Role of State in Planning |Mixed Economy | Economics

The basic objective of planning in a mixed economy is to accelerate the rate of capital formation in order to promote faster economic growth which will ultimately lead to poverty alleviation; if necessary redistributive measures are adopted.

In the early 1950s it was felt that a rapid expansion of the economic and social responsibilities of the State will alone be capable of fulfilling the legitimate expectations of the people. So it was believed that the state could play a significant role both in raising the domestic rate of savings and in putting it to more productive use.

The role of the State may now be discussed against this backdrop:

1. Externalities:

Apart from its role in maintaining law and order, defining and protecting property rights, enforcement of contracts and the like, the State has to take the primary responsibility of providing elementary education, basic health care, safe drinking water and other facilities which have favourable effects on the overall level of productivity. In the presence of significant externalities (beneficial or harmful), direct State intervention is necessary and justified.

2. Investment on Infrastructure-Building:

Direct involvement of the state is deemed justifiable in case of projects (e.g., roads, railways, major irrigation, steel plants, etc., which call for investments on a scale far beyond the capacity of individual investment and/or are in the nature of public utility concerns such as P & T department, the fire brigade, water supply corporations, etc.

In most cases, even if the private sector is allowed to operate, the need for effective mechanisms to define and enforce standards, norms of efficiency and ‘fair’ rate of return on investment is universally accepted. All these call for State regulation.

3. Promoting Saving and Expanding Investment Opportunities:

The government can also help the process of development by creating conditions which induce people to save more. So it is the task of the government to create an integrated financial infrastructure and provide various incentives to both households and corporate to save more. Moreover, the government can intervene in various ways to expand profitable investment opportunities.

4. Equity and Justice:

Strong state intervention is a logical corollary of the goals of social justice and preventing undue concentration of wealth and economic power in private hands. This is why the Government of India had declared in the early stage of planning that India was going to have a socialistic pattern of society in which there would be progressive reduction of inequality and poverty.

This also explains why there was so much stress on the expansion of the public sector; which, it was thought, would hold in check the rapid expansion of the private sector. In fact, it was expected that the public sector would act as a countervailing force against the private sector. Even in 1974, the World Bank had specified a common strategy of development for its member countries, viz., redistribution with growth.

Redefining the Role of State:

At present the public sector is much less dominant in a mixed economy like India than it used to be in many critical sectors and its relative position is likely to decline further as government ownership in many existing public sector organisations is expected to decline to a minority mainly due to privatisation and disinvestment.

It is quite obvious that India’s industrial growth in future will depend largely upon the performance of the private sector and government policies may, therefore, provide an environment which is conducive to such growth. In other words, the basic task of the government is create a macroeconomic environment in which economic agents can have the maximum opportunity to optimize.

This means that the Government has a very important role—but a different one from that envisaged in the past. There are many areas, e.g., the social sectors, where its role will clearly have to increase. There are other areas, e.g., infrastructure development, where gaps are large and the private sector cannot be expected to step in significantly. In these areas the role of the State may have to be restructured.

It will have to increase in some areas of infrastructure development, which are unlikely to attract private investment, e.g., rural infrastructure and road development. In others, e.g., telecommunications, power, ports, etc., the private sector can play a much larger role provided an appropriate policy framework exists.

Here the role of the State needs to change to facilitate such investment as much as possible while still remaining a public sector service provider for quite some time. In all these areas, the role of the State as a regulator is to ensure a fair deal for consumers, transparency and accountability.