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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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Return of Licence Raj

Many of the government’s regulations on drug pricing and real estate transactions through the Real Estate (Regulation and Development) Act are necessary and serve the public interest.

Photo Credit : PTI


The signs are everywhere: the Licence Raj is back but with a new set of clothes. Three respected business leaders – Uday Kotak, Rahul Bajaj and Anand Mahindra – have spoken out recently on how over-regulation across taxation, markets, banks, pharmaceuticals, telecom and other sectors is reversing some of the gains made by economic liberalisation. They complain of the “proliferation of regulations in business” that compel them to follow the letter, not the spirit, of regulations.  

Kotak Mahindra Bank vice-chairman and managing direct Uday Kotak didn’t mince his words: “When one takes a view that let’s follow the spirit, and the letter is not clear, you get a push back (saying) ‘this is the rule: have you followed it or not’. You get a slap back. If you play for spirit, you run into problems. I’ve no ability to question spirit (so) let me follow rules. We are living in this world where we are going in a transition from principles to rules.” 

Kotak – who ironically has been appointed by the government to head the Infrastructure Leasing & Financial Services (IL&FS) board and clean up a fraudulent entity that has created a liquidity crisis in the financial sector – launched a broadside on the government’s tendency to over-regulate: “In the early days of my career, I was very comfortable to hit the ball on the line. I’ve now come to a view (to) make sure you hit the ball inside the line. If it hits the line, then it is the umpire who decides whether it is outside or inside, so make sure that, come what may, work towards following the rules but hit the ball clearly inside the line. If you look at reputational risk, you are first hung in the court of media well before you go out to the real world.”  

In 1985, Kotak barely knew Anand Mahindra who had returned a few years ago from Harvard University to work in the family business. The two men struck up a business partnership that has led to the creation of one of India’s largest private banks. Mahindra says the current environment reminds him of the days of the Licence Raj. He understands Kotak’s sense of angst about the proliferation of regulations: “Your job is not to eliminate risk, but to eliminate unwarranted risk. Risk is a very integral element of the capitalist system.”

Rahul Bajaj is equally trenchant about new rules made by the Security and Exchange Board of India (SEBI) and the corporate affairs ministry following economic defaulters absconding from India. They were allowed to flee not because existing regulations were not strict enough but because they were not strictly enforced by tax authorities. The problem thus lay in not implementing existing rules. It did not lie in making those already stringent rules even stricter. There’s little point in shutting the barn door after the horses have bolted. For absconders, the door was left wide open to allow flight. 

In the 1980s, the Licence Raj gave politicians and bureaucrats vast powers of discretion. Corruption was endemic. After economic liberalisation under Narasimha Rao-Manmohan Singh in 1991-96, discretion gradually gave way to black-and-white regulations that allowed businessmen to abandon their monthly trips to Delhi to meet ministry officials, often with folded hands, to get their work done. 

Many of the government’s regulations on, for instance, drug pricing and real estate transactions through the Real Estate (Regulation and Development) Act are necessary and serve the public interest. New regulatory bodies have professionalised sectors that in the 1980s acted with few checks and balances. For example, the establishment of SEBI in 1991 led to the banishment of badla trade (borrowing at annual interest rates of up to 24 per cent against non-existent shares). Shares were dematerialised and brokers compelled to make quick, reliable payment. Market defaults were rampant in the 1980s. They rarely occur today as brokerages and mutual funds have invested heavily in technology, ensuring greater transparency of trades in real time. Similarly, regulatory authorities in insurance (IRDA) and telecom (TRAI) have brought professionalism to sectors where ad-hocism used to prevail.

The problem with “over-regulation” that Bajaj, Kotak and Mahindra complain about is that it creeps upon you stealthily. Regulators can get enamoured of their own power. The dispute between the Reserve Bank of India (RBI) and the government is a classical example of regulatory overreach. The RBI is autonomous. But with autonomy comes responsibility. Just as free speech is not absolute and is accompanied by reasonable restrictions (public disorder, incitement to violence, defamation), autonomy comes with caveats. 

The RBI is owned by the government and through it by the people. Its high interest rate policy under former governor Rahuram Rajan was questionable. Inflation had moderated sufficiently by 2015-16. The economy needed investment. Banks, hit by newly reclassified NPAs, had frozen lending to corporates. Instead of easing interest rates, Rajan stubbornly stuck to a didactic high interest rate regime to tame inflation which had already been largely tamed. The economy sank into a deflationary spiral, exacerbated subsequently by demonetisation in November 2016 (two months after Rajan left office). Growth continues to limp along with the RBI persisting with higher than necessary interest rates despite inflation remaining muted. 

Taxation is an area where, oddly enough, the Central Board of Direct Taxes (CBDT) has simplified tax returns and used algorithmic technology to reduce cases of scrutiny that can lead to endless litigation. However, the implementation of the Goods and Services Tax (GST) led to what can be termed compliance overreach. Small businesses were forced to hire chartered accountants to handle digital compliance with a plethora of forms. These have been simplified but GST rates remain unnecessarily complicated. Former chief economic advisor (CEA) Arvind Subramanian had argued for a single-rate tax (between 16 and 18 per cent), an idea that was shot done by bureaucrats in the finance ministry who revel in complicating the simple because it gives them greater discretionary power. 

The best kind of regulation, as Kotak implied in his mild criticism of the creeping new Licence Raj, stresses the spirit, not just the letter, of the law.

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