The Evolving Role of the State in a Globalised World

The state we see today looks very different from the one our grandparents knew. Earlier, the government was expected to run factories, set prices, issue licences, and directly provide jobs, food, and healthcare. Today, much of that role has shifted. Private players build highways, run airports, and operate telecom networks, while the state increasingly watches from the sidelines as a rule-maker and referee. This transformation is not accidental. It is the product of globalisation, which has forced governments to rethink what they do, how they do it, and why.

From welfare state to competition state
Why the traditional model came under strain
The Indian story: liberalisation and its aftermath
What changed after 1991
The regulatory state: rules instead of rowing
A growing family of regulators
The state as an enabler
Setting the rules of the game
Facilitating information flow
Creating market institutions
The tension between economic efficiency and social responsiveness
Finding a middle path
What the new state actually does
Challenges ahead

From welfare state to competition state

For much of the twentieth century, the dominant model across the world was the welfare state. Governments took direct responsibility for citizens’ well-being, providing healthcare, education, housing, pensions, and employment protection. Public sector enterprises dominated strategic industries, and the state was seen as the primary engine of development.

Globalisation changed this calculus fundamentally. As capital became mobile across borders, governments found themselves in a new kind of contest. States began competing to attract investment by offering favourable conditions to businesses, which translated into downward pressure on taxation, regulation, and social spending. The political scientist Philip Cerny famously described this shift as the rise of the competition state – a state whose core mission is not social solidarity but international competitiveness.

The core logic of the competition state is simple: in an interconnected economy, countries that burden business with too many rules, high taxes, and inflexible labour markets will lose investment to those that do not. Traditional welfare states are moving towards innovation, flexibility, and competition, with wages stagnating, inequality growing, and labour institutions under stress as capital gains government support.

Why the traditional model came under strain

Several forces pushed governments away from the welfare model. First, the end of the Cold War and the collapse of planned economies discredited state-led development in many circles. Second, institutions like the World Bank and IMF began attaching conditions to loans that required recipient countries to liberalise. Since the Berg Report of 1981, these institutions have become major players stipulating structural adjustments and preferred policies that nation-states should adopt as a condition of support.

Third, mounting fiscal deficits made generous welfare commitments increasingly unaffordable. Lower tax revenues constrained resources for social programmes, and neo-liberal thinking promoted the idea that markets could deliver services more efficiently than governments. Together, these pressures produced a new orthodoxy built on three pillars – deregulation, privatisation, and market-oriented reform.

The Indian story: liberalisation and its aftermath

Nowhere is this transformation more visible than in India. Until 1991, the economy operated under what was colloquially called the “Licence Raj” – a thick web of permits, quotas, and government approvals that businesses needed just to expand capacity or launch a new product. Then came the balance-of-payments crisis.

In July 1991, the country was on the brink. Foreign exchange reserves had fallen to less than $1 billion, barely enough to cover three weeks of imports, inflation had surged to 17%, and the government was forced to pledge gold reserves with the Bank of England to secure emergency loans. Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh responded with the New Economic Policy, built on the three pillars of Liberalisation, Privatisation, and Globalisation – the LPG reforms.

What changed after 1991

The reforms dismantled the old architecture of state control. Industrial licensing was abolished for most industries – except for 18 that were later reduced to just 6 – ending the Licence Raj, and the number of industries reserved exclusively for the public sector was reduced from 17 to 8, and later to just 3. Sectors like telecommunications and civil aviation, once the exclusive domain of public enterprises, were thrown open to private players.

Foreign investment rules were also relaxed dramatically. The Foreign Exchange Regulation Act was replaced by the more liberal FEMA, and automatic approval was granted for foreign direct investment up to 51% in most sectors. Capital markets were reformed, with the Securities and Exchange Board of India empowered as a regulator and the National Stock Exchange established.

The results have been profound. India’s inflation-adjusted GDP grew from $266 billion in 1991 to $4.18 trillion in 2025, and poverty declined steeply from 55.1% in 2005-06 to 16.4% in 2019-20. A world-class IT industry emerged, a large middle class expanded, and the country became one of the world’s most dynamic economies.

The regulatory state: rules instead of rowing

Stepping back from direct production did not mean the state became smaller or weaker. It meant the state took on a different role – that of a regulator rather than a producer. The government stopped “rowing the boat” and focused on “steering” it.

This transformation gave rise to a new institutional landscape. Independent regulators today govern large sectors of the Indian economy, from financial markets and airports to telecom and electricity utility companies, making them an increasingly important institution of governance. These bodies are created by parliamentary law, accountable to parliament, and insulated from direct cabinet control – giving them the space to take technical decisions without day-to-day political interference.

A growing family of regulators

The alphabet soup of Indian regulators has expanded rapidly since 1991. The Reserve Bank of India continues to oversee banking but now plays a more facilitative role. SEBI regulates capital markets, TRAI governs telecommunications, IRDAI supervises insurance, CCI enforces competition law, and PFRDA looks after pensions. These regulatory authorities guarantee that markets remain fair and transparent after liberalisation, provide functional autonomy to private investment, and protect the economy from shocks.

Why are such bodies needed? Because markets left entirely to themselves can fail. Regulation is crucial to correct market failures like inefficient allocation of goods and services, asymmetric information, market instability, and market monopolisation, and regulators combine the power to set standards, monitor compliance, and punish violations. Traditional government departments often lack the technical expertise and autonomy to handle such tasks well.

The state as an enabler

Alongside the regulatory role, the contemporary state has taken on the task of building an enabling environment for markets to function. This involves three broad activities.

Setting the rules of the game

Markets cannot function without clear, predictable rules on property rights, contracts, competition, and dispute resolution. Regulators are intended to establish and enforce the rules of market functioning, set tariffs in the lead-up to competitive markets, and replace politically motivated decisions with technocratic, transparent rules that produce predictable outcomes. Initiatives like the Insolvency and Bankruptcy Code, the Goods and Services Tax, and the RERA framework for real estate all reflect this rule-making function.

Facilitating information flow

Markets depend on reliable information. Disclosure norms for listed companies, credit rating frameworks, food labelling rules, and data protection laws are all examples of how the state enables markets by ensuring information flows smoothly between buyers and sellers. Without such mechanisms, trust breaks down and transactions become costly.

Creating market institutions

Some institutions that look “natural” today had to be deliberately constructed. Stock exchanges with electronic trading, commodity exchanges, credit bureaus, and digital public infrastructure like UPI and Aadhaar are examples of institutional architecture built by or through the state to make markets work at scale. The state has become an institution-builder.

This new model is not without its critics, and for good reason. The shift from welfare state to competition state involves real trade-offs. When governments chase investment by cutting taxes and loosening regulations, the resources available for social protection shrink. When public enterprises are privatised, employment security for workers often erodes. When the state retreats from agriculture and rural development, the most vulnerable sections can be left exposed.

The retreat of the state from sectors like agriculture and rural development disproportionately affected the poor, who depended on government programmes for access to credit, inputs, and markets, leading to calls for a more balanced approach that combines market mechanisms with strong state intervention where markets fail. Regional disparities have widened, with better-endowed states like Karnataka, Tamil Nadu, and Maharashtra racing ahead, while others lag.

Finding a middle path

Policymakers increasingly recognise that pure deregulation is not enough. Growth must be accompanied by social investment. Programmes like the Mahatma Gandhi National Rural Employment Guarantee Act, the National Food Security Act, Ayushman Bharat, PM-KISAN, and the Jan Dhan-Aadhaar-Mobile trinity reflect an effort to combine economic openness with stronger safety nets. The Atmanirbhar Bharat initiative, launched during the pandemic, has even signalled a partial recalibration of the balance between global integration and domestic resilience.

Environmental governance is another area where pure market logic has proven inadequate. The failure of environmental administration, governance, and regulatory infrastructure to keep pace with the magnitude and pace of economic growth since 1991 has produced significant degradation. This has sparked debates on strengthening public disclosure mechanisms and adopting market-based environmental instruments alongside traditional command-and-control regulation.

What the new state actually does

Putting all of this together, the contemporary state’s role in a globalised world can be captured in a few key functions: it regulates rather than produces, steers rather than rows, enables rather than commands, and partners with the private sector rather than substituting for it. It sets standards, enforces contracts, corrects market failures, provides public goods that markets will not, and cushions citizens against the rougher edges of globalisation.

At the same time, it has to retain the capacity for social responsiveness – ensuring that growth translates into jobs, that inequality does not spiral out of control, and that vulnerable groups are not left behind. Striking this balance is perhaps the defining challenge of contemporary governance.

Challenges ahead

The transformation is far from complete, and several challenges remain. The absence of a government-wide initiative to improve regulatory quality, along with the dominant presence of state-owned enterprises and multi-level government structures, has prevented the creation of a consistent and coherent regulatory environment. Regulators sometimes lack real independence, technical capacity, or coordination with each other. Overlapping jurisdictions and slow dispute resolution can create uncertainty for investors and citizens alike.

There is also the question of democratic accountability. Independent regulators concentrate significant powers – rule-making, enforcement, and adjudication – in technocratic bodies that are distant from direct electoral politics. Ensuring that they remain transparent, fair, and answerable is an ongoing concern.

What do you think? Has the shift from a welfare state to a regulatory, competition-oriented state served citizens well, or has it widened the gap between those who thrive in open markets and those who get left behind? And as new challenges like artificial intelligence, climate change, and digital monopolies emerge, what should the next evolution of the state’s role look like?

References

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Table of Contents

From welfare state to competition state 🔗

Why the traditional model came under strain 🔗

The Indian story: liberalisation and its aftermath 🔗

What changed after 1991 🔗

The regulatory state: rules instead of rowing 🔗

A growing family of regulators 🔗

The state as an enabler 🔗

Setting the rules of the game 🔗

Facilitating information flow 🔗

Creating market institutions 🔗

The tension between economic efficiency and social responsiveness 🔗

Finding a middle path 🔗

What the new state actually does 🔗

Challenges ahead 🔗