“It would be far better, therefore, to have a simpler regulatory framework supplemented by active and efficient supervision. The problem is that supervision demands active monitoring and accountability from the government department or regulatory body. This creates a perverse incentive to keep adding more top-down regulations
regardless of their effectiveness,” Sanyal wrote.
Sanyal said there were many ways of being non-complaint. “Focus on having a simple system that works for most of the people, then supervise it properly. The more complex a system, the more rigid and opaque it becomes,” he said. Chief Economic Advisor Krishnamurthy Subramanian, who was also at the briefing, backed Sanyal’s arguments.
“When you have more regulation, it creates a false sense of complacency, and as a result supervision does not happen that much. Because you feel like you have taken care of all the problems through multiple rules. If you have lesser rules, you will supervise better,” Subramanian said.
Sanyal said recent episodes in the Indian economy, like the IL&FS saga, and the Punjab National Bank scam, would not have been avoided with more regulation. He said the system would have needed better supervision, not more regulation.
“The world of uncertainty is fundamentally different from the world of risk, and therefore, it requires policy tools that are also significantly different. However, the default policy response tends to be dominated by the risk-based approach,” Sanyal wrote in the paper.
“If you had a simple law and some degree of supervision, everything would be much better. If you have simpler rules, there are fewer things to comply with. In simple system everyone knows what it is,” he said.
Observing that a complex law leads to more discretion, Sanyal said, “We have tried to completely remove discretion by virtue of trying to create more and more regulation, which in fact, doesn’t help the case. In fact, as we make it more complex, more discretion, not less.”
Another point here is no amount of complex regulation is going to solve the problem of ex-post resolution because you live in an uncertain world, things will go wrong in ways you never imagined, he said.
Irrespective of the quality of regulations
and supervision, the fuzziness of a world of Uncertainty further requires systemic trust, he said. “This implies revitalizing old-fashioned responses such as corporate governance, transparency, ethics and skin-in-the- game. Moreover, there should be a greater acceptance of the likelihood that things will go wrong. No amount of ex-ante planning and rule-making can compensate for efficient ex-post resolution and contract enforcement,” he said.