Economic Survey calls for simplification of regulations and process reforms

Attempt to reduce the problems often results in having ever more complex regulations leading to even more non-transparent discretions

Solution is to Simplify Regulations and invest in greater Supervision Even if it implies greater discretion

Discretion needs to be balanced with transparency, Systems of  Ex-Ante Accountability and Ex-Post Resolution Mechanisms

The Economic Survey has called for simplification of regulatory processes in the light of uncertainties in the real world scenarios. The Economic Survey 2020-21 was presented in the Parliament today by the Union Minister for Finance and Corporate Affairs Smt. Nirmala Sitharaman.

The Survey states that administrative processes in India are often loaded with significant amount of procedural delays and other regulatory complexities in decision making process making them inefficient and cumbersome for all stake holders. It has highlighted this problem and recommended ways and means to resolve this administrative challenge. 

The Economic Survey observes that in order to solve the problems, authorities often make attempts to reduce discretion by having ever more complex regulations, which is counterproductive and results in even more non-transparent discretion. 

According to the Economic Survey, international comparisons show that the problems of India’s administrative processes derive less from lack of compliance to process or regulatory standards, but from over-regulation.

The Survey observes that it is not possible to have regulations that can account for all the uncertainties in the world and all possible outcomes. The evidence shows that India over-regulates the economy. This results in regulations being ineffective even with relatively good compliance with process.

Using the framework of “incomplete contracts”, the Economic survey argues that the problem of overregulation and opacity in Indian administrative processes flows from the emphasis on having complete regulations that account for every possible outcome. This is due to the inadequate appreciation of the difference between ‘Regulation’ and ‘Supervision’, on the one hand, and the inevitability of incomplete regulations, on the other hand. This is illustrated by a study of the time and procedures needed to voluntarily close a company in India. Even when there is no dispute/ litigation and all paperwork is complete, it takes 1570 days to be stuck off from the records.

Citing academic theories, Economic survey says that real-world regulation would inevitably be incomplete because of the combination of:

1. bounded rationality due to “unknown unknowns”,
2. complexity involved in anticipating and framing “complete” contracts that must specify all obligations in full across all possible contingencies,
3. the difficulty that these two aspects pose for a third party to verify decisions unambiguously.

While real-world regulation is inherently incomplete, increasing the complexity of regulatory provisions reduces verifiability and fosters opaque discretion in the hands of the supervisor. Thus, over-regulation, not simpler regulation, leads to excessive discretion ex post.

The solution, the Economic Survey says, is to avoid substituting supervision with more complex regulation. The optimal solution is to have simple regulations combined with transparent decision-making process. Having provided the government decision maker with discretion, it is important then to balance it with three things:

1. improved transparency,
2. stronger systems of ex-ante accountability (such as bank boards) and
3. ex-post resolution mechanisms.

The Economic Survey notes that where ever such regulatory processes have been simplified, Ease of Doing Business has improved significantly. For example, the new Government e-Marketplace (GeM portal) has increased the transparency in pricing in government procurement. This has not only reduced the cost of procurement but has also made it easier for the honest government official to make decisions.

Regulatory simplification paired with enhanced supervision reduces opaque discretion and improves administrative efficiency through transparency and accountability mechanisms. Call for simplification of regulatory processes to address administrative inefficiency and opaque discretion arising from overregulation. Using the incomplete contracts framework, the Survey explains that bounded rationality and verification limits make complete regulation impossible; increasing regulatory complexity reduces verifiability and fosters opaque discretion. The prescribed solution is simple regulations combined with strengthened supervision, improved transparency, robust ex ante accountability, and ex post resolution mechanisms to balance retained discretion and improve administrative outcomes.