Model Answer
0 min readIntroduction
The New Economic Policy of 1991, centered on Liberalization, Privatization, and Globalization (LPG), along with the subsequent adoption of New Public Management (NPM) principles, aimed to fundamentally redefine the role of the state. These reforms sought to reduce government intervention in the economy, foster market efficiency, and enhance public service delivery through methods akin to the private sector. A primary objective was to curtail government functions and rein in public expenditure, believing that a smaller, more efficient state would lead to greater economic dynamism. However, paradoxically, most nations, including India, have witnessed an expansion in both government functions and public expenditure in the post-reform era, necessitating a deeper examination of the underlying causes.
Objectives of Liberalization, Privatization, and Globalization (LPG) and New Public Management (NPM)
The core tenets of LPG and NPM were rooted in a neoliberal philosophy advocating for a minimalist state, greater market orientation, and efficiency in public services. Their primary objectives included:
- Liberalization: To reduce government regulations and restrictions on businesses and trade, encouraging private sector growth and competition. This involved deregulation, tax reductions, and easing restrictions on foreign trade and investment.
- Privatization: To transfer ownership, management, and control of government-owned enterprises to private entities. The aim was to increase efficiency, reduce the public sector's financial burden, and improve overall economic productivity through disinvestment.
- Globalization: To integrate the domestic economy with the global economy through trade, investment, technology, and cultural exchange, thereby enhancing international trade and investment.
- New Public Management (NPM): To improve the efficiency, effectiveness, and service quality of public sector organizations by adopting market-based approaches and performance-oriented management techniques. Key themes included financial control, value for money, setting targets, performance monitoring, and customer-centricity.
The Paradox: Increased Government Functions and Expenditure
Despite these stated objectives, governmental functions and expenditure have, counter-intuitively, expanded. This paradox can be attributed to several interconnected factors:
1. The Evolving Role of the State
While LPG and NPM aimed to shrink the state, the actual role of the government has evolved rather than diminished, particularly in developing countries. The state has transformed from a direct provider to a facilitator, regulator, and enabler.
- Facilitator of Market Economy: To create an environment conducive to market operations, the government must invest in essential infrastructure (physical and digital), establish clear legal frameworks, and ensure macroeconomic stability. These foundational roles require significant public investment.
- Regulator of Markets: With liberalization and privatization, the need for robust regulatory bodies to prevent market failures, protect consumer interests, and ensure fair competition has grown. Examples include regulatory authorities in telecommunications, banking, and energy. Amitabh Kant, former G-20 Sherpa, noted India's high regulatory compliance burden, attributing it to a lingering "socialist mindset" and calling for a shift from controlled to enabled regulation (2025). A TeamLease RegTech report (2025) highlighted that a typical manufacturing MSME in India navigates over 1,450 regulatory obligations annually.
2. Increased Demand for Social Welfare and Public Goods
Economic reforms, while promoting growth, often lead to increased income inequality and social disparities. This necessitates greater government intervention in social sectors.
- Social Safety Nets: To mitigate the adverse effects of liberalization (e.g., job losses, increased cost of living for vulnerable sections), governments have expanded social welfare programs, including subsidies, direct benefit transfers (DBT), healthcare, and education. For instance, Crisil Ratings projects that social welfare spending by the top 18 Indian states will remain high at approximately 2% of GSDP, or around ₹6.4 lakh crore, in FY26. India's expenditure on social services increased from 6.7% of GDP in 2017-18 to 7.8% of GDP in 2023-24.
- Provision of Public Goods: Essential public goods like national defense, law and order, environmental protection, and public health remain the state's responsibility and often require increased expenditure with population growth and new challenges.
3. Global Challenges and Externalities
Globalization has brought new responsibilities and expenditures for governments, often unforeseen at the time of initial reforms.
- Environmental Protection: Growing awareness of climate change and environmental degradation has led to increased government spending on sustainable development, renewable energy, and pollution control measures.
- International Commitments: Adherence to international treaties, trade agreements, and participation in global forums (e.g., WTO, UN Climate Summits) entails financial and administrative commitments.
- Security Concerns: Globalization has also led to increased transnational threats like terrorism, cybercrime, and pandemics, necessitating greater investment in national security and public health infrastructure. The COVID-19 pandemic, for instance, dramatically increased government health expenditure worldwide.
4. Administrative Reforms and Capacity Building
NPM aimed at efficiency, but implementing these reforms and building modern administrative capacity itself requires investment.
- E-Governance Initiatives: The push for digital governance to improve service delivery, transparency, and accountability (a core NPM principle) requires substantial investment in IT infrastructure, training, and maintenance. Programs like Mission Karmayogi (2020) for civil services capacity building and the CPGRAMS (Centralized Public Grievance Redress and Monitoring System) exemplify this.
- Performance Management: Implementing performance-based systems, audits, and evaluations (NPM hallmarks) necessitates new bureaucratic structures, data collection mechanisms, and expert personnel, adding to administrative costs.
5. Unforeseen Consequences and Path Dependency
The initial reform designs sometimes overlooked certain systemic realities or created new demands.
- Costs of Transition: Disinvestment processes, restructuring of public sector units, and capacity building for newly privatized entities or regulatory bodies can entail significant transitional costs.
- Clientelism and Rent-Seeking: In some contexts, liberalization and privatization can create new avenues for rent-seeking and corruption, necessitating increased oversight and anti-corruption expenditure.
The following table summarizes the contrasting objectives and actual outcomes:
| Aspect | Intended Outcome (LPG & NPM) | Actual Outcome (Paradox) |
|---|---|---|
| Government Functions | Limit direct provision, reduce state intervention. | Shift to regulation, facilitation, welfare, and new public goods provision; increased complexity. |
| Public Expenditure | Reduce overall spending, improve fiscal health. | Increased spending on social safety nets, infrastructure, regulatory bodies, e-governance, and new global responsibilities. |
| Role of State | Minimalist state, market-driven economy. | "Smart State" - active in regulation, welfare, market correction, and enabling private sector. |
| Efficiency | Achieve efficiency through market competition. | Efficiency gains offset by new demands, administrative costs of reform, and evolving societal needs. |
Conclusion
The paradox of increasing government functions and expenditure despite the intended shrinking of the state by LPG and NPM reforms highlights the complex and dynamic nature of governance in the modern era. While these reforms successfully ushered in an era of economic growth and greater efficiency in many sectors, they simultaneously necessitated a new, expanded role for the state as a regulator, facilitator, welfare provider, and protector against new global challenges. The increase in public expenditure is, therefore, not merely a failure of the reforms but a reflection of the evolving social contract, increasing citizen expectations, and the state's indispensable role in ensuring equitable growth and stability in a globalized world. Future reforms must acknowledge this expanded mandate and focus on enhancing the effectiveness and transparency of this larger, yet crucial, public sector.
Answer Length
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