Deregulation can give the boost growth needs
The biggest gift the government could give the economy is to unleash the entrepreneurial dynamism and skills of the country’s biggest resource — its people
India’s annual budget exercise serves dual roles. First, it provides an institutional forum for the central government to state its policy ambitions for the next fiscal year, the financial allocations to back them up and its revenue-generating plans to fund them. Second, the budget provides an early signal of government intentions that the private sector can use to make its own plans for the year ahead.
In terms of this year’s budget, the highlights were the additional rebates that made salaried income till ₹12 lakh free from taxation, and the reduction of some import duties. The effects of these two initiatives are, however, marginal. Even though the tax rebate package will exempt 90% of salaried Indians from paying any income tax, the bill for it is just 0.3% of Gross Domestic Product (GDP). This reflects the fact that even before the new rebate measure, almost 79 million salaried workers in India paid no taxes, i.e., their incomes were below the lowest taxable income level of ₹7 lakh. Similarly, the tariff reductions will only have a token effect since the average tariff rate will decline by just one percentage point to 10.6% as a result.
The reality of the Indian economic situation is that the country is stuck in a middling growth trajectory. The growth boost of 2023 was mostly a delayed return of economic activity after the Covid-induced output losses. Indeed, the slower growth rate of 6.4% for 2025, which has attracted much attention is almost identical to the average economic growth rate between 2015 and 2024 even after excluding the Covid-hit years of 2021 and 2022 (see the Economic Survey 2024-25).
The only big idea that successive governments in India have had for pushing economic growth is to boost infrastructure expenditure. The government’s growth vision for the past 25 years in India can be summarised as “build infrastructure and the rest will follow”. This strategy, unfortunately, has been a bust for 15 years now. However, the more it fails the more governments double down on this strategy. It is as if the government has only one arrow in its growth quiver: Infrastructure spending. All other initiatives are directed at welfare spending programmes. This reflects either a lack of ambition or lazy thinking or, possibly, both.
Infrastructure is undoubtedly useful for the private sector. However, it only one of many ingredients in the profitability calculations that underpin private investment. Private profitability depends equally or more on the regulatory structure underpinning labour markets, land markets, credit markets, output markets and taxation. In addition, the certainty of the policy environment in which it operates is yet another key factor for business investment. Yet, since the 1991 reforms, successive governments have shied away from deregulation.
Regulations have this nasty tendency to be very difficult to remove. Hence, new regulatory interventions tend to be additions to existing regulations rather than replacements for outdated ones. Consequently, over time the regulatory edifice becomes a gigantic maze which only empowers those that enforce the laws or the special interest groups that figure out how to manoeuvre around them. The unease of doing business in such a regulatory maze is enough to dissuade many would-be entrepreneurs. It is no surprise that the most dynamism in the Indian economy over the past two decades has been in the IT sector where regulatory forbearance has been the default stance of the government.
If one is looking for inspiration for policy reform, one can find it in current developments in Argentina. The Javier Milei government came to power there a year ago in the backdrop of 250% inflation along with an economic recession. This was, of course, just the latest episode in a 75-year history of policymaking that had turned Argentina from the third-richest country in the world into a struggling middle-income country teetering from one crisis to the next.
Milei’s first major decision was to try and get the government out of people’s lives. He decided that accomplishing this could not be done by using prunes and shears on the existing regulatory structure. Instead, his government took a chainsaw to the existing framework and has been systematically shrinking the regulatory and fiscal role of the government in society.
The results have shown within a year. Argentina is growing again; monthly inflation is down to 2%; and the government budget is in a surplus. This was accomplished by across-the-board deregulation and cuts in fiscal spending. Interestingly, the fiscal cuts were concentrated on capital expenditures while leaving social spending relatively unchanged.
The Argentinian reforms are likely inappropriate for the United States (US) where, ironically, they are currently serving as the template for the new Trump administration as it goes about neutering the state. The US is not a failed State. Its institutions work well, it has been outperforming the rest of the developed world consistently for the past two decades, and it has been, perhaps, the only source of safe financial assets in the world. This combination cannot be produced by a dysfunctional State which needs to be dismantled.
India is different. It is unable to achieve a sustained growth breakthrough despite currently enjoying a demographic bonanza, a huge market size and an enviable scale of educated people. It is a country where the State exists everywhere but is unable to do almost anything competently. The dysfunction is everywhere: Roads, hospitals, schools, law enforcement, regulations and more. It is facile to expect a state which struggles to enforce its own traffic laws to have the sagacity and competence to design industrial policy wherein it chooses the right sectors to protect and the key actors to incentivise to maximise the country’s growth potential.
The biggest gift that the government could give Indians is to unleash the entrepreneurial dynamism and skills of the country’s biggest resource — its people. The way to do that is to stop trying to regulate what they should do and how they should do it. Rather, after 75 years of running the show, it is possibly time for the State to get out of its way.
Amartya Lahiri is Royal Bank professor of economics, University of British Columbia. The views expressed are personal