India’s push for deregulation raises questions about balancing economic efficiency with societal stability
Prof Satya Narayan Misra
Deregulation became the new buzzword after India moved on to Regulation from a control regime in 1991. Speaking at the Global Business Summit 2025, PM Modi announced the formation of a Deregulation Commission to eliminate hundreds of compliances and further streamline regulatory processes. He highlighted how the GST has created a single large market, significantly benefiting industries by simplifying taxation and fostering economic integration.
The PM’s statement was a takeoff to FM’s budget speech, where she highlighted the need to promote ease of doing business, update old laws, and develop a flexible, people-friendly, and trust-based regulatory framework. The cry for deregulation has echoes in the new Department of Government Efficiency under Elon Musk in the new Trump dispensation, whose objectives include modernizing Fed technology, reducing regulation, and streamlining government agencies. It has resonance also with the initiative taken by the UK to open a New Regulatory Innovation office in October 2024 to speed up the introduction of new technologies like AI.
Regan Regime
The 1970s under Ronald Regan not only dismantled the welfare role of the state, as suggested by Keynes, under FDR to come out of the quagmire of economic depression in the 30s by embracing market fundamentalism, advocated by Hayek and Milton Friedman. It also ushered in the dismantling of regulatory bodies for airlines, trucks and railways, and electric power generation. The sharp reduction in tax rates of the super-rich fitted into the economic rhetoric of better tax compliance and tax generation, as demonstrated by his advisor Arthur Laffer.
India bit this ideology bug in 1991 when it dispensed with the license permit quota (LPG) raj to embrace liberalization, privatization, and globalization (LPG) raj, by substantially dumping the dirigiste regime under Pandit Nehru & Indira Gandhi. While the acronym remained unchanged, it has changed the economic contours and sinews of India forever, with the mantle of PSUs as ‘the temples of modern India’ shifting to the private sector players, with the role of bureaucracy shifting from that of controllers to regulators, from masters to enablers.
It had the intended consequence of doubling the stagnant ‘Hindu rate of Growth’ of 3.5% and the unintended consequence of accentuating income inequality, by turning a blind eye to distributive justice as brought out by the Nobel laureate Amartya Sen. The trickle-down growth theory of Robert Solow did not happen, either in the USA or in India.
In terms of regulation, however, India witnessed the creation of a slew of regulatory bodies like SEBI in 1992 to regulate the stock market operation, PFRDA in 2003 to regulate pension, FEMA in1999 to regulate foreign exchange, IRDA in 1999 to regulate insurance, the Companies Act 2013 to regulate companies the and Consumer Protection Act of 2019.
RBI’s Feat
Post the US financial crisis in 2007-2009, the government constituted the FSLRC under Justice B.N. Srikrishna, which recommended that RBI should regulate the banks and payments but be divested of its debt management function which should be vested in an independent debt manager (PDMA), as is practiced in the USA and UK. The Committee also recommended the creation of a Unified regulator for the rest of the finance sector and a Financial Redressal Agency. Most of the recommendations have not seen the light of the day.
However, chastened by the US financial crisis, a Financial Stability Development Council was set up in 2010 under the chairmanship of the FM, with heads of all financial sector regulators as members, to strengthen and institutionalize the mechanism of maintaining financial stability, financial sector development, inter regulatory coordination along with monitoring macro-prudential regulation of the economy. It must be said to the credit of RBI as the apex regulator of the banking sector that not only waded through the subprime crisis creditably but also the banks have been able to comply with the Basel 3 norms of Capital Adequacy Ratio of 10.5% by a fair margin.
The CAR of SBI stands at 14.48% and the RBI has received an A+ rating in the Global Finance Banker Report Cards 2023. This rating recognizes RBI’s effective management of India’s economy, including its efforts to control inflation within the glide path and maintain financial stability.
The entire thrust of deregulation is predicated on the concept of economic efficiency as full freedom will allow the business to achieve full efficiency. However, intervention and regulation are justified when societal gains from regulation completely outweigh societal costs. In a remarkable book ‘The Road to Freedom’ (2024), the Nobel laureate Joseph Stiglitz argues that we need more regulation rather than less, particularly in areas like the environment and the financial sector.
Modi & Trump
The US financial crisis as per a committee headed by him was a big wake-up call about the fallibility of capitalism and the myth that ‘big banks do not fail’. Inadequate oversight and regulation of the financial industry, particularly in mortgage lending and securitization, allow risky practices to go unchecked. Raghu Rajan in his famous book ‘Fault Lines’ also brought out how unregulated banks can play havoc with the financial system.
It would be worth recalling how the Gramm – Leach – Bliley Act of 1999 during the Presidency of Clinton repealed the Glass – Steagall Act of 1933 which separated the banking function from the investment function. Stiglitz had observed that the GLB Act was largely responsible for conveying the culture of increased investment taking by commercial banks & for causing the US financial crisis. Given such historical red herrings, India must proceed with utmost caution before emulating Trump’s experiment with deregulation.
In particular, the cautionary note of Stiglitz on the importance of beefing up the regulatory architecture of the financial sector and environment must not be glossed over. As Santayana wrote: Those who cannot remember the past are condemned to repeat it. In the quest to promote the private sector and bolster the ease of doing business, Mr Modi must not turn a blind eye to history to become a blue-eyed boy of Trump. As the new RBI Governor Sanjay Malhotra has rightly pointed out in the context of deregulation we need to be wary of the tradeoff between ‘stability and efficiency’.
(The writer is a Professor, Emeritus, KiiT University, Bhubaneswar. Views expressed are personal.)
