The linkage between regulations and economic growth has been an area of debate. Throughout economic history, and especially that of political economies, the impact of regulations and regulatory bodies, which ensures the implementation of myriad regulations on economic growth has been both good and bad. There is no clear correlation, either positive or negative, between the number, volume or complexity of regulation and economic growth. A lightly regulated environment can lead the economy to a crisis like subprime and the collapse of financial systems. On the other hand, there are numerous examples across the globe where a highly regulated environment has led to widespread economic hardship, high poverty levels and underdeveloped private enterprises. Therefore, the right balance is critical.
India, over the last two decades, has taken significant steps in finding the right balance between the state’s responsibility towards the welfare of citizens, based on socialistic principles and economic growth, fuelled by the private enterprise based on capitalistic principles. The biggest role of regulations is to decrease uncertainty and ensure fair market practices. The first and foremost step is to create a continuous environment of financial stability. This responsibility falls on the shoulders of the Reserve Bank of India (RBI), which regulates the financial and payments system, the fulcrum on which any economy is built. RBI played a significant role in protecting the Indian economy during the previous two periods of severe global crisis i.e., the subprime crisis in 2009 and the COVID-19 pandemic in 2020. The Indian regulatory system ensured that Indian financial institutions do not build any exposure to the toxic mortgage-backed securities that precipitated the 2009 crisis. On both occasions, the RBI proactively shifted to monetary easing, aiding the fiscal stimulus packages given by the Central government. Especially, handling the 2020 crisis and its after-effect of high inflation has been remarkable.
India has been one of the few countries which has, more or less, controlled inflation without severely impacting economic growth. Its current inflation rate of 6.5 percent is not very far from its last ten years’ average of about 6 percent and it is expected to trend down to RBI’s near-term target of 4 percent. This has been achieved along with keeping India’s economic growth above 6 percent and maintaining its position as one of the fastest-growing economies in the world.
One of the major success stories of India has been its well-advanced digital payment system. RBI encouraged the setting up of the National Payment Corporation of India (NPCI). NPCI has been at the centre of developing UPI payment systems, which is one of its kind inter-operable, real-time payment system across 381 banks. In 2022, UPI supported Rs 126 billion in transaction value, enabling more than 2,000 transactions every second. India is now ready to export its UPI network to other countries. This is a fine example of what can be achieved when regulators, public bodies and private enterprises collaborate with the right intent.
Another extremely critical regulator for India’s financial system is the Securities and Exchange Board of India (SEBI), which has modernized at a rapid pace in the last 10-12 years. The regulations for strengthening AIFs (Alternative Investment Funds) have arguably been the most critical steps taken to channel domestic savings and foreign investments to fund the growth of domestic enterprises. The assets of AIFs in India surpass Rs 6.4 trillion, making it a grand success within a decade of its operationalization. SEBI has also pivoted its policies to increase access to public capital markets for startups and new-age companies. This decade can potentially see an IPO boom in India fuelled by the structural rise of entrepreneurship, new unicorns, and a supportive regulatory environment.
There are several other powerful regulatory bodies, with IRDA (Insurance Regulatory and Development Authority), TRAI (Telecom Regulatory Authority of India), CCI (Competition Commission of India) and IBBI (Insolvency and Bankruptcy Board of India) being the major ones. India has chosen the goal of achieving inclusive growth which can’t be entirely left to the free market, especially given the fact that India is a large diverse country with high-income disparity. The policy approaches for inclusive growth are spearheaded by Niti Aayog, which comes out with policy documents and discussions targeting specific challenges. Some of its forward-looking policy initiatives such as building a methanol economy, zero pollution mobility, reducing carbon emission, and focused development of relatively poorer regions such as the Northeast and renewable energy are likely to be transformative for India. One of its grand successes has been the development of institutionalized and comprehensive data collection across the length and breadth of the country, which can be analysed for creating the right policies across numerous fields. One such example is the policy tracker of NFHS, which tracks health, nutrition and population policy indicators data at the parliamentary constituency level.
India has been taking confident strides in building an enabling regulatory and policy environment. The previous 10-15 years have been extremely encouraging and India is likely to continue the path of progressive regulations leading to its goal of becoming the third-largest economy by the end of this decade.
The author is Chief Executive Officer, TIW Capital. Views expressed are personal.
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