The Indian Economy Blog

February 20, 2006

Deregulation Musings

Filed under: Basic Questions,Regulatory reforms — Naveen @ 9:29 am

Assuming that there is a consensus on the necessity of deregulation, how does one proceed to do so in the context of today’s Union government and state governments in India? We have regulations across the union, state, district/municipal levels. But the Centre’s powers to tax income, production and foreign trade have far greater economic impact than others. On the other hand the state’s ability to influence the local economic environment is undeniable, given their power on microeconomic regulations. The question is where do we want to go from here?

Scenario1: Power vested in the Union government to deregulate and (let us say) they do so.

Scenario 2: The power is transferred to the state governments who then have the authority to deregulate.

There are trade-offs concerning decentralisation in either case. Moreover, there have been mixed successes on both counts on the Indian front. Some state governments have taken the initiative and have a more economy-friendly environment (Maharashtra, Karnataka, Tamil Nadu and a few others). And in fact, the division of finances to these states are held up by other poorly functioning ones. The laggard ones do not even have the basic rule of law for a functioning economy in place. And the Union government’s performance towards these states has been more proactive on this count. What is the appropriate framework for the future of economic deregulation?

1 Comment »

  1. There can’t be a simple answer to this if we’ve learned anything from the soviets, even if the Indian economy isn’t as industrialized.

    Local state owned enterprises should be de-regulated at the state’s local stock market if possible, otherwise be national.

    There is a great PBS documentary that almost leads into this conversation, and it’s called Commanding Heights. It’s about economic systems in general over this century, it has an manmohan singh interview before he got a big raise.. PBS also has good stuff on India’s permit raj.

    Comment by Devang — February 20, 2006 @ 9:34 pm

  2. There is a huge list of state owned companies For what it’s worth, banks might be the last to privatizes, but maybe not, GE wants in to the Indian market. That is a terrible spam filter… what will it take to get rid of it? I’d rather watch comment spam than deal with such a spam filter. Get rid of it!

    The PBS documentary goes into how the soviets tried to give stock to the general public during deregulation, something similar must be tried in India. The government can’t be trusted with that much money. The returns can be progressive, with the poor getting more stock. All stock distributions would only be to tax-payers offcourse. If such a program was instituted and advertised, it might even garner support from the national masses…

    Comment by Devang — February 20, 2006 @ 9:50 pm

  3. My concern is more about the liberalization of regulatory frameworks than state-owned enterprises. A lot of action on this count actually happens at the state level. Check an elaborate discussion of labour laws at

    Is the politics in any state amenable to labor deregulation or can the Union government take economic leadership on this count. The future is difficult to predict, but I hope the discussion will elicit clarification on where the pressure points lie.

    Comment by Naveen — February 21, 2006 @ 4:51 am

  4. I agree with Naveen, even though the Centre has the ability to set the policy agenda and tax regimes, the implementation is squarely with the States. However with the basic output of governance being seen today as allocation of resources and patronage, it would take a while for this thinking to go to utilisation/ making the most of opportunities in a sustainable manner. Which is where the regulation and its implementation are important.

    You cannot have a situation, for too long, where the Administration has to be armed with a verdict from the Judiciary, to implement the policies it has formulated and promulgated ! This change can only happen from the State/ Municipality level, as they are the closest to the people and their situations

    Crises are one way of making this happen, and at the Centre the Fx balance did set into motion forces of change which have had far reaching impact. However I cannot think of any internal crisis which has happened at the state level, which has triggered a long term change cycle (Punjab- Khalistan/ Operation BlueStar, Gujarat Riots, Bombay Blasts, UP – Babri Masjid, Kashmir/ North East – Cross Border terrorism, Orissa – starvation deaths : all of these are manmade events but they have not set a reform cycle in place at the state level)So what is it that will make all people realise that we need to work towards creating a ‘civil society’ !

    Comment by venkat — February 21, 2006 @ 6:36 pm

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