The call for deregulation is buzzing in the air again. At the Global Business Summit 2025 in mid-February, Prime Minister Narendra Modi announced the formation of a Deregulation Commission to eliminate hundreds of compliances and further streamline regulatory processes.

He noted that the Goods and Services Tax regime introduced in 2017 has created a single large market by removing state levies, significantly benefiting industries by simplifying taxation and fostering economic integration.

Modi’s statement was a takeoff from Finance Minister Nirmala Sitharaman’s budget speech, in which she highlighted the need to promote ease of doing business, update old laws and develop a flexible, people-friendly and trust-based regulatory framework.

The cry for deregulation has echoes in the new US Department of Government Efficiency under Elon Musk in the Donald Trump dispensation, whose objectives include streamlining government agencies and cutting “red tape”.

It echoes the initiative taken by the United Kingdom in October 2024 to open a new Regulatory Innovation office to speed up the introduction of new technologies like artificial intelligence.

The thrust of deregulation is predicated on the claim that allowing business full freedom will allow it to achieve full efficiency. However, this is not always the case. As key economists have noted, state intervention and regulation are necessary when the cost to society outweighs the gains.

In his remarkable book The Road to Freedom, the Nobel laureate Joseph Stiglitz argues that more regulation is required rather than less, particularly in areas like the environment and the financial sector.

He notes that the United Nations-appointed committee that he headed established that the US financial crisis of 2008 was a big wake-up call about the fallibility of capitalism and the myth that “big banks do not fail”.

Instead, the inadequate oversight and regulation of the financial industry, particularly in mortgage lending and securitisation, allowed risky practices to go unchecked.

According to Stiglitz, the economic system most conducive to a good society is progressive capitalism where there is dispersed power, reduced inequality, and a rich “ecology of institutions”. The changing nature of our society and economy requires “more government intervention and public investment, higher taxes and more taxation”.

Such an approach is in direct contrast to the case for minimal government and regulation made by his principal ideological adversary, Friedrich Hayek. In his book The Road to Serfdom written in 1944, Hayker had famously declared, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”

British Prime Minister Margaret Thatcher, an admirer of Hayek, handed out copies of Road to Serfdom at cabinet meetings.

But Stiglitz believes that Thacher’s favorite thinker was responsible for the “desertification of human hope”. The neoliberalism of US President Ronald Regan, Thatcher, and now of Trump, and the urge to dismantle all kinds of regulations bring to mind an observation of philosopher Isiah Berlin: “Freedom for the wolves has often meant death to the sheep.”

This was borne out in the US in the 1990s, with the repeal in 1999 of the Glass-Steagall Act passed in 1933 in the wake of the Great Depression. This act had prevented commercial banks from making speculative investments that could jeopardise depositors’ savings. The removal of this safeguard, Stiglitz, allowed commercial banks to make risky investments and eventually caused the US financial crisis of 2008.

The recent thrust for deregulation is a continuation of the programme launched in the 1980s by US President Ronald Reagen, who began to dismantle the welfare role that the state had played since the economic depression of the 1930s. Instead, Reagen embraced the market fundamentalism advocated by Fredrich Hayek and Milton Friedman.

It also ushered in the dismantling of regulatory bodies for airlines, railways and electric power generation. The sharp reduction in tax rates for the super-rich fitted into the economic rhetoric of Reagan’s economist advisor Arthur Laffer that this would result in better tax compliance and generate higher revenues for the government.

India adopted this ideology in 1991 when it dispensed with the licence permit quota raj to embrace liberalisation, privatisation and globalisation by substantially dumping the dirigiste regime it had followed under Jawaharlal Nehru and Indira Gandhi. It has changed the economic contours of India forever.

The dominant economic role of Public Sector Units shifted to the private sector. The bureaucracy moved from being controllers to regulators, from masters to enablers.

The changes, as intended, revved up the rate of growth, which had long stagnated at 3.5%. But, as Nobel laureate Amartya Sen noted, it had the unintended consequence of accentuating income inequality, by turning a blind eye to distributive justice.

The claims that gains at the top would “trickle down” to those at the bottom proved to be hollow, both in the US and in India.

In terms of regulation, however, India witnessed the creation of a slew of regulatory bodies and laws such as the Securities and Exchange Board in 1992 to regulate the stock market operation, the Insurance Regulatory and Development Authority of India and the Foreign Exchange Management Act in 1999, the Pension Fund Regulatory and Development Authority in 2003 and the Consumer Protection Act in 2019.

After the 2008 US financial crisis, the government constituted the Financial Sector Legislative Reforms Commission, which recommended that the Reserve Bank of India should regulate the banks and payments but be divested of its debt management function. This function, it suggested, should be vested in an independent debt manager, as is in the US and the UK.

The committee also recommended the creation of a unified regulator for the rest of the finance sector and a financial redressal agency. Most of its recommendations have yet to become reality.

However, chastened by the US financial crisis, a Financial Stability Development Council was set up in 2010 under the chairmanship of the finance minister, with heads of all financial sector regulators as members, to strengthen and institutionalise the mechanisms for maintaining financial stability, financial sector development, inter-regulatory coordination along with monitoring macro-prudential regulation of the economy.

It is to the credit of the Reserve Bank that India waded through the US financial crisis with the central bank managing India’s economy well.

But given the historical red flags, India must proceed with utmost caution before emulating Trump’s experiments. In particular, Stiglitz’s cautionary note about the importance of beefing up the regulatory architecture of the financial sector and environment must not be glossed over.

As the new Reserve Bank of India Governor Sanjay Malhotra has pointed out in the context of deregulation, India needs to be wary of the tradeoff between “stability and efficiency”.

Satya Narayan Misra is Professor Emeritus at Kiit University, Bhubaneswar.