There has been much discussion about the nature of the constraints facing manufacture. Labour regulation is often portrayed as the villain of the piece, responsible for making it difficult for enterprises to grow. Officials of business associations and individual business persons have often been quoted on these matters. But a survey of 200 employers gave us a somewhat different picture of employers’ views.
The Institute for Human Development (IHD) recently completed a study of constraints in manufacturing. The study (Sandip Sarkar, Dev Nathan and Balwant Singh Mehta, ‘Promoting Employment and Skill Development in the Manufacturing Sector in India,’ August 2014) involved a survey of 200 employers, small, medium and big, across three industrial centres (NCR, Pune and Chennai) in two industries, the automotive and electronics sectors, with the fieldwork carried out between September 2013 and April 2014.
What does this survey tell us about how employers see the relative importance of different constraints? That labour regulations is not the main constraint in the growth of manufacturing is something that clearly emerges from our survey. The table below shows that labour regulations rank only fifth in order of importance. Electricity, the cost of finance, access to finance and access to land all rank as more important than labour regulations in holding back manufacturing.
Looking at electricity in a little more detail, more than fifty per cent of survey units owned or shared a generator, adding to both fixed capital and operational costs – generator electricity is at least twice as expensive as grid power. The increase in capital cost is increased by the high rate of interest. But despite increased capital investment, 78 per cent of units reported a loss of production due to power cuts.
A constraint that was mentioned by virtually all employers, though it did not figure in the questionnaire and thus not listed in the table above, was corruption. This was of two types. One is what is referred to as ‘inspector raj’, the plethora of payments to officials from various departments, ranging from environment to municipal authorities. What is interesting is that labour inspectors are actually constrained in making inspections. They can do that only when there is a complaint or with the permission of senior officers. So, even the inspector raj is not so much a matter of labour inspectors as of officials from other departments.
The other type of corruption is of the higher-order policy type. Large units mentioned the difficulties in navigating the myriad permissions that are required and the possibilities of hold ups or even cancellations of decisions when the political dispensation changes. Of course, the notorious retrospective changes in tax laws figured in discussions with some large units.
Is the ‘inspector raj’ more important than the restrictive nature of labour or other laws themselves? Employers of all sizes placed much more importance on the problems faced with negotiating clearances from the bureaucracy than the laws themselves. The laws, as economists would say, are an occasion for extracting rent. These rent payments, and the harassments and delays involved might well be more important than the laws themselves. Some employers said that even if one complied with regulations (labour, environment, etc.) in order to get the necessary certificates of compliance one had to pay the inspectors.
In addition, there was one point that was made across the size spectrum – that business would much prefer to have to pay a single tax, such as the proposed GST, since that would involve payment to just one official! They found the multiple visits and multiple payments irksome and time-consuming. Some employers felt that such a single tax was being opposed since it would reduce the power of bureaucrats in the plethora of departments currently involved in tax collection. They also said that departments with on-line payments led to less time loss and lesser payments to officials than departments that still required paper work.
One should not presume that all business persons are victims of corruption and not complicit in the process. There surely is an evading of taxes and creation of black money, with business and officialdom working together. But along with the tax system, the politico-bureaucratic system also needs reform to reduce corruption, or what economists call transaction costs. More important is the transparent provision of facilities, such as electricity, finance and land.