Bad regulation is our biggest public scam

Losses imposed by bad policies can be enormous, yet they catch the attention of TV anchors and the public only when a huge number is put on the losses (as in the 2G spectrum and coal blocks cases). The numbers in these cases later turned out to be greatly exaggerated, but nevertheless helped focus public anger on rampant corruption.

Unfortunately, we have no estimates of the high cost of bad regulation and red tape. These hugely depress economic activity, revenue and welfare spending. Our labour regulations make hiring so daunting that, according to the latest employment data, employers have created hardly any new jobs in the last seven years, so increasingly workers are pushed into self-employment.

Rs 150,000 crore worth of government infrastructure projects are held up for want of various clearances. But we have no estimate of the impact on jobs, poverty or economic growth. Hence we see no public outrage, no activism through TV anchors or courts.

We need independent estimates of the costs of government action and inaction. Nobody can dispute the need for regulations on labour, the environment or land acquisition. Still, we need estimates of which regulations impose the greatest costs, and how their cost can best be mitigated. We need deep reforms, which must be guided by good estimates of costs and benefits. This will help judicial activism too. In many countries, judges orders extensive cost benefit analysis before delivering verdicts. There is no such tradition in India, and the courts often depend on lobbies or activists who have an axe to grind and so produce highly biased estimates. We need independent estimates.

The Prime Minister’s Economic Advisory Council, headed by C. Rangarajan, is probably the best body for the task. The Planning Commission is too political, and the Ministry of Parliamentary Affairs cannot be called independent at all.

In the US, the Competitive Enterprise Institute recently surveyed the extent and cost of federal regulations. The Federal Register, a compendium of regulations, has swollen from 2,620 pages in 1936 to 44,812 pages in 1986 and 78,961 pages today. Anybody thinking the US is a land of free enterprise is woefully out-of-date.

The CEI estimates the cost of compliance with these regulations at a whopping $1.8 trillion a year, nearly 12% of GDP. We need similar estimates of the cost of compliance in India. When the costs are sky-high, corruption will surely replace compliance.

The US has a Congressional Budget Office preparing independent estimates of government finances, and of the costs and benefits of proposed legislation. Being independent, its estimates have credibility and help guide the public debate. It is well staffed and produces dozens of reports every year on all major legislation. We have nothing comparable.

A controversial Immigration Bill is currently being discussed in the US Congress. Some claim that immigrants impose huge costs by taking advantage of welfare benefits, while others highlight the taxes that will be paid by fresh immigrants. The CBO has clarified the debate by estimating that the new Bill will decrease the US population by 10.4 million and reduce the budget deficit by $197 billion over 10 years.

As regards a supposedly reformist new Farm Bill, the CBO estimates this will save only $33 million per year from the baseline cost estimate of $974, highlighting the lack of true reform. Another CBO report on biofuel taxes estimates the cost per gallon of tax credits for different biofuels, the cost to the taxpayer, and the cost per tonne of reduced carbon dioxide emissions. We need something similar in India, but one that also covers the burden of regulation created by older legislation.

The annual Doing Business report of the IFC/World Bank shows that India ranks only 132nd out of 185 countries in ease of doing business, and has not improved its ranking for years. India’s ranking is particularly bad in relation to ease of starting a business (173rd), getting a construction permit (182nd), paying taxes (152nd), trading across borders (127th) and enforcing contracts (184th). These are outrageous rankings. Waste and corruption are rife in such clearances. Yet they provoke no public outrage because we have no clear figures on how they cost jobs and incomes, and worsen poverty.

At a time when the trade deficit has ballooned and the rupee is crashing, it is most disturbing to see India’s low rank in ease of trading across borders. We desperately need reforms in trade facilitation to slash red tape and costs. We will get a public clamour for this only after an independent expert body tells us exactly how badly we are being impoverished by stupid regulations and corrupt officials.

What do you think?