A modern state is a welfare state with formal enterprises and formal jobs. An entrepreneurial state takes big risks to get us there. But recent commentary about GST and demonetisation suggests some of us have lost the romance of policy which views the state as a force for change, justice and risk-taking. An entrepreneurial state fights for what it believes in despite the re-election risks of imposing short-term pain for long-term gain, knows that change does not come from a beheading but death by a thousand cuts, and has the self-confidence that a 10-year plan isn’t 10 one-year plans. Restoring the lost romance of policy is important because creating formal jobs for 10 lakh kids every month needs big risk-taking.
The most painful arguments against GST and demonetisation have been a defence of informal employment. Employers who don’t pay minimum wages, Provident Fund, and ESI don’t deserve sympathy. How long do young Raju and Chhotu have to work in informal retail without an appointment letter or eight-hour workday? Are small enterprises only viable if we don’t enforce our laws? Isn’t informality the slavery of the 21st century? Isn’t universal enforcement of minimum wages only possible with electronic salary credit? India is poor not because Indians don’t work hard but because our informal enterprises don’t have the productivity to pay the wage premium.
Of our 6.3 crore enterprises, 2.4 crore don’t have an office or work from home, only 85 lakh have any tax registration, only 12 lakh pay the mandatory social security, and only 18,000 companies have a paid-up capital of more than Rs 10 crore. We don’t need so many enterprises; the US economy is seven times our size and only has 2.2 crore enterprises. No decent country has 84 per cent of its currency in high value notes, 85 per cent of its labour force working without a formal appointment letter, or 99 per cent of its enterprises with less than 10 employees. The notion that “Indian culture” is responsible for this informal employment is, at best, the soft bigotry of low expectations and at worst, racism. Informality is a child of regulatory cholesterol and the riskless view of informality.
GST and demonetisation have real economic risks like skill hysteresis, demand deferring, and informal employment cratering. But thankfully, demonetisation’s biggest human risks are unrealised; there’s been no change in food prices at the 100 largest mandis or the 22,500 people that die every day. Report cards either way are premature; pundits must remember the wise “It’s too early to tell” quip of Chinese Premier Chou Enlai to Henry Kissinger’s question in 1970 about the impact of the French revolution of 1789. More importantly, the true risks of failure of big decisions in complex systems need to be underestimated; economist Albert Hirschman called this underestimation of failure the hiding hand necessary for entrepreneurship and progress.
Ricardo Hausmann of Harvard suggests the only way to improve air traffic safety is having plane crashes since everything known about air traffic safety is already built in. The country’s honourable patience with demonetisation not only has lessons for the GST transition but suggests three immediate policy actions; civil service reform, taxation recalibration, and lower regulatory cholesterol. The first is obvious.
Though necessary secrecy cramped style, some demonetisation pain came from government plumbing not keeping up with the cognitive, technical and specialised demands of India-scale. The generalist civil service needs rebooting with lateral entry, specialisation, performance management, adopting the early retirement army colonel threshold, etc. Second, the next budget should lower tax rates and raise the individual exemption limit to Rs 5 lakh. Finally, higher formal employment needs lower regulatory cholesterol; three low hanging fruit are a Universal Enterprise Number (instead of the 25 plus numbers every enterprise has today), going PPC (paperless, presenceless and cashless for all compliance), and salary choice (employee flexibility in mandatory salary confiscation of 45 per cent).
Globally, voters are forcing politicians to blur neat boundaries between the left and right and conservative and liberal. It was always simplistic to assume that business people don’t care about people and politicians hate fiscal discipline or can’t get re-elected once they do the right thing. Instead of misunderstanding Keynes’s quip “in the long run we are all dead” as foolishness in planting trees you won’t sit under, an entrepreneurial state knows the best time to plant a tree was 20 years ago but the second best time is now. Indians must lose our sense of humour about the rule of law by moving from deals to rules; it’s economically corrosive for an Indian who follows a rule to feel she has missed a deal.
On my first trip to Patna this month a wise man said it has been Bihar’s misfortune that imaandaari (honesty) is equated with bewakoofi (stupidity). This isn’t a moral or spiritual insight; formal jobs are a rare — if not extinct — species in Bihar. The stories a society tells itself are unacknowledged legislation; India’s new story about formalisation, enforced laws, and lower costs of imaandaari will create new role models in business, politics and bureaucracy. Risk-taking could change the perception of government from “meddling, ungrateful, arrogant, dishonest, jealous, and surly” to a force for good. It’s the state that lays the foundation of equality; our biggest romance of policy was universal franchise at birth (previous democracies progressed through the landed, rich, and educated before reaching women).
Obviously, risks, like romance, can end badly and demonetisation could translate to political punishment in 2019. But it could translate to higher tax revenues for redistribution, a beginning of the end for informality, and a fairer India. A magnificent case for the romance of risk was Tagore’s quip that life should not be the infinite elongation of a straight line; the risks of GST and demonetisation are real but we won’t get a modern state until we have an entrepreneurial one.
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