New Delhi: State governments need to prioritise a fresh round of business-related deregulation, essentially removing the most onerous, time-consuming, and costly provisions, in order to ease doing business in India, the Economic Survey has recommended.
Such regulations, it said, are a bigger problem for India’s micro, small and medium enterprises (MSMEs) than they are for large companies. This is of particular importance because MSMEs are more likely to follow a balance between labour and capital in their growth strategies, rather than prioritising capital-intensive growth as large companies tend to do.
The Economic Survey 2024-2025, presented in Parliament by Finance Minister Nirmala Sitharaman Friday and prepared by Chief Economic Adviser V. Anantha Nageswaran, pointed out specific areas—such as in land, labour, transport, logistics, and the environment—where regulations were proving to be more of a hindrance than enabler.
“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.
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Big companies manage, but MSMEs bear the brunt
It further noted that large companies “invariably” tend to prioritise capital-intensive growth over labour-intensive growth, while MSMEs are likely to have a better balance between the two, which encourages employment generation. “That is a compelling reason to ensure that the state does not hinder their growth,” the Economic Survey said.
“Deregulation is more critical for MSME growth than large enterprises. Compliance costs in terms of time and financial resources are non-trivial for MSMEs. Large enterprises usually find a way around compliance.”
It further said that, over the last few years, the Union government has acknowledged the need to deregulate and has taken steps towards this, such as implementing process and governance reforms, simplifying taxation laws, rationalising labour regulations, and decriminalising business laws.
States, too, have taken part in this effort, it noted, but added that these efforts have laid the foundation for the next round of deregulation, “the need for which is urgent and the scope for which is immense”.
“Many states have set targets of becoming billion to trillion-dollar economies over the next two decades,” the survey noted.
“However, current regulations act as binding constraints on growth by increasing the cost of market entry, force-fitting inefficient models for operations, and prolonging industrial sickness,” it said. “Regulations hurt businesses’ ability to start and grow over time.”
How regulations are hurting Indian businesses
The Economic Survey went on to list numerous ways in which business regulations were in fact hurting businesses and impeding growth, rather than encouraging both.
For example, it said that current factory regulations make it cheaper for a business to run two 150-worker factories rather than one 300-worker factory, which discourages the efficiencies that accrue from scaling operations up.
“Regulations also hurt workers by discouraging job creation, limiting wages, and encouraging informal employment,” it noted.
“For example, Indian workers cannot formally work overtime because the law requires employers to pay at least twice the regular wage. Indian workers accept informal employment to receive overtime pay.”
Other examples it noted were the time and resources spent to obtain the Change of Land Use license and ensuring compliance with zoning regulations; paperwork involved in allowing women to be employed on night shifts; and working hour limits on apprentices that prevent those undergoing formal education from becoming apprentices, among various others.
“Given their economic capacity, Indian firms cannot adhere to applicable regulations without jeopardising growth opportunities and hurting investments and job creation,” the Survey said. “Indian regulations force employers to redirect resources away from potential growth and employment opportunities to meet compliance requirements.”
What needs to change
The Economic Survey highlighted several areas where regulatory improvements, particularly by state governments, could go a long way in encouraging businesses.
These include legal status and administrative rules; regulations relating to land, buildings, construction, labour, transport, logistics, buying and selling, and environment; as well as sector-specific regulations.
“In each of these areas of regulation, the state issues mandates, including permits, standards, price and quantity controls, fees and taxes, compliances, inspections, and penalties,” the survey noted. “Each substantive mandate increases the cost, time, and uncertainty of starting and operating a business, discouraging intensive economic activity and the growth of enterprises.”
Thus, the Economic Survey said, governments should look towards liberalising standards and controls, revising licensing norms, modifying regulatory thresholds, blunting barriers to enterprise growth, and instituting procedural safeguards.
“Thereafter, states must implement line-by-line corrections to regulations to allow greater freedom in decision-making,” it added.
Reducing costs and penalties
The survey said that standards and controls must be examined to ensure they impose the “lowest cost necessary” to achieve their social objectives, and added that legal safeguards need to be introduced regarding the imposition of penalties on businesses.
“States can enforce many regulations through punitive actions like civil penalties and cancellation of licences,” it said. “These punitive actions can limit businesses’ ability to operate within legal limits.”
“States can improve the investment climate by increasing the accuracy and transparency of such punitive action,” it added.
Further, the survey said that states impose “direct costs” on the operation and growth of Indian businesses by imposing tariffs and taxes. It said that, while these tariffs and taxes bolster the state governments’ resources for public spending, they can reduce the competitiveness of Indian businesses.
“States can encourage sustained growth by rationalising tariffs and fees in line with standards from other jurisdictions, sub-national or international.”
Significantly, the Economic Survey also noted that state governments impose similar regulations on business despite varying risks of “socially undesirable” outcomes, such as fire, pollution and building collapse. This, it added, often resulted in low- and medium-risk businesses bearing an inordinately high cost of compliance.
“By adopting risk-based regulation, state departments can optimise public resources to generate social benefits like fire safety and environmental protection,” it said. “Under risk-based regulations, low- and medium-risk businesses would also face lower compliance costs without substantial public safety and health reductions.”
(Edited by Sanya Mathur)
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