India is unique among emerging economies, as its growth has been driven primarily by services rather than manufacturing. If you take a cross-section of the Indian economy from 1980 until now, the share of manufacturing in India’s gross value added has crept up marginally, from 16% to 17.5%. The share of services, however, has gone up dramatically, from 33% to 55% of India’s gross value added.
What accounts for this unique feature of the Indian economy? The answer is that the brunt of economic regulation has fallen on manufacturing, as the factory — rather than the call centre or software firm — is seen as the archetype of industry. Services, by contrast, have been less exposed to regulatory attention.
That, however, is changing, as the growth of services brings them into the limelight. To recount some experiences in this regard: a few years back, an inspector visited a modern office of a service sector company run by one of us and demanded to see the snake-pit (meant to trap snakes). Arcane regulations mandate that all establishments have one. Recognising that hardly any observe this stipulation in practice, he indicated that the demand could be made to go away for a consideration.
On another occasion, when the second floor of an authorised office was being fitted out, a consultant assured us there would be no problem if we installed electric connections. When we did so, however, the same consultant arrived with the police, wanting to arrest the owner for violating regulations. It was evident this was an extortion ring run in cahoots with local authorities.
Multiple similar incidents point to the hazards of doing business in India. When deregulation became the theme for the 2025 Budget, and Finance Minister Nirmala Sitharaman announced setting up a high-level committee for regulatory reform, that was indeed the right priority.
To curb regulatory cholesterol, the regime of inspections, checks, and no-objection certificates (NOCs) should be replaced by self-certification-based approvals and renewals, at least in low-risk activities. The validity of licences and approvals can be extended by the States in line with best-in-class practices in India and Southeast Asia. Certified third parties can be brought in to provide a range of approvals, such as building plans, labour, fire safety, and lift — speeding up the process.
Need for reforms
For ease of doing business that helps entrepreneurs on the ground, factor markets such as land and labour need to be reformed. Land should be made available for industrial use by lifting restrictions and easing regulations around land acquisition, change of land use, zoning, and building byelaws.
Further, full transparency should be legally mandated on documentation, NOCs, and checklists needed for all approvals and inspections. Deviations from the official procedure made available online should not be permitted. A joint inspection with prior notice should be mandated with a common checklist and harmonised documentation, taking place not more than once a year.
Technology should also be introduced for automated approvals and NOCs. For example, buildings not in flight paths or below a certain height can get an automatic NOC from the Airports Authority of India based on geotagged location. A similar approach for NOCs related to mining, forests, railways, and defence can be envisaged.
There is a need to go through labour laws and the Factories Act with a fine-tooth comb, eliminating archaic provisions and decriminalising other offences. A time-bound appeals mechanism should be instituted for harassment cases by departments, with consequences for overreach. To change the culture of the bureaucracy from one of blocking to enabling, facilitating investments and economic growth should be made part of the performance evaluation criteria of all departments.
India needs manufacturing and services engines to fire. And gig work is set to be a permanent part of this landscape. Indian labour laws need to acquire sufficient flexibility to accommodate this.
There are moves afoot in some States to equate gig workers with full-time employees and impose overly inflexible labour laws currently applicable to the latter on the former. If anything, the movement should be in the opposite direction. If we are to utilise India’s demographic dividend, we cannot wish away gig work, which offers significant opportunities for India’s burgeoning workforce.
Regulation that recognises the rights and dignity of workers — whether gig or full-time — is essential. Such regulation should, however, be optimal, legitimising enterprises running on their labour rather than placing insuperable obstacles in their path. The prevailing attitude of regulators towards business remains one of distrust. This bureaucratic attitude needs to be transformed into one of trust.
Essentially, India is once again at a 1991-like moment. It carried out successful macro-economic reforms in 1991, and stable monetary and fiscal policies continue to serve it well to this day. However, achieving the goal of a developed India by 2047 requires stepping up the rate of economic growth to at least 8% annually and sustaining it at that level, even as it rows against strong external headwinds created by global trade wars.
This requires deep reform at the micro-economic level. While external factors may be beyond India’s control, energising the domestic economy by removing regulatory cholesterol is a powerful internal lever it can pull.
Ashish Dhawan is the founder-CEO of The Convergence Foundation; Sanjeev Bikhchandani is an entrepreneur
Published – May 08, 2025 01:46 am IST