The Regulation Raj

Our approach seems to be, 'Have problem, do a quick-fix'. We need to learn that ill-conceived fiscal fixes will not work

A friend of mine told me with some anguish that the recent budget might be the worst in 40 years. The budget is one symptom. He was implying that we had not been witness to an environment which was as hostile to businesses, entrepreneurship and growth as we have suddenly acquired in the last few years. Have problem let's do a quick fix: that seems to be the approach of our present rulers. We have a fiscal problem in large measure because we were not disciplined in good times and to be fair, in some measure, because post-Lehman, fiscal laxity was seen as a necessity to prevent a recession.

The solution to the problem, as contemplated now, consists of a series of measures to "squeeze" tax revenue from the productive sectors of the economy using arbitrary methods, increasing enormously the discretionary powers of the income-tax department and setting inordinately aggressive targets for tax-collectors. If private companies are unpopular in Delhi, increase the corporate tax rate by a few percentage points. But for heaven's sake do not start playing games, providing perverse incentives and increasing discretionary diktats. Theorists will tell you that organisations hurt themselves when they make do with second-order, sub-optimal solutions instead of doing a root-cause analysis and solving the real underlying problem. Patchwork solutions typically are put up by leaders who plan to retire in a year, not by leaders who want to create something solid and leave behind a good legacy. In which category would our present rulers like to be remembered?

India's draconian pre-1991 import controls grew step by step as we tried to "plug" one loophole after another. It started with an innocuous memo from a joint secretary to the RBI, asking that "requests" for foreign exchange be "routed" through the commerce ministry. By the time we finished, we had suffocating agencies like the Joint Chief Controller of Imports and Exports (the infamous JCCIE), the Directorate General of Trade and Development (the impossible DGTD, which did its best to stifle trade and development of all sorts), the Director General of Supplies and Disposals (DGS&D) whose diabolical and malign role still remains a mystery to most of us and so on. The draconian measures started as "ad hoc", short-term fixes for the acute foreign exchange crisis of the mid-50s. The pattern was similar: Have crisis? Let's fix it by imposing arbitrary restrictive rules; let's increase the discretionary powers of various government departments; let's put a squeeze on productive businesses. No one bothered to look into the fact that the root causes may have been an overvalued exchange rate and a regulatory regime that was unfriendly to businesses and growth.

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