Role of Government and State Financial Institutions in Indian Economy

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  • Topic: Five-year plan, Five-Year Plans of China, Monetary policy
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  • Published : January 17, 2012
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Role of Government and State Financial Institutions in Indian Economy Introduction
* The Economy of India is the ninth largest in the world by nominal GDP and the fourth largest by purchasing power parity(PPP). The country is one of the G-20 major economies and a member of BRICS. The country's per capita GDP (PPP) was $3,408 (IMF, 129th in the world) in 2010, making it a lower-middle income economy. * The independence-era Indian economy (before and a little after 1947) was inspired by the economy of the Soviet Union with socialist practices, large public sectors, high import duties and lesser private participation characterizing it, leading to massive inefficiencies and widespread corruption. However, later on India adopted free market principles and liberalized its economy to international trade under the guidance of Manmohan Singh, who then was the Finance Minister of India under the leadership of P.V.Narasimha Rao the then Prime Minister. * Communist policies governed India for sometime after India's Independence from the British. The economy was then characterised by extensive regulation, protectionism, public ownership, pervasive corruption and slow growth. Since 1991, continuing economic liberalisation has moved the country towards a market-based economy. Early Policy Developments

* Many early post independence leaders, such as Nehru, were influenced by socialist ideas and advocated government intervention to guide the economy, including state ownership of key industries. * The objective was to achieve high and balanced economic development in the general interest while particular programs and measures helped the poor. * India's leaders also believed that industrialization was the key to economic development. This belief was all the more convincing in India because of the country's large size, substantial natural resources, and desire to develop its own defence industries. * The Industrial Policy Resolution of 1956 greatly extended the preserve of government. There were seventeen industries exclusively in the public sector. * The government took the lead in another twelve industries, but private companies could also engage in production. * This resolution covered industries producing capital and intermediate goods. As a result, the private sector was relegated primarily to production of consumer goods. The drawbacks it had…

* The government's extensive controls and pervasive licensing requirements created imbalances and structural problems in many parts of the economy. Controls were usually imposed to correct specific problems but often without adequate consideration of their effect on other parts of the economy. * For example, the government set low prices for basic foods, transportation, and other commodities and services, a policy designed to protect the living standards of the poor. * However, the policy proved counterproductive when the government also limited the output of needed goods and services. * Price ceilings were implemented during shortages, but the ceiling frequently contributed to black markets in those commodities and to tax evasion by black-market participants. * The extensive controls, the large public sector, and the many government programs contributed to a substantial growth in the administrative structure of government. * The government also sought to take on many of the unemployed. The result was a swollen, inefficient bureaucracy that took inordinate amounts of time to process applications and forms. * Business leaders complained that they spent more time getting government approval than running their companies. Current Reforms

* India's current economic reforms began in 1985 when the government abolished some of its licensing regulations and other competition-inhibiting controls. * Since 1991 more "new economic policies" or reforms have been introduced. Reforms include currency devaluations and making currency partially...
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