In a mixed economy, the entire economic system is divided into three parts:
(i) Sectors which are exclusively controlled and managed by the private enterprise subject to the general control and regulation by the State;
(ii) Sectors which are exclusively controlled and managed by the State; and
(iii) Sectors which are jointly managed and controlled by the state and private enterprise.
Essential Parts of the Economic System
1. Private Sector:
There is a vast private sector in India dealing with both production and distribution of goods and services. The private ownership has taken many forms—single proprietorship, partnership, joint stock companies and co-operatives.
The private sector produces and distributes a major proportion of the total product of the country. This is quite clear from the fact that it contributes to the GDP to as much as 75 per cent. Almost the entire agriculture is in private hands.
The private sector industries are based on self-interest and profit motive. Individual initiative is given full scope and the system of private property is respected.
Individual freedom and competition are allowed to exist. At the same time, it is not free capitalism but is controlled capitalism because free enterprise and profit motives are all controlled in the interest of society.
2. Public Sector:
The Industrial Policy Resolution of 1948 of the Government of India contemplated a mixed economy. There was a sphere reserved for private enterprise and another for public ownership. The Government felt that the State could contribute more quickly to the increase of national wealth by expanding its activities.
In the 1956 Industrial Policy, industries were divided into three categories. The first category included industries, the future development of which would be the exclusive responsibility of the State. There are 17 industries in this category and all new units in these industries would be set up only by the State.
In the second category were included such industries which would be progressively State-owned but the private sector may be permitted to supplement the effort of the State. This category comprised 12 industries which were less important than those included in the first category.
The third category included all the remaining industries and their future development would, in general, be left to the initiative and enterprise of the private sector. Even in this category, it would be open to the State to open any new industry. Thus no field was safe from Government embrace.
In a country aiming at a socialist pattern of society, the public sector has to occupy progressively “the commanding heights” in the economy. Over the last four decades, the public sector has emerged as a major factor in the country’s economic growth.
The public sector, though it contributes only around 25 per cent to the country’s GDP, is of crucial importance because it controls some key production and distribution activities of the economy.
3. Economic Planning:
The present age is the age of planning. If a Rip Van Winkle were to awake to-day from a slumber which had started in the 30s and were to tour throughout the world, he would be amazed at the importance now attached to economic planning.
In fact, during the last four decades, there has been growing faith throughout the world in the benefit of a centrally directed economic system. In most countries whether with a democratic set up or under dictatorship the authority of the Government is freely invoked to stimulate new investment and technological change in a systematic manner to use the national resources in accordance with the economic conditions of the country and to synchronise the process of economic development with the socio-economic institutions of the country.
The planning mechanism is an urgent necessity in an underdeveloped economy to pierce the vicious circle of poverty and to break out of a mould of stagnation.
A mixed economy is necessarily a planned economy. Economic planning has become an integral part of the Indian economy. Economic planning is an essential element of a socialist economy, but all planned economies are not necessarily socialist economies.
A country may adopt planning while retaining its capitalistic structure. In India, economic planning has been introduced in a basically capitalistic framework. In India planning is not all-pervasive but limited in scope and it also lacks the element of compulsion. Indian plans lay down targets even for sectors over which the state has little control.
The entire agriculture is in the private sector and the government attempts to realise the targets laid down for this sector by providing certain incentives which may or may not work.
In other words, plans have been largely indicative in character i.e. they are not legally binding on the public or the private sector. Market mechanism has a predominant position in the Indian economy.
In contrast to rigid communistic types of planning, we have democratic planning in India. Under this type of planning, people’s welfare and well-being are also of great significance.
The mixed economy does not merely call for co-existence of the two sectors—private and public but also suggest inter- penetration. It is argued that private enterprise is not so private because of the massive public money invested through the public financial institutions.
Another aspect of inter- penetration between the two sectors is substantial dependence of private enterprise on public enterprise for the supply of basic goods and utility services and the like. Sometimes, the prices charged by public enterprises used to be kept low for the benefit of private enterprises.
The dependence of private enterprise on public enterprise has helped to reduce a compartmentalised approach towards the problems of the two sectors. The gap between the two sectors may be further narrowed if the private sector is made more socially-oriented and public sector more business-oriented.
India has a very complex mixed economic system. First, a simple mixed economic system is characterised by the existence of private and public sectors.
India has a multiplicity of sectors private, public, joint, co-operative, workers’ sector and also tiny sector. Secondly, a simple mixed economy is characterised by complementarily between planning and pricing.
India has a multiplicity of mechanisms at work Five Year Plans, annual plans during plan holidays, ideas of rolling plans, elaborate system of controls and regulatory measures etc. Finally, a simple mixed economy is expected to reach a target level of social welfare, and for this task, the profit policies are to be designed according to a social purpose.
The social welfare function in India is defined by the multiplicity of objectives which are sometimes conflicting in nature. For example, in terms of Five Year Plans, India aims at efficiency, justice, stability and growth.
Productive efficiency in its static sense refers to allocation efficiency of the given resources. Productive efficiency in its dynamic sense refers to economic growth. In order to promote a higher rate of growth, large investments are undertaken.
Such investments increase the flow of money faster than the flow of output and, as a result, inflation starts. Thus price stability comes in conflict with economic growth.
Similarly, economic growth comes in conflict with social justice. Progressive tax system is used to reduce income inequalities but the same tax policy hampers private incentives to invest and thereby generate growth.
The present-day mixed economy of India has evolved through a series of policy formulations and legislations. It started with the Industrial Policy Resolution of 1948. This was followed by the Industries (Development and Regulation) Act, 1951, Directive Principles of State Policy, 1954, Industrial Policy Resolution 1956, MRTP Act 1969, Industrial Licensing Policy, FERA 1973.
These enactments and policy formulations have been supplemented from time to time by Five Year Plans, controls and regulations on prices, output, production and various anti-poverty schemes.