goods and services produced by the individual producers and entrepreneurs in an economy at any particular time is known as domestic product of the economy. This concept of domestic product is of two types—Gross Domestic Product (GDP) and Net Domestic Product (NDP). In the same manner Gross National Product (GNP) and Net National Product (NNP) concepts are also stated in this regard.

Institutional set up is a system where the production and distribution processes are owned and controlled by private sector or public sector. Indian economy has dualism. But Indian economy is an under-developed economy leaning towards economic development.

However, on the basis of ownership, the economy is divided into two sectors—Private Sector and Public Sector. On the basis of occupation, economy can be classified as under—Primary Sector, Secondary
Sector and Tertiary Sector. Besides, we also find rural sector and urban sector in all types of economy. But there is no line of demarcation among all sectors. All these are closely related. Private and public sectors are two aspects of an economy and cannot be separated. Similarly, primary, secondary and tertiary sectors are also dependent on each other. Thus, economic prosperity of a country depends upon the development of all these sectors. So, these sectors must be developed by all means.
The population situation in India is very grave as our population in the world is next to China. It means there is “population explosion” in India which has retarded our economic development in many ways.

Indian economy is also suffering from many problems besides population explosion and these are poverty unemployment, rise in prices and  inflation etc. These problems are a curse for the nation and government is doing a lot of work to solve all these problems.


Every country has adopted certain institutions by which the process of production and distribution is carried on.  In certain countries, there is a complete ownership or control of economic institutions in the hands of private groups or individuals and there production is done for profit motive or individual gain. These’ countries are completely capitalist countries like America, England etc. In some other, these institutions are controlled and owned by the State and it is expected that the production process may be carried on in the public interest. These countries are completely socialist countries like Russia, China etc. There are certain other countries where production process is carried by both the State and the private sector e.g. India, Pakistan, Ceylon etc. In a way it is a capitalistic democracy where efforts are made to achieve certain welfare objectives of socialism. Thus it is clear that institutional set-up is a system where the production and distribution process are owned and controlled by (a) private sector (such as small and large productive enterprises and business houses) or (b) public sector (i.e., the government bodies, the banks, insurance companies and similar financial institutions providing productive services or the central government, the state government, the Reserve Bank of India and so on) or (c) joint (private and public) sector.

Thus, Institutional set-up is comprised of (a) Productive enterprises and Business Houses (b) Financial Institutions and (c) Government Agencies.
In India, certain institutions are completely in the hands of the private sector. These institutions are run purely with a private interest but the government can have their social control under various provisions of the law through regulation and direction. There are also certain institutions in our economy which are represented by both the public and private sectors from the point of view of ownership and control. There are other institutions which are solely run by state or the public sector. The characteristic of our mixed economy is such here that public sector, like private sector, also does the production activity with a profit motive as certain government industries, generation of electricity etc. But here the main objective of the public sector is social welfare, social justice and balanced regional growth and not purely profit motive.

Types of an Economy

Economy is of various types. Smallest type of economy is a Household Economy, where a few members satisfy family wants by earning something. Many a time an economy is divided into Village economy, Town economy, Regional economy, National economy and whole world or International economy. Generally, the economy is classified on the basis of ownership and level of development.

(a) On the basis of ownership. An economy is of three types viz. (i) Capitalist economy, (ii) Socialist economy, and (iii) Mixed economy.

(b) On the basis of level of development. An economy is of two types viz. (i) Developed economy, and (ii) Underdeveloped economy.

Capitalist Economy

A capitalist economy is an economy in which all the economic activities are regulated and controlled by market conditions without any outside interference. In other words, a capitalist economy is a system where there is a private ownership of factors of production. Production is done with a view to earn profit. In such an economy what, how much and where to produce depend on price mechanism. Thus, the people in such an economy have ftll economic freedom as producers, sellers, buyers, employees, employers, owners and consumers. Capitalist Economy is also known as Free Enterprise Economy, Free Market Economy etc.

According to Prof. McConnell, “A capitalist economy may be characterized as an automatic self-regulating system motivated by the self-interest of individual and regulated by competition.”

Socialist Economy

Socialist economy is an economy which is owned and controlled by the government. Here all the economic resources of the country are owned by the government and these are used in the public interest. All the like what to produce, how much to produce, how to produce etc. are taken by the Government in view the public interest. Economic activities are controlled and managed by a Central Planning Authority. Income is also distributed among individuals on the basis of their needs and efficiency. Thus, Socialist economy is a kind of system under which economic system of the country is controlled and regulated by the Government so as to ensure welfare and equality of opportunity to the people in a society.
According to Samuelson, “Socialism refers to the Government ownership of the means of production, planning by the Government and income redistribution.”

Mixed Economy

It is a mixture of the characteristics of capitalist and socialist economies. In this economy, like capitalist economy, certain economic activities are fully owned and controlled by private enterprise and rest of the economic activities, like socialist economy, are controlled by the Government. Mixed economy is a golden mean between two opposite ideologies. It is a coordination and mixture of the merits of both the economies, setting aside their demerits. Thus Mixed Economy is that economy in which private ant/public sectors co-exist and coordinate for achieving a common economic objective.
According to Samuelson, “Mixed economy is an economy in which both public and private institutions exercice economic control”

Developed Economy

It is an economy where the pace of economic growth is at its maximum, national and per capita income is very high and country has reached the tertiary stage after crossing primary and secondary stages. The standard of living in such an economy is very high. Generally, the word ‘economic growth’ is used for a developed economy. The economies of the countries like America, England, Germany, Japan, Canada, France etc. are developed economies.

Under-Developed Economy
Under-developed or developing economy is that where there is no full or maximum use of available resources due to vicious circle of poverty. Per capita income is less and standard of living of the people z low, In other words, this is that economy where (a) per capita real income is lower than in developed countries, (b) human’ and natural resources are not fully utilized, (c) production technique is inefficient and traditional and (d) there is desire for economic development. But as the country goes on developing, the modern industrial sector, though small, keeps increasing in size and the traditional agricultural or rural sector keeps shrinking.

According to Prof. M.P. Todaro, “Under-developed economy is that economy in which there are low level of living, absolute poverty, low per capita income, low consumption levels, poor health services, high death rate, high birth rate and dependence on foreign economies. “The under-developed economies in the world are Pakistan, Indonesia, Ceylon, Bangladesh etc.