How To Unleash Creation Of Well-Paid Jobs In India

A supervisor speaks with workers at a warehouse in Koduvalli, Thiruvallur, on Sept. 22, 2021. (Photographer: Anindito Mukherjee/Bloomberg)

→ EODB 2.0: Unshackle employers from the excessive criminalisation of compliance.

A wonderful line from the Ramcharitmanas by Tulsidas: jaum mrgapati badha medukanhi bhala ki kahai kou tahi, roughly translates to “If a lion were to kill frogs, will anyone speak well of him?” A modern state is a lion that catalyses, encourages, and supports productive employers that create well-paying jobs which fund the welfare state. But India's 75-year journey to 1,536 employer legislations with 69,233 compliances represents a lion killing frogs – our 6.3 crore enterprises only translate to 23,500 companies with a paid-up capital of more than Rs 10 crore. We make the case for a new three-pronged ease-of-doing business project — EODB 2.0 — in which the first phase targets reducing our 26,134 jail provisions currently embedded in employer compliance.

A new report titled Jailed For Doing Business dissects the criminality in India's business laws. The report suggests that among the universe of 1,536 legislations, 54% (843) have clauses of imprisonment. Of these, 29% are at the union and 71% at the state levels. In the 26,134 compliances, two out of every five items have imprisonment clauses going up to 10 years. A jail time of up to 3 years can be meted out under 86% of the clauses.

Five of our states, Gujarat, Punjab, Maharashtra, Karnataka, and Tamil Nadu have over 1,000 clauses of imprisonment in their business laws.

While labour laws are half of the compliance universe they contribute over 65% of imprisonment clauses. Within these laws, the Factories Act, of 1948 is the largest contributor accounting for 31% of all the criminal clauses.

21st-century Indian entrepreneurs don't need microscopic oversight on the provision of spittoons, gender-segregated washrooms, places for storage of clothing, and painting the inner walls of canteens. Can we afford to send our job creators to jail for failing to display the abstract of an act or the lime washing of walls? If one compares the quantum of punishment prescribed for such misdemeanours with provisions prescribed in the Indian Penal Code, 1860, many of them are at par with homicide and death due to negligence. These jail provisions don't create virtue or fill our jails but encourage bureaucracy serving rent-seeking behaviour and sustaining a corrupt inspector raj.

Wide Range Of Excessively Punitive Laws

The Interstate Migrant Workmen Act, 1979, The Payment of Gratuity Act, 1972 among others view contraventions through the lens of criminality. Another pillar of social security, the Minimum Wages Act, 1948, is similarly excessive.

There is provision for imprisonment for failing to meet procedural requirements, such as providing notices showing the date of payment of wages, maintenance of registers and records, and the disbursal of identity cards.

Likewise, the Maternity Benefits Act, 1961, is laden with bureaucratic obstacles, including obligations to display the abstract of the legislation in workplaces with infractions carrying a jail term. In the digital age, there are more sophisticated tools for distributing information electronically. Other legislation such as the Drugs and Cosmetic Act, 1940, Electricity Act, 2003, Legal Metrology Act, 2009, The Essential Commodities Act, 1955, and Petroleum Act, 1934 among others have jail terms prescribed for failing to comply with procedural obligations.

Decriminalisation, Rationalisation, Digitisation

Ease of Doing Business 1.0 began a few years ago with the central government usefully targeting a rise in our World Bank rankings. This report has since been discontinued because of data manipulation but it always had the birth defect of not recognising what is called Goodhart's law of government; when a metric becomes a goal it ceases to be useful. The World Bank framework was useful but its input variables ignored the employer perspective. We make the case for a three-phase EODB 2.0; phase one decriminalisation, phase two rationalisation, and phase three digitisation.

Let's dive into five possible items for the phase one decriminalisation agenda.

First, we need a regulatory impact assessment committee within the law commission that reviews business laws, the quantum of penalties, and rationalises them by the gravity of default. This may help reduce criminality by 30%-40%.
Second, we must end the criminalisation of procedural lapses and use jail with extreme restraint given its socioeconomic costs. Technical or procedural lapses typically arising from a lack of awareness need different treatment as compared to wilful actions meant to default and steal.
Third, we should adopt an indicative set of standards of legal regulations to guide lawmakers. These standards need to include principles of necessity, proportionality, and coherence. The standards should be followed by the Parliament and state assemblies while proposing and amending regulations.
Fourth, we should introduce sunset clauses so that laws don't become a liability for our future. Our business climate is changing rapidly and our regulatory environment needs to keep pace. Sunset clauses should be standard in our employer law-making process to terminate clauses and rules after a specified time. Every imprisonment clause should go through periodic scrutiny to review its need and relevance.
Fifth, we should create alternative mechanisms and frameworks wherein certain offenses become liable for imprisonment only in repeat instances. Some of the offenses should be made compoundable where monetary compensation ought to be made acceptable in lieu of imprisonment terms. In 2020, the Union government announced its intention to compound some offenses under the Companies Act to reduce the compliance burden amid the pandemic. This should be extended to compliances under other legislations as well.

The second EODB 2.0 phase of ‘rationalise' will eliminate the duplication, redundancy, and overlap between various register and return requirements across Acts and compliances.

For example, an MSME with a single plant in Maharashtra needs to maintain at least 48 different labour registers.

There are at least 10 different formats of wage register, 8 different formats of leave and attendance register, 4 different formats of accident register among others. A National Compliance Commission should be constituted to review the necessity, legality, and relevance of compliances at the centre, state, and municipal levels to reduce the compliance universe by at least 30-40% without diluting controls. This could also operationalise innovations like an enterprise Aadhaar number, enterprise self-certifications, etc.

The third phase of EODB 2.0 of digitise would make compliance cashless, paperless, and presence less. This would adopt innovations like a consolidated, risk-based digital inspection system to replace the physical inspector raj, an enterprise digi-locker, and a national open compliance grid.

Help, Not With Subsidies, But With Freedom And Trust

India@100 is near; over the next 25 years our chances of higher prosperity and inclusiveness increase with a government that does less so it can achieve more. Our legacy economic policy framework shunned entrepreneurs, viewed business with distrust, and used criminality as a tool for control. Over 75 years this excessive criminalisation has bred corruption, blunted formal employment, and created a large number of economic dwarfs. India's entrepreneurs can deliver the millions of well-paying jobs that she needs. This delivery doesn't require government subsidies but the freedom and trust that starts with ending excessive criminalisation.

Manish Sabharwal and Rishi Agrawal are co-founders of Teamlease Services and Teamlease Regtech respectively.

The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.