Our 60,000-plus employer compliance universe that changes 5,000-plus times a year makes India a hostile habitat for MSME job creation
A dictionary suggests that a bully is “someone who frightens someone else" and an ally is “someone who helps and supports someone else". Do our 63 million micro, small and medium enterprises (MSMEs) view the Indian state as a bully or an ally? Policy imagination and rhetoric often romanticize MSMEs over large employers because it believes that MSMEs are a source of massive job creation, are the salvation of less-skilled job seekers, and embody solid middle-class values. But MSMEs can’t hear what policymakers say because of what they do—unleashing a universe of 60,000-plus possible compliances and 3,300-plus possible filings for enterprises. We would like to make the case for massive regulatory rationalization, simplification and digitalization because no MSME can possibly keep track of this regulatory cholesterol that is made even more toxic by 5,000-plus changes annually.
A wonderful new book, The Bombay Plan: Blueprint For Economic Resurgence, edited by Sanjaya Baru and Meghnad Desai, traces the origins of our MSME-hostile state to a document written in 1944 by eight entrepreneurs and managers. The plan articulated a comprehensive vision for economic development, voluntarily invited the state to control key sectors, but inadvertently became the intellectual opening balance for the poverty-breeding Avadi Resolution of 1955 and Second Five-year plan of 1956. But to be fair, post-1947, policymakers cherry-picked over-regulation of the private sector from the document without adopting its focus on primary education, basic healthcare, sanitation and adult literacy (what we now call human capital and which has become the binding constraint for our enterprise growth and poverty reduction). But much of India’s regulatory cholesterol for employers is not driven by economic justifications—consumer protection, market failures, information asymmetry and externalities—but reflects what economist Cass Sunstein calls expressivism; where values rather than facts are used to make policy. And, it is unclear whether the compliance load of the accompanying table makes India a better society and economy.
The progress made in Ease of Doing Business (EODB) rankings is real, but it’s time for another exercise that takes a ground-up look at our current regulatory frameworks. A new book by Cass Sunstein called The Cost-Benefit Revolution is useful reading and also attractive for its intellectual honesty in highlighting three challenges for technocratic policymakers using cost-benefit analysis: Distribution (hard to identify who bears costs and obtains benefits), welfare (nobody has a welfare metre and proxies are useful but can produce serious errors), and knowledge (nobody knows enough, and guesswork and unintended consequences are inevitable). But we think a cost-benefit analysis would suggest that we hurt the very people we are trying to protect (MSMEs and employees) by breeding informality and its inevitable companion, a cottage industry of consultants and corruption.
India’s next wave of EODB should have three vectors—rationalization (cutting down the number of laws), simplification (cutting down the number of compliances and filings) and digitization (architecting for true paperless, presence-less and cashless). Rationalization could start with clustering our 44 labour laws into a single labour code and should include reviewing levels (do we really need the peak goods and services tax or GST rate and payroll confiscation of 45% for low-salary levels) and increasing competition (the lowest-hanging fruit is competition for mandatory employer payroll deduction monopolies like provident fund and Employee’s State Insurance that offer expensive products and treat customers badly). Simplification would include replacing our 25-plus different numbers issued by various government arms to every employer with a unique enterprise number (an Aadhaar for enterprises). Finally, we must move away from the current approach to digitization as a website, where you log in with a password and upload files (the equivalent of an ATM machine with a teller physically sitting behind the façade and handing out cash) and shift to open architecture-based API frameworks, where multiple players compete in providing services to employers (GST Network is a good template).
All good doctors worry about iatrogenic risks (the unintended toxic consequences of their treatment), distinguish between good and bad cholesterol, and recognize the wisdom of Renaissance physician Paracelsus’ warning that the dose makes the poison (too much or too little of anything are both a problem). Even a doctor who does not know economics will tell you that changing regulations every three hours makes life miserable for MSMEs and breeds informality (a sense of humour about the rule of law). The next avatar of our EODB programme must aim to decisively shift the Indian state from being an MSME bully to an MSME ally. The upside could be about 50 million more formal jobs.
Manish Sabharwal and Sandeep Agrawal are co-founders of Teamlease Services and Avantis Regtech, respectively