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Decriminalisation bill can end Inspector Raj and create jobs, wealth and large enterprises

If the government’s proposal to bring a “holistic decriminalisation” bill in the Winter Session of Parliament gets enacted into law, it will be one of India’s greatest reforms since 1991. One of the objectives of this proposed law is to “end harassment and reduce compliance burden on businesses,” Minister for Commerce and Industry, Piyush Goyal, said in a speech on 30 September 2022. For the moment, the proposed Bill is the property of Parliament and has not been released in the public domain, so the details are missing.

This reform should have accompanied Prime Minister PV Narasimha Rao’s statement on Industrial Policy 1991. The 1991 policy ended or reduced the Licence-Permit-Quota Raj, but left entrepreneurs facing the tyranny of the Inspector Raj intact. Three decades later, Prime Minister Narendra Modi’s proposed law, we hope, will mark the beginning of the end of the Inspector Raj, or, at least, its rationalisation through digital governance.

When viewed through the lens of the government’s intention to make India an investment destination for global and domestic capital, it would be a reform that should end the endemic of harassment, corruption, and rent-seeking by officials of the Union government. Corruption by officials of state governments will end when criminal provisions in State laws and rules get similarly rationalised; some of these will get rationalised with amendments to Union laws that are enforced by state governments.

To put the decriminalisation debate in perspective, here are some numbers from an Observer Research Foundation report titled, Jailed for Doing Business:

  • The business regulatory universe comprises 1,536 laws, of which more than half, or 843 laws, carry imprisonment clauses. Under these laws, there are 69,233 compliances businesses face as an aggregate, of which almost two out of five, or 26,134, carry imprisonment clauses.
  • Of the 843 laws with imprisonment clauses, 28.9 percent, or 244 laws, have been enacted by Parliament; the rest by State legislatures and rules.
  • Of the 26,134 compliances that carry imprisonment clauses, a fifth, or 5,239 clauses, are situated in Union laws.

Also read: India doesn’t need a media market regulator. Industry actually needs more economic freedom

What do these numbers mean and how do they show up?

  • Of the 69 million enterprises in India, only 1 million are formal employers; as a result, the remaining informal enterprises get no access to institutional capital, talent, or supply chains. India’s predatory and rent-seeking policy infrastructure ensures that businesses choose to remain under the regulatory radar—small may not be beautiful but it is certainly safe.
  • For instance, a small business with 150 employees or more has to deal with 500 to 900 compliances a year, on which it can end up spending up to INR 12-18 lakhs by hiring consultants to be compliant with labour laws, taxes, factories, and so on.
  • This creates a regulatory bias against small businesses—once a line of scale is crossed, managing a compliance department becomes cost-effective; until then, for the small business owner-manager, compliance becomes a risk-management strategy, almost an economic activity.

What should be done to end this regulatory cholesterol?

Regulatory cholesterol is cumulative policy actions of the three arms of the State—the executive, the legislature, and the judiciary—using instruments of legislations, rules, regulations, or orders, to create or raise barriers to a smooth flow of ideas, organisation, money, and, most importantly, the flow of the entrepreneurial spirit. There are several expressions of regulatory cholesterol, but as far as decriminalisation of compliances goes, here are some recommendations:

  • Reform all compliances with an overarching legislation, across ministries and departments. Smaller steps being taken to ease doing business in India, such as shifting the responsibility under the Legal Metrology Rules from directors to executives, should converge into this single bill.
  • Use criminal penalties in business laws with extreme restraint—the idea of using a criminal clause as a default option should be done away with and replaced by a justification for imprisonment, including the term in jail.
  • End the criminalisation of all compliance procedures such as filing on a wrong form or mislabelling.
  • Introduce sunset clauses for all imprisonment clauses—this needs a new enabling law as a precursor.
  • Digitise all compliance filings, as has been done by the income tax department.
  • Convert every department that acts as a regulatory body to go paperless and faceless. This should look beyond merely creating a website and uploading records. This will enable automated record reconciliation, identify leakages, detect frauds, and flag discrepancies.

By reducing the compliance burden such that it ends harassment, the government is moving in the right direction. To prevent any policy holes left after the passage of the bill into an act, this is a law that needs to be studied hard, debated well, and only then enacted. Of course, there will be political opposition. It is up to the government to ignore the rhetoric and embrace the solutions for the greater good of the country.

India’s first-generation economic reforms that began under Prime Minister PV Narasimha Rao reversed the direction of the Indian economy. This policy ended the tyranny of the License-Permit-Quota Raj, a policy abomination that suppressed the Indian economy for 44 years.

The second-generation reforms occurred under six prime ministers, from Rao, Atal Bihari Vajpayee and HD Deve Gowda, to Inder Kumar Gujral, Manmohan Singh, and the incumbent Narendra Modi. There are 69 crucial reforms that were enacted in the three decades between 1991 and 2021. These include, but are not restricted to, the opening up of the economy, the outsourcing of economic governance to regulatory bodies such as SEBI and CCI, and introducing the goods and services tax.

Now, under Prime Minister Narendra Modi, the country is getting ready for third-generation reforms. Among them are reforms that rationalise compliances and imprisonment clauses—retain a handful, reduce or remove most, compound the rest and turn physical imprisonment into financial penalties. The Inspector Raj, expressed through the colonial, corrupt, and rent-seeking policy infrastructure, must be disassembled and jobs, wealth, and large enterprises created.

The road to India as a US$30 trillion economy by the middle of the 21st century is crucial for a rising nation. India needs to fire all policy bullets in its arsenal to make it happen. The proposed decriminalisation bill is one such bullet train to prosperity.

Gautam Chikermane is the Vice President of ORF. Rishi Agrawal is the co-founder and CEO at Avantis RegTech. Views are personal. 

The article originally appeared on the Observer Research Foundation website.

Source: The Print

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