It is often believed that India’s regulatory problems are due to the lack of regulatory standards and poor compliance to process. International comparisons, however, show that India ranks better than its peers on having regulatory standards in place and compliance to process.
The real issue seems to be effectiveness of regulations caused by undue delays, rent seeking, complex regulations and quality of regulation.
The ‘World Rule of Law Index’ published by the World Justice Project provides cross country comparison on various aspects of regulatory enforcement. The index has various sub-categories, which capture compliance to due processes, effectiveness, timelines, etc.
In 2020, India’s rank is 45 out of 128 countries in the category of ‘Due process is respected in administrative proceedings’ (proxy for following due process). In contrast, in the category ‘Government regulations are effectively enforced’ (proxy for regulatory quality/effectiveness), the country’s rank is 104 (Table 1). India stands at 89th rank in ‘Administrative Proceedings are conducted without unreasonable delay’ (proxy for timeliness) and 107th in ‘Administrative
Proceedings are applied and enforced without improper influence’ (proxy for rent seeking). This shows that, contrary to the popular belief, India is relatively good at complying with processes, but lag in regulatory effectiveness.
In fact, India’s performance has improved significantly in following due process in administrative proceedings, with its rank improving from 72 in 2015 (out of 102 countries) to 45 in 2020 (out of 128 countries). In contrast, it has deteriorated over time on certain other parameters. This makes it clear that having regulations and enforcing process is one thing, whereas their effectiveness is another.
The index shows that United Kingdom, United States, Singapore and Canada are placed much better than India in case of both, following due process and regulatory effectiveness.
However, the gap between India and these counties is much wider in regulatory effectiveness than in due processes being followed. Similarly, India is placed better than other BRICS countries (barring South Africa) in terms of respecting due process, but, worse than them in the effectiveness of those standards.
The same conclusion can be derived from various World Bank studies. Its Regulatory Quality Index2 shows that despite improvement in India’s regulatory quality since 2013, it is still much lower than UK, US, Singapore, Japan etc. Similarly, the World Bank’s Ease of Doing Business (EoDB) report (2020) shows that despite making huge strides in the overall EoDB rank, India still lags behind in the sub-categories ‘Starting a business’ and ‘Registering Property’ where the country’s rank is 136 and 154 respectively. The report points out that this is due to the high number of procedures required to legally start and formally operate a company as well as the time and cost consumed to complete each procedure.
Regulatory Quality captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. Estimate gives the country’s score on the aggregate indicator, in units of a standard normal distribution, i.e. ranging from approximately -2.5 to 2.5. This is a part of Worldwide Governance Indicators (WGI) of World Bank.
As an illustration of unnecessary regulation in India, take the case of voluntary closure of a company. A study by Quality Council of India (done for Economic Survey) shows that the time taken from point of decision of closure to actually the company getting struck off from the Registrar of Companies is 1570 days (i.e. 4.3 years), even if all paperwork is in place and the company is not involved in any litigation or dispute. This is the best possible case of a routine activity. Interestingly, out of the total time taken, about 1035 days are taken for clearances by Income Tax, Provident Fund, GST departments and in taking back security refunds from various departments.
In contrast, voluntary liquidation takes about 12 months in Singapore, 12-24 months in Germany and 15 months in UK. In Germany, for very large and active companies, it takes 2-4 years. Given the likelihood of disputes and litigation, for the comparable large cases it may take upto a decade in India.
THE INEVITABILITY OF INCOMPLETE REGULATIONS
The problem of over-regulation stems from not recognizing the inevitability of incomplete contracts and regulations in a world of uncertainty. Real world contracts are inherently incomplete because of three key reasons that reinforce one another’s influence. First, as Herbert Simon has highlighted in his the Nobel-prize winning work, humans are boundedly rational because the future comprises of “unknown unknowns.”
Therefore, writing complete contracts that will efficiently fit every future situation is inherently impossible in the real world. Finally, because of these two features, a third party may be able to observe outcomes ex-post but cannot verify ex-ante decisions unambiguously.
Incomplete regulations become inevitable when the reality of incomplete contracts is acknowledged. In theory, regulators and policymakers can choose to invest entirely in the drafting process by identifying every possible state of the world that might materialize and by specifying an appropriate solution to each state. But, in reality, they confront a vexing problem:
The future is unknown and unknowable. As a result, when faced with uncertainty, it simply costs too much to foresee and then describe appropriately the contractual outcomes for all (or even most) of the conceivable states of the world. Thus, the reality of incomplete contracts leads to inevitability of incomplete regulation. This makes some discretion unavoidable.
In a complex and uncertain world, moreover, the actual outcomes or situations do not fit in the neat boxes assumed in the regulation; hence the supervisor has to exercise some judgment. There is a widespread belief, however, that ever more detailed regulations reduce discretion.