Thirty years after ending the Licence Raj, India needs to end the Inspector Raj to facilitate job and wealth creation say Gautam Chikermane and Rishi Agarwal.
India's business and labour laws, which were framed in 1948, have 26,134 imprisonment clauses, a majority of which are archaic and hinder ease of doing business according to a Jailed For Doing Business, a report by the Observer Research Foundation (ORF).
The report, which has been authored by Cheikermane, Vice President of the Observer Research Foundation and Agarwal, co-founder and CEO of TeamLease RegTech, argues for a rewriting of India's business laws which haven't been updated for the 21st century.
Stating that the Factories Act needs to be amended to reflect the realities of 21st century, Chikermane told BOOM, "The Factories Act of 1948 is the copy of the Factories Act of UK which has been amended in 1960. But India continues to carry those ridiculous clauses.
"Some of them mention spittoons. You do not need spittoons today in any factory. But we have not repealed, amended or adapted to the new 21st century India. Our report argues that it is time," he said.
However, he insisted that they aren't calling for the total removal of imprisonment clauses but for simplifying and rationalising the clauses.
"Nowhere in the report are we saying that all these imprisonment clauses have to go. We are saying that they need to be rationalised, we need to re-examine them from the 21st century perspective," he added.
Agarwal argues that replacing criminal punishment with financial penalties is one of the first things governments should be looking at.
"We have to first decriminalise everything that is a minor technical lapse or a procedural lapse. I am not saying let entrepreneurs off the hook. There has to be penalties but those can be financial penalties. That is the first and the most important step we need to take and it is a low hanging fruit," he said.
Edited excerpts of the interview with Gautam Chikermane and Rishi Agarwal follow
What got you started on it or was there one specific instance that made you think of doing this report and what has this journey meant of working and collecting all this data?
Gautam Chikermane: Two things happened. One thing you must know from my writings more than a decade or even 15 years is my deep personal irritation with corruption. Second, you must have read in my writings how India has been shunning wealth creators. It has been literally spitting on its entrepreneurs. Despite that we have reached where we have–that is a 3 trillion dollar economy, no thanks to the government.
When I met Rishi I realised that he is doing something to fix what is happening at the ground level. Over an evening conversation I realised that he was sitting on a huge amount of data which so far the literary or the scholarship or the policy fraternity has not seen or does not know.
I would talk about Labour Law, how labour is constricting growth, how Inspector Raj is taking bribes and getting in the way of wealth creators. This was for the first time when I actually began to read the precise laws that empower the Inspector Raj. I put two and two together and we started out. I thought it would be another routine paper, 4000-5000 words, and maybe 3-4months of effort.
You have got to read it to believe it how sorry the morasses, the dark dank swamps of India's compliances are. We put it all together classified into various sections, put it in perspective and suddenly what we have is a report that has been, to say politely, well received by both within the industry as well as in the government.
So I am hoping that we can begin the change that we have all been yearning for. You have written earlier also that change is now tangible. We have given policy makers tangible, touchable, readable tools with which to fix this.
Could you tell us about what the scale of this problem is, if you were to use numbers to describe this?
Rishi Agarwal: India has 1536 ACTS that affect employers. Among these 1536 ACTS, there is a maze of 69,233 compliances at Union, State and local levels. That is the size of India's regulatory universe. This compliance is broken down into seven broad categories. Labour being the largest contributes 30 per cent in terms of ACTS, 47 per cent in terms of compliances, a whopping 68 per cent in terms of criminality which we have attempted to expose in our report.
A large portion of these are at the state levels. Approximately 80 per cent of these compliances that have criminality are at state levels, about 20 per cent are at the Union level. So that is the size of the universe that we are talking about.
If I decouple this further, a MSME in manufacturing, say pharma, goes through about 913 compliances in any given year. This company is a small company with say 100 employees, working out of one plant, one office, one state. If you were to scale this to say one state to 5-6 states, or 10 states, or from one plant to say 5-6 plants, the number of compliances they would have to comply with would suddenly go into several thousands. And you go beyond 10 plants into several tens of thousands. That is the size of the problem that we are dealing with.
How many of the laws will actually lead to a criminalisation? How much time do companies spend actually responding to compliances for the fear of criminalisation?
RA: Two out of five clauses in India's regulatory universe have criminality built into them. If you break that into numbers among the 69,233, 26134 have provisions for criminality. So two out of five in general. One out of three are actually from the Factories Act. A whopping 68 per cent of these are from the labour area. Every company in India employs labour. Labour Laws are supposed to be some of the most complex.
Most of these were written either pre-independence during the colonial era or right after independence. For example, the Factories Act was in 1948, which is the original Act which is still invoked. Labour courts are currently being codified but we are yet to see the implementation. There has been some serious activity in that space but we are far from seeing them live. So that is a reality.
Companies have to spend a lot of time, effort, energy and money in managing compliances. And that is how Gautam and I originally met as I was trying to solve the simplification and automation problem for the corporates; he was on the policy side. We were having a bird's eye view, a camel's eye view and an ant's eye view of the problem. He had a policy view of the problem. So the data and the narrative came together in this report.
One of the key things to remember is that there is a Central Government Law and a State Law. How does this interplay work and how does it impact an organisation?
RA: Factories Act is a Union Act; labour is a concurrent subject where Centre and State or Union and State both legislate laws. The core Union Act provides the framework in which the states go ahead and write their rules.
So, when you look at the specific compliances for a given state, those are actually taken from the Factories Rules of the state. Each one of those rules ranges between 200 pages to about 250 pages; 220-230 is the sweet spot that most of these rules range there. And most of the compliances for the state are in the rules. While the Union Act lays the broad foundation, the specifics on the forms, the formats the registers and the implementation of the Act lies with the state.
If I am a factory manager, should I be thinking of both these concurrent subjects at the same time as I implement? Could one be more likely to get me imprisoned compared to the other?
RA: Certain industries are under the Union government where the appropriate government is Union. Most of the other industries are where the State rules apply. So if you look at petroleum or insurance or banking, there the Central rules apply. For all the other industries, the State rules apply.
So if you are a factory manager operating a factory in the state of Maharashtra or Karnataka you are worried about the State rules. All the others have Union flavours attached to them. So, for example, Company Law, SEBI Law, various commercial acts, finance and taxation including direct tax, indirect tax, GST, customs, they are all Union Laws. But when you are dealing with labour, you deal with the state assuming that the appropriate government is the State Government.
It is worth asking even though many years have passed, why have these laws have been framed in this form. Five states have more than 1000 imprisonment causes, according to your report, in business laws. What goes into this and what can we take away from the way some states seem to have when it comes to the larger context of ease of doing business?
GC: So of the five states that you mentioned, Gujarat, Maharashtra, Karnataka and Tamil Nadu are $200bn and larger. But Punjab is the sole exception. So, if you remove Punjab for one minute, and I will come back to Punjab, then what you are seeing is a direct correlation between the number of imprisonment clauses and the size of the State's economy.
Having said that, why does Punjab have so many criminal clauses, I just do not understand. All the other states, even if you think that the law makers are wearing a cloak of great nobility and want the best for their constituents and for their geographies in terms of doing business to protect their people, you keep adding more and more compliances and more and more criminal clauses within those compliances.
Punjab is something that I just do not understand. Having said that the criminality in Punjab or even Haryana from the farmers' side in terms of polluting the environment, had it been an industrial plant or industrial sector doing various things or doing even a tenth of the pollution that happens to Delhi every year, they would be behind bars for life.
There are enough clauses out there under the EHS, which is the Environment Health and Safety category where a lot of these people could be in jails. While the farmers, who are actually polluting the environment openly, brazenly are being let go; even right now we are discussing taking those criminal cases away from the farmers. So probably it is virtue signalling.
Largely more industrialised states can have more imprisonment clauses. Having said that, I think most of these laws have been made mindlessly. I do not think the application of mind may have happened in 1948 when the primary law was enacted and the rules framed. But after that as it has increased. The Factories Act of 1948 is the copy of the Factories Act of UK which has been amended in 1960. But India continues to carry those ridiculous clauses.
Some of them mention spittoons. You do not need spittoons today in any factory. I do not think people are spitting or that the culture of collecting spit and cleaning it exists any more. But we have not repealed, amended or adapted to the new 21st century India. Our report argues that it is time.
Nowhere in the report are we saying that all these imprisonment clauses have to go. We are saying that they need to be rationalised, we need to re-examine them from the 21st century perspective. From the perspective of economic growth, from the perspective of entrepreneurs' wealth creation, wealth creators and job creators.
If you look at the multitude of laws and the categories under which they are sitting, what according to you are the areas that we should be paying attention to in terms of decriminalising first and what could perhaps wait for phase 2?
RA: It is the 80-20 rule which is applicable, the Pareto Principle, the universal principle. The lion's share, as I mentioned earlier, of criminality lies in the Labour Laws. 68 per cent of the items are sitting there. Within Labour Laws which are 29 Union laws and there are a total of 463 when you talk of Acts and Rules at the state level, 32,000 compliance are there, of which about 17000 give or take have criminality attached to them.
Now, the question really is what kind of criminal items are these. When you drill down into the details, you will realise that many of them are extremely procedural. You failed to put the format together; you failed to clean the spittoon. You did not lime wash the inner walls of the latrines used by the contractor, you did not reconstitute a canteen committee all of these and many more are examples of items that have criminality attached to them.
When you look at these they will sound extremely procedural. That means that you did not know the right format. You did not know the specific item, but when you look at the outcome, none of them caused any harm, there was no intent to steal, no loss of life or limb, no fraud; it was a procedural or a technical lapse.
We have to start there. We have to first decriminalise everything that is a minor technical lapse or a procedural lapse. I am not saying let entrepreneurs off the hook. There has to be penalties but those can be financial penalties. In certain cases where criminalisation is required, where you may be indulging in exploitation, criminalisation has to be there. But in the rest of it where procedural lapses and technical lapses are there, we have to start criminalization from there. So that is the first and the most important step we need to take and it is a low hanging fruit.
What about areas like income tax? Have you looked at the Income Tax Act and Companies Act?
RA: Just like Gautam said, a lot of times criminality has been bought into our Acts and Rules very loosely. We failed to recognise that criminality has a lot of socio-economic costs associated with it. Lot of these misdemeanours do not need to send an entrepreneur to jail.
An entrepreneur is trying to create jobs, is contributing to the economy and there are better ways to hold them accountable than giving the power to an Inspector to sending them to jail. I think that is where the most important thing is.
Gautam, you said the reason you got interested in doing the report and worked on it was corruption. That was your entry point. I assume therefore that a lot of these procedural and technical laws and the likelihood of getting caught for a lapse leads to corruption because obviously people are not going to jail or our jails would be overflowing.
GC: One very senior government official asked me very blatantly that show me who is in jail because of these clauses. I said nobody is in jail because you are not doing your duty. If there is a law of the land, and somebody is in breach, then it is the job of the inspector to put that person in jail. Are you trying to tell me that no entrepreneur has breached any of these 26134 compliances, I asked him. Obviously it was said in a light manner.
The fact of the matter is, what we were initially doing on the basis of anecdotal evidence, logic now I can see it how the entire edifice, how the system has been created wherein the entrepreneurs and wealth creators are at the mercy of the Inspector Raj.
To put it in perspective in 1991, when the statement on industrial policy in 1991 was released followed by the Union Budget 1991-92 by Manmohan Singh and the earlier one by PV Narasimha Rao that over a period of ten years, I think, ended the Licence Raj. But Inspector Raj was left untouched. I do not know where these tributaries of rent-seeking go. How high do they go? Where do they end? I do not know enough and maybe another research is perhaps needed.
But if these compliances that we have now showcased in our report are rationalised, and nowhere, do we say we want to end all criminalities. Our issue here would be if there is a wilful tax evasion then that person has to be criminalised. Or if there is a repeat offence of certain kind perhaps a criminalisation can be explored but overall it should be financial penalties.
Some State Governments and Union Ministries have got in touch with us, so there is receptivity for this idea. If these are removed, and as per one of our recommendations as we said, should be done at one go, it will end the Inspector Raj. So 1991 ended the Licence Raj, 2022 or whenever this new law is enacted will end the Inspector Raj. That is the sole purpose and it is a big hurdle to doing business.
A lot of this is driven by an overarching thought about how people are almost guilty until proven innocent or have to be threatened with dire circumstances else they will not behave. How do we address that?
RA: If you look at the genesis of some of these, either they were in the colonial times or right around independence. Now, let us talk about how the country was at that time. The contribution of private sector manufacturing was next to nothing. Public sector was the largest creator of jobs at that time. Nobody really paid attention to some of these things since then, but then if you look at 75 years later, cut to 2022 private sector has been officially recognised even at the Prime Minister's level as the engine of growth in the economy. What was not there in 1948 and 1950 is there today.
But what has not happened, which should have happened while the rest of the country has changed and we have become among the top five economies of the world, we have never come back to the drawing board and review why 999 entrepreneurs out of the 1000 call India a very difficult place to do business in. And I have been doing this for a long time now, we work with 1500 corporates in India and if I were to tell you what anecdotal everyone tells me is that compliance management is complex.
Now you ask the next question, why do you think it is complex? Most people will not be able to give you what exactly is difficult. But they will tell you that it is very complex.
Now that's where we have attempted to do a data driven story to make sure that people see the full elephant in the room. In the past everybody was seeing their own leg of the elephant. Somebody saw this small portion, somebody saw the nail, somebody saw the feet, and nobody saw the full size of the elephant. We have attempted to put enough data on the table to show what the size of this problem is, why India continues to be a hostile environment to do business, why is there so much distrust of the entrepreneur?
If you look at some of the IT companies, they are giving BMWs as a joining bonus. Companies are bending over to provide world-class cafeterias, attractive remuneration packages, Mauritius and other country vacations as a part of the remuneration package. So the country is changing and the world is changing.
So we are bending over backwards to bring the best talent in the country. Gone are the days where we needed such hostile regulations in order for Corporate India to comply and just to reiterate, we are not saying that criminalisation needs to go. All that we are saying is it needs to be rationalised so that we can reduce the hostility and distrust that is so deeply ingrained into our doing business practices.
GC: Let me give you one number that will provide the image of what we are trying to tell you. There are 63 million enterprises in India, of which only 1 million is in the formal sector. Why? Because the moment a small entrepreneur decides to expand, he/she suddenly, overnight has to negotiate 400-600 compliances a year. That is the minimum.
There could be more depending on the nature of the industry. It is far better to remain small and perhaps start another company doing the same thing but remain under the regulatory/compliance radar.
As a result when we talk about job creators, MSMEs are the job creators, corporates are the bad guys. This is the narrative we have been hearing for some time. Well, the small job creators do not pay the minimum wage, they do not have worker safety mechanisms, and they do not have worker insurance. So is the kind of political economy that India needs? No, we need hard core jobs, we need well-paying jobs, we need regulated, the worker needs protection, those only at a particular scale can happen.
But if you are going to keep your company small by over regulation, at any time in an MSME that has crossed the compliance limit 20 inspectors can descend on that company's premises at any moment. Is this the kind of regulatory infrastructure we are looking at?
As we look ahead, what is the one thing that you feel we should focus on to ensure that it does not happen again? Linked to that, how do you catch it? What do I essentially do to be more alert and aware, so that more of this doesn't happen?
RA: Ignorance of the law is not an excuse for non-compliance. So there is no excuse for not knowing the law. If you are doing business in the country, you need to know the law. Our argument is not for a common citizen to not to know the law, our argument is for the law to become simple, unambiguous and straight forward so that it is easier to comply with rather than flying under the radar. That is a simple answer that I have to say.
Now, the second part or the first part of your question was what needs to be so that this can be avoided in the future. And we have given a recommendation there for setting standard legal drafting practices, eliminating criminality as a tool of control in trivial instances, not letting procedural and technical lapses become liabilities for criminal penalties, not letting law makers use it loosely. Under exceptional circumstance or the intention to fraud, steal, causing damage to the environment, evading taxes and only then can jail term or imprisonment be allowed to be used in the law.
Right now, it is anybody's business. You go to one regulator in one state and if they are not familiar with standard drafting techniques, they will use imprisonment as a technique for every contravention. You go to another state they are using it more meticulously. We have left it to people, we have to move it to the system, we have to move it to processes and we have to make the system accountable and lawmakers accountable for including imprisonment.
This boils down to trust, doesn't it? How do you build trust to some extent at least between government and policy makers, industry entrepreneurs, and businessmen?
GC: I think here is where the report breaks out of economics and policy and gets into the realm of politics. I think the grand narrative that India has been working under so far has been that industry is bad, wealth creation is evil. I must have my wealth, otherwise wealth is evil. Everybody wants wealth, everybody wants to get rich. I think we need to bring dignity to entrepreneurs.
We can see the beginnings of that dignity in the 41 unicorns that happened last year. There is a goal to have 100 unicorns this year. I do not know if that will happen or not but it is a noble goal.
This is the easy part, they are all in technology. They do not come under the factories act, maybe shops and establishments, taxation or some industry-specific, maybe some consumer protection at best. But if we want jobs, this dignity must be given to small entrepreneurs, given to manufacturing, it must be given at the Union level and then at the states. You talked about the Union State breakup. The 20 per cent laws that are with the Union Government, of them even if 15 per cent are fixed, then down the line you are looking at multiple laws because the state legislatures derive their authority from the base law at the Union.
So the fact that it is only 20 per cent is perhaps a good thing. If you have watched that movie KaalaPattar, the essential part of the film was the coal-miner was evil and the coal workers are noble and the whole narrative is therefore we need to nationalise the mines. We are just saying that you just rationalise compliances and you will get there much faster. India will become a wealthier nation much faster. It may not take 15 years. It could take 12 years to reach a 10 trillion dollar economy.