[Editorial Analysis] Changing the Indian state from bully to ally

Mains Paper 3: Economy

Prelims level: MSMEs

Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment


• A dictionary suggests that a bully is “someone who frightens someone else” and an ally is “someone who helps and supports someone else”.

• Do our 63 million micro, small and medium enterprises (MSMEs) view the Indian state as a bully or an ally?

• Policy imagination and rhetoric often romanticize MSMEs over large employers because it believes that MSMEs are a source of massive job creation, are the salvation of less-skilled job seekers, and embody solid middle-class values.

• But MSMEs can’t hear what policymakers say because of what they do unleashing a universe of 60,000-plus possible compliances and 3,300-plus possible filings for enterprises.

• We would like to make the case for massive regulatory rationalization, simplification and digitalization because no MSME can possibly keep track of this regulatory cholesterol that is made even more toxic by 5,000-plus changes annually.

Ease of Doing Business in India

• The progress made in Ease of Doing Business (EODB) rankings is real, but it’s time for another exercise that takes a ground-up look at our current regulatory frameworks.

• A new book by Cass Sunstein called The Cost-Benefit Revolution is useful reading and also attractive for its intellectual honesty in highlighting three challenges for technocratic policymakers using cost-benefit analysis:

• Distribution (hard to identify who bears costs and obtains benefits), welfare (nobody has a welfare metre and proxies are useful but can produce serious errors), and knowledge (nobody knows enough, and guesswork and unintended consequences are inevitable).

• A cost-benefit analysis would suggest that we hurt the very people we are trying to protect (MSMEs and employees) by breeding informality and its inevitable companion, a cottage industry of consultants and corruption.

• India’s next wave of EODB should have three vectors rationalization (cutting down the number of laws), simplification (cutting down the number of compliances and filings) and digitization (architecting for true paperless, presence-less and cashless).

• Rationalization could start with clustering our 44 labour laws into a single labour code and should include reviewing levels (do we really need the peak goods and services tax or GST rate and payroll confiscation of 45% for low-salary levels) and increasing competition.

• Simplification would include replacing our 25-plus different numbers issued by various government arms to every employer with a unique enterprise number (an Aadhaar for enterprises).

Way forward

• We must move away from the current approach to digitization as a website, where you log in with a password and upload files and shift to open architecture-based API frameworks, where multiple players compete in providing services.

• All good doctors worry about iatrogenic risks, distinguish between good and bad cholesterol, and recognize the wisdom of Renaissance physician Paracelsus’ warning that the dose makes the poison.

• Even a doctor who does not know economics will tell you that changing regulations every three hours makes life miserable for MSMEs and breeds informality.

• The next avatar of our EODB programme must aim to decisively shift the Indian state from being an MSME bully to an MSME ally.

• The upside could be about 50 million more formal jobs.

Share article