Economic Survey 2025 tabled by Finance Minister Nirmala Sitharaman on the first day of the Budget session said there is an observed tendency for firms in India to remain small to remain under the regulatory radar and steer clear of the rules and labour and safety laws. By staying small, the survey noted that firms lose access to institutional capital, skilled talent, and technology infusion and often function outside formal supply chains.
Ironically, the biggest casualties of firms staying small are employment generation and labour welfare, which most regulations were originally designed to encourage and protect, respectively, the survey said.
While much has been done in this space through policy action to incentivise firms to grow, part of the solution lies in digitisation, decriminalisation and divestment of functions.
For instance, the survey highlighted measures such as the PAN 2.0 project focusing on paperless processes while establishing PAN as a common identifier for all digital systems of specified government agencies, the Jan Vishwas Act 2023 that decriminalised 183 provisions in 42 central Acts administered by 19 ministries and departments.
“It is true that much has been done, and it is also true that much remains to be done for at least two reasons. One is our size; two, as the economy grows, hitherto unseen and non-binding constraints emerge and become binding. Hence, there is a constant need to evolve,” the survey stated.
It also highlighted the significance of deregulation for MSMEs more than large enterprises. While large enterprises usually find a way around compliance, management and financial bandwidth are limited for smaller enterprises.
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.
For example, the survey noted that the factory regulations make it cheaper for a business to run two 150-worker factories than one 300-worker factory, discouraging economies of scale. “Regulations also hurt workers by discouraging job creation, limiting wages, and encouraging informal employment. For example, Indian workers cannot formally work overtime because the law requires employers to pay at least twice the regular wage.”
Another area is around the increase in the cost of all operational decisions in firms. For example, factory owners must dedicate time and resources to obtain the Change of Land Use license and ensure compliance with zoning regulations. Moreover, factory owners are also required to invest in transportation, additional land, construction of rooms for rest and canteens, and paperwork to employ women on night shifts.
“In sum, regulations must be rationalised to ensure that the regulation is the minimum necessary to achieve its objectives and the maximum feasible given the limited managerial and other resources at the disposal of small and medium enterprises. The focus of reforms and economic policy must now be on systematic deregulation,” the survey opined.