1. Rent-seeking woes: How to free India of Inspector Raj

Rent-seeking woes: How to free India of Inspector Raj

Opaque systems of governance that are paranoid of everyone tend to create institutions and frameworks more prone to rent-seeking

By: | Updated: September 8, 2016 7:26 AM
So, on one hand, while the state is still transitioning out of a geriatric view of interacting with businesses, Indian businesses themselves have grown to be entrepreneurial, risk-taking and global. So, on one hand, while the state is still transitioning out of a geriatric view of interacting with businesses, Indian businesses themselves have grown to be entrepreneurial, risk-taking and global.

Back in school, the class monitor (who would often be the teacher’s pet) had the power to make life potentially tough for you—either by being overtly moralistic, or worse, falsely implicating you. And the grievance redressal mechanisms against a teacher’s pet always used to be too hopeless to even attempt trying. We’ve grown up dreading words like raid, police, custom’s officer, inspectors—words that can instil a sense of paranoia even in law-abiding citizens and businesses. If you are picked for inspection, the general feeling is that they are out there to ‘get you’—and more often than not, you need to perfect a conniving nod of the head, or sleight of hand to slip in a covert body language that indicates that you are ‘ready to negotiate’.

This is the key thorn in India’s ease of doing business challenge, as it valiantly tries to recuse itself from the odd-130 rank. Inspectors and regulators, generally, do the last leg delivery of any regulation, or government initiatives. Much like a nurse in a hospital, or a call centre executive of a telecom giant, or a courier deliveryman of a major online shopping portal—your interaction with these last-leg actors often determines your satisfaction with the multi-million dollar corporate entity as a whole.

At a philosophical level, the situation in India is understandable. Much of the country’s economic institutions have evolved from a Soviet model of central planning, where it was imperative for the government to control production and prices, collect data about everything, and be extremely suspicious of businesses and any sign of above-average wealth. Decades of liberalisation and reforms have been aimed at axing (or chipping, depending on politics) these archaic structures.

So, on one hand, while the state is still transitioning out of a geriatric view of interacting with businesses, Indian businesses themselves have grown to be entrepreneurial, risk-taking and global. Spates of foreign firms are also rubbing shoulders with them, expecting a professional business environment.

At cross-roads of these two opposing ethos of operation sit the inspectorates—who have jurisdiction over ambitious businesses, but are mandated to ensure imposition of laws that date back to the 1950s and 1960s. These are still modern, when one considers that if you open an establishment in Mumbai, the relevant legislation—Mumbai Municipal Corporation Act—dates back to 1888.

Opaque systems of governance that are paranoid of everyone tend to create institutions and frameworks that are more prone to rent-seeking. India’s tryst with corruption, ranging from petty to megalomaniacal, is symptomatic of such systems.

Globally, regulation is a dialogue between three actors—regulator, business and consumer. These three need to trust each other for the system to function. If you go to a shop for a packet of biscuits, and you do not trust the food regulator’s stamp on it, it is very unlikely for you to eat those biscuits. Similarly, if the regulator does not trust businesses, it will always go ballistic on all of them—doesn’t matter if they are law-abiding or cheating the system. If the business is convinced that regulator is nothing more than a gang of crooks, it will always think that manipulating the system is the only way out.

A strict inspectorate actually ends up helping law-abiding businesses—by keeping the illegal ones out and improving consumer confidence. No company will be happy if an unregulated competitor enters the market and, say, sells counterfeit products or creates sub-standard goods that result in a bad name for the industry. Inspectors, in turn, need cooperation of businesses if they are to remain relevant. Inspectorates hardly have 40-50 staff members—it is humanly impossible to effectively inspect thousands of businesses.

Finally, consumers need to be confident of institutions entrusted with their protection—or else, like in the case of Maggi, the amount of lead content in noodles would be decided over angry confrontations across newspaper columns, Facebook walls and Twitter hashtags.

An interesting experiment was done by health inspectors in the UK on restaurants. The regulator started a transparent method of giving stars to restaurants based on their level of cleanliness, and required them to prominently display the rating on their doors. The regulator designed an app through which anyone could check which are the clean and tidy ‘five’ star certified restaurants in any locality. Soon, instead of inspectors chasing restaurants, the reverse happened—they started approaching the inspectors to have themselves rated. Turns out, diners aren’t fond of going to restaurants where there is a potential of rats in the kitchen.

This became a great success—simply because regulator, business and consumer were all communicating with each other. The regulator educated consumers to look out for the stars—effectively converting them into hundreds of inspectors on their behalf. Restaurants, in turn, became more compliant, because they could see a direct link between better regulation and more business. The local government more relaxed because it could now use its limited number of inspectors on focusing on the truly hopeless defaulters.

Come to think of it—it’s the basic principle behind Trip Advisor.

Is there a reason this will be difficult to introduce in India? Because inspectorate is more inclined to tick the boxes of an odd 1980 law that it is mandated to enforce, than to stop and wonder if that law is indeed promoting compliance, and if not, how to creatively come up with mechanisms to promote the same.

Advanced countries have inspectors whose sole job is not just to inspect and fine, but to give advice to the business on how to better comply, encourage alternatives to inspection, and reduce inspection burden on businesses with a good history of compliance. The UK inspectors have a ‘growth duty’ in their official charters—making them additionally responsible for ensuring growth of businesses in their jurisdiction.

Policy-makers need to ultimately realise that, at the end of the day, a business and a regulator are in a relationship. And like all relationships, if there is no trust, there is no relationship.

The author is a senior economic adviser to a foreign mission, based in New Delhi. Views are personal

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