By Shweta Rajpal Kohli, President & CEO, Start-up Policy Forum

Deregulation is fast emerging as the policy theme of the year. Over the past few weeks, Prime Minister Narendra Modi, Reserve Bank of India (RBI) Governor Sanjay Malhotra, and Chief Economic Advisor V Anantha Nageswaran have all indicated that the government and regulatory machinery are keen to remove bottlenecks in compliance and regulatory decision-making, making it a significant reform plank for India in 2025.

Perhaps the most welcome news has been the announcement by the PM to set up a Deregulation Commission aimed at minimising bureaucratic hurdles and alleviating the compliance burden across sectors, once again bringing the “ease of doing business” in India back in focus.

One of the most impactful areas for deregulation could be fintech, particularly financial regulators. India’s financial market necessitates careful oversight, balancing growth, and stability through judicious regulation. There is immense respect for India’s financial regulators as their efforts to strike this balance have allowed our economic system to be robust, stable, safe, and healthy.

Nothing can diminish that overarching goal. At the same time, the balance between promoting innovation and ensuring regulation is critical. Malhotra has emphasised the need to refine the regulatory framework to foster innovation while safeguarding consumers.

Strategic deregulation in the financial sector can catalyse growth, innovation, and competitiveness, fostering a business-friendly environment and attracting investments. This involves carefully assessing each regulation to ensure it strikes the right balance: promoting innovation and protecting consumers without stifling growth. Independent evaluations are invaluable to ensure objectivity.

As emphasised by the Economic Survey, a proactive approach necessitates a robust regulatory impact assessment (RIA) mechanism to ensure quality and prevent unintended consequences. Since regulations are the primary tools that our regulators use to shape the market, RIA is essential to maximise their effectiveness. This approach integrates existing surveillance tools with a comprehensive view of regulatory impact.

Malhotra has reassured stakeholders of continued consultation and pledged smooth implementation of new regulations. To ensure continuous open dialogues, these stakeholder consultations need immense commitment and consistency from the industry and the regulator. Establishing a regular 360-degree feedback loop with external expertise to monitor and assess regulatory effectiveness is essential to ensure this.

At the ministry level, the endeavour is to reduce the compliance burden and enable a path of deregulation. As the sector evolves, so does the quality of regulations, encompassing accountability, accessibility, open procedures, expertise, and efficiency. Effective regulation also requires enforcement; in 2023-24, the RBI imposed penalties of `86.1 crore, and the Securities and Exchanges Board of India levied `74.66 crore in fines. Beyond enforcement, a proactive assessment of the impact of their decisions is a valuable practice for regulators.

This impact assessment is critical because over-regulation can significantly stifle innovation, particularly for start-ups where time is of the essence. Product-market fit typically requires 18-24 months, encompassing developing a minimum viable product and subsequent iterations. Prescriptive regulations can upend this time frame, forcing start-ups to pivot or abandon promising ventures. Performance-based standards that outline functional requirements while allowing flexibility offers a more practical approach. Regulators are also in the business of disruption, albeit a different kind: balancing disruptive innovation and systematic stability. Even the RBI endorsed that regulation, like everything else, has costs, recognising the trade-offs between stability and efficiency.

Independent assessments provide the foundation for a regulatory framework that safeguards stability and actively cultivates innovation and entrepreneurial spirit.

A comprehensive evaluation

Navigating regulations can be challenging for start-ups who need certainty and predictability for growth and development. While regulatory sandboxes have helped start-ups test products and find product-market fit, evolving regulatory requirements — like lending or discount broking — can force them back to the drawing board and lengthen go-to-market cycles. This underscores the need for a nuanced approach to regulation that balances innovation with safeguards.

This need for balance through regular impact analysis is globally recognised. RIAs have been implemented across a range of Organisation for Economic Co-operation and Development (OECD) member and non-member nations, including the US, UK, Australia, Mexico, Türkiye, New Zealand, and Denmark, with the aim of better policymaking that has socio-economic implications. The OECD recommends that regulators be subject to oversight on problem definition and scope before finalising policy. In the long run, this ensures optimal use of resources, including staffing and administrative costs of deliberating policy decisions.

As India moves closer to its $10-trillion economy vision, its innovators and entrepreneurs, supported by a stable regulatory regime, will be crucial to accelerating growth. In a dynamic market, robust enforcement against bad actors is vital, but regulators should be responsive to market dynamics.

The proposals to enable impact assessments of regulators and ongoing deregulation efforts signal a commitment to building a favourable investment climate.

Like those they regulate, regulators strengthen their role through transparency and continuous independent impact assessment, cultivating a flourishing business ecosystem. After all, innovation can’t be mandated, but it can be nurtured.