The compliance burden imposed by states on enterprises is too thick for them to flourish and generate formal employment
ndia’s former prime minister Indira Gandhi saying “strong states lead to a weak nation" and then Andhra Pradesh chief minister N.T. Rama Rao saying “the central government is a conceptual myth" were merely extreme views in a long Indian debate on the relative roles of the state and central governments. This debate, seeded by the introduction of dyarchy in 1919, became an important part of the three-year task for the 299 remarkable people who started writing our Constitution in 1946. The tricky state and Centre intersection has traffic jam potential. Massive, uncoordinated and punitive regulatory cholesterol after independence made life difficult for employers. The goods and services tax (GST) cleared some of it, though covid’s pain is challenging finances, guarantees and borrowing now. But the case we need to make is that states need to act more boldly in rationalizing, simplifying and digitizing employer compliances for India to attract factory refugees from China and create a fertile habitat for formal non-farm job creation.
India’s employer regulatory cholesterol universe is vast: 1,536 Acts that create 69,233 compliances and 6,618 filings every year. More painfully, this changed eight times a day last year. While the Centre should hold up a mirror, 55% of the Acts, 63% of compliances, and 65 % of filings are at the levels of states. And since both the Centre and states legislate on labour, these constitute almost 72% of all the state compliances. States account for a whopping 97.4% of the 2,721 labour registers, displays and returns demanded. The average state has 50 different registers and 15 unique returns to be filed in a year.
This regulatory cholesterol may seem like a thorn in the flesh, but it is a dagger in the heart. It breeds informal, sub-scale and uncompetitive enterprises that don’t have the productivity to grow, pay minimum wages, or afford to offer workers social security. India’s 63 million enterprises only translate to 120 million GST registrants and only 70,000 of these have annual revenues of more than ₹5 crore. Compliance complexity gets compounded by geography, size and headcount, and that is why India doesn’t have large factories, formal employment looks like a rounding error in total employment, and the farm sector continues to employ 45% of our labour force. A reboot of the compliance system needs state governments to do three things:
Rationalisation: All states should form a compliance commission with a 90-day mandate to review all their compliances and filings for relevance. Redundant, duplicate and overlapping items should be identified and rescinded by way of an executive order. There is significant redundancy and overlap between different registers required to be maintained under different Acts. There are at least four different formats of accident registers, seven formats for wage registers, four of inspection/visit books, and several formats of attendance records, employee records and advances. The number of registers and returns can be reduced by 90%.
Simplification: A micro, small and medium enterprise (MSME) in a state can be inspected by as many as 20 inspectors. At least 12 inspectors can inspect various labour records under different Acts. There is no coordination among inspectors. One or more inspectors can visit unannounced at any time and begin a manual inspection process to review similar employee records such as wage, leave and attendance, overtime, advances, and accidents. The process is highly manual with little or no digital interface. States need to review these practices and introduce risk-based, consolidated, faceless, presence-less, and digital inspection processes. Telangana has recently implemented such a process, which can serve as a blueprint
Digitization: States should catalogue all enterprise interfaces needed for one-time applications for licences, registrations, renewals, returns and payments. They should build or upgrade existing digital platforms to ensure that no physical visit or meeting is required to conduct day-to-day business with enterprises. All documentation should be submitted and received electronically, with unique tracking numbers, date and time stamps, service level agreements, and an escalation matrix to reduce the need for third-party consultants and physical office visits for submissions, follow up and payments. They must also establish a common portal to publish all regulatory changes, instead of multiple portals at the department, municipal, zila parishad and gram panchayat levels.
A big constituency for state governments is MSMEs. They account for 32% of India’s gross domestic product (GDP), 24% of employment, 45% of exports, 33% of manufacturing, and 25% of services. They are the most vulnerable to the covid crisis, the least responsible for it, and the key to its solution. This importance of small businesses is global. Jack Ma suggests Alibaba’s biggest economic contribution is an ecosystem that helps Chinese small businesses grow, Angela Merkel suggests the backbone of Germany’s industrial value creation is its Mittelstand, and Ronald Reagan believed small businesses embody American optimism. Regulatory cholesterol hurts MSMEs in particular because they don’t have the resources, time or skills to handle the complexity that supports a parasitic community of consultants, retired bureaucrats and inspectors whose services include “good relations".
Granville Austin’s wonderful book, The Indian Constitution; Cornerstone of a Nation, chronicles the Constituent Assembly debates around federalism, arguing, “The most singular aspect of the drafting of the federal provisions was the relative absence of conflict between the centralized and provincialists. There is no dearth of argument over the distribution of powers, emergency powers, and revenue distribution yet avoided what Ambedkar called the tight mold of federalism and could be both unitary as well as federal according to the requirements of time and circumstances". The time and circumstances for state governments to reduce regulatory cholesterol have come; expanding formal non-farm job creation needs them to axe their excessive compliances and filings.