Release Proposed Regulation in India with Cost-Benefit Analysis & Input from Stakeholders

By Richard Rossow —

Source: Magalie L’Abbé’s flickr photostream, used under a creative commons license.

Status: Not StartedIndia’s business regulators use different formats for public review of draft regulations, often leaving little time for review and comments from stakeholders

Medium Difficulty: With OppositionAdopting a standardized cost-benefit analysis of new regulation, as well as a cogent process for notification and stakeholder engagement could be done without legislation. However, as with other attempts at standardization, it can be difficult to enforce. Hence, legislation may be required to give this policy implementable.

This is the eleventh installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.

Businesses in India face a fast-changing regulatory environment that makes long-term business planning a difficult task. The government has often articulated the goal of establishing a more thoughtful approach to regulation but it is far from implementing a plan to achieve the same.

For investors to commit substantial amounts of capital to scale up a business and hire workers, the company’s leadership must have confidence in its long-range market forecasts. This allows executives to judge the true merits of investment in one market versus another and includes three primary factors.

  • Market Access: Market access is an obvious precursor to investment, and the Modi government’s quick steps to liberalize foreign equity restrictions has made it easier for foreign investors in many sectors to invest in India.
  • Market Size/Growth: A business will assess a potential market’s size and growth rate. On these parameters, clearly no market offers greater opportunity for growth in the coming decades than India.
  • Stable Business Model: Potential investors must determine if they can build out a relatively stable business model to tap into the opportunity, with particular features such as product approval, cost features, distribution channel, and tax treatment. India still presents formidable challenges to investors hoping that a business model will enjoy some level of regulatory stability.

Regulatory stability as an economic axiom can be tough to measure. The world’s most prominent set of metrics for judging a country’s business environment is the World Bank’s landmark Ease of Doing Business rankings. However, these studies do not directly capture the benefit of consistent regulation in their inventoried categories which look at issues such as the number of permits to start a business, getting electricity, etc. Countries are understandably expected to try to reform their economies to meet these important criteria. Yet some areas where stability is valued by potential investors are not captured through these parameters.

Over time, various officials inside and outside the government of India have articulated the importance of regulatory transparency and consistency. In March 2013, the Financial Sector Legislative Reforms Commission urged the government to establish mandatory notice and comment periods for regulations, as well as to conduct cost-benefit analyses. A year later the Ministry of Law pressed other ministries to offer draft laws for public consultation. In 2015, the Expert Committee on Prior Permissions and Regulatory Mechanism highlighted the damaging impact of bad regulation and went so far as to call for a new “Standing Committee on Regulatory Affairs” to measure the impact of new regulations.

Apart from thoughtful regulation, businesses appreciate having a reasonable chance to react to new regulations. If one uses a 30-day notice and comment period as a benchmark for a business to prepare a considered response, India’s regulators have a very mixed record. Looking at recent draft regulations, the Telecommunications Regulatory Authority of India, far exceeds a 30-day notice & comment period. The Institute of Chartered Accountants of India is above the 30-day mark, too. The Food Safety and Standards Authority is just below the threshold. Other regulators we reviewed — all in the financial space — were well below, to varying degrees.

Figure 1: Average Time for Notice & Comment on Regulations Issued in India

Data does not include extensions. Compiled by CSIS Wadhwani Chair staff.

Regulatory change is part of doing business in any market. But regulators should have a transparent process that balances the multiple goals of regulation. Consistency in regulation allows potential investors a better opportunity to judge the likely benefit of making a new investment over time, which is an important component of deciding where to invest. “Staying the course” on regulation is far less exciting than initiating major new reforms. However, for many industries, consistent and transparent regulation is fundamental to making large investments.

Mr. Richard M. Rossow is senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Follow him on twitter @RichardRossow.

Richard Rossow

Richard Rossow

Richard M. Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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