RQ | Implementation and rule of law

Draconian laws coupled with lax implementation deliver too much power to regulators. This makes the business environment unpredictable and makes it harder to do business.

Following the arrest for rape of a taxi driver who was hailed using the Uber app, the Delhi government has gone on to ban Uber. Not satisfied with that, it has gone on to ban all other app-based taxi hailing services (Ola and TaxiForSure are the other big ones). Following the incident last weekend, the government has suddenly decided to throw the rule book at these aggregators and accused them of running taxi services without a license. The point to note here is that until the weekend’s alleged rape, it seems that these businesses were all kosher.

A few months back Mint had an excellent piece (I hope I’ve got the link right) on the absurdities of some of India’s labour laws, and pointed out that most companies are in the breach of such laws. Essentially while the labour laws in India are not very short of being Draconian, what allows businesses to do business and people to go about their lives is lax implementation. And it seems that this issue of draconian laws and lax implementation is not restricted to labour alone.

The iconic Bangalore Club in Bangalore has had its liquor license withdrawn following a raid by the excise department last week. The trigger for this raid is alleged to be a case where a security guard of the club refused to let in the car of a police officer who was not carrying his membership card. This is alleged to have led to a series of cases which finally led to the excise raid and the cancellation of the license. It seems that before the police officer’s car was stopped, there was no violation of excise rules.

In a recent dispute on VAT, the Karnataka government has forced Amazon to stop storing third party goods in its “fulfilment centres”. There has since been back and forth on this and the commissioner of commercial taxes who implemented the order has since been transferred. It was initially expected that the Karnataka government would take the legislative route to clarify this tax dispute in the current Assembly session at Belagavi, but that seems to now be put on hold. Instead, it is likely that the laws are going to remain the way they are and Amazon will by “spared” on account of lax implementation.

Lax implementation of laws is a major impediment to doing business, for it removes predicability. Clear laws which are implemented well set down clear rules for businesses and there is little in terms of what is right or wrong. Such laws make it possible for businesses that choose to be “100% legal” to take a path where there is no ambiguity on their activities. Lax implementation, however, biases the playing field in favour of players who are willing to play on the borders of legality and who rely on lax implementation and benevolence by regulators to continue doing business which is technically illegal. Soon, this results in an equilibrium where everyone is in violation of some rule or the other and remains in business only due to the “benevolence” of regulators.

This implies that regulators who are in charge of implementing these draconian laws have enormous powers over the business they regulate, for any move by the business that the regulator does not like can be responded to by a throw of the proverbial rule-book. This places these businesses at the effective control of these regulators and helps perpetrate what Amit Varma calls the “mai-baap sarkar” – where you function solely due to the benevolence of the government or people acting on behalf of it.

Prime Minister Narendra Modi has stated that one of his goals is to improve the ease of doing business in India. As long as we do not have predictable and rule-based implementation of law, it results in giving significantly higher powers to the regulators, which makes the business environment unpredictable, and makes it harder to do business. If we have to improve our ease of doing business ranking to 50 (as stated by Modi), a necessary step is to implement each of our laws in letter and spirit, without any room for ambiguity. Of course this will lead to the diminishing of power of the regulators over their “regulatees”, but solving that is a political problem which the government ought to solve.