Optimal regulation to push industry growth

The Economic Times, June 27, 2011

By Pradeep S Mehta

One of the biggest challenges that we in India face is creation of jobs, and reduction of poverty and inequality. One priority is to facilitate business as an engine of growth in a way that it is sustainable and inclusive. Facilitating private sector to contribute significantly to such a model of growth would be critical – and can be done by reviewing the role played by the government. An emerging option, though challenging, is to boost manufacturing to create more jobs, especially for the rural landless and underemployed.

In the Indian context, manufacturing sector could be considered as a pivot around which various other sectors revolve. By boosting the manufacturing sector, spillover effects would transfer to the whole economy. In fact, many emerging countries in recent decades have relied on a development strategy focused on promoting the manufacturing sector and the export of manufactured goods.

The new manufacturing policy of the government aims at raising the share of manufacturing to 25% of GDP by 2022 from the existing 15%, so that another 100 million jobs are created directly and a much larger number of jobs in the upstream and downstream sectors.

To achieve this task, it is imperative to create an enabling environment for business to function more efficiently. Also, to see that regulation is a facilitating device rather than a controlling one, it needs to be optimal and even-handed. Taking a fresh approach to government-business interaction is one of the ways forward, as a continuous and constructive dialogue helps in finding solutions even to vexed issues. In this, economic democracy is also crucial bearing in mind that crony capitalism builds up hostility against the private sector.

Harmonious relationship between government and business could add equity and sustainability in the way latter performs. In India, successive governments at the central and state levels are realising the significance of promoting such interactions. The liberalisation drive and the public-private partnership model added fillip to this.

In its exercise of developing the approach to the 12th Five-Year Plan on industry, Planning Commission has targeted optimal interactions among government, business and stakeholders, and laid emphasis on boosting the manufacturing sector. On the input side, services sector also needs to be boosted to provide the critical infrastructure, which is currently in deficit. In fact, many emerging economies in recent times have relied on a development strategy focused on promoting the manufacturing sector and export of manufactured goods.

One area of focused deliberation in this exercise is the Business Regulatory Framework. It has four elements that need extensive and intensive work: Competition Policy, Business Regulation, Simplification of Business Procedures and Business Responsibilities. An optimal framework covering all four elements, along with a continuing dialogue among government, business and stakeholders, has the potential to serve as the overarching guiding philosophy and a bridge for developing an optimal business regulatory environment. Let us analyse each of the four pillars.

A competition policy is beyond competition law as it seeks to address the large distortions in our economic governance system created by different policies, laws, regulations and praxis. On the other hand, competition law is restricted to dealing with anti-competitive practices in the market. One important aspect that the competition policy will seek to address is the lack of competitive neutrality that creates an unlevel playing field between the private and public sectors. For example, the rule of government staff, which includes non-officials like me, when travelling on government business, to fly only by Air India when private airlines can offer better prices and services.

In terms of business regulation, it is a common fact that a lot productive resources get wasted on dealing with policies and laws that are not contemporary, objective, proportionate, comprehensive and are full of gobbledegook. Various national as well as sub-national reform measures have been undertaken, yet, it is an unfinished agenda and a lot of ground still has to be covered.

Some of the government regulations are archaic and exist on our statute books because of the inertia. An example is the Land Acquisition Act of 1894, covering an issue that is often hotly debated. Getting land to establish factories is cardinal, but the issue is plagued with problems under the current charged political climate.

In simplification of business procedures, it is quite difficult for starting, and running, a business in spite of the fact that many states have passed single-window laws. According to the World Bank , India is ranked 134 in 2011 – a dismal picture. One of the worst handicaps is getting contracts enforced, because our judicial system works like a snail, thus raising governance issues. The government of India is now establishing the National Mission for Justice Delivery and Legal Reforms that will have one of its goals as disposal of cases within three years against the existing 15 years.

Finally, on the issue of Business Responsibility, a more acceptable definition of corporate social responsibility is needed. Towards the end of 2008, at the instance of the ministry of corporate affairs, the process for development of Draft National Voluntary Guidelines for the Social, Environmental and Economic Responsibilities of Business was initiated. These guidelines are now ready, and await formal notification. It is critical for the government to evolve an environment that ensures greater uptake of these guidelines by business.

To conclude, just like other factors of production, ‘regulatory environment’ determines competitiveness of a business entity. Countries are not competitive, but firms are.

Businesses operate in a maze of regulations administered by central, state and sub-state governments. Across this maze, most often, subjectivity kills predictability and – in turn – competitiveness. Countries have bridged and simplified the business regulatory framework to boost entrepreneurship, employment and growth. It is time India crosses this bridge, as it has arrived there.

Pradeep S Mehta Secretary General, CUTS International

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