Monday, June 29, 2009

Role of Government in Economy

What is the role of government in economy? In the form of a driver, which controls the market with its own mammoth enterprises or in the form of a joint partnership with private sector or in the form a traffic police man which simply regulates the market?

Before going to answer it we have to look into some facts, what is the role of government? It’s very natural to think that if government invest highly in market and create mammoth public sector companies, it will create huge profit and which in turn can be used to elevate people from poverty. But what happened usually is that these state run companies will not give good return, it may even end in loss. To support these enterprises government will provide huge subsidies and save it from competition from the private sector through trade barriers, taxes etc. Government may even put large amount of money to compensate for the losses of public sector.

What's the result? Instead of elevating people from poverty it simply drain more resources. And for customers; they will not have a choice, what public sector give accept it.

It’s not the job of government to invest directly in market and eliminate competition. Equal opportunities and competition is the basis, but state run companies are backed by governments, as long as government is there to back them losses will not be a problem, but in the case of private companies, they are controlled by individual, or a group of investors.

If there is a loss, it will seriously affect them- so they will work hardly for profit. Government have to support these individuals to raise their capital and have help them in reinvesting, tax incentives should be given to them if they are reinvesting the money and make further progress instead of further tax hikes. If he is investing in research and development sector then give him/her more incentives and protect their copy right and ownership in the product.

If companies are expanding it will create more opportunities which in turn will create growth. And when there is a competition in market, it will help to reduce prices and which will benefit more people. A good example of for this case is the situation of mobile telephony sector in India.

For decades public sector companies ruled the Indian telecom sector, and if you applied for a new telephone connection it will take many years to get one. After opening of market too private players- many players like Airtel, Vodafone, Idea cellular, Tata, Reliance etc came to market and now a connection request will be processed within minutes. This forced the state player BSNL to adopt new techniques to hold the customer base. In the end customer - common people- satisfied.

You can find other tragedies too. In India petrol distribution networks are controlled mainly by Public Sector companies like Indian Oil Corporation, Hindustan Petroleum Corporation Ltd etc. Some time ago, before this recession scenario petroleum products touched all time high, at that time government didn't raised the price substantially or reduced the price substantially, but instead they forced the state run companies to give subsidies using their own money.

This eventually turns highly profitable IOC to a low profitable one. What private companies did? They didn't have the backing of government and the difference between the prices for oil in PSU companies and Reliance run pumps where substantially high. Customers simply avoided the Private oil pumps, this forced Reliance to shut down their pumps and cause a severe financial hardship on state run companies.

Government’s job is to create equal opportunities to citizen's, educate the masses, give them starter pack- capital- to run an industry, sell the shares back to them, and simply act a regulator as to avoid financial malpractices. When government opened the telecom sector- it starts working fine, when government opened the economy in 1991 to a good extend, it too working fine.

Open the economy, allow competition give incentives to starters, and act as a regulator, invest in education and ensure equality in access to government services, the economy will grow.


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