Choked by red tape

Indian firms are hobbled by endless compliances, complicated laws and overlapping regulations.

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Illustration by NILANJAN DAS

INDIA HAS COME A LONG WAY since the days of the licence raj, but starting and running a business still remains difficult. From land acquisition to compliance with labour and licence laws to the ever-present threat of harassment by inspectors and officials, Indian firms deal with a daunting series of challenges. These lead to inordinate delays and cost overruns, disillusioning entrepreneurs to the point that many look abroad to find more business-friendly environments to operate in. On an average, there are 27,000 compliances relating to labour alone, with 61 acts governing environment, health and safety (see Unease of Doing Business). (Compliances refer to legal regulations; these include paying taxes or getting business registrations. Filings are paperwork submissions and records-keeping requirements.)

Take the story of Binod Kumar Chaudhary, a billionaire from Nepal and chairman and president of the Chaudhary Group, which is involved in both the hospitality and food sectors (it manufactures the popular Wai-Wai noodles). In 2010, he bought land in Surat, intending to set up a hotel, but abandoned the project after several years of trying to get approvals. “The procedure for getting approvals for land and buildings is very complicated,” he laments. “[Business is] all about the timing and opportunity cost.” He adds that in his experience, when it comes to setting up factories, state governments have been very supportive, but when it comes to the hospitality business, getting approvals is a nightmare. And another example is that of Rohan Shah, an entrepreneur looking to set up a factory in Maharashtra who went online to detail his months-long ordeal (see Ground Realities).

Even small MSMEs (micro, small or medium enterprises) operate under a heavy regulatory burden, for instance, they can face inspections from at least 20 government departments in India. “Our inspection process does not have a risk-based approach,” says Rishi Agrawal, co-founder and CEO of Avantis RegTech (a TeamLease company), a firm focused on enabling the ease of doing business in India. He adds that regulations often draw no distinction between sectors: “An IT company is treated at par with a factory, and inspectors can show up any time.”

If you include both central and state regulations, there are 1,536 acts that apply to enterprises, with 69,233 compliances and about 6,000 filings. A mid-size company deals with about 5,000-10,000 compliances a year. For labour alone, companies have to maintain 42 different registers, with another 5-6 for wages. Agrawal says that the number of these registers can be brought down to 10. There are other instances of duplication as well, e-commerce companies operating across India need to get GST (Goods and Services Tax) registrations in every state. According to Avantis, a small firm in India, with one factory and up to 500 employees, needs about 23 licences, has to abide by over 750 compliances and has to submit about 120 filings a year, while medium firms (up to 5,000 employees) have to grapple with over 5,500 compliances.

A note published in January this year by industry body FICCI (the Federation of Indian Chambers of Commerce and Industry) stressed the need for the government to reduce this regulatory burden. It estimated that on an average, Indian firms need to comply with 1,984 rules and regulations, which include submitting filings and getting approvals under 122 central and state laws. The Companies Act alone imposes about 286 compliances, with the GST regime, which was brought in to simplify business processes, adding to that burden.

Consider the food business. Firms in this sector require three different kinds of licences, central, state and basic. Each of these requires a number of different forms and supporting documentation to be submitted to and approved by various departments. A basic FSSAI (Food Safety and Standards Authority of India) licence requires eight different forms to be submitted; the state-level version requires 14 and the central one, 16. The FSSAI website states that since obtaining these licences takes ‘more than 60 days’, applicants can start their businesses before they have been granted. However, since there is no guarantee of licences being granted, firms that do so could find their investments going down the drain, and in the meantime, they are vulnerable to harassment by authorities. There are other issues as well. Agrawal says these include complex records-keeping requirements, a multiplicity of submission dates for various filings, ambiguous laws that are open to interpretation and a dizzying number of rule changes through the year (his firm estimates that there are about 2,500 rule changes annually).

Even MSMEs operate under a staggering administrative burden, for example, there are 10 different formats for wage registers, four different accident registers and four different muster rolls. However, the Union government has recently taken steps to ease these burdens. It recently simplified India’s labour laws, subsuming 29 central labour acts into four codes, which are expected to reduce the number of licences, registrations, permissions and renewals required. For instance, when it comes to payrolls, the former system required firms to file one annual return each under the Minimum Wages Act, the Payment of Wages Act and the Payment of Bonus Act. Under the new system, these three filings will be replaced by a single annual return.

Six Up, Half a Dozen Down

However, the implementation of reforms is fraught with challenges. Agrawal points out that this requires dealing with many groups with vested interests. Not all are unreasonable, for instance, trade unions are protesting the easy hire-and-fire provisions in the new central codes. Secondly, since labour is a concurrent list subject, state governments can formulate their own rules, which means that the four central codes could easily balloon once more. Similarly, land laws are mired in complexity and opacity. Land use is fundamental to business, whether for setting up a factory or for an infrastructure project. A major issue is that most land in India is classified as agricultural, over 60 per cent, according to World Bank data from 2016. For businesses to use this land, it needs to be converted to industrial use, and many businesses report that re-zoning land often involves labyrinthine processes and extortion by government officials.

One reason for the surfeit of permissions required has to do with how many ministries there are. In his book India Unlimited: Reclaiming the Lost Glory, Arvind Panagariya, former vice-chairman of the NITI Aayog, points out that as of early 2018, there were 53 ministries in India. Of 19 major nations, only Sri Lanka, with 51 ministries, came close. China, the US and Germany all have less than half that number, 25, 22 and 13, respectively. The correlation is simple, more ministries mean more bureaucracy. Multiple ministries also slows down decision making, as there are overlaps in jurisdiction, leading to multiple clearances being required on identical issues.

According to an analysis by TeamLease Compliance, the Indian regulatory landscape has 677 acts, 25,537 compliances and 2,282 regulatory filings at the central level alone. Finance and taxation alone are governed by 54 central and 62 state acts, with 945 central compliances, 2,339 state compliances, 254 central filings and 736 state filings. A World Bank analysis points out that in 2018-19, businesses in India spent 252 hours, on an average, simply preparing and paying taxes. In Singapore, that number was 49 hours, the lowest in the world.

One of the Modi government’s earliest promises was ‘minimum government’. It has tried to deliver on this, for example via changes in land acquisition laws and by simplifying business processes through new laws like the GST and the Insolvency and Bankruptcy Code. Nonetheless, the multiplicity of ministries and departments makes this difficult, 10 different departments might well ask for 10 different compliances that all regulate the same aspect of the business. Still, officials like Deepak Bagla, MD and CEO of Invest India, a government body to facilitate business investment, says the government is working on a single system of permissions to prevent duplication and limit the number of officials involved.

The Big Picture

Fears of running afoul of regulations also leads Indian businesses to domicile overseas and complicates the experience of global giants operating in India. In 2014, global phone maker Nokia shut down its manufacturing plant in Chennai, set up to export products to international markets, after the Tamil Nadu government served it with a Rs 2,400 crore tax notice, saying that it had also been selling phones made at this plant in the domestic market. In a separate tax case, the Supreme Court ordered Nokia India to deposit Rs 3,500 crore in an escrow account. ‘The asset freeze imposed by the tax department prevents Nokia from exploring potential opportunities for the transfer of the factory to a successor to support the long term viability of the established, fully functional electronics manufacturing ecosystem’, the company had said at the time.

According to the Hurun Global Unicorn Index 2020, Indians have set up 61 ‘unicorns’, start-ups valued at over $1 billion, but 40 of them are based outside the country. The 21 firms based in India have a cumulative value of $73.2 billion; those domiciled abroad are worth $99.6 billion. On a related note, the world’s largest furniture retailer, Ikea, first announced plans to set up shop in India in 2012, but it took nearly six years to get the necessary approvals and permissions. On the maze of compliance requirements, Rajesh V. Shah, co-chairman and MD of Mukand, a major steel and machines producer, says: “I believe a root cause is that once an incident happens, whether it is financial [irregularity] or a [firm] breaking the rules, a new set of restrictive and punitive regulations arrive and are put in force. It then becomes impossible to reverse [the new rules].”

Another attempt by the government to ease the burden of doing business in India has to do with getting rid of the ‘inspector raj’. These include the shift toward ‘faceless assessments’ by the income tax department, as well as the GST regime itself. However, these remain works in progress, for example, businesses have complained that the GST platform is not exactly user friendly and is prone to error. Similarly, the government’s ‘transparent taxation’ programme, which aims to eliminate the human interface between taxpayers and the income tax department to reduce corruption and rent-seeking by officials, is yet to give results. Over the past few years, many businesses have complained of harassment and arm-twisting tactics by tax officials despite their taxes being paid on time.

Even so, the government has announced a host of programmes to improve the ease of doing business. These include Start Up India and Make in India, geared toward improving access to credit, making it easier to set up businesses and get permissions. Manish Sabharwal, chairman of TeamLease Services, says that this stems from the difference between a law in theory and in application. “About 18,000 of the 60,000 compliances in India prescribe jail [as penalty for non-compliance],” he says, highlighting that this makes it easy for corrupt officials to extort businesses. “We have to use the Covid window for reforms,” he adds, saying that there are three kinds of reforms: flick-of-the-pen reforms, institutional reforms and capacity-building reforms. “While capacity-building and institutional reforms will take time, flick-of-the-pen reforms should begin right away, and cut criminalisation from at least 75 per cent of compliances.”

Over the past few years, the government has put in significant effort to raise India’s ranking in the World Bank’s Ease of Doing Business ranking. This includes the setting up of Invest India, mandated to facilitate investment, helping businesses get approvals, permissions and land, as well as implementing a ‘single window’ approach for businesses to deal with the central and state governments. “We do everything for businesses,” says Bagla, “from identifying business opportunities and working with investors on business plans to identifying a location [for them to set up shop] and getting all approvals.” Invest India is hoping to bring in transparency, ease communication with government departments and offer in-depth analysis to investors on the viability of proposed projects. “We have relationship managers; we want to showcase the new India [to investors],” says Bagla, adding, “young, bright people from across sectors and top universities have joined us. My first objective is to be a single window for investors and insulate them from complexities.” The agency’s job is also to advise the government on new policies and the simplification of old rules. For example, Bagla’s team has found that for central approvals, there are about 2,000 fields that need to be filled in various forms, of which nearly 1,300 are redundant or involve duplicate work. He says a single form for approvals from 13 ministries is being developed, and will be ready by the first quarter of next year. A digital locker, in which paperwork and certificates can be stored, is also being developed.

According to a World Bank report, it takes 29 days to start a new business in India and involves 12 procedures. In Europe and Central Asia, it takes 11.9 days, in OECD high income countries, it takes about nine days and in Sub-Saharan Africa, it takes about 21.5 days. In terms of procedures for starting businesses, OECD countries have 4.9, Europe has 5.2 and Sub-Saharan Africa, 7.4. When it comes to contract enforcement in India, the situation is similarly grim, on an average, it took 1,445 days, nearly four years, to enforce contracts in India in 2018-19 and cost nearly one-third of the claim value.

Vietnam, which has emerged as a favoured investment destination, has focused on improving access to credit and making it easier for businesses to run day-to-day operations. In 2019, until October, FDI into Vietnam rose by 7.4 per cent year-on-year. China, meanwhile, has joined the ranks of the world’s top 10 most improved economies for ease of doing business for the second year in a row, according to the World Bank Group’s Doing Business 2020 study. According to the World Bank analysis, the country has focused on improving the domestic business climate for small and medium enterprises, in 2019, its core reforms included simplifying the process to get building permits, reducing the time to get water and drainage connections, streamlining the process of obtaining electricity connections and increasing the transparency of electricity tariff changes. The World Bank’s analysis of India showed that it had become easier to get construction permits in Delhi and Mumbai; there are 19 procedures to get a construction permit in these cities, and it takes about 98 days to do so. For South Asia as a whole, the numbers are 149.7 days and 14.6 procedures.

The Road Ahead

Several countries have concertedly pushed the ease of doing business agenda. They have focused on key areas such as speedy sanctions for construction permits, electricity connections and access to credit. India’s trajectory has been multi-focused, and while its federal structure can be a bane or a boon depending upon the state, the government’s lack of focus in doggedly pushing through reforms and executing them has been visible in the slow progress. It has pushed through some sweeping reforms, such as those relating to labour and taxation, but the fine print of execution has meant that the reforms have not had the desired on-ground outcomes. The government has to identify major areas that hurt the ease of doing business and address the pain points in a systemic, focused way, for instance, in terms of improving access to credit or ensuring that electricity connections are provided within a stipulated time.

To ease the process of land acquisition, in early September, the government launched a website detailing land banks available in some states, though this, like many of the Centre’s other efforts, remains a work in progress. As does the repealing of redundant laws. New laws have been ratified but the process of repealing of laws that are no longer relevant for today’s world has also been a slow process.

In 2015, the Repealing and Amending Act was passed to begin this process. Among the first few laws to be repealed were the Indian Fisheries Act, 1897, and the Foreign Jurisdiction Act, 1947. The Law Commission of India, in its 248th, 249th, 250th and 251st reports on obsolete laws has recommended the repeal of 289 enactments, of which 62 were identified in the state list. Similarly, the Ramanujam committee, constituted by the Prime Minister’s Office, recommended a repeal of 1,741 enactments, of which 83 were identified for repeal by the state legislatures. In 2015, an urgent letter was sent to state governments asking them to repeal redundant laws as identified by several committees. Union law minister Ravi Shankar Prasad has said that the Modi government has repealed 1,458 old and archaic acts. Some include the Hackney Carriage Act, 1879, which was for regulation and control of hackney carriages, and the Dramatic Performance Act, 1876, which was enacted when theatre was being used as a medium of protest against the British rule.

There are also structural issues, for instance, India’s political ecosystem brings its own complications. One is that ministries, rather than being purely administrative agencies, are also seen as fiefs to be granted to political partners as rewards for work or for an alliance. Another issue, identified by Panagariya in his book, is that India’s plethora of ministries also give rise to gross inefficiencies. India has separate ministries for steel, textiles, electronics, information technology, mines, chemicals and fertilisers. Aside from the overlapping jurisdictions, the fact that many ministries buy and sell from/ to each other also creates inefficiencies. Sectoral ministries have also been barriers to the closure of many loss-making and sick enterprises. He suggests phasing out many ministries and amalgamating others to improve efficiency. For instance, a transport ministry could replace the ministries of roads, shipping, civil aviation and railways. An energy ministry could similarly replace the ministries of coal, power, petroleum and gas and new and renewable energy. Social welfare ministries, such as minority affairs, tribal affairs, women and child development and social justice and empowerment could be consolidated into a single ministry. The ministry of skill development and entrepreneurship could be merged with the ministry of human resource development.

Reining in India’s infamous bureaucracy and its love for laws will require a multi-tier approach—from changing attitudes and fixing accountability to cutting down the total number of ministries and departments and doing away with redundant laws. This will entail taking politically tough decisions and flawless execution. Sabharwal makes the case for compliance commissions to be set up in the states, mandated to review all filings and compliances for relevance within 90 days. All redundant and overlapping items should be identified and rescinded by executive order, he says.

In terms of improvement, there is greater use of technology than ever before in governance. A decade ago, even members of Parliament hardly used their official emails. And as human touch points reduce, rent-seeking goes down. Labour reforms and competition among states for investment are also good for the reform agenda. At the same time, policy action has come alongside a change in mindset; Chaudhary says that it’s often a combination of archaic laws and mindsets that present a formidable challenge.

The States Show the Way

At the state level, some administrations stand tall in terms of improving the ease of doing business. Telangana is one such, having made significant strides in ending the inspector raj and addressing the pain points in running businesses. It has a single-window clearance policy where all approvals need to be given within 30 days. If a department does not respond within the stipulated time, the approval is considered granted, with a fine levied on the government official in charge.

Karnataka is another, the state government has decided to allow industries to commence operations as soon as they get basic approvals from the concerned committee either at the district or state level without having to wait for multiple clearances. Uttar Pradesh is yet another, it jumped to the second position in the annual ease of doing business rankings released by the government in the first week of September, leaping ahead of states such as Gujarat, Telangana, Rajasthan and Maharashtra. It has implemented 186 of the 187 reforms suggested by the Union government for the promotion of industry and internal trade. UP’s single window clearance, the Nivesh Mitra portal, is being touted as one of the bigger reforms done by the state. Several other states have also taken steps to ease labour laws and improve their business environments. Rajasthan has established a one stop shop for fast tracking investments into the state. UP has also allowed MSMEs to start operations within 72 hours of receiving their application. The state has also approved a start-up policy to set up 100 incubators in the state. Arunachal Pradesh has allowed self-certification under 12 labour laws.

For India to rise as an investment destination, the Centre will have to lead with vision and conviction and states will have to aggressively streamline rules and ensure transparency. The Covid-19 crisis presents an opportunity to replace the red tape with a red carpet.

with M.G. Arun

CASE STUDIES

GROUND REALITIES

Maharashtra

Policy change, Maharashtra chief minister Uddhav Thackeray (centre)

A state revenue official says processes are paused when new governments come to power, and that the coronavirus has caused delays

In August, after nine months of running the administrative gauntlet, Rohan Shah went online to detail his difficulties in setting up a manufacturing facility in Maharashtra’s Sangli district. He wrote that he first visited the district administration office, where he was asked to file seven documents with supporting paperwork, three of which took three months, 20 visits to various offices and cost Rs 2,000 in legal fees. More serious problems began when he submitted an application to convert the land to non-agricultural use. A month after submitting this application, he was asked to visit the revenue department office, where he was told he needed to get NOCs (no-objection certificates) from 11 different departments. Of these, the NOC from the local tahsildar proved impossible to get because the office simply did not respond to his requests. The NOC from the local gram panchayat was also impossible to get because Shah refused to pay the bribe he alleges he was asked for.

An official with the Maharashtra revenue department says Shah did not take into account ground realities. His application involved changing land-use permission from agriculture to manufacturing; the official says that when Shah filed his application, a new government had just taken over, normally, administration pauses at this point until the new government makes its policies clear. “After that, the state was under complete lockdown from early March till September,” says the official. “Only 10 per cent of government employees were asked to report to work. It is obvious that the administration would move at a snail’s pace during this testing time.”

by Kiran D. Tare and Shwweta Punj

SINGLE WINDOW REFORM

Telangana

Systemic reform, Telangana chief minister K. Chandrashekar Rao (centre) at the launch of TS-iPASS in 2015

Over 13,000 clearances have been issued through the TS-iPASS system

Five years ago, the state government introduced a new system, the Telangana State Industrial Project Approval and Self Certification System (TS-iPASS), to create an easy commercial and industrial environment for investors. Through this, the state expedites approvals, allowing investors to begin operations as soon as their applications are filed. To do so, the state uses software designed by Infosys; information from applications is automatically sent to relevant government departments, which have to raise queries/ clear applications within 48 hours.

“We have crunched the processes and paperwork to facilitate swifter clearances,” explains Jayesh Ranjan, state principal secretary of industries and commerce and information technology. “Any defects [in applications] have to be identified within 48 hours of getting the application. Technology, including satellite imagery, is relied on instead of physical inspections, and we also rely on self-certification by investors.” So far, more than 13,000 clearances have been issued through TS-iPASS. “An indicator of investor confidence is that 23 per cent [of these clearances] are [on applications from] repeat investors, one of them, Hindustan Sanitaryware, has made seven proposals,” says Ranjan.

Rajesh Agarwal, MD of Micromax Informatics, says that this single-window clearance saves time and expenses and makes the process clear. “The process is fast as most operations are online, and we can apply for all required permissions in one go.” The state also maintains a digital land bank that allows investors to remotely view plots and appraise logistics.

by Amarnath K. Menon