ECONOMIC SYSTEMS
An economy is an organisation through which citizens make their livelihood. To deal with its internal problems, every economy has certain norms and rules of conduct called institutions. Resources, industries, kin, money, etc. are examples of economic institutions. The economic system is a pattern of cooperation among associates of an economy with its specific institutions. It comprises the institutions that direct an economy.
Features of an Economic System
• Orderly institutional arrangement
• Man-made phenomenon
• Evolutionary, dynamic and flexible
TYPES OF ECONOMIC SYSTEMS
Capitalism
• In this type of economic System, the ownership of means of production lies in the hands of private individuals and institutions.
• It is wholly market-based and profit is the guiding principle of all economic activities, regulated by the forces of demand and supply – that whatever is in demand will be produced since it yields high profits.
• The consumer is the supreme factor around whose choices the goods and services are based. It is also called a ‘Free Market Economy’ since all citizens have the legal freedom to opt for any occupation or agreement.
Features
• Price mechanism: In the absence of external interference, the prices in a capitalist economy are determined in accordance with the movement patterns of demand and supply. The production decisions of quality, quantity and place of produce are decided in tune with the price mechanism.
• Freedom of enterprise: The citizens are free to choose the occupation or profession based on their capability and liking. They can use their means of production as per their preferences.
• Competition: The number of competitors is high because of the presence of market economy and price mechanism. Moreover, individuals can choose ways of using their means of production with no restrictions on the profit motive.
• Profit orientation: All the economic activities are profit- driven.
• Sovereignty of the consumer: The ‘Customer is king’ principle prevails in a capitalist economy. Since the consumer, through his choices, decides on the demand and supply in the market, his satisfaction is given the utmost care.
• Labour as a commodity: Labour is available in the market for a price called wages from people with inadequate means of production who are unable to utilize their own labour.
• No government interference: The role of the government is to protect its citizens from foreign invasion, and acts of terrorism and ensure law and order in the state. It does not interfere with the economic activities
Merits
• Economic freedom
• Equal right to work
• Right to accrue wealth
• Rich choice of goods and services
• Encouragement to success and hard work
• Consumer as prime focus
• Quality production
Demerits of Capitalism
• Disproportionate sharing of wealth
• Neglect of public welfare
• Risk of cyclical fluctuations
• Ruthless competition
• Discord between the haves and have-nots.
• Consumer sovereignty becomes a myth as most of the consumption choices are directed by advertisement and sales propaganda.
Socialism
Presently, there is no nation in the world that can be termed a truly socialist economy. After the great fall of the Soviet Union that claimed itself to be the antithesis of capitalist America, doubts about a socialist economy have abounded. Even China has started adopting such economic measures that cannot be categorized as a socialist economy.
Nevertheless, in socialism, the economic system is administered and regulated by the government. The objective is to secure the welfare and equality of the society.
Main Features
• Social or collective ownership: All means of production are socially owned and utilized by the government. No individual ownership in any form is encouraged. However, an individual can hold private property as is necessary for his subsistence.
• Central planning authority: Based on a survey of available resources (human and physical), a central planning authority established by the government decides on economic issues. Accordingly, an exhaustive plan is made in pursuit of the pre-determined goals. The planning authority prepares plans for the economy as a whole.
• Government control: It is present in all economic activities and also in central planning. Plans of the central planning authority are carried out only with the approval of the government.
Merits of Socialism
• Optimum usage of economic resources
• Better way out to basic problems
• Lesser cyclical fluctuations
• Rapid and balanced economic development
• Equitable distribution of income
• Better equipped to face economic crisis
Demerits
• No proper basis of cost calculation
• Curtain of concealment
Mixed Economic System
In India, after independence, while making the choice of an economic system, the Jawaharlal Nehru-led nation decided to blend capitalism and socialism. Known as ‘mixed economy’ and rightly so, it aims to include the best of the other two systems. It is characterized by the joint operation of the private and public sectors and the allocation of economic resources is done accordingly.
Main Features
Partnership of the private and public sectors: The public sector strives for the betterment of the interests of the common man, works towards a more equitable distribution of income and promotes its ideals of a welfare state. The private sector too is given a specific responsibility.
• Planned economy and government control: Focusing on economic development, periodical plans for the nation are made by the Government to be adhered by both sectors. To reach the set destination and uphold social welfare, the private sector is regulated and controlled by the government.
• Private property and economic equality: Having permitted the right to private property, the government through a well-planned mix of laws, taxes and welfare programmes ensures fair distribution of income and wealth.
Merits
• Economic freedom and capital formulation
• Competition and efficient production
• Efficient allocation of resources
• Advantages of planning
• Economic equality
• Freedom from exploitation
At present there are 7 socialist countries while 4 are communist countries in the world.
Demerits
• Unstable economy: The current trend in India shows a strong shift to a capitalist economy. Some decades ago, the focus was socialist economy. Based on the strength at a given time, one sector dominates the other thereby tilting towards one economic system. This may destabilize the mixed economy in the long run.
• Constrained growth: Just as riding on two horses, in a mixed economy neither the private sector is allowed to operate freely nor does the public sector function to its optimum efficiency. This prevents desired growth in both sectors.
Sectors of Economy
A nation’s or economy’s economic activity can be broadly classified into three primary sectors and economies are named for their predominance in these sectors.
Primary Sector
The economic activities that take place while exploiting the natural resources fall under it, such as mining, agricultural activities, oil exploration, etc. When the agriculture sector (one of the sub-sectors of the primary sector) contributes a minimum of half of the national income and livelihood in a country it is called an agrarian economy.
Secondary Sector
It contains all of the economic activities under which the raw materials extracted from the primary sector are processed (also called the industrial sector). One of its sub-sectors, manufacturing, has proved to be the largest employer across the western developed economies. An economy is considered industrial when the secondary sector accounts for at least half of the jobs and national income in that nation.
Tertiary Sector
This sector includes all economic endeavours that involve the production of services, including banking, healthcare, education and communication. An economy is considered to be in the service sector when it provides at least half of the livelihood and national income in that nation. Experts went on to construct the quinary and quaternary sectors of the economy. However, they belong to the tertiary sector as subsectors.
• Quaternary Sector: Often referred to as the “knowledge” sector, it encompasses many activities such as research and development, teaching and so forth. When determining the calibre of human resources available to an economy, the industry is the most significant factor.
• Quinary Sector: It encompasses all actions where important decisions are made. It includes the top ranking decision-makers in both the public and private corporate sectors, including their bureaucracies.
Organised Sector
• Employees in this industry have guaranteed job and social security and employment terms are regular and set.
• It can also be defined as an industry where the enterprises are subject to several statutes and are registered with the government. Hospitals and schools fall under the organised sector.
• The jobs of those employed in the organised sector are secure. They have a maximum amount of hours that they must work. The employer has to pay them overtime if they put in more hours.
Unorganised Sector
• An unorganized worker is a home-based worker, self- employed worker or wage worker in the unorganized sector as well as a worker in the organized sector who is not covered by any of the Acts pertaining to welfare Schemes listed in Schedule II of the Unorganized Workers Social Security Act, 2008.
• Due to the informal and seasonal nature of work and the dispersed placement of firms, wage-paid labour in this sector is typically non-unionized.
• Low wages, insecure and irregular work and a lack of protection from legislation or trade unions characterize the industry.
• The unorganized industry relies heavily on labor and indigenous technologies. Workers in the unorganized sector are so dispersed that the legislation’s execution is severely inadequate and ineffectual. There are few unions in this industry to act as watchdogs.
• However, the unorganized sector’s contribution to national income is far more than that of the organized sector. It the informal sector contributed about 45% to the total GDP of the economy in FY 2022-23 whereas the organized sector contributes less than half, depending on the industry.
Public Sector
• The government controls the majority of the assets in the sector, and it is the segment of the economy associated with delivering different governmental services.
• The goal of the public sector is not only to make money. Governments collect funds through taxes and other means to cover the costs of the services they provide.
Private Sector
• In economics, the private sector is that part of the economy that is run by private individuals or groups, usually as a means of enterprise for profit and is not controlled by the state.
• By contrast, enterprises that are part of the state are part of the public sector and non-profit organizations are regarded as part of the voluntary sector.
• Private sector enterprises are characterized by ownership and management in the hands of private individuals and are guided by personal initiatives and profit motives.
PPP (Public Private Partnership)
• A public-private partnership (PPP) is an agreement between the public and the private sector for the provision of public assets and/or public services.
• The private corporation invests for a predetermined amount of time in this kind of collaboration.
• PPP does not equate to privatisation since the government is still in complete control of the services it provides.
• The distribution of risk between the public and private sectors is clearly established.
• The private firm is compensated based on performance and is selected through open competitive bidding.
• In developing nations when borrowing money for significant projects is hindered by numerous constraints, the public-private partnership (PPP) option presents an alternative.
• It can also provide the necessary knowledge for organising or carrying out significant initiatives
Indian Context
• India has a mixed economy in which both the private sector and public sector are allowed to operate.
• In 1948 industrial resolution divided the industries into three categories: i) Three industries in which the state was given an exclusive monopoly and ii) six industries, where the state had the exclusive right to set up new units but the existing private units were allowed to operate, iii) eighteen industries where regulations and direction are necessary and iv) all other industries not included in the above three categories, where the private sector was allowed the freedom to operate.
• The 1956 industrial policy divided all industries into three categories. i) seventeen industries (schedule A) whose future development was to be the exclusive responsibility of the state ii) twelve industries (schedule B) where the state would increasingly establish new units but the private sector would not be denied to set up their units. iii) all other industries (not listed in Schedule A or B) where the private sector was given full freedom to operate.
• The government of India has duly emphasized the mutual coexistence and mutual dependence and cooperation of the private and public sectors.
• The new industrial policy of 1991 abolished the licensing system and ushered in new era liberalization, where the role of the public sector was diluted.
• Doors of foreign investment considerably opened and numerous incentives and initiatives were granted to the private sector to expand its business activities.
The private sector plays the following dominant role in Indian economy
• It has an extensive modern industrial sector
• It has become the powerful driver of development
• It has led to the growth of small-scale industries
• It has huge employment and investment potential
• lt plays significant role in health and education sector
• Significance of Corporate Sector in India
• The phenomenal growth of the private sector of India can be attributed to political will, financial reforms, usage of more advanced technology, young and large English speaking working class. The 7-8 % annual GDP growth rate of India is one of the highest growth rates in the world. The last 15 years witnessed a phenomenal rise in the growth of the private sector in India. The opening up of the Indian economy has led to the free inflow of foreign direct investment (FDI) along with modern cutting-edge technology, which propelled India’s economic growth. The market changed as soon as the markets were opened for investments. This saw the rise of the Indian private companies which prioritized customer’s need and speedy service. Further, the government of India also divested some of its enterprises to ensure the smooth operation of these companies which otherwise were loss-making. It also went further and forged joint ventures with private Indian companies, especially in sectors like telecommunication, petroleum, housing, and infrastructure. This inculcated healthy competition and benefited the end consumers since the cost of services or products came down substantially.
Every domestic economy is divided into three sectors:
General government sector
Real sector
Financial sector
Real Sector: The real sector of the economy consists of enterprises (non-financial corporations), households and non-profit institutions serving households.
Financial Sector: The financial sector consists of corporations principally engaged in financial intermediation or in auxiliary financial activities that contribute to financial intermediation.
The Real Sector plays a crucial role in driving economic output and is made up of the industries essential for the growth of a country's GDP. The expansion of the real sector relies heavily on a strong and well-functioning financial system, which makes the development of the financial sector a key factor in supporting the growth of the real sector. The key indicators of the real sector include GDP data, employment rates, private investments, consumption patterns, and metrics such as wholesale and consumer price indices (inflation), along with production levels in agriculture and industry.While the nominal economy focuses on the financial aspects, the real sector is concerned with the production side of the economy. Activities within the real sector include processes like farmers harvesting their crops and textile manufacturers converting raw cotton into finished textiles.