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2020 Economic Survey | Chapter- 1 | Wealth Creation: The Invisible Hand Supported by the Hand of Trust

India’s dominance as global economic power for three-fourths of economic history manifests by design.

World GDP by major economies Global contribution Legacy IAS academy Best IAS Academy in Bangalore
Global Contribution to World’s GDP by Major Economies
  • Kautilya’s Arthashastra postulates the role of prices in an economy (Spengler, 1971).
  • Historically, Indian economy relied on the invisible hand of the market with the support of the hand of trust:
    • Invisible hand of the market reflected in openness in economic transactions.
    • Hand of trust appealed to ethical and philosophical dimensions.
What is Invisible hand of the market?
  Definition: The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand.
Description: The phrase invisible hand was introduced by Adam Smith in his book ‘The Wealth of Nations’. He assumed that an economy can work well in a free market scenario where everyone will work for his/her own interest.   He suggested that if people were allowed to trade freely, self-interested traders present in the market would compete with each other, leading markets towards the positive output with the help of an invisible hand.   In a free market scenario where there are no regulations or restrictions imposed by the government, if someone charges less, the customer will buy from him. Therefore, you have to lower your price or offer something better than your competitor. Whenever enough people demand something, it will be supplied by the market and everyone will be happy. The seller end up getting the price and the buyer will get better goods at the desired price.
  • Post-liberalisation, Indian economy supports both pillars of the economic model advocated in our traditional thinking.
What is liberalization?
Liberalisation (or liberalization) is any method of how a state removes limitations on some private individual ventures.
  Objectives To boost competition between domestic businesses To promote foreign trade and regulate imports and exports Improvement of technology and foreign capital To develop a global market of a country To reduce the debt burden of a country To unlock the economic potential of the country by encouraging the private sector and multinational corporations to invest and expand. To encourage the private sector to take an active part in the development process. To reduce the role of the public sector in future industrial development. To introduce more competition into the economy with the aim of increasing efficiency.
  Reforms under Liberalisation Deregulation of the Industrial Sector Financial Sector Reforms Tax Reforms Foreign Exchange Reforms Trade and Investment Policy Reforms External Sector Reforms Foreign Exchange Reforms Foreign Trade Policy Reforms  
  • Survey illustrates enormous benefits accruing from enabling the invisible hand of the market.
  • Exponential rise in India’s GDP and GDP per capita post-liberalisation coincides with wealth generation.
GDP and GDP per capita over the decades graph Legacy IAS Academy Best IAS Academy in Bangalore
India’s GDP and GDP Per Capita over the decades
  • Survey shows that the liberalized sectors grew significantly faster than the closed ones.
  • Need for the hand of trust to complement the invisible hand, illustrated by financial sector performance during 2011-13.
  • Survey posits that India’s aspiration to become a $5 trillion economy depends critically on:
    • Strengthening the invisible hand of the market.
    • Supporting it with the hand of trust.
  • Strengthening the invisible hand by promoting pro-business policies to:
  • Provide equal opportunities for new entrants.
  • Enable fair competition and ease doing business.
  • Eliminate policies unnecessarily undermining markets through government intervention.
  • Enable trade for job creation.
  • Efficiently scale up the banking sector.
  • Introducing the idea of trust as a public good, which gets enhanced with greater use.
  • Survey suggests that policies must empower transparency and effective enforcement using data and technology.
February 2024