Shankar Mourya/Hindustan Times
Shankar Mourya/Hindustan Times

Opinion | Tackling regulatory cholesterol to reduce our farm dependence

India needs another round of Ease of Doing Business reforms to create more formal non-farm jobs and ease rural distress

Writer C.S. Lewis said, “You can’t go back and change the beginning but you can start where you are and change the ending." Indian farmers are poor because they have too many colleagues and the productivity programmed into these 45% of our workers generating 14% of our gross domestic product (GDP) represents a perpetual condemnation to poverty. However, the migration of our farm labour to non-farm jobs is held back by massive regulatory cholesterol for formal non-farm job creation; emphasizing “formal" is important here because many policy pundits still fight yesterday’s war of unemployment while our labour force has moved on to face its fight for higher wages. Higher wages need formal enterprises and formal employment whose breeding needs another round of Ease of Doing Business reforms, or EODB 3.0; a bold, targeted and time-bound reduction of regulatory cholesterol that plagues all formal employers but is particularly painful for new and small ones.

Perpetual tension is baked into any democracy, where everybody has a vote, and its economy, where the productivity of geographies, sectors, firms and individuals is always unequal. However, India’s 250 million farmers are an extreme case. Despite agriculture employment dropping from 64% to 45% of all workers since 1991, the absolute numbers only began their decline in 2011. Meanwhile, China’s share of farm employment is down from 56% to 16%. Besides, 64% of India’s rural employment on farms is politically unsustainable.

The exploitation of Indian farmers continues for multiple reasons: unplanned urbanization (which has created a vast divergence between the cost of living in rural areas and cities), low manufacturing in India (most countries have transitioned their farm labour to factories) and our unsuitable human capital (an absence or mismatch of skills). However, India has the world’s largest agricultural labour force primarily because most of our 63 million non-farm enterprises pay some wages, but don’t have the productivity to pay a wage premium. We need fewer enterprises and more formal ones. Our 12 million goods and services tax (GST)-registered enterprises (up from 6 million paying indirect taxes) represent huge progress, but we need to raise the numbers of those of our 63 million enterprises paying social security (only 1.2 million currently), our companies with a paid-up capital of more than 10 crore (only 19,500), our enterprises with institutional finance (only 8 million), and our enterprises with more than 100 employees (less than a million at present).

EODB 1.0 (delicensing) and EODB 2.0 (11 taxes becoming one GST) have brought our entrepreneurs to the threshold of recognizing that the costs of formality are now lower than the benefits that going formal offers. However, most enterprises hesitate because of the sheer enormity, complexity and irrationality of our compliance universe. There are more than 1,000 Acts, 58,000+ compliances, 3,000+ filings and 2,500+ annual changes. While this universe of regulatory cholesterol is a thorn in the flesh of big enterprises, it is a dagger in the heart of small and new enterprises. EODB 3.0 must have three components; rationalization, simplification and digitization.

The rationalization agenda is clear—a one-time exercise that leads to fewer laws, compliance processes and filings. However, sustaining acceleration in formal job creation needs two structural changes. One is fewer ministries (we have 55) and fewer cabinet ministers (Japan has 9, US has 15 and the UK has 21). The second is civil service reform. Our services combine a dysfunctional cocktail of views that prohibit everything unless specifically permitted, and treat those they service as guilty, until proven innocent. They end up meddling in business to complicate things. The Indian state needs to interfere less, so it can do more.

On the simplification agenda, enterprises need a version of Aadhaar, a universal enterprise number to replace the 20+ current government-issued numbers. Action is needed on the goofy, tired and misgoverned social security monopolies of the Employees’ State Insurance Corporation (ESIC) and the Employees’ Provident Fund Organisation (EPFO). Their complexity breeds corruption and the wedge they create between haath-waali salary (what workers get) and chitthi-waali salary (what’s on paper) incentivizes informality. Fifty million new people could join such employee welfare trusts if competition is encouraged among those offering such retirement benefit services, an employee’s EPF contribution is made optional, and the administrative fee of such funds is capped at their costs. We also need one labour code instead of four. The lack of one definition for wages, workers and establishments breeds litigation, and multiplicity breeds corruption. We must fortify decentralization by making labour a state subject. Twenty-nine chief ministers matter more than one prime minister in creating fertile job habitats; their alibis need taking away, and competitive federalism needs fuel.

Lastly, the digitization agenda—a paperless, presence-less, and cashless world for compliance. This needs shifting from uploading documents to a government website with passwords, to an API architecture that permits the straight-through processing of filings from external systems. At present, the sequence of compliance tracking, processing data, creating returns, and making filings is mostly digital in the early phases, but forcibly morphs from online to offline later. The GST has a useful template for compliance that must be copied—with a 2020 deadline.

The only way to help sustain India’s farmers is to have less of them. EODB 3.0 can move 100 million farmers to formal non-farm enterprises over the next 10 years. Let the games begin.

Manish Sabharwal & Sumita Kale are, respectively, with Teamlease Services and Avantis Regtech

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