Reduce regulatory risk for growth

In his Independence Day address, the prime minister called for a change in the prevailing mindset of doubting wealth creators. This found further articulation in the finance minister’s Budget speech as well as in the Economic Survey. The recognition of this problem is a welcome development. Regulatory overreach and higher risk perceptions are a major concern, constraining business growth that need to be addressed.

A complex and unpredictable tax administration is a substantive burden. One transformative decision would be to give up the practice of fixing tax collection targets. These are increased linearly. In the real world, profits never grow linearly. The result is that in a year of weak performance, even honest tax officers coerce taxpayers to pay more than is  due as no one would like to jeopardise his career. Ensuring completion of tax scrutiny within three years of the filing of a return would be another major step. Retrospective tax claims are a big risk of doing business in India. For investors, especially those from overseas, tax unpredictability is a major concern. Now that the tax authorities have had enough experience of looking at transfer pricing and related issues in most sectors, making the advance tax ruling process faster and credible should be a priority.

When something goes wrong and there is public outrage, the tendency, over the decades, has been to put in place more stringent penal provisions, even though the existing ones may have been adequate. The Supreme Court has rightly observed that in an economic offence, grant of bail should be the norm; completion of investigation, a charge sheet and the trial is the sequence in which, on establishment of guilt, punishment follows. Compliance by the enforcement agencies with the Supreme Court’s directions would go a long way towards reducing the prevailing anxiety. The new company law enacted with bipartisan consensus in 2013 had 81 provisions with criminal liability. The concept of criminal liability of a corporate entity is conceptually flawed. In the US, where criminal proceedings against corporations have been in vogue, plea bargaining is normal. Criminal proceedings are routinely settled with fines. Plea bargaining is alien to the criminal justice system in India. Instead of trying to reduce the number of criminal provisions in the company law, the goal should be to have none. Criminal liability under the Indian Penal Code and other laws are adequate.

Stiffer penal provisions, along with discretion with enforcement agencies, increases the space for corruption. Kaushik Basu, as chief economic advisor, had suggested a change in the anti-corruption laws to make only taking of a bribe an offence and not giving. The bribe giver usually has no option but to bribe in order to continue doing his business. If he is freed from criminal liability, he would have the incentive to become a complainant or a whistle blower. This would help in making a real dent against corruption. This suggestion, though quite radical, does deserve serious consideration.

The rankings on ease of doing business, single window and deemed clearances have been positive initiatives. It is now time for a more comprehensive exercise of putting in place a system of regulatory impact assessment for all regulations. The question to be asked is whether, on balance, the extra cost to business of a particular regulatory requirement outweighs the public benefit from it. The methodology for doing this is well evolved. Further, is a permission required at all, or, the firm can be expected to comply with the relevant standard with known penalties for non compliance? Is a renewal of a permission necessary? Is inspection by a government official the best approach, or a system of credible third-party certification with oversight would be preferable, as it could lead to both better compliance and lower transaction costs. In many areas, there are just not enough government officials to actually be able to do the inspection and certification that they are required to do.

Bureaucracies have the intrinsic impulse to over regulate and it has not been easy to restrain them. Even in the US, the mother country of the free market, presidents keep calling for deregulation. They claim progress in making things easier for business. A British prime minister had set up a unit in his own office to be able to achieve progress. The principle of getting rid of two existing regulations for a new one being proposed was tried out. In India, a system of external scrutiny of a proposed new regulation is required. At present, the agency empowered to introduce a new regulation takes the final decision. Even if it does undertake stakeholder consultations, it would be natural for it to see merit in its own initial proposal. In any case, it is not required to undertake any regulatory impact assessment.

Inspired by the Soviet planning system, India created too many ministries and departments. Though many of them became redundant after the economic reforms of 1991, they continue. The idea of independent regulators was promoted in the early 1990s to insulate economic regulation from the political process, taking inspiration from the US practice. The unintended consequence over the decades has been the ability of ministry after ministry to create their own regulatory commissions and appellate tribunals. India may have the largest number of such bodies in the world. They function in a judicial manner. Speedy decisions are not expected from the judicial process and outcomes are unpredictable. The state of the telecom sector is a stark illustration of the consequences.

Reversing the pendulum is not going to be easy. Sustained political leadership would be needed to create a genuinely business-friendly environment. This, however, is a precondition for India to achieve its full growth potential.

The writer is a former secretary, DPIIT