By Ashvin Parekh
Regulations play a vital role in modern society, and with good design and management regulations deliver important public benefits. Poorly designed regulations, however, can result in rules that create only costs and little or no public benefits. More importantly, poor regulatory management of accumulated regulations stifles innovation and hinders economic growth. This article discusses a unique challenge for policymakers today, which is to find a way to trim unnecessary regulations while preserving required public protections.
Regulatory accumulation refers to a steady and unintentional growth of regulations. It is recognised by several government bodies and committees set up by policymakers who are conscious of the ease of doing business in progressive countries. In the US, for example, the House Judiciary Subcommittee has evaluated that this accumulation slows the economy by nearly one percentage point annually. It is believed that this, in case of the Indian economy, would be almost double the amount. The slower economic growth caused by regulatory accumulation could well be `7-8 lakh crore annually. The burden of this regulatory accumulation per Indian citizen could be Rs 5,000-6,000 per annum. If we had managed our regulatory accumulation properly in the last two decades, we could have been the third-largest economy in the world. Considering India’s ranking in the ease of doing business, the cost of compliance could well be much more than the estimate above.
The impact of regulatory accumulation on Indian households is significant. Major studies have observed that these costs are passed on to the consumer in the form of higher prices. The effects of these price increases are regressive. The poorest income groups experience the highest proportional increase in the prices they pay. Equally so, the large penalties paid by a business for non-compliance are eventually borne by consumers.
The economic effects of deregulation are very encouraging. Several jurisdictions that have reversed or at least slowed regulatory accumulation have succeeded in reducing the quantity of regulations on their books by about 40% within three years. The 2025 Economic Survey made a detailed reference to this in the context of micro, small, and medium enterprise (MSME) funding and for the financial services sector in general in India.
Before discussing some encouraging initiatives by policymakers and regulatory bodies, let us explore one critical aspect of recognition of the cost of compliance. Regulatory bodies and progressive trade associations such as the Indian Banks’ Association or the Association of Mutual Funds in India should make an effort to create a formal framework to identify, determine, and disclose the cost of compliance. The measure of the cost of compliance can be critical for evaluating any deregulation. Likewise, there should be an approach to measure the public benefits. In the enthusiasm to become a custodian or protector of public interest or benefits, regulatory accumulation can only grow manifold. A study on the growth of regulatory notifications and circulars by financial sector regulatory bodies in India would perhaps reveal and assess the significant on burden business and, thereafter, passed on to consumers. Deregulation offers the potential for a win-win: a more dynamic economy and relief for those most burdened by the status quo. Clear goals, measurements, and high-level commitments are critical.
In this backdrop, the 2025 Budget discussed the regulatory reforms and recognised that although the government had demonstrated a steadfast commitment to “ease of doing business” in the financial and non-financial sectors, it was determined to ensure regulations keep up with technological innovations and global policy developments. A light-touch regulatory framework based on principles and trust will unleash productivity and employment. Through this framework, regulations will be updated, particularly those made under old laws. To develop a modern, flexible, people-friendly, and trust-based framework appropriate for the 21st century, it proposed to form a high-level committee of regulatory reforms. The committee will be set up for a review of all non-financial sector regulations and make recommendations within a year.
Though the policymakers have left the deregulation review for the financial sector, perhaps for a future date, the general belief is that regulatory accumulation is far more significant and burdensome in this sector, as evidenced by NITI Aayog. This is in the case of MSME funding. A recent paper by the Aayog, entitled “Initiating Culture Change through Government Process Review: Learnings for India from UK’s Red Tape Challenge” is a clear admission of structural issues and its contribution to regulatory accumulation.
The recent unwinding of some regulations by market regulator Securities and Exchange Board of India, after a change in its leadership, is happy evidence of recognition of the cost of compliance burden. This marks a slow beginning towards deregulation.
Industry expects the new leader of the insurance regulator, who will soon be selected, to reexamine the noticeable growth of regulatory accumulation in the past three years. The paradox in the sector is noticeable as the cost of compliance has increased by at least 6-8 percentage points annually, and there are regulations on the other hand limiting the expense of management.
In conclusion, it can be observed with reassurance that policymakers have recognised the need for deregulation. It may start with non-financial sectors, but the high-powered committee could perhaps provide a sound basis and a framework which can be later utilised for the financial sector as well. The framework could identify and recognise regulatory accumulation, and examine its redundancy in a structured way. This organised way of evaluating the burden of regulatory compliance and weighing it against the public good can then become the basis for all such effort in various sectors.
In a similar way, the high-powered committee can also establish a basis to determine the cost of compliance, not only in a given sector but all sectors, which can thereafter measure the cost vis-à-vis the protection of public interest. This basis and parameters to determine the cost of compliance and disclosure methods will make it a reliable approach through which policymakers, regulators, and businesses can reduce red tape. This will create a win-win situation for all.
The writer is managing partner, Ashvin Parekh Advisory Services LLP.
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