by Vivek Kaul
Given this, it is safe to say that it is almost impossible to run a business without breaking some rule or law. Also, given the fact that the government wants entrepreneurs to follow so many rules and laws, there are inspectors whose job it is to make sure that everything is being followed. Of course, for a small price, these inspectors are willing to look the other way.
As Gurcharan Das writes in India Grows at Night—A Liberal Case for a Strong State: “The ‘licence raj’ may be gone, but an ‘inspector raj’ is alive and well in many states; the ‘midnight knock’ from an excise, customs, labour or factory inspector still haunts the small entrepreneur…. Industry studies show that bribes constitute a significant cost of doing business. More than the money, it is the fear of harassment and humiliation by officials that deters a young person from becoming a manufacturing entrepreneur.”296
All this leads to petty corruption and pushes up the cost of doing business for entrepreneurs. It is also one of the reasons why India shows up very low in the ‘ease of starting a new business’ rating parameter in the Ease of Doing Business rankings. So not only does it cost existing entrepreneurs, but it also makes things difficult for prospective ones as well.
A calculation made by the economists Laveesh Bhandari and Bibek Debroy estimated the private earnings of public officials at Rs. 92,123 crore, or 1.26 per cent of the GDP, in 2010-2011.297 The point being that the total cost of petty corruption and the bribes that public officials take turn out to be just as costly as the big scams are. It is just that they are much more difficult to measure.
The question is: What can be done to control this phenomenon? One answer can be the inculcation of better moral values in children through the education system while they are young. But, as we have already seen, the Indian education system is not able to deliver on basic things like reading, writing and basic maths. Hence, this might be a bit too much of a utopian idea.
Another answer is simplification in the rules and laws that entrepreneurs need to follow in order to get a business going and then keep it running. The number of permits and no-objection certificates needs to be slashed. Over and above this, the multiple inspections carried out by inspectors need to be replaced with self-certification along with random checks.
As Mihir Sharma writes in Restart: “The Indian state is run for its nice, kindly inspectors, and not for workers or entrepreneurs.”298 This needs to be corrected. Again, this is easier said than done, given that those who benefit from the current situation, whether directly or indirectly, are likely to resist.
As Vijay Joshi writes in India’s Long Road: “It is sometimes argued that both society and the state should ignore corruption because it has the virtue of making bureaucratic wheels turn faster (‘speed money’)…. A bribe culture may have precisely the opposite effect and induce bureaucrats to create more red tape, licences and other barriers to entry in order to increase their own take.”299
In fact, the economist Kaushik Basu has an interesting idea which he originally wrote about when he was the Chief Economic Advisor to the Ministry of Finance between 2009 and 2012. He talks about this idea in detail in his book An Economist in the Real World.
Basu’s idea essentially tries to distinguish between the bribe giver and the bribe taker. As he writes: “Under the current law, once a bribe has been paid, the interests of the bribe giver and the taker become fully aligned…. Hence, they tend to collude to keep the act of bribery hidden.”300 Given this collusion, it is hardly surprising that bribe giving is rarely revealed in courts.
And this leads to a situation where a majority of bribery incidents go unpunished. Basu proposes that this be changed by making a simple amendment to the Prevention of Corruption Act. The act of giving a bribe should not be declared illegal, while the act of taking a bribe should continue to be illegal. In fact, if bribery charges are proven, the bribe taker should be made to return the bribe to the bribe giver.
What will this do? As Basu writes: “He [the civil servant taking a bribe] will know that, once he has taken the bribe, he can no longer rely on help from the giver in keeping this fact a secret. Unlike [under] the existing law, after the bribery [emphasis original], the interests of the giver and the taker are diametrically opposed to each other. Knowing that this will happen, the bribe taker will be much more hesitant to take the bribe in the first place.”301
The point that Basu is trying to make is that, if the law as it currently stands is changed, the incidence of bribery would come down.
This idea sounds very interesting, although at the same time it is very radical for the Indian government. At the very basic level, a better legal system which makes faster decisions would go a long way in controlling corruption in the country (as we shall see in the next section).
If a programme like Make in India has to really take off, then the corruption in India has to come down. The act of setting up a business and then running it needs to become substantially easier than it currently is. Only then will more individuals turn towards genuine entrepreneurship.
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In the Ease of Doing Business rankings, India stands 178th as far as enforcing contracts is concerned. The reason for this is fairly straightforward. If one party to a contract does not keep his side of the deal, it takes way too much time to get things sorted out by approaching the courts.
As per the Ease of Doing Business rankings, it takes 1,420 days, or nearly four years, in Mumbai to resolve a dispute. The time to resolve a dispute is “counted from the moment the plaintiff files the lawsuit in court until payment”. Furthermore, “this includes both the days when actions take place and the waiting periods between”. It is safe to say that the time taken to resolve a dispute by approaching the court would be significantly higher than four years in most parts of the country.
Anyone who has ever done the rounds of any Indian court would know that the Indian judicial system places very little value on time. In fact, they still shut down for a summer vacation, something which has survived from the days of the British Raj. Over and above this, adjournments of cases are carried out on a fairly regular basis. In fact, sometimes lawyers of two opposing parties are known to get together to keep getting cases postponed and, meanwhile, keep making easy money.
Not surprisingly, there is a huge number of case backlogs. The 246th Law Commission Report, titled Arrears and Backlog: Creating Additional Judicial (Wo)manpower, defines backlog as: “When the institution of new cases in any given time period is higher than the disposal of cases in that time period, the difference between institution and disposal is the backlog. This figure represents the accumulation of cases in the system due to the system’s inability to dispose of as many cases as are being filed.”
Data from the 24 High Courts shows that, up to the year 2013, the backlog was of 44 lakh cases. In the case of the lower courts, the backlog was of 2.6 crore cases. For the Supreme Court, the backlog was of 64,919 cases as on December 1, 2014.302
As of 2011, around 24 per cent of cases had been pending in courts for at least 5 years. Nearly 9 per cent of the cases had been pending for more than 10 years. At the beginning of 2014, around 3.1 crore cases were pending in courts across India.303
One reason for this lies in the fact that the government is the biggest litigator. As Gurcharan Das writes in India Grows at Night: “The main culprit of the judicial delay [is] the government, which appeal[s] all judgements automatically and proceed[s] to lose them again in the higher courts…. The problem [lies] in the fact that the decision to litigate [is] made at the lowest level in the bureaucracy but the decision not to litigate [is] made at the highest level. If this process were simply reversed, government litigation would come down.”304 Within the government, the police force contributes the most cases, in particular the criminal ones.305
What does not help is the fact that India has too few judges and, at the same time, there are huge vacancies which haven’t been filled up. India has around 16.5 judges per ten lakh of its population. In co
mparison, the United States has 101 judges for a comparable population.306 Interestingly, the Supreme Court, in a judgement on March 21, 2002, had said that there should be at least 50 judges per every 10 lakh Indians. 307
As of December 31, 2015, the total number of sanctioned posts of judicial officers in the district and subordinate courts that come under the 24 High Courts had stood at 20,620. Of these, 4,501, or almost 22 per cent, were vacant.308 In fact, a June 2016 news report in The Times of India said that five High Courts are functioning with a more than 50 per cent vacancy.309
This has led to a situation wherein the existing judges have to dispense cases very quickly. A study carried out by Daksh, a non-governmental organisation based out of Bengaluru, found that the most relaxed High Court judges had around 15-16 minutes to hear a case, whereas the most busy ones had around 2.5 minutes. Hence, on an average, a High Court judge had around five to six minutes to decide on a case. In fact, at the Kolkata High Court, there are 163 cases listed before a judge on any given day in the five and a half hours that are spent hearing cases.310
If a High Court judge is spending two to two and a half minutes on deciding a case, it can’t possibly be a good thing. One thing that needs to happen is that the number of cases being filed needs to come down. Big Government needs to litigate less for starters.
The vacancies in the courts need to be filled up. This would go a long way in bringing down the backlog. Between January 2009 and September 2015, the backlog of cases in courts across India increased from 3 crore to 3.1 crore. This is not a huge jump. While there is a backlog of more than 3 crore cases, what we do not realise is that courts dispose of around 2 crore cases every year. Between 2009 and 2015, the average vacancies of judges against the sanctioned strength was around 21 per cent. During the same period, the backlog of cases increased at around 1.5 per cent per year. If there had been no vacancies, then the backlog could have been brought down to less than one crore by now.311
The sad part is that neither the government nor the judiciary has paid attention to this basic fact, which could lead to the number of outstanding cases coming down in quick time.
Furthermore, special courts need to be set up to get rid of cases that do not need much expertise. The Law Commission Report, cited earlier in this section, talks about the setting up of special morning and evening courts for dealing with traffic/police challan cases. These cases constituted around 37.4 per cent of the pending cases over the previous three years, the 2014 report points out.
As the report further points out: “These Courts should be in addition to the regular Courts so that they can reduce the case load of the regular Courts…. Recent law graduates may be appointed for short durations, e.g., 3 years, to preside over these special traffic Courts. These special Courts should only deal with cases involving fines.”
Only once the backlog of cases starts to come down will the Courts be able to spend more time on more important cases. Furthermore, only then will it take lesser time in resolving a contract dispute by taking it to court. As is often said, and at the cost of sounding very clichéd, a very fundamental reform of the judicial system is needed. Only such a reform will help India go up in the Ease of Doing Business rankings and, more importantly, improve the ease of doing business in reality.
This can only happen if the number of things that need the attention of Big Government as things currently prevail comes down. The government needs to concentrate on fewer things, and among them, the administration of justice and the protection of contracts and property rights are some of the most important.
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There are many other constraints to the Make in India programme being able to take off. And most of them are Big Government factors, as we shall see.
The indirect tax system that entrepreneurs need to follow is fairly complicated. This despite the fact that the tax system has been simplified over the past two decades. But the cascading effect of these taxes and the complexity still remains. As the World Bank jobs report points out:
It seems likely that it is the complexity and lack of uniformity of tax systems rather than the tax rates themselves that impose significant costs on firms. These tax systems create distortions in the economy and make it difficult to raise adequate revenues. Simplifying the tax regimes (by reducing the number of taxes and exemptions) and widening the tax base is likely to benefit firms and [reduce] distortions in the economy.
For the past many years, India has been trying to move towards a uniform, nationwide Goods and Services Tax (GST). On August 3, 2016, the Rajya Sabha, the upper house of Indian Parliament, finally passed the 122nd Constitutional Amendment Bill for the introduction of the Goods and Services Tax (GST). This was after the Lok Sabha, the lower house of Indian Parliament, had passed the Bill in May 2015.
The passing of the Bill will be looked upon as an important achievement for the Modi government. Also, credit must be given to the Modi government for reaching out to the Opposition and getting almost everyone on board (excluding the AIADMK party) to get the Bill passed in the Rajya Sabha.
Having said that, the Bill could have been passed during the period 2009-2014 if the Bhartiya Janata Party, which is in power right now, hadn’t opposed it as vehemently as it did then.
Indirect tax is essentially a tax on goods as well as services, and not on income or profits. India currently has a plethora of indirect taxes, both at the state government level as well as at the union government level. The GST will subsume many of these taxes. It hopes to have one indirect tax for the whole nation, and this will convert the country into one unified common market.
The GST, or value added tax (VAT), as it is also known as, is already present in large parts of the world.
Until now, the Constitution empowered the central government to levy an excise duty on manufacturing. Let’s take the case of a company which manufactures cars. It needs to pay an excise duty to the union gov ernment on every car that it manufactures. The current rate of excise duty is 12.5 per cent on small cars. While the company pays this tax to the government, it ultimately recovers it from the end consumer who buys the car.
The central government can also levy a customs duty on exports as well as imports. Furthermore, the Constitution allows the central government to levy a service tax on the supply of services, which the state governments can’t.
On the other hand, the state governments are allowed to levy a VAT, or a sales tax, on the sale of goods. This division has essentially led to a multiplicity of taxes.
According to the Report of the Select Committee of the Rajya Sabha on the 122nd Amendment Bill of the Indian Constitution, presented in July 2015, this exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, Central Sales Tax (CST) is levied on the inter-state sale of goods by the Central Government, but collected and retained by the exporting states. Over and above this, “many states levy an entry tax on the entry of goods in local areas”.
This multiplicity of taxes has led to an inherently complicated indirect tax structure. This is another excellent example of Big Government. As the Select Committee Report points out:
Firstly, there is no uniformity of tax rates and structure across States. Secondly, there is [the] cascading of taxes due to ‘tax on tax’. No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State-level sales tax or VAT, and vice-versa. Furthermore, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this ‘tax on tax’.
Let’s understand this through an example. Let’s take the case of a dealer in one state buying goods from another state worth Rs. 1,00,000. As the goods are moving from one state to another, he has to pay on this a central sales tax of Rs. 2,000 (2 per cent of Rs. 1,00,000). His effective purchase price works out to Rs. 1,02,000. On this, he builds a margin of Rs. 8,000 and his sales price works out to Rs.
1,10,000.
When he sells these goods, the state sales tax (or the VAT) will be charged on Rs. 1,10,000. If the tax rate is 5 per cent, then it will work out to Rs. 5,500 (5 per cent of Rs. 1,10,000). This means that the final price of the goods will be Rs. 1,15,500 (Rs. 1,10,000 + Rs. 5,500).
In this case, the state sales tax is also being paid on the central sales tax of Rs. 2,000, which has already been paid. Central sales tax paid while purchasing goods from one state is not available as an input tax credit while selling the goods in another state. This leads to a cascading effect as tax on tax needs to be paid. In this case, the cascading effect is Rs. 100 (5 per cent of Rs. 2,000, the central sales tax). This ultimately gets incorporated into the price of the goods, making them more expensive than they should be. What this shows is that any form of Big Government comes with a cost attached to it.
The cascading effect and the fact that the indirect taxes already paid in one state cannot be deducted while paying indirect taxes in another state make many Indian businesses uncompetitive. The Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST), better known as the Arvind Subramanian Committee Report, has an excellent example.
As the report points out: “Consider a simple example, where intermediate goods produced in Maharashtra go to Andhra Pradesh for production of a final good which, in turn, is sold in Tamil Nadu. Effectively, the goods will face an additional tax of 4 per cent, which will reduce the competitiveness of the goods produced in Andhra Pradesh compared with goods that can be imported directly to, say, Chennai from South and East Asian sources.”