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The Government Should Do A Whole Lot LESS To Ensure Ease Of Doing Business

And it starts with cutting the bureaucracy down to size.

24/04/2017 12:32 PM IST | Updated 25/04/2017 8:55 AM IST
Danish Siddiqui / Reuters

Despite it being the ostensible focus of the present NDA government, "ease of doing business" in India seems stuck. Prime Minister Modi, in an attempt to make India one of the top 50 places to do business, has directed ministers and bureaucrats to reduce hindering procedures and paperwork—however, the country has only limped from a position of 131 to 130 in the World Bank's ease of doing business rankings despite the push for the last two or three years.

So, why has the government not been able to solve this not-so-complex puzzle? Why has Modi's dynamic leadership and noble intentions not yielded dividends on this count?

The quality of governance seems to be inversely proportional to the size of the government!

As it happens, the answer does not lie in the current political leadership but in the rather curiously designed governance structure of India—which has been designed to rule rather than govern. This complex system, which exists to solve the problems afflicting India today, is actually the root cause of most of them.

According to its official website, the Indian government has more than 50 ministries/departments, 16 apex offices and some 85 commissions; there's an army of bureaucrats and millions of government servants serving our large and populous country. Yet how do we compare to other large economies? The USA, an economy which is 10 times bigger than us in terms of GDP, has just 15 departments. As for China, a country much bigger than India in terms of population, area, and size of the economy? Just 20 ministries and five offices! Therein perhaps lies the secret of governance, or in our case, the lack of it. One can fairly surmise, given the state of affairs in India vs. China and the US, that the quality of governance seems to be inversely proportional to the size of the government!

A ministry or department once formed behaves like a living organism. It acquires its own identity, shape, and size where it needs energy (budget/power) to survive, grow and stay relevant. Unfortunately, more budgets are granted only if the ministry is more relevant/visible—and there lies all the pain. To stay relevant, ministries draft more rules, notifications and circulars so that more work is created and more budgets are allocated, which in turn creates hindrances for normal businesses.

To stay relevant, ministries draft more rules, notifications and circulars so that more work is created and more budgets are allocated, which in turn creates hindrances for businesses.

Let's consider the example of the Ministry of Labour. In an ideal world, such a ministry would look after the welfare of labour, draft rules related to minimum wages (ironically a state subject), and monitor issues related to wages and work conditions. However if one just makes policies and issues advisories, it reduces the scope of work and in turn, causes a reduction in budget and power. As a result, the Ministry of Labour does not concern itself with labour alone but also forays into healthcare and operates certain hospitals! Yes indeed—it is not the Ministry of Health but the Ministry of Labour which focuses on providing healthcare to the workers of India. It has a department called ESIC (Employee State Insurance Corporation) which collects close to 6.5% of wages earned by an employee and uses this money to provide healthcare. Are ESIC hospitals best in the country? NO. Are these hospitals really sought after by all workers? Well NO. Is there a perfect alignment of interest among hospitals and workers? NO. Needless to say, the condition of ESIC remains pathetic (like any government hospital), with poor quality of care, zero accountability, and dismal service standards.

So if there is no operational excellence, no benefit or advantage, then why does the government need to run hospitals and force people to use ESIC rather than give them the freedom to buy health insurance and choose hospitals?

Yet rather than reforming ESIC, the government keeps bringing more people under its ambit (the new limit is a monthly wage of ₹21,000). Why? I'm guessing it's because the core concern is not the welfare of workers but the power vested with ESIC and the Ministry of Labour. Without this massive operating outlay, the ministry will be faced with budget cuts/reduced power, a scenario abhorred by bureaucrats and ministers alike.

This scenario is not limited to the Ministry of Labour. Every day, every ministry/department is probably busy thinking of laws and rules that can take the intervention of the state to next level. Recently, Parliament passed a bill mandating employers to provide 26 weeks of paid maternity leave. But the well-meaning minister did not consider that this stipulation would deter many small businesses from employing women. Then there's another minister who is thinking of ways to control portion sizes served by hotels—the list goes on!

While startups were earlier taxed on profits, just like any other company, they are now also getting taxed on investments thanks to the overactive government.

PM Modi in an address to NASSCOM (industry body of IT companies) once pointed out that the success of the famed Indian software industry was despite it. He said that the IT industry grew as the government had little understanding of the sector—by the time the government took notice of it, it had already become quite big. Unfortunately, despite the PM's astute understanding, the government continues to meddle in just about every industry.

One good example of unnecessary government intervention is the launch of Startup India, which was actually a setback to a flourishing segment of entrepreneurs.

The Startup India program was launched in January 2016 amid much fanfare. Within a year, we've had startup events, startup sessions and even a Startup India policy whose main highlight is that now a nodal body can certify startups! Has this helped the startup scenario? Far from it. If you look at the data, 2016 was probably the worst years in terms of VC investments (lowest in last many years) and policy confusion. The increased government attention has only muddled the startup scene. While startups were earlier taxed on profits, just like any other company, they are now also getting taxed on investments thanks to the overactive government. So much for ease of business and a proactive government!

There are too many cooks everywhere—we have a Ministry of Steel and we also have a Ministry Of Heavy Industries. We have a Ministry Of Surface Transport and also a Ministry Of Railways. Tomorrow there will be a Ministry of LCVs and then a Ministry Of 22-Tyre Trucks! Overall, the whole governance structure looks like something lifted out of the satirical British comedy Yes Minister. Except that in the Indian context, it is more of a tragedy.

There needs to be a paradigm shift where the aim of government shall be to enable rather than to provide.

So, for a startup or any company, what will be the best ministry to deal with? MSME or DIPP? Or a specific functional ministry depending upon the core area (fintech, travel, steel, textiles and so on so forth). Needless to say, with dozens of ministers and departments working on the same matters from their parallel universes, and with no one willing to relinquish an inch of control, things remain in perpetual gridlock as every ministry in order to remain relevant/powerful keeps on adding its own notifications, rules, processes. What gets kicked out of the window? Ease of doing business.

French writer and aviator Antoine de Saint-Exupery once wrote: "Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away." Similarly, ease of business can only happen if there are fewer ministries to deal with and not more. India can only improve its ranking if it reduces 52 ministries to 20 and eliminates the massive rusted bureaucracy ruling the masses in the guise of serving them.

The government needs to do some massive rethinking and to withdraw from a large number of areas instead of intervening unnecessarily in more of them. There needs to be a paradigm shift where the aim of government shall be to enable rather than to provide. This was something which was well understood by PM Modi until 2014.

So, what happened? Why has Modi—a famous proponent of maximum governance and minimum government—not been able to effect a turnaround rather than just add to the problem?

Why has Modi—a famous proponent of maximum governance and minimum government—not been able to effect a turnaround... the answer lies in the curiously designed governance system.

The answer to this puzzle does not lie at the door of the political leadership but at the door of the Indian governance system and its colonial-era design. During the Raj, India's administrative system was tasked with helping the rulers rule rather than providing governance. Even when the British relented in 1935 and started giving the "natives" a say in governance, the underlying system remained loyal to the masters in London. This system created an anomaly where the front face (i.e. the political class) became accountable for everything while the back end (i.e. the bureaucracy) controlled delivery as well execution of state powers.

The Indian bureaucracy—aka the iron frame of India—ran the administrative machinery from behind the scenes but by dint of being faceless and formless became a formidable supreme power with little to no accountability. The whole situation was aptly summed up by Sir Humphrey in Yes Minister: "Dear Bernard, ministers comes and ministers go, but we remain forever." So while the political class gets judged constantly and faces a change of guard every five years, bureaucrats remain glued to their positions to provide continuity in governance. Also, the majority of ministers/politicians defer to the "expertise" of the bureaucracy and their understanding of the intricacies of governance.

The whole situation was aptly summed up by Sir Humphrey in Yes Minister: "Dear Bernard, ministers comes and ministers go, but we [bureaucrats] remain forever."

Hence to assume that a politician will come and reform this rusted Indian service delivery system and usher in a new era of policy thinking—even as the same tired entitlement-seeking army of "experts" run the show from behind—is to be blind to the realities of the system.

No politician or media organisation or judge can set in motion the required change. The only hope is that India will get a strong PMO secretariat/cabinet secretary who decides that enough is enough and he or she needs to reform this massive government rather than just demanding (and getting) more and more privileges for their clan.

History tells us that the last time India saw some serious reform, it didn't come from the political class but from bureaucrats. T N Seshan as Election Commissioner changed forever the way elections happened in this country. A former bureaucrat cut all the rules/regulations in the 1991 economic reform and a strong CAG head turned crony capitalism upside down with same system, same machinery and same people.

Hence, bringing India among the top 50 places to do business is going to remain a pipe dream until the present political leadership figures out a way to minimise this vast maze of ministries, departments, apex offices, commissions and what not. Till then, god save the king!

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