There are so many complex reasons why the Indian economy rarely reaches its potential output level that we are hard pressed to fix the problems. But I am a strong believer in the Occam’s Razor principle that the simplest explanation is the best one.

There is a saying in England, or used to be, that you could do anything as long as there was no law against it. But when the Brits started running India, they turned this practice on its head. The operating system after 1860 became that an Indian couldn’t do anything that was not permitted by law.

This principle, or way of governing, is now 184 years old. It informs everything every government has done since then. If you think about it you will see how pervasive it is and how much it infringes your freedoms and impacts everything.

Indeed, after 1955, it’s been applied even more rigorously and thoroughly by successive governments.

Even when some attempt has been made to dilute this practice, the bureaucracy has quietly reinstated it. Its power lies in permitting and preventing.

To take just one example, there is the number of required compliances required of businesses. In 2021 there were 25,000 Central and 43,000 State level compliances.

Narendra Modi tried to fix the problem in 2021 by reducing the number of compliances but the weeds have grown right back. In 2022 the Central ones were reduced by 6,000. No one knows what the State governments did. Probably nothing.

That’s bureaucracy for you. Mindless rule making is how it measures its productivity.

Not just that. For every rule, there’s an equal and opposite rule. There’s also the fact that the more rules there are the more bribes you can demand merely for ticking the compliance boxes.

The rule and the regulation

The reason I am bringing this up yet again now is that the practices of governments are as important as their policies. The failure to recognise this, or the inability to do anything about it, is what has stymied many well thought out policies of all governments.

The politicians want to hurry things up but their bureaucrats want to slow things down. This colonial approach to governance has blurred the distinction between the rule and the regulation in India.

Bluntly put, the bureaucracy doesn’t know the difference between regulation and rule making. This Victorian legacy is an extraordinary phenomenon of Indian governance.

Amazingly, almost any government employee can make a rule. There are no filters. Worse, sometimes it is a formal rule but mostly it is not. That’s why when you ask to see it, the official punishes you by delaying and denying. It’s so much simpler to pay her a bribe.

So whichever political formation comes to power next month, it must hugely abridge this power to make rules. And this needs to be done at all levels of government. Different officials of the same department can’t have different rules that cease to apply the moment a bribe is paid.

The economy as a traffic jam

At a much larger level, this untrammelled delegated power to make rules has the most retardant effects on the economy. The people who make the rules just don’t understand that while a rule is an administrative instrument, a regulation is a way of facilitating the smooth functioning of transactions.

So over the years what we have got is a combination of tunnel vision, incompetence and malfeasance. Often-times these rules, which are regarded as regulations, work at cross purposes, contradict each other and combine to form impasses.

Add to this the fact that State and Central governments make their rules independently, and court decisions that take a narrow view of a rule being a law, what you get is the Indian economy: a good example of slow moving traffic.

In this context the question we need to be asking is why the three main parts of the economy, namely, the product market, the labour market and the financial market are always out of sync. Some of it is, of course, because of underlying economic causes.

But in India at least a lot of it is because of the bureaucratic confusion between administrative rules and market regulations. This confusion prevents the economy from attaining its full potential output.

There’s too much sand in the works or what Manish Sabherwal, the chairman of TeamLease, once called “regulatory sclerosis”. In fact it was a TeamLease study that drew the prime minister’s attention to the problem of knee-jerk rule making.

He has tried to fix the problem but the time has come to go hammer and tongs at it by removing, once and for all, the power of the bureaucracy to make arbitrary rules.

Otherwise he can forget about India becoming a developed economy this century.