Imagine a vibrant economy held back by endless bureaucracy, where entrepreneurs are bogged down by inspections and red tape instead of focusing on innovation and growth. That's the stark reality India faces with its notorious 'inspector raj,' and it's a battle that's far from won. But here's where it gets interesting – the country is finally pushing back, easing some regulatory burdens on businesses. Yet, true economic freedom remains elusive, and every enterprise deserves the breathing room to thrive and compete fairly. Let's unpack this together, step by step, so even newcomers to these topics can follow along easily.
In recent months, India has made noteworthy strides in trimming the dense web of regulations that have long stifled private sector dynamism. These changes are a step in the right direction, but they need to accelerate if we're to achieve genuine economic liberty. Picture this: businesses, from tiny startups to sprawling corporations, craving space to expand without constant hurdles.
For instance, the government has scrapped 114 quality control orders designed to safeguard consumers, but which often ended up blocking smaller companies from accessing affordable imported materials. That said, plenty of these orders linger on, meaning the relief is partial at best. And this is the part most people miss – these regulations might seem protective on the surface, but they inadvertently raise costs and limit options for businesses trying to keep prices down.
Another key development is the rollout of four new labor codes, covering wages, industrial relations, social security, and working conditions. These were approved by Parliament nearly six years ago, and their implementation is a long-overdue simplification of labor laws.
Meanwhile, Niti Aayog has reportedly completed a groundbreaking report proposing major overhauls in how government bodies monitor companies – shifting from a mindset of distrust to one of trust. This could transform everything from business registrations to inspections, fostering a more supportive environment.
Across various Indian states, rule books are being updated on diverse fronts, including building permits, women's working hours, and land use regulations. It's a patchwork of progress, but a promising one.
Even the Reserve Bank of India has taken action, abolishing 9,446 circulars in favor of just 244 master directives for the banks it oversees. This consolidation aims to streamline everything from lending practices to compliance.
To understand the backdrop, recall the 1991 economic reforms that dismantled the 'licence raj' – the era of needing government permission to start or expand businesses. But they largely overlooked the 'inspector raj,' a term for the army of inspectors (factory, labor, pollution, tax, and more) wielding excessive powers. For beginners, think of it like this: if licence raj was about barriers to entry, inspector raj is about the ongoing harassment once you're in the game. These policy shifts are essentially the first notes in a symphony of deregulation, not the grand finale. Simplifying this chaotic tangle of rules across federal, state, and departmental levels is a monumental task – one that's just beginning.
At the heart of this is a deep-rooted culture of suspicion rather than trust. A telling example: When Jaswant Singh became finance minister in 2002, he gathered top tax officials and declared that civilized nations don't raid their own citizens' businesses for taxes. During his two-year tenure, not a single tax raid occurred. It's a powerful lesson in how shifting the state's approach from adversarial to collaborative could revolutionize interactions with entrepreneurs across all regulations. But here's where it gets controversial – some argue that strict oversight is essential to prevent fraud and protect the public, countering the push for trust-based systems. Is this balance tipping too far, or is it overdue?
Why should we care about deregulation? Let's turn to the World Bank's Enterprise Surveys for insights. These are among the most thorough global datasets on business conditions, drawn directly from owners and managers. They cover everything from financing hurdles and corruption to infrastructure woes, workforce skills, regulatory pressures, and market competition. For instance, they track how much time senior executives waste on government red tape and how many firms view licensing and permits as major obstacles.
Comparing India to other developing Asian nations like China, Vietnam, and Indonesia reveals just how burdensome our regulations are. Indian firms spend disproportionately more time and effort navigating these hoops. And this is the part most people miss – the data holds steady across firm sizes, whether small (5-19 employees), medium (20-99), or large (over 100). However, bigger companies can afford expert teams to handle inspectors, while smaller ones are often left scrambling, which exacerbates inequalities.
Reducing this regulatory overload could address a lesser-known challenge in India: the 'missing middle' – the gap between giant corporations and tiny, inefficient enterprises. We lack enough mid-sized businesses, which are crucial for strong job growth. The sixth economic census from over a decade ago revealed that the average Indian firm employs just 2.24 workers, highlighting issues of scale and productivity. An IMF report notes that 75% of India's manufacturing units have fewer than five employees, versus just 38% in the US. Studies also show that in competitive US markets, surviving firms grow quickly, but they stagnate in India. The productivity divide between small and large firms here is more than double that in the US, and small Indian firms aren't always the young upstarts they are across the pond – many remain small due to barriers.
Factors like limited formal financing play a role, but regulatory burdens and the endless compliance time they demand are a major culprit. For example, a small entrepreneur might spend days filling forms instead of developing products, stifling potential.
Fundamentally, deregulation boils down to economic freedom, as Bhuvana Anand from the think tank Prosperiti argued in a recent Business Standard piece. She points out that growth doesn't magically appear; it's driven by businesses investing, innovating, trading, and hiring. The current reforms, and hopefully more to come, could grant them the room they need to flourish.
The author is executive director at Artha India Research Advisors.
What do you think? Is India striking the right balance between deregulation for growth and regulations for safety? Do you agree that trust-based oversight is the way forward, or is stricter control still needed? Share your views in the comments – I'd love to hear your take!
