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.

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.