The stubbornly entrenched problems of licence, permit and inspection raj continue to haunt small service enterprises
It is not easy to do business in India’s second largest commercial city. My colleagues and I at Centre for Civil Society undertook a deep dive into the realities of Doing Business in Delhi. We found that most of the claims of reforms in Delhi are window-dressing. Our studies find that problems of licence, permit and inspection raj are still stubbornly entrenched in the case of traditional retail services enterprises.
Take for example the restaurant sector. Any eating house in Delhi faces cumbersome and often overlapping regulations. An alcohol-serving restaurant needs to acquire 11 licences (13 if they play recorded music and choose to install a lift) and submit 57 documents before they open shop legally. The process is daunting in the absence of procedural clarity and functional communication channels between the government and enterprises. Little wonder, then, that despite contributing 2.1% to India’s gross domestic product (GDP), 66% of the Indian food services market, comprising restaurants, cafes, bars and street kiosk stalls, remains unorganized.
Our research team found that it takes 120 to 150 days to obtain all the licences, if there is no delay beyond the officially stipulated time, and that the formal cost varies from ₹ 18,000 to nearly ₹ 2 lakh. More than half of all respondents in our survey found the overall licensing procedure to be difficult or very difficult to follow. An excise licence, rated the most arduous of all by the respondents, costs restaurants anything between ₹ 7.64 lakh and ₹ 18.52 lakh annually.
Even if restaurateurs manage to fulfil all the licencing requirements to open, they are plagued by arbitrary changes in rules. Restaurants face frequent and unreasoned government orders that directly and adversely impact their operations. For example, in May 2018, the department of excise in Delhi banned liquor-serving restaurants from playing recorded music on the grounds of “nuisance caused by high volumes". In another instance, the New Delhi Municipal Corporation (NDMC) banned the use of rooftops by restaurants and bars following a mishap in Connaught Place in December 2017.
Similarly, let us consider the problems of meat processors and retailers. The livestock sector contributes 4.1% to the total GDP of India. Our study finds that in Delhi, a thoughtless regulatory framework around the production and supply of meat has led to the slaughter and sale of animals outside the ambit of regulations.
The NDMC both regulates and operates the only slaughterhouse in the state (in Ghazipur) permitted to slaughter buffalo, sheep and goat. This government monopoly alongside the Food Safety and Standards Regulations 2011 on private commercial slaughter have rendered all slaughter of chicken in the city effectively illegal.
Municipal authorities recognise the egregious violation of the doctrine of separation of powers and the absurdity of effectively banning private slaughter. Authorities follow a ‘keep calm and carry on’ policy in the city, and 95% of all enterprises in the sector remain either completely or partially unlicensed. But ‘informal policies’ are ripe opportunities for rent-seeking, and Food Safety and Standards Authority of India (FSSAI) regulations still render these shops illegal. Moreover, 72% of licence holders claimed to have paid more than the prescribed cost while obtaining a licence.
Moreover, we find that there has been no discernible improvement in the inspection regime for service sector enterprises. Corruption, harassment and subversion of rules continue to be rampant. Twenty-eight percent of restaurateurs we surveyed described the intention of inspectors as deliberately finding faults, and 30% felt that inspectors were only concerned with their own interests. While inspectors from South Delhi Municipal Corporation (SDMC) claim to inspect meat shops once a year, our enterprise surveys indicate a frequency at least 12 times higher. In our mock inspections, only 2.8% of meat shops were compliant with more than 80% of the rules examined. Instead of achieving any measure of compliance, inspections have emerged as flourishing channels of rent-seeking.
An inspection regime ought to maximise compliance by providing relevant information to enterprises such as easily accessible guidance material and checklists. Out of the 12 departments that regulate the operations of a restaurant in Delhi, only one has published a guidance document. Likewise, inspectors from both the SDMC and FSSAI mentioned that checklists are used during inspections for meat shops. However, about 81% of the respondents were not aware of the parameters used for conducting inspections.
Over the years, government authorities in Delhi—central, state and municipal—have made ad hoc rules surrounding service sector enterprises without adequate consultation and have attempted to pacify socio-cultural angst through instruments not fit for purpose. Businessmen who pay the one-time costs and obtain the licences are then subjected to unclear and arbitrary inspections and rule changes. These short- and long-term costs deter entrepreneurs from growing their business.
India has seen a dramatic rise in the World Bank’s Doing Business rankings. But the measure leaves out the part about small enterprises still struggling in the face of the licence-permit-inspector raj. If this is the state of affairs in Delhi, one can imagine the difficulties of doing business for small entrepreneurs in the rest of India. The distance between the existing regulatory practices and the OECD best practice standards indicates a need to rethink and redraw both the licensing and inspections rules, particularly at the intersection of local, state and central governments.
The idea behind ease of doing business is to first recognise that economic freedom is non-negotiable if human beings are to flourish. By approaching ease of doing business programmatically and with the intent of only making life easier for large businesses, instead of on principle, we do ourselves great disservice.
Bhuvana Anand is a research advisor with the Centre for Civil Society.
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