Regulatory Reforms in India- Explained Pointwise

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. The objective of the high-level committee will be to strengthen trust-based economic governance and take transformational measures to enhance ease of doing business, especially in matters of inspections and compliances. The committee will be expected to make recommendations within a year.

What is the significance of regulatory sector reforms in India?

What are the key reforms undertaken?

1. Simplification of Regulation: The Jan Vishwas Act 2023 decriminalized 3400+ legal provisions and reduced 39,000 compliances. The SPICe+ portal simplified business incorporation by integrating PAN, TAN, DIN, and other identifiers into a single form. For ex– The Economic Survey 2024-25 emphasized the need to “peel off layers of needless rules” and adopt a “minimum government, maximum governance” approach.

2. Ease of Doing Business (EoDB) and Penal Provisions: The Jan Vishwas Act 2023 removed jail provisions for minor procedural defaults, such as delayed filings or incorrect calculations. For ex– The Economic Survey 2024-25 called for decriminalizing regulations that do not involve physical harm, fraud, or large externalities.

3. Sunset Clauses for Outdated Regulations: The Economic Survey 2024-25 recommended sunset clauses to automatically repeal regulations after a fixed period unless explicitly renewed. For ex– The Insolvency and Bankruptcy Code (IBC) introduced time-bound resolutions, setting a precedent for regulatory efficiency.

4. Consolidation of Laws and Codes: The Labour Codes consolidated 29 central labor laws into 4 codes, simplifying compliance for employers. The GST regime unified 8 central and 9 state taxes into a single tax, reducing compliance costs.

5. Structured Notification Schedules: The Economic Survey 2024-25 proposed structured notification schedules to ensure predictable and phased implementation of regulations. The GST Council meets quarterly to announce changes, providing businesses with a clear timeline for compliance.

6. Risk-Based Regulatory Inspections: The Shram Suvidha Portal introduced risk-based inspections, reducing unnecessary scrutiny for compliant businesses. The GST e-way bill system uses data analytics to identify high-risk transactions for inspection.

What are the challenges in implementing regulatory reforms?

1. Red Tape Overload: India’s regulatory framework is often criticized for being overly complex, with over 85,000 compliances and 5,000+ jail provisions for businesses. This creates a high compliance burden, especially for small and medium enterprises (SMEs).

2. Ease of Doing Business Mirage: Despite India’s rise in the World Bank EoDB ranking from 142nd (2014) to 63rd (2020), SMEs still face challenges due to excessive penal provisions and interpretation subjectivity.

3. Legacy Laws: Many regulations, such as the Factories Act (1948) and Shops and Establishments Act, are outdated and do not align with modern business practices. India has over 1,000 central laws and 15,000 state laws, many of which overlap or conflict, creating confusion for businesses. For ex– The TeamLease report highlights how fragmented labour laws have slowed employment growth, making consolidation a critical reform.

4. Regulatory Volatility: Frequent and unpredictable regulatory changes create uncertainty for businesses, especially startups and SMEs.

5. Inspection Harrasment: Traditional inspection systems are often manual, subjective, and prone to corruption, leading to harassment of businesses.

What are the key recommendations for the High-Level Committee?

1. Modernizing Regulations for Growth: Introduce sunset clauses for outdated regulations to ensure periodic review and repeal. Also, adopt a risk-based approach to compliance, focusing on high-risk sectors while reducing scrutiny for low-risk businesses. For ex– The GST regime consolidated 17 indirect taxes into one, reducing compliance costs by 20-30% for businesses.

2. Smart Sanctions for Business: Restrict jail provisions to only those involving intentional fraud or physical harm. Introduce a National Employer Compliance Grid (NECG) to streamline compliance filings and reduce subjectivity. For ex– The Shram Suvidha Portal reduced labor inspection timelines by making reports public within 48 hours, enhancing transparency.

3. Five year check-up for Regulations: Implement sunset clauses for all regulations, with a mandatory review every 5 years. For ex– The Telecom Regulatory Authority of India (TRAI) periodically reviews its policies to align with technological advancements.

4. One-Stop Law Shop: Consolidate sector-specific laws into umbrella codes, such as the Environmental Code or Energy Code. For ex– The Companies Act, 2013 replaced the 1956 Act, simplifying corporate governance and compliance.

5. Regulatory Calendar: Introduce a structured regulatory calendar for all ministries, with pre-announced dates for notifications and amendments. For ex– The RBI’s monetary policy calendar provides clarity on interest rate decisions, reducing market uncertainty.

6. AI and Analytics for Proactive Compliance: Expand risk-based inspections to all sectors, using AI and data analytics to identify high-risk entities. For ex– The Food Safety and Standards Authority of India (FSSAI) uses a risk-based approach to prioritize inspections for high-risk food businesses.

7. Global Best Practices: Adopt successful international regulatory models, such as the US Regulatory Flexibility Act, which mandates regular reviews of business regulations, and Singapore’s Pro-Enterprise Panel, which reduces inspections for compliant businesses to enhance ease of doing business.

What should be the way forward?

1. “Peel the Onion” Approach: The Economic Survey 2024-25 likens deregulation to peeling an onion—each layer removed reveals the next, making the process easier over time.

2. Digital Public Infrastructure (DPI) for Employers: The proposed PAN 2.0 and Entity Digilocker can revolutionize compliance by creating a paperless, presence-less, and cashless ecosystem.

3. Butterfly Effect: Small deregulatory actions can trigger a ripple effect, leading to significant gains in business competitiveness and growth.

4. Regulatory Cholesterol: Reducing excessive regulatory burdens is essential for unlocking India’s entrepreneurial potential and fostering high-wage job creation.

5. Viksit Bharat by 2047: Sustaining 8% GDP growth over the next decade requires a concerted focus on deregulation, innovation, and simplifying the regulatory framework.

Conclusion:

India’s regulatory reforms have made significant strides, but the journey is far from over. By focusing on simplification, decriminalization, and digitization, India can create a business-friendly environment that fosters innovation, entrepreneurship, and economic growth. The Economic Survey 2024-25 and Union Budget 2024-25 provide a clear roadmap, but timely implementation and political will are crucial to realizing the vision of a Viksit Bharat.