The race that devours its runners: What India must avoid as it deregulates

The idea for this column began with two Substack essays that seemed, at first, to have nothing to do with India. One was Noah Smith’s vivid portrait of China’s young working population trapped on an economic treadmill. The other was Gulzar Natarajan’s analytical dissection of China’s industrial vulnerabilities, specialised clusters, excess capacity, and the fragile social contract beneath the gleaming infrastructure. But read together, and through a Hayek-Friedman lens, these essays transform into a cautionary map for any state attempting reform. For India, which is now advancing deregulation and administrative restructuring at scale, they offer a simple warning: a reforming state can still accidentally build an involuted system, outwardly efficient, inwardly exhausted, if it does not design competition and deregulation with clarity of purpose.

Lewis Carroll once satirised political process with a scene in “Alice’s Adventures in Wonderland”, where the Dodo organises a “Caucus Race”: everyone runs in circles without rules, direction, or purpose until someone arbitrarily declares the race over and hands out prizes. It was meant as nonsense; today it reads like a description of certain modern development strategies. China’s current economic moment, as Noah describes it, now resembles that race. Gulzar Natarajan’s analysis uncovers the deeper anatomy beneath this despair: a country built on thousands of highly specialised industrial clusters, towns that manufacture 70% of the world’s spectacles, 63% of its shoes, or half of Japan’s coffins. These clusters were once engines of competitive advantage, but have now become vulnerabilities. When export demand falters, the pain is not spread across the nation; it is concentrated brutally in the very towns where state-supported monocultures took root. A slump in exports erodes the livelihoods of entire local ecosystems. And this is happening in a country whose outward manifestations of power remain dazzling, high-speed railways, high-tech megacities, EV exports, green industrial investment, global manufacturing supremacy. For a Hayek- or Friedman-inspired economist, the problem is not markets per se, nor competition itself. It is the misalignment between what competition should achieve and what it has been forced to do. Markets are supposed to be discovery processes that generate knowledge, discipline firms, and empower consumers. But when competition is orchestrated through state incentives, over-subsidised capacity, forced expansion, protections for unproductive firms, and no mechanisms for exit, it stops being discovery and becomes movement for its own sake. It becomes involution: a system where inputs escalate but outputs stagnate.

This, in essence, is the philosophical lesson India must absorb as it undertakes its own decade of deregulation. India is finally breaking down archaic rules, rationalising penalties, digitising processes, and shifting toward trust-based governance. But deregulation is not a neutral tool. It is entirely possible to deregulate formally while replicating the underlying logic that produced China’s treadmill. The first risk is deregulation without clarity of purpose. China’s involutionary dynamic was born from reforms that had no philosophical anchor. Industrial policy expanded because expansion itself became a proxy for national greatness. If India treats deregulation similarly, as an administrative housekeeping exercise rather than a mission to expand individual agency, it will merely replace one dense thicket of rules with another, only digital this time. Hayek cautioned that the state must understand what not to do before deciding what it ought to do.

The second risk is what one might call bureaucratic involution. Where China’s involution is economic, India’s could be administrative. If every ministry creates its own digital compliance platform, its own grievance portal, its own inspection dashboard, and its own “ease of doing business” metrics, firms will find themselves navigating multiple high-tech entry points into the same maze. The race becomes about launching portals and meeting process-based targets rather than simplifying the citizen’s or entrepreneur’s lived experience. Reform becomes a competition among departments without reducing the collective burden on society.

The third danger is what China illustrates most starkly: reforms without exit mechanisms. China has dozens of loss-making EV firms that cannot be allowed to fail because local governments depend on the jobs. Similarly, it has industrial clusters that remain artificially alive because shutting them down would be politically explosive. India must avoid this trap. Many of our regulatory bodies, committees, tribunals, and schemes persist long after their purpose has sunset. Deregulation that merely adds new institutions while keeping old ones alive will double the friction. A reforming state must be as committed to closure, of rules, schemes, bodies, and processes, as it is to creation. Exit ensures that system remains adaptive.

The fourth risk is metric-driven performativity. If India evaluates ministries based on process indicators such as number of inspections digitised, number of forms consolidated, or number of schemes rationalised, then ministries will optimise for those indicators. The system will produce motion, presentations, rankings, awards, but not necessarily freedom, prosperity, or predictability. Friedman warned repeatedly that bureaucracies, once given targets, pursue them with missionary zeal, often at the cost of the very citizens they serve.

So what must India do differently? A deregulation agenda requires the state to internalise four principles. First, reform with direction, not indiscriminately. Deregulation must be guided by the aim of expanding voluntary exchange, economic freedom, and institutional trust. Removing 100 clauses is not automatically progress; removing 10 clauses that meaningfully expand agency is. Second, institutionalise exit. Every new reform should displace an older one. Every scheme should have measurable criteria to justify its existence. The state must be architected for graceful closure. Third, adopt adaptive regulation rather than one-size-fits-all compliance. India should allow states to innovate on regulatory design while ensuring baseline protections. This prevents the uniform, rigid, top-down incentives that pushed China toward involution. Fourth, anchor reforms in household welfare, not administrative vanity. A reform is real only if it expands the choices, security, and prosperity of ordinary citizens. If our reforms aim to enlarge human agency rather than build administrative monuments, we can avoid the race that devours its runners. The only race worth running is the one that frees individuals, not the one that exhausts them.

Aditya Sinha (@adityasinha004) writes on macroeconomic and geopolitical issues.