Understanding Regulatory Cost and Effectiveness: Evidence from India

Regulatory costs impose a significant burden on private enterprises in India. The Environmental Clearance (EC) licensing law, which aims to prevent projects that pose excessive environmental risks, requires that every sizeable capital investment project – including in power, infrastructure, mining and extraction, industry, and construction – seek prior approval from a government body. The process can take 3 to 5 years and poses barriers to firms wanting to enter the market, while raising costs for firms already in the market. An important and current policy concern is how to manage the trade-off between easing the regulatory burden of the EC while ensuring environmental compliance in a context where pollution causes rising health and economic costs.

The project aims to building a unique dataset covering almost all of the 13,000 EC applications received since 1980. Using a combination of newly-released government datasets and proprietary firm-level data, the researchers will link the regulatory process followed for each application with a rich set of project and firm characteristics, in order to shed light on questions related to the study of regulatory cost and effectiveness and regulatory discretion in weak institutional settings. In particular, the researchers will consider how the EC process allocates regulatory cost and how it this cost varies along a number of dimensions. For instance, it is likely that large, politically-connected firms are much better able to navigate the convoluted and at times corrupt EC process than smaller entrants.

The resulting dataset will also allow for an analysis of the recent policy changes of the EC in an attempt to make the process more transparent. The dataset will be cleaned and organized and made available to the wider public. Overall, the study will be of direct relevance to the Indian authorities since a governmental review the EC law is currently underway, and it could help inform on cost-effective alternatives to the current EC regulation. Further, understanding the mechanisms behind effective regulations could also help design effective regulatory policies in other sectors or countries.