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Indian Economic Policy

Notes 10.2 Need for Economic Policy in India

In order to understand the worth of economic policies in India, we should understand its need in
India. This would help us to develop a perspective about economic policies and plans of the
Government. It may be noted that market system is not perfect, however, and in some situations, our
economic well-being can be raised by regulating it or even by side-stepping it altogether. Thus, failure
of market is the most important reason that we make economic policy. The competitive markets
generate a Pareto optimal solution and an economy that reaches a Pareto optimal solution is believed
to be efficient. If one or more of the assumptions of Pareto optimal solution does not hold good, the
market system does not give rise to an efficient outcome and the condition is called market failures.
Some of the reasons for market failures are under-provision of public goods, choices through time,
presence of externalities, existence of common property resources, imperfect competition, asymmetric
information, etc. which need some kind of Government intervention. Such intervention is in the form
of economic policies and programmes. Moreover, under Pareto optimal solution the distribution
may not be equitable one. Thus, state can give a direction to the resource allocation in more efficient
manner in the larger public interest through participation in the production activities. Apart from
this, the Government can try to shift the economy from one Pareto optimal solution to another by
redistributing purchasing power and then allowing people to trade in competitive markets. In India,
the framers of the Constitution provided certain Directive Principles to solve the social and economic
backwardness of the country. The directive principles says that the state shall ensure to all its citizens
the right to an adequate means of livelihood; to ensure a fair distribution of the material resources of
the country for the common good; and to distribute the wealth in such a way that the wealth is not
concentrated in the hands of a few people. This also calls for an economic policy.
Aims of Economic Policy in India
The economic policy in a developing country like India aims to accelerate the process of economic
development. This ensures swift economic development. The concept of economic development is
distinct from the concept of economic growth. The objectives of economic development are as follows:
1. Full Employment : The economic growth of a country is directly related to the goal of full
employment since it yields the individual security, which, in turn, promotes progress, contributes
to human dignity and weakens non-functional discrimination in the population.
2. Better Distribution of Income : Inequalities in income lead to misallocation and misutilisation
of resources. We market mechanism promotes inequalities which lead to a serious breach of
social welfare. Thus, economic policy may provide better distribution of income and wealth in
country.
3. Stability of Prices and Rates of Foreign Exchange : The rate of foreign exchange keeps fluctuating
and affects international trade. This causes uncertainty in the economic life for which an economic
policy is needed as a powerful instrument to ensure stability in the country.
4. Human Development and Decent Work : Education and illiteracy rate, life expectancy, the
level of nutrition, consumption of energy per head etc. are involved in the measurement human
development. This is an indicator of improvement in the quality of life and is considered an
important objective of economic development. Consequently, decent work has emerged another
goal of economic development. Work and employment itself, rights at work, security, and
representation and dialogue are the four dimensions of decent work.
5. Maintenance of Fair Competition : Effective anti-monopoly policy brings competitive conditions
which are essential for welfare maximisation.
6. Avoidance of Cyclical Fluctuations : Free market economies are characterised by business
cycles or trade cycles which an economic policy must overcome.
7. Rapid Economic Growth : The main aim of economic policy in a developing economy is to
ensure rapid economic growth of the country.

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