[The link to the Chapter can be found here]
The Economic Survey 2021 was released on 30th January 2021. The ‘Economic Survey’ is a summary of the ‘annual economic development in the country throughout the year,’ released before the Union Budget. It is drafted by a team led by the Chief Economic Advisor (CEA) of the country. At present, this post is occupied by Krishnamurthy Subramanian.
The Economic Survey provides an optimistic picture of India’s post-COVID recovery, predicting a V-shaped recovery curve. It expects the economy to grow at 11 % (real growth rate adjusted for inflation) during 2021-22, after an expected 7.7 % contraction in the current financial year.
This article deals with Chapter 6 of the Survey titled ‘Process Reforms: Enabling decision-making under uncertainty.’ The Chapter makes a compelling argument in favour of deregulation, i.e., reducing the time and procedures to complete certain processes in the country. It highlights that India’s regulatory problems are not caused by lack of regulations and compliance thereof, but by ‘effectiveness of regulations caused by undue delays, rent-seeking, complex regulations and quality of regulation.’ Therefore, policy-makers must allow for some discretion in decision-making, rather than a maze of rules and regulations which are bound to increase complexities.
This is substantiated using data and evidence from across the globe. They are as follows-
World Rule of Law Index by World Justice Report– There are four sub-categories relating to regulatory compliance, rule of law, effectiveness, etc., in which ranking is done. The Survey considers the rankings of 2020. Of 128 countries, India’s rank is reasonably high in ‘Due process is respected in administrative proceedings’ (45), but significantly lower in effectiveness (104), timelines for completing procedures (89), and rent-seeking/influence (107th). It can be inferred that India is good at compliance with procedures and regulations but severely lags in the effectiveness of the same. Over time, it has also been seen that India has improved its rank in compliance but deteriorated in the other parameters.
Regulatory Quality Index and Ease of Doing Business (EoDB) Report by World Bank– The former shows that India’s regulatory quality has improved over time, but ‘it is still much lower than UK, US, Singapore, Japan, etc.’
In the latter, it is seen that India has improved its overall rank substantially; it lags in categories like ‘Starting a Business’ and ‘Registering Property,’ where its rank is 136 and 154 respectively. This is mainly because of the large number of procedures and legal hurdles in completing these processes.
A study by the Quality Council of India (for Economic Survey)– The Study found that the time taken for the voluntary closure of a company is, on an average, 1570 days (4.3 years) ‘even if all paperwork is in place and the company is not involved in any litigation or dispute.’ Compared to Singapore (12 months), UK (15 months), and Germany (12-24 months), we have a lot of ground to cover.
These facts highlight severe problems with our regulatory regime.
Why are Incomplete Regulations Inevitable?
As per the Survey, over-regulation arises when policy-makers fail to appreciate the incomplete nature of regulations. Since the future is filled with uncertainties and unforeseeable contingencies, it is impossible to define and specify obligations accounting for every possible situation. Therefore, to embark on an attempt to do so through over-regulation can be very counter-productive, and some discretion in decision-making is inevitable. Over-regulation can lead to an increase in opaque discretion because several rules can be interpreted in various ways, and the sheer number and complexity of the rules can make monitoring by a third-party logistically impossible.
The Survey uses an example from the US to support their argument. When inspectors manning old-age homes in the US were given detailed protocols to audit, they could not cope up. A small percentage (about 10 %) of these were regularly followed, while the rest were used selectively in some homes and not in the others. The approach is arbitrary, as it allowed the inspectors greater discretion to interpret and apply the rules according to their whims and fancies.
It also refers to a study that uses data from various Indian states to establish their argument further. According to the Study, the de jure number of days to get a construction permit (signifying the number/complexities of regulations) correlates positively with the average number of days actually taken to obtain the same. In other words, the actual number of days taken to get a permit increases with an increase in regulation (as can be inferred from the de jure days to obtain a permit).
Therefore, regulation and discretion are not in a ‘zero-sum game’; on the contrary, they are positively correlated. Further, the discretion following over-regulation is opaque and cannot be realistically monitored.
Why do Policy-Makers and Decision-Makers Prefer Regulation over Discretion?
The main reason why regulations are preferred over discretion is that the former is measurable while the latter is not. The decision-makers, at the ground level, are merely agents working for their principal (usually the State/Central Government). Their main objective is to reduce future accountability by following a ‘check-list.’ This is achievable only when there are a large number of measurable regulations, as opposed to subjective discretion. For example, if teachers get an incentive-based pay depending upon students’ test scores, their energies will be devoted towards achieving such scores, rather than the other essential aspects of student learning.
Another reason for policy-makers to prefer regulations is that discretion is often questioned with the benefit of hindsight. Thus, if the exercise of discretion by decision-makers results in undesirable consequences, the entire exercise is judged based on the consequences themselves, instead of presuming good faith on the part of the decision-makers. This results in value-judgments that are unfair and reflective of the high degree of prudence expected of the decision-maker (that he should have known the consequences).
What do non-effective regulations lead to?
Firstly, it leads to more regulation, although the very response is the problem. Any regulatory problem is sought to be addressed through more regulation. Ultimately, people start functioning in the less-regulated/less-transparent part of the economy. For instance, a huge number of labour regulations has led to a massive informalisation of the sector, where the burden of compliance is less stringent.
Secondly, the officials refrain from exercising discretion even when there is a case to do so. For instance, in public procurement, as per the General Financial Rules, the ‘Lowest Cost Method’ or the L1 principle is commonly used for bidding. While there have been several demands for reforming the process, since the system is largely ineffective, it persists because the decision-makers would instead use quantifiable/measurable parameters to justify their decision than their subjective satisfaction by exercising discretion.
Thirdly, Government departments follow default precedent irrespective of the results it has provided in the past. For instance, in tax-related matters, the Department has the option of approaching the Commissioner of Income Tax-Appeals, the Income Tax Appellate Tribunal, the High Court, and then the Supreme Court. Consider this data- “As per calculations in Economic Survey 2017-18, Department’s appeals constitute nearly 85 per cent of the total number of appeals filed in the case of direct taxes. Of the total number of direct tax cases pending by the quarter ending March 2017, the Department initiated close to 88 per cent of the litigation at ITATs and the Supreme Court and 83 per cent of the litigation pending at High Courts. However, the Department loses 73 per cent of its cases in Supreme Court and ITAT and 87 per cent in High Court.” Despite the low success rates, assesses prefer filing an appeal to prevent any questioning later.
How to Solve for Discretion?
Through the elaborate discussion, the Survey concluded that supervisors/decision-makers must be given greater discretion, but how can they be held accountable? It suggests three ways.
Firstly, ex-ante accountability must be strengthened. This means that the decision-makers must be accountable for their decisions (with a presumption of prudent judgement in their favour) instead of the outcome of such decisions through ex-post audits (which suffer from hindsight bias).
Secondly, the decision-making process must be transparent. This also promotes trust in public institutions. According to the Survey, the benefits of transparency can be seen in public procurement through the Government e-Marketplace (GeM). The platform has led to a decrease in the prices of various goods procured by the Government and reduced inefficiencies and rent-seeking activities.
Thirdly, there must be an efficient ex-post resolution mechanism. This means the court system should be efficient in resolving various disputes in a just and timely manner. “As per the World Bank’s Ease of Doing Business report (2020), it takes 1445 days to resolve a commercial contract in India as compared to 589.6 days in OECD high income countries and 120 days in Singapore. The report also shows that the cost of litigation in India is around 31 per cent of the claim value.” In the World Rule of Law Index, our rank in ‘Civil Justice is not subject to unreasonable delay’ is 123/128 countries, further proving that the situation is dire. An efficient system can also protect decision-makers whose decisions are questioned, except when there is outright fraud/malpractice.
Conclusion
The Chapter, in a way, is myth-shattering and counter-intuitive compared to commonly held notions. The recent trends, however, suggest that the Government has realised the importance of deregulation, as evident from the massive simplification exercise undertaken with the Labour Law regime. Similarly, the restrictions on the use of geospatial data have also been removed a few days back, allowing private players to invest heavily in these technologies. A few years back, the Insolvency and Bankruptcy Code was also a manifestation of the same idea- that deregulation and simplification is the way forward.
The Chapter ends with an interesting recommendation, earlier highlighted in Chapter 8 of the 2016-17 Economic Survey, i.e., enacting the Transparency of Rules Act. Under the Act, ‘all departments will need to mandatorily place all citizen-facing rules on their website.’ The department officials cannot enforce any unpublished rule. This will relieve the citizens from following a complex paper-trail and a series of notifications to know the requirements.
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