The Five Roles Of Government In Market Economy

“Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. Thus, it is on the study of wealth and on the other and more important side a part of the study of a man.” - Alfred Marshall

Economics can be studied in two further branches viz. Macroeconomics and Microeconomics. Microeconomics is basically concerned with the mechanism of allocation of given resources. Further, microeconomics is a partial equilibrium analysis as it seeks to determine price and output in an industry independent of those in other industries. Moreover, microeconomics analysis looks into the determination of relative prices. It studies the individual economic units. Examples: individual demands, price of a product, etc.

When the production of goods and services is directed by the laws of demand and supply, the term we use is the market economy. Here the natural resources contribute to the supply whereas the purchase by government, consumers and businesses comes under demands. There are different characteristics of market economy which defines it and they are – freedom of choice motive of self-interest, competition, private property, limited government, and systems of market and prices.

When it comes to the betterment of a country or in other words if the country has to prosper then the government has to take charge or at the very least it must interfere with the market economy and therefore the government play five major important roles in the market economy.

There are total five major roles that government plays in a market economics. These are as follows:

Providing the economy with a legal structure:

This is the most important role of the government which it should provide and without it an economy has a fair chance of collapsing overall. This particularly requires the government to make sure that the pr0perty rights act as a referee (provide enforcement of contracts) and imposing penalties for wrong/foul play or unethical practices by any organization or individual in its market economy. Due to the complexity of the role, it is often considered the most important and therefore requires all the parts of the government to function.

GST: The GST (goods and services tax) was enforced on 1st July 2017, came as a remarkable step the current government. It removed all the indirect taxes and enforced a comprehensive single tax which was accepted by more than 2/3rd of the Indian states, therefore enforcing in the whole country. Three tax slabs were proposed under the GST tax. And eventually this new reform or say the new type of legal structure gave more transparency by letting the sales invoices show the tax applied. It even reduced cost that resulted in increased consumption of goods and which would directly affect the increase in production in some or the other way. The structure also provided more tax revenue collection.

Insolvency and bankruptcy code: Introduced in the year 2016, the government introduced a new reform which offers uniform, comprehensive insolvency legislation which will encloses all companies, partnerships and individuals. The government has proposed a separate framework for bankruptcy resolution in failing banks and financial sector entities. India ranks 136/189 in World Bank’s index on ease of resolving insolvencies. The code has provisions to address cross border insolvency through bilateral agreements and reciprocal arrangements with other countries. Therefore, it is seen as an approach for the betterment over the weaker policies regarding the same issue before the code came into force.

Promote and maintain effective competition:

This is the second most important function of the government. Competition is extremely important in marketplace because it enhances quality, keeps a check on the price, provides wider choice and makes sure the market isn’t monopolized. Healthy competition is the only way to keep innovation robust and moving. Big companies tend to ignore their research and development branch and prefer to just cash in comfortably from their dominant market share. The government’s role is this area should be more concerned with the effective and just competition between the small scale and big scale companies.

The ecommerce giant Flipkart was recently bought by Walmart (total 77% of the company was bought for $17 billion). Earlier the ecommerce giant amazon wished to buy Flipkart which would’ve reduced the competition to null for amazon as it the second largest ecommerce giant in India only after Flipkart. It had resources to effectively buy the latter but couldn’t do it because of the governments strict policies protecting this unfair advantage.

The telecom giant Reliance Jio was too much into news and still is. This is because of all the free internet it provided in the beginning and also using the resources it had in an unfair means. The other competitors had to face problems due to this enforcement and finally the government also didn’t help them just as it had helped Walmart to buy flipkart and not amazon.

Redistribution of income:

An economy in which the majority wealth is concentrated among a core group of people or organizations is highly dysfunctional and unfair. Resources must be allocated such that everyone is capable of living a comfortable life. Means could be tax exemption, subsidies, low interest loans. Therefore it does have a major role in redistributing the incomes too.

The current government has worked pretty well under this with the most important being the “Pradhan Mantri Gramin Awas Yojana” to provide houses to the poor and people in rural areas. Money is also allocated so that the financially challenged people get facilities like education, food, electricity at subsidized rates.

Providing student loans to students from low-income households and reserving a portion of seats in colleges for them has helped in accelerating the Indian social and economic scenario. But one area in which the government is still woefully neglecting, is the student loans for people aiming to pursue their studies abroad. Such loans are offered by both private and public banks at a steep interest rate and they also come attached with strict conditions. Definitely an area where the government of India can improve upon.

Provision of public and quasi-public goods:

There are some goods which the market can’t provide, goods that require huge investment or heavy resources; this vacuum is filled by the government. Goods like judicial system, defense, and railways are under the government.

The Indian government barely spends 3% of the GDP on education. This is a particularly dismal figure for a country with a population of more than 1.2 billion people. Absence of proper education and training leads to jobless youth which can bring down the economy in the long term, especially for socialist countries like India.

Another example is of the Indian Railways is facing heavy losses for the consecutive 3-4 years, losses such that there is a huge difference between expenditure and returns. This is hindering the development in this particular sector like operation of bullet trains.

Promoting growth and stability:

The growth and stability in a market economy are a direct result of the government’s policies and its effectiveness in enforcing those policies. The fiscal policies are under the Ministry of finance and the monetary policies are under Reserve Bank of India (RBI). They collectively form and plan the strategy for the market economy.

A well planned initiative which is the Smart city mission, which aims to enable better living and drive economic growth. But so far the government has been seen making promises and doing nothing in the light of the proposed cities. No major progress has been seen yet. Moreover there hasn’t been any minor progress too. This particular step of government is the most debated and questions the promises made at the time of election campaigns by the present government.

The Make in India initiative by government is a gateway to success for India if properly implemented. Giving subsidies for manufacturing and setting up businesses are good starting steps but the government needs to cut back the red tape and provide sources for raw material and also help in logistics.