• India embraced an economic model which has the features of both free market capitalism and socialism. The policy makers called this a model of ‘Mixed Economy’.
• The reason for adopting such a hybrid model was to raise people’s standard of living and reduce income inequality.
• India embraced an economic model that uniquely combined free market capitalism with that of State intervention in essential sectors of the economy.
• The record of India’s successive governments in providing social welfare is at best mediocre.
• The Government must build a comprehensive welfare state with a strong emphasis on redistribution of resources to poor along with provisions of social services (Public Health, Education, Equitable Institutions, Un-Employment Benefits, Old Age Pensions etc.) financed through taxation.
• In today’s changing World of high technology, the Government must do a lot of public spending on investment in human capital and research and development.
• On Jobs creation front, the government must adopt a judicious mix of labour market institution that includes a fairly flexible labour market allowing easy hiring and firing of employees along with strong labour associations to safeguard the interest of employees.
• On the External front, the government must embrace globalisation, openness to trade and investment but with risk sharing approach. The government should share the risk arising out of globalisation, by training and skilling those who have suffered from the negative impact of globalisation. The process of risk sharing will make globalisation acceptable to all.
• Adopting the above features will allow India to achieve high growth along with high social ambitions/indicators.
• Therefore, in a nutshell, the future of India’s rapid and sustainable development lies in the following:

Functions of Government

Allocation Function

• The government provides certain public goods and services which the private sector fails to provide because there exists no market for them.
• Example: National Defence, Public Parks and National Highways etc.
• The reason of government providing such goods is the nature of public goods. The public goods are by nature non-rival and non-excludable.
• Non-Rivalry means, the consumption of the good by one individual does not stop another individual from consuming the same good. The goods remain available to all the citizens.
• Non-Excludability means the government cannot exclude any person from enjoying the benefit of the good whether they pay or not. The goods are non-excludable in nature.

Distribution Function

• The government through its tax and expenditure policies attempts to bring out income redistribution in the society that is fair to all.
• The government transfer payments from one citizen to other through taxation policy.
• Example: Old age pensions, Social sector initiatives for the poor. Through these programs, the government provides income support to those individuals who do not have any source of earnings. The funds for running these programs comes from progressive taxation. Those with higher income paying higher taxes.
• The idea of distribution is not to rob the rich by forcing them to pay high taxes or to discourage people from earning more but to make just redistribution which will be equitable for all.
• Think like this, the per capita consumption of common resources will be higher for rich individuals as compared to the poorer individual (who survives on bare necessities). Thus they must pay a higher price for its provision. Space taken by an SUV or Sedan on the road is much higher than the space taken by Bicycle. Thus, the SUV owner must pay a higher price/ tax for the construction of the road as compared to bicycle owner. The above example explained the concept Progressive taxation.
• Similarly, the old age pensions are not grants by the government but are right of those individuals who have worked endlessly during their productive years. Thus, the government must take care of them by providing them old age benefits.

Stabilisation Function

• The economy tends to undergo periods of instability and fluctuations. The periods of fluctuations require the government to play an active role in removing it.
• The year of 2008-09 witnessed the Global Financial Crisis. The GFC led to a decline in GDP growth rate along with employment. To help recover economy from the GFC, the government provided Fiscal Stimulus package for the industry.
• Let’s understand the channel

• Similarly, the economy may at times overshoot when expenditure becomes greater than output. In such a situation when consumers are spending more than what producer are willing to supply. Inflation happens. To remove inflationary pressure from the economy, the government intervenes through tight fiscal policy.