18. Role of the State in Economic Development – Business Environment



This chapter deals with the evolution of the concept of state participation in economic development, the justification and examples of government intervention, scope of governmental action, different roles of government in the economy, reasons for governments' participation in development in poor countries, etc, and concludes with the areas where governmental action is considered important. After reading this chapter, you will be able to relate to the role of the Indian state in the economic development of the country.


A century ago, there was a general bias against interference by the state in the running of industry. It was a tacitly accepted formula that the business of the government was to govern, to preserve law and order and to defend the country from invasion. Likewise, it was considered that the business of industry was to make things affordable to the consumers. Interference by industry in politics was fatal to good government, and interference by the state in industry was fatal to efficient production. Business influences, it was argued, are apt to corrupt politics; and political influences are apt to corrupt business. The wisest course for a government to follow was to pursue a policy of laissez faire; to abstain from a blundering intervention and leave industry to its own devices. But uncontrolled laissez faire in the course of its chequered history of capitalist countries revealed certain innate defects: (i) inequalities of opportunity and income; (ii) wastage and inefficiency arising, for example, from monopoly; (iii) instability, and the unemployment or inflation associated with instability. There were also other defects such as poverty and insecurity arising out of inequality and the abuse of economic power by the employer.


State participation in economic development is no more a matter of disagreement among social scientists. The free play of economic forces has often resulted in anarchy of production, unemployment and economic instability. Laissez faire has now been considerably diluted. State intervention is now considered necessary to ensure economic stability and full employment of the productive resources. The transformation of free-enterprise economies from ones with a non-interfering state to one that intervenes too often and far too much in economic affairs has been due to the following historical developments: (i) The facile assumption of the classical economists that capitalism does not require any state intervention and has enough self-correcting mechanism within itself has been proved wrong by the regular occurrence of trade cycles, causing untold miseries to people in times of recession and depression due to unemployment and falling incomes. State intervention becomes absolutely necessary to restore the economy back to its recovery—prosperity path; (ii) The necessity of the state to concentrate on defence production and the coordination it has to bring about in transporting men and materials to the theatres of war so as to execute its war efforts successfully call for and justify state interference; (iii) The emergence of socialism as an alternative to capitalism and its vehicle of delivery, namely, central planning, has provided another justification; (iv) The emergence of labour power and the imperative of the state to protect its interests calls for state intervention; (v) The concept of a welfare state and the need to direct development efforts to have a human face and covered by a social safety net could not be achieved without the active role of the state; and (vi) Corporate misgovernance goaded by greed, profiteering and unethical attitudes have landed economies into recession and worse, calling for state intervention. The Wall Street crisis of 2008 has forced the American and subsequently other governments globally to pump in trillions of dollars to restore the economy back to a semblance of normalcy.

The defects of the free-enterprise system, changes arising out of historic evolution of economies, the extraordinary conditions prevailing during war and other such exigencies and so on have brought about a complete realignment of the respective functions of the state and private enterprises. Today, the aims of governments in the modern economy, though less easily defined, are: (i) provision of essential public services; (ii) control of particular sectors of the economy for strategic, social or economic reasons; (iii) application of social policy; and (iv) responsibility for the overall state of the economy. Though these diverse functions can be distinguished from one another in principle, it is by no means always easy to determine the precise aim of a particular measure in practice. Moreover, these aims are much more varied in the extensiveness of their interpretation from country to country. The governments of developing countries apart from performing these functions are forced by the conditions prevailing in their countries to initiate, activate, promote, supervise and sustain the various processes involved in economic development.1 In the words of Arthur Lewis, the role of the state in a developing economy is indeed multidimensional.


Today, governmental intervention has become an accepted phenomenon. Even in the United States and the United Kingdom, where free-enterprise has much more significant presence than in other countries, the governments occupy and assume important and pivotal roles in economic development. “More business in Government, less Government in business, a popular slogan among American enterprisers, was seldom heard during the Great Depression, when businessmen were quite willing to accept Government aid in the form of favourable legislation in order to save their business.”2 As Arthur Lewis pointed out, “No country has made economic progress without positive stimulus from intelligent government.”3 The government may fail to sustain economic growth in a country on account of too little or too much interference. If it does either, economic development can be hampered to a substantial extent. Therefore, a balance has to be struck at some point. A. H. Hansen contends that “the extent to which the government will be permitted to widen its scope of activities in a democratic set-up depends on the issue whether the State is competent enough to carry out the functions assigned to it.”4 He believed that Adam Smith and other classical economists adhered to the laissez-faire principle largely because the governments of their days were notoriously inefficient and corrupt. Further, the industrial revolution and the exploitation of labour by industrialists made it necessary on the part of government to interfere in the economic activities of the country. Thus, state interference largely depends upon the social and political ideology of a community and also on the economic circumstances of a country. In a socialistic society, the state not only comes to occupy the sole and pivotal position in the country, but it is also wholly responsible for initiating and directing its economic activity.

Even in the case of free-enterprise-based advanced countries, state intervention had been effective in promoting speedier industrialization. The Government of Emperor Meiji (1852–1912) in Japan started many public sector industries, especially in those fields where private enterprise did not evince interest. Foreign trade was kept in the hands of the government to promote a vigorous sale of Japanese products abroad. After the October Revolution of 1917 in Soviet Russia, the adoption of “State Capitalism” and “War Communism” aimed at the centralization of economic and administrative powers in the hands of the state to achieve faster economic growth based on socialistic principles. It is obvious that the state in a socialist country wields a predominant control in economic activities as in such an economy the government has to play a decisive role as all the means of production are owned by the state and all activities directed by the government. But even in a country like the United States, which is the citadel of private enterprise, the role of government in the process of economic development is no less insignificant. For instance, during the world-wide depression of the 1930s, American economy was on the verge of total collapse and it was President Roosevelt's New Deal Programme that saved the situation. But for his government's public expenditure programme, American economy would not have recovered, and, worse still, it would have brought in a much-dreaded world-wide disaster.

Post-September 2008, history repeated itself when the long-booming economy of the United States literally collapsed under the weight of the subprime crisis and the government bailed out dozens of monolithic corporations with the poor tax payers' money, running into trillions of dollars.


The modern capitalist or market economies are characterized by government interference in varying degrees. Government intervention in the market sets out to attain two goals: social efficiency and equity. Social efficiency is achieved at the point where the marginal benefits to society for either production or consumption are equal to the marginal costs of production. The issue of equity is difficult to judge due to the subjective assessment of what is a fair distribution of resources is and what it is not.5 There are many other reasons to explain why there is a need for state intervention among which the following are the most important ones:

  1. The need for government-provided legal structure: The contractual arrangements and exchanges needed for free market operations cannot exist without the protection and enforcement of a governmentally provided legal structure.
  2. Government's role is vital to ensure the working of free market: The claim that the market mechanism leads to efficient use of resources (i.e., produces what consumers want most and does so in the cheapest possible way) is based on the assumption of competitive factor and product markets. This means that there are no obstacles to free entry and free exit and that consumers and producers have full knowledge of market conditions. Monopoly may lead to a level of production below the socially efficient level. Government regulations or other administrative measures are needed to secure these conditions.
  3. All goods cannot be provided through markets: Even if all barriers to competition are removed, production or consumption characteristics of certain goods are such that these goods cannot be provided for through markets. For instance, public goods which include water and sewerage services, pavements, tsunami- and flood-control systems, public services such as police and civic services cannot be provided by the private firms even if funded or subsidized by the government.
  4. Public policy is needed to realize socio-economic objectives: The market system, especially in a highly development oriented economy, does not necessarily bring high employment, price stability and the socially desired rate of economic growth. Public policy is needed to secure these objectives. Governments of low-income economies may want to achieve inclusive growth and development with a human face. But in a market driven economy that is subject to distortions, this may not be possible. Governments may use taxes and subsidies to correct such distortions with a view to helping the poor and the marginalized.
  5. Government's role in redistribution of income is significant: Social values may require adjustments in the distribution of income and wealth which result from the market system and from the transmission of property rights through inheritance. “Breaking social chasms and creating a psychological, ideological, social and political situation propitious to economic development becomes the paramount duty of the state in such countries.”6 It includes “maintaining public services, influencing attitudes, shaping economic institutions, influencing the use of resources, influencing the distribution of income, controlling the quantity of money, controlling fluctuations, ensuring full employment and influencing the level of investment.”7
  6. To promote and maintain high level of economic activities: Today, government participation is considered as an essential ingredient of high and rising levels of economic activities for both developing and developed countries.
  7. As sources of income and expenditure: In developed market economies, budgets of governments exercise a very significant influence over the economy. In a number of these countries, government revenue as well as expenditure exceed one-third of the GDP.
  8. Growing state participation is found to be vital in national production: In many countries, there has been a growing participation by the state in national production and a vast expansion of its laws, regulations and executive fiats governing economic affairs.
  9. State ownership in industries found necessary even in free-enterprise economies: Even in free market economies, state ownership of enterprises and even the whole of certain industries is quite common. There has also been a tendency in some of these countries to nationalize certain critical industries as well as to own enterprises in important industries.
  10. Regulating private sector/free markets: In recent times, governments or their agencies have started to take upon themselves the correction of market distortions or when corporate greed leads to misgovernance and defrauding of stakeholders. The Reserve Bank of India (RBI), securities and exchange board of India (SEBI) and telecom regulatory authority of India (TRAI) are some of the regulatory public bodies that regulate some of the activities of players in their respective areas.

In short, there is hardly any country in the world the economy of which is not in one way or the other influenced by its government.


According to Arthur Lewis, governmental functions may be grouped into nine categories: (i) maintaining public services; (ii) influencing attitudes; (iii) shaping economic institutions; (iv) influencing the use of resources; (v) influencing the distribution of income; (vi) controlling the quantity of money; (vii) controlling fluctuations; (viii) ensuring full employment and (ix) influencing the level of investment.”8 All these groups of activities in the case of low-income countries are very essential to keep a track of events in the country and to channel activities in the right direction. But it must be emphasized here that these countries lack the knowledge and experience that are necessary to shoulder these responsibilities.

Therefore, Lewis observes, “It is very easy to overload the Governments of less developed economies and it is quite clear that it is better for them to confine themselves to what they can manage than for them to take on an excessive range. The essential of governmental interference in the economic activities of underdeveloped country is again necessary to break the vicious circle of poverty and to remove the obstacles of economic growth.”9


There are four important roles played by the government in an economy:

  1. regulatory;
  2. promotional;
  3. entrepreneurial; and
  4. planning.


In most countries, governments play the role of a regulator of various segments of the economy either directly or indirectly. A large part of the economy of even most of non-centrally planned countries is regulated by the government, as discussed below:

  • Government may determine the conditions under which persons or associations may enter certain lines of business as in the granting of a charter, a franchise, or a licence, or permitting any person to use any public facilities or resources.
  • Government may regulate or assist the conduct of economic ventures of various types once they are under way.
  • Public control may extend to the results of business operations as in the limitation of public utility profits, ceiling on dividends and imposition of excess profit taxes on business, etc.
  • Government may control the relationship between various segments of the economy, the purpose being to settle conflicts of interests or of legal rights and to prevent concentration of economic power in the hands of few individuals or in a few localities.

Government regulation of an economy may be broadly divided into (i) direct control and (ii) indirect control.

  1. Direct administrative or physical controls: They are more drastic in their overall effect and impact. For instance, many developing countries have instituted a variety of direct controls over their economies including industrial licensing and price and distribution controls. The use of industrial licensing is justified as the mechanism by which the state can control industrial investment and allocate resources to conform to predetermined priorities and plan targets.
  2. Indirect controls: Indirect controls are usually exercised through various fiscal and monetary incentives and disincentives or penalties. For instance, a high import duty may discourage imports and fiscal and monetary incentives may encourage development of export-oriented industries.


The promotional role played by the government is very important in developed as well as in developing countries. Considering the whole of its activities, a government does more to assist and to help develop industrial, labour, agricultural and consumer interests than it does to regulate them.

In developing countries, for instance, where the infrastructural facilities for development are inadequate and entrepreneurial activities scarce, the promotional role of the government assumes special significance. The state will have to assume direct responsibility to build and strengthen the necessary development of infrastructure such as power, transport, finance, marketing, institutional for both training and guidance and other promotional activities.

The promotional role of the state also encompasses the provision of various fiscal, monetary and other incentives including measures to cover certain risks for the development of certain priority sectors and activities.


The growing importance of the entrepreneurial or participative role of the state was evident from the fast expansion of the public sector enterprises in most countries in the second half of the 20th century.

Public ownership in free societies and their growth in recent times are justified for the following reasons:

  1. War efforts require direct state participation: In a democracy, the national emergency of war inevitably causes an expansion of state activity including public ownership of defence-oriented industries because modern requirements of war cause people to forsake their convictions concerning private responsibility and to concentrate on massed power in the state apparatus.
  2. Direct role in economic stabilization: Major economic dislocations, such as the Great Depression of the 1930s and the Wall Street Crisis of 2008 also tend to stimulate state activity, again leaving a residue of public ownership that takes time and efforts to dissipate, if it is ever finally accomplished.
  3. Multiple roles during economic dislocations: In economic dislocations, as in the early history of the United States and in the economic development of developing nations today, governments are called on to act as banker, helper or owner of infant industries and generally to expand their central concern for the economy, thus creating considerable degree of public ownership at the outset.
  4. Acquisition and management of non-profitable, but essential business: When private undertaking becomes unprofitable but the need for their services continues, government may be prevailed upon to acquire and manage such non-profitable business concerns at a loss. In India, for instance, more than 120 loss-making textile mills were in the process of being closed in different parts of the country, the Government of India took them over and has been managing them through the national textile corporation (NTC) since then.
  5. To avoid wastage of national resources: Governments are also required to extend the owner–manager relationship when there has been a pronounced wastage of national resources or when the threat to them is great, thus diminishing the nation's ability to defend itself or to preserve the bases of a sound economy.
  6. To curb monopolistic or oligopolistic private sector growth: Government ownership may also be extended by the failure of private management to consider itself a trustee of the public good and abuse its power, especially in cases when the condition is of monopoly or semi-monopoly.

For these reasons and also due to compulsions of development, there has been a tendency in many developing countries to assign a dominant place to the public sector, as was evident in India.


In socialist and mixed economies such as India, the state also directly participates in planned economic development under a central planning agency called the planning commission. Economic planning is defined as the conscious and deliberate attempt on the part of the state to quicken the process of economic development in the shortest possible time with the available resources in a time-bound programme. Following the example of Soviet Russia, India has adopted five year plans since 1951 and has gone through ten five year plans with two interruptions and with varying results. Under planned economic development, the state has played an active role by promoting several public sector enterprises. It has tried to promote faster industrial development and a more balanced economic growth among regions and sectors, even while protecting labour, farmers and the marginalized sections of the society. Economic planning in India is dealt with in detail separately elsewhere in the book.


Granted the inevitability of governments' participation in economic development programmes, an issue that would defy easy solution is the apportioning of the various areas of growth between the private and the public sectors. There is no agreement amongst economists with regard to the extent to which governments can participate in the economic development of a country. As pointed out by Meier and Baldwin, “Given the case of developing a particular country, some observers would restrict the government's role to framework planning whereby governmental decisions are general in scope and few in number; others would extend the rate of direct interference with the market mechanism and to some specific controls over private enterprise; still others would completely supplant the market mechanism with central planning and control and have the State replace the private entrepreneur.”10 In actual practice, we cannot single out a country where a uniform pattern of governmental planning is seen. Each country according to its own political ideology assigns a suitable role to its government.

This function of the government's participation in stimulating and sustaining an overall development falls into two categories: one is the extreme case of a complete state take-over of all economic activities, both strategic and ordinary; the other is the case where it is believed that more reliance on market mechanism must be laid in order to achieve economic growth, and state participation looked upon as a necessary evil curtailed to a minimum.

Reasons for Governments' Participation in Development in Poor Countries

Whatever be the outcome of the controversy, there are a number of reasons for the government to take initiative in the process of the economic development of a poor country. State intervention is inevitable in developing countries to break the (i) circular constellation of forces that keep the poor country in a stationary state of underdevelopment and (ii) to usher in economic growth through comprehensive government planning. The economic rationale for state intervention in the process of economic development of poor countries is briefly discussed below:

  1. Producing defence goods: There are certain key industries which are associated with the production of defence goods and these are generally left in the hands of the governments. It would be difficult otherwise for the poor nations to maintain a control over defence factories which are essential to safeguard the independence and to defend the country against any external aggression.
  2. Establishing strategic industries calling for huge investments and long wait: It is necessary to establish certain strategic industries in a country which calls for heavy investments on the part of the investor. Such industries enable a country to prepare a base on which industrial expansion can be sustained and accelerated. Such heavy investment, let us say in iron and steel, heavy power projects, nuclear energy programmes, etc., very probably may not come from private individuals. Moreover, the gestation period in the case of these strategic industries imposes too long a wait which may be ordinarily beyond the capacity of the private sector, which justifiably enough expects quick returns.
  3. Building infrastructure to support industrialization: All round growth of the economy is possible only when there are facilities for transport and quick and easy means of communication in the country. Transport plays a vital role in the process of the economic growth of any country. The construction of roads, railways, telephones etc. is very essential for augmenting economic growth. The building up of an infrastructure falls on the shoulders of the government itself. It is pertinent to note that in the history of economic development of many countries, the laying of the infrastructure was undertaken by their governments although there might be instances of some participation on the part of private sector too in constructing some means of transport and communication.
  4. Creating external economies through building social and economic overheads: In the initial phase, development is hindered for want of basic social and economic overheads. These create external economies, but require huge investments. These are essential for the development of industry and agriculture. But private enterprise will not enter these areas. Provisions of economic and social overheads would include building and maintenance of railways, roads, harbours, airfields, educational institutions of all types, P&T and other communications, public utility services, medicare, water supply, housing and so on.
  5. Ushering in balanced regional and sectoral growth: The government's direction is needed to promote external economies and more generally, “balanced growth.” The all-round growth of different sectors must be simultaneously undertaken in order to achieve the overall growth of the economy. The private sector is generally interested in the economic activities of those sectors which provide maximum profits. It is not guided by the social notions of benefits but looks for quick profits whereas governments are not always guided by considerations of profits but have to look to the larger interests of social benefits and to the country at large. Therefore, the strategy of balanced economic growth can be evolved only through the initiative of governmental action and interference. Likewise, a balanced regional growth is also essential for the orderly development of the entire country so as to avoid social tension and regional acrimony. In India, for instance, there is a great deal of regional imbalances between and within states. The central government has been trying its best to promote development of underdeveloped regions through planned economic development and establishing public sector enterprises.
  6. Initiating development by breaking the vicious circle of poverty: Economic development must be initiated in a manner that will break the vicious circle of poverty. Such a breakthrough may not be possible unless government action is initiated. It is also necessary that a certain minimum amount of investment be called for so as to initiate the process of economic growth and to take the economy from the stage of stagnation to self-reliance and then to the self-generating take-off stage. This calls for a “critical minimum effort” which may provide a boom for investment effort. Such an investment is essential to initiate the growth of these poor countries.
  7. Need for market intervention to boost forces for growth: Simple market forces cannot ensure high rate of investment and growth in output. Economic rigidities and structural inequilibrium hinder free operation or even the normal process of growth. Since economic development is not an automatic or spontaneous process, government should interfere with the market forces to break the vicious circle of poverty.
  8. Generating new resources and develop skills: Poor countries also suffer from deficiency of resources and skills. This calls for wise and efficient allocation of limited resources. Only the state is best fitted to do this through centralized planning. Besides, a government can mobilize large resources through taxation, borrowing and deficit financing. Large enterprises that require huge investment can be started only by the state.
  9. Curbing monopolies: Besides, monopolies should be curbed, investments in schemes of collective values made, long-term problems of economy tackled, immediate prospects of profit shouldn't be the sole criterion, economic decisions properly coordinated, integration of various sectors of economy ensured only by a decisive role of the state.
  10. Providing financial facilities: Finance is the nerve-centre of development. To mobilize savings, sound banking, insurance and financial structures are necessary such as land development banks, national bank for agriculture and rural development (NABARD), cooperative societies and agricultural refinance corporations of India (ARCIs). For industries, various boards, bureaus etc. such as state finance corporations (SFCs), industrial development bank of India (IDBI), national industrial development corporation (NIDC), industrial credit and investment corporation of India (ICICI) and rehabilitation and modernization funds are necessary.
  11. Institutional changes: New and vibrant legal and social structures, tenancy reforms, fair wages and rent controls, Monopolies Restrictive and Trade Practices (MRTP) Act, community development programmes, promotion of small industries, social security schemes, social welfare measures, etc. are needed.
  12. Direct participation: Direct state participation is seen in public sector enterprises in basic, heavy and strategic industries, apart from defence and defence-oriented industries. Direct services of the state which help economic development may be grouped into four categories: (a) the development of social overhead facilities; (b) bringing about institutional and organizational changes; (c) increasing the productive capacity of labour through higher mobility of factors of production, etc. and (d) the establishment of state undertakings and rendering assistance to private industries.
  13. Indirect measures: Governments exercise indirect control through monetary, fiscal and commercial policies, apart from the physical controls through Foreign Exchange Management Act (FEMA) and MRTP acts, etc. Indirect controls have also been playing their part to serve the national development goals. Various quantitative and qualitative monetary weapons have been deployed from time to time to regulate prices. A number of fiscal and monetary incentives have been offered to encourage the growth of priority sectors such as exports, small scale industry and small business.

The Indian constitution incorporates a number of features that are economically very significant and have far reaching ramifications. The socio-economic and political objectives of the Indian Republic and the basic guiding principles of the state's functioning are clearly laid down in the preamble of the Indian constitution, the fundamental rights and the directive principles of the state policy. The Constitution also earmarks economic powers and responsibilities of the union government and various state governments.

The economic responsibility bestowed on the state by the Indian constitution is so enormous that it calls for considerable government interference in the functioning of the economy. In fact, a number of the constitutional amendments, including the first amendment, were affected to enable the state to implement its economic policies and programmes.

There are quite a good number of industrial and labour laws to regulate the employer–employee relations, working conditions, wages, bonus, labour welfare and social security, etc.

No less important than the regulatory role is the promotional role played by the Government in India. India being a mixed economy, the state has to provide necessary facilities for the growth of the private sector.

The expansion of the entrepreneurial/participative role of the state has been very spectacular. The public sector has grown substantially, both vertically and horizontally. In terms of contribution to net domestic product (NDP) at current prices, the share of the public sector as a whole has increased from about 10 per cent in 1960–61 to over 25 per cent today. More than 90 per cent of the commercial banking sector is in the hands of the state.

Areas Where Governmental Action is Vital

Governmental actions are broadly grouped into nine categories by Arthur W. Lewis as mentioned earlier in this chapter. These activities may be either direct or indirect. Indirect activities include the fiscal and monetary policy, control and regulation of foreign trade and foreign exchange. Fiscal and monetary policies are, if suitably adopted and implemented by the government, bound to create a stimulating influence on the economic development of an underdeveloped nation.

From the foregoing analysis, it is clear that the role of the government in initiating economic development seems to be of great significance and is indispensable for economic growth. The areas of government action are normally the following:

  1. Development of agriculture: In underdeveloped economies, generally, agriculture is an important sector contributing a sizeable percentage to the total national income. It also provides employment to the vast majority of the people. Moreover, agriculture is largely in the hands of poor subsistence farmers whose productivity is very low by all standards. What is necessary in these poor countries is that their governments must try to increase agricultural productivity through different measures. The cause of poverty in the poor nations is not the predominance of agriculture but its low productivity. The farmers must be provided with the proper incentives in order to bring about an increase in production as well as in the productivity of land, labour and capital. The development of agriculture is more important than anything else in an underdeveloped economy. Governments should initiate and activate the organizational, technological and institutional changes necessary to transform agriculture. Besides this, industrial development complements agricultural growth. Faster industrialization is possible only if there is a simultaneous agricultural growth to feed the industries as well as the growing industrial labour.
  2. Development of agricultural infrastructure: The second field where governmental action is called for is in the supplementary aspects of agriculture itself. For example, dams, reservoirs, etc. cannot be left in the hands of private individuals as they not only involve very large capital investments but they do not yield profits in the initial years of investment. But a government cannot think in terms of profits alone and it has to take into account the overall social benefits also. In an agro-based peasant economy, the availability of irrigation enables the agriculturist to cultivate more than one crop a year. This will definitely raise the total production of land.
  3. Development of transport and communication: The third field of activity where governmental initiatives and actions are necessary is the sector of public transport. The construction of infrastructure and the means of communication and transport facilities will go a long way to provide the necessary stimulus for economic activities in a country. As a rule, it is found that the government has to invest a large amount of capital for providing transport facilities for the growth of the private sector. In actual fact, the public sector provides different types of facilities for the growth of the private sector and instead of hampering its growth activity helps it to flourish.
  4. Development of social overhead facilities: As indicated earlier, the development of social overhead facilities by the government has been accepted in all countries. The private sector with its profit making motive is rather reluctant to invest a large amount on such infrastructures and social services. The construction of irrigational works, roads, railways, post and telegraphs, telephones, power stations, education and other social services are, in short, the important aspects of heavy expenditure falling under economic and social overhead facilities. In underdeveloped countries, the investment in these constitutes a large share of the total public expenditure of the government. For example, in most of the underdeveloped countries the volume of public investment in economic and social overheads constitutes more than 50 per cent of the total investment. In some countries it is much higher than 50 per cent. Such an enormous outlay of public investment in these nations is made to realize the accelerated rate of economic growth.
  5. To bring about socio-economic transformation: The next important type of governmental action calls for bringing about a change in the social, political and economic sphere in general and the institutions in particular. The idea behind such an effort is to remove institutional obstacles for economic development. In agriculture, administrative, technological and organizational changes are necessary to create a new social order to embark on the path of economic growth. Land reforms, security of tenures, availability of credit facilities, etc. are indispensable for expecting rise in agricultural production.
  6. Maintenance of congenial industrial climate: Similar changes are essential in the industrial structure of the country as well. The maintenance of harmonious relations between employers and employees, encouraging the mobility of labour, etc. needs elaborate consideration on the part of the government. The establishment of consumers' cooperatives, the application of minimum wages legislation, expansion of market, etc. must catch the attention of the government so as to create a suitable climate for higher investment and economic growth. The problem of the maintenance of industrial peace in these underdeveloped countries where there is a constant tug-of-war between employers and their employees must be considered with care and sympathy. The exploitation of labour cannot be accepted anymore and therefore the governments of underdeveloped countries are required to pass suitable labour legislations in order to protect the interests of labour.
  7. Promotion of labour productivity: Labour as an important factor of production must be properly nourished. Underdeveloped countries do not suffer from a dearth of the labour force but from surplus labour and from the qualitative point of view are very poor when compared to that of the industrially advanced nations. Moreover, the problem in the underdeveloped countries is of the non-availability of skilled labour. It is the duty of the governments to establish more educational and technical institutions to train the labour force and to equip it with the technical knowledge which is very essential for economic growth. Another problem is the problem of managerial personnel. If government endeavours to establish large scale state industries without giving thought to the training of personnel to handle and run these large undertakings, it will have to face charges of criticism for inefficiency. To avoid such criticism in the future, productive agents such as labour must be fully trained so as to enhance the productivity and efficiency of state undertakings. All these training programmes provide a basis for sound industrial growth. The scarcity of both entrepreneurs and skilled labour is as much the cause as the effect of industrial backwardness.
  8. To make adequate finance available: Apart from providing facilities in promoting the quality of the labour force in the country, the supply of finance at a suitable rate of interest to the private sector is another important aspect which governments in underdeveloped countries have to reckon with. There may be and usually is a complete direct participation in the industrial growth of a country by the government in a socialist economy but in a democratic set-up where the participation of the private sector in economic growth is called for or even essential, it becomes the duty of the government to create a suitable climate in the country which will be conducive to higher investment by the private sector. Therefore, suitable fiscal and monetary policies have to be framed so as to encourage the private sector to establish more and more industries. Besides this, the private sector requires financial and other types of assistance from the government to establish and multiply industries within the country. The Indian government has organized a number of financial organizations such as the IFC and ICICI which are assisting the private sector. These go a long way in catering to the needs of individual enterprise. Besides these financial institutions such as Unit Trust of India (UTI), Life Insurance Corporation of India (LIC) and Industrial Development Corporation of India provide financial assistance on a large scale to Indian private corporate sector. Apart from financial assistance, the training of the labour force, banking facilities, export promotion schemes and so on are evolved to assist the private sector in a number of ways. Thus, it is evident that industrial activities must be carried out jointly by the government and private individuals in the interests of faster economic growth.
  9. Initiate industrial growth in vital areas: The government may initiate the industrial establishments or even take over from the private sector those units which it may not be able to run economically. There are instances such as Japan where the government sold factories to private entrepreneurs after having run them efficiently over a long period of time. Therefore, it is difficult to find all the countries in the process of economic growth following a single and generally accepted formula. On the whole, it would seem appropriate to say that government may be an initiator, promoter and leading partner in the economic growth of the country. The degree of each aspect depends upon the type of government, the social, political and economic atmosphere the country has and the people's attitudes toward economic growth itself.
  • State participation in economic development is no more a matter of disagreement among social scientists. It is now considered necessary to ensure economic stability and full employment of the productive resources. Today, governmental intervention has become an accepted phenomenon. State interference largely depends upon the social and political ideology of a community and also on the economic circumstances of a country.
  • The defects of the free-enterprise system have brought about a complete realignment of the respective functions of the state and private enterprises. Today, the aims of government in the modern economy are inter alia: (i) provision of essential public services; (ii) control of particular sectors of the economy for strategic, social or economic reasons; (iii) application of social policy; and (iv) responsibility for the overall state of the economy.
  • The modern market economies are characterized by government interference in varying degrees on the following grounds: (i) the need for government provided legal structure; (ii) to ensure the working of free market; (iii) to ensure the availability of required goods through markets; (iv) to work out and implement public policy to realize socio-economic objectives; (v) to ensure redistribution of income; (vi) to promote and maintain high level of economic activities; (vii) to prepare sources of income and expenditure; (viii) to facilitate national production; and (ix) to own and operate industries in the public sector necessary in free-enterprise economies.
  • There are four important roles played by the government in an economy, namely: (i) the regulatory role, (ii) the promotional role, (iii) the entrepreneurial role and (iv) the planning role. There are a number of reasons for the government taking initiative in the process of the economic development of a poor country: (i) production of defence goods; (ii) establishment of strategic industries calling for huge investments and long wait; (iii) building infrastructure to support industrialization; (iv) ushering in balanced regional and sectoral growth; and (v) initiating development by breaking the vicious circle of poverty.
  • State intervention is inevitable in developing countries for the following reasons: need for market intervention to boost forces for growth; for creating external economies through building social and economic overheads; for generating new resources and developing skills; for curbing monopolies; to provide economic and social overheads; to provide financial facilities and institutional changes, all of which are carried through direct participation, indirect measures.
  • The areas of government action are normally in the following areas: (i) development of agriculture; (ii) development of agricultural infrastructure; (iii) development of transport and communication; (iv) development of social overhead facilities; (v) bringing about socio-economic transformation; (vi) maintenance of congenial industrial climate; (vii) promotion of labour productivity; (viii) making available adequate finance; and (ix) initiating industrial growth in vital areas.
developing economy economic stability entrepreneurial role
laissez faire economic planning promotional role
rationale of government intervention regulatory role skills development
social overheads socio-economic transformation state participation
welfare state    
  1. What role would you assign to the government in the economic development of an underdeveloped country? Discuss it with special reference to India.
  2. Account for the growing importance of the public sector in developing countries like India. What are the areas in developing economies where state initiative and participation become indispensable?
  3. Account for the extension of the public sector in developing countries and attempt a critical assessment of its performance with particular reference to India.
  4. Write a short note on “State Initiative and Participation” in economic development.
  5. Discuss the role of the state in economic development, especially the part it has to play in providing capital for economic growth.

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