India learns state’s role in market economy

Karl Polanyi argued that “laissez-faire was planned”. India’s economic journey suggests a related lesson: markets can generate wealth, but institutions, public capability and social purpose determine whether that wealth becomes durable.

For decades, India’s economic debate was framed through a simple story. The state planned, regulated and licensed excessively; private enterprise was constrained; then came 1991, when licences were dismantled, the economy opened and growth accelerated. The conclusion seemed obvious: the state was the problem and the market was the solution.

India today makes that narrative increasingly difficult to sustain.

The government is building highways, freight corridors, ports and industrial parks while investing in semiconductors, defence manufacturing, digital infrastructure and advanced technology. It is simultaneously attracting multinational companies and attempting to develop domestic capabilities. Public investment is increasingly being used to create the conditions for private investment to flourish.

India is therefore neither returning to the “Licence Raj” nor embracing laissez-faire. It is experimenting with a more complicated model: a state that does not seek to own the economy but seeks to shape the conditions under which markets become more productive, competitive and resilient.

This distinction matters beyond India. Artificial intelligence (AI) has made computing capacity, semiconductors and energy strategic concerns. Geopolitical tensions have transformed supply chains into questions of national security. Governments that once regarded industrial policy with suspicion are rediscovering it. India, however, has been confronting the underlying question for decades: what should the state do when the market cannot, and what should it stop doing when the market can?

Market was never entirely “free”

Polanyi challenged the idea that free markets emerge naturally when governments simply step aside. Markets require institutions: property rights, enforceable contracts, stable currencies, infrastructure, financial systems and mechanisms for maintaining competition. Businesses require roads, ports and communications; workers require education and mobility. Behind the market’s apparent spontaneity lies considerable institutional construction.

The market, therefore, is not necessarily the opposite of the state. Historically, states have often helped make markets possible.

Polanyi’s second important insight was the double movement. When markets expand beyond the social relationships that contain them, society eventually demands protection. Workers seek safeguards, governments regulate finance, public education expands, welfare systems emerge and environmental rules are created. Market expansion generates social pressures, and society responds by creating institutions to manage its disruptive consequences.

Few countries illustrate this process better than India.

From planning to liberalisation

India’s economic story did not begin in 1991. Colonial rule had reorganised the economy around imperial priorities, leaving independent India with a weak industrial base, limited capital and inadequate infrastructure. The challenge after independence was therefore not merely to make markets more efficient but to build the industrial and technological foundations of an independent nation.

The answer was planning.

The Nehruvian state invested in steel plants, dams, scientific institutions, heavy industry, infrastructure and public-sector enterprises. Planning was not simply ideological. The state sought to build capabilities that private markets were unlikely to create quickly enough. A steel plant could generate economic value beyond its immediate profitability, while scientific institutions could produce knowledge whose commercial value might emerge only decades later. The developmental state was making long-term investments whose social returns exceeded their immediate private returns.

Yet the system eventually became excessively restrictive. Licensing, quotas and bureaucratic controls protected inefficient producers rather than encouraging competition. Regulation increasingly became an end in itself. The state that had been created to overcome developmental constraints became one of those constraints.

This was the Licence Raj. Then came 1991.

The reforms dismantled much of the old regulatory structure, expanded foreign investment and competition, and gave private enterprise substantially greater freedom. New industries emerged, Indian companies became globally competitive and the information-technology sector expanded rapidly.

But India did not become a laissez-faire economy in 1991.

The state continued to regulate finance through the Reserve Bank of India, shape agriculture through procurement and subsidies, maintain responsibility for food security and invest heavily in infrastructure. Strategic sectors remained subject to government intervention. India therefore did not simply move from “state” to “market”; it moved from one state-market relationship to another.

The cultural memory of this transformation is reflected in Scam 1992, which portrays an India moving from a tightly controlled financial system towards a more open market economy. Its broader lesson is that markets can expand faster than the institutions designed to govern them. The global financial crisis made the same point: when financial systems become more sophisticated than their safeguards, governments eventually have to intervene to prevent financial failure from becoming social collapse.

This is the double movement in practice.

From government ownership to market-making

India’s contemporary economic strategy differs from both the Licence Raj and classical laissez-faire. The state is increasingly attempting to build the infrastructure and capabilities within which private enterprise can operate at greater scale.

A fundamental difference exists between a government owning every factory and a government building the infrastructure, skills, institutions, and technology platforms that allow thousands of private companies to compete.

The first is command. The second is market-making.

India’s digital transformation illustrates this distinction. Digital public infrastructure has created interoperable platforms on which banks, fintech companies, merchants and consumers can participate at extraordinary scale. The state did not need to own every transaction; it created infrastructure on which private actors could compete.

The same logic is visible in semiconductor ambitions, electronics manufacturing, defence production and other strategic industries. The objective is not necessarily to manufacture everything domestically, but to ensure that India possesses sufficient technological and industrial capability to participate in global markets without becoming helpless within them.

Self-reliance need not mean isolation. It can mean strategic interdependence without strategic dependence.

A globally integrated India does not need to manufacture every component itself. But it needs enough technological, financial and industrial capability that disruption elsewhere does not become an existential vulnerability at home.

The important question, therefore, is not whether India is becoming more statist, but what kind of state capacity it is building.

A subsidy that permanently protects an inefficient company differs fundamentally from an incentive that helps an industry achieve scale, develop technology and eventually compete globally. Protection can preserve weakness; well-designed industrial policy can create capability.

The test should therefore not simply be how much money the government spends, but what productive capacity that expenditure creates.

Growth is not enough

India’s growth rate should not breed complacency. Gross domestic product (GDP) is the beginning of the argument, not its conclusion. The harder question is whether growth creates productive employment and expands human capabilities.

The labour market is changing alongside the economy. AI, automation and platform-based employment are altering the relationship between labour and capital. The Economic Survey has identified gig and platform work as an increasingly important part of the labour market.

This creates a 21st-century version of Polanyi’s problem.

The 19th century confronted the social consequences of turning labour into a commodity on an unprecedented scale. The 21st century may confront a different question: what happens when technology changes the economic value of human labour itself?

India cannot respond by resisting technology. It needs AI, advanced manufacturing, automation, semiconductors and digital systems to raise productivity. But technological progress will not automatically distribute its gains.

Education, healthcare, skills, mobility and social protection will determine whether technological change becomes broadly empowering or narrowly enriching.

Education should therefore not be treated merely as social expenditure. It is productive infrastructure. A highway connects markets; a digital network connects businesses and consumers; education connects people to economic opportunity.

Similarly, social protection can be understood not merely as redistribution after growth but as insurance that allows people to participate in economic change. A medical emergency that pushes a family into poverty can destroy savings, interrupt education and force the sale of productive assets. A worker without protection against economic shocks may be unable to retrain or move into a more productive occupation.

Yet the opposite danger must also be recognised. Not every government programme produces development. Regulation can become rent-seeking, protection can become permanent, subsidies can become politically impossible to withdraw and bureaucracy can substitute procedures for outcomes.

The lesson is therefore not that the state should control the market. The state should build the institutional conditions under which competitive markets can create wider prosperity.

A capable state is not necessarily a large state. It is one that can build what markets cannot build efficiently, regulate what markets cannot regulate safely, protect people when economic shocks threaten human capability and withdraw when its intervention is no longer necessary.

That last part may be the hardest. Governments are often good at entering markets; they are much less good at leaving them. India learned this during the Licence Raj and must not forget it during the age of industrial policy.

What artha can teach modern economics?

India’s older intellectual tradition adds another dimension to this debate.

Classical Indian thought did not regard artha as illegitimate. Wealth, material security, productive capacity and political power were recognised as necessary. But artha was not the entirety of human purpose. It existed alongside dharma, kama and moksha within the framework of the purusharthas, the four aims of human life.

This does not mean that ancient India possessed a ready-made economic model. The Arthashastra is not a modern economics textbook, and the Mahabharata is not a policy manual. The significance is conceptual: the Indic tradition is uncomfortable with the idea that wealth can be completely separated from the moral and social order in which it operates.

The Bhagavad Gita’s concept of lokasangraha, the preservation of social order, expresses one dimension of this concern. The Mahabharata’s emphasis on rajadharma places political authority within a framework of obligation, while the Arthashastra treats taxation, trade, agriculture, markets and administration as components of an organised political order.

In other words, prosperity has a context.

The Mahabharata provides a powerful illustration. The Kuru dynasty does not lack wealth, political power or military strength. Its tragedy emerges because power becomes progressively detached from responsibility and legitimacy.

The epic does not condemn artha. It warns against artha without dharma.

That distinction has a modern economic equivalent. A financial system can become sophisticated while becoming disconnected from the productive economy. A corporation can maximise short-term returns while weakening its long-term foundations. A city can become richer while becoming unaffordable to the people who make it function. An economy can grow while human capability, social trust or ecological resilience deteriorates.

The problem is not prosperity. The problem is prosperity that consumes the conditions of its own survival.

Beyond the state-versus-market binary

India’s economic history should therefore not be written as a simple journey from socialism to capitalism. It is better understood as a series of institutional corrections.

Colonial extraction created the need for economic sovereignty. Planning attempted to build industrial capability. The Licence Raj demonstrated the dangers of excessive control. Liberalisation released enormous private energy. Digital public infrastructure created new platforms for market participation. Contemporary industrial policy is attempting to build technological and strategic capability without abandoning global integration.

Each phase corrected something in the previous one, while also creating new problems.

That is not evidence of failure. It is what economic history looks like.

India does not possess final answers to the questions confronting economies everywhere. How much should governments intervene in markets? How should countries balance globalisation with strategic resilience? How should workers be protected when technology changes faster than institutions? When does industrial policy create competitive capability, and when does it merely protect incumbents?

But India possesses something valuable: experience.

The great mistake would be to turn the current economic model into another binary choice. India does not need to choose between the state and the market. It needs to determine what each is good at.

Markets are extraordinarily effective at experimentation, competition, discovery and innovation. States are indispensable when investments have long horizons, when social returns exceed private returns, when systemic risks require regulation or when strategic capabilities cannot be built through fragmented private incentives alone.

The objective should therefore not be permanent protection but temporary support that creates permanent capability. It should not be state ownership but public infrastructure that enables private productivity. It should not be autarky but resilience. It should not be growth at any cost but growth that expands human capability without consuming the foundations of future prosperity.

This is more demanding than either laissez-faire or state control. Laissez-faire asks government to step aside; command economies ask government to decide.

India’s emerging challenge is harder: to build institutions that allow the state and the market to make each other better.

India did not move simply from the state to the market. It moved through different versions of the state: the colonial state extracted; the developmental state built; the Licence Raj controlled; the liberalising state released; and the contemporary state is attempting to build infrastructure, capabilities and resilience within which private enterprise can operate at unprecedented scale.

Whether this experiment succeeds will not be determined simply by government spending, the number of companies attracted or the rate of GDP growth. It will depend on whether the institutions being built today make tomorrow’s prosperity more productive, resilient and widely accessible.

That is the real test of Atmanirbhar Bharat (self-reliant India). It is the real test of industrial policy and, more broadly, a test of capitalism itself.

Markets clearly create wealth. The harder question is whether markets can create wealth without allowing wealth to become the only measure of what matters – and whether states can be made capable enough to create prosperity without becoming the source of all economic power.

Polanyi warned that laissez-faire was planned, but India’s history suggests something more: markets can create wealth. States can create capability. Institutions determine whether the two reinforce each other, and society ultimately decides what the wealth is for.

Perhaps that is the question India should carry from 1991 into 2047: not whether the market or the state should win, but whether both can be made to serve a larger objective.

Because a rich economy is not necessarily a successful civilisation.

The harder achievement is to become richer without losing sight of what the wealth is for.