‘Capitalist’ economy was a term coined by 19th-century German economist and social theorist Karl Marx to define a system in which a small group of people who control large sums of money, or capital, make the most significant economic choices. Capitalism is an economic system with multiple theories and explanations that have evolved over ages but the crux of capitalism is private ownership of the means of production. Along with capitalism, there are other economic systems such as communism or socialism. It’s important to understand these economic systems to have a better understanding of global trade.
In order to understand capitalism, you should be familiar with the free market. The free market is an economic system established on demand and supply with no or very less government interference. For capitalism to succeed, the free market is a necessity, it is driven by the laws of demand and supply and its sole purpose is to gain profit. Competition acts as a catalyst for companies to come up with creative ideas in order to maximize their production and profit. Different companies compete in a free market to outshine with their products, and these products provide consumers with options to pick what suits them the best. The owner is in charge of managing production, finances, and operating their companies efficiently.
In this great adventure of contemporary civilization, almost every country in the world is trying to familiarize themselves with democracy, and capitalism to find the right mix of market competition, political pluralism, welfare, and participation.
India has a long history of transitioning from a complete socialistic system to a mixed economy. India was the poster child for post- World War II socialism among the Third World countries. Mining, water, machine tools, insurance, electric plants, and steel, amongst other industries, were effectively nationalized in the mid-1950s as the government seized the commanding heights of the economy.
The Industries Act of 1951 was a prerequisite to all businesses to get a license from the government before they could take-off, develop, or change their products. One of India’s foremost indigenous firms made 119 proposals to the government to start novel businesses or expand existing ones, only to find them outlawed by the bureaucracy. The government enforced import tariffs to dissuade international trade, and domestic businesses were prohibited from opening foreign offices in a doomed effort to build up domestic industries. Foreign investment was subject to repressive constraints.
But, the planners were unsuccessful. Manufacturing never took off, and the economy rambled; India trailed behind all its trade-embracing contemporaries. However, in 1991 India embarked on major reforms to liberalize its economy after almost three decades of being a socialist republic and the fourth of crawling liberalization. Through the reforms of 1991, the government brought expenditure in line with revenues and moved away from fixed exchange rates, permitting the Indian currency to mirror world prices. Now, India is much more attuned to free-market ideas.
The reforms of 1991 aimed at converting the Indian economy into a market economy, and increasing the participation of private players in all sectors of the economy. There was the abolition of industrial licensing, the role of the public sector was diluted, free entry was allowed for foreign investment and technology, and it finally led to the beginning of privatization in India. Slowly, different sectors of the Indian economy are moving towards a more privatized way of functioning.
The Stock Market in India is probably the area with the least government intervention in India; the responsibility of developing the stock market, regulating the exchanges, and developing rules is assumed by the Stock Exchange Board of India (SEBI). It was founded in 1992 as an independent authority. The NSE (National Stock Exchange) is largely owned by bank and insurance companies such as Life Insurance Corporation of India, and State Bank of India. Similarly, the BSE (Bombay Stock Exchange) is about 40% owned by brokers with other outside investors and domestic financial institutions owning the rest of it.
However, even after thirty years of India embracing a capitalist norm, the government still maintains a monopoly over certain industries, and India remains a mixed economy (mostly socialist), but we’re getting there. To understand this better, let’s do a comparative analysis with the world’s biggest capitalist system, the United States. This doesn’t necessarily mean that the country is completely capitalistic; it’s a mixed economy giving opportunities to both public and private enterprises to thrive.
The US encourages economic freedom and gives a fair opportunity to private companies to thrive but at the same time, it allows government interference to ensure the public is not exploited in any way. When we look at American capitalism, we see a market-driven system where government regulation and Protestant ethics help ensure that the public interest is protected. Their system of free-market capitalism has generated the world’s greatest economic growth, brought millions out of poverty, and achieved the highest standards of living, however, for some Americans, their economic status is less than optimal. The US government does not own property and it does not own the means of production. The US government generates revenue mostly through its tax receipts, revenue from national parks, and other similar assets is less than 1% of total inflows.
Coming back to India, even the Economic Survey of 2019-20 says India’s four-decade-long ‘dalliance with socialism’ is an aberration from its norm of relying on the ‘invisible hand’ of the market for wealth creation. It argues for an insistent push to disinvestment in PSUs in the upcoming year, pointing out that the strong directive to the government gives it the capability to undertake bold restructurings. Public sector banks are cited as examples of inefficiency and wealth destruction. The survey also goes on to say, the government could explore the privatization of education at all points to boost capacity.
Largely, the Survey makes it clear that fortune makers need not be viewed with suspicion, and markets are best left to oversee themselves with governments only making sure rogue fundamentals don’t damage trust. The survey makes a case for minimal government intervention, the economic survey is providing a major part to the market to play out.
Concluding the topic, for a long time we’ve been told capitalism and democracy, are the twin ideological pillars capable of bringing unprecedented prosperity and freedom to the world, however, most countries in the world are mixed economies, where India is slowly moving towards a more capitalist economy through various steps the major one being the reforms of 1991. It is still far from the likes of the US and there will always be certain aspects that cannot be capitalized.