(Photo: Ramesh Pathania/Mint)
(Photo: Ramesh Pathania/Mint)

Opinion | A good nudge to relieve businesses of regulatory sludge

Companies need freedom from the sludge of 58,000-plus compliances they have to face each year

Now that India’s policymakers have taken on board Richard Thaler’s principle of nudge, it is time to get them moving faster on another track he has been advocating recently—removing sludge. Intuitively, both terms are easy to understand. A nudge gently pushes people to make the right choice, without restricting their free will. On the other hand, sludge is anything that makes it harder for individuals to make the right choice, anything that curbs what he calls “wise decision making". So, for instance, a default-checked opt-in box for insurance while booking a flight online is a nudge; it encourages the flier to choose the right option of insured travel, but also allows him an easy one-click choice to opt out. However, if we have to fill forms with many details, and the terms of the deal are set out in complex language, it is more convenient to take the risk and skip being insured—the sludge here prevents people from doing the right thing.

While identifying the right thing is crucial for policymakers, nowhere is sludge more evident than in regulatory compliance. What we term as “ease of doing business", Thaler would slot under removing sludge. Businesses in India face 58,000-plus possible compliances a year—there are multiple regulators and government departments at the centre, state and city, and the gram panchayat level, each putting in demands. We all know how this leads to loss of precious productive time, and increased costs and efforts in compliance. Not to mention the frustration felt by those who want to do the right thing but find the going hard. It’s not just the number of returns that have to be filed; what can be most time consuming and frustrating is staying up-to-date with the changes that are coming at businesses faster than they can process. Over the past 12 months, there have been more than 2,400 changes in compliance requirements across 1,100-plus Acts. All businesses know that even with the best intentions, it is easy to miss a date of filing or make inadvertent errors in doing so. All this regulatory cholesterol makes it more rational for enterprises to stay under the radar and, in the case of the unorganized sector, add informal rather than formal jobs. If India’s economy is to grow to $5 trillion, we need more formal jobs and a larger formal sector, and removing the sludge will help firms make the right choice.

Thankfully, there is already change on the cards. A draft cabinet note has been prepared by the department for promotion of industry and internal trade last month for a National Ease of Doing Business Policy. From what has been reported in the media, it appears there will be an overhaul. Ministries and departments have been asked to actually measure the time and cost spent by businesses on compliance. The administration is being asked to justify the need for licences, remove those that can be removed, replace them with simple registration processes where needed, and so on.

While departments are being asked to justify their compliance demands individually, the Prime Minister’s Office has to take an overview from the perspective of a small business that deals with multiple departments and regulators to enable the formalization India needs. A cue can be taken from the ministry of corporate affairs’ new e-form AGILE, introduced in March, which has made starting a new business much simpler. Instead of interacting separately with five departments, now with one form and one set of documents submitted online, the company is incorporated, allotted a Corporate Identity Number, Permanent Account Number and Tax Deduction and Collection Account Number, and automatically registered for the Goods and Services Tax, Employees’ State Insurance Corp. and Employees’ Provident Fund Organization. This draws a new company and its employees into our tax and welfare networks in a single sweep, without the need of additional efforts. In April, another small change removed the tedious requirement of notarized affidavits by each subscriber to the memorandum of association and first directors. These two changes are estimated to have cut the time it taxes to incorporate a new company from 12 days to six, and reduced the documents needed from 56 to 19. Estimated savings on procedures and time have pushed India’s position on the “Starting a New Business" parameter of the World Bank Ease of Doing Business rankings up from No. 137 to No. 105 (keeping all other points same).

So, Ease of Doing Business is not just about simplifying a one-time registration process in one department. The sludge to be removed includes the number of interactions a business has to have with multiple departments, and the number of records that have to be maintained by a business. A business could potentially have to register for 21 different numbers; why can’t this be replaced by a Unique Enterprise Number, that can be used across all central and state departments?

The proposed National Ease of Doing Business Policy looks at changing the mindset at the Centre, and this could be a new era in regulation and control. But we need this vision to translate into action on the ground on the scale that this government is aiming for. Just like the nudges proposed in the Swachh Bharat Mission, states too need to get on board for a national clean-up of the sludge that permeates our business world. As Thaler says, “Less sludge will make the world a better place." It is time India became a better place to do business.


Sumita Kale is with Avantis Regtech, a TeamLease company

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