Updated: November 29, 2018 12:20:47 am
Ludo and Snakes & Ladders are both very different games even though both involve rolling a dice. Ludo is more laborious, but you know where you are going, and you will eventually get there. In Snakes & Ladders, the ladders create an illusion of accelerating progress, but the game has more snakes than ladders, the snakes are often longer than ladders, and progress is therefore volatile, patchy and unpredictable. I’d like to make that case that a) success in creating fertile habitats for formal job creation — ease-of-doing business (EODB) — is more like Ludo rather than Snakes & Ladders and the work of decades, b) India’s move from 142 to 77 in EODB rankings over the recent past is a self-fulfilling prophecy that should be celebrated more, and c) our urgent and unfinished agenda in EODB is regulatory rationalisation and civil service reform. Let’s look at each in more detail.
The case for EODB as Ludo (consistently warm with incremental but sustained efforts) rather than Snakes & Ladders (hot or cold with episodic big bang stuff), is easy; sustained positive or negative efforts have long shadows that play out over long periods of time. A wonderful video shows how the Top 10 countries by GDP moved between 1960 and 2017; India drops out in 1972 (about two decades after the worst regulatory cholesterol of our licence raj began) and only reappears in 2010 (about two decades after the reforms of 1991 began).
Compounding is the 8th wonder of the world; Ray Kurzweil of Google calls this the second half of the chessboard based on the story of the Indian inventor of chess whose king grants him his reward of one grain of rice on the first square and doubling on each subsequent square of the chessboard. By the first half of the chessboard (32 squares) the inventor only had a field of rice with 279 tonnes; by the second half, he had rice pile higher than mount Everest or more than 1,199 billion tonnes. EODB is not about flick-of-pen big bang reforms but involves detailed, incremental and sustained work over decades.
Our EODB ranking rise has important signaling and momentum value. The confidence of investors in a country is not the solving of a sum but the painting of a picture; a mind game with multiple variables. EODB lacks the excitement of fiscal and monetary policy or the dazzling effects of subsidy schemes but dullness does not diminish importance and there are large gains from improved regulatory plumbing. I guess the rankings were not celebrated enough because even the government worries that the everyday experience of entrepreneurs of the state has not changed enough. This hesitation is important fuel for the next phase of EODB reform: Regulatory rationalisation and civil service reform.
EODB so far has not addressed the staggering burden on enterprises; 60,000 possible compliances, 6,000 possible filings, and 600 changes every year. The lowest hanging fruit is labour laws; we need a single labour code, a single universal enterprise number to replace 25 plus numbers, competition for expensive social security programmes like EPFO/ESI, and a new definition of compliance digitisation (moving from website for uploading documents with passwords to an API architecture that will allow straight-through-processing of filings from external systems). But sustainable EODB needs civil service reform; the current structures, processes, human capital and thought worlds are at best inadequate, and at worst, hostile for mass entrepreneurship.
Nehru believed the Indian Civil Service was neither Indian nor civil nor a service but Vallabhbhai Patel prevailed with his steel frame view. That steel frame is now a steel cage; the permanent generalist civil service needs to be challenged with lateral entry, restructuring the organisation pyramid that has become a cylinder (250 plus people with the rank of secretary to Government of India) by designing an Eiffel Tower (maximum 50 with that rank), enforcing the colonel threshold of the Indian Army for civil services (you retire at 50 if you are not shortlisted for promotion), specialisation, sharper performance management (98 per cent being outstanding is statistically impossible), and much else. Our regulatory cholesterol is mostly a symptom of this disease.
EODB is an important policy goal for two reasons; first, because India’s problem has shifted from jobs (work that pays minimum wages) to productivity (work that pays living or aspirational wages). Second, because of dated policy and policy imagination that views enterprises as big companies like IBM or Tata’s or suit boot waallas. But regulatory cholesterol is most punishing for small and medium enterprises who create the most jobs. Firm productivity comes from access to talent and capital but our regulatory cholesterol after the Avadi resolution of 1955 led to decades of firms and individuals concluding that the benefits of formality were lower than the costs of formality. Consequently, India got stuck in a low-level equilibrium with millions of informal enterprises who didn’t have the productivity, inclination or need to pay living or aspirational wages.
But our focus on EODB over the last few years has created an underappreciated discontinuity — firms and individuals concluding that the benefits of formality are higher than the costs of formality — that will compound over the next decade. Outcomes are starting; 5 million new enterprises registered for GST (a doubling of indirect tax registrants between 1947 and 2017) and 30 million new social security payers (a doubling of the coverage reached 1947 and 2014). Imagine the long-term impact of both on wages. Now imagine the missed compounding of EODB not being made a policy priority in 1947 or 1968 or 1991.
Sardar Patel said that the best time to plant a tree was 20 years ago, but the second-best time is today. If we continue compounding our EODB like we have recently, India will finally put poverty in the museum it belongs in because formal jobs change lives in ways that no subsidy ever can.
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