Page 196 - ES 2020-21_Volume-1-2 [28-01-21]

06

Process Reforms: Enabling

decision-making under uncertainty CHAPTER

International comparisons show that the problems of India’s administrative processes
derive less from lack of compliance to processes or regulatory standards, but from over-
regulation. In this chapter, the issue of over-regulation is illustrated through a study of
time and procedures taken for a company to undergo voluntary liquidation in India. Even
when there is no dispute/ litigation and all paperwork is complete, it takes 1570 days to
be stuck off from the records. This is an order of magnitude longer than what it takes in
other countries.

Using the framework of incomplete contracts, the chapter argues that the problem of
over-regulation and opacity in Indian administrative processes flows from the emphasis
on having complete regulations that account for every possible outcome. This is due to the
inadequate appreciation of the difference between ‘Regulation’ and ‘Supervision’, on the
one hand, and the inevitability of incomplete regulations, on the other hand. Real-world
regulation is inevitably incomplete because of the combination of: (i) bounded rationality
due to “unknown unknowns”, (ii) complexity involved in framing “complete” contracts
across all possible contingencies, and (iii) the difficulty for a third party to verify decisions.
This makes some discretion unavoidable in decision making. The evidence shows that
over-regulation, not simpler regulation, leads to opaque decision making.

The problem is that policymakers, by default, tend to favour prescriptive regulation over
supervision. Unlike supervision, regulation can be easily measured. After all, regulations
provide criteria or checklists, making it easier for regulators to follow and reduce their
accountability later on. In contrast, it is difficult to quantify the amount and quality of
supervision.

The optimal solution is to have simple regulations combined with transparent decision-
making process. Having provided the government decision maker with discretion, it is
important then to balance it with three things- improved transparency, stronger systems
of ex-ante accountability (such as bank boards) and ex-post resolution mechanisms. As
an illustration, the chapter shows how the new Government e Marketplace (GeM portal)
has increased the transparency in pricing in government procurement. This has not only
reduced the cost of procurement but has also made it easier for the honest government
official to make decisions.