Regulatory Reforms 2.0 for Ease of Doing Business

Team Leaseregtech, January 06, 2022

By  Rajshree Agarwal and Amol Kulkarni

India’s regulatory environment is constantly evolving. The government has repeatedly highlighted its efforts in promoting transparency and timeliness in granting clearances. Several states and most recently, the central government has set up an online single window system. At the same time, new requirements are being introduced, particularly to deal with technological developments and related risks.

Easing the process of granting approvals is necessary but not sufficient to enhance ease of doing business and ease of living. It is critical to examine the rationale of proposed requirements and periodically examine if existing requirements are achieving their objectives, or need to be changed. This can only happen if there is sufficient clarity about the root of the problem, the tools deployed/ proposed have a high probability to achieve the desired objective, without unnecessarily disproportionately impacting stakeholders.

A five-judge bench of the Supreme Court of India, in the matter of Modern Dental College and Research Centre v. State of Madhya Pradesh & Others, has laid down the following four-step mechanism to determine if a measure restricting a right can be considered proportionate or not: 

1. It must have a legitimate goal (legitimacy stage).

2. It must be a suitable means of furthering this goal. There must be a rational connection between the measure and the objective (suitability stage).

3. There must not be any less restrictive but equally effective alternative (necessity stage).

4. The measure must not have a disproportionate impact on the stakeholder whose right is being restricted (balancing stage).

This test was subsequently applied by a nine-judge bench of the Supreme Court in Justice KS Puttaswamy v. Union of India, in which the Court upheld privacy as a fundamental right. The same test was also utilised to test the constitutional validity of the aadhaar program. Key elements of the test can also be used to examine the need for an additional requirement and if an existing requirement should continue or not.

The Regulatory Guillotine framework, as adopted in several jurisdictions, adopts similar tests to identify, review, simplify and streamline clearances. It requires the compliances to pass a sequential test of legality, necessity, and proportionality by reversing the burden of proof, to be retained. Only those compliances which pass all three tests are retained as is, and the remaining are either removed or amended.

Several countries have benefitted from adopting this framework. For instance, in Kenya, 315 licenses have been eliminated and 379 licenses have been simplified. Countries like Moldova, Ukraine, Serbia, Mexico, and Russia have also benefitted from the framework, with an estimated annual savings of 188.7 million euros to the Serbian economy. More recently, Uzbekistan, Thailand, the Philippines, and Pakistan have launched reform processes inspired by it.

However, having to run the compliances through the Regulatory Guillotine framework may not be enough. As comprehensive Regulatory Change Management is need of the hour. The means involving stakeholders in the regulatory change process since inception, and working with them to ensure a seamless transition to new regulatory frameworks.

In May 2021, the United Kingdom released the report of its Taskforce on Innovation, Growth, and Regulatory Reform. Like the Indian Supreme Court and Regulatory Guillotine framework, it emphasizes institutionalizing the principle of proportionality. It means that ensuring the design and implementation of regulations, including their cost, is proportionate with the level of risk. To this end, the use of ‘sandboxes’ and ‘testbeds’ to test innovations and base regulation on impact has been recommended.

The report also recognises that the regulation needs to support the growth and scaling of enterprises, and should not be cause for them to remain stunted. In this regard, it recommends regulators introduce ‘scale boxes’ to provide agile regulatory support to high-growth innovative scale-up companies. These principles are relevant for India as well, wherein micro and small enterprises have often been spared of regulatory burden for a specified period, but are left to deal with a barrage of regulation when such exemption period is over. Similarly, enterprises often operate in the informal economy to avoid regulatory requirements associated with the formal economy. This results in them remaining small.

As indicated earlier, India is also increasingly using digital tools to enhance transparency and ease of doing business. The European Commission recently released an approach to digital-ready policymaking. The approach focuses on for following principles:

1. Using user-centric processes, including simplification and automation

2. Ensuring alignment and consistency with other digital policies, standards, and investment programs

3. Once-only principle for collection of data and reuse, sharing of data already provided, in a transparent and secure manner

4. Leveraging ICT landscape by involving information technology experts and stakeholders having experience with digital processes

5. Innovation for ensuring better outcomes and added value for citizens and stakeholders

6. Digital-ready drafting by setting clear rules, clear governance frameworks, using simple precise, and clear wording

Several of these principles apply to India as well wherein digital application processes may not be user-friendly, requiring submission of information more than once, and unintentionally imposing costs on small businesses. These become even more important as India gears up to adopt a data protection framework.

We can also take inspiration from a few countries which have placed a regulatory cap with a commitment to not increase the number of regulatory requirements after achieving a goal of say, one-third reduction. Such second-generation of regulatory reforms can go a long way in enhancing the ease of doing business and ease of living in India.

*Authors work for CUTS International, a global public policy research and advocacy organisation.  

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