PUBLIC ECONOMICS

ASSIGNMENT

To Professor Joyita Chowdhury

From Pranjali Chhajed

Q-1 Read the following Economic and Political Weekly article about the impact of

economic reforms on the social sector in India.

a) Write a short essay focusing on India's public spending on social sector development

and how economic reforms have impacted it.

The economic reforms of 1990 in India brought about significant changes promoting

liberalization, privatization, and globalization. These reforms helped improve efficiency and

move towards a market-driven economy. They also helped to improve the macroeconomic

growth but they came at a significant opportunity cost in terms of neglect of the social sector.

P.R. Panchamukhi in his paper Social Impact of Economic Reforms in India critically highlights

the severe neglect of the social sector particularly health and education which suffered greatly

during the reform period.

One of the central arguments of Panchamukhi’s paper is that economic reforms have led to a

sharp decline in public spending in the social sector. Expenditures like planned, non-planned,

developmental, and capital all saw a reduction during this period. There was also an inter-

governmental fiscal system. When the central government reduced their social sector

expenditures then state governments especially in less developed states like Orissa and Uttar

Pradesh followed. These states already had a poorly developed social sector and a decline in both

central and state spending multiplied their challenges.

The economic reforms implemented a lot of fiscal policy changes. This was done to reduce

government intervention in the economy and to promote market competitiveness. The first fiscal

reform was to reduce the direct and indirect taxes. This led to the decline of government revenue
at both center and state levels. Due to this their ability to invest in health and education also

declined.

In the graph you can see how investment in health by the government keeps on going down

(Bhagwati & Panagariya, 2013).

The social sector is treated as a residual sector. Whenever the fiscal deficits need to be reduced,

the social sector is the first one from where the expenditure are cut. This also faced very little

opposition from the pressure groups. Policy that led to economic reforms treated the social sector

as a secondary concern. Social sector expenditures were high target for cuts when it came to

reduction of the fiscal deficit. Sectors like commodities were treated as non-negotiable in terms

of budget allocation. Additionally, the weakening of the Indian rupee during the reform period

made it more difficult to import good quality equipment in medical and education sectors

straining the already limited access to both these sectors.

All these reductions have long-term effects on the economy. The social sector helps contribute to

human capital formation and human development. This is necessary for the sustainable growth of

the economy. Even though economic reforms are going to lead to short-term macroeconomic

gains, they will weaken the social fabric of the country. Efficient markets don’t always mean that
there are going to be equitable outcomes. Structural inequalities have been deep-rooted in Indian

history. The majority of population is dependent on the government to provide them with health

and education. Cutting down on social investments will harm the most vulnerable. It will also

worsen the social divide as those who can afford the private services would benefit from this

reform and the less privileged ones would see reduced access to quality public services

The success of the country is often measured in terms of GDP growth or fiscal deficit reduction

but they often fail to ignore the long-term consequences of neglecting the social infrastructure.

Even though India gained a lot from economic reforms all of this was offset by the social costs of

underinvestment in health and education. Rather than viewing social spending as a drain on

resources, policymakers should focus on integrating social sector investments into their reform

agendas. If India wants to go towards a path of sustainable development then it needs to ensure

that there is a balance between promoting market efficiency and ensuring that all citizens

regardless of their background have access to good quality education and healthcare.

In conclusion, we see that Panchamukhi's paper provides a critical analysis of how market-driven

growth has led to the downfall of the social sector. The long-term downfall of the social sector

has deepened inequalities and weakened human capital. There is a need for rethinking how the

reforms are designed, suggesting that true development can only be achieved when economic

and social objectives are pursued together.

Ahluwalia (2002) describes the impact of ten years of economic reforms in India on the

policy environment in the article titled, “Economic Reforms in India since 1991: Has

Gradualism Worked”. Read the article and answer the following.

Select any major area of your choice and explain the changes that happened in that area

focusing on the changes brought by the economic reforms. These areas include fiscal deficit

reduction, industrial and trade policy, agricultural policy, infrastructure development,

financial development, and social sector development

Economic reforms in 1991 transformed India from a heavily regulated economy to one that

embraced liberalization and globalization. India's growth improved significantly, and the GDP

increased, but it still fell short of the projections made by the reform advocates. During this time,

Industrial and Trade policies also underwent a lot of changes. One of the key features of

economic reforms was the removal of heavy regulatory frameworks and moving away from

License Raj, where the government maintained tight control over industrial production, trade,

and investment decisions.

Industrial sector

Industrial policies which were introduced in 1990 marked the beginning of the liberalization of

India's manufacturing sector. Before the reforms, industrial sectors like steel, heavy machinery,

telecommunications, and power generation were reserved primarily for public sector

investments. All these regulations crumbled during the reform period. Industries restricted to

only the public sector were drastically removed, leaving only a few necessary ones under

government control, such as defence, atomic energy, and railways. Industrial licensing was also

banned, which reduced the government authority that had previously hampered private

investment.
The abolition of the license permit tells us how excessive regulation can hinder growth. This is

observed mainly in small businesses where rigid regulations can create barriers and lead to

inefficiencies for entrepreneurs. Despite all the reforms, the Industrial sector still faced some

challenges. Certain sectors like garments, shoes, and toys were reserved only for small-scale

industries. No large investments were allowed in this sector, limiting India's ability to capitalize

on its labor-abundant comparative advantage. Due to these restrictive policies, India was not able

to export any of its labour-intensive manufactured goods and could not take part in global

competition.

In recent years, the government has started to remove certain items from the reserved list and has

also increased the investment amount for small-scale industries. Despite all these changes, as per

Dani Rodrik's analysis, India's manufacturing sector still remains underdeveloped relative to its

GDP per capita. The country has failed to make a mark in the manufacturing sector, with only a

small amount contributing to its GDP growth (Rodrik, 1993).

Trade sector

In parallel to industrial reforms, India's trade policy also underwent significant changes, moving

towards liberalization. Before the pre-reform, India's trade policy was characterized by high

tariffs, import restrictions, and a strong inward-looking approach that tried to reduce imports by

substituting it with domestic production. Import tariffs and the licensing system were removed

during the reforms. The liberalization process was gradual, but many restrictions were eventually

lifted. Even though the tariffs were reduced significantly, trade reforms still lagged behind
industrial reforms. Even after lowering its taxes, India’s tax remained the highest among the

developing countries.

This shows that the government had a cautious approach towards tariff reduction, especially for

consumer goods. This reflects the government's reluctance to embrace liberalization fully. This

might come from political considerations and a desire to protect domestic industries. Trade

liberalization should not be viewed as a technical adjustment but should be seen as a shift

towards embracing global interdependence. Companies that are more open to global

collaborations can better innovate and grow. Due to India's gradualist approach, opportunities

have been missed to integrate manufactured products into global value chain, which is very

important for economic success (Singh, 2008).

Challenges

Industrial and trade policy reforms have marked a significant shift, but some challenges remain.

Policies have been implemented unevenly across the different states. States like Maharashtra and

Gujarat have attracted investment and growth, while the others are lagging. The regional

disparities suggest that a more targeted approach to policy implementation is needed. State

governments should understand the challenges and opportunities faced by different states so that

they can tailor their strategies to ensure inclusive growth that benefits all regions of society.

When we come to trade, we see that India is not able to increase its participation in the global

value chain. India has accumulated significant capabilities in capital and skill-intensive sectors,
but they have failed to make a presence in labor-intensive manufacturing. Labor-intensive

sectors are crucial for generating employment and reducing poverty. (Singh, 2008).

India's industrial sector is focused on fostering innovation, improving infrastructure, and

enhancing productivity in the manufacturing sector. There is a need for a proactive industrial

policy that takes into account both domestic and international challenges and sustains economic

growth. Government initiatives like Make My India are helping the manufacturing sector by

encouraging foreign investment and increasing domestic production. There is still a need for

deeper structural reforms, which include easing labor laws, enhancing the ease of doing business,

and addressing infrastructure restrictions. There should be a balanced approach that

simultaneously nurtures small businesses while allowing for large-scale operations that can

compete globally. Engaging people at all levels, particularly those who belong to marginalized

communities, can create a more equitable framework and ensure that the benefits are widely

shared. This approach would enhance the effectiveness of the policies.

In conclusion, economic reforms have improved the industrial and trade sector, but a lot of work

remains. As suggested by Ahluwalia, Singh, and Rodrik, India needs to fully utilize its

comparative advantage and integrate into the global economy. A balanced approach that is

focused more on innovation and inclusivity is called for. This would help India sustain its long-

term growth and development.

Q-2 The Decentralization process has transferred constitutional status to local institutions,

such as village panchayats in rural and municipalities in urban areas.

Based on P. Bardhan’s article on “Decentralized Development”, explain to what extent

decentralization has successfully contributed to the socio-economic development of nations.

Decentralization has been a critical topic in developmental economics, especially in emerging

economies where managing local resources and governance is important for achieving socio-

economic development. With the help of Pranab Bardhan’s article on decentralization, we are

going to analyze how decentralization has impacted social and economic development. We will

also see that this model can make the governance more responsive to local needs, improve

accountability, and address disparities. However, at the same time, it also raises important

questions about the capability of the regional institutions and the balance between autonomy and

oversight.

Brandhan’s main idea about decentralization revolves around decision-making authority and the

transfer of power from the central government to the local government. Local government is

closer to the people than the central government, and they understand their concerns better. They

would be better at managing the unique needs of their communities. Decentralization also helps

in improving accountability. When the power of decision-making is transferred to the local level,

they bring the governance closer to people and make the officials more responsive to community

needs. Officers are very close to their community, and they have a personal incentive to help

them. This leads to better services and more efficient use of public resources.

Decentralization is also seen as a way to reduce inequalities by directing resources to

marginalized communities. Local governments being more aware of the problems, know where

to use the resources and they address the socio-economic problems of different communities.

This helps to reduce the social divide among the people. One of the other reasons that

decentralization can promote socio-economic development is because of community

participation. People feel closer to the local government than the central government and can tell

their issues more openly. Moreover, the participatory approach can ensure that the

developmental activities are more aligned with the preferences of the local communities.

However, decentralization comes with its fair share of problems. Different local governments

have different levels of institutional capacity; in some cases, they do not have the expertise or

infrastructure to manage many responsibilities effectively at the local level. This raises questions

about whether decentralization is enough to improve socio-economic outcomes. Without

institutional support, the full benefits of decentralization are not realized.

Decentralization leading to better accountability can also be critically analyzed. There is a risk of

elite capture where local elites are the dominant decision-making power, and they monopolize

the benefits of decentralization, ignoring the needs of the community. This risk is more in the

regions where social hierarchies and power imbalances are deeply rooted. Decentralization can

also lead to uneven resource management. Wealthier regions might benefit more than the poorer

areas. Local elites can also divert the resources for their benefit rather than addressing the needs

of disadvantaged groups. Even though decentralization creates opportunities for greater

engagement, it does not guarantee that all voices will be heard equally. Marginalized groups are
not able to participate entirely in the conversation. This limits their ability to influence the

decisions that affect their lives.

There is a need for investment in local governance to ensure its effectiveness. Local government

should be supported with training programs and any technical assistance so they can handle the

demands of the local community. Strengthening the local government is the first step necessary

to achieve all the intended goals. There should also be control on the concentration of power in

the hands of the few influential people. This would prevent the exploitation of the poor people.

Efforts should also be made to ensure that members of the community can contribute to the

decision-making. This involves inclusive decision-making structures and proactive measures to

involve underrepresented groups.

There is a need to strike a balance between the central government and the local government in

the decentralized system. Too much control by the central government on the local government

can hinder flexibility and innovation, while giving too much control can lead to mismanagement.

Decentralization works when local governments are granted a reasonable degree of autonomy

but are also supported by state-level coordination and assistance.

Decentralization has the potential to improve governance and also help in socio-economic

development, but certain challenges must be addressed to make decentralization work more

effectively. Decentralization offers greater accountability, equitable resource distribution, and

enhanced community participation but at the same time, it depends on the capacity of the local

government, inclusivity in community engagement, and the presence of safeguards against elite
people and inequality to make it successful. Decentralization can promote development, but a

balanced approach is necessary to bring a positive change in both social and economic factors.

Do you think that it is important to rely on the principles of transparency and

accountability while providing autonomy to local institutions? Explain briefly

Yes, it is crucial to rely on the principles of transparency and accountability when providing

autonomy to the local institutions.

Transparency means that all the decision-making processes which involve financial transactions

and policy implementation should be open and accessible to the public. This would allow the

citizens to see how the decisions are made and ensure that those in power cannot make all the

decisions in secrecy. This would also allow them to evaluate whether the decisions made are

effective and beneficial to society. On the other hand, accountability means that the local

authorities are held responsible for their decisions and actions. If local officials are misusing

their power, they will face legal or political consequences.

As mentioned in the previous answer, if local elites are dominant in decision-making, then the

resources that should benefit the whole community would be directed towards niche self-interest

groups. If they are granted autonomy without transparency and accountability, they will

manipulate decentralized systems to serve their own interest at the expense of the community.

With a lack of transparency, the risk will become even more prominent.
Decentralization can lead to more efficient outcomes by bringing decision-making closer to the

people. However, without transparency and accountability, these benefits can be deteriorated.

Transparency is crucial in preventing local governments from misusing their autonomy and

committing acts like fund misallocation, favouritism, and corruption, which would result in the

inefficient use of public resources.

All the local authorities should be answerable to their communities. Transparency will allow the

citizens to monitor their use of public funds, track development projects, and ensure that their

voices are heard in the decision-making process. Accountability allows the government to get

penalized for misuse of power if they are not able to follow their promises.

In conclusion, it is essential to rely on the principles of transparency and accountability when

providing autonomy to local institutions. This ensures that decentralization leads to genuine

development and not just a transfer of power from one group to another. Local institutions can

serve people only when their actions are transparent, and they are accountable for their decisions,

allowing decentralization to use its full potential as a tool for inclusive and equitable

development.
 References

1) P.R, P. (2000). Social impact of economic reforms in India: a critical appraisal. Economic
and Political Weekly.

2) Ahluwalia, M. S. (2002). Economic reforms in India since 1991: Has gradualism

worked? Journal of Economic Perspectives, 16(3), 67–88.
https://doi.org/10.1257/089533002760278721

3) Bardhan, P. (1996). Decentralized development. Indian Economic Review.

4) Rodrik, D. (1993). Trade and Industrial Policy Reform in Developing Countries: A

Review of Recent Theory and Evidence. https://doi.org/10.3386/w4417

5) Singh, A. (2008). The past, present and future of Industrial Policy in India: Adapting to
the changing domestic and international environment. University of Cambridge, Centre
for Business Research.

6) Bhagwati, J. N., & Panagariya, A. (2013). Reforms and economic transformation in

India. Oxford University Press.