There are primarily two types of economies-capitalist or free market economy and socialist economy. Mixed economy is a median between these two main economies taking some characteristics of either of them. The capitalist or free market economy is marked by private ownership of the major means of production, i.e. land, labour, capital and entrepreneurship.
There is profit motive that drives the organisers of these factors of production. In socialist economy these factors are owned by the government. The production is done not due to profit motive but to satisfy the needs of the people. In a mixed economy, the private ownership of factors of production as well as public ownership go side by side. The government keeps an overall control on the business activities of private entrepreneurs.
During British rule, i.e. up to 1947, the Indian economy was purely capitalistic. The British exploited the rich resources of the country to drain it of its wealth and make Britain a prosperous country. Although there was private ownership of factors of production, they were not allowed to earn profit but were directed to remain subservient to the British cause. As there was no local Indian government, there was no state ownership of resources as such. When India achieved independence in 1947 the economy was in a bad shape. There was no capital, no infrastructure, no industry worth the name.
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The economy was almost entirely dependent on agriculture. The majority of the population was in the grip of poverty, unemployment and destitution. The founding fathers of the country knew that they had a gigantic task of rebuilding the country in their hands. Not only the industry and infrastructure were to be created but also the trade and commerce to be developed, agriculture to be improved, and most importantly the poverty to be eradicated.
This huge task could not have been performed by following a single economic system. Keeping all the industries and factors of production in the hand of the state would have kept the private sector out of the task of nation rebuilding. This would have deprived the nation of the services of vast private enterprises and worked to the great disadvantage of the nation. Putting the entire factors of production in private hands would have allowed them to control production according to their motive of earning huge profits instead of national priorities.
All development was therefore taken up through Five-Year Plans. Each Plan targeted some priority areas. The state earmarked adequate amount of funds to undertake the projects earmarked in the Plan. The private sector was allowed to supplement the public sector-to earn profit as well as participate in the national development. Before assessing India as a mixed economy, it is essential to know what mixed economy is. As said earlier, it is a median between capitalist economy and socialist economy.
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The capitalist economy, also known as free market economy, is characterised by private ownership of resources, profit motive and consumers’ sovereignty. The price is determined by the market forces of demand and supply. Consumers will buy goods if the price suits them, the sellers will sell if they are able to make some profit at that price. The producers will manufacture those goods which are easily sold in the market. There is little intervention by the government which plays only a supervision role. America, England and France are examples of capitalist economy.
The socialist economy is marked by the state ownership of factors of production. Goods are produced as per orders of the government based on the needs of citizens. Each person works according to his capacity and gets as per his need. The state determines the level and type of production which is distributed equitably among the people. China, Russia and Poland are examples of socialist economies.
In a mixed economy, the public sector and the private sector exist side by side. Some factors of production are owned by the state and some are in the private hands. The public undertakings generally are the basic industries or strategic industries which are necessary from the defence point of view. Although private sector is allowed to exist, it is subject to government control. The prices are determined by the forces of demand and supply, but the government exercises control and intervenes by imposing a maximum limit on the prices of goods. If the seller charges more price, the consumer can lodge a complaint in the Consumer Court.
India as a mixed economy has made rapid strides during about sixty years after independence.
Millions of people who were living below the poverty line have been uplifted. This has become possible because the government took the basic industries like mining, quarrying, iron and steel, heavy electricals, nuclear energy in its hand because they create raw material for many other industries. This not only stopped the country’s dependence on import of raw material but also developed many other industries like textile, electronics, chemicals, etc. The programmes for the development of small scale industries, tiny industries were also launched but were allowed to remain in the hands of private businessmen.
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The industrial development was, therefore, sustained at a higher level. The policies made by the government were implemented equally well by the public sector and private sector. Similarly, the agricultural sector which is the mainstay of Indian economy and is largely in the hands of private farmers, cultivators and peasants has been allowed to flourish by favourable policies like exempting agricultural income from income tax, giving subsidy on agricultural inputs like fertilizers, fixing minimum support price for major crops like wheat, rice and sugarcane, and undertaking other programmes of modernisation and mechanisation of agriculture. In the financial sector, several decisions were taken for the development of economy.
The nationalisation of 14 major private banks in 1969 and six other banks in 1980 was done to make them direct their activities for the development of society, instead of concentrating on profits. They were asked to lend liberally to farmers who wanted to buy inputs like fertilizers, good quality seeds, farm implements, etc. They were also asked to encourage small traders, businessmen, small scale industries, self-employed professionals.
The branches of nationalised banks are doing what is called social banking. However, a large number of private banks are also allowed to exist because they are supposed to be more efficient and adopt modern technology in rendering service to the customers. The banks are regulated and controlled by the Reserve Bank of India through monetary decisions like deposit and lending interest rates, maintenance of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). Thus, overall control lies with the State.
It has been stated by experts that India is now deviating from its path of mixed economy. Certain moves by the government, like privatisation of some Public Sector Undertakings (PSUs), allowing foreign multinational companies (MNCs) to establish their business in India, development of mall culture and encourage huge foreign direct investment (FDI) and encouraging big private houses to expand their business allowing them to fix prices of products have convinced people that the economy is adopting the capitalist mode. However, it should be kept in mind that in the present era of globalisation, the country has to adopt a liberalised policy for expansion of business including exports. It has paid us rich dividends because our annual GDP growth rate at over 8 per cent has been the second highest in the world. The key sectors are still held by the government. The policies are framed by the state according to national priority. The economy remains a mixed economy with a strong public sector and a vibrant private sector.