To mitigate the crisis, rethink role of regulators
Before any intervention, they must demonstrate its economy-wide impact on jobs and investments
The economic impact of the coronavirus disease (Covid-19) may outlast its health effects. The global economy was stabilising before the spread of Covid-19. But now, there is a consensus that we may be headed for not just a slowdown, but perhaps even a recession.
The Organisation for Economic Cooperation and Development estimates that a broad contagion will lead to a 1.5% slowdown in the global growth. The World Trade Organization also expects a “substantial” impact on the global economy. The economic impact on India will be more profound because most jobs are informal, State capacity for disaster response is low, and health care is far from universal.
Conventional wisdom says that exceptional times require exceptional measures. Western countries are, therefore, deploying a combination of social spending and private sector bailouts. The United States (US) put together a near trillion-dollar fiscal stimulus plan (around 5% of the US’s GDP) that includes payroll tax cuts, relief for small businesses, sectoral bailouts and direct payments to Americans.
The equivalent for India, as a share of GDP, would be over ~9.5 lakh crore. This is not too short of the annual GST collection. The rupee is not a global currency like the dollar, limiting India’s ability to print money like the US. India’s current resources constrain its ability to mimic or sustain such spending. Consider the fact that the muscular Bharatiya Janata Party government struggles to increase real expenditure on military equipment, even in normal times.
India can take an alternative path to building economic resilience — by repurposing its regulators to be more market-friendly. The country liberalised industries such as telecom and broadcasting in the 1990s and handed over sectoral governance to regulatory bodies. Such bodies are meant to guide rather than prescribe. However, since India liberalised under the duress of the balance of payments crisis, regulatory design helped maintain heavy-handed State control. Consequently, businesses are often locked in adversarial court battles with the State. Regulators watch over idly, as disputes erode value.
The most high-profile of such disputes, in recent years, bears testimony to the failure of regulatory bodies in smoothening the interaction between markets and the State. In October 2019, the Supreme Court demanded that telecom companies pay statutory dues worth ₹1.47 lakh crore to the central government. That amount is 25 times more than the funds allocated for national broadband, under the BharatNet programme. Naturally, these dues didn’t pile up overnight. They stem from a 15-year-old dispute over whether a share of revenues from dividends, interest income and asset sales should accrue to government in exchange for giving telcos a licence to operate. In hindsight, a well-regulated industry would not be subject to such a large fiscal shock.
Another way to offset economic disruption at a time of global crisis, is for the State to impose a moratorium on fresh regulations that don’t address large market failures, such as in the case of telecom. According to global health experts, the development of an approved Covid-19 vaccine will take, at the minimum, 18 months. As a result, regulated markets will remain stressed in the medium-term. The message for regulators is loud and clear — they must put the economic dimension of public interest at a much higher pedestal than they do, during this period.
Rule changes involve stakeholder consultations, business re-engineering, and on-ground implementation. For instance, broadcasting regulations introduced earlier this year require changes in the pricing, bundling and carriage of TV channels. Are they mission critical for the economy? Probably not. In fact, the precursor to these regulations caused wide-scale cord cutting by around 12 to 15 million subscribers in 2019. The Maharashtra Cable Operators Federation and individual distributors have already asked the Telecom Regulatory Authority of India to defer the new exercise, because household visits, to implement these changes, are accompanied by significant health risks.
Focusing on regulatory relief for those at the top of the economic pyramid may seem counter-intuitive, but the same logic applies to the much-welcomed moratorium on statutory compliance announced by the finance ministry on Tuesday. Moreover, regulated industries generate hundreds of thousands of jobs and attract large private investments. They help organise and generate value in supply chains. Even through a downturn period, telcos created around 28,000 direct jobs and around 48,000 indirect jobs in 2018-19. Indirect jobs are largely contractual and such workers are laid off when supply chains collapse.
If regulators were to adopt a talisman for managing the economic fallout of the global pandemic it should be this — clearly demonstrate the economy-wide impact of new interventions on jobs and investments. In fact, “regulatory impact assessments” that measure such effects ex ante are used widely by many countries. India should immediately mandate such techniques through legislation and thereby preserve economic value.