How many hours do you end up spending on regulatory matters?” we asked Agarwalji, a garment exporter. “Around 15-20%,” he said, “approvals and inspections, labour audit, water, building certificate, new site formalities and so on. Every day, I spend a couple of hours going through some of these.” Since this involved government officials, he couldn’t delegate it; officers would insist that the owner be their single point of contact. This is not an exception, but a sad reality facing many manufacturers, specially MSMEs.
Manufacturing MSMEs are at the centre of job-led growth in India. Firms up to 10 years old account for about 30% of all formal employment. Yet, most Indian manufacturers stay small and suffer from low productivity; firms that last 40 years only increase employment by 1.4 times from where they started.
Similar firms in the US increase employment by seven times. One big factor holding MSMEs back is the burden of various local, state and central government regulations and approvals. According to a 2022 World Bank survey, senior managers in manufacturing firms, like Agarwalji, spend nearly 15% of their time dealing with government regulations.
This diverts time from business imperatives, creating a regulatory glass ceiling that discourages investment and growth. When we try to understand root causes, we see a combination of suspicion towards private enterprise and a deeply risk-averse bureaucracy. This results in rules that are too many, too complex and too process-heavy.
By some estimates, formal enterprises must navigate more than 25,000 labour-related compliance requirements. This includes a web of central and state government licences, permissions, registrations and renewals. A recent report by TeamLease RegTech found that nearly 500 compliances are required to set up and run a small automotive manufacturing unit.
The rules often focus on the wrong things, like asking for quarterly reports on raw material usage or specifying the creation of a ‘managing committee’ for canteens in a factory. Other rules even dictate how often factory walls need to be repainted. While many of these are not followed, selective enforcement will not create an ecosystem conducive to growth.
Bad laws need to be reformed, not ignored. We need to foster a sense of trust between businesses and the government. The latter, on its part, needs to implement fewer and better laws. The aim should be to promote competition and growth, rather than incentivizing firms to remain small and under the radar.
States can learn from each other. In 2014, Rajasthan amended its labour laws to introduce flexibility and incentivize MSME growth. The result? Output and workers per factory grew at twice the pace than the rest of India for the next two years. Plus, common-sense practices such as clear criteria for approvals, well-defined timelines and effective grievance resolution mechanisms will help reduce arbitrariness and uncertainty in the business environment.
We must also build trust between bureaucrats and the political leadership. A 2010 survey of IAS officers found that 80% cited political interference as a reason for leaving the service. Outdated procedures were a key constraint. On the other hand, it has been observed that when bureaucrats feel confident that their decisions will not be subject to later inquiries, they work together with businesses to resolve issues.
Investigations of bureaucrats (or politicians) should be based on clear evidence of wrongdoing, and not just on the impact of their decisions on private enterprise. Any decision will have winners and losers, after all. That assurance could empower bureaucrats to administer rules without stifling businesses. Indeed, states that perform better on many metrics, like Tamil Nadu or Gujarat, typically have better relationships between their politicians and bureaucrats.
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As government regulation improves, compliance and enforcement will follow. Bureaucrats will have more resources to enforce fewer laws, while businesses will have fewer incentives to break rules. Bureaucrats and industry can work in sync. Effective grievance resolution can aid cooperation between the government and businesses. The government’s role as a facilitator would then become clearer.
Economic growth and job creation are imperatives. To achieve this, entrepreneurs must be treated not with suspicion but as responsible partners in the country’s growth. The appropriate role of government is to create an environment where businesses are encouraged to do what they do best: create jobs and wealth. Fewer, simpler and clearer laws would be a step in the right direction.