A recent report by an investment bank says that the three biggest areas of focus on the economic-policy front for the Indian government right now are striking bilateral trade deals, stepping up investments in strategic industries such as semiconductors and reducing the burden of regulation on firms as well as citizens.
The new Economic Survey written by officials in the finance ministry made a compelling case on how a surfeit of outdated regulations hold back the growth of firms, especially smaller enterprises that drive job creation. It also identifies what can be done to fix the problem.
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Earlier this month, in a lecture delivered in Mumbai, Sanjeev Sanyal from the Prime Minister’s Economic Advisory Council spoke about the importance of process reforms that usually get less attention in India than structural reforms.
The case for a fresh round of deregulation is in the air. There are lessons to be learnt from economic history, especially about how controls introduced at a particular point in time to deal with a problem tend to stick on even after the underlying situation has completely changed.
The origins of the interventionist state in India can be traced back to the first half of the 20th century, in the early days of World War II. The colonial government armed itself with sweeping powers over economic activity in the country. The Defence of India Rules were imposed on 3 September 1939, just two days after the German army invaded Poland.
The government gave itself extensive powers over the supply of essential commodities. Rule 81 of the Defence of India Rules created sweeping powers “for regulating or prohibiting the production, treatment, keeping, storage, movement, transport, distribution, disposal, acquisition, use or consumption of articles or things of any description whatsoever” (italics added).
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Rule 84 gave the government the power to “prohibit or restrict the import or export of all goods or goods of any specified description from or to any specified person or class of persons.” The ability of companies to raise funds as well as have the freedom to use them was restricted in May 1943 through restrictions on capital issues.
The shortages during the war led to a sharp increase in prices. The government then gave itself the power to control prices of items of mass consumption such as cloth. An early attempt to de-control prices in 1947 failed as inflation began to climb once again, and price controls were quickly re-imposed. Many of these powers that the colonial government had created for itself for the war effort were adapted for the planning era.
As the first Five Year Plan document released in 1951 noted: “To some extent, overall control through fiscal, monetary and commercial policies can influence the allocation of resources, but physical controls are also necessary. Controls on production and on movement and on physical allocations to consumers become inescapable.” It later added that administering such controls in an economy dominated by small enterprises made the task even more difficult.
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In the late 1970s, the short-lived Janata Party government headed by Morarji Desai had set up a committee led by Vadilal Dagli, an economic journalist, to suggest ways to reform the system of controls and subsidies. It was one of the early steps taken by finance minister H.M. Patel to reconsider the entire way the Indian economy had been managed over the previous few decades.
Many parts of the Dagli committee report are still worth reading today. It noted, for example, that the authorities imposed controls without thinking enough of the administrative machinery needed to implement them.
A multiplicity of controls, with multiple objectives, often neutralizing each other, could lead to contradictory orders that increase the discretion—and hence the scope for corruption—in the administration. A lot of economic legislation was no longer relevant but continued to remain in the law books. Some controls sought to promote a certain activity while others sought to prevent some other activity. It is important to make a distinction between the two.
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Among the recommendations of the Dagli committee was one that called on all economic ministries to examine all legislation in their area of work, and identify redundant regulations. It also said that all controls should be updated annually, and the results placed before Parliament. Necessary control orders should be consolidated and simplified.
However, the recommendations of the Dagli panel, which were made public in 1979, stopped short of recommending the economic reforms that were launched in 1991. Its focus thus was on making the existing system less onerous rather than totally replacing it.
The 1991 reforms did away with all sorts of controls on investment, trade and prices. However, even more than three decades later, there is an entire web of regulations that impose immense burdens on companies, especially the smaller ones. Not all these are under the Union government. Many of the most onerous regulations are within the ambit of various state governments. Current attempts at deregulation in India will thus have to target constraints on firms at all levels of government.
The author is executive director at Artha India Research Advisors.
