Dear Reader,
The 32nd edition of Spotlight provides a snapshot of the ongoing discussion on deregulation nation-wide. It highlights how deregulation can unlock economic growth through Rajasthan as a leading example of state-led reforms to reduce compliance burdens and attract investment.
We look forward to hearing your comments and suggestions!
|
|
|
Unlocking India's Growth Through Deregulation
|
|
|
India’s GDP currently grows at 6.3%, but to achieve sustainable, long-term growth and reach developed nation status by 2047, it must maintain a 7.8% rate, as noted by the World Bank. A major hurdle is its outdated and excessive regulatory framework, which raises compliance costs, stifles business, especially for MSMEs and deters investment. To close this 1.5% growth gap, India needs urgent structural reforms focused on simplifying regulations and improving the Ease of Doing Business (EoDB) through a more transparent, streamlined, and growth-oriented approach.
The Economic Survey of India 2025 emphasises EoDB 2.0, urging states to take charge as agile regulators tailored to local economic contexts. At the core of this shift is deregulation. Empirical evidence links deregulation with increased productivity, competitiveness, and GDP growth, making it a vital lever for India’s economic transformation.
|
|
|
|
What is Deregulation?
Deregulation refers to a deliberate and systematic process of identifying and removing or easing binding constraints within the regulatory framework that hinder business efficiency, competition, and innovation. It is not about the arbitrary removal of rules but about assessing which regulations are outdated, redundant, or counterproductive, and modifying them to better serve public and economic interests. Effective deregulation involves continuous calibration, rooted in evidence-based policymaking, to ensure that the process enhances productivity and investment without compromising critical safeguards such as consumer protection, labour rights, or environmental standards.
The Government of India has announced the formation of a High-Level Committee (HCL) to deal with regulatory reforms by reviewing all non-financial sector regulations, certifications, licenses, and permissions.
|
|
|
As indicated by PM Modi, the ultimate goal is to empower and protect the wealth creators of the Indian economy by removing unnecessary barriers that hinder enterprise and innovation. And this can be achieved through Deregulation.
|
|
|
|
Seven Reasons to Deregulate
- Reduce Complex Compliance Burden: India's regulatory framework is often layered with overlapping, outdated, and excessive complex compliances. Deregulation simplifies these processes, making it easier for businesses to start, operate, and expand.
- Disproportionate Compliance Burden on MSMEs: Overlapping and outdated regulations disproportionately impact MSMEs by raising compliance costs and stifling growth. The Economic Survey 2024–25 flags over-regulation as a key constraint, while ASI data and Crisil (H2 FY23) highlight how rising input prices (24.4%) and interest rates have further eroded MSME profitability.
- Attract Investment: Complex regulations increase uncertainty and risk for investors. Deregulation creates a predictable, transparent business environment, boosting investor confidence and inflows, both domestic and foreign.
- Enhance Competitiveness: High compliance and input costs reduce India’s global competitiveness. Streamlining regulations lowers these costs, making Indian industries more competitive—particularly important for strategies like "China Plus One."
- Promote Entrepreneurship and Innovation: A simplified regulatory regime encourages entrepreneurship by reducing entry barriers and operational red tape, allowing innovators and startups to thrive
- Improve Government Efficiency: Deregulation reduces bureaucratic delays, allowing public institutions to focus on strategic oversight and facilitation rather than micro-management.
- Support Federal Flexibility (EoDB 2.0): As highlighted in India’s Economic Survey 2025, empowering states to tailor regulations to local economic contexts is essential for improving EoDB across diverse regions.
What to Deregulate?
As per Government of India, states can deregulate subjects in the State List (land, buildings, water, local trade) and Concurrent List (labor, electricity, logistics, municipal laws) by amending laws to simplify the regulatory framework.
Key areas for deregulation include streamlining land acquisition, simplifying building permits, and reducing environmental clearance requirements. Reducing both direct and indirect compliance costs is key towards lowering business barriers. Direct costs include measurable expenses like form-filling, staff training, and reporting—typically calculated by time and wage rates. Indirect costs refer to harder-to-quantify impacts such as delays, lost opportunities, and productivity loss, often estimated through surveys or benchmarks. Simplifying export processes and improving access to credit will also contribute to a more efficient, competitive economy. The table 1 below represents a comprehensive comparison of the costs associated with establishing and operating a business in India with its peer countries like Malaysia, Thailand, Indonesia and Bangladesh.
|
|
|
Table 1: Comparative Cost Analysis – India vs. Peer Economies
|
|
Comparative Analysis of India’s Business Costs
- Starting a Business: In India, it costs 7.2% of income per capita, higher than Vietnam (5.6%) and Indonesia (5.7%).
- Construction Permits: Obtaining construction permits in India costs nearly 4% of warehouse value, compared to 2.8% in China, 0.5% in Vietnam, and 1.3% in Malaysia.
- Electricity Costs: Industrial electricity costs in India are 10–25% higher than supply cost, while countries like Vietnam, Cambodia, and Malaysia offer rates 10% below generation cost.
- Labour Costs: India’s minimum wage is $215 per month, significantly higher than Bangladesh’s $48 (Global Wage Report 2020–21).
- Land Acquisition: Factory land in industrial zones in Maharashtra is 25% more expensive than in Thailand, with additional costs like higher stamp duties (6% in India vs. 2% in Thailand).
- Regulatory Burden: India's 18% GST on construction labor costs, compared to Thailand's 7% VAT, and restrictive land-use regulations limit industrial land availability to 55%, versus Thailand's 65%.
|
|
|
Table 2 presents an example of key regulatory challenges in Rajasthan along with corresponding recommendations across four critical thematic areas. Rajasthan stands out for its proactive, enterprise-friendly policies, as seen in its 2025-26 budget, which introduces reforms like streamlined fire NOCs, extended clearances, and relaxed working hours for women—key steps toward its $350 billion economy goal by 2029.
Strategically, Rajasthan is India’s largest state by area, with the 3rd-largest highway network, 2nd-largest rail network, and a 23% share in the NCR. Over 58% of the DMIC falls here, supported by 320+ industrial areas and SEZs. Despite being landlocked, its connectivity and policy push make it a critical investment hub highlighting the gaps and providing evidence-based recommendations for the state.
|
|
|
Table 2: Key Regulatory Gaps and Recommendations
|
|
|
Way Forward
To unlock growth, India must adopt a light-touch, evidence-based regulatory framework, prioritising sector-specific reforms over one-size-fits-all rules. This begins with simplifying compliance by digitising processes through single-window clearances and eliminating redundant regulations, especially for MSMEs, using Regulatory Impact Assessments (RIA). Empowering states through EoDB 2.0 will enable tailored policies that address local needs while maintaining national alignment.
The HLC must curb bureaucratic discretion, enforce accountability, and strengthen alternate dispute resolution mechanisms. Together, these measures will create a transparent, competitive, and innovation-friendly ecosystem that will attract investment, boost productivity, and bridge the 1.5% GDP growth gap. Institutionalising periodic reviews will ensure the regulatory environment remains agile and responsive to evolving economic needs.
Written by: Tasmita Sengupta, Research Associate at CUTS International. The author acknowledges the guidance of Amol Kulkarni, Research Director at CUTS International.
|
|
|
|
