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To the ledger

Best laws are self-enforcing, they create incentives to comply

Written by Bibekdebroy |
December 26, 2008 11:45:08 pm

After the Mumbai incident, there is now a proposal (from the defence ministry) that all coastal states must compulsorily register all boats. There is a separate proposal (from the agriculture ministry) that all states must enforce the Marine Fisheries Regulation Act. Note that under the Marine Act, registration is already required. It is just that legislation isn’t enforced. Lack of registration is a problem that plagues a variety of sectors. In India, self-employment is very high, described as own-account enterprises (without any hired workers, that is, they are owner-operated). In August 2007, the National Commission for Enterprises in Unorganised Sector brought out a report on the unorganised sector. This found that 56.5 per cent of the work force (NSS data for 2004-05) reports itself as self-employed. Much of this self-employment is subsistence-level and self-employment is higher in backward states (Bihar, Orissa, UP, West Bengal) and lower in advanced states (Himachal, Kerala), especially states that do well on education. Therefore, such self-employment (handloom-weavers, street-vendors, food-processors, rickshaw-pullers, rag-pickers, beedi-rollers, potters) is typically a low-income, low-subsistence occupation and shouldn’t be confused with self-employment by professionals (doctors, lawyers, brokers). Across all varieties of self-employment, the average monthly value addition is Rs 1167 in rural India and Rs 2175 in urban India.

Depending on family size, this isn’t enough to get that household above the poverty line. The sooner this variety of self-employment goes away, the better. To get back to registration, 84.9 per cent of these own-account enterprises aren’t registered. This isn’t a rural India problem, since 76.3 per cent of enterprises in urban India aren’t registered either. Nor is this a Factories Act problem, since very few (5.6 per cent in urban India) are registered under the Shops and Establishments Act. A few (11.5 per cent in urban India) have licences issued by municipal corporations and local bodies, but that’s not a large number either. If the individual is in petty trade (street hawkers, vendors) or a cycle-rickshaw puller, lack of registration may imply illegality and, after Manushi’s pioneering work in Delhi (beginning around 1996), consequent bribery and harassment have been documented across urban India. For instance, there are 73,000 cycle-rickshaw licences in Delhi, but the actual number is more than 5 lakh. There are 35,000 licences in Patna, but the actual number is 90,000. There are 14,099 licences in Allahabad, but the actual number is 31,812. That’s the reason informality (lack of registration) is often equated with illegality, though that’s not necessarily true. Informality is usually correlated with development.

The more a country develops, the lower the informality. That’s the reason informality is low in developed countries. In 2002, an ILO study tried to quantify informality and reported between 50 and 75 per cent of non-agricultural employment in developing countries is informal. (This isn’t a figure for own-account enterprises alone, but all unregistered enterprises.) But at 83 per cent, the figure is even higher for India. Which of India’s states is most advanced in manufacturing? The answer depends on the indicator used and may also be controversial. However, by any indicator, most people will agree Gujarat is more advanced than West Bengal. Subject to population sizes being different, one would therefore expect relatively more people to be employed in manufacturing in Gujarat. In September 2008, the Prime Minister’s Working Group on Manufacturing submitted a report and this has an extremely revealing table. Total manufacturing employment in Gujarat is 1.47 million and that in West Bengal is 3.11 million. True, this doesn’t adjust for population sizes. But the real killer is elsewhere. Of Gujarat’s 1.47 million, 1.06 million is urban employment and 963,995 in registered enterprises. Of West Bengal’s 3.11 million, 1.27 million is urban and 1.24 million in registered enterprises. In relative terms, registered and urban employment is more in Gujarat.

The 3rd all-India Census of SSI (small-scale industry) for 2002-03 shows a pattern that’s no different. There are 10.52 million SSI units, employing 25 million. But 18.8 million of employment is in unregistered units. Registration is high in Punjab, Haryana, Gujarat and Maharashtra and low in UP, Bihar and West Bengal. When we say that the IIP (index of industrial production) doesn’t give a complete picture of what is happening to industrial growth, that’s because the method of collection doesn’t have a good handle on the unorganised sector. Registration isn’t purely a security issue, though it is true registration for enterprises (including boats) and individuals (such as through national identity cards) will make it easier to address security concerns.

Why is there disinterest in registration? Note that several government incentives and subsidies (both enterprise and individual) are facilitated and conditional on registration. Unless we answer this question, we will be tempted to insist on mandated registration and realise (like the Marine Act) that the law will not be enforced. The best laws are those that are self-enforcing in the sense that they create incentives to comply. For example, is there any point in insisting on birth registrations overnight, when a large number of births take place at home?

Arguing that non-registration is a function of development and progress will automatically ensure registration is a trifle too simplistic. As figures show, India’s non-registration levels are higher than those of many developing countries. There is greater validity in the rural argument, since rural residence makes registration difficult. But as figures again show, this is an urban problem too. Nor are quotas (cycle-rickshaws) the answer, though quotas ensure some enterprise is illegal and incapable of registration. Barring really remote parts of rural India, one finds it difficult to believe that people lack information about registration systems. In a generic sense, the answer is there are no incentives to register and few disincentives from non-registration. The decision not to register is a conscious rather than inadvertent one, after weighing costs and benefits. Registration procedures are cumbersome. They lead to high costs, including bribes paid for registration. There may also be public servant preference for non-registration. Registration involves payment of fees (often one-time) to the public account. Non-registration ensures a continuous flow of bribes to the private account. To ensure greater registration, part of the answer is to rationalise and streamline registration procedures, reducing transaction costs.

A few of these procedures figure in the World Bank’s Doing Business database. But one suspects this kind of supply-side improvement isn’t enough. If government monopolies are bad, they will also be inefficient at delivering registration services. Now that IIP has been outsourced (not to forget the issue of PAN cards), why can’t these be outsourced too? Why can’t there be multiple channels and choice for registration? Why can’t registration be bundled with other public services? That’s probably the right response.

The writer is a noted economist

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