In an emerging economy, regulators should have a market development orientation instead of a control mindset.


At the end of nearly three decades of “reforms” if we were to survey Indian industrialists or entrepreneurs on whether they were more enthusiastic, confident and optimistic about investing and whether they felt more trusted today than by the steel frame before 1991, the answer would most likely be a “No”. We may have climbed several places in ease of doing business for real reasons, but we may also concede that its design may be flawed. Let’s analyse the reasons behind this disillusionment.


Controls have spread their tentacles in a new avatar—regulations. The bite of bureaucrats was far less stinging when they were under pliable politicians accountable to Parliament than when they are independent regulators accountable to none in particular. It removes accountability and the need to balance growth of the related markets and its regulation. For example, India is terribly short on equity and with increasing open-economy risks need a greater part of savings going into savings. But is SEBI mandated to balance its regulation with this objective? With the daily dose of regulations India must be the most “constricted” equity markets getting into such granular details like the age, sex composition, remuneration, training, and registration for directors. For example, one wonders how many listed entities are asking the question today: Is it worthwhile staying listed anymore?

Along with the lack of accountability, the tendency of many regulators to tinker around with the price and ever tightening regulations has worsened the situation. The easiest way to appear heroic in a price sensitive market is to fix lower and lower prices, fixing it at investment unworthy levels, be it electricity, insurance, telecom, or airlines. Price is what the person who is investing should decide. Markets should be allowed to work freely and balance the consumers and producer interests. The next is the mistaken belief that the true barometer of efficient functioning of regulator is ever tightening daily dose of regulations, most of which are premised on “business is basically dirty”—perhaps reflective of how society itself views them.

In an emerging economy, regulators should have a market development orientation instead of a control mindset. It requires die-hard believers of the functioning of markets to balance competing economic interests, preferably people who have experienced its functioning by being part of it. But almost all regulators are ex-bureaucrats who may have mostly been trained to believe that they are better arbiters than markets.

The purpose of market regulation is (i) to bridge asymmetric information and moderate so that the conventional legal maxim “let the buyer beware” is not stretched to its limits, (ii) that the participants do not create too much negative externalities and if they do, pick up the tab, and (iii) the most basic contractual obligations are enforced between the parties and to ensure speedy resolution of conflicts, besides curbing manipulation.

Can anyone argue that our “beyond reforms or reproach” courts have progressed an inch towards efficient courts in countries with whom we have to compete? There is hardly a regulation which addresses this fundamental issue of expeditious contractual enforcement.

Our labour laws have remained static, the quality of labour delivered by our education system is on continuous decline, but the only thing that has gone up is the productivity adjusted minimum wages, which has priced out our labour in many sectors. Land laws have introduced senseless rigidities. With two of four factors more rigid than before, on balance even after considering the various positives in capital markets, things are slanted against business and towards the consumers, farmers, labour and land owners—perhaps far more than in 1991.


Our infrastructure (including the softer ones like skills, attitudes, discipline, respect for rules, etc.) is at best nascent in comparison. Our industry bears MAT and CSR which companies exporting into India do not. Institutions like Competition Commission (CCI), which have reduced relevance in an open economy, allow Ola and Uber to build monopolies, allow giant companies from China (some of whom produce whole of India’s consumption in just one of their machines/locations) and ASEAN to freely import into India any quantum desired. But CCI will restrain two tiny plants within India (fit enough to be called only pilot plants by world standards) just because under the most granular system of classification, it might lead to toxic levels of concentration. It is the theatre of the absurd: let’s remember that each moneylender is a monopolist within his village, a specialist doctor is a monopolist inside his operation theatre; so do we get down to that level? If the entire ASEAN is a common free trade zone, it should be the relevant market for defining concentration—something which misses the eyes of CCI.


Indian industry has hardly been compensated adequately for inflation. Every elected government thinks the best way to serve labour is to prescribe higher and higher minimum wages and serve farmers welfare is to hike MSPs. Every government has become price assertive where it concerns supplies to industries even as it strives to supply the same things free of cost to citizens—for example, water and electricity. Poor revenues have led to poor investments in capacities in these government monopolies. This self-created scarcity seems to have given the bandwidth to government monopolies to hike prices with no “markets” to challenge their extortionate prices, be it water (which has gone up 10 times or so for industries on the last decade in most states), electricity or coal. But the industry has no luxury to pass through these, since most prices are determined by “import parity” prices due to the spate of ill negotiated and premature FTAs and the false pride in strong exchange rates. The politicians hardly realise that a mispriced currency misprices everything else and a strong overvalued currency over-prices every other goods and services, both in the domestic market and for exports and at the prevailing overvalued levels, Indian industry is priced out of most markets, including domestic markets.


If existing investments are unprofitable, highly uncompetitive real interest rates kill the spirit of new investments. Let’s ask the vast army of unemployed and potential entrants their choice between a 3-4% higher inflation (say 7% instead of 3%) and getting some employment—answers will be a resounding slap to the monetarists who think a single pill can solve all ills: inflation control to protect pensioners cannot take dominant precedence over young blood seeking jobs. Probably every pensioner would himself compromise his “real income” for employment of his sons and grandkids. In their dogmatic approach as regards real interest rates, Indian monetarists have completely lost the plot.


As is said, India has laws and China has order. Strict and swift enforcements punish the offenders only, but lax punishments punish everyone. The cock-a-snook evasion by a few singes the officialdom, and its prime response to crime and overstepping law is more and more laws, humungous compliance formalities, forms and self-declaration, etc. The answer to this is to have fewer laws and employ more people and punish with near certainty those who transgress. Here is where our governments have been spineless in employing people in the fear of hiking fiscal deficit in one of the least taxed countries. There is an urgent need to overhaul our laws and weed out many of them. Probably we should benchmark our laws with the BRCS and some other select set and what does not exist in all of them should not exist in India either.

The bureaucracy and regulators may mistrust business. But they themselves are subject to several layers of scrutiny—internal audit, statutory audit, CAG audit, Parliamentary committee’s scrutiny with supplementary doses from CVC, CBI, Enforcement Directorate, the Lokpals and the ever eager to nose in courts, with or without the aid of PILs. This leaves no incentive for anyone sensible and towards the end of career to attempt anything useful. No other country mistrusts its officials as much as India does: we just cannot build a society based on layers and layers of mistrust

V. Kumaraswamy is author of Making Growth Happen in India, Sage publications