STATE Vs MARKET

INTRODUCTION

State versus market is a debate of deciding whether government should interfere in market
function or not? in other words, it discuss the need of socialisation and privatisation.
Therefore, there is need to discuss the advantages and disadvantages of both, which will help
in building up an unbiased perspective for the same.
The discussion of governmental intervention in the market begins with the "Classical Theory
Of Employment" , This theory says that, there is no need of governmental intervention in the
market because it's function depends on the demand and supply for the commodities and
services. Later, in 1929 THE GREAT DEPRESSION occurred in US economy it keynes
theory proved that government plays an important role of balancing the economy. unlike
private enterprises government's spending is welfare oriented.

MARKET ECONOMY: ADVANTAGES & DISADVANTAGES

ADVANTAGES:-

 More innovations.

 Increase in efficiency

 production

 Good infrastructure

DISADVANTAGES:-

 Does not focuses on development but growth.

 Unequal distribution of GDP.

 No responsibility towards environment.

 Increase in negative externalities.

 Exploitation of natural & human resources.

 No sustainable development.

 Monopoly market.
  Lack of employment for unskilled labours.

 No welfare programme for poor.

SOCIAL ECONOMY: ADVANTAGES & DISADVANTAGES

ADVANTAGES:-

 Public welfare policies.

 Employment for unskilled labours (MANREGA)

 Protection of human rights (LABOUR LAWS & FUNDAMENTAL RIGHTS)

 Safe environment & health care (HOSPITALS/ SAVE WATER SAVE LIFE)

 Taxation policies.

 General economic fairness (MSP)

DISADVANTAGES:-

 Higher taxation

 Market failure because of new government policies.

 Economic disruption (INFLATION)

 Less choices in the market.

CONCLUSION

In conclusion, it can be said that both privatisation and socialisation have it's own pros and
cons in order to avoid maximum disadvantages one should have mixed economy which
comprises of the combination of state and market economy.
Along with this there must be clear limitations to their intervention in the economy that
would help to prevent it from market failure. this will lead an economy towards development.
 Different Way to study STATE Vs. MARKET

In the 21st century, in the era of liberalisation, privatisation and globalisation, debate on the
respective role of state and market has revived.

Arguments in favour of more market role:

 According to the public choice approach, administrators/politicians are concerned with self-
interest instead of public interest.
 According to new public management (entrepreneurial government), the government should
play an enabling role rather than participating in the market.
 The countries which follow excessive state intervention lead to inflated bureaucracy,
corruption, skewed distortions.

Arguments in favour of more role of the state:

 The great depression of the 1930s and the recession of 2008-09 showed that we could not
leave it solely to market forces. Keynesian theory of macro-economic states that massive
investment by the government is necessary.
 The role of government is needed in third-world and developing countries to provide basic
infrastructure and facilities in which the market can operate.
 The market ignores equity.
 The market cannot ensure optimal allocation of resources; It can’t ensure equilibrium
between demand and supply.

Balanced View:
Government should do less in areas where market work (or can work) and should do more in
those areas where the market can’t be relied upon. These areas are:

 Establishing law & order,

 Investing in basic infrastructure,
 Maintaining macroeconomic stability,
 Delivering basic social services,
 Protecting the vulnerable and
 Protecting the environment.
 A better example of State vs market debate is Indian Railways. Presently, the Railways is
being operated by the Government alone. Thus, it can provide affordable transportation
facilities to the general public. But at the same time, the opposing argument is that, due to the
non-intervention by the private sector, Indian Railways has not developed up to the
expectations. It faces many issues like delays, safety issues, poor quality of infrastructure etc.
This notion of state vs market debate is a wrong one, both are irreplaceable, and both need
each other.
PUBLIC Vs. PRIVATE SECTORS

Public Sector

The Public Sector consists of businesses that are owned and controlled by the government of
a country. The ownership and control of the central or state governments in these
organisations are either complete or partial. But it still holds a majority stake and makes
every single decision regarding running the entity. These organisations include government
agencies, state-owned enterprises, municipalities, local government authorities and other
public service institutions.

Some of them can be non-profit organisations while others participate in commercial

activities as well. It generally focuses on providing goods and services to the general public at
relatively cheaper rates than private companies. Its main aim is to ensure the welfare of the
general public within a country.

Private Sector

The Private Sector enterprises are owned, controlled and managed either by individuals or
business entities. It can be small-scale, medium-scale or even large-scale organisations. These
get formed to earn a profit from their business operations, and they can raise funding from
individuals, groups, and the general public.

The different entities within the private sector include sole proprietorship, partnership,
cooperative societies, companies and multinational corporations. They also focus on taking
care of the needs of their customers to survive in the long run. Ever since the introduction of
the New Economic Policy in 1991 by the Government of India, almost every industry in the
country has opened up to the private sector. It has led to a phenomenal increase in the size of
the Indian economy and its growth rates.

Differences between Public and Private Sector

The main differences between Public and Private Sectors are as follows:

Public Sector Private Sector

Definition
Public sector organisations are owned, Private sector organisations are owned, controlled and
controlled and managed by the government or managed by individuals, groups or business entities.
other state-run bodies.
Ownership
The ownership of the public sector units can The ownership of private sector units is by individuals or
be by central, state or local government entities with zero interference from the government.
bodies, and this ownership is either full or
partial.
Motive
The main motive of public sector The main motive of the private sector is to earn profits
organisations is to engage in activities that from their business operations.
serve the general public.
Source of Capital
The capital for public sector undertakings The capital for private sector entities comes either from
comes from tax collections, excise and other its owners or through loans, issuing shares and
duties, bonds, treasury bills etc. debentures, etc.
Employment Benefits
Public sector units provide several Private sector units offer benefits like higher salary
employment benefits like job security, packages, better chances of promotion and recognition,
housing facilities, allowances and retirement competitive environment and greater incentives in terms
benefits. of bonus and other benefits.
Stability
Jobs within the public sector are very stable Jobs within the private sector are not very secure since
since the chances of getting sacked due to non-performance can lead to sacking. Companies can
non-performance are very low. also fire people in case of cost cutting or scaling down of
operations.
Promotions
The criteria for promotion in the public sector The criteria for promotion in the private sector units is
units is generally based on the seniority of the generally based on the merit and job performance of the
employee. employee.
Areas
Some of the main areas that come under the Some of the main areas that come under the private
public sector are police, military, mining, sector are information technology, finance, fast moving
manufacturing, healthcare, education, consumer goods, construction, hospitality,
transport, banking, etc. pharmaceuticals, etc.
Conclusion

Any country needs both the public sector and the private sector to work at their full potential.
There are many differences between the two but a robust financial and economic system must
have an adequate mixture of companies belonging to both these sectors.

ECONOMIC PLANNING- MEANING AND SIGNIFICANCE

Economic planning involves developing strategies and policies to achieve economic goals.
This is done by setting objectives, prioritizing them, allocating resources, and implementing
measures. Planning can be done at different levels, such as national, regional, or local. Once
goals and priorities are identified, policies and strategies are developed, such as focusing on
infrastructure, promoting exports, or improving access to education and healthcare. These
policies are then implemented through programs and schemes.

The success of economic planning depends on various factors, such as the availability of
resources, the effectiveness of policies and strategies, and the capacity of institutions to
implement them. In many countries, economic planning is often guided by a series of Five-
Year Plans, which are updated periodically to reflect changes in economic priorities and
conditions.

Meaning of Economic Planning

Economic planning is when a government or organization decides what things are important
and how to use the money to achieve certain goals. They make plans based on predictions
and decide what rules to put in place to control the economy. The main goal of economic
planning is to help the economy grow and improve in a way that can be maintained for a
long time.

Economic planning in India has been an integral part of the country’s development strategy
since its independence in 1947. The main objective of economic planning in India is to
achieve rapid economic growth while promoting social justice and reducing poverty. This has
been achieved through various Five-Year Plans, which outline the country’s economic and
social goals, and the policies and strategies required to achieve them. Some of the key
objectives of economic planning in India include the following:

 Economic growth: One of the primary objectives of economic planning in India is to

promote economic growth, measured in terms of gross domestic product (GDP). This
involves increasing the production and consumption of goods and services in the
country, creating jobs, and reducing poverty.
 Reducing Poverty: Economic planning aims to reduce poverty by creating
employment opportunities, increasing the productivity of the workforce, and
providing basic necessities to the poor.
 Self-Sufficiency: One of the primary objectives of economic planning in India has
been to achieve self-sufficiency in key areas such as food, energy, and defence. This
is done by promoting domestic production, reducing dependence on imports, and
promoting indigenous research and development.
 Social justice and equity: Economic planning in India also aims to promote social
justice and equity by ensuring that the benefits of economic growth are distributed
fairly across all sections of society.
 Regional Development: Economic planning in India also aims to promote regional
development by reducing regional imbalances and promoting the development of
backward regions. This is done by providing infrastructure, incentives, and subsidies
to promote industrialization and economic growth in these regions.
 Employment generation: India has a large and growing population, with a
significant portion of the workforce employed in the informal sector. Economic
planning aims to create new employment opportunities, especially in the
manufacturing and services sectors, and promote entrepreneurship and self-
employment.
 Reducing regional disparities: India is a vast country with significant regional
disparities in terms of income, infrastructure, and access to basic services such as
healthcare and education. Economic planning aims to reduce these disparities by
 allocating resources to underdeveloped regions and promoting balanced regional
development.
 Balanced Regional Development: Economic planning also aims to promote
balanced regional development by ensuring that the benefits of development reach all
parts of the country. This is achieved by investing in infrastructure, setting up
industries in backward areas, and promoting entrepreneurship.
 Increased Standard of Living: Economic planning in India aims to increase the
standard of living of the people by promoting economic growth and providing access
to basic amenities such as healthcare, education, and housing.

Types of Economic Planning

Planning by Direction and Planning by Inducement

 Planning by direction, which is an inherent feature of socialist society, involves

the complete absence of a laissez-faire system. One central authority plans directs
and executes according to predetermined economic priorities under this style of
economic planning.
 Planning by Inducement, on the other hand, is more democratic in nature. It
entails market manipulation for the sake of planning. Although there is no
obligation, planning by enticement employs some persuasion techniques.
o Enterprises have production and consumption independence under this sort
of planning. However, the state uses rules and methods to manage and regulate
these freedoms.

Financial Planning & Physical Planning

 Resource allocation in financial planning is done in terms of money, and it

is critical to eliminate supply and demand misalignments. As a result, it is critical
in maintaining a supply-demand balance and regulate inflation in order to achieve
economic stability in the country.
 The allocation of resources in physical planning is done in terms of persons,
machinery, and materials. To guarantee that bottleneck situation are avoided during
the execution of the plan, an overall assessment of the available resources is
conducted. It is regarded as a method of long-term planning.

Indicative Planning & Imperative Planning

 The operation and execution of plans are based on the principle of decentralization
in indicative planning. The private sector is neither entirely regulated nor directed to
accomplish the plan's objectives under this style of planning. However, it is projected
to meet those goals. The government assists the private sector in this endeavor but
does not direct it in any way.
 In imperative planning, on the other hand, the government has complete control
over all economic operations. The government has complete control over the
production factors. Even the private sector is required to follow the government's
strict policies and choices.

Rolling Plans & Fixed Plans

  Every year, three plans are set up and implemented as part of a rolling plan. The first
is an annual plan, which involves planning for a single year; the second is a 5-
year plan; and the third is a 15-year plan, which includes bigger goals and
objectives that are aligned with prior year planning.
 A fixed plan, in contrast to a rolling plan, refers to preparing for a specific length
of time, such as four, five, or ten years ahead. It provides specific goals and
objectives that must be completed in a specific time frame. Unless there is an
emergency, the annual objectives are met (those listed in the fixed plan).

Centralized & Decentralized Planning

 Planning is considered a limiting prerogative of the central planning authority

under the centralized planning system. The plan's formulation, as well as its
objectives, targets, and priorities, are completely the responsibility of this authority.
There is no economic liberty, and all economic planning is controlled by bureaucrats.
 Decentralized planning, on the other hand, refers to the execution of a plan from the
ground up. The central planning body formulates the plan in conjunction with the
various administrative entities for the central and state schemes in this style of
planning. The plan for district and village levels is created by the state planning
authority.

Economic Planning in India

 Sir M Visvesvaraya, a civil engineer and ex-dewan of the state of Mysore, published
"The Planned Economy of India" in 1934, which was the first attempt to establish
economic planning in India.
 The Planning Commission, which was replaced by NITI Aayog on January 1,
2015, is responsible for economic planning in India.
 The NITI Aayog (National Institution for Transforming India) was founded with the
intention of accomplishing long-term development goals through cooperative
federalism.
 The history of economic planning in India is interesting, from the formation of NITI
Aayog through the replacement of the Planning Commission's 5-Year Plan with a 15-
Year Vision document.

Conclusion
The different types of planning are taken up by the government based on the development
needs and the socio-political scenario of the country. Many major economies follow a
decentralized approach to planning due to its benefits and huge growth potential. Even in
India, the planning commission is replaced by the NITI Aayog to give impetus to
decentralized planning.

COMPARITIVE ECONOMIC DEVELOPMENT- DIFFERENT

GROWTH MODELS
The Harrod-Domar Growth Model
The Harrod-Domar models of economic growth are based on the experiences of advanced
capitalist economies to analyse the requirements of steady growth in such economy. The
Harrod-Domar economic growth model stresses the importance of savings and investment as
key determinants of growth. The model emphases on the dual character of investment:

1. It creates income which is regarded as the ‘demand effect’.

2. It augments the productive capacity of the economy by increasing its capital stock
which is regarded as the ‘supply effect’ of investment.

The main assumptions of the Harrod-Domar models are as follows:

1. A full-employment level of income already exists.

2. There is no Govt. Intervention.
3. Closed economy i.e no Foreign Trade.
4. Average propensity to consume is equal to marginal propensity to consume.
5. Savings are equal to Investment.

Given the above main general assumptions, we shall discuss both models separately as
below. Although Harrod and Domar models differ in some aspects, they are similar in
substance as both the models stress the essential conditions of achieving and maintaining
steady growth.

The Harrod Model:

An English economist, Henry Roy Forbes Harrod (13 February 1900 – 8 March 1978) tries to
show in his model how steady growth may occur in the economy. Once the steady growth
rate is interrupted and the economy falls into disequilibrium, cumulative forces tend to
perpetuate this divergence thereby leading to either secular deflation or secular inflation.

The Harrod Model is based upon three distinct rates of growth as below:

1. The actual growth rate (G): is growth in income (Y) in the given period. Mathematically;
G = ∆Y/Y The actual growth rate (G) is determined by:

(a) Saving-Income ratio (s) known as the Average Propensity to Save

(b) Capital- Output ratio (C)

G = s/C

The relationship between the actual growth rate and its determinants is expressed as: GC = s
------(1) Now;
The above equation so derived explains that the condition for achieving the steady state
growth is that ex-post (actual, realized) savings must be equal to ex-post investment.

2. The warranted growth rate (G w): Warranted growth Rate also known as Full-capacity
growth rate refers to that growth rate of the economy when it is working at full capacity. In
other words, Gw is interpreted as the rate of income growth required for full utilization of a
growing stock of capital.

Warranted growth rate (Gw) is determined by capital-output ratio and saving- income ratio
and their relationships is expressed as:

Gw Cr = s or Gw =s/Cr

where ;
Cr denotes the amount of capital-output ratio needed to maintain the warranted

s denotes the saving-income ratio.

The above equation reflects that if the economy is to advance at the steady rate of Gw at its
full capacity, income must grow at the rate of s/Cr per year.

3. The natural growth rate (Gn):

The natural growth rate also known as the potential or the full employment rate of growth is
the rate of economic growth required to maintain full employment. The natural growth rate
regarded as ‘the welfare optimum’ by Harrod is the maximum growth rate which an economy
can achieve with its available natural resources.

The Natural growth rate is determined by natural conditions such as labor force, natural
resources, capital equipment, technical knowledge etc.

Condition for the Achievement of Steady Growth:

According to Harrod, the economy can achieve steady growth when there is equality between
G and Gw at the same time between C and Cr. This condition can be expressed as:
G=Gw and C=Cr
Harrod states that a slight deviation of G from G w will lead the economy away and further
away from the steady-state growth path. Thus, the equilibrium between G and Gw at this
junction is considered as a knife-edge equilibrium.

Instability of Growth:

As discussed above, to achieve steady growth in economy, a balance between G and Gw

must be maintained otherwise the economy will be in disequilibrium. Therefore, Harrod
analysed two situations. The first situation implies that if such situation occurred, the
economy will find itself in the quagmire of inflation. This is because under this situation, the
growth rate of income being greater than the growth rate of output, the demand for output
would exceed the supply of output.

In contrast, the second situation implies if such situation occurred, the economy will lead to
secular stagnation because actual income grows more slowly than what is required by the
productive capacity of the economy leading to an excess of capital goods (C>Cr).

For once if steady growth equilibrium path is disturbed, it is not self-correcting. Therefore, it
follows that one of the major tasks of public policy is to bring G and Gw together in order to
maintain long-run stability. For this purpose, Harrod introduces his third concept of the
natural rate of growth. The whole argument can also be shown with the help of the following
diagram:

As shown in Panel –(A) of the above figures, starting from the initial full employment level
of income Y0, the actual growth rate G follows the warranted growth path Gw up to point E
through period t2. However, from t2 onward G deviates from Gw and is higher than the
latter. In subsequent periods, the deviation between the two becomes larger and larger.

As shown in Panel–(B), from period t2 onward, G deviates from Gw where G falls below Gw
and the two continue to deviate further away in subsequent periods.
Interaction of G, Gw and Gn:

To achieve full employment equilibrium growth, the economy must satisfy the condition
where Gn=Gw = G. But this is a knife-edge balance. For once there is any divergence
between natural, warranted and actual rates of growth conditions of secular stagnation or
inflation would be generated in the economy. The same argument can be shown through the
following diagram:

As shown in Panel-(A), if Gw>Gn, secular stagnation will develop resulting in

unemployment. In such a situation, Gw is also greater than G for most of the time because the
upper limit to the actual rate is set by the natural rate.

If Gw < Gn, secular inflation will develop in the economy. In such a situation, Gw is also less
than G for most of the time as the one shown in Panel-(B) of the above diagram.

The instability in Harrod’s model is due to the rigidity of its basic assumptions such a fixed
production function, a fixed saving ratio, and a fixed growth rate of labor force. The policy
implications of the model are that saving is a virtue in any inflationary gap economy and vice
in a deflationary gap economy. Thus, in an advanced economy, s has to be moved up or down
as the situation demands.

The Domar Model:

Evsey David Domar (April 16, 1914 – April 1, 1997), A Russian American economist builds
his model from both demand as well as the supply side based on dual effect of investment
and provided the solution for steady growth.

To simplify the model, the demand and the supply equation in the incremental form can be
written as follows:

The demand side of the long-term effect of investment can be summarized and expressed
through the following relation as:

∆Yd = ∆I (1/α) [Change in income (∆Yd) equals multiplier (1/α) times the Change in
investment (∆I)]

Where ‘α’ (Alpha) = Marginal propensity to save which is reciprocal of multiplier.

The supply size of investment can be summarized and expressed through the following
relation as:

∆Ys = σ ∆K [Change in output supply (∆Ys) equals the product of Change in real capital
(∆K) and capital Productivity (σ)]

Equilibrium for Steady Growth:

For achieving steady growth, aggregate demand and aggregate supply must be balanced as
expressed below:

∆Yd = ∆Ys i.e

∆I/I = α σ OR ∆Y/Y = α σ

COMPARISON OF HARROD MODEL AND DOMAR MODEL

Similarities

 Both models are based on same assumptions.

 Both models are Knife-edge equilibrium.
 Both models focuses on Steady state growth.

Dissimilarities:

 Harrod focuses on rate of growth needed to equate Investment with savings while
Domar is interested in rate of Investment needed to equate demand with supply.
 Harrod used 3 distinct types of growth rates (Ga,Gw and Gn) and Domar used only
∆Y/Y.
 Harrod is based on Accelerator and Domar is based on Multiplier.
SOLOW MODEL
RAGNER NURSKE
ROSTOW MODEL
SCHUMPETER MODEL
INFRASTRUCTURE DEVELOPMENT

India’s high growth imperative in 2023 and beyond will significantly be driven by major
strides in key sectors with infrastructure development being a critical force aiding the
progress.

Infrastructure is a key enabler in helping India become a US $26 trillion economy.

Investments in building and upgrading physical infrastructure, especially in synergy with the
ease of doing business initiatives, remain pivotal to increase efficiency and costs. Prime
Minister Mr. Narendra Modi also recently reiterated that infrastructure is a crucial pillar to
ensure good governance across sectors.

The government’s focus on building infrastructure of the future has been evident given the
slew of initiatives launched recently. The US$ 1.3 trillion national master plan for
infrastructure, Gati Shakti, has been a forerunner to bring about systemic and effective
reforms in the sector, and has already shown a significant headway.

Infrastructure support to the nation’s manufacturers also remains one of the top agendas as it
will significantly transform goods and exports movement making freight delivery effective
and economical.

The "Smart Cities Mission" and "Housing for All" programmes have benefited from these
initiatives. Saudi Arabia seeks to spend up to US$ 100 billion in India in energy,
petrochemicals, refinery, infrastructure, agriculture, minerals, and mining.

The infrastructure sector is a key driver of the Indian economy. The sector is highly
responsible for propelling India’s overall development and enjoys intense focus from the
Government for initiating policies that would ensure the time-bound creation of world-class
infrastructure in the country. The infrastructure sector includes power, bridges, dams, roads,
and urban infrastructure development. In other words, the infrastructure sector acts as a
catalyst for India’s economic growth as it drives the growth of the allied sectors like
townships, housing, built-up infrastructure, and construction development projects.

To meet India’s aim of reaching a US$ 5 trillion economy by 2025, infrastructure

development is the need of the hour. The government has launched the National
Infrastructure Pipeline (NIP) combined with other initiatives such as ‘Make in India’ and the
production-linked incentives (PLI) scheme to augment the growth of the infrastructure sector.
Historically, more than 80% of the country's infrastructure spending has gone toward funding
for transportation, electricity, and water, and irrigation.

GOVT. INITIATIVES

 Capital investment outlay for infrastructure is being increased by 33% to Rs.10 lakh
crore (US$ 122 billion), which would be 3.3 per cent of GDP and almost three times
the outlay in 2019-20.
 In recent years, there has been a substantial increase in the pace of construction of
national highways, from an average of 12 kilometres per day in 2014-15 to around 29
kilometres per day in 2021-22.
  As per the Union Budget 2023-24, a capital outlay of Rs. 2.40 lakh crore (US$ 29
billion) has been provided for the Railways, which is the highest ever outlay and
about 9 times the outlay made in 2013-14.
 Infrastructure Finance Secretariat is being established to enhance opportunities for
private investment in infrastructure that will assist all stakeholders for more private
investment in infrastructure, including railways, roads, urban infrastructure, and
power.
 National Infrastructure pipeline projects of around Rs. 111 lakh crore.
 National Monetisation Pipeline of Rs. 5 lakh crore for 5 years to make use of
brownfield projects.
 PM Aawas Yojana to provide affordable housing to Urban and Rural poor.
 Smart city Mission to create 100 smart cities with allocation of 15 billion $.
 Target to produce 400 GW of renewable energy by 2030.

CHALLENGES

 Lack of cooperative federalism between centre and states.

 Many projects have been stalled due to problems in Land acquisition and
environmental clearances.
 Protests by displaced population and farmers.
 Poor governance of infra projects as many projects are hit by time and cost overrun.

SUGGESTIONS

 Public-Private partnership projects must be promoted to bring quality and timely

completion of projects.
 There should be a public project monitoring framework to decide viability, cost and
time involved in projects.
 Training of officials involved in public projects to improve governance and quality.
PURCHASING POWER PARITY