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.