“The most persistent tendency in India has been to have too much government and too little administration; too many laws and too little justice; too many public servants and too little public service; too many controls and too little welfare.”
Nani Palkhivala’s unerring description of the Indian state holds true to this day. The public manifestation of the Indian state’s deep distrust of its enterprises has resulted in a regulatory framework of 1,536 Acts, 69,233 compliances and 6,618 filings as identified by Teamlease and Avantis RegTech. Unfortunately, this archaic regime also increases compliance costs, which create a perverse incentive for enterprises to remain small and unproductive.
Multiplicity of approvals and the associated obstinate red-tapism also forces entrepreneurs to spend a bulk of their time navigating the maze of regulations. Consequently, entrepreneurs are forced to adopt strategies like arbitrage to operate within the four corners of law. For example, Some enterprises only hire contract workers, who are employees of the contractor and not considered a part of the firm’s workforce under the extant labour laws. This allows enterprises to remain small enough to be exempted from onerous labour regulations. Although not ideal, such hiring practices are often the most rational option for enterprises.
Recognising the compliance burden on our entrepreneurs, the Department for Promotion of Industry & Internal Trade has formulated a business reforms action plan. It seeks to simplify and digitise compliances, identify all outdated laws along with concomitant rules/regulations and decriminalise offences which can be resolved through civil remedies. Complete digitisation of processes and forms would also reduce rent seeking opportunities by curbing physical interface with government officials.
Adoption of a principle-based regulatory regime, instead of trying to draft rules addressing all eventualities that may or may not arise in the future, is the need of the hour. Our risk averse bureaucracy, however, has institutionalised this practice of formulating rules for any eventuality due to the fear of ex post facto investigations of their decisions. For instance, despite expert committees recommending a need for allowing more discretion in the bidding process for government contracts, we still rely on the lowest cost method or L1 criteria to select bidders. The L1 system is prevalent since it allows for mechanical regulation by bureaucrats rather than any exercise of administrative discretion. This apprehension is on account of investigative overreach in cases where decision makers were charged with corrupt practices despite no proof of malafide intent or unjust enrichment. Such apprehensions can be addressed by instituting transparent decision-making processes in different ministries and statutory regulators.
A good institutional architecture would be to emulate the board-driven decision making process of regulatory bodies like the RBI and SEBI. Such boards consist of members drawn from government, academia, business, etc. This ensures that any decision taken undergoes proper scrutiny, allowing for evaluation of the same by officials from diverse backgrounds. Adopting such a structure would also help prevent any ad-hoc decision making, avoid mistakes leading to disputes and ensure that no single person is able to unduly influence decisions.
Department Related Standing Committees (DRSCs) of the Parliament or state legislatures could be mandated to conduct a review and cost benefit analysis of all existing legislations and rules made thereunder. The DRSCs can ask relevant departments to justify the rationale for keeping such rules or laws on the statute books. Additionally, any new rule or regulation brought out by any department should follow a process similar to that of the pre-legislative consultation policy. This would require the proposed rule or regulation to be put up for comments from stakeholders along with detailed impact analysis, justification for introduction, etc. Subsequently, the department can place the proposed rule or regulation before the DRSC with a brief summary of the feedback received from stakeholders along with its responses.
A legislation along the lines of the U.S. Administrative Procedure Act, 1946, should also be promulgated by the Parliament. This act subjects “all subordinate legislation to a transparent process by which due consultations with all stakeholders are held, and the rule or regulation making power is exercised after due consideration of all stakeholders’ submissions, together with an explanatory memorandum which broadly takes into account what they have said and the reasons for agreeing or disagreeing with them.” Adopting such a consultative approach would increase transparency, reduce arbitrariness and the risk of affected parties seeking a judicial recourse for striking down the concerned rule or regulation.
Governance through periodic issuance of circular/office memorandum distorts the principle of regulatory certainty for enterprises and citizens. There are close to 4,000 regulatory changes a year that affect enterprises. This forces entrepreneurs to divert their creative energies towards keeping a track of such circulars instead of focusing on expanding their enterprises. As suggested in the economic survey 2016-17, a Transparency of Rules Act should be enacted, which requires all governmental departments or entities to disclose all relevant acts, rules and regulations to the public. This would allow for lesser litigation and compliance costs for entrepreneurs. Additionally, as rules and regulations undergo amendments at regular intervals, the concomitant circular should mention such amendments along with a copy of the updated rule/regulation. This would provide regulatory certainty to enterprises as they would not have to keep a record of all the amendments to circulars. An institutionalised process audit by a third party should also be put in place to prevent application of any rule or regulation which has not been disclosed to the public. For example, street vendors could not access loans under the PM Street Vendor’s AtmaNirbhar Nidhi (PM SVANidhi) scheme since they lacked knowledge about onerous regulations like obtaining a letter of recommendation from the urban local body, affidavits on stamp papers, etc.
The prevalence of regulatory cholesterol prevents millions of small enterprises from scaling up productivity and providing gainful employment to others. The Central and state governments have made a good beginning by digitising existing processes, focusing on self certification for compliance, etc. This must be accompanied by an institutionalised approach as outlined in this article, which would require the government to shed its distrust of private enterprises. Liberating private enterprises from the clutches of numerous filings, forms, inspections, etc. would unveil entrepreneurial energies, catalyzing economic growth and job creation on a large scale.
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The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.
