Regulatory Reforms in India  Introduction

• Finance Minister Nirmala Sitharaman recently announced that a high-level committee for regulatory reforms will be set up for a review of all non-financial sector regulations, certifications, licenses, and permissions. 
• India is undergoing a significant transformation in its regulatory landscape, and the latest initiative from Finance Minister Nirmala Sitharaman highlights the government’s intent to create a business-friendly environment. 
• By setting up a high-level committee to review non-financial sector regulations, the government aims to streamline the country’s regulatory framework and foster a more transparent, efficient, and growth-oriented economy. 
• The committee’s task is to evaluate existing rules, certifications, licenses, and permissions, with a clear focus on strengthening trust-based economic governance and improving the ease of doing business.
• These regulatory reforms are designed to eliminate bureaucratic inefficiencies and compliance burdens, ensuring that India’s economic ecosystem remains competitive, transparent, and conducive to innovation and business growth.

Why Are Regulatory Reforms Critical for India?

• • Strengthening the Financial Sector:
    • India’s financial sector has gained significant strength due to effective reforms. The banking sector, which was once burdened by high levels of Non-Performing Assets (NPAs), has successfully reduced NPAs from 11.2% in 2018 to 5.0% by 2023.
    • The Insolvency and Bankruptcy Code (IBC) played a critical role in recovering ₹2.5 lakh crore in stressed assets, significantly improving financial health. 
    • The ongoing digitization efforts, including UPI handling over 8 billion transactions monthly, have also contributed to enhancing financial inclusion and transparency in India’s banking and payments ecosystem.
  • Enhancing Ease of Doing Business: 
    • One of the standout outcomes of India’s regulatory reforms has been the improvement in the Ease of Doing Business (EoDB) ranking. 
    • India’s rise from 142nd in 2014 to 63rd in 2020 reflects the impact of key reforms. 
    • The simplification of the business incorporation process, reducing the time from over 30 days to less than 3 days, and the implementation of GST, which consolidated 17 central and 9 state taxes into a single system, are examples of efforts that have streamlined business operations and lowered compliance costs.
  • Economic Growth and Investment Boost:
    • Regulatory reforms play a pivotal role in unlocking India’s economic potential. The country has seen impressive achievements thanks to these reforms, making it an attractive destination for investors.
    •  For example, India received a record $84.8 billion in Foreign Direct Investment (FDI) in 2021-22. This surge in FDI can be attributed to regulatory changes that have improved the business environment, including the ₹2.5 lakh crore Production-Linked Incentive (PLI) scheme, which spans across 14 sectors.
    • Additionally, the Unified Payments Interface (UPI), which surpassed 100 billion transactions in 2023, showcases the success of regulatory support in building a robust digital payments ecosystem, further enhancing economic activity.
  • Growth in Manufacturing and Digital Sectors: 
    • The manufacturing sector has also benefitted from these regulatory reforms. The simplification of labor laws, including the consolidation of 29 central labor laws into 4 comprehensive codes, has reduced compliance burdens on businesses.
    •  India’s manufacturing sector continues to grow at a rate of 7% annually, and its integration into global value chains has been bolstered by these reforms. 

• Digital Dominance: 

• • • India’s digital transformation is a key pillar of its regulatory reform agenda, enabling inclusive growth and enhancing economic governance.
    • Digital India has empowered over 1.2 billion beneficiaries, with India’s startup ecosystem thriving, as evidenced by over 100,000 registered startups by 2023.
    • India has also seen improvements in its Global Innovation Index ranking, demonstrating the growing international recognition of its regulatory advancements in the digital realm.

• Social Sector Transformation: 

• • • The social sector has also benefited from reforms aimed at improving inclusivity and addressing systemic challenges. 
    • The Direct Benefit Transfer (DBT) system has saved ₹2.25 lakh crore, ensuring that financial assistance directly reaches beneficiaries without intermediary interference. 
    • Additionally, Ayushman Bharat, the world’s largest health insurance scheme, has impacted over 500 million citizens, providing them with access to essential healthcare services.
    •  Moreover, the National Education Policy (NEP) 2020 has redefined India’s education system, focusing on inclusivity, innovation, and skill development for future generations.

• Advancing Sustainable Development: 

• • India has made significant progress in integrating sustainability into its growth trajectory, aligning with global sustainability goals. 
  • The country’s renewable energy capacity has surpassed 175 GW, positioning India as a leader in clean energy adoption.
  •  Additionally, India raised over $10 billion through green bonds, attracting global investments aimed at promoting environmental sustainability. India has also made strides in reducing its emission intensity by 15%, contributing to global efforts to combat climate change.
• Accelerating Infrastructure Development: 
  • India’s infrastructure development has witnessed rapid progress, supported by regulatory reforms. 
  • The $1.5 trillion National Infrastructure Pipeline and the Real Estate (Regulation and Development) Act (RERA) have accelerated growth in the infrastructure sector. 
  • RERA has brought greater transparency and accountability to real estate transactions, and initiatives like NITI Aayog’s efforts to reduce project delays by 40% further highlight the positive impact of regulatory streamlining on infrastructure.

Key Regulatory Reforms in India

• Decriminalizing Minor Business Violations: 
  • The Jan Vishwas Act 2023 also removes jail provisions for minor violations, such as delayed filings or minor errors in tax calculations. This change is aimed at encouraging businesses to comply with regulations without the fear of harsh penalties for minor procedural errors. 
  • The Economic Survey 2024-25 recommends decriminalizing regulations that do not involve significant harm, fraud, or physical damage.
• Sunset Clauses for Outdated Regulations: 
  • Sunset clauses are another crucial reform, ensuring that regulations are automatically repealed after a fixed period unless explicitly renewed.
  •  The Insolvency and Bankruptcy Code (IBC), which mandates time-bound resolutions, has set a precedent for introducing time-sensitive regulatory measures. 
  • The Economic Survey 2024-25 suggests implementing sunset clauses across all regulatory frameworks to ensure periodic review and adaptation.
• Simplification of Regulations: 
  • The Jan Vishwas Act 2023 is a significant step toward simplifying India’s regulatory landscape. It decriminalized over 3,400 legal provisions and reduced 39,000 compliances, making it easier for businesses to comply with the law. 
  • Additionally, the SPICe+ portal, which integrates PAN, TAN, DIN, and other identifiers into a single form, has simplified business incorporation. 
  • The Economic Survey 2024-25 advocates a “minimum government, maximum governance” approach, which calls for eliminating redundant regulations that hinder business growth.
• Consolidation of Laws and Codes: 
  • India has made significant progress in consolidating laws to reduce complexity. The Labor Codes, which consolidated 29 central labor laws into 4, and the GST regime, which unified 17 indirect taxes into a single tax, are examples of this approach.
  •  These consolidations reduce the compliance burden on businesses and simplify the regulatory framework.
• Risk-Based Regulatory Inspections: 
  • India has introduced risk-based inspections to replace outdated, subjective, and often corrupt systems.
  •  The Shram Suvidha Portal and GST e-way bill system utilize data analytics to prioritize high-risk entities for inspection while reducing unnecessary scrutiny for compliant businesses. This change aims to create a more efficient and transparent regulatory environment.

Challenges in Implementing Regulatory Reforms

• Inconsistent Interpretation of Regulations:  While India’s Ease of Doing Business ranking has improved, moving from 142nd in 2014 to 63rd in 2020, businesses still experience challenges due to subjectivity in enforcement. For instance, the Goods and Services Tax (GST), although a major reform, has had implementation challenges due to varied interpretations of tax rules across different states. 
• Outdated Legacy Laws: Many legacy laws, like the Factories Act (1948) and Shops and Establishments Act, are outdated and do not align with modern business practices, causing confusion. A notable case is the Retail and E-Commerce Sector, where companies like Amazon and Flipkart face challenges due to a regulatory environment that was designed for brick-and-mortar stores.
• Red Tape Overload: India’s regulatory system still has over 85,000 compliances and more than 5,000 penal provisions, which continue to burden small and medium enterprises (SMEs). For example, a study by the World Bank noted that businesses in India spend an average of 2,300 hours per year just to comply with regulations. A notable example of this is the Factories Act (1948), which requires over 50 different compliance forms for a factory to operate legally, a process that can often be cumbersome and confusing, especially for small-scale industries. Simplifying these requirements is a key area where regulatory reforms are crucial.
• Regulatory Volatility: Frequent regulatory changes create uncertainty, especially for new businesses and startups, hindering long-term planning and stability. For instance, the introduction of new tax policies or changes in foreign direct investment (FDI) rules can impact business models. A glaring example is the Telecom Sector: In 2016, the Telecom Regulatory Authority of India (TRAI) introduced changes to pricing regulations, and then again, new changes were made in 2020 regarding the spectrum pricing policy. These constant adjustments left telecom companies in a state of flux, affecting their financial projections and strategic decisions. 
• Inspection Harassment: Traditional inspection systems are often prone to corruption and subjective interpretations, leading to harassment for businesses. The Shram Suvidha Portal, which was introduced to digitize labor inspections and reduce harassment, has made some improvements, but the system is still evolving, and there are ongoing reports of arbitrary inspections and undue pressure on businesses. Also, a survey by PWC found that nearly 60% of businesses reported facing issues with arbitrary GST inspections. The risk-based inspection system and automated reporting through digital platforms like GST e-way bill system are steps in the right direction but have yet to be fully implemented across all sectors.

Key Recommendations for the High-Level Committee

• To address these challenges, the high-level committee must focus on the following recommendations:
• Smart Sanctions: Restrict jail provisions to intentional fraud and physical harm cases. A National Employer Compliance Grid (NECG) can streamline compliance filings and reduce subjectivity in enforcement. For example, SPICe+, the business incorporation portal, is already a step in this direction, integrating PAN, TAN, and DIN into a single application form, drastically reducing paperwork and time.
• Regular Review of Regulations: Implement a system of regular review for all regulations, with mandatory reviews every five years, similar to the Telecom Regulatory Authority of India (TRAI) policy reviews. Telecom Sector has seen regulatory changes to adapt to new market realities, such as the introduction of MNP (Mobile Number Portability) and pricing regulations, which have been periodically updated to reflect new market conditions. Such reviews help remove redundant or inefficient rules while introducing new frameworks that facilitate growth.
• Modernizing Regulations: Introduce sunset clauses to ensure outdated regulations are automatically repealed. For instance, the Insolvency and Bankruptcy Code (IBC), introduced in 2016, has already shown how time-bound measures can simplify legal proceedings. The IBC mandates that insolvency resolutions occur within 180 days, which has helped streamline processes and encourage faster decision-making. Adopt a risk-based approach to focus on high-risk sectors while easing compliance for low-risk businesses. The GST e-way bill system, for example, utilizes data analytics to flag high-risk transactions for inspection, allowing businesses that have a good compliance history to avoid unnecessary inspections. This model could be expanded to other sectors for more targeted regulatory oversight. 
• Consolidation of Sector-Specific Laws: Further consolidate regulations into umbrella codes, such as Environmental Codes or Energy Codes, to simplify compliance. An example of successful consolidation is the Labour Codes, which merged 29 central labor laws into 4 codes. This move simplified labor law compliance for businesses, reducing their administrative burden. 
• Global Best Practices: India can also look to international regulatory models for guidance on how to further streamline its regulatory processes. For example, the US Regulatory Flexibility Act mandates regular reviews of business regulations to ensure they remain relevant and efficient. Similarly, Singapore’s Pro-Enterprise Panel reduces inspections for businesses with a clean record, enhancing the ease of doing business. These models emphasize a proactive, risk-based approach to regulation, which can reduce unnecessary burdens and improve the business climate in India.
• Structured Regulatory Calendar: The introduction of a structured regulatory calendar would provide businesses with a clear and predictable timeline for when changes to regulations will occur.   For instance, the Reserve Bank of India’s (RBI) monetary policy calendar is an example of how providing advance notice can reduce uncertainty in the financial sector. Businesses can adjust their strategies based on the calendar, thus minimizing risks associated with sudden policy changes. 
• AI and Data Analytics for Proactive Compliance: To enhance the efficiency of regulatory inspections and compliance checks, India should expand the use of AI and data analytics. An example of successful use of AI in regulatory compliance is the Food Safety and Standards Authority of India (FSSAI), which uses AI to prioritize inspections for high-risk food businesses, ensuring that only those with potential compliance issues are thoroughly checked.

What Should Be the Way Forward?

• The Economic Survey 2024-25 compares deregulation to peeling an onion: each layer removed reveals the next, making the process easier over time. This step-by-step approach can help streamline India’s complex regulatory framework gradually, making it more business-friendly and efficient.
• Digital Public Infrastructure (DPI) for Employers: With initiatives like PAN 2.0 and Entity Digilocker, India can create a paperless, presence-less, and cashless ecosystem for businesses. These digital tools will streamline compliance processes, reduce paperwork, and enable real-time tracking of business activities, making the entire system more efficient.
•  Butterfly Effect: Small deregulatory actions can trigger a butterfly effect, where the cumulative impact leads to significant gains in business competitiveness and economic growth. For example, simplifying the process for small businesses to obtain licenses or reducing inspection frequencies for compliant firms can lead to more startups and job creation, driving innovation in the economy.
• Regulatory Cholesterol: Reducing excessive regulatory burdens is essential for unlocking India’s entrepreneurial potential. A more agile regulatory environment will foster high-wage job creation and greater business innovation. By minimizing cumbersome processes, India can encourage both domestic and international investment.
• Viksit Bharat by 2047: Sustaining 8% GDP growth over the next decade will require focused efforts on deregulation, innovation, and simplifying the regulatory framework. This vision of Viksit Bharat by 2047 can only be achieved by maintaining a regulatory environment that encourages entrepreneurship, investment, and economic development.