It should go beyond the immediate short-term pains for the industry and augur well in the long run
The Supreme Court’s recent ban on BS-III vehicles has sent the Indian auto industry into a tizzy. The Society of Indian Automobile Manufacturers has called the ban unfortunate and Tata Motors termed the move “unexpected and unprecedented". Firms have announced that there might also be labour-market implications, with contractual labour especially feeling the pinch. But are these environmental bans really bad for the industry? To understand, one needs to appreciate that there is a short- and long-run aspect to this story and also that the dynamic gains in the long run might actually outweigh the static losses today. In fact, prior scholarly research indeed points to such possibilities, especially if one considers a nuanced explanation of how regulation can actually encourage innovation (rather than mute it), following the classic debate on this issue provoked more than two decades ago by Harvard economist Michael Porter. Writing in 1995 in Journal Of Economic Perspectives, Porter and his co-author Van der Linde contested the traditional intuition that regulation is detrimental to innovation. Termed now as the controversial Porter’s hypothesis, they noted that in contrast, more stringent and properly designed environmental regulations can actually “trigger innovation that may partially or in some instances more than fully offset the costs of complying with them".