Why India needs fluid economic laws in areas like digital, informal sector, MSMEs

The logistical and legal framework needed to regulate the economic resources in any country must be in place to ensure their efficient and fair utilisation.

By Mohanish Verma

The rapidly changing new global economic order has thrown us into a phase of shock and uncertainty, without any forewarning and reaction time. While the challenges of technology were already posing issues, the breakdown of domestic and global economies due to the pandemic, calls for quickly creating mechanisms and structures which facilitate rebuilding and rejuvenating the economies. Every economy has to adapt to the situation and evolve strategies to create synergy between its economic laws and development requirements.

Every act of law has a logic and history, with clear objectives and specific provisions. With changing situations, all laws, including economic laws, need to evolve and keep pace addressing the dynamic environment. In recent times with a change in characteristics of economies, it has become increasingly difficult to update the laws to match the changes. Whether it is the case of corporate tax laws, banking Laws, GST or VAT laws, the challenge has got more complicated. Large emerging economies like India, China, Brazil or developed economies like the US, the UK and Australia are all being driven to reform.

There has to be a greater effort towards response on a more real-time basis.  China and India are perhaps more alert and sensitised of the situation. While in China, the logistical support to react on a real-time basis may be more advanced, in India also the government is fully apprised of the challenges of outdated economic laws. India has been able to jump significantly in the ease of doing business rankings (from above 150 to 63 now) in the past few years.
Economies in various stages of development always need to evolve, particularly those in emerging markets.

In the past two decades over 6,000 studies (in the context of many economies including India) have been done to understand how economic regulations and business rules have had an impact on growth, productivity, employment and trade. These findings and correlations include the study of the Debt Recovery Tribunals in India and its positive impact (Visaria, 2012), reduction in complexity of the tax system by 10% has the effect of 1% reduction in tax (Lawless, 2013), economies with good business environments grow faster (Djankov, etc, 2006) etc. These studies indicate that economic laws which impact the business regulatory environment have played a critical and positive role in development and growth.

The logistical and legal framework needed to regulate the economic resources in any country must be in place to ensure their efficient and fair utilisation. Over time, formal economic laws have been framed in different parts of the world, depending on the prevailing challenges, environment and objectives. The digital economy is now threatening to challenge income, and variables like market valuation and market share are becoming more relevant.

Even developed countries like USA, UK, Italy and Australia are evolving to meet the dynamic global economic environment. The economic barriers and sharing of taxation, as well as tariff issues, are top political and economic issues. The logistical transformation, political will and administrative acumen has a critical role to play.

Updating the economic laws on a real-time basis is almost an impossible task. Yet some critical aspects to be addressed include areas such as (i) variety of industries have increased phenomenally in the past 20 years. (ii) Indian economic activities have a greater impact and correlation with global markets and economies in recent times. (iii)Old and obsolete economic laws need to be weeded out. (iv) Logistical infrastructure for implementation of laws in a fair manner needs to be in place (v) Framing of laws, and regular amendments have to be ensured after honest and dynamic feedback from knowledgeable and well-meaning institutions and individuals. (vi) A synergy has to be maintained with international institutions and major economic powers to ensure fairness and dynamism.
The canvass is large and issues are being added and changed on a real-time basis.

The story of economic development in India is unique, in terms of its size, population, diversity, natural resources, human capital and the huge market for the global world. Several Indian economic laws relating to taxation, banking laws, foreign exchange regulation, gold control, narcotics, consumer protection, customs, GST are clearly and directly related to economic regulation and raising of resources.

In countries with less variety of economic activities, economic laws can be fewer and simpler. The challenge to handle large and complex nature of economic activities, in India, remains a challenge. How strict should banking or corporate laws be, to also keep businesses motivated? Yet, frauds have to be checked.

Changes in Companies Act (2013-2019), Income Tax Act (1961-2020), Introduction of GST (since 2016), The FEMA (1999-2019) or Money Laundering Act (2002 onwards), The Benami Transactions Act (1988-2018), Banking Laws (1949-2020) and Debt Recovery Laws(2016) are significant strides taken by the state to bring about reforms for boosting the economic environment. Other areas where economic laws need to focus include increasing digital footprints, social media and informal sector and MSME’s, due to their heterogeneity.

There has been a significant appreciation of these reforms relating to economic laws. However, to consider a more objective analysis of the rapid changes, perhaps a more detailed and specific analysis and study may be the need of the hour. The issues of addressing reforms and evolution based on changing business and economic structures, as well as ground level and technology-driven changes, must be an ongoing process to ensure that economic laws in any country, including India, play a strong positive role in the long run.

IRS Officer and has also been a visiting researcher, Georgetown University, Washington DC. Views are personal.