Top 7 Examples of Economic Control

An economic control is said to be established, when restrictions on individual are imposed. An individual can be producer or consumer. The control, thus, restricts the choices of producers and consumers.

In other words, that the control can be imposed in a planned economy from the supply side, from the demand side and/or from both the sides.

But the problem is to understand as to what types of controls a state can apply in planning, so that it may minimise the choices of the producers or consumers in order to channelise the resources to seek the rapid economic development as one of the main objectives of a planned economy.

The state can adopt one measure or more, as the case may be, out of various types of controls for restricting producer’s or consumer’s choices.

As such the various types of controls are as follows:

Example # 1. Control of Investment:

The control of investment is a key factor of planning. The output can be increased or decreased through investment control in any particular field of production. The control of investment is also a very useful technique to prevent or expand production in a desired direction, and the scale of any industry can be reduced or increased.

The control of investment is basically governed by the state in a planned economy on the basis of the objectives and priorities of economic planning. The nature and the quantum of public investment in Indian planning varied from one five year plan to the other with the variations of priorities in different plans.

For instance, India’s First Five Year Plan laid much emphasis on agriculture rather than on industry. In this plan, out of the total outlay of public investment, 45 per cent of resources was allocated for agricultural sector. Later on, the priorities in the Second and Third Plans changed. The unemployment problem was taken on the priority basis in these plans.

It was with this view that the investments were increased to promote small scale, rural industries and service sectors, so that the additional jobs might be created and inequalities in the society reduced to an extent.

The public investments also depend on the type of economic system which is supposed to fulfill many socioeconomic obligations of planning. India has already declared the objective of planning to set up a ‘socialistic pattern of society’. India, as such, has adopted mixed economy in which the private sector is also held responsible to come forward and fulfill the desired goals of planning.

It is with this view that the Government of India imposes indirect methods of control on both private and public sectors, so that they may ensure the rapid and balanced economic growth in the country.

The investment control may be direct or indirect. The investment outlay in public sector comes under state’s direct control whereas the control of investments over private sectors may be both direct and indirect.

Example # 2. Control on Savings:

The successful operation of a plan needs the control over savings. The outlay of a plan mainly depends on internal resources. The savings are the basic source of internal resources of planning. The savings are the difference between total national output and total consumption. This difference in the form of savings is very important source of internal resources which may be mobilised for the investment in planning.

The amount of savings can be raised only when the economic controls are imposed to increase the national production of commodities and services on the one hand and some restrictions on the consumption on the other. There are two sources of savings. Firstly, public savings which consist of taxes, profits from public enterprise concerns and so on. Secondly, private savings realised through various small savings schemes and loans from the public or banking institutions.

The inflationary trend in the country probably affects savings adversely. The state would, therefore, have to keep inflation well within the limits through preventive checks or indirect controls in order to increase the savings on the one hand and to control the level of consumption on the other.

Example # 3. Production Control:

The control on production is also determined by the pre- decided objectives of planning in which production targets are fixed. In a planned economy when the objective of planning is to stimulate industrial development in the country, the production in capital goods and basic industries is preferred than that of other industries. If the planning aims at post-war reconstruction, the production in building construction industries is brought under control.

The targets of production may be physical value and financial value. The fulfillment of targets ultimately depends on the financial outlay of the plan. The production target arid the degree of control differ from one plan to the other. In this respect, the Second Plan visualised an objective of increasing production in steel, cement, coal and fertiliser industries.

The total output of capital goods industries was fixed to be increased by 150 per cent in the Second Plan as compared to the position at the end of First Plan.

The control on production may be by direction or by inducement. The production control in public sector is carried out by the direction of the state. In case of private industry, the control may be both by direction and by inducement.

The control on production may be expansive in some cases of production and on the other hand, restrictive in some other cases. The total programme of production, in this way, needs control either by the direction of the state or by inducement to regulate and control the different activities of production, like production, prices, wages and markets.

Example # 4. Consumption Control:

The control on consumption is worked out either for expanding or for contracting the level of consumption in a planned society. In this regard, the two major controls may be identified gradually as the expansive consumption control and the restrictive consumption control.

The nature of consumption control is decided by the objectives of planning. The plan’s objective of enhancing the standard of living or the welfare of the people calls for the expansive consumption control. As opposed to it, the restrictive consumption controls are exercised in case the plan has the objective of developing the underdeveloped areas, or of increasing sufficiently the supply of a particular good or goods and of making rapid industrialisation of the country.

The restrictive consumption controls, such as food grain control, rationing and public distribution are commonly used mainly for the purpose of meeting the shortage of the various things in India and in most of the world.

The method of control on consumption may be direct and indirect. The direct control is applied through the introduction of rationing and public distribution system, which is generally, used both in war and peace time. The direct consumption control may also be prohibitive in some cases of consumption. The restrictive use of wine, liquor and drugs is the most appropriate example of direct consumption control of preventive nature.

Example # 5. Control on Profession and Occupation:

The control on profession and occupation is also governed by the state directly or indirectly. But it can be exercised only with the other controls. The control on profession and occupation is needed during the period of war or during any other economic and financial emergency, like depression, frictional unemployment and over-production when the economy cannot afford various maladjustments having arisen through such distortions in the economy. This type of control, indeed, carries least weight in a planned economy.

Example # 6. Exchange Control:

The foreign exchange control means the control of the rate of exchange, control on external capital movements, control on the foreign exchange reserves, and control on the exports and imports of the country. It is inevitable in a planned economy. The exchange control may be applied either fully or partially which may be enforced in different degrees in a planned economy.

The degree of the exchange controls relies on the character and nature of the planned economy, external environment, reserves of gold and foreign exchange and the mutual adjustment between the national economy and world economy. It is with this view that the full control of foreign exchange is required in case of a fully planned economy, limited foreign exchange reserves and international stability.

The Objectives and Methods of Exchange Control:

The foreign exchange control may be of several types. The application of the degree of control depends on the nature and objectives of a planned economy. Almost all methods of exchange control are applied in a planned economy, but in a less planned economy a few of them are used.

The exchange control has the following objectives in a backward country which are gained through the use of proper method of exchange control:

i. Stabilise the Foreign Exchange Rates:

The main objective of exchange control is to stabilise the foreign exchange rates. If the exchange rates are instable, the functioning of the planned economy might be disturbed. In order to stabilise the exchange rates, the method of devaluation or revaluation of the domestic currency, as the case may be, is applied.

ii. Control the Movement of Capital Abroad:

One of the important objectives of exchange control is to check the movement of domestic capital abroad. It is likely to affect adversely the smooth functioning of the economy of a country. In order to safeguard the wide objectives of a planned economy, it becomes essential to control the outflow of the domestic capital.

iii. Preserve the Foreign Currency Reserve:

It is also an objective of exchange control to preserve the foreign currency reserves in the hands of the central bank of the country. A planned economy has always to pass through the shortage of foreign exchange. Therefore, the state may hold the foreign currency reserves or may take over even the personal foreign assets available in the country, so as to make their proper use in the development of the economy.

iv. Development of the Foreign Trade:

The exchange control is also necessary for the proper development of the foreign trade which may be known as the backbone of the planned economy. In fact, the foreign exchange control is for the foreign trade and by the foreign trade. But the control over foreign trade cannot be a success till it operates under the framework of an economy where types of control are absent.

v. Fulfill the Sectorial Needs of Foreign Capital:

In a planned economy, besides the internal resources, the foreign capital is needed to fulfill the sectorial requirements of foreign capital. To achieve the object, the state applies the exchange control which tends to ensure the proper distribution of foreign capital among various sectors of the economy.

Example # 7. Price Control:

The control on prices is regarded as necessary for the successful planning in a planned economy. The stability of the foreign exchange rate is inherently related with the general price level of a commodity. The price stability in a country controls and regulates the exchange rates and itself is controlled by the foreign exchange rate, which leads to economic development with a rapid growth.

Objectives of Price Control:

The main objective of price control in the economy is to provide economic stability, so that the planning may be a success.

There may be other objectives of price control in a planned economy, which follow as under:

1. Control serious fluctuations in wages and rate of interest;

2. Regulate and control prices;

3. Protect consumers against inflationary conditions;

4. Protect the interest of producers, and

5. Make the plan a success, so as to ensure the rapid economic growth of the country.

Methods of Control on Prices:

There are two methods of price control-direct and indirect. The nature of control on prices is determined by the state or the central bank of the country which takes the decision on the matter through its observations in view of the objectives of planning, internal and external conditions of the country and the requirements of the economy.

i. Direct Method of Fixing Prices:

The direct method of fixing prices consists mainly of voluntary agreements between a few monopolists and public authorities, warnings, exhortations and negotiations. The direct method of fixing prices is of great importance in the sense that it is very much result-oriented.

The direct methods of fixing prices are as under:

1. In the first method, the prices are fixed by the state with the least prior calculations. The way of calculation is very simple, and it is counted on account of average cost of production plus normal profit. In this method, the moderated levels of prices are commonly fixed for a particular period. The price changes in the short intervals are not allowed, but in due course of time, the changes may be possible in view of comparative study of price situations.

2. In the second method, in case of certain products, the prices are fixed at certain level on the basis of cost analysis. But the cost analysis is not so simple. So, there is hardly any difference between the first two methods applied in a fully controlled economy, and they cannot be successfully applied if there are frequent changes in the cost of production, uniformity in the quality of product and state pricing policy.

3. In the third and last method, the state freezes the prices of different products at the existing level. It has been a very popular method during the war and post-war periods when the prices have a very serious and regular rising trend in the economy. The freezing of prices at a particular level is a dictatorial method of price control, and it is often used by the state at the time of emergency. As in Great Britain after the Second World War, the Price of Goods Act was passed in December 1939 to seal the prices at a reasonable level.

Similarly, in India in 1975, the Late Prime Minister Mrs. Indira Gandhi sealed the prices of essential commodities during the emergency period. It was an important achievement of the period.

ii. Indirect Methods of Price Control:

Besides the direct method of price control, the state may use certain indirect methods of price control. The commonly used indirect methods of price control may consist of the restrictions on money supply, credit control, and budgetary measures and so on, with the result that the indirect methods of price control bring the effective demand to a low level and increase the domestic production.

To meet the requirements of the planned economy, the price stability is essential. That may be achieved only when the direct methods are well-supported by the indirect methods of price control.