Imperative to wipe out trust deficit, ‘get out of the way’ & deregulate, says CEA

“But, ‘get out of the way’ and trust people, we must, for we have no other choice,” the CEA said. Once the trust deficit is addressed, it is a good bet the Indian public will overcome the challenges and turn them into opportunities, he said.

Nageswaran recommended rolling back regulations “significantly”, stopping micromanagement of economic activity, and embracing risk-based regulations. The Economic Survey underscored that deregulation is more essential for growth of micro, small, and medium enterprises (MSMEs) vis-à-vis large companies. It also called for states to take the lead in Ease of Doing Business (EoDB) 2.0.

According to the CEA, a “business as usual” approach carries a high risk of economic growth stagnation, if not economic stagnation. “Yes, trust is a two-way street and the non-government actors in the economy have to vindicate the trust reposed,” he said, without elaborating. The Ministry of Finance has been disappointed with India Inc for not kickstarting investments despite a sharp corporate tax rate cut in 2019, and companies building a healthy balance sheets with large cash reserves in the years following the pandemic.

The Survey stated the Indian economy will need to grow by around 8 per cent in real terms every year for at least a decade to achieve a sustained rise in standard of living, and much of that growth would need to come from the domestic sector.

“Unleashing the potential of domestic-led growth in India via enhancement of investment and economic efficiency will entail a combination of efforts, viz., assessing the actual/true cost of regulation, undertaking systematic deregulation to reduce/remove the same by liberalising standards and controls and designing policy prescriptions that reduce the cost and burden of undertaking an economic activity, for citizens and businesses alike,” the Survey said.

The Survey noted that while the government has pursued policies to support MSMEs, like boosting access to finance and providing market linkages, the regulatory compliance burden has remained a challenge, which prevents small firms from growing. It said that deregulation is more critical for MSME growth than large enterprises, as compliance costs are “non-trivial” for MSMEs, while large enterprises “usually find a way around compliance”.

It said that the faster economic growth that India needs is only possible if the union and state governments continue to implement reforms that allow SMEs to operate efficiently and compete cost-effectively.

“The logic for staying small often is to remain under the regulatory radar and steer clear of the rules and labour and safety laws. Ironically, the biggest casualties are employment generation and labour welfare, which most regulations were originally designed to encourage and protect, respectively,” the Survey said.

“Unburdened by licensing, inspection and compliance requirements, the people and small enterprises of India, with their high aspirations and intrinsic inventiveness, will find answers to the pressing challenges of growth, employment and development,” it added.

The Survey pitched for EoDB 2.0 to be a state government-led initiative “focused on fixing the root causes behind the unease of doing business”. While EoDB reforms so far have dealt with reducing compliance burdens, digitisation, and extending incentives to key sectors, the second round should prioritise liberalising standards and controls, including removing restrictions on women’s participation in factories and rationalising parking norms, it said.

As a starting point to identify reform opportunities, the Survey recommended that states should look at regulations pertaining to administration, land, building and construction, labour, utilities, transport, logistics, local trade, and environment, in addition to any sector-specific regulations.

It also called on the states to learn from regulations in other states as well as countries to “identify opportunities for growth-inducing reforms”, adding that they can learn from each other’s recent deregulation experiences and creative solutions deployed towards common problems.

According to the Survey, regulatory prohibitions are excluding women from high-paying jobs on the factory floor.

“India’s ten most populous states collectively impose 139 prohibitions on women from participating in specific factory processes.

Governments impose these prohibitions given the dangerous nature of the processes. However, inter-state comparison and scientific literature indicate that these prohibitions are enforced without evidence of special health risks to women workers,” it said.

“Commercial buildings in many Indian states must build more floors to get the same floor space as some frontier states and countries.

This makes Indian commercial buildings artificially slender, wastes valuable commercial land, and increases the cost of construction,” it added.

The Survey also pushed for greater private sector participation in building approvals and inspections. “Indian states give private parties limited opportunities to participate in enforcement processes for building safety. This limits the ability of Indian states to enforce regulations and encourage compliance,” it said.

With regards to penalising non-compliance with regulations, it noted that states do not have to adhere to procedural safeguards to reduce chances of arbitrary action

“For example, many states do not require departments to issue detailed show-cause notices, allow representations by the accused person, or issue reasoned decisions before sealing or demolishing buildings. Without these safeguards, states are more likely to make inaccurate or bad-faith decisions about the use of buildings in Indian cities. Guaranteeing procedural safeguards by law can reduce the legal risk of investments and job creation, encouraging rapid growth,” the Survey said.

It also called for reducing electricity tariff markup for industrial users. “Across states, industrial users can pay a 10–25% markup over the cost of electricity supply. Other countries impose lower rates for electricity use. For example, Vietnam sets the electricity sale price at a 10% lower rate than the cost of generating electricity. Such differences in energy costs reduce the global competitiveness of Indian factories, discouraging growth,” it said.