Wednesday, 09 Oct, 2024
By: Anshul Vipat
Our dream of $5 trillion economy won’t be achieved if we continue to harass businesses in the name of compliance
Former Prime Minister Jawaharlal Nehru and then Indira Gandhi put the country on the path of socialism. One of the prominent policies of the yesteryears leaders is to put a check on industrialisation. Touted as "License Raj", the government control was so strong that it not only decided which company would produce what, but also the amount of production, as well as the price of commodities. Soon enough, the tight control started bearing its fruits. With very limited industrialisation, and almost negligible investment, our economy started to tank.
The License Raj, which was thought to be important for India's economic success, was doing just the opposite. The situation came on the brink of disaster in 1991 putting India almost on the bankruptcy forcing the then-Narismha Rao government initiating liberalisation reforms. The government reduced licensing regulations; lowered tariffs, duties and taxes; and opened up to international trade and investment.
While the 1991 reforms has removed many economic restrictions, a limited license raj continues to exist. This is one of the reasons why the Narendra Modi government is planning to bring a holistic decriminalisation bill in the budget session of the parliament. In the words of Commerce Minister Piyush Goyal, "objective of this proposed law is to “end harassment and reduce compliance burden on businesses".
But why do we need such a law when India is doing so well in ease of doing business.
The mesh of compliance
Sample this: As many as 45 documents are needed to be submitted to open an eatery in the National Capital against only 19 to buy a gun. In addition, Delhi requires a ‘Police Eating House License’ from the Delhi Police that asks for 45 documents. An entrepreneur wanting to start a restaurant business in Bengaluru needs 36 licenses while those in India’s financial capital Mumbai need 22. This startling admission came from none other than K.V. Subramanian, former chief economic adviser.
Data source: Economic Survey, 2020-21
In contrast, China and Singapore require only four licenses to open a restaurant. Enforcing a contract in India takes 1,445 days on an average compared to just 216 days in New Zealand, 496 days in China and 790 days in Brazil. Enforcing contracts is one parameter in which India’s performance has been very poor over the years. While India takes 1,445 days to resolve an average dispute, New Zealand takes about one-seventh of it - 216 days. For registering property, it takes roughly 58 days and costs on an average 7.8 percent of a property’s value to register it. Goods manufactured in India “can take 7-10 days to reach a port whereas in countries like China, Bangladesh and Vietnam it takes less than a day.
So while the government may claim that India's "rank in ease of doing business according to World Bank report has improved from 142 in 2014 to 63 in 2022, it is important to note that we are 136th in Ease of Starting Business, 115th in Paying Taxes, 154th in Registrating Property, 136th in resolving insolvency and 163th in Enforcing Contracts. Talking about the latter, only a few countries like Afghanistan, Mozambique and Zimbabwe perform worse than India. (The World Bank ranks 190 countries based on 10 benchmarks).
Time to end the business “harassment”
Setting up and operating services or manufacturing business in India face a maze of laws, rules and regulations. The Economic Survey of 2019-20 pointed out 6,796 compliance items that a manufacturing unit has to conform which is a tedious and time consuming task. The survey called it a “bewildering wide range of rules”. Talking about compliances required to open a factory, one needs about 4,000 pages of non-objection certificates (NOC) and filings. Most of the process is manual, paper-based and requires physical contact with government officials leading to delays and opportunities for corruption.
Let’s look into sector-wise classification in compliances:
Data source: Business Insider
And the cumbersome process does not end with just procuring license. A small business with 150 employees or more has to deal with 500 to 900 compliances a year, on which it can end up spending up to INR 12-18 lakhs by hiring consultants to be compliant with labour laws, taxes, factories, and so on. Infact, the entire business regulatory universe comprises 1,536 laws, of which more than half, or 843 laws, carry imprisonment clauses. Then, we have administrative policy changes that adds complexity to this mesh of hurdles. On an average there are 322 regulatory changes, 856 quarterly and over 4,000 yearly. Imagine the huge amount of human resources wasted to keep track of, leave alone file, these changes.
In a lifetime, a company has to face 69,233 compliance laws out of which more than 25,000 carry imprisonment laws. Five states have more than 1,000 imprisonment clauses in their business laws — Gujarat, Punjab, Maharashtra, Karnataka and Tamil Nadu. These are the states that attract the maximum private investments.
No doubt, we have made tremendous progress since 1991. In 1990, India was not part of the world’s top 10 economies. Today, we are the fifth largest economy and are expected to be the world’s third-largest economy within this decade and US $10 trillion within a dozen years. However, this won’t be achieved if we continue to harass businesses in the name of compliance. The Indian economy continues to be burdened by this infrastructure of illegal entitlements that slow the rates of economic growth and job creation.
Which is why the planned proposal is a crucial policy correction. If the amendments are enacted, it could be the starting point for deeper economic reforms. Its time India reboots itself to the tune of 21st century. As the then finance minister Manmohan Singh had quoted Victor Hugo while tabling 1991 reforms in the parliament, “No force on earth can stop can stop an idea whose time has come.”
