India’s encounters with economic reforms remain steeped in disbelief. Or, shall we say, preconceived notions, anchored in the status quo of the past, prevent us from observing, leave alone celebrating, them. The underreporting of ground-zero reforms unleashed by Madhya Pradesh Chief Minister Shivraj Singh Chouhan on 7 May 2020 is a classic case. Perhaps, it is to do with the language Chouhan used — Hindi, and not English. Or, it has been downplayed in the national media because these policies pertain only to the state of Madhya Pradesh. Or, and we believe this could be the biggest reason, the inherent bias against the BJP (that the Party and BJP-governed states) can and will do nothing on economic reforms.
Reforms were long-pending, Chouhan said in a video statement, COVID19 has become the new trigger. “Investors had been mired in red tape and trapped in the spider’s web of regulations,” he said. “We have decided to free them. This is the time for us to change our laws and bring them in tune with the times, make them simple such that we bring investors from within India and outside into Madhya Pradesh.” In particular, he referred to attracting those companies to Madhya Pradesh that sought exit from China, an aspiration we have been hearing for the past two months now. The changes to laws, rules and regulations that followed in Chouhan’s 26-minute-long speech illustrate how political will can be used to deliver economic reforms. While the fine-print of these reforms is awaited, this essay examines his proposals and concludes that while going in the right direction, they are not enough.
What works…
There are five sets of reforms that Chouhan has unleashed and are good for attracting capital, entrepreneurs, jobs, wealth and growth to Madhya Pradesh. These reforms are around registration, licences, shops, returns and labour.
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Registration reform
For any entrepreneur seeking to set up a factory, a service business or a construction project, registration will be done in one — repeat, one — day. Unlike other announcements in the past that give us reason to yawn and say ‘more of the same’, this time Chouhan has made officers accountable, with penalties imposed on the concerned officer for delay. The one-day deadline seems real, though execution will tell us how it goes.
This is a landmark reform when seen in the currency of time. Study this list of permissions and licences and the average time taken to get them — it can suck out all the enthusiasm from a young entrepreneur. A factory licence takes 21 to 30 days. The consent to establish takes seven days. A no objection certificate from the fire department needs seven days. Safety clearance from the Chief of Electrical Inspector General requires seven days. A micro, small and medium enterprise registration, where the process is offline, eats up seven days. Permission under the Contract Labour (Regulations and Abolition) Act, 1970, needs seven to 14 days. And it takes seven days to get permission to set up an office under the Shops and Establishment Act, 1953.
To get any and all of these permissions, an entrepreneur needs to fill several forms, meet various officials, across many locations. If all these have been compressed into a single day, with accountability embedded into the system, it is clearly a message from Chouhan to entrepreneurs to invest in Madhya Pradesh.
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Licences reforms
Under the Factories Act, 1948, read with Madhya Pradesh Factories Rules, 1962, a licence for a factory will now be valid for 10 years rather than one year. All applications will be accepted online, and so will the registration. Working hours have been increased during the COVID19 period, and overtime hours have been increased to 72 under the Payment of Wage Act and Minimum Wages Act, 1948, read with The Madhya Pradesh Payment of Wages Rules, 1962. For a new licence under the Contract Labour (Regulations and Abolition) Act, 1970, read with The Contract Labour (Regulation and Abolition) (Madhya Pradesh) Rules, 1973, the licence will be valid for the entire duration of the project and will not need an annual renewal.
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Shops reforms
Under the Madhya Pradesh Shops and Establishments Act, 1958 the time for shops to be open has been increased. They can now open at 6 am and remain open till midnight. This will bring convenience to shoppers and give flexibility to shopkeepers. To call this a reform is a bit excessive. These are executive decisions in tune with a 21st century India, where ‘night life’ is lighting up, one city after another. Besides, not all shopkeepers need to stay open and the decision is left to them.
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Returns reforms
Chouhan has reduced the number of returns to be filed under the Madhya Pradesh Factories Rules, 1962. From 61 registers and 13 returns, an entrepreneur will need to have just one register and file one return. Further, self-certification will be adequate for the filing of the return. Where necessary, he has allowed third party inspection by agencies empanelled by the state’s labour department.
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Labour reforms
Factories employing less than 50 employees will not be inspected. Under the Contract Labour (Regulation and Abolition) (Madhya Pradesh) Rules, 1973, the threshold number of labourers has been increased to 50 from 20. Routine inspections are history and will be required only after permission from the Labour Commissioner or based on complaints. The threshold under the Madhya Pradesh Industrial Relation Act, 1960, is proposed to be increased from 100 to 300 employees. Chouhan also mentioned a dispute resolution mechanism without approaching courts. How that will play out remains to be seen.
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…and what doesn’t
There are two areas where Chouhan needs to pay attention before the reforms he has initiated turn into economic activity. These include ending the raj of some hidden inspectors and reaching out to a wider network of entrepreneurs by speaking to them in a language that’s more in tune with business.
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Siege of Inspectors
But starting a factory is not the end; it is only the beginning. Once a company comes under the Factories Act, 1948, it needs to comply with a number of regulations, maintain records for adequate ventilation and temperature management (it needs to record temperature four times per day), maintain adequate lighting, manage cleanliness, provide for drinking water facilities, urinals. In addition, it needs to maintain a register of water sealed gas holders, humidity register, record of lime washing, record of examination of pressure vessel, certificate of stability, record of eye examination, register of child workers. These are an indicative sample and not the complete list. Several points here are important, but not all. The latter need to end.
Here’s another list, this time of the number of inspectors that an entrepreneur operating a factory needs to deal with. This list comprises the factory inspector for general oversight; the labour inspector for minimum wages, salary register, attendance register, overtime register, fines and deductions registers. Inspections from the Regional Provident Fund Commissioner, the Pollution Control Board, and the Employees’ State Insurance Corporation are routine. Other inspections include the fire inspector, the electrical inspector, the lift inspector, the boiler inspector, the explosive inspector, the legal metrology inspector, the health inspector, the food and safety inspector, and the property tax inspector. Some of these come under the jurisdiction of the Union government, which Prime Minister Narendra Modi needs to look into, which then the State governments can execute.
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Communications outreach
The other gap in Chouhan’s initiative is the language of reforms. By limiting it to Hindi-speaking, Hindi-reading constituency, he may restrict these policies to the Hindi heartland. He may not be able to attract immediate attention of investors from the non-Hindi speaking states in India or foreign investors. Of course, entrepreneurs will not be stopped by linguistic hurdles; they will find a way. But a simultaneous English translation of all policies would reach out to a wider sample of investor-entrepreneurs. It’s not that the Madhya Pradesh government does not understand it. On the documents page of the government, Hinglish is the medium of conversation, even if Hindi is the medium of policy. That is, the headlines and links to laws and regulations are in English (apart from Hindi), while the precise laws and regulations are only in Hindi. With a team of translators, this is easily fixed.
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A brave new Madhya Pradesh?
Madhya Pradesh has demonstrated that it has the political will and the intent to deliver concrete measures to revive a sagging economy due to COVID19. There is clarity of vision and focus on outcomes. There is clear recognition that labour reforms will help kickstart the economy. However, unless it has been thought-through right till the process on the factory shopfloor, executing all these reforms, from registrations and licences to returns and labour, all in a single day could become yet another wasted opportunity of aspirational and wishful thinking. We will be watching this space closely and until we see on-ground change in operations and ease of doing business, we remain positively sceptical.
We see Chouhan’s reforms as a starting point, not the end. These are second-generation reforms that are building ground-up. The first-generation reforms happened in 1991 and have delivered their fruits. They were led by the Union government. But almost three decades later, the oil of the economy is now flowing in the regulatory pipelines of States, from which the regulatory cholesterol needs to be cleared. The reforms initiated by Prime Minister Narasimha Rao now need to be powered by Chief Ministers of 28 states.
These reforms are a path, a regulatory infrastructure on which entrepreneurs can come and invest, create jobs and GDP, deliver economic growth and taxes. They are brave, far-reaching and in the interest of the state. Chouhan is attempting to clear up the hurdles to doing business that have accumulated over decades of rent-seeking and red tape. He is also setting the direction that other states can and must emulate. Above all, these reforms could turn out to be a virtuous cycle of good politics delivering good economics leading to re-election.
Gautam Chikermane is Vice President at ORF. He tweets @gchikermane. Rishi Agrawal is co-founder and CEO at Avantis RegTech. Views are personal.
The article was first published on the ORF website.