The low hanging fruit has been plucked. The road ahead will need deeper and more impactful reforms at all levels of governments — Union, States and Local.
This article is part of the series 30 Years After: Review and Renew the Reforms Agenda.
Although Prime Minister PV Narasimha Rao’s 1991 reforms changed the business climate of India’s economy, they failed to address the underlying soil in which an economy grows or shrinks. The policy ended the License Raj but did not move a needle on Inspector Raj. Thirty years later, the latter continues to thrive. The sweeping powers given to the bureaucracy ride a well-oiled executive machinery that’s targeted at rent-seeking and corruption. Rao alone cannot carry this burden. Leave alone reform, successive Prime Ministers have not even examined these excesses. The Indian economy continues to be burdened by this infrastructure of illegal entitlements that slow the rates of economic growth and job creation. Despite three decades of continuing reforms that have changed the character of doing business in India, if Prime Minister Narendra Modi wants to give the economy another mega-push, he will have to fix this problem of abuse of powers and create an enabling mechanism at the Union level, such that States can follow through and end this tyranny.
69,233 layers of regulatory cholesterol…
The measure of the problem is humongous and out of tune with a 21st-century India. Take the scale. Out of 63 million enterprises spread across India, there are only 1 million formal employers. More than 98 percent of Indian employers stay small by choice. As a result, they get no access to institutional capital, talent, technology and supply chains. On the other side, they employ less than three employees on an average, leading to less-than-optimal job creation. This motivation to remain small has a sound survival logic. These companies want to stay under the regulatory radar of laws and rules that ensure they pay minimum wages, offer social security or provide safe and hygienic working conditions. This is not because they want to evade the political or societal objectives of the law but because the clauses have become monstrous and their breach beyond manageable.
Companies want to stay under the regulatory radar of laws and rules that ensure they pay minimum wages, offer social security or provide safe and hygienic working conditions
The moment an entrepreneur aspires for growth and his/her company raises its head to expand its scale and becomes part of the formal economy, it can lead to more than 400 compliances a year that become applicable as soon as the setup is formalised—overnight. As a result, there are clear incentives to stay economically small and administratively informal. This multidimensional, economic, and administrative problem has roots in India’s archaic complex regulatory environment. We term this a ‘formalisation tax’ on employers and companies; it is the biggest hurdle to scale. It is also the most important source of corruption.
India’s policy challenge is not merely to catalyse more enterprises but equally to nurture existing enterprises to enable growth on the economic and wealth side, and job creation on the political side. Once the policy fraternity focusses on reforming this—something we see as inevitable—the political returns will be faster and economic returns higher; they are the low-hanging fruits of India’s political economy. If the regulatory infrastructure can be eased to convert just 10 percent of its 63 million enterprises from informal to formal, 100 million new formal jobs can be created. However, the key binding constraint is what we call ‘regulatory cholesterol’, a universe of 1,536 laws, 69,233 compliances and 6,618 filings that businesses face at an aggregate.
Adding complexity to this mesh of hurdles is the fact that they change at a rate that’s administratively astonishing—there were 322 regulatory changes over the past month, 856 in the last quarter and 4,104 over the past 12 months. You need an army of compliance officers to keep track of, leave alone file, these changes. The problem articulated, here are some reform suggestions that offer to make doing business in India easier.
The key binding constraint is what we call ‘regulatory cholesterol’, a universe of 1,536 laws, 69,233 compliances and 6,618 filings that businesses face at an aggregate.
…and 8 reforms to end it
Altogether, we have identified eight reforms tributaries that can feed the rivers of economic growth and job creation and through them wash away the decaying debris of the past. With the objective of increasing transparency, raising accountability and reducing time spent on compliance management, this essay argues for compliances and filings becoming paperless, presence-less, cashless, faceless systems, while pushing for changes in administrative procedures.
1.Constitute a National Compliance Commission: India’s regulations need an urgent review. An empowered National Compliance Commission must be set up to reduce the compliance burden by at least 50 percent. It should focus on identifying duplication and redundancy among compliance requirements. The commission should remove ambiguity, standardise implementation and simplify record keeping. There is no need to have ten different formats of wage registers and five different formats of muster rolls under different laws. The Factories Act and related Rules constitute 9,129 compliances, or about 13 percent of the total, in the country. The Electricity Act and related Rules contribute an additional 4,257 compliances, or six percent. Removing or reforming these low-hanging problems is not so difficult.
There is no need to have ten different formats of wage registers and five different formats of muster rolls under different laws.
2. Create a Unique Enterprise Number (UEN): Indian enterprises deal with multiple identities, indicatively: Provident fund to employees’ state insurance corporation, permanent account number to corporate identification number, to tax deduction and collection account number. These are issued by different State agencies, and Union and State departments. As a result, there is no single source of truth to build a corporate profile. This can be resolved with a UEN along the lines of Aadhaar for individuals. All departments of the government and financial institutions will register an enterprise on the basis of its UEN. It will help create a holistic corporate profile for governance, credit, risk and compliances.
3. Create Enterprise Document Vault: India needs to go paperless. Managing paper is inefficient, expensive and non-sustainable. Although the government has initiated several digital initiatives, this simple point has escaped the minds of policymakers. Based on the success of the electronic document vault, DigiLocker, this concept should now be extended to enterprises. All documents such as licenses, registrations, permissions, consent orders, notices and such like issued to an enterprise will be delivered by government departments and will be hosted in this vault. In tune with the data protection law, these documents can be retrieved by inspectors, financial institutions and other government departments upon consent. The UEN-based corporate profile of credit and risk along with an electronic document vault will reduce document forgery and fraud leading to deeper credit penetration and reduce Non Performing Assets (NPAs). It will also standardise a company’s regulatory profile.
The UEN-based corporate profile of credit and risk along with an electronic document vault will reduce document forgery and fraud leading to deeper credit penetration and reduce Non Performing Assets (NPAs).
4. Strengthen Commercial Courts Infrastructure: India’s commercial court system needs an overhaul. It takes 1,445 days to dispose of a commercial case in India as against 120 in Singapore. While India ranked 63rd overall in the World Bank Ease of Doing Business rankings, it ranked a poor 163rd in enforcing contracts. Millions of commercial cases compete with civil cases for months for their turn in regular courts, leading to delays. The Government should expedite capacity building (judges, staff, court rooms, and e-hearings) in hubs of economic activity in the country for faster disposal of cases, slashing the turnaround time by at least 50 percent. The current digital drive led by the Supreme Court will help. Of course, those with an intention to delay will continue to dog the higher courts. The mechanism, therefore, will need to be worked on in conjunction with the Judiciary that functions outside the economy but, rooted in the past and unwilling to match the speed of the nation, hurts it the most.
5. Digitise Compliance Management. All compliances and filings must go digital. Today, an entrepreneur deals with over 70 different licenses, registrations and approvals (related to entity, land, trade, construction, fire, electricity, labour, environment, weights and measurements and so on) to start his manufacturing setup. An MSME deals with at least 400 compliances annually on an on-going basis. The process is manual, paper-based and requires physical contact with government officials leading to delays and opportunities for corruption. All compliances should go digital with a vision of creating paperless, presence-less, cashless and faceless systems. This will enhance transparency, accountability and timeliness. The government should think about creating a public utility which will enable compliance digitisation at scale by publishing APIs (Application Programming Interface, a software that allows two applications to talk to one another) to be consumed by a vibrant ecosystem of private app providers.
6. Digitise Regulatory Updates. With more than 4,000 regulatory changes a year that affect enterprises, India needs a centralised repository of all updates. Currently, they are published on at least 2,233 different websites at the Union, States and Municipal levels. These changes impact an enterprise’s obligations as they notify changes to dates, duty structures, revisions to forms, penalties, and methodology of calculations, amongst others. The onus is on an enterprise to periodically visit the websites, discover the changes and evaluate applicability. The government needs to create a centralised repository or an electronic gazette of all regulatory changes that impact enterprise. There should be personalised notifications based on preferences of industry, ministry, department, state, categories and types, and must be easily searchable, user-friendly, and machine readable.
The government needs to create a centralised repository or an electronic gazette of all regulatory changes that impact enterprise.
7. Digitise Inspections: An MSME in India can be inspected by as many as 20 inspectors at any time. To illustrate with a recent example, take the case of Kerala-based Kitex Group, which was raided by 11 inspectors in one month, leading to the company shifting base to Telangana. The current inspection system is manual, paper-based and requires physical contact. There is an urgent need to reimagine this abuse of Inspector Raj in the current system and replace it with a consolidated, risk-based digital system.
8. Introduce Self Certification or Third Party Certification: Enforcement of compliance requires regulatory capacity in the government. Unfortunately, the current installed capacity is far behind industrial demand. The capacity in government departments is not increasing in line with increase in demand for these services. As a result, government agencies often become an inadvertent bottleneck leading to delays and opportunities for rent seeking. An entrepreneur deals with many agencies of the government for registrations, permits, inspections, verifications, certifications and no objection certificates. For instance, an Electrical Inspector for inspection and certification of generator set installation; an Inspector for inspection and certification of lifts post installation; Fire Inspectors for inspection and certification of building and firefighting equipment; Legal Metrology Officer for weighing equipment verification certificate, amongst others. There is a serious need to augment capacity with a PPP (Public Private Partnership) model along the lines of PUC (Pollution under Control) certifications under the Motor Vehicles Act. The government needs to enable self certifications and third party inspections and certifications by empanelled vendors. This will help augment enforcement capacity as well as improve public convenience.
The past six years have been exciting from an ease of doing business perspective. India has seen a major jump in its doing business rankings, from 142 in 2014 to 63 in 2019. The low hanging fruit has been plucked. The road ahead will need deeper and more impactful reforms at all levels of governments—Union, States and Local. These reforms will require tougher decisions, laser sharp focus and greater allocation of resources. Leaning on the COVID crisis, Madhya Pradesh has begun the journey, while Uttar Pradesh is aspiring to; Tamil Nadu and Telangana are on their way; other states must follow through. But above all, standing at the helm of affairs in the Union government as well as a large majority in Parliament, all initiations of compliance reforms, or what can be termed as Tier Three Reforms, lie at the door of Prime Minister Narendra Modi and his party, respectively.
The journey from 1991 to 2021 has served India well—in 1990, India was not part of the world’s top 10 economies; in 2021, it is the world’s fifth largest. It is expected to be the world’s third-largest economy within this decade and US $10 trillion within a dozen years. Lying under these macro-numbers are two distinct but disjointed ideas. Expectations and aspirations on the one side. And the need to create jobs, taxes and wealth on the other. The easy and immediate way to bridge them is by embarking on these compliance reforms.
Disclaimer: This article was first published on ORF. No changes to the content has been made.