Economic Survey 2021: More Prescriptive Regulation, Less Supervision Has Led To Overregulation

India's administrative process suffers from overregulation rather than lack of compliance or regulatory standards, according to Economic Survey 2020-21.

The root cause of the problem of overregulation is an approach that attempts to account for every possible outcome, said the survey for 2020-21 tabled on Friday. It cited time taken for voluntary liquidation, incomplete contracts and several tax-related processes while arriving at this conclusion.

The survey pointed out that it takes more than 1,570 days for a company to be struck off the register, even in absence of any dispute or litigation. The effectiveness of regulations suffers due to their complex and rent-seeking nature, it said.

Citing the World Justice Report, the survey said India’s rank has fallen on key parameters like enforcement, effectiveness and application of government regulations in the last five years. While India is better than some BRICS countries in aspects like respecting due process of law, it falls behind in their effectiveness. Countries like the U.K., the US, Singapore and Canada, however, have a better regulatory effectiveness than India.

Economic Survey 2021: Related Coverage

• Economic Survey Calls For Fresh Asset Quality Review After Covid

• Survey Expects Recovery Past Pre-Pandemic Levels In Two Years

• Economic Survey: New Farm Laws A Remedy, Not A Malady

Here’s what the Economic Survey said about processes and regulatory reforms in India:

Effectiveness Of Regulations

The survey cited instances where India lags peers on business closure and enforcement.

For instance, a company deciding to voluntarily liquidate itself has to wait for more than 1,000 days to get a final clearance from the income tax, provident fund and GST authorities, and also get back any security refunds. In comparison, the entire process of voluntary liquidation doesn’t take more than 12-24 months in countries like the U.K., Singapore and Germany.

Right from the day when a company decides to close its operations, it can take around 270 days to obtain shareholders' approval and more than a year after that to get a final sanction from the National Company Law Tribunal.

The opacity in Indian administrative process stems from a tendency to emphasise on complete regulations that try to account for every possible outcome, the survey said.

Incompleteness, Discretion and Overregulation

On the state of legal regulation in India, the survey said:

• There is a need to create simple regulation and provide flexibility and discretion to any supervisory authority.

• It takes more than 1,445 days to resolve a commercial dispute to India as compared to 120 days in Singapore or 580+ days in OECD countries.

• Citing the number of days taken for granting construction permits in various states, the report concludes that regulatory discretion increases with an increase in the number of regulations.

• Based on study of public procurement and government department, the report says that more regulations are added regardless of their effectiveness. Further, regulatory discretion is not exercised in certain instances when there is a case or need to do so.

• Appeals filed by the income tax department constitute 85% of the total tax appeals filed in the court. The department has a success rate of only 27%, 13% and 27% at the Supreme Court, high court and the ITAT, respectively.

The problem of discretion, the survey points out, can be handled through three possible ways —bringing transparency, strengthening ex-ante accountability or building a resilient resolution mechanism.

Need For Transparency And Administrative Process Reforms

The survey says that recent changes in labour laws and the BPO sector have contributed to adopt certain reforms. On the same lines, India needs a simple institutional architecture as well.

Proliferation of autonomies bodies is necessary to maintain transparency, efficient supervision and accountability, it said. All laws, rules and regulations must be presented in an updated and unified manner at all times to simplify their understanding, it said.