Deregulation Phase II rolled out in January 2026, expands compliance reduction push: Economic Survey

State capacity is built not only through new institutions or additional controls, but through disciplined removal of frictions that impede productive activity.

• Phase II of deregulation launched in Jan 2026, expanding reforms to key sectors
• Task Force aims to simplify and digitize processes, reducing compliance.
• Deregulation seeks to enhance growth, jobs, and private investment with stable policies.

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The government rolled out Phase II of its Compliance Reduction and Deregulation initiative in January 2026, expanding the scope of reforms across key sectors such as land, building and construction, labour, environment, education, health, utilities and overarching regulatory frameworks, the Economic Survey 2025–26 said.

The Survey said the initiative reflects a broader reorientation of governance towards strengthening state capacity through the disciplined removal of regulatory frictions. “The Economic Survey brings together these three elements – state capacity, the society, and deregulation – in the pursuit of Viksit Bharat and global influence. A strong and stable currency would be a natural corollary of that,” it said.

Finance Minister Nirmala Sitharaman tabled the survey in Parliament on January 29.

Phase I outcomes encouraging, Phase II broadens scope

According to the Survey, outcomes from the first phase of deregulation have been encouraging. “The experience of Phase I illustrates a broader lesson of this chapter: that state capacity is built not only through new institutions or additional controls, but through disciplined removal of frictions that impede productive activity,” it said.

Building on this experience, “Phase II of the Compliance Reduction and Deregulation initiative was rolled out in January 2026 to cover additional priority areas, including land, building and construction, utilities and permissions, environment, education, health, labour, and overarching reforms,” the Survey noted.

“The current phase of deregulation demonstrates how disciplined removal of friction can strengthen state capacity at scale,” it added.

Deregulation as institutional reorientation

“Deregulation, when pursued as a continuous and coordinated governance process, is not a retreat of the State but a strengthening of it,” it said.

By “simplifying rules, clarifying responsibilities, and making processes predictable and time-bound, administrative effort is shifted away from low-value policing toward problem-solving, monitoring, and execution,” the Survey said, adding that deregulation thus becomes “not only a pro-business reform, but a mechanism for building state capacity itself”.

The chapter also examined the compliance reduction initiative as a practical demonstration of institutional capability. “Deregulation is treated not as regulatory withdrawal, but as institutional reorientation, shifting administrative effort from low-value policing toward coordination, facilitation, and problem-solving,” it said.

Task Force driving coordinated reform

The Survey detailed the role of the Task Force on Compliance Reduction and Deregulation, constituted in January 2025 under the chairmanship of the Cabinet Secretary T.V. Somanathan. The Task Force was set up “to drive reforms that simplify regulations and streamline procedures across States and Union Territories”.

Its objectives include identifying “redundant, overlapping, or outdated compliances”, guiding States in amending laws and procedures, encouraging standardised reform templates, facilitating risk-based compliance frameworks, promoting digitisation of government-to-business services through a countrywide Single Window System, and documenting best practices for replication.

“What distinguishes this exercise from earlier deregulation drives is not only the number of reforms, but the institutional process: cross-agency coordination, iterative problem-solving with States, and real-time learning,” the Survey said.

Priority areas and state-level momentum

The Task Force identified 23 Priority Areas across five broad sectors – Land Use, Building and Construction, Labour, Utilities and Permissions, and Overarching Priorities – covering a large share of regulatory interactions between enterprises and the State.

Beyond common templates, “several States and Union Territories have undertaken innovative reforms that go beyond the common reform templates, tailored to their specific administrative, economic, and spatial contexts,” the Survey said. This, it added, demonstrates how deregulation is being internalised as “a continuous governance process rather than a checklist exercise”.

Growth, jobs and resilience

The Survey linked deregulation with broader economic outcomes. “Sustained state-level deregulation efforts are enabling small and medium enterprises to expand and integrate more effectively into formal value chains, elevating the economy’s medium-term growth potential,” it said.

India has also recorded “significant employment growth in recent years, supported by structural reforms, tax rationalisation, and a sustained focus on skill development”. Measures such as deregulation, Goods and Services Tax reforms and labour reforms implemented by states have contributed to rising labour force participation and employment growth across industry and services.

The Survey noted that FY26 was marked by heightened external uncertainty, including penal tariffs affecting exporters. “The government responded by using this crisis as an opportunity to push through key measures such as GST rationalisation, faster progress on deregulation, and further simplification of compliance requirements across sectors,” it said.

Looking ahead, the Survey said predictable and stable regulatory frameworks would be critical for reviving private capital expenditure. “Reviving private capital expenditure in such areas requires buffering sector-specific uncertainty by enhancing predictability through deregulation and simpler, more stable laws and frameworks,” it said.