Indian Economy, 5th edition (4 page)

The economic system of India was a mixed economy in pre-1991 years as it is in post-1991 years but the composition of state-market mix has gone for a change. In future, as the socio-economic and political factors will be changing, India will be redefining its mixed economy, accordingly.

The emergence and evolution of the mixed economy was thus able to settle the long-standing debate as to what was the best way to organise an economy. Starting in 1776 with the
w
ealth of Nations
of Adam Smith, it continued till we had the World Development Report of 1999 by the WB
4
. The dilemma continued for almost two and a quarter centuries (1776–2000).
t
oday, once the World Trade Organisation (WTO) has taken over the world economy, the brand of the mixed economy it advocates, is more inclined towards the free market economy. But it does not propagate to make the state an economic non-entity i.e., it leaves scope, for greater state intervention in the required areas if need be.

Role of State in an Economy

The dilemma of searching the ideal way of organising an economy, as it evolved, was also going to solve another riddle. This riddle was the role of the state in an economy.
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If we look back into the economic history of the world, we see
three
possible roles for the
s
tate/Government in the economy:

(i)
As a
regulator
of the economic system (where the state takes important economic decisions, announces the required kind of economic policies, takes the sole responsibility to get them implemented and controlling and punishing those who don’t oblige to those economic decisions).

(ii)
As a producer and/or supplier of the
‘private goods and services’
(these include all those goods and services which constitute the part of market and which will be distributed among the needy according to the principles of the market mechanism. Here the state earns profit as a private enterprise).

(iii)
As a producer and/or supplier of the
‘public goods’
or the
‘social goods’
(these include the goods and services which look essential from the social justice and well-being perspective for the people. Education, healthcare, sanitation, drinking water, nutrition, caring for the handicapped and old etc. come under this category. These goods which are generally distributed free of cost at times might reach the beneficiaries at the subsidised prices. The loss incurred by the state in this way is paid out of the public exchequer which means that the whole economy pays for the cause of a few people).

As different economies selected different roles for the state according to their socio-political ideologies, the world had differing ways of organising the economy and had resulted in the different economic systems in the past.

On the issue of regulating the economy there has been no debate, as we see all economic systems being regulated by the state only. But the selection of other two functions of the state in an economy made the real difference. The economy which selected both the roles (ii and iii) for the state under monopoly we called them the state economies. This category of economy had two variants in the socialist economy at least the labour was not owned and exploited by the state unlike the other—the communist economy where labour used to be under complete state control. These economies had almost no market.

The economic system which left both the roles (ii and iii) as the sole responsibilities of the private sector was called the capitalistic economic system. Here the state had almost no economic role but played a passive role of the regulator.

Mixed economies had at least kept one economic role fixed for them (i.e. iii) while they played the sole role of supplying public goods to the needy people. In some of the mixed economies the state went on to take some of the roles of supplying the private goods (i.e. ii) even by carrying heavy burdens of subsidies.

The WB document—the WDR, 1999 was a judgement on the possible and the suitable roles of state in the economy which suggested a timely shuffling of state’s role in the economy as per the socio-economic and political needs of the economy. We may understand the moot question via
k
eynes for whom the political problem of mankind is to combine three things:

(i)
Economic efficiency,

(ii)
Social justice, and

(iii)
Individual liberty.

In the process of realising the above-mentioned three objectives, an economy cannot go for either allowing only state’s role in the economy or only the market’s role in the economy. These challenges could only be faced properly once the state and the market both are given a balanced role in an economy—the balance to be defined by its present conditions and the direction of the future desire of the economy. Striking the right balance between the roles of the state and market in the economies came to be known as the process of economic reforms in the post-WTO world.

If we analyse the need of an economy, we see some compulsory roles for the state in it:

(i)
If the regulation and control of an economy is left to the private individual or group (i.e. firms) they will be using the regulatory powers to maximise their profits and returns at the cost of others. That is why this role must rest with the state. It looks more logical in the democratic political set-ups, wherein the interest of the largest numbers is being represented in the regulatory provisions.

(ii)
The responsibility of producing and distributing private goods to the people could be well handled by the private sector as this is a profit-fetching area. The state should not burden itself with this responsibility as this could be well taken up by the private sector. But in the absence of the proper presence of the private sector in an economy, many countries in the world gave this responsibility also to the state, India being one among them. But as the private sector became capable, in some countries this responsibility was given up by the state in favour of the private sector and better development has been possible in those economies. In this sense India delayed this process while in Indonesia, Malaysia, Thailand and S. Korea the state did give up this responsibility allowing the entry of the private sector.

(iii)
The responsibility of producing and supplying the social/public goods to the needy people cannot be left to the private sector as this is a loss-making role. It means, the state will have to take the sole responsibility or may need to expand its role in such areas—as we see in the post-reforms India.

As the private sector becomes capable of playing the proper role in producing and supplying the private goods, state saves its important human and economic resources which is transferred to take care of the public goods’ production and distribution.

Basically, the WB study, the
East Asian Miracle
(1993) recognises the above-given shift of one kind of mixed economy to the another kind of mixed economy—in the case of the Malaysian, Thai and S. Korean economies—taking place since the mid-1960s. Experts believe that this shift could not take place in time in India. And once it started (1991–92) it was too late and this choice was not voluntary but obligatory. The East Asian economies had gone for the same kind of reform process but by their choice.

Sectors of an Economy

Every economy tries to maximise the returns of economic activities in which it is involved. Whatever be the organising principles of an economy, the economic activities are broadly classified into three broad categories which are known as the three sectors
6
of the economy:

(i) Primary Sector

This sector includes all those economic activities where there is the direct use of natural resources as agriculture, forestry, fishing, fuels, metals, minerals, etc. In some of the economies, mining activities are considered a part of secondary sector though we see direct use of natural resources here. Broadly, such economies term their agricultural sector as the primary sector. This is the case in India.

(ii) Secondary
s
ector

This sector is rightly called the manufacturing sector which uses the produce of the primary sector as its raw materials. Since the manufacturing is done by the industries this sector is also called the industrial sector—bread and biscuits, cakes, automobiles, textiles, etc.

(iii) Tertiary Sector

This sector includes all those economic activities where different ‘services’ are produced such as education, banking, insurance, transportation, tourism, etc. This sector is also known as the service sector.

Types of Economies

Depending upon the shares of the particular sectors in the total production of an economy and the ratio of the dependent population on them for their livelihood, economies are given different names, such as:

(i) Agrarian Economy

An economy is called agrarian if the share of its primary sector is 50 per cent or more in the total output (the GDP) of the economy. At the time of independence, India was such an economy. But now it shows the typical symptom of a service economy with primary sector’s contribution falling to almost 18 per cent of its total produce while almost 60 per cent of its population depends on the primary sector for its livelihood. Thus, in
monetary terms
India is no more an agrarian economy, the dependency ratio makes it so—India being the first such example in the economic history of the world.

(ii) Industrial Economy

If the secondary sector contributes 50 per cent or more to the total produce value of an economy, it is an industrial economy. Higher the contribution, higher is the level of industrialisation. The western economies who went for early industrialisation earning faster and enough income and developing early were known as developed economies. Most of these economies have crossed this phase once the process of industrialisation saturated.

(iii) Service Economy

The economy whose 50 per cent or more produce value comes from the tertiary sector is known as the service economy. First lot of such economies in the world were the early industrialised economies. The tertiary sector provides livelihood to the largest number of people in such economies. In the last decade (2003-04 to 2012-13), growth has increasingly come from the services sector
*
, whose contribution to overall growth of the economy has been 65 per cent, while that of the industry and agriculture sectors has been 27 per cent and 8 per cent respectively.

By the end of the 19
th
century it was a well-established fact, at least in the western world, that industrial activities were a faster way to earn income in comparison to agrarian activities. The
s
econd
w
orld
w
ar had established the fact for the whole world—and almost every country started their preparation for the process of industrialisation. As country after country successfully industrialised, a pattern of the population shift from one to another sector was established, which was known as the
stages of growth
of an economy.
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With the intensification of industrialisation, dependency on primary sector for livelihood decreased and dependency on secondary sector increased consistently.
S
imilarly, such economies saw a population shift from the secondary to the tertiary sector—and these were known as the ‘post-industrial’ societies or the service societies. Almost the whole Euro-America falls under this category—these economies are having over 50 per cent of their total produce value being contributed by their tertiary sectors and over half of the population depends on the sector for their livelihood. Many other countries which started industrialisation in the post-war period did show abberations in this shift of the population and the income—India being one among them.

IDEA OF NATIONAL INCOME

Income is probably the most frequently used term of economics, used by experts and lay masses. Income level is the most commonly used tool to determine the well-being and happiness of the nations and their citizens. This remains true today also, even if we know that ‘income’ is not an exhaustive idea to know about the well-being of the society. There has been some reason for such a perception about the concept of income. Basically, when the idea of ‘human development’ came into being by early 1990s, the concept of the ‘human development index’ ultimately was heavily dependent on the level of ‘income’ of individual in a country. Education and life expectancy can only be enhanced once the required amount of ‘investment’ (expenditure on them) could be mobilised. Thus, somehow, income came to be established as the ‘focal point’ of ‘development/human dvelopment’.

As income of a single person can be measured, it can be measured for a nation and the whole world, although the method of calculating may be a little bit complex in the latter’s case. In due course of time,
four ideas/ways
to calculate the income of a nation
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developed, which are the subject matter of the ‘national income accounting’- an area to which the disciplines Commerce and Statistics are closer. These four ways to look upon ‘income’ of an economy, although different from each other in some way, are the concepts of GDP, NDP, GNP and NNP. All are a form of the national income, but are different from one another. They all say a different story about the income of a nation in their own specific way. Here, we discuss them in a very objective way.

GDP

Gross Domestic Product (GDP) is the value of the all
final
goods and services produced within the boundary of a nation during one year. For India, this calendar year is from 1st April to 31st March.

It will be better to understand the terms used in the concept,
‘gross’
means same thing to Economics and Commerce as ‘total’ means to Mathematics;
‘domestic’
means all the economic activities done inside the boundary of the nation/country and by its own capital;
‘product’
is word to define ‘goods and services’ together; and
‘final’
means the stage of a product after which there is no known chance of value addition in it.].