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Strategic Deregulation: Balancing Growth and Stability
Context:
In an era marked by digital finance, geopolitical shifts, and disruptive technologies, the key question is not whether India needs deregulation, but how to implement it effectively without triggering economic instability.
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- Deregulation is not about eliminating safeguards but about reducing friction and streamlining governance.
- The Union government is expected to establish a national deregulation commission to expedite approvals and eliminate barriers, particularly for smaller businesses.
- However, as the Chief Economic Advisor recently pointed out, digitisation alone does not equate to deregulation.
- True reform must extend beyond central directives and take root at state and local levels.
Lingering Impact of Bureaucratic Controls
- Despite economic liberalisation, remnants of the licence-permit raj persist.
- Regulatory bottlenecks remain entrenched in archaic laws, excessive approvals, and the discretionary power of officials who often see regulation as a tool of control rather than a means to enable economic growth.
- This institutional inertia—sometimes manifesting as corruption—makes business success contingent not only on merit but also on navigating a system where personal connections are as crucial as operational excellence.
Lessons from Financial Sector Reforms
- Carefully calibrated deregulation has strengthened India’s financial sector, fostering banking expansion, capital market growth, and fintech innovation.
- However, history has repeatedly demonstrated that excessive deregulation, if unchecked, can lead to financial crises.
- The 2008 global meltdown stemmed from an unregulated subprime mortgage market, while collapses in various industries resulted from excessive risk-taking in poorly supervised environments.
- The downfall of FTX highlighted the dangers of financial innovation outpacing regulatory oversight.
Risks of Unchecked Deregulation
- Advocates of free markets argue that industries should be opened up with minimal regulation to foster competition and efficiency.
- While this can drive innovation, it also carries risks, particularly in sectors reliant on borrowed capital.
- The collapse of such businesses does not just affect shareholders but has broader economic consequences.
Aviation Industry: A Cautionary Tale
- The deregulation of India’s aviation sector increased competition and lowered fares.
- However, reckless expansion and financial mismanagement rendered several business models unsustainable.
- Kingfisher Airlines defaulted on nearly ₹9,000 crore in loans, while Jet Airways collapsed under an ₹8,500-crore debt burden.
- The absence of financial safeguards led to systemic failures that impacted banks, employees, and passengers alike.
Telecom Sector: A Double-Edged Sword
- Liberalisation in the 1990s and 2000s drove India’s telecom boom, but aggressive price wars and unsustainable financial strategies led to a sector-wide crisis.
- Companies like Vodafone Idea remain mired in debt, forcing government intervention to stabilise the industry.
- Meanwhile, BSNL continues to struggle without a clear strategic direction.
- Deregulation alone was insufficient—financial oversight mechanisms were needed to ensure long-term viability.
Deregulation and Foreign Investment Risks
- While deregulation attracts foreign investment by easing capital flow and technological integration, it also exposes domestic industries to foreign dominance.
- Walmart’s acquisition of Flipkart and the prevalence of foreign digital payment platforms underscore this vulnerability.
- In contrast, China has maintained stringent regulatory oversight, ensuring foreign investment aligns with national economic priorities.
Regulating Emerging Technologies
- Artificial intelligence (AI) is shaping credit assessments, blockchain is transforming financial transactions, and decentralised finance is challenging traditional banking models.
- These innovations raise critical regulatory questions:
- Who is accountable when AI-driven lending discriminates against borrowers?
- How do authorities oversee financial transactions bypassing traditional banks?
- Without proactive oversight, such developments could introduce systemic risks that are difficult to contain.
Balancing Deregulation with Labour Protections
- Deregulation has been a key driver of employment, but it has also weakened labour protections.
- The gig economy, powered by platforms like Ola, Uber, Swiggy, and Zomato, has flourished due to regulatory flexibility.
- However, gig workers lack basic social security protections, highlighting the need for a balanced approach that fosters business growth while safeguarding worker rights.
Phased Approach to Deregulation
- India requires a strategic model of deregulation—one that promotes business expansion while ensuring economic stability.
- Phased implementation should be the norm, allowing policies to be tested before full-scale rollout.
- Regulatory sandboxes, already successful in fintech, should be extended across industries to enable innovation without exposing the economy to untested risks.
- Financial oversight mechanisms must evolve alongside market liberalisation.
- Deregulation should not follow a one-size-fits-all approach; each sector requires tailored safeguards to balance public interest with competitive growth.
