Incumbents vs insurgents

Regulatory cholesterol reduces competition, increases inequality and hurts job creation without helping workers

Economist Joseph Schumpeter viewed relentless and brutal competition as the most important feature of capitalism because it made the economy “like a hotel that was always full but the people keep changing”. But regulatory complexity, bulk, and overreach sabotage Schumpeter’s continuously changing hotel and instead create what the Eagles’ song, Hotel California — a place where “you can check out any time you like, but you can never leave”. 

Regulatory cholesterol blunts competition and favours incumbents (established, large companies and connected entrepreneurs) over insurgents (start-ups, small companies, and first-generation entrepreneurs). We’d like to make the case for massive ease-of-doing business plumbing reforms that would make India a more fertile habitat for entrepreneurship, manufacturing job creation and competition. 

Illustration by Binay Sinha

India became a hostile habitat for insurgent entrepreneurs after the Avadi Resolution of 1955 that unleashed the licence raj. Successful entrepreneurs began spending most of their time in Delhi because draconian licensing meant connections could replace strategy, you didn’t need marketing but had distribution, you didn’t need human resources but had administration, you didn’t need corporate finance but accounting, and didn’t have clients but had hostages. The 1991 reforms were an important discontinuity in freeing corporate India but important misses were formalisation, corruption and regulatory plumbing. Informality — transmission losses between how the law is written, interpreted, practiced and enforced — created a sense of humour about the rule of law that breed informality and encouraged corruption. Recent reforms like the Goods and Services Tax (GST), shell company tightening, demonetisation, the Real Estate (Regulation and Development) Act or RERA etc are massively accelerating formalisation. But regulatory plumbing has never got the attention it deserves probably because of our permanent generalist civil service; at best they change roles too frequently or, at worst because they are too big for small things and too small for big things. Even today, multiple regulations, permissions, registrations, licences, and filings characterise the life of an Indian employer in manufacturing (see chart: The story in numbers).

Large factories deal with regulatory cholesterol through consultants (often ex-employees of the regulatory agencies) or large in-house “liaison” teams. But small companies and first-generation entrepreneurs struggling with raising money, attracting employees and winning customers find the crushing compliance burden distracting at best, and life threatening at worst. There are multiple explanations for India’s pathetic 11 per cent share of manufacturing in our labour force —infrastructure, skills, capital etc. — but one of them surely is our regulatory regime. The bulk of Chinese exports come from MNC subsidiaries or companies set up in the last 25 years. India will never reach the high peaks of manufacturing employment as a percentage of total labour force of the UK, the US and China (45 per cent, 33 per cent, and 28 per cent respectively) but surely 11 per cent is the wrong number. Global trade growth is slowing because of toxic rich country politics but will come back and we should get ready with a fertile habitat for job creation by restructuring our state at two levels; strategic (rationalisation, institutionalisation and specialisation) and plumbing (quantity and quality of interface).  

 We need a higher bar for regulation and law making; there must be a clear and recurring case of intervention based on consumer protection, information asymmetry, externalities, or market failure. Too many of our laws are an answer looking for a question (unclear or infinite objectives) or arise in response to abuses (drunk driving becomes an argument against cars). Digitisation is welcome but too much of information technology in government is an ATM machine with a teller sitting behind it physically handing out cash (no straight through processing) or paving the cow path (automating existing dysfunctional processes). The digitisation projects of government that involve logging into a website with a password to upload forms needs shifting their thought world to open architecture-enabled interfaces (APIs) that would enable straight-through-processing of application, returns, challans, and filings. 

An important place to start is labour laws; a single labour code (instead of 44 central laws), merging the Shops and Establishments Act and Factories Act, issuing a universal enterprise number (to replace the 25-plus numbers issued by government to large employers), digital filing for all labour legislation (EPFO, ESI, LWF, EDLI, EPS etc.), and competition within social security providers.

Economist EF Schumacher’s most readable book was Small is Beautiful. Small employers and first-generation entrepreneurs have always had a special place in policy imagination, rhetoric and trust. But bad, big and bulky policy that is a thorn in the flesh of big employers is a dagger in the heart of small employers. Labour laws have long chosen the old over the young and employees over job-seekers; it’s time for policy to choose insurgent firms over incumbents. 

The authors are cofounders of Teamlease Services and Avantis RegTech respectively