What India’s deregulation debate misses – Opinion News

By Aasheerwad Dwivedi & Aditya Sinha

“Deregulation” is back in fashion, from Javier Milei’s Argentina to the corridors of Washington. In India too, the term has found its way into the Economic Survey. For many, it evokes images of shuttered offices and pink slips. But that’s a shallow take. True deregulation is more than dismantling the state, it’s about making it work better. Sometimes, that means fewer rules. Other times, it means more capacity, smarter hiring, and process redesign.

At its core, deregulation seeks to strip away unnecessary rules and bureaucratic red tape that bog down government efficiency. The goal isn’t simply a smaller government. It’s a smarter and more efficient one. It is an enabler of economic activity in the country.

Take the Indian Patent Office. Until recently, it took years just to decide whether to grant or reject a patent. It was primarily due to two reasons: Understaffing and complicated/outdated procedures, with the former being the bigger roadblock. Sanyal and Arora (2022), in their Economic Advisory Council to the Prime Minister working paper titled “Why India needs to invest in its IPR ecosystem?”, documented the level of understaffing in Indian patent office and the problems it was creating. Even after increase in manpower over the last few years, India had only about 800 people in patent office. Compare this with 8,125 in US and 13,804 in China. Naturally, it took years to process the applications.

In this case, any improvement in the sector could not happen without strategically investing in hiring more manpower, and information technology (IT) infrastructure and systems. The government has, in recent times, hired about 500 more people, and the plan for hiring another 500 is already in place. This was supplemented with improvement in processes. This is an example of a sector where efficiency doesn’t come from cuts in budgets or manpower, rather it requires increase in both. Similarly, the Food Safety and Standards Authority of India has been in the news for acute staff shortage at all levels. To make matter worse, a large part of the existing working staff was hired on contract or part-time. It must be noted that such a situation arose despite government sanctioning 493 additional posts for the food regulator in 2018. Can we expect it to ensure and enforce food safety standards in the most populous country with a lack of working hands? The only way it can do so is by hiring more people. There are various other sectors where this will hold true.

Drawing from institutional economics, particularly the work of Douglass North, institutions must reduce transaction costs to be effective. This requires not just fewer rules, but the capacity to enforce the essential ones. Herbert Simon’s theory of bounded rationality shows that decision-makers operate under cognitive and resource constraints; without adequate personnel, regulatory systems become dysfunctional, regardless of their formal design.

Michael Lipsky’s “street-level bureaucracy theory” further suggests that the discretion and capacity of frontline workers shape real-world policy outcomes. Understaffed agencies create de facto deregulation, not through legal reform but through non-enforcement. In such cases, the state fails not because it regulates too much, but because it governs too little. Thus, deregulation should be understood through the lens of “state capability theory”, where effectiveness is determined not by the absence of rules, but by the presence of institutional competence.

Kartik Muralidharan, in his book Accelerating India’s Development, gives another interesting example. The Integrated Child Development Services scheme’s anganwadi centres are staffed with just one worker who is responsible for early childhood nutrition, education, home visits, and copious administrative work. A study conducted by Muralidharan and his colleagues in Tamil Nadu found that adding a part-time worker to the anganwadis to focus on early childhood education led to large gains in learning outcomes and reduction in childhood malnutrition and stunting. They estimate that the present discounted lifetime value of these benefits would be 13 to 21 times the cost of hiring extra workers. This is a massive return on investment by any standards. He argues, using many such examples, that India is foregoing these large returns by underinvesting in state capacity.

We see this play out across sectors. The Food Corporation of India needs strategic hiring, logistics and IT experts, and not blind job cuts. Public hospitals are chronically understaffed and under-resourced. Police forces, essential for public safety, face acute personnel shortages. These are just a few examples. As Muralidharan notes, India has a small government, only 16 public employees per 1,000 people, compared to 57 in China, 77 in the US, and 111 in Brazil.

Weak state capacity is a critical constraint to development. Viewing policy through a binary of state versus market misses the point. India has neither a fully functional state nor a robust market. Both need strengthening. The 1990s liberalisation delivered high growth, but sustaining it now requires tougher reforms, in land, labour, and urban policy that demand effective state capacity.

It’s time we reframe deregulation not as cost-cutting or job rationalisation, but as a strategy to build a more capable and efficient state.

The writers are respectively assistant professor (economics), Faculty of Management Studies, University of Delhi, and a public policy professional.

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