Jagran Opinion: As MSME Tackles Compliance Burden, India Moves Toward A Simpler Regulatory State

India’s next wave of economic expansion will depend less on adding new programmes and more on removing the silent frictions that tax every productive activity. A striking illustration comes from Decoding Compliance for Manufacturing MSMEs in India (TeamLease RegTech, 2025), which shows that a single manufacturing MSME operating in one state navigates 998 unique compliance obligations and 1,456 total annual compliances. It must secure over 70 approvals, maintain 48 statutory registers, and prepare for visits from 59 different inspectors. The compliance maze grows denser with time: FY 2024–25 saw 9,331 regulatory updates, or 42 rule changes every day, most of which apply to the 6.45 crore MSMEs that form the backbone of India’s job creation and nearly 30 per cent of its GDP. The economic cost is equally stark, a typical small manufacturing unit spends Rs 13–17 lakh annually simply to remain compliant. These numbers are not an inconvenience; they are a macroeconomic constraint.

At a time when India seeks to sustain 8 per cent annual growth, double its R&D intensity from 0.7 per cent to 1.5 per cent of GDP, and expand global manufacturing share, regulatory friction has become the binding constraint on productivity. The 2024–25 Economic Survey acknowledges that this burden slows formalisation, depresses labour productivity, and impedes innovation.

A Rare Institutional Shift

For decades, Indian regulators have displayed a structural tendency to accumulate rules. Every outlier becomes a checklist, every incident a precedent, and every new technology a fresh licence. Against this backdrop, the Reserve Bank of India did something extraordinary on 28 November 2025: it voluntarily shrank its regulatory footprint. By consolidating over 9,000 circulars, notifications, and guidelines into just 238 Master Directions, the RBI achieved a 97 per cent reduction in its regulatory clutter. No regulator anywhere routinely prunes itself; the natural bureaucratic instinct is expansion. That the country’s most systemically important regulator led the pruning effort signals a deeper shift: India is now ready to build a regulatory state that governs with simplicity rather than density.

As per media reports, this shift is reinforced by NITI Aayog’s High-Level Committee on Deregulation, chaired by Rajiv Gauba, which has proposed the Jan Vishwas Siddhant—a trust-based, transparency-driven approach to regulation. It aims to scrap routine licences and no-objection certificates, move inspections to accredited third parties, and ensure that every regulation undergoes a compliance-cost and enforcement-burden assessment. The central insight is that regulation must protect society, not produce administrative friction.

Why Deregulation Matters for Growth

A country cannot innovate when it spends managerial bandwidth on procedural compliance rather than problem-solving. Nor can it scale globally when a significant share of capital and labour is tied up in meeting routine filings, responding to inspectors, or tracking daily rule changes. Deregulation boosts economic performance in at least four ways.

First, it raises firm productivity by freeing managerial time and reducing transaction costs. Second, it increases investment certainty by providing stable and predictable rules—crucial for sectors such as pharmaceuticals, semiconductors, and renewable energy where gestation periods are long. Third, it encourages formalisation by reducing the relative cost of legality. Finally, it improves innovation intensity by reducing the regulatory drag on experimentation, scale-up, and risk-taking.

If India were to reduce even 10 per cent of the compliance burden on its MSMEs, it would release thousands of crores in productive resources, more than many subsidy-based interventions.

The Trust–Risk–Impact Framework

The Gauba Committee’s recommendations can be coherently understood through a Trust–Risk–Impact (TRI) framework—an operating system for a new regulatory state.

Trust as the Default

The first principle is a presumption of economic freedom. Any activity not explicitly prohibited is automatically permitted. Licences and approvals apply only in genuinely high-risk domains—national security, serious environmental harm, public health, and large non-compensable externalities. Routine economic activity requires notification, not permission. Where licences are required, they should be perpetual unless the inherent risk warrants renewal. This reverses the existing logic, where entrepreneurs must prove innocence before operating.

Risk-Based Enforcement

This pillar ends inspection raj. Inspections shift from government officials to accredited third-party assessors, breaking incentive distortions and conflicts of interest. Enforcement visits are determined by algorithmic risk scoring, not human discretion, and follow a “zero-surprise” regime with clearly defined digital checklists. Predictability replaces personal authority.

Predictable Rules

A modern regulatory state must prioritise stability. All regulatory updates should occur on predetermined dates—one or two per year—barring exceptional circumstances. Major rule changes undergo structured public consultation, cost–benefit analysis, and reasonable lead time. Every regulation carries a sunset clause, forcing periodic review rather than acquiring perpetual life.

Impact Assessment

Every rule must undergo regulatory impact assessment (RIA) before issuance. This includes compliance costs for firms and enforcement costs for government. Existing rules undergo phased RIA to eliminate duplications and low-value controls. Regulation becomes evidence-led rather than form-led.

Proportionate Sanctions

Criminalisation is reserved for serious harm. Filing delays, clerical mistakes, and technical lapses shift to civil penalties. With 486 imprisonment clauses sitting over a single MSME unit—and 26,134 clauses across 843 laws nationwide—India has criminalised far more business behaviour than any comparable economy. Deregulation must restore proportionality.

A New Regulatory Pyramid

These reforms can be visualised as a pyramid: trust at the base, risk-based enforcement above it, then predictable rules and impact assessment. If adopted coherently, India would transition from a control-based regime to a principles-based regulatory architecture that is simpler, cheaper, more predictable, and more innovation-friendly.

(The author is a public policy analyst. The views expressed in this article are his own.)