MARKET ECONOMY AN INSTRUMENT OF ECONOMIC TRANSFORMATION "Economic freedom is a necessary condition for the creation and sustainability of civil

l and political freedoms". Friedman, Milton According to Friedman, this economic freedom can only be achieved in a market-oriented economy, specifically a free market economy. A market economy is an economy in which the prices of goods and services are determined in a free price system. Market economies can range from hypothetically pure laissez-faire variants to Mixed Economy in US (substantial market regulation, agricultural subsidies, extensive government-funded research and development, Medicare/Medicaid, yet at the same time foundationally rooted in a market economy) and Socialist Market Economy in China (most of the industry is state-owned through a shareholder system, but prices are set by a largely free-price system). Before discussing the merits and perceived demerits of a market economy, lets have a look at a story below.
An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama's socialism worked and that no one would be poor and no one would be rich, a great equalizer. The professor then said, "OK, we will have an experiment in this class on Obama's plan". All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A (substituting grades for dollars something closer to home and more readily understood by all). After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little. The second test average was a D! No one was happy. When the 3rd test rolled around, the average was an F. As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else. To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. It could not be any simpler than that.

India went for economic reforms in the early 1990s allowing deregulation in industries and foreign capital inflows into the Indian market to a large extent. Critics of the market economy pointed to creation of social inequality in the absence of government support. While it is true that the role of government can be completely ruled out in a practical scenario, the move towards market economy paved way for government to act as a catalyst rather than as an interventionist. Lets consider some socio-economic data for Indian economy in the post-reform period (1991 onwards) compared to the pre-reform period. From a Hindu growth rate of around 3% in GDP during 1947-1991, the GDP growth post-1991 has been around 7%. More importantly, the per capita GDP has risen from US$ 901 in 1991 to US$ 3563 in 2011. Indias overall exports stood at US$ 18.14 billion in 1991, and in 2011, the figure reached US$ 225.6 billion. Indias foreign exchange reserves increased from US$ 1.2 billion in 1991 to US$ 320 billion by Oct 2011. After economic reforms, India emerged as an attractive destination for foreign institutional investors (FIIs). Investments by FIIs increased from a meager US$ 6 million in 1991 to an astronomical US$ 127 billion by Dec 2011. India's literacy rate has grown from 52.2% in 1991 to 74.04% in 2011. The percentage of people below international poverty line (below US$ 1.25) has fallen from 39% in 1991 to 26% by 2005 and is expected to be below 22% by 2015. From the above data, it is evident that the move towards market economy in India has not just uplifted the economic conditions of people but has improved the social facets of the economy too. Studies have also shown that non-farm

growth has propelled agricultural productivity to contribute towards poverty reduction. These growths were the outcome of the economic reform policies. Reduction in the level of poverty helped literacy rate to go up simply due to the fact that people staying above the poverty line felt encouraged to send their children to school. Market economy has created a large middle class in India, considered as one of the largest in the world. This middle class is increasingly seeking autonomy, personal freedom, more education, civic and economic rights, and rule of law. Like any other middle class anywhere in the world, this middle class also wishes to conserve and promote democratic ideas and institutions. The existence of this ever-growing middle class is an additional fillip for democracy in India. With increasing purchasing powers, this middle class is also attracting more FIIs and FDIs (foreign direct investments) and helping in the economic growth of the country. Since the 1990s, the middle class in India has become more visible both as economic and social force. Besides emerging as a buying power, this class is increasingly getting involved in associational activities and social movements. Democracy as a consequence, is getting strengthened. One particular sector which has emerged strongly after the 1991 reforms is the Services sector. Services now contribute 55.2% of the total GDP. Two new industries have emerged since the economy opened up for private sector participation, namely IT and Telecom. Not only have they grown spectacularly on the global arena, but their contributions towards providing employment to millions of people have created that balance in the society, which many critics believed would been destroyed by market economy. Three sectors which have attracted the highest FDI Equity flows in 2010-11 are Services sector (Financial and Non-Financial), Computer software & hardware and Telecommunications. These three sectors contribute around 37% of FDI inflows in India. All these three sectors are a direct result of market economy. Thus we have seen that India have used the benefits of market economy to promote the development of human capital, and investment in human resources to solve basic problems like poverty, unemployment and illiteracy. It has also used the fruits of a liberal economy to facilitate the absorption of know-how, both technological and organizational and create an entrepreneurial climate that require a lot of attention in many developing countries. Investment for the development of modern infrastructure has been promoted through market economy. The benefits of economic liberalization have been used judiciously to augment the development of economy and society. The Road Ahead: The Indian economy has gone past that critical stage where to open up means taking risks of being dumped by advanced economies. Indian economy is now gearing up for second generation of reforms. Following is a list of certain Bills if passed can provide an impetus to economic activities in India: The Mines (Amendment Bill): The Bill can remove the significant roadblock to an expansion of mining activity by making it compulsory for mining companies to share profits/royalties with affected tribes. Land acquisition, rehabilitation and resettlement Bill: This will replace the old 1894 Land Acquisition Act. The Banking Laws (amendment) Bill: These amendments would enhance the regulatory powers of the Reserve Bank and increase the access of the nationalized banks to the capital market to raise funds required for expansion of the banking business. The Insurance Bill and PFDRA (Pension funds) (amendment) Bill: The bills will allow up to 49% FDI in domestic Insurance firms and up to 26% FDI in pensions. Companies Bill: The Bill is particularly powerful in the areas of oversight, protection of minority shareholders, management and business conduct and overall governance. Direct Tax Code and GST Bill: It will abolish exemptions and lower rates while increasing revenues for government. FDI Policy in Retail: While currently on hold, this policy will bring reforms in the multi-billion retail sector in India bringing large FDIs and technological knowhow. Market economy is not the panacea to all social problems. But if these second phase of reforms are brought to India, the economy would open up further to adjust itself to the growing demands of globalization.