Cross the red tape Rubicon

Economic Times, August 23, 2012

By Pradeep S Mehta

India needs to launch regulatory impact assessments to weed out laws that hurt business growth

The origin of the term ‘red tape’ lies in an old British Indian practice of tying all files with red tape while being carted on mules and donkeys from Delhi to the summer capital Shimla.

This is perhaps an apocryphal story, nevertheless revealing. While the British left India, the system got much worse than the hardy animals that carried the files to the hills.

Now, Prime Minister Manmohan Singh has called for unleashing animal spirits to spur growth, promising ad nauseam to create transparency and cut down corruption. That can be done only when irrational regulatory barriers are removed.

Other than unshackling enterprise, cutting red tape also attacks corruption systematically. A recent survey by Regus showed red tape as an important factor in business perception (38%) that impacts growth. However, political instability (58%) was the most worrisome factor, followed by inflation (41%). Wonder what the government can do about the political instability, but it can, among other things, tame inflation by reining in the unbridled fiscal deficit.

Controlling fiscal deficit was one of the five challenges identified by the PM in a recent media interview. He said he was also keen to cut red tape, improve the response time of government to business proposals and cut down infructuous procedures to make the country a more business-friendly destination. Procedures are the bane because everyone wants to be more cautious than the man who stops when a cat crosses the road.

Let’s take the endless debate over FDI in pharma. The simple way is to empower the Competition Commission of India to vet all such mergers and takeovers with a special dispensation and leave it to them. That’s their job.

At the macro level, many other policies such as public procurement, public-private partnership, skill development, natural resources allocation, legal reforms to cut down on delays and so on are trapped due to inter-ministerial turf battles promoted by either status quoism or vested interests. Legal reforms are mortgaged to the powerful bar that thinks they would lose if the system improves.

The power situation is bad due to the archaic policy on coal. The PMO and the Cabinet Secretariat are making hectic efforts to work as policy coherence units, but they have limited time and resources. The government also has to deal with difficult coalition partners. Also, major infra projects are lagging behind, affecting the country’s socio-economic fabric.

At the micro level involving every possible state and local government, it is a maze (see accompanying graphic). The national manufacturing plan too speaks about reforming the business regulatory framework to boost the manufacturing sector. The solutions would apply to the services sector pari passu, and that would then rejuvenate the business scenario.

The major problem with many micro issues is that these are under the jurisdiction of states. Each state has its own peculiarities and contours that vary according to the leader in charge. One way forward is to establish a non-partisan Chief Ministers’ Governance Forum, as advocated by former Prime Minister Atal Bihari Vajpayee in 2002, which can offer a structured platform for exchange of experiences of successes and failures. In our own experience comparativeness exchanges help hugely.

Macro issues can be best handled by a group of ministers with representation by states, Parliament and key stakeholders, who can debate and find solutions as a national imperative. A similar exercise at the level of the states would also be needed. These have to be non-partisan. Bodies such as the National Development Council deal with a panoply of issues and their meetings usually become state-versus-Centre dialogue, more often acrimonious.

Even our goods and service tax forum, though chaired by an opposition leader, has not made much progress. Parochialism and apprehension have skewed progress.

Micro issues, particularly relating to the regulatory burden, can be dealt with by using regulatory impact assessments of both new and existing laws and praxis. For example, Mexico, launched The Agreement for Deregulation of Business Activity in 1995. It involved review of existing legislation for legal and economic justification, positive and negative outcomes, as well as the human and budgetary requirements for implementation.

The exercise led to review and revision of 95% of regulations, with an estimated 40% reduction in either the scope or mandate. In 1998, South Korea introduced the Presidential Regulatory Reforms Commission. Each ministry was given a target to guillotine their existing regulations by half.

Regulations that hindered market access or competition were to be eliminated totally, while strengthening those relating to environment, health or safety. Consequently, 35% of all regulations were removed and that added significantly to its industrial growth.

Many industrialised countries too have set up such systems. For example, the UK has the Better Regulation Task Force and all new laws are required to assess the cost burden of each proposal as well.

Most OECD countries have carried out regulatory reforms and showed huge economic gains translating into lower costs for businesses and lower prices for consumers. India should also launch regulatory reforms through regulatory impact analysis. Of course, states need to be brought on board because they have the most red lights. These can be turned to green, sooner than later.

Pradeep S Mehta Secretary General, CUTS International

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