ASSIGNMENT 2

PUBLIC ECONOMICS
SEMESTER II MA ECO (P)

Submitted to: Prof. Dr. Qamar Alam

Submitted by: Anushka Srivastava

Roll no.: 241H0400004
1. Explain the concept of market failure with examples. How
does government intervention help correct market failures,
and what are the potential risks of such intervention?
Market failure occurs when free markets fail to allocate resources
efficiently, leading to a loss of economic welfare.
Common causes include:
Externalities (e.g., pollution harming third parties).
Public Goods (e.g., national defense, which private markets
underprovide).
Market Power (e.g., monopolies raising prices).
Information Asymmetry (e.g., consumers lacking product
knowledge).

Government Intervention
Governments address market failures through:
Regulations (e.g., environmental laws).
Taxes/Subsidies (e.g., carbon taxes or education subsidies).
Public Goods Provision (e.g., infrastructure).
Information Campaigns (e.g., health awareness).

Risks of Intervention
Potential risks include:
Government Failure (inefficient policies).
Unintended Consequences (e.g., black markets).
Regulatory Capture (favoring industries over public welfare).
While government intervention can correct market failures, it must
be carefully designed to avoid inefficiencies or adverse effects.

2. Discuss the role of the Finance Commission in India’s fiscal

federalism. How has the 15th Finance Commission’s
recommendations influenced center-state financial
relations?
The Finance Commission of India plays a crucial role in the country’s
fiscal federalism, established under Article 280 of the Constitution.
Its primary functions include recommending the distribution of tax
revenues between the Union and the States, determining grants-in-
aid for states in need, and assessing financial relations to maintain a
stable fiscal environment. By facilitating equitable resource
allocation and promoting cooperative federalism, the Finance
Commission acts as a balancing mechanism between different levels
of government.

Role in Fiscal Federalism

Resource Allocation: The Commission helps bridge financial
imbalances by allocating resources to states, enhancing their fiscal
autonomy and efficiency.
 Equity Among States: It addresses inequalities by providing more
financial support to backward states, ensuring balanced
development across regions.

Consultative Process: Extensive consultations with both central and

state governments foster cooperation and inclusivity in decision-
making.

Influence of the 15th Finance Commission

The 15th Finance Commission, constituted in November 2017, has
significantly influenced center-state financial relations by:

Adapting to GST: Its recommendations reflect the changes brought

about by the Goods and Services Tax (GST), which altered revenue-
sharing dynamics between the central and state governments.

Performance Criteria: The Commission introduced monitorable

performance criteria for national programs, encouraging
accountability and effective use of funds.

New Challenges: It addressed emerging issues such as the

bifurcation of Jammu and Kashmir into Union Territories, which
necessitated a reevaluation of resource distribution.

Conclusion
The Finance Commission is vital for maintaining fiscal federalism in
India, ensuring fair resource distribution and fostering cooperative
governance. The 15th Finance Commission's recommendations have
further refined center-state relations, adapting to contemporary
fiscal challenges while promoting equitable growth across states.

3. Analyze the implications of India's fiscal deficit trends on

economic growth and inflation.How can the government
balance fiscal sustainability with development goals?
Implications of Fiscal Deficit on Economic Growth
Short-term Impact: High fiscal deficits can crowd out private
investment, leading to slower GDP growth. A study indicates that a
₹1 million increase in deficit reduces GDP growth by 0.000069 units.

Long-term Potential: Increased capital expenditure (capex) on

infrastructure (₹11.1 lakh crore in FY25) aims to boost productivity,
but a potential capex shortfall could hinder growth momentum.

Inflation Risks
Direct Pressure: Financing deficits through RBI borrowings raises
money supply, contributing to inflation. A 1% rise in deficit can lead
to a 0.3-0.5% increase in inflation.
 Indirect Effects: Currency depreciation and higher interest rates can
further exacerbate inflationary pressures.

Balancing Sustainability and Growth

Strategies
Fiscal Consolidation: Targeting a fiscal deficit of ≤4.5% by FY26
through improved GST collections and low-cost borrowing.

Strategic Expenditure:
Infrastructure Capex: ₹11.1 lakh crore to drive job creation.
Agricultural Reforms: ₹1.27 lakh crore to stabilize rural demand.
Health/Education: ₹4.2 lakh crore for human capital development.
Revenue Enhancement: Expanding the tax base and strategic
disinvestment (targeting ₹50,000 crore in FY25).

Challenges
Coordination with states on fiscal policies, global economic
slowdowns, and rationalizing subsidies are critical for achieving
sustainable growth.

In summary, India's government must balance fiscal discipline with

growth-oriented investments to achieve robust economic
performance while managing inflation effectively.

4. Critically evaluate the impact of the Goods and Services Tax

(GST) on revenue mobilization, interstate trade, and ease of
doing business in India.
India's Goods and Services Tax (GST) has significantly reshaped the
economy since its 2017 implementation. Below is a critical evaluation
of its impact across three key areas:
Revenue Mobilization
Positive Impacts:
Consistent growth: GST collections reached ₹1.84 lakh crore in
February 2025, a 9.1% YoY increase, driven by economic recovery and
stricter compliance measures.
Expanded tax base: The number of GST-registered businesses doubled
from 6.5 million (pre-2017) to 14 million (2025), improving revenue
predictability.
Efficiency gains: Digital tools like e-invoicing and AI-based monitoring
reduced tax evasion, contributing to a 12.5% average annual growth in
collections since 2020.

Challenges:
Refund pressures: Refunds surged 17.3% YoY to ₹20,889 crore in
February 2025, indicating administrative bottlenecks.
Import reliance: GST on imports grew only 5.4% (vs. 10.2% domestic
growth), exposing vulnerability to global trade slowdowns.

Interstate Trade
 Positive Impacts:
Economic integration: Interstate goods flow rose to 70% of GDP in FY22
(from 55% in FY18), driven by unified tax rates and reduced
checkpoints.
Logistical efficiency: Domestic trade grew 44% between FY18–FY21,
outpacing GDP growth (19.7%), as GST eliminated state-level tax
barriers.

Challenges:
Compliance complexity: While e-way bills streamlined logistics, small
businesses still face challenges adapting to real-time documentation
requirements.

Ease of Doing Business

Positive Impacts:
Simplified compliance: GST replaced 17 indirect taxes with a single
regime, reducing compliance costs by ~20% for SMEs.
Digital transformation: Automated processes (e.g., e-invoicing, GSTN
portal) cut return filing time by 30% and improved transparency.
Global recognition: India’s World Bank Ease of Doing Business rank
jumped from 142nd (2014) to 63rd (2024).

Challenges:
Initial implementation hurdles: Businesses faced technical glitches and
frequent rate changes in early years, though stability improved post-
2022.
Ongoing reforms: Budget 2025 amendments (e.g., mandatory ITC
reversal for credit notes) add short-term compliance complexity despite
long-term benefits.

Critical Outlook
While GST has strengthened revenue streams (averaging ₹1.75 lakh
crore/month in FY25) and boosted formalization, its success remains
tied to sustained digital adoption and macroeconomic stability. Future
reforms, such as the proposed Track and Trace Mechanism (2025),
must balance compliance rigor with SME-friendly policies to maximize
gains.

5. Compare and contrast Universal Basic Income (UBI) and

targeted welfare programs (such as PM-KISAN and
MGNREGA) in terms of fiscal feasibility and effectiveness in
reducing poverty.

Poverty Reduction Effectiveness

UBI
Strengths: Eliminates exclusion errors and reduces administrative costs;
trials show 17-37% poverty reduction.
Limitations: Cash transfers lack the asset-building impact of MGNREGA.

Targeted Programs
PM-KISAN: ₹6,000/year to farmers increased rural consumption by 12%,
but excludes non-landowners.

MGNREGA: Lifted 5.5 crore households above the poverty line, created
assets, and raised rural wages by 5-9%.

Structural Trade-offs
Labor Markets: UBI may reduce formal labor participation, while MGNREGA
increased workdays significantly.

Political Economy: UBI faces resistance due to potential subsidy cuts, while
PM-KISAN aligns with farmer interests.

Implementation: MGNREGA’s decentralized structure enables effective

local job creation compared to UBI's untested delivery.

6. Discuss the role of public expenditure on health and

education in promoting long-term economic growth. Use
examples from India’s National Education Policy (NEP) and
Ayushman Bharat scheme.

Role of Public Expenditure on Health and Education

Human Capital Development: Investment in health and education
enhances productivity, innovation, and economic progress.
Productivity and Efficiency: A healthier, educated workforce contributes to
higher economic growth.
Poverty Reduction: Increased public spending reduces inequality and
poverty, fostering a more inclusive economy.
Mortality Reduction: Higher public health expenditure decreases mortality
rates, particularly among vulnerable populations.

India’s National Education Policy (NEP)

Increased Investment: NEP aims for public education spending to reach
6% of GDP, up from 3.9%.
Quality Enhancement: Focuses on improving educational quality through
curriculum reforms and teacher training.
Equitable Access: Promotes inclusive education and lifelong learning
opportunities for all.

Ayushman Bharat Scheme

Healthcare Access: Aims to improve healthcare access for vulnerable
populations.
Financial Protection: Reduces out-of-pocket health expenditures,
protecting against catastrophic health costs.
Impact: A 10% increase in public health spending can lower the average
probability of death by about 2%.
Challenges and Way Forward
Low Spending Levels: Combined public spending on education (3.3% of
GDP) and health (1.3% of GDP) remains low compared to global standards.
Implementation Issues: Effective execution and fund utilization are crucial
for success.
Integrated Approach: Health and education programs should be aligned
with other pro-poor initiatives for maximum impact.
By prioritizing public expenditure in these sectors through initiatives like
NEP and Ayushman Bharat, India can enhance its human capital and
achieve sustainable economic growth.
7. Examine the impact of privatization and disinvestment of
Public Sector Undertakings (PSUs) on government finances
and economic efficiency. Discuss recent examples such as
Air India and LIC.
The privatization and disinvestment of Public Sector Undertakings
(PSUs) in India have significant implications for government finances
and economic efficiency. Recent examples, such as the privatization
of Air India and the strategic disinvestment of Life Insurance
Corporation (LIC), illustrate these impacts.

Impact on Government Finances

Revenue Generation: Disinvestment is intended to generate revenue
for the government. However, the contribution of divestment
proceeds to overall revenue has diminished, accounting for only
1.6% of total revenue in FY24-25. The government has set a modest
disinvestment target of ₹47,000 crore for FY26, down from previous
years.
Reliance on Dividends: With privatization efforts slowing, the
government increasingly relies on dividends from profitable PSUs.
For instance, it has revised its dividend target to ₹55,000 crore for
FY25, indicating a focus on maximizing returns from existing public
investments.

Fiscal Stability: The shift away from aggressive privatization reflects

a strategy to stabilize finances without significantly increasing the
fiscal deficit, which is projected at 4.9% of GDP for 2024-25.

Economic Efficiency
Operational Improvements: Privatization can lead to greater
operational efficiency and productivity. For example, Air India, once
a loss-making entity, is expected to improve service and profitability
under private management. The government’s decision to privatize
Air India aimed to reduce operational inefficiencies that plagued the
airline for years.

Market Dynamics: The disinvestment of LIC through an Initial Public

Offering (IPO) was intended to enhance market discipline and
 efficiency in the insurance sector. It aimed to increase competition
and improve customer service by exposing LIC to market forces.

Challenges with Ailing PSUs: Despite the potential benefits of

privatization, recent reports indicate that the government plans to
invest approximately $1.5 billion in struggling state-owned firms
instead of pursuing their privatization. This reflects challenges in
finding buyers for underperforming PSUs and raises questions about
long-term economic efficiency.

8. How has digital public infrastructure (such as UPI, Aadhaar,

and Jan Dhan Yojana) improved governance and financial
inclusion in India? Discuss the benefits and challenges.
Digital public infrastructure (DPI) in India, exemplified by initiatives
such as the Unified Payments Interface (UPI), Aadhaar, and Jan Dhan
Yojana, has significantly enhanced governance and financial
inclusion. However, it also presents certain challenges.

Benefits of Digital Public Infrastructure

1. Enhanced Financial Inclusion
Access to Banking: The Jan Dhan Yojana has opened over 47 crore
bank accounts, providing millions with access to banking services,
particularly in rural areas.

Digital Payments: UPI has revolutionized transactions, facilitating

over 45 billion transactions worth ₹84 lakh crore in FY24, making
payments accessible and efficient.

2. Improved Governance
Transparency and Accountability: Aadhaar has streamlined identity
verification for various services, reducing fraud and ensuring that
benefits reach intended recipients. This has led to savings estimated
at 1.14% of GDP through direct benefit transfers (DBT).

Efficient Service Delivery: Digital platforms enable faster processing

of government services, reducing bureaucratic delays and
enhancing citizen engagement.

3. Economic Growth
Boosting Productivity: DPI supports economic activities by enabling
secure digital transactions and integrating various services, which
can increase overall productivity.

Crisis Management: During the COVID-19 pandemic, initiatives like

the Garib Kalyan Yojana utilized digital infrastructure for swift
financial assistance, demonstrating the resilience of DPI in crisis
situations.
 Challenges of Digital Public Infrastructure
1. Digital Literacy and Access
Despite advancements, India still faces challenges with low digital
literacy and unequal access to technology, particularly in rural and
underserved areas.

2. Privacy and Security Concerns

The reliance on platforms like Aadhaar raises concerns about data
privacy and security. Instances of data breaches or misuse can
undermine public trust in these systems.

3. Interoperability Issues
While efforts have been made to create interoperable systems,
challenges remain in ensuring seamless integration across different
platforms and services.

4. Vulnerabilities in Infrastructure
Recent incidents highlighted vulnerabilities within interconnected
systems, emphasizing the need for robust security measures to
protect against cyber threats.

Conclusion
India's digital public infrastructure has made significant strides in
promoting governance and financial inclusion through initiatives like
UPI, Aadhaar, and Jan Dhan Yojana. While these systems enhance
efficiency and accessibility, addressing challenges related to digital
literacy, privacy, and security is crucial for maximizing their
potential benefits. Continued investment in infrastructure and
education will be essential to ensure that all citizens can fully
participate in this digital transformation.

9. Should India introduce a carbon tax to curb pollution and

promote green energy? Discuss the economic and
environmental implications.

The introduction of a carbon tax in India could play a crucial role in curbing pollution and
promoting green energy. This approach has significant economic and environmental
implications, particularly in light of India's commitment to reducing greenhouse gas
emissions and transitioning to a more sustainable economy.

Economic Implications

1. Revenue Generation

A carbon tax can generate substantial revenue for the government. This revenue could be
reinvested into renewable energy projects, public transport, and energy efficiency programs,
fostering economic growth while addressing climate change. For instance, increasing the
current carbon tax rate of ₹1.6 per tonne of CO2 could enhance funding for green initiatives
and job creation in the renewable sector.
2. Impact on Industries

While a carbon tax may increase production costs for carbon-intensive industries, it can
incentivize them to adopt cleaner technologies and practices. This transition could lead to
increased operational efficiency and innovation in the long term. However, industries may
face short-term challenges, including higher prices for consumers and potential job losses in
traditional sectors.

3. Global Competitiveness

Implementing a robust carbon tax could help India align with global standards, especially as
international regulations tighten, such as the European Union's Carbon Border Adjustment
Mechanism (CBAM). Without a structured carbon credit system, Indian manufacturers risk
losing their competitive edge in global markets.

Environmental Implications

1. Reduction in Emissions

A well-designed carbon tax is expected to reduce greenhouse gas emissions by encouraging

businesses and consumers to shift towards cleaner energy sources. This aligns with India's
goal of achieving carbon neutrality by 2070 and fulfilling its commitments under
international climate agreements.

2. Promotion of Renewable Energy

The revenue generated from a carbon tax can be directed towards renewable energy projects,
thus accelerating the transition from fossil fuels to sustainable energy sources. This would not
only help reduce emissions but also create jobs in emerging green sectors.

3. Public Awareness and Behavioral Change

A carbon tax can raise public awareness about the environmental impact of carbon emissions,
encouraging individuals and businesses to adopt more sustainable practices.

Challenges

1. Implementation Issues

Implementing a carbon tax poses challenges, particularly in a developing economy like India.
Concerns about economic impacts on low-income households and industries must be
addressed through careful design and implementation strategies.

2. Political Resistance

There may be political resistance to introducing a carbon tax due to fears of public backlash
against rising costs of living and potential job losses in traditional sectors.

3. Need for Complementary Policies

For a carbon tax to be effective, it should be part of a broader strategy that includes
regulatory measures, subsidies for renewable energy, and investments in public transportation
infrastructure.

Conclusion

Introducing a carbon tax in India presents both opportunities and challenges. While it could
significantly curb pollution and promote green energy through enhanced revenue generation
and behavioral change, careful consideration must be given to its design and implementation
to mitigate economic impacts on vulnerable populations and industries. Ultimately, aligning
this initiative with India's broader climate goals will be essential for fostering sustainable
development while addressing pressing environmental concerns.