The political adage of campaigning in poetry but governing in prose means election season often involves dangerous populist promises. Populist politicians often suggest Scandinavian social democracies as inspiration but forget that the World Bank’s Ease of Doing Business
scale ranks Denmark third of 190 countries, Norway seventh and Sweden 12th. Their dense social safety nets are underwritten by remarkably free economies while India’s universe of regulatory cholesterol —over 60,000 compliance rules, 3,600-plus filings and over 5,000 changes every year —is asphyxiating. But relatively unnoticed recent changes by the Ministry of Corporate Affairs
(MCA) substantially reduce regulatory cholesterol for the 0.1 million new companies incorporated in India every year by saving 0.6 million mandays, 4 million documents and 1,000 trees.
Most people equate Ease of doing business
reform as deregulation, but simplification, rationalisation and digitisation are underappreciated policy interventions in catalysing formal entrepreneurship. An MCA
announcement at the end of March introduced a new form called AGILE that makes starting a new business much simpler — incorporation of a company now automatically registers it under GST, ESIC (Employees State Insurance Corporation) and EPFO (Employees Provident Fund Organisation). This was followed up by an early April announcement that did away with the tedious requirement of affidavits by each subscriber to the Memorandum of Association (MoA) and first directors on Rs 100 Stamp Paper with notary public certification. We estimate these changes combine to cut new company incorporation time by half (from 12 to 6 days), reduce documents needed (from 56 to 19).
These reforms build on the past; the MCA
21 programme of a decade ago began electronic submission of documents and forms, and payments. Yet, though the process went online in 2006, the maze of forms and departments a company had to interact with individually continued to bog the system down. Anyone who wanted to start a business had to go through more than a dozen steps while applying for the mandatory Director Identification Number (DIN), Digital Signature Certificate (DSC), name reservation, incorporation of company, PAN, TAN etc. In October 2016, there was a small breakthrough with SPICe, the father of AGILE. The Simplified Proforma for Incorporating Company Electronically (SPICe) was a single form that completed five steps in one online submission — DIN for up to three directors, name, incorporation of new company, PAN and TAN. The MCA
and Central Board of Direct Taxes (CBDT) were linked at the backend. With the stabilisation of GST, the MCA has now gone further to give us AGILE, an e-linked form to SPICe, bringing further simplification, as the backend at six departments have now been integrated. For a new company, this means that instead of interacting separately with MCA, CBDT for PAN, CBDT for TAN, CBIC, ESIC, EPFO, there is one form and one set of documents to be submitted online. These changes are hardly inconsequential; plugging these savings estimates in procedures and time taken in starting a new business, takes India’s ranking on starting a new business parameter of the World Bank Ease of Doing Business
up from 137 to 105 (all other factors remaining the same). India’s overall ranking goes up to 75 from 77 — this may seem small but shows how plumbing changes can cumulate to big impact.
Illustration: Binay Sinha
The gains will be larger if we look at the big picture of the formalisation of the economy. It is much more difficult now for companies to stay under the radar. A high compliance burden leads to a culture of evasion. Not just tax collections, this affects environment, health and safety standards and much more. A key victim of an informal setup is the employee who has a job but may not have adequate wages, and is not covered under pension or insurance schemes.
Formal enterprises are more productive than informal ones because they have higher access to credit, talent and knowledge. For a country whose GDP is approaching $3 trillion in nominal terms — we no longer have to embarrassingly convert our output in purchasing parity terms — lowering regulatory cholesterol means our multi-decade sense of humour about the rule of law — our 63 million enterprises translating into only 1 million social security payers — is set to change.
These reforms enable the next phase. India needs a unique enterprise number; a company currently has to register for more than two dozen numbers —each with a different government department, and each asking for its own set of documents. A single identity will make for easier compliance, less potential for evasion and make it much easier to set up thumb rules and heuristics to bring up automatic red flags when a company’s profile and activity do not match the information in its returns. We need to adopt the India Stack — paperless, presenceless and cashless — for all regulation. And we must redefine digitisation from uploading forms into a website to creating open API’s (Application Program Interfaces) that will enable Straight Through Processing.
Contrary to myth, India does not have a jobs problem but a wages problem; everybody who wants a job has a job, they just don’t have the wages they want or need. This is because too many Indians work in unproductive geographies (Karnataka produces the same GDP as UP with a third of the people), unproductive firms (only 19,500 of our 63 million enterprises have a paid up capital of more than Rs 10 crore), unproductive sectors (half our labour force that works in agriculture only generates 14 per cent of GDP), and unproductive skills (this year the bottom 10 per cent engineers will make less salary than the top 10 per cent ITI graduates). An important solution is more formal firms that have the productivity to pay the wage premium. But formalisation needs the lower regulatory cholesterol that comes from simplification, rationalisation and digitisation. The MCA announcement didn’t make as much news as the poetry of the Nyay scheme, but the prose of changes to the infrastructure of opportunity rarely do.
The writers are with Teamlease Services and Avantis Regtech, respectively