Making Budget 2025 reforms work: The road to effective implementation

The FM has proposed some interesting regulatory reforms. The announcements need to be nuanced before implementation

For over a decade now,  regulatory difficulties in India have risen to prominence. In the 2025 Budget speech, the finance minister (FM) announced some interesting moves aimed at addressing these concerns. In the field of finance, a mechanism under the Financial Stability and Development Council (FSDC) was announced to evaluate the impact of current financial regulations and subsidiary instructions, as well as formulate a framework to enhance their responsiveness and support the development of the financial sector. 

Regulation is the use of state power to modify behaviour. Ideally, the areas of coercion should be linked to addressing market failure, and not veer into central planning. The highest power of regulators in India is found in the field of finance, drawing on the approach that was taken in establishing the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) many decades ago. There is now a significant consensus that financial regulation in India is inching towards central planning and diluting the rule of law. The field of regulatory theory has demonstrated these difficulties and showed the way forward on how regulatory organisations can be better designed to address these problems. Policymakers have been looking at these difficulties, and the possible policy pathways, in search of solutions.

  The policy lever that the Budget speech has announced consists of the FSDC being entrusted with the responsibility of evaluating the impact of financial sector regulations and more. At first glance, this could sound interesting. We retain the financial regulators — with thousands of employees and all the discretionary power intact — but bring an external organisation that will try to improve their work. For this to make sense, questions of staff capability and of power need to be addressed.

  Financial regulators are putting out tens of pages of regulation every day and thousands of pages each year. To even read and comprehend these regulations requires high levels of capability. To rise above the ways of the regulators, to be able to see regulations from the perspective of regulatory theory that can cater to India’s growth, is an even bigger ask. And then comes the question of power. The regulators jealously guard their turf, and will not readily cede ground, regardless of criticism or evidence of harm from some regulations. 

  Can the FSDC shake the juggernauts? The FSDC is a body with a secretariat of about five people. It has played a convening role in pulling heads of regulators together for meetings. After these meetings, press releases are put out. A quick examination of these releases shows that to date, the FSDC has not done anything substantial. It is hard to see how the FSDC could rise to this challenge.

  How can the Ministry of Finance (MoF) make the best of this situation? We should see that the FSDC cannot overpower the vast staff strength of the regulators. Where the FSDC can help is in pushing to solve the problem at the root cause — by bringing regulatory theory to bear on improving the processes used by the regulators. Every step of the journey, of how regulations are made, need to be put up for discussion and criticism, leading up to better mechanisms being adopted.

  As an example, Sebi has just issued a regulation that governs how it makes regulations. This is an important step forward in some ways. It is a move that reformers have advocated since 2013, and, in some respects, it has finally arrived. However, this text also has limitations. It envisages a separate structure within Sebi that will review regulations written by the main body of Sebi. What is instead required is for the main regulation-making body to work differently.

  Turning to regulation outside of finance, the FM said that the government will update regulations that were made under old laws. To develop this modern, flexible, people-friendly, and trust-based and contemporary regulatory framework, she proposed specific measures, including setting up of a High Level Committee for Regulatory Reforms (HLCRR). The HLCRR will review all non-financial sector regulations, certifications, licences, and permissions and make recommendations within a year.

  The first question that arises here is the meaning and scope of the phrase “non-financial regulations”? Will the scope include subordinate legislation made under the Companies Act, the Competition Commission of India Act, the Food Safety and Standards Authority of India Act, and the Drugs and Cosmetics Act, among others? What about subordinate legislation made under the various Labour Acts of the Union? In addition, there are laws regulating accountants, auditors and other professions and education. For example, the Pharmacy Act deals with drug retailing as well as some bits of the pharmaceutical manufacturing, besides regulating the profession of pharmacists.

  Here also, we face the same problems. The FSDC is at least a permanent body; the proposed HLCRR will start from scratch. Assuming it is able to assemble a technical team of about 20 people, it will have to take on the might of 20,000 people in the state who are steadily putting out a flow of regulations, all of which involve intricate domain knowledge. And even if the said HLCRR is able to have the intellectual power to write a good document, there are questions of power. Every piece of government derives importance out of wielding coercive power, and will zealously guard its own discretion in the exercise of this power.

  How could we make the best of this situation? Once again, the right strategy is not to go to specifics. It is impossible for the HLCRR to substantively understand and critique, say, regulation of airports within a year. As we have learned from the journey of Indian finance, it takes 25 years for a team to fully grasp a domain. It would make more sense for the HLCRR to draw from Indian regulatory theory, to focus on redesign of regulatory frameworks. Alternatively, it could focus on one or at most two non-financial regulatory organisations (e.g. perhaps the Telecom Regulatory Authority of India and the Airports Economic Regulatory Authority of India), to utilise the existing knowledge of regulatory theory and propose improvements in their working.

  The author is an honorary senior fellow at the Isaac Centre for Public Policy, and a former civil servant