Bibek Debroy: Non-registration is bliss

The National Common Minimum Programme (NCMP) drives all government policy now. Let me give you two quotes from NCMP. The first is from a segment on small-scale industry (SSI).

"In the past few years, the most employment-intensive segment of small-scale industry has suffered extensively. A major promotional package for the SSI sector will be announced soon. It will be freed from the Inspector Raj and given full credit, technological and marketing support. Infrastructure upgradation in major industrial clusters will receive urgent attention."

Ignore the bits about promotional packages, support and infrastructure and note what is said about the Inspector Raj. The second quote is from a segment on employment and labour laws.

"However, labour laws other than the Industrial Disputes Act that create an Inspector Raj will be reexamined and procedures harmonised and streamlined."

The Inspector Raj surfaces again. The Federation of Indian Chambers of Commerce and Industry (Ficci) has recently produced a survey-based report on what is much more than a Raj Quartet.

This tells us that an average factory/establishment is subjected to 37 annual inspections, with anything between nine and 24 inspectors. This is just an average. In some cases, there are 67 annual inspections.

In descending order of importance, inspections are due to environment, State Pollution Control Board (SPCB, also environment), labour officers, sales tax, excise, provident fund enforcement, Employees' State Insurance (ESI) and industrial safety and health.

Administrative law reform should be much more than civil service reform. Ficci rightly argues, as several other people have, that the Inspector Raj is alive and kicking, even if the Licensing Raj has eased.

At least for manufacturing. And while no one wants all regulation to end, there is an obvious case for rationalisation and harmonisation. Understandably, all industry chambers are diplomatic.

Consequently, Ficci won't dare to do a Hernando de Soto (The Other Path, not so much The Mystery of Capital) kind of exercise, documenting oil and grease required for government machinery to run smoothly.

Leave that to the likes of Madhu Kishwar. And if you missed that in the issues of Manushi, you'll find it in her new book. For the likes of rickshaw-pullers and street-vendors. The Inspector Raj should be eased for everyone, not just SSI.

But there is a special small-business cum small-entrepreneur angle, with more than 55 per cent of India's workforce reporting itself as self-employed. Every sensible entrepreneurial activity you can think of requires any number of signatures, particularly if land is involved.

And in a market-based world, signatures come at a price. Economies of scale and scope are fashionable expressions. They exist in bribe-giving too. Hence, corruption isn't distributionally neutral. It hurts the poor more and is a regressive system.

One, thus, wonders about data thrown up by the third All India Census on SSIs, for the period 2001-02. Admittedly, there are problems with methodology and definitions.

For a start, registered units are on Census basis and unregistered units are on survey basis and there are significant differences between Census data and SSI data reported in the Economic Survey.

SSI registration isn't mandatory, not unless one is covered under the Factories Act provisions. (The proposed Small Enterprise Development Bill also makes registration optional.) However, any unit should prefer registration, because that's a pre-requisite for credit and other subsidies, or exploiting governmental promotional programmes.

Why then are there 2.26 million registered units and 9.15 million unregistered ones? Lack of registration may be driven by a motive of staying outside the tax net (indirect, if not direct) and circumventing labour legislation. But one suspects there is an element of transaction costs associated with registration.

"Transaction costs" is a much-abused expression and is used to underline India's manufacturing disadvantage, vis-à-vis say, China. This is an abused expression because transaction costs should really be about procedural costs, not infrastructural costs, which also tend to be included sometimes.

Consider where most of these unregistered units are, state-wise. Most of them are in Uttar Pradesh (UP), West Bengal (particularly Medinipur), Maharashtra, Andhar Pradesh, Karnataka (particularly Bangalore) and Tamil Nadu.

An even better indicator is not the state-wise distribution of unregistered units, but the ratio of unregistered/registered units across states. And the highest figures are in West Bengal and UP.

At the risk of some subjectivity, these states aren't exactly perceived to be investor-friendly. They may be inspector-friendly states, and that, indeed, is the point.

Higher transaction costs associated with registration provide the trigger for staying unregistered and in terms of trade-offs, benefits from government programmes don't compensate for costs of obtaining registration.

While this kind of administrative law reform is the province of states, the Centre can certainly catalyse the process. At least, for labour-related laws, recommendations of the Second National Commission on Labour being a case in point.

On the broader issue of administrative law reform, one can't get more farcical than the Commission on Review of Administrative Laws (also known as the Jain Commission).

This submitted a report in 1998 and this government-appointed Commission couldn't examine administrative law because it didn't have access, administrative law not having been collated since 1966.

The assorted rules, regulations and orders weren't even available with the Legislative Department. Instead, the Jain Commission examined statutory law reform.