MBA Aspirants are expected to understand the critical assessment of economy. This general awareness article on ‘market based economy’ will help you in WAT/Essay/GD and PI also.
Read: Can market based economy get India Shining?
An economy that operates by voluntary exchange in a free market and is not planned or controlled by a central authority (generally government) is called as market economy.
Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well-being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidizations. As opposed to this system, the economies that have excessive government intervention are called socialist and planned economies.
While most developed nations today could be classified as having market economies, India is often considered to have a mixed economy.
Experts believe the market economy is clearly the system of choice in today's global marketplace, because it allows market forces to drive most of their activities, typically engaging in government intervention only to the extent that it is needed to provide stability.
But, there is significant debate regarding the amount of government intervention considered optimal for efficient economic operations.
For the period between independence and 1991, India pursued planned socialist policies aggressively. But it did not solve India’s economic problems. In fact, India grew so slow, that a derogatory term was used to refer to slow growth as Hindu rate of growth.
In a planned socialist economic system that India adopted, there were inherent weaknesses. Consumers cannot choose and only those goods and services are produced which are decided by the government. Lack of profit motive may lead to firms being inefficient. Lot of time and money was wasted in communicating instructions from the government to the firms. This all lead to a slowdown in growth.
Moreover, Disadvantages of socialism include slow economic growth, less entrepreneurial opportunity and competition, and a potential lack of motivation by individuals due to lesser rewards.
China in 1978 and India in 1991 did reform marking a shift towards market based economy. It has lead to higher GDP growth rates. It is said that an extra percentage of GDP growth rate has a potential to create 1.5 million extra jobs in manufacturing. Moreover, one job in manufacturing can create three extra jobs in services sector. So a total of six million jobs can be created in India just if India could grow faster than the current growth rate of 4-5 %.
Considering an average family size of five in India, six million jobs mean 30 million people earning more and moving up in terms of social class and status. There is a case of China to prove this. China, because of its higher growth rates, after adopting market based system in many areas, has since 1978 brought out 500 million people out of poverty.
Moreover, globalization is forcing the third world countries to adopt market based system in most of their economic sectors. Also, India does not have enough resources to achieve such high growth rates. So it has to restructure the economy to make it attractive for foreign capital to flow. The need for foreign capital in India can be logically explained from the following fact.
In economics, there is a term called as Incremental capital output ratio. It can be computed by dividing the investment share in GDP by the rate of growth of GDP. Generally, for a country like India, considering its structure, this ratio comes out to be four.
Therefore, if India targets a GDP growth rate of 9 % year on year, it would require an investment share of 36 % to GDP (four times the growth rate). India’s savings is in the range of 32 % of GDP. Therefore the balance has to come through external route which is FDI and FII.
China has embraced capitalism and foreign capital in industry and surpluses out of it have been used in healthcare sector which is almost completely government funded (public sector owned). Therefore we see that a healthy mix of both ideologies can co-exist in a country.
So, even in India, Industrial sectors require market based economy within the ambit of globalization but social sectors do require government funding and cannot be left completely to market based forces.