Role of State in Economic Development

Economic development implies the development of an economy. It refers to a process where the real per capita income in a country increases over a long period of time. Because of economic development, the welfare of the people also increases in the economy. The state plays an important role in the development of an economy by generating employment for the poor and promoting their social welfare. The promotional role of the state in economic development is as follows:

Providing rural infrastructure and extending credit to the poor at a low rate of interest as an effective instrument to eradicate poverty.
Development of infrastructure such as transport, irrigation, power and electricity, and communication is required to promote agricultural and industrial development.
The state has to intervene in macro-economic management. The government can intervene in some sections of the population which are not covered by market mechanism.
Income inequality is not a healthy phenomenon. Revenue policy and public expenditure policy are two measures undertaken by the government to reduce income inequality in an economy. The progressive and proportional system of taxation helps to reduce the gap between the rich and the poor. All the public expenditure incurred in projects benefit the middle class and the poor sections of an economy.

Guidelines from the Constitution

The Constitution of India embodies the goals of an economy and provides guidelines to the government for working with respect to the economy. These are provided through the directive principles of state policy. It specifies the guidelines to the government in supervising, directing and controlling the Indian
economy.

Goals in the Preamble of the Constitution of India:

Social, political and economic justice
Liberty of thought, expression, belief, faith and worship
Equality of status and opportunity

Hence, the goals mentioned are about the welfare state and the establishment of a socialistic pattern in society.

Instruments of State Intervention

Fiscal Policy

Fiscal policy refers to the revenue and expenditure policies of the government and helps to correct the situations of excess and deficient demands. It is also called the budgetary policy of the government.

Components of Fiscal Policy

Government expenditure is increased to adjust deficient demand and decreased to adjust excess demand.
Tax burden is decreased to adjust deficient demand and increased to adjust excess demand.
Public borrowing is increased to adjust excess demand and decreased to adjust deficient demand.
Borrowing from RBI is increased to adjust deficient demand and decreased to adjust excess demand.

Instruments of Fiscal Policy

The main instruments of fiscal policy are taxation policy and expenditure policy.

Taxation Policy – Read here

Expenditure Policy – Read here

Monetary Policy

Monetary policy is the policy of the Central Bank which is introduced with the objective to control the country’s money supply including currency, demand deposits, and foreign exchange rates. Monetary management is very essential for the smooth functioning of an economy. This policy seeks to influence the total demand by influencing the amount and cost of credit available to the borrowers.

Public Sector Enterprises – Read here

Public Sector Enterprises