The Chamber of Industrial & Commercial Undertakings (CICU), a non-profit society that represents industrial and trade interests in Punjab, wrote a letter to the Prime Minister requesting support for Micro, Small, and Medium Enterprises (MSMEs) to cope with the Covid-19 crisis.
Industry bodies have asked the Union and state governments for various relief measures, including financial assistance and reforms in land and labour regulation. States have responded by relaxing previously rigid regulations across a variety of domains.
Punjab, for instance, passed the Right to Business Act recently. The stated aim of the Act is to improve the ease of doing business by allowing “self-declaration, exemptions, [and] speedier approvals and inspections” for new MSMEs.
Before the passage of the Act, MSMEs needed seven different approvals prior to beginning operations. Each of these approvals requires multiple documents, many of them overlapping. After getting the clearances, MSMEs had to apply to the state-level Department of Industries and Commerce, for final registration.
The Punjab Right to Business Act simplifies this process. Now, a prospective business owner can apply to the newly created District Nodal Agency before getting any clearances. The nodal agency has to provide “in-principle approval” for the MSME within 15 days for enterprises located outside industrial parks and three days for those in industrial parks. If the nodal agency does not respond before the deadline, registration is deemed approved.
This approval allows MSMEs to operate for three-and-a-half years before wading into regulatory clearances. During the ‘in-principle approved’ period, MSMEs are free from inspection, unless there is a specific complaint that is “of a serious nature”.
The MSME can use this period to plan and secure the full set of approvals. It is not clear what would be serious enough to warrant inspection, but that may be clarified once the rules are released. The in-principle approval reduces the administrative time and costs involved in starting a business, especially those incurred to ‘facilitate’ administrative processes.
The in-principle approval covers six sections: the sanction of building plans, issuance of an occupation certificate for buildings, application for fire NOC, registration of trade license, approval of factory building plan, and registration of shop or establishment. While the approval does cover a seventh sanction, land permissions, it does not allow the nodal officer to alter land-use restrictions.
At first glance, this Act merely postpones the regulatory burdens of MSMEs into the future and does not change the need for the various licenses. This Act only focuses on the ease of opening a new MSME. It does not, on its own, impact the regulatory or legal burdens of existing MSMEs. All the clearances still need to be obtained, the only difference being, later.
Punjab still has close to 1,500 state-level compliance requirements in its books, besides central compliances. Take, for instance, the trade license requirement. The Right to Business Act does not eliminate the need for the license; it merely does away with requiring the clearance ex-ante. But in combination with The District Reform Action Plan, the process for obtaining this particular licence has been made simpler. Only two documents are required to obtain the licence, identity proof and an occupancy certificate and the government obliged to issue the license in 12 days. Perhaps over time, the government will do away with the requirement altogether.
Some other states have also attempted such simplifications. Gujarat, in late 2019, passed the Gujarat Micro, Small and Medium Enterprises (Facilitation of Establishment and Operation) Ordinance. The stated aim of the Ordinance was similar to that of the Punjab Act.
In the case of Gujarat, the applicant applies not to a district level officer, but to a state-level one. The “Acknowledgement Certificate”, is similar to the “In-principle approval” given in Punjab. In Gujarat, unlike Punjab, there are no defined deadlines in this ordinance. The ordinance says that after submission of intent to start a business, the acknowledgement certificate will be provided “forthwith”. In Punjab, there are defined timelines, and a presumption of acceptance if those timelines are not met.
The Right to Business Act, along with the additional reforms taken place by the Government of Punjab will likely engender a friendly environment in which to start and operate small enterprises. From 2015 to 2018, the state’s ease of doing business score has increased from 36.7 to 54.4. This Act is likely to push the score up even higher.
MSMEs, which employ a substantial chunk of India’s non-agricultural labour, have been struggling for the past few years. The ongoing COVID-19 pandemic has not been kind to small firms, but troubles started well before that. Industrial output growth was at 1.3% for 2019-2020, compared to 5.2% in 2018-19. Other states should consider the Right to Business approach to encourage small businesses to start up again and come back stronger.
The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.