To stay shipshape, cut regulatory flab

Narendra Modi's review last week of the progress on deregulation underscores India's need to improve its regulatory quality to raise economic performance and achieve development metrics. While no universally accepted estimate exists of how much of India's GDP is forgone on account of red tape, GoI has moved regulation towards a more trust-based approach. Results are visible in tax receipts that are climbing despite less visible regulation. Technology is an enabler by making regulation discrete and more effective. Yet the bulk of the permit raj resides in municipal and state bureaucracies, with considerable scope for streamlining.

The compliance burden of heavy regulation discriminates against small enterprises. This is of particular concern to policymakers due to the size of India's informal economy. Less red tape can encourage the migration of a large workforce into social security networks. Deregulation is a policy tool for equitable growth so long as the compliance cost declines with rising economic output. There is also the inflationary impact of regulation, which contributes to income inequality. Elimination of licences that serve as entry barriers improves market efficiency and sets off a virtuous cycle of deregulation.

For all its economic impact, deregulation has received less policy attention than it deserves. This is evident at the local level of government, where pockets of deregulation have demonstrated favourable economic outcomes. GoI can push its agenda using an enviable stack of digital infrastructure to transition from a regime that prescribes acceptable economic behaviour to a lighter regime that merely specifies unacceptable behaviour. Analytical tools available to regulators today allow for a system based on trust. Parallel developments in governance structures reinforce the effects of technology. The PM has given India a short window to catch up with the regulatory quality found in advanced economies. His government will have to sustain the momentum for cutting red tape.