The Government of India is planning a unified compliance framework and platform for all regulations. That's a good step. But it will succeed only if it is seen as a genuine process re-engineering effort than as an endeavour to develop an IT solution. This was after all one of the objectives of the old eBiz solution which was launched 7-8 years back.
I have written earlier several times on the importance of easing what Manish Sabharwal of Teamlease describes as regulatory cholesterol. An important part of it is the world of compliances.
I have written earlier several times on the importance of easing what Manish Sabharwal of Teamlease describes as regulatory cholesterol. An important part of it is the world of compliances.
The graphic below from Teamlease is cognitively striking in its illustration of the compliance thicket.
This is a good summary,
And this for state-wise distribution
For resource constrained and poorly digitised businesses (read SMEs), these compliances remain mostly on paper, leaving them at the mercy of regulatory officials.
Contrary to conventional wisdom, any effort to rationalise compliances is not as easy as commonly imagined. The checks and balances within governments means that one cannot simply deregulate away compliances. This requires a mission-mode engagement over a reasonable period of time. And that is perhaps the desirable way in which it has to be done.
Contrary to conventional wisdom, any effort to rationalise compliances is not as easy as commonly imagined. The checks and balances within governments means that one cannot simply deregulate away compliances. This requires a mission-mode engagement over a reasonable period of time. And that is perhaps the desirable way in which it has to be done.
Compliances and filings have a history and reason. Many can be dispensed with, some clubbed together, in some cases the standards and information requirements revised downwards, periodicity reduced, and so on. Then the required regulatory changes may have to be enacted and revised guidelines issued. Finally, the various departmental databases standardised and integrated so that all compliances are drawn from the same underlying basic data. This requires co-ordination among central government departments and with state governments.
This is a formidable exercise which requires painstaking work and close co-ordination. It requires a Mission Directorate which is empowered enough to take quick decisions. It is also important given the fate of earlier efforts at such rationalisation, including the attempt to have a single identity number for all businesses.
The work of reducing, streamlining, and digitising compliances can be clubbed together with completing the partially done agenda on unique corporate ID and corporate registrations and permits involving the Ministries and Departments of Corporate Affairs, Labour, and Revenue, and their state government counterparts
This blog has been a promoter of improving ease of doing business far before it even started becoming discussed seriously. It is today top priority for state and national governments. While I am an ardent supporter of reducing the 'regulatory cholesterol', I am also cautious about the likely adverse impact of an ideological embrace of deregulation as against a merit-based approach.
One also gets the impression that expectations from such deregulation today are far more than what it is likely to deliver. Atleast certain segments of commentariat have started to claim ease of doing business as one of the magic pills for India's problems, even going to the extent of suggesting elimination of all regulations, atleast for a few years. For fiscally strapped governments, ease of doing business can appear to be a free lunch.
This is a dangerous illusion for atleast four reasons.
1. Ease of doing business improvements, like all else, can only get you so far. Given the enormity of the problems, and when the challenges are multi-dimensional and numerous, the marginal gains can be small in relative terms.
2. Even if implemented with intent, given the weak state capacity, its impact will vary widely. After all, there are limits to how much of these compliances, for example, can be automated or dispensed with.
3. A headlong plunge from excessive regulation to complete deregulation, motivated by some ideological fervour, is likely to be growth contracting over the medium-term and also result in limited productive growth creation in the short-run.
4. An excessive focus of the limited state capacity bandwidth on ease of doing business is likely to displace attention away from other more important but also much more difficult reform areas. After all complacency in terms of improvements in some rankings is not uncommon whereas the real gains can be illusory.
Substantively on the issue itself, nobody questions the fact that these compliances are excessive in India. And simplifying them is a foundational requirement to promote business growth and jobs. Further, while there is no doubt that improving them can improve business climate, there is little empirical evidence on their actual stand-alone impact in terms of business growth or job creation. Nor do we know how binding are these as constraints to business formation and growth. In particular, how do they affect the smaller and larger firms? In fact, we also need more granular data and evidence on how does it stack up with other countries.
There is also the distinction between ease of doing business reforms which remove obstacles (deregulation) and those which are in the nature of promotion and facilitation. Accounts of the Chinese experience highlight the critical role played by the latter in encouraging business investment, and the presence of numerous formal and informal barriers.
Also, while the numbers above can appear frightening, we need to see it in perspective. For a start, this is an aggregation of the universe of compliances from the numerous regulations. We are interested in the typical firm, say, a small scale textile unit or a large footwear manufacturer, which while being a significant number would nevertheless be far smaller. Further, many of these compliances are likely weekly/monthly reports etc or duplications to multiple agencies.
An ideological campaign against compliances runs the risk of degenerating into one which ends up cutting through all restraints and safeguards, as may be happening with Trump deregulation in the US. In a country like India where state capacity is weak, civil society not as strong, and private sector prone to cut corners on standards and be exploitative, there is a strong merit in having the right level of compliances. In fact, I would go as far to argue that erring on the side of caution may not be that terrible an idea.
It is a good practice to undertake deregulation based on some quick and practical costs-benefit assessment. So, instead of a slash and burn approach to eliminating compliances, it may be useful to divide compliances into different categories. Some can be eliminated straight away whereas some being critical safeguards or statutory requirements will have to remain. The remaining will need to be assessed for relevance. And the relevance will vary across categories of business size and type. Further, many compliances involve reporting of information in different formats, which can be consolidated and streamlined. The periodicity of some monthly compliances could be brought down to quarter or annual. Some other compliances could be mandated for public disclosure of information on websites.
In fact, in case of the larger companies, it is possible to simplify compliance reporting considerably with some of the aforementioned approaches. However, in case of smaller firms and start-ups which have the least capacity to undertake such onerous requirements, it may be important to dispense with several compliances and rely on trust. The government could also offer simplified shared services that would make it easier for them to report on compliances.
As we pursue the compliance reforms, one should realise that the thicket of compliances did not arise purely from a regulatory mindset of the government. While that surely was perhaps the major contributor, it cannot be denied that businesses' track record of cutting corners and poor governance has been an important factor. Without the latter also being acknowledged and actions initiated to address them, the former alone is likely to lead to only pyrrhic victories. Perhaps even worsen the situation.
This blog has been a promoter of improving ease of doing business far before it even started becoming discussed seriously. It is today top priority for state and national governments. While I am an ardent supporter of reducing the 'regulatory cholesterol', I am also cautious about the likely adverse impact of an ideological embrace of deregulation as against a merit-based approach.
One also gets the impression that expectations from such deregulation today are far more than what it is likely to deliver. Atleast certain segments of commentariat have started to claim ease of doing business as one of the magic pills for India's problems, even going to the extent of suggesting elimination of all regulations, atleast for a few years. For fiscally strapped governments, ease of doing business can appear to be a free lunch.
This is a dangerous illusion for atleast four reasons.
1. Ease of doing business improvements, like all else, can only get you so far. Given the enormity of the problems, and when the challenges are multi-dimensional and numerous, the marginal gains can be small in relative terms.
2. Even if implemented with intent, given the weak state capacity, its impact will vary widely. After all, there are limits to how much of these compliances, for example, can be automated or dispensed with.
3. A headlong plunge from excessive regulation to complete deregulation, motivated by some ideological fervour, is likely to be growth contracting over the medium-term and also result in limited productive growth creation in the short-run.
4. An excessive focus of the limited state capacity bandwidth on ease of doing business is likely to displace attention away from other more important but also much more difficult reform areas. After all complacency in terms of improvements in some rankings is not uncommon whereas the real gains can be illusory.
Substantively on the issue itself, nobody questions the fact that these compliances are excessive in India. And simplifying them is a foundational requirement to promote business growth and jobs. Further, while there is no doubt that improving them can improve business climate, there is little empirical evidence on their actual stand-alone impact in terms of business growth or job creation. Nor do we know how binding are these as constraints to business formation and growth. In particular, how do they affect the smaller and larger firms? In fact, we also need more granular data and evidence on how does it stack up with other countries.
There is also the distinction between ease of doing business reforms which remove obstacles (deregulation) and those which are in the nature of promotion and facilitation. Accounts of the Chinese experience highlight the critical role played by the latter in encouraging business investment, and the presence of numerous formal and informal barriers.
Also, while the numbers above can appear frightening, we need to see it in perspective. For a start, this is an aggregation of the universe of compliances from the numerous regulations. We are interested in the typical firm, say, a small scale textile unit or a large footwear manufacturer, which while being a significant number would nevertheless be far smaller. Further, many of these compliances are likely weekly/monthly reports etc or duplications to multiple agencies.
An ideological campaign against compliances runs the risk of degenerating into one which ends up cutting through all restraints and safeguards, as may be happening with Trump deregulation in the US. In a country like India where state capacity is weak, civil society not as strong, and private sector prone to cut corners on standards and be exploitative, there is a strong merit in having the right level of compliances. In fact, I would go as far to argue that erring on the side of caution may not be that terrible an idea.
It is a good practice to undertake deregulation based on some quick and practical costs-benefit assessment. So, instead of a slash and burn approach to eliminating compliances, it may be useful to divide compliances into different categories. Some can be eliminated straight away whereas some being critical safeguards or statutory requirements will have to remain. The remaining will need to be assessed for relevance. And the relevance will vary across categories of business size and type. Further, many compliances involve reporting of information in different formats, which can be consolidated and streamlined. The periodicity of some monthly compliances could be brought down to quarter or annual. Some other compliances could be mandated for public disclosure of information on websites.
In fact, in case of the larger companies, it is possible to simplify compliance reporting considerably with some of the aforementioned approaches. However, in case of smaller firms and start-ups which have the least capacity to undertake such onerous requirements, it may be important to dispense with several compliances and rely on trust. The government could also offer simplified shared services that would make it easier for them to report on compliances.
As we pursue the compliance reforms, one should realise that the thicket of compliances did not arise purely from a regulatory mindset of the government. While that surely was perhaps the major contributor, it cannot be denied that businesses' track record of cutting corners and poor governance has been an important factor. Without the latter also being acknowledged and actions initiated to address them, the former alone is likely to lead to only pyrrhic victories. Perhaps even worsen the situation.
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