Sunday, February 19, 2006

Deregulation musings

Assuming that there is a consensus on the necessity of deregulation, how does one proceed to do so in the context of today’s Union government and state governments in India? We have regulations across the union, state, district/municipal levels. But the Centre’s powers to tax income, production and foreign trade have far greater economic impact than others. On the other hand the state’s ability to influence the local economic environment is undeniable, given their power on microeconomic regulations. The question is where do we want to go from here?

Scenario1: Power vested in the Union government to deregulate and (let us say) they do so.

Scenario 2: The power is transferred to the state governments who then have the authority to deregulate.

There are trade-offs concerning decentralisation in either case. Moreover, there have been mixed successes on both counts on the Indian front. Some state governments have taken the initiative and have a more economy-friendly environment (Maharashtra, Karnataka, Tamil Nadu and a few others). And in fact, the division of finances to these states are held up by other poorly functioning ones. The laggard ones do not even have the basic rule of law for a functioning economy in place. And the Union government’s performance towards these states has been more proactive on this count. What is the appropriate framework for the future of economic deregulation?

Cross-posted on the Indian Economy blog.

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