Challenges in India's Regulatory Framework
Over the past decade, regulatory challenges in India have become increasingly prominent, leading to proposals in the 2025 Budget to address these issues.
Financial Regulation
- The Finance Minister announced a mechanism under the Financial Stability and Development Council (FSDC) to evaluate the impact of existing financial regulations and develop a responsive framework for the financial sector's growth.
- Regulation involves using state power to influence behavior, ideally addressing market failures rather than veering into central planning.
- In India, the most powerful regulators are in finance, with significant influences drawn from models like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi).
- There is a growing consensus that financial regulation in India is leaning towards central planning, undermining the rule of law.
Challenges with Implementation
- The FSDC is tasked with evaluating financial sector regulations, but its limited capacity and previous lack of substantive action raise questions about its effectiveness.
- Financial regulators produce extensive regulations, posing challenges in comprehension and implementation.
- The FSDC's small secretariat is unlikely to challenge the entrenched positions of established regulators.
Proposed Improvements
- The Ministry of Finance (MoF) should leverage the FSDC to improve regulatory processes using regulatory theory.
- An example is Sebi's move to regulate how it creates regulations, a step advocated for since 2013, albeit with limitations.
Regulation Beyond Finance
- The government plans to update outdated regulations with a modern framework, proposing a High Level Committee for Regulatory Reforms (HLCRR).
- The HLCRR is expected to review non-financial sector regulations within a year, but its scope and ability to address diverse regulations remain unclear.
- Like the FSDC, the HLCRR faces challenges in understanding and influencing broad regulatory domains given the extensive existing regulations.
Strategic Approach
- Instead of focusing on specifics, the HLCRR should draw from Indian regulatory theory to redesign frameworks.
- Focusing on improving one or two non-financial regulatory bodies could be more feasible.
