SynopsisBusinesses, irrespective of their size, have to deal with complex laws, arbitrary compliances and too much discretionary powers of the bureaucracy. As a result, ease of doing business remains a mirage.
Everyone knows the gritty side of business. Here is the shitty side: According to the Factories Act 1948 and related rules, a businessman can go to jail for one to three years if the doors to the toilet at the workplace do not have gender markings. While laws are intended to protect people and maintain order, the fact of the matter is that many remain ludicrous but vexing in the age of entrepreneurship.
When the World Bank released its Doing Business Report 2020 report in 2019, India came in at the 63rd position in ease of doing business (EoDB). The overall rank of India in the 2015 report was 142 out of 190 economies. But in five years (2014-19), India had leapfrogged 79 positions. Such significant gains would surely mean businesses in India now find it easier to operate.
Rishi Agrawal, CEO, Avantis Regtech, says there have been improvements in EoDB rankings. According to him, India was in the bottom quartile back in 2014, but is now in the second quartile in 2020, which is the latest ranking. “In absolute terms, significant changes have happened. But is this enough for a country that is looking to get to $10 trillion as its logical destination in this decade? The answer is no,” says the CEO of the Pune-based “regulatory technology solutions company enabling Ease of Doing Business for over 1,557 legal entities.”
Agrawal peels this onion a little further. There are about 10 parameters in the World Bank report and in four parameters, India is still putting up a dismal show. One of them is registering a business, where we are ranked 136th.
The other parameter is registering property, where India is ranked 154th. For paying taxes, we are at 115th and as far as enforcing contracts are concerned, we are ranked at a dismal 163rd. It takes 1,445 days in India today for a commercial dispute to get resolved, says Agrawal.
It still takes months to register a new business, he says, and if it is a factory, one requires some 6,200 licenses, registrations, permissions and consent orders. After that, it still requires 600 to 1,000 compliances a year for an MSME to work with one manufacturing plant, and sometimes approvals from 20 to 40 inspectors.
“Businesses still spent lakhs of rupee a month dealing with five different consultants to complete their compliances and this is the reality in the 21st year of the 21st century, although we have moved from the fourth quartile in rankings to the second quartile. So, yes, in absolute terms, things have changed. In relative terms, a lot more needs to be done to change the life of an entrepreneur on the ground,” says the CEO of Avantis, a Team Lease company.
When Gayathri Vasudevan, Chairperson, LabourNet Services India, wanted to start a garment factory in Gharaunda, Karnal, in 2018, she did not anticipate the kind of problems she would face. “We were trying to open a garment factory, a small one with 50 to 100 workers, in Karnal. The beauty of it was that a place was not available because there were no industrial sheds there. When we sought approval for an industrial shed, it took us a painfully long eight months to get it, despite having the support of the local administration, the central administration, the state administration and the local MLA. Everybody was encouraging. Everybody was supportive. But the reason behind the delay were very simple issues,” says Vasudevan. From getting a three-phase electricity connection to the road connectivity, she had to deal with a plethora of rules and issues.
“If we are thinking of taking jobs to semi-urban areas — and I am not talking rural, I am talking about small tehsil headquarters — it is very difficult. I think the government’s intent is there, but it is still very difficult for you,” says Vasudevan, whose company is run as a social enterprise that enables livelihoods.
Problems are not limited to merely starting a business. Even when it comes to day-to-day affairs, businesses face a plethora of rules and regulations that can be very difficult to keep track of.
Citing an example, Pradeep Mehta, Secretary General, CUTS International, says even for intercorporate borrowing, a friend was sent to jail on a weekend — which reduces the chance of getting bail till the court reopens. “Such examples are absolutely exasperating in terms of ease of running a business. In fact, this is the problem we should focus on and not on ease of getting permits, whether or not you got the registration in time or what have you,” says the head of the consumer advocacy group.
Mehta says there are several issues, and chief among them is the lack of accountability. “We all know you have provided too much discretionary powers to the bureaucracy. They have been given so much power that they can harass you. Secondly, many of the legal provisions are so badly drafted that they continue to generate negative outcomes. The focus has to be on ease of running business, particularly to handle the nuisance value,” says Mehta.
A regulatory environment with a plethora of rules and compliances has a severe impact on businesses. Ashwin Chandrasekhar, V-P of Finance and EoDB, Global Alliance for Mass Entrepreneurship (GAME), says with entrepreneurs having to deal with several laws, notifications and guidelines that come out every day, it is very hard to focus on aspects like risk planning and investment.
Most of these regulations are obscure, he says. “We have built these laws on top of each other. Someone in the 1950s passed a law and in the 1970s they realised there was some mistake and they passed a law on top of it. Research shows that you have got very different definitions across the same set of laws that apply to one enterprise and I think that creates a lot of confusion.”
In one such effort to reduce regulatory burden, GAME has been working with various state governments to remove unnecessary compliances. Chandrasekhar says one such requirement is the necessity to get a trade licence, but abolishing it has been very difficult because of stiff resistance from state- and local-level officials.
It is not just the laws that are an issue, but the changes that happen in these that make compliance very difficult. The law of the land in India is highly fluid, and it changes many thousand times a year. According to Agrawal, in a normal year, there are about 3,000 to 3,500 changes. During Covid, the regulatory environment was hyperactive, and we saw an additional 1,100 changes to regulations that affected entrepreneurs.
“In the Covid period, if you were to look at the numbers, 4,600-odd changes happened in this hyperactive year of 2020 that affected entrepreneurs. Where are these published? On 2,233 websites of the Centre, state and local bodies. How do we find them? Go to the website, browse through it to find the relevant section, go through a miasma of pages — some of them may not even work — and you will find it if you are lucky,” says Agrawal of Avantis Regtech.
iStockThe pandemic resulted in frequent changes in rules and regulations and this severel impacted businesses.So what happened during the pandemic and why did the system go on an overdrive? There were laws that were getting changed overnight, notifications were coming out, there were changes to dates and specifications on how much space you can occupy in a building, who can work, who cannot work. While these changes disrupted the plans of most entrepreneurs, the way information dissemination was done has hurt almost everyone.
“We do not have a central repository of all the rules that can affect entrepreneurs,” says Agarwal. “Each local body has its own website. Each has its own design and its own navigation structure. Some of the changes in rules get reflected on the website days after these actually become active. Understanding exactly what happened can be a problem because some of these are only put out in the local language. So, while things have changed over the last 10 years, a lot of these still get written in the local language when a shall versus a may versus a should can have different meanings in law.”
Second, the vast majority of Indian compliances are still ad hoc, manual, paper based and people dependent. There is very little digitisation at the government level, and it is even lower as far as compliance by an entrepreneur is concerned.
“So, you are dealing with a situation where a company has to deal with 600 to 1,000 compliances, give or take. And I am talking about a company with a single-state, single-business, single-entity presence in the country. You are dealing with a couple of hundred filings a year, and you are dealing in an ad hoc, manual, paper-based and people-dependent programme where proximity to the department concerned and physical filing is important,” says Agrawal.
Mehta of CUTS International says it is also important to highlight the fact that it is not just the law, but the judicial system is also failing businesses. “There is an urgent need for systemic reforms in the legal system in order to address the ease of running a business. We ourselves are doing a very major project on analysing Supreme Court orders that have resulted in adverse economic impact and how the court approached such cases.”
He points to the recent troubles of Vodafone as a case in point. “This is a rare circumstance where, in the process of competition, we have to protect competitors. This is usually not the case, as usually in the process of competition, you protect the process of competition,” says Mehta.
India’s complex and often arbitrary compliances have many unintended consequences. Vasudevan says it is onerous to do anything that is localised in nature because of the intersection between local, state, and central laws. “If you are looking at manufacturing, I think one reason companies want to be small is if you operate multi state, it is just a nightmare. So, if you are smaller, your compliance levels are less. Your cost may still be very high, but it is still less than what it would have been if you had tried to aggregate and move forward,” says Vasudevan.
Echoing similar views, Chandrasekhar of GAME says EoDB is closely linked to formalisation of firms. When you have a large number of firms in the informal economy, even government schemes will not have the intended impact. He adds that the Emergency Credit Line Guarantee Scheme is a classic example of this as only 5-7% of the MSMEs could access the programme aimed at mitigating the economic distress of the pandemic on small businesses.
If we go by numbers, Agrawal says India had about 63 million enterprises, out of which only one million were formal. This means 62 million enterprises continue to operate in the informal sector.
Further, out of the one million formal enterprises, only half are actively contributing to the Employees’ State Insurance (ESI) and Provident Fund (PF) schemes. Agrawal says about 70,000 of these firms have a revenue greater than Rs 5 crore and about 22,500 have a paid-up share capital of Rs 10 crore or more. This means of the 63 million enterprises, only 22,500 have a paid-up share capital of Rs 10 crore. This displays the level of India’s regulatory cholesterol.
“There is a miasma of 1,536 acts in India today that affect entrepreneurs. These translate into about 69,233 compliances across central, state and local laws across seven broad categories — labour, environment, health and safety, finance and taxation, commercial, industry specific, secretarial and general,” says Agrawal.
Out of the 69,233 procedures, 26,134 have jail terms associated with them. “Some 37% of our compliances can send an entrepreneur to jail. That is the kind of hostile ecosystem that our entrepreneurs operate in,” says Agrawal.
One area that India has realised it needs to work on is its labour laws. Set in the colonial era, the labour laws are tuned to income and job security and not boosting job creation. This meant labour laws often clashed with economic growth.
Mehta cites the examples of schemes like ESI and PF. They are good and well-thought-out welfare legislations, but do they give the worker the status of being a partner in production? “The worker is a partner in a business, and without the worker, we cannot do what we are doing. Have our factories been able to treat the workers as a human capital rather than treat them as cost centres? This is a problem,” says Mehta.
India has now unveiled a new set of labour laws that is expected to be both business- and worker-friendly, while also encouraging economic growth. But there are a couple of issues here, too.
“The new labour codes are not yet operational and it is taking a long time to get these working,” says Vasudevan. “Also, if most MSMEs are not in the formal sector and they do not plan to be in the formal sector, the new laws do not impact most of the workers in the MSME sector.”
Agrawal says 91% of the labour in the country is outside the ambit of the labour laws. “What you are talking about, in terms of protection, is only for the 9% of the labour in the organised sector and the rest still do not benefit. I think the first problem that we have to deal with is to expand the applicability of labour laws so that a larger chunk of our labour can start benefiting,” says Agrawal.
These are a few instances that businesses continue to face staggering issues. It is indubitable that for the government to realise its economic ambition, there has to be tangible improvement on the ground. India cannot become a $10-trillion economy by 2032 by burdening its entrepreneurs with such compliances and jail terms.
(Edited by Ram Mohan. Lead image by Sadhana Saxena and illustrations by Mohammad Arshad)
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