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Economic Freedom Through Responsible Regulation
Context:
The central theme of the latest Economic Survey is unambiguous: “Get out of the way.” It emphasises that enhancing economic freedom is a critical driver of growth.
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- To achieve this, the Survey proposes systematic deregulation by evaluating regulations based on their cost-effectiveness—considering monetary, opportunity, and state capacity costs, as well as unintended consequences.
- While the call for deregulation has been a recurring theme for over a decade, it has gained significant traction in recent years, particularly as the adverse effects of excessive regulation on economic growth have become increasingly evident.
- This push for deregulation is as significant today as the landmark economic liberalisation reforms of the early 1990s.
A Renewed Focus on Deregulation
- Reviewing Regulations: In her 2023-24 Budget speech, the Finance Minister urged financial sector regulators to conduct a comprehensive review of existing regulations to simplify, ease, and reduce compliance costs.
- She advocated for public consultation in regulatory decision-making to ensure optimal governance.
- High-Level Committee: Expanding on this initiative, the 2025-26 Budget has proposed the establishment of a High-Level Committee for Regulatory Reforms to review all non-financial sector regulations.
- Assessing Impact: Additionally, it introduces a mechanism to assess the impact of financial regulations and subsidiary instructions, reinforcing the government’s commitment to evidence-based policymaking.
- Periodic Reviews: The Competition (Amendment) Act of 2023 further bolstered this agenda by mandating periodic reviews of regulations by the competition regulator.
- Public Consultation: It also made public consultation a mandatory step in the rule-making process, setting a precedent for greater transparency and accountability.
Deregulation as Better Governance
Deregulation does not imply reduced governance but rather better governance. It is not about eliminating regulations entirely but about removing unnecessary ones while preventing the introduction of redundant or burdensome rules. Responsible regulation is key to this approach, and two essential principles underpin it:
- Comprehensive Regulatory Scope: Regulations include primary legislation and subordinate legislation such as rules, regulations, subsidiary directions, circulars, and any other binding legal norms issued by the central and state governments, as well as regulatory bodies.
- Transparent and Inclusive Process: The formulation and review of regulations should integrate public consultation and economic analysis to ensure they are necessary, effective, and balanced.
India’s Progress in Transparent Regulation-Making
- India’s financial regulators have been pioneers in embracing transparent and consultative rule-making processes.
- The Securities and Exchange Board of India (SEBI) was among the first to introduce public consultations in 2002—well before the 2014 government policy that mandated consultations for all draft legislation.
- In 2016, the Supreme Court also recommended institutionalising stakeholder consultation in the law-making process.
- Despite the absence of statutory obligations, regulators such as the Insolvency and Bankruptcy Board of India, the International Financial Services Centres Authority, and the Pension Fund Regulatory and Development Authority have proactively adopted structured frameworks for rule-making.
- Most recently, SEBI introduced the SEBI (Procedure for Making, Amending, and Reviewing of Regulations) Regulations, 2025, further formalising the approach to transparent governance.
Nine Key Principles for Effective Regulation-Making
- Apply to All Binding Legal Instruments: Regulation-making principles should extend beyond formal regulations to include circulars and other binding instruments that impose obligations on market participants.
- Democratic Legitimacy in Rule-Making: Only the governing board of a regulatory body should have the authority to make regulations, ensuring accountability and preventing delegation to departments or officials.
- Mandatory Public Consultation: Public input should be sought not only from industry stakeholders but also from the general public. Draft regulations must be approved by the governing board, reviewed in light of public feedback, and accompanied by a published response to comments before finalisation.
- Diverse Consultation Methods: Regulatory bodies should employ multiple engagement formats—advisory committees, working groups, roundtables, workshops, and discussion papers—while ensuring a measurable Public Consultation Index to assess engagement quality.
- Economic Analysis of Regulations Public consultation should be informed by an economic analysis of proposed regulations to enhance understanding, improve suggestions, and minimise the risk of regulatory reversals.
- No Exemptions from Due Process: Regulations should not allow discretionary exemptions from consultation. However, in cases of urgent intervention, temporary regulations with a defined expiration period may be issued, subject to due process before becoming permanent.
- Regular Review of Regulations: Biennial reviews should be mandated to eliminate outdated rules and ensure all regulations remain aligned with evolving business and market needs.
- Continuous Public Engagement: Instead of limiting feedback to specific consultation periods, regulators should allow the public to propose new regulations or amendments at any time. Such proposals should be reviewed biannually and incorporated where appropriate.
- Binding Clarifications for Regulatory Certainty: Regulators should be required to issue binding clarifications upon request, ensuring legal certainty and predictability for market participants.
