Mixed Economic Framework Note PDF

**Mixed Economic Framework** India\'s development experience is inextricably linked with India\'s decision to opt for a mixed economy in the beginning of her own planning process. There neither was nor is even now a consensus among social scientists whether the choice of the mixed economy concept w...

**Mixed Economic Framework** India\'s development experience is inextricably linked with India\'s decision to opt for a mixed economy in the beginning of her own planning process. There neither was nor is even now a consensus among social scientists whether the choice of the mixed economy concept was right for India. On the one hand, the heavy industry bias, insufficient resource allocation, non-competitive nature of Indian economy in the global context, (high cost economy and shackling of the growth impulses) are all traced to this decision to opt for mixed economy. It implied a significant degree of government intervention and control. On the other hand, the left-wing economists **have** viewed the adoption of mixed economy framework as being \"little more than a device for legitimising the rule of the capital in direct collaboration with the State. They seem to regard it as axiomatic that a mixed economy represents nothing more than a compromise weighted heavily in favour of the vested interests.\" It has nevertheless to be conceded that market forces left to themselves cannot offer a solution to the problem of poverty, when millions of people live so close to subsistence and a large number below subsistence level. Also, given the way India\'s culture has evolved, a centrally planned economy with the State steering the social and economic change is an impossible model for the country. Pursuit of a mixed economy, therefore, has been the only feasible proposition. **Salient Features of Mixed Economy** Mixed economy implies demarcation and harmonisation of the public and private sectors. In it, free functioning of the market mechanism is not permitted and the government intervenes or regulates the private sector in such a way that the two sectors become mutually reinforcing. A mixed economy represents an achievable balance between individual initiative and social goals. Planning and market mechanisms are so adjusted that each is used for realising the objectives of the \'economy to which it is most suited. There is a commitment on the part of both the sectors to national objectives and priorities. The concept of mixed economy represents a middle position between the two extremes of planned economy and market economy. This concept is flexible and has its own means and methods of approaching economic, political and social issues. To achieve clarity in the understanding of the concept of mixed economy, let us discuss the meaning and characteristics of Capitalism, Socialism. **Capitalism** Capitalism has been defined as an economic system stressing individual initiative with a central role for a market economy, the profit motive and ownership of means of production, by private individuals and corporations. **Essentials of Capitalism** **1) The Right of Private Property:** The various means of production are under the private ownership of individuals. The private individuals can hold, use or sell them as they like. Right of inheritance by the sons and daughters or other legal heirs is implicit in this right. **2) Freedom** of **Enterprise**: There is no restriction on the right of the individual to engage in any business or enterprise for which he has the necessary means. **3) Profit Motive**: Profit motive is at the heart of a capitalist system. It is profit, not any altruistic feelings, which makes an entrepreneur invest in any economic activity. **4) Competition**: Competition exists among producers, sellers, buyers, job seekers, employers, investors etc. This is achieved through cost control, price cutting, advertisements etc. **5) Consumers Sovereignty**: In a free market economy, wishes and preferences of the consumers direct the economic activity. The consumer occupies a key role in the system. **6) Price System**: It is the price mechanism which makes the capitalist economy function automatically without there being any central direction or control on production, consumption or distribution decisions. **7) Inequalities of income**: Unequal distribution of property among individuals leads to unequal distribution of incomes. There is a wide gulf between the incomes of the rich and the poor. Since there is no central planning authority to make the fundamental economic decisions and thus to allocate productive resources among various competing uses, the market economy uses the price mechanism, which plays a vital role in the working of the economy. Any imbalances are solved and corrected automatically through the price mechanism and demand-supply interaction. There are adequate rewards for greater efficiency and hard work through higher compensation. There is also incentive to save and invest and provide for higher incomes for the present and future generations. Market mechanism also enables entrepreneurs to take risks for higher profits, undertake innovations giving rise to technological progress. **Socialism** \"Socialism is an economic organisation of in which the material means of production are owned by the whole community to a general economic plan, all members being entitled to benefit from the of such socialised planned production on the basis of equal rights". As against this, democratic socialism is characterised by public ownership of at least ***the*** \"strategically important material means of production\" while, at the same time maintaining individual freedom of both consumption and occupation**.** 1\) It is based on social and economic planning, collective ownership of factors of production, social welfare and cooperation. 2\) Socialist economy requires a central authority to determine the goals of society and coordinate the community\'s **efforts to attain** those goals. 3\) Socialist economy is a centrally planned economy, with the central authority planning the allocation of resources so as to attain the goals and objectives of the society. 4\) Equity or equitable distribution of income is central to socialism. 5\) Social welfare rather than private profit characterises a socialist society\'s goals. **Salient Features of Mixed Economy** Having described the two extremes of capitalism and socialism, it is now possible to define a mixed economy in functional terms. A mixed economy is characterised by: i)a balance between the market economy and the planning mechanism; ii)a clear demarcation of the boundaries of public sector and private sector so that the core sector and strategic sectors are invariably in the public sector; **iii)** while profit motive influences decision-making in the private sector, the economic viability criteria for investment decisions in the public sector is based on social cost-benefit analysis; iv\) the ownership of means of production as between public sector, private sector, joint sector and cooperative sector is so decided that there is a balance between personal and social incentives and sectional and general interests; v\) there is occupational freedom and freedom of consumers\' choice; vi\) the government intervenes to prevent undue concentration of economic power, and monopolistic and restrictive trade practices; vii\) the government endeavours to take care of the consumption levels and objectives of the weaker sections of the society through public distribution system, poverty alleviation programmes etc.; viii\) social objectives of equity, employment, balanced regional development, family welfare are emphasised; ix\) the doctrinaire rigidities of socialism are avoided and a pragmatic approach to decision-making for promoting economic growth is usually adopted; and x\) mixed economy is not merely an economic concept and the rights of the individual are respected and protected subject only to the requirements of public law and order and morality. Thus even though mixed economy is a mixed form of capitalism and socialism, it has an identity of its own. The evils of extreme economic systems of pure capitalism and pure socialism are avoided in a mixed economy. It presents a middle path. **EVOLUTION OF MIXED ECONOMY IN INDIA** As early as the First Five Year Plan, the Indian policy makers decided that the State must not only assume the responsibility of providing the infrastructure facilities and the social overheads, but should also undertake direct promotional work. It was recognised that the government should intervene in the industrial field and accordingly the development of basic and strategic industries was earmarked to the public sector. It was also recognised that the task of economic development of the country was so large that the initiative of both the private and public sectors had to be harnessed for optimal growth. The concept of mixed economy was evolved so that both the private and public sectors could contribute to the process of growth. It was considered that individual enterprise and initiative would be the best catalysts of change in the sphere of agriculture, organised industries, small scale industrial units, trade and construction. With the announcement of the Industrial Policy Resolution, 1956, the concept of mixed economy was given a definite shape and policy direction. Even before that, the Industrial Policy Resolution of 1948 had sought to establish mixed economy, with both private and public sectors, increasing controls in government hands for regulating all industries. The two main instruments of industrial policy were the Industries (Development and Regulation) Act of 1951 and the Companies Act of 1956. These two Acts conferred on the government, through licensing procedure, the power of regulating location, production and expansion of major industries in the country. **Industrial Policy Resolution, 1956** The Avadi Resolution of the Indian National Congress declared the establishment of a socialistic pattern of society as the aim of economic and industrial policy of the government. The Resolution made it clear that \"the State will necessarily play a vital part in starting and operating big projects through overall controls of resources, trends and essential balances in the economy \... with strategic controls over the private sector to prevent the evils of anarchic industrial development.\" Consequently, the Parliament adopted on 30th April, 1956, a new Industrial Policy Resolution, the main features of which were as follows: The industries were classified into three categories: **Schedule A**: Those industries which were to **be** the sole responsibility of the State. This list included 17 industries - arms and ammunition, atomic energy, iron and steel, heavy machinery required for mining, heavy electrical industries, coal, mineral oils, mining, iron ore and other important minerals (like copper, lead and zinc, etc.), aircraft, air transport, railways, ship-building, telephone, telegraph and wireless equipment, and generation and distribution of electricity. **Schedule B**: There were about a dozen industries in the list, where the State might establish new units or existing units might be progressively nationalised. In these industries, the private sector was guaranteed plenty of opportunity to develop and expand. It included the following industries : Other mining industries, aluminium and other non-ferrous metals not included in Schedule A, machine tools, ferro alloys and steel tools, chemicals, antibiotics and other essential drugs, synthetic rubber, pulp, road and sea transport. **Schedule C**: Industries in this Schedule consisting of the rest of the industries, not included in Schedules **A** and B, would be in the private sector and would **be** subject to the social and economic policy of the government. The Industries (Development and Regulation) Act of 1951 and other relevant laws would apply to these industries. Among other things, the resolution emphasised that fair and non-discriminatory treatment would be given to private sector industries and their development, encouraged by developing transport facilities and by providing financial assistance. The regulation recognised that the private sector by itself could not bring about rapid industrialisation of the country. It, therefore, provided vital and expanding **scope** for public sector industries. At the same time, private sector was assured of an important place in the industrial structure of the country. The resolution **also** acknowledged the important role of village, cottage and small scale industries. The resolution accorded a prominent role to the public sector. The apprehensions of the private sector that the public sector would develop at their cost did not turn out to be correct and private sector found ample scope for its expansion. **Industrial Policy Resolution, 1977** The new Industrial Policy of **1977** was very critical of the **1956** Resolution on the ground that \"Unemployment has increased, rural-urban disparities have widened and the rate of real investment has stagnated. The growth of industrial output has been no more than three to four per cent per annum on the average. The incidence of industrial sickness has become widespread and some of the major industries are worst affected. The pattern of industrial costs and prices has tended to be distorted and dispersal of industrial activity away from the urban concentration has been very slow\". Other points of criticism were that international giant industrial concerns had penetrated the protected Indian market and monopolistic power of the large business houses had increased. The new policy focused on the development of small scale sector, cottage and household industries and the tiny sector. It further provided for using provisions of the Monopolies and Restrictive Trade Practices Act against expansion of larger industrial houses. The public sector was to be used for providing strategic goods of basic nature and also for maintaining supplies of essential goods. In areas where foreign collaboration was not required because of the availability of indigenous technical know-how, such collaboration agreements were not be renewed. Apart from giving greater importance to village and small scale sector and at the same time instilling a sense of fear among large industrial houses, the new policy did not lead to much achievements. **Industrial Policy of 1980** Outlining the Industrial Policy of 1980, it was stated, \"The Industrial Policy, announcement of **1956** \... reflects the value system of our country and has shown conclusively the merit of constructive flexibility, In terms of this resolution, the task of raising the pillars of economic infrastructure in the country was entrusted to the public sector for reasons of its greater reliability; for the very large investments required and the longer gestation period of the projects for economic development, The **1956** Resolution, therefore, forms the basis of this statement. The policy accorded priority to optimum utilisation of installed capacity, balanced regional development, agro-based industries, export-oriented industries and promoting \"economic federalism\" by equitable spreading of investment over small but growing industrial units in urban as well as rural areas. **MIXED ECONOMY** - **RECENT TRENDS AND AN APPRAISAL** The decade of the **1980s** witnessed a rapid expansion of the industrial activity in India which can be attributed mainly to the reforms undertaken in both industrial and trade policies. Further policy changes became necessary for accelerating the industrial growth in the **1990s** in order to consolidate the achievements of the last decade. The new policy initiatives were announced by the government in the Statement on Industrial Policy on 24th July, **1991.** The policy deregulates the economy in a substantial manner. The major objectives of the new policy package will be: - to build on the gains already made - correct the distortions or weaknesses that might have crept in - maintain sustained growth in productivity and gainful employment - further encourage growth of entrepreneurship and upgrade technology in order to attain international competitiveness. All sectors of industries whether small, medium or large, belonging to the public, private or cooperative sector are to be encouraged to grow and improve on their past performance. The provisions of the new policy are: **i)** Industrial licensing was abolished for all projects except in **18** industries where strategic or environmental concerns are paramount or where industries produce goods with exceptionally high import content. With this, **80** per cent of industry has been taken out of the licensing framework. **ii)** The **MRTP** Act was amended to eliminate the need for prior approval by large companies for capacity expansion or diversification. This will enable Indian firms to become large enough to compete effectively in the global markets. **iii)** The requirement of phased manufacturing programmes was discontinued for all new projects. iv\) Areas reserved for the public sector were narrowed down, and greater participation by private sector was permitted in core and basic industries. In place of the seventeen areas earlier reserved for investment by the public sector, only eight such areas are now reserved. These eight are mainly those involving strategic and security concerns. **v)** Government clearance for the location of projects was dispensed with except in the **case** of 23 cities with a population of more than one million. **vi) A** National Renewal Fund has been set up to ensure that the costs of technological change and modernisation industry would not be borne by the workers. It will be used to provide a safety net to workers in sick and non-viable enterprises, and to finance their retraining and redeployment. Along with a reform of industrial policies, steps were taken to facilitate the inflow of ***direct*** foreign investment. These non-debt-creating inflows will reduce reliance on fixed interest-debt and also bring in new technology, marketing expertise and modern managerial practices. The following measures were taken in this regard: i\) The limit of foreign equity holdings was raised from 40 to **51** per cent in a wide range of priority industries. ii\) The Foreign Investment Promotion Board has been set up to negotiate with large international firms to expedite the clearance required for projects in non-priority industries.