HOW TO SHED REGULATORY CHOLESTEROL

The 1950 movie Rashomon by Akira Kurosawa investigates truth through a plot where four people provide alternative, subjective, self-serving and contradictory versions of the same murder. Kurosawa’s profound message—where you stand depends on where you sit— applies deeply to India’s employer compliance universe of 1,536 Acts, 69,233 compliances and 6,618 filings. Every central, state or local policymaker takes a narrow view of their acts, compliances and filings. So while there are no villains here, there are victims; the complexity of employer compliances increases exponentially with industry, sector, geographic spread, size and headcount. Rationalising, simplifying and digitising this universe will lead to 100 million new formal non-farm jobs, convince China factory refugees to choose India and mitigate the economic damage caused by Covid.

India’s poverty—there are 138 countries ahead in per capita income— is not a child of culture or unemployment but of low productivity. Too many of our people work in low productive areas (Karnataka’s GDP equals UP with a third of the people), low productivity sectors (45 per cent of workers toil on farms but only generate 14 per cent of GDP), low productivity firms (our 63 million enterprises only translate to 19,500 companies with a paid-up capital of Rs 10 crore) and low productivity skills (only 15 per cent of India’s labour have any formal vocational training or higher education qualifications). A huge spike in the number of our formal enterprises— whose higher productivity comes from access to human, social and financial capital—is key to India’s prosperity.

A complex compliance universe breeds informality because firms and entrepreneurs conclude that the benefits of formality are lower than its costs. India’s regulatory cholesterol is a direct result of the Avadi Resolution of 1955 that murdered competition, kneecapped capital markets and distrusted entrepreneurs. India and China had the same per capita in the early 1990s but now they are four times higher. Some of this was luck— China’s 1978 opening up coincided with a 30-year supercycle of global growth, global trade openness and global manufacturing supply chain deconstruction. But much of this was skill; China created a fertile habitat for formal non-farm job creation that has moved 400 million people off farms.

India in 2020—post-Covid and post-China border escalation—must think about export promotion and import substitution but should focus on economic complexity. Harvard Growth Lab director Ricardo Hausmann suggests that sustainable economic success comes from economic complexity, and his model predicts India will be more

prosperous than it is. India makes and does everything but not always well or at scale. Our missing ingredient is massive formalisation (10 per cent of our labour force covered by employer-based social security needs to go up to 50 per cent) and large employers (we need companies like Foxconn, which has a million workers in China). But prospective large employers and China factory refugees are spooked by our regulatory cholesterol because new investments read the law as it is written—and gaps in the way the law is written, interpreted, practised and enforced are deterrents. And the Shah Rukh Khan “Main hoon na” has lost potency because factory investment horizons almost always outlast political and bureaucrat tenures. Three systemic changes would help:

Rationalisation of stock: India’s too many laws breed too large a central government (we surely don’t need 58 cabinet ministers when Japan has 8, the US 14 and the UK 22) and too top-heavy a bureaucracy (we surely don’t need 250plus people with the rank of secretary in Delhi). Our laws must be examined for efficiency, relevance and effectiveness and reduction in regulatory bodies, number of registrations, renewals, returns, registers etc. For example, given the multiple definitions of wages under different labour acts, enterprises are required to maintain wage registers in different formats under different acts. There are 20 different inspectors who can inspect a factory in India. We need a GST type of exercise that not only subsumed several taxes but drastically cut the number of registrations, payments, returns and filings. The chart shows that half our problem comes from labour; we need a single national labour code and reduced payroll confiscation for lowwage employees, from 40 to 25 per cent. A building block for rationalising will be a Universal Enterprise Number—an Aadhaar number for enterprises— instead of the 30-plus numbers issued by government agencies. Simplification of flow: India’s compliance universe changed over 3,000 times last year. The changes include due dates, duty structure, interest and penalty calculations, forms, applicability, threshold values and classifications. The changes are published on 2,233 websites across central, state and local levels, sometimes in local languages only. There is no central repository of these changes. India needs a consolidated, central digital repository of all regulatory updates, searchable by date, ministry, department, Centre, state, Union territory and jurisdiction. We must institutionalise mandatory ease of doing business (EoDB) review of any regulatory change with a framework that includes parameters to assess whether: (a) it helps digital payment migration; b) enables paperless recordkeeping; c) promotes self-service compliance by reducing dependence on third-party consultants and d) cuts time spent on filings. Changes are inevitable, but it appears many recent changes could have been avoided or consolidated.

Digitisation of stock and flow: India’s compliance universe needs a three-year deadline of no physical filing. Aarogya Setu demonstrated its capability to innovate, design, build and distribute technology platforms to solve realworld problems quickly. The government should create an enterprise digital vault linked to the Universal Enterprise similar to DigiLocker. This vault should serve as a consolidated digital repository of all governmentissued documents such as licences, registrations, permissions, consent orders, certificates, notices etc. This initiative would help convert bits to bytes and nudge India towards a green paperless compliance ecosystem. We also have to redefine digitisation beyond a website and uploading records; every interface with enterprises (licences, renewals, filings, inspections, payments, general queries) should be ported to a secure open architecture with Open Digital Interfaces (ODI) for vendor platforms that enable straight-through filings like income tax and GST. This will automate record reconciliation and also identify leakage, detect fraud and flag discrepancies.

The Covid lockdown has exposed our inadequate formalisation in two ways—MSMEs and migrants. Formal MSMEs have behaved more honorably than informal ones because they can; they have access to equity, debt and working capital. Informal enterprises have no staying power. And since most migrants work for informal entities, they found themselves unable to sustain life in India’s job magnets after a few weeks. Formalising our economy will increase productivity and also greatly improve the resilience of our enterprises and workers.

No single company is subject to the entire compliance universe across central/ state governments, regulators, cities, industries and sectors. But compliance complexity compounds with ambition, scale and investments. India’s rise in the EoDB rankings is an important milestone, and those efforts must continue, but it’s time to shift the focus to the daily and lived experience of employers. The magnificent Hampi ruins in Karnataka have a band at the bottom of every supposed state building, with three animals reflecting Krishnadeva Raya’s wisdom—that all rulers need elephants for stability, horses for speed and tigers for courage. Employer compliance is a public good, but our current universe murders speed, courage and honesty. Covid is painful but could be transformational if it triggers a reboot of India’s compliance ecosystem. ■

Manish Sabharwal and Rishi Agrawal are co-founders of TeamLease Services and Avantis RegTech, respectively

Formalising our economy will not only increase productivity but also greatly improve the resilience of our enterprises and workers