Kadambari Shah and Shreyas Narla on Continuing the Reform Agenda

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. Today my guests are Shreyas Narla and Kadambari Shah, who are my colleagues at the Mercatus Center and research scholars working with me on the 1991 Project. 

We spoke about the kinds of policy change we would like to see in the coalition government led by Modi’s in his third term. We talked about the research Shreyas, Kadambari and I have been working on in the areas of competition policy, regulating India’s digital marketplace, labor law reforms, scaling India’s manufacturing, streamlining GST, and much more. For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts.

Hi, Shreyas. Hi, Kadambari. Welcome back to the show. I’m so excited to have you here—my favorite people. We talk with each other all the time, literally all the time. It feels a little bit strange to do this for a recording, but we must do what must be done.

SHREYAS NARLA: That’s true.

RAJAGOPALAN: I think this is a good chance to take stock of a few things. Talk about the research we’re putting out. We’ve had a slate of papers come out this month. 

Past Budgets Announcements and Upcoming Budget

There’s a new government, there’s a lot of talk about what kinds of reforms will happen. We’re recording sometime in the first week of July and we have the budget scheduled for end of July. In India, for whatever reason, the big policy changes are now expected to come with the budget. Which technically should just be budget and appropriations, but in India, for historical reasons, that’s not been the case.

I thought we’ll have a chance to talk about all of these things, plus some of the great research you guys have been doing. One, how do you guys view the budget? Any favorites? Which is such a nerdy question to ask, like if you have a favorite budget in the past, but you must, given what we do. If so, what kind of things are you looking forward to in this budget? Also, what are some of the highlights you remember from previous budgets? 

KADAMBARI SHAH: My pick would actually be the 2019 budget which was also called the Aspirational Budget. I really like it because it focused on women and outcomes for women in particular. You had the MUDRA loans, which help women entrepreneurs. There was an outlay of, I think, 1 lakh crore for self-help groups to help with financial independence, healthcare and education benefits, just so much more. That really excited me. And I think for future budgets, especially this one, I am excited to see what outcomes for women will be mentioned and promoted through it.

RAJAGOPALAN: That’s actually interesting because normally the stuff that we have outlined for women is all the welfare entitlements. We’re talking about an LPG scheme or we’re talking about household goods. You’re right, in that 2019 it shifted toward thinking about women as an integral part of the workforce, women as an integral part of the banking system, women as entrepreneurs. That was actually a really big shift. The aspiration is not so much to include women, but to shift the idea of women from inside the household who receive these very domestic entitlements, to bring them into the workplace that actually gets counted where typically we’re only looking at outcomes for men.

SHAH: Exactly. I think this whole aspect of looking at women in the economic realm was great. The social ones, even the LPG and all was there, which is important, but in terms of the economic realm, that was what was really, really exciting. There were these mahila shakti kendras, which were set up for skill development in rural areas, which was also great. I think it’ll be exciting to see what the new budget says.

NARLA: To me, Shruti, when I think about in the larger historical trajectory of how Indian budgets have come through, I think of the 1977 budget of the Janata government, right after Emergency. I think of the 1991 budget for obvious reasons. The reason why I think about these budgets is because they’re not just merely financial statements or announcements of government policy. They represent some kind of a fundamental shift in our economic philosophy, how we think about governance, how we think about what are the priorities for the Indian government.

With 1977 budget, it was almost like a first-time acknowledgment from the government that we’ve done planning for about these many decades. Has that even shown anything for us? Should we do something different? We get that difference in 1991 budget, where we make a very emphatic statement that we’re going to be part of the global economy. Then since then, like you guys mentioned earlier, we’ve had the stream of Dream Budget, Millennium Budget, Once-in-a-Century Budget, Aspiration Budget—you name it.

That also tells you how the budget, like you mentioned earlier, is no longer something simply about the statement of expenditure, and revenue and appropriations. It’s almost a platform for the government to announce itself about what it wants to do. What I’m actually looking forward to seeing now is will there ever come a point or at least if not with this budget, but at least in the years to come, if the government can offer us some insight about what is the thinking behind these budgets. What are the intellectual underpinnings behind the budget?

We have going forward, especially with the COVID pandemic and the challenges we faced in the last five years, moving forward, how do we align our budgetary processes and thinking keeping in mind the new challenges that we are going to face? Just to somehow assume that it’s business as usual might not be the best way to think about it. Are we going to prioritize long-term sustainability? How do we focus on building economic resilience? Should we rethink how we do social welfare? Especially with the way things are changing and our economy is transforming. I’m more curious to see if we’ll have a budget that can perhaps mark the next shift that we saw with ’77 and ’91.

RAJAGOPALAN: I think we are thinking along the same lines. I like the ’91 budget for obvious reasons. For me, the ’97 budget is an interesting one, not because it was called the Dream Budget under Chidambaram, but mainly because it was a signal to all of us. I actually do remember that time, as it was happening, reading the newspaper, there was a fear that after the Narasimha Rao government and after Manmohan Singh leaves, the United Front government comes, that there won’t be much continuity and the reforms will stall.

The United Front government was quite left-leaning. The fact that there was that continuity maintained and every budget, something small moving toward reforms—in this particular budget it was streamlining direct taxes and lowering direct taxes, that sort of thing—one, eased a lot of fears and gave some momentum to keep the reform agenda going. I think in the last few years, I also really like the 2019 budget that Kadambari mentioned but not for the same reason. 

This is the thing. We like some big policy ideas, but we also like some very dorky things as economists. For me, this is such a small thing, but it’s really important. We have never been transparent about the kinds of deficits that we’ve had and off-balance sheet deficits was a pretty big thing in India. It was a tool that was just used all the time. What we mean by off-balance sheet financing is basically things that are not recorded on the balance sheet. The sorts of things I’m talking about is the borrowings that are raised by public enterprises. These are typically through bonds or the short-term and long-term loans that the government is actually giving all these public sector enterprises and so on.

This stuff was just not disclosed, so of course, people who know how the sausage is made knew about it. We always knew that the deficit numbers in India are underreported, like everyone always added to that number, but starting in 2019, they did a few things. One, they actually disclosed off-balance sheet borrowings and off-balance sheet deficit items on the deficit. Second, there was an attempt made to reduce these off-balance sheet items. I think the biggest thing there is look, we want to keep our deficits tight, we want to keep them low.

Past a point, you also have to say, hey, these are our numbers, good or bad, high or low. These are the numbers. They actually reflect the reality of what’s going on in the economy and with government spending and so on. That kind of transparency is really important. Even if in the next few years your deficit numbers are slightly higher, at least they are more accurate rather than hiding things under the couch here and there. That for just broader macro stability, rule of law, we’ve talked so much about those kinds of reforms as part of the 1991 Project and this seems like a weird little footnote almost.

I know in 2019 people were discussing the aspirational part. Actually, most of them were discussing the weave of Nirmala Sitharaman’s saree and whether it matches her briefcase and all of those crazy things. In this case, I think these sorts of small things which get missed in the major headlines and reporting also really need to be thought through and highlighted. I think for the 40-year future of India, this kind of reform becomes very, very important. 

Restarting reforms

Let’s talk about some of the reforms. Again, in an ideal world, I don’t think the reforms need to be aligned with the budget announcement. I think they can be and should be separate and I think the budget can have some big-ticket items, but it should be separate from reforms. What I look forward to in this budget is actually a reallocation of how the government uses funds. I think we need to spend more on health and education. We need to spend it at the state and local level. I think we need to really roll back things like fertilizer subsidy. 

We need to really rethink how we support the electricity utility companies and the DISCOMs. These are oftentimes public sector, sometimes they’re public and private sector. These are the things where funds are being very poorly allocated and they’re actually going to the least productive parts of the economy. Just a reallocation of that toward people, because people are the most productive part of the economy, would make a very, very big difference. That’s what I hope happens, but who knows?

What do you think is going to happen, not just in the budget, but also after that, in terms of the continuation of some of the reforms? There’s been a lot of talk about where this is a coalition government, BJP is no longer the single largest party with its own majority. It needs support from NDA partners. Question one is, do you think some of the reforms that the NDA government has been pursuing in the last 10 years, will they be continued? What do you think is going to happen with this continuation?

NARLA: I think the continuity will remain in some aspects, Shruti, especially in matters of infrastructure development. I think that has been in fact an area which consistently across different consecutive governments from the 1991 period onward have maintained, that we have seen just in the way that the national highways have developed, the port capacity increase and so on. The numbers are staggering. It’s visible for everyone to talk about it.

Of course, there have been some points that have been factored in, that there was a change in definition in how we calculate roads and everything. But even factoring in all of that, there’ve been a doubling of the kilometers of the length of national highways that I think is, I would say, a visible example of what reforms can look like and how they have been continued. I think what’s interesting, and this is a recent study that came out I think in the Journal of Development Economics that basically said that for the reduction of trade tariffs that happened between ’91 and 2001 led to increased infrastructure spending by state governments.

I think every one percentage point reduction in tariffs resulted in 0.5% increase in infrastructure investment. This is obviously because lower tariffs mean it’s cheaper for firms to import materials, boosting productivity, and it’s encouraging high production levels. This is what’s encouraging because it gives you a very clear example of an open economy. This gives you very clear examples of less intervention, which in its own way helps the government to do what it has to do, which is really build the kind of infrastructure that’s required to support the markets and the private sector.

That’s one area that seems more promising. I do think with this government, again, being in power, that’ll just continue because it’s a work that just doesn’t stop. The other I think about is the commitment that this government has also pursued with the renewable energy policy. We set up in 2010 the solar mission with a simple target. Wasn’t simple, but a target of 20 gigawatts, which was increased to 100 gigawatts. We’ve managed to scale to a point that—not exactly 100—but last year, India now has solar capacity that’s close to about 70.10 gigawatts.

The other success of at least the renewable energy policy is the fact that our solar prices, the tariffs came down significantly. We went from having 10 rupees per unit in 2014 to almost about less than two rupees per unit in 2020. One of the reasons for this is because we shifted from the feed-and-tariff system of pricing. As opposed to fixed rates, we went into reverse auction systems that meant much more competitive prices. In a way, showing us that we have done well as far as at least solar capacity goes. It’s also the same effect we saw with wind energy tariffs and so on.

I think this promising aspect of renewable energy somewhere perhaps will also encourage the government to pursue it further and reduce our dependency on traditional sources of power or energy. I think these two areas I feel have been A, consistent in the way the government has pursued it from the previous governments, and it has only shown promising results. My guess is that if they continue on the path that they have with these two sectors at least, or two aspects, it’ll show the results that it has already shown.

SHAH: I think the push for Digital India is something that is a great reform and I would like to see continued as well. As much as we all get frustrated with OTPs and all of that, I really think India’s one of the best digital payment interfaces. Wherever I go, the payment interface in India I think is far superior than what I’ve seen in some other places in the world, even though they may be more economically developed than us. In terms of Digital India, it’s not just an urban phenomenon because there’s a policy Bharat Net which is being targeted specifically in rural area to expand broadband connectivity.

That is something that is great because with the mobile phone and connectivity, so much of the world opens up to you. You would be sitting anywhere and have access to all of it, and that’s what we see happening in India as well. I think India has the highest number of mobile phone and internet users, or one of the highest. We have a huge population also, but I think in terms of the proportions, it is very high. 

The other thing that I really liked was also in terms of the e-KYC because I remember sitting in banks for hours waiting to get things done, and now you could do it all on your phone. There are privacy issues and other issues with authentication, but having it all on your fingertips, in some sense, does make life easier. 

I think related to Digital India is also ease of doing business, which has seen an increase. There are a lot of criticisms in terms of the World Bank study of the ease doing business ranking, but the fact that India moved from 142 out of 190 countries in 2015 to 63 in 2020 is an impressive feat. There were a lot of different policies that promoted doing business in India.  But the single window system is one which also relates to Digital India.

Putting everything online in one place to see it as a snapshot of different policies and rules, regulations, compliances needed, it is helpful to businesses. Whether the system works or not is a different question, but putting it all online is a step in the right direction. The ease of doing business rankings between states also encouraged healthy competition, with states competing to attract different businesses. And then of course other things in terms of banking, in terms of access to credit, there have been a lot of different reforms over the last few years to improve ease of doing business and the potential for growth through that, is something that is important and I hope that that will continue.

RAJAGOPALAN: Like Kadambari, I don’t trust that World Bank study too much. I know we all use it and we all cite it, but I think the bank’s methods have been questioned depending on which year and who’s putting the report together. I don’t want to get into that. I agree with you that there is some effort. My worry always with the way the ease of business is happening in India is it’s, again, very centralized. It’s like, oh, a group of special people or a special sector will be invited to set things up and then they will get the single window clearance. It’s almost like when you go to the airport, you have that special line which has TSA Pre, or you have a separate business class line or a special diplomats line.

SHAH: DigiYatra.

RAJAGOPALAN: DigiYatra in India. This is almost like there’s a separate line for which things will be streamlined and they get to move forward very quickly, and then the rest of the world has to stand in the same long queue. Then it also distorts how we think of ease of business. There are people in government that we’ve spoken who genuinely believe that they have done a lot, but what they’ve done is they’ve done a lot for a very small group of people or for a select few companies or a select few sectors. Both Kadambari and my hope is that they just broadbase this to a much larger group of people; no more special classes. Things are moving in the right direction.

My pet peeve, and I think you guys know this because I have complained and ranted about this so much, is the GST. I find it astounding even now. I should not be surprised by this anymore because I just shouldn’t. I have been thinking about this for so long, but India has seven nonzero rates. My mind starts melting a little bit when I say that, right? It was supposed to be the good and simple tax. Everything starts well. There’s a zero rate and there’s one nonzero rate.

Then they’re like, hey, there are some things which are necessities, some things which are clearly luxuries. Let’s have two nonzero rates. Before you know it, we have seven nonzero rates. This is different from all those cesses that get applied, environmental cess and Swachh Bharat Cess and this cess and that cess. That’s about 21 different cesses in addition to these seven nonzero rates, so we have those cesses applied to about 50 different goods and services. Before you know it, you are not exactly back to the old system that had hundreds of rates and exceptions. This is still an improvement, but it’s still pretty bad. My big hope for the reform is systematically streamlining GST.

We should be at two nonzero rates and no more than two nonzero rates, no cesses, no additions. Just we should have things that are completely exempt from consumption taxes and then we should have a low and a high rate, and eventually move toward consolidating only to one rate. The reason is this just again increases the complexity of any kind of production. If you have 50 different inputs and you’re spending that much time calculating which input is taxed at how much, and then figure out the VAT, because it is a VAT system. Then you need to figure out the invoicing and the forward and backward linkage.

First is all of that is a little bit nutty, but the second part, which is even more disturbing to folks like us, is the rent-seeking. When you have so many rates, there’s obviously going to be people who are going to try and shop between those rates. Everybody wants a lower rate. There have been 550 rate changes for different goods and services, which is insane. Shreyas and I tried to put this together, we stopped after 500. This is at the GST council meetings where people will come and petition. 

What ends up happening, or at least what we noticed, is you have a situation where well-organized sectors that have associations—well-organized sectors obviously have fewer players, they tend to be monopolistic or oligopolistic in nature, they have scale—they tend to have very organized lobbying, and they try and get the more favorable rates. The government has remained revenue neutral. We’ve talked about the kind of fiscal prudence that the Modi government has always shown. To remain revenue neutral, that means you need to increase the taxes for someone else, and it’s typically going to be those sectors which have large numbers of manufacturers, which are typically MSMEs. We’re talking about matches and agarbattis and beedis. Now, these are the things that will go up.

I think we have to think about how regressive the system is, how much rent-seeking it encourages, just the complexity of the damn thing. I will stop ranting. We have to streamline GST. That’s my single hope for this budget and for the continuity of reforms. Bringing in GST was an awesome thing. Now we have to actually make it work like it’s supposed to work. A simple good tax of all goods and services. Eventually in future, yes, we can talk about how we can include property and stamp duty, and those sorts of things also under GST, or bring in liquor under GST. There are a bunch of things which are not yet included under GST. That would be the hope in terms of continuity.

Do we have anything else on continuity, or should we maybe talk about what the government hasn’t been doing that it should be doing which is the day job? That’s what we really do. 

The Tinkering of Government

NARLA: I think just on the continuity part, Shruti, I think when you talk about simplifying the GST rate, I think about so many other aspects of the policy. Where just the government can really simplify, because at the end of the day, let’s say we are talking really about a firm that is producing, I don’t know, a toy. In terms of the GST rate, the input costs for producing that toy, everything from the rates that it has to pay under the GST system, the tariffs that are involved, if it requires certain aspects to manufacture that toy, and that’s related to toy-related items, you’re talking about tariffs of about 70% on toys.

RAJAGOPALAN: Yes, the only thing worse than a toy car is a real car where the tariffs are even worse.

NARLA: That is true, well said. I get it that when you see great national highways, you see great connectivity, you see that infrastructure-wise, we have great support in that sense. Kadambari pointed out about the digital India. This is also a direct result of the fact about how high-speed fiber optic has doubled. There are all these things that connect well, and they make sense and they show that there is some movement in the right direction.

If they’re not as sufficiently seamless with each other—you may produce all the solar capacity you may want, but if your DISCOMs are not in a position to pay for it, which is where the problem is, it is on the electricity side of things, then the gains that you may get from one aspect may not necessarily translate the way they should. I think it’s these little linkages, I think that the government should somehow—I guess every government does look at these issues. It’s not that we are reinventing the wheel, but we need to make more gains or actually make most of the gains we are having right now.

RAJAGOPALAN: Yes, I would actually add to that and say I don’t think the problem is that the government doesn’t try to fix a problem. Actually, I think it’s the opposite, it’s trying to fix specific problems. I think actually what we need is a change of mindset, that you shouldn’t be tinkering sector-wise, firm-wise when it comes to tariff lines, when it comes to GST and things like that. That you should just overall have low tariff lines. Then things will fall in place because all the entrepreneurs and all the manufacturers will try and adjust, and they’ll also plug into the rest of the world.

The other thing is when they keep tinkering and changing, it creates a lot of uncertainty. Now we don’t know if a firm should make its own spare parts, if it should buy them domestically, if it should import them. With GST and tariff rates we’re going to keep tinkering with them to get them streamlined with other things that we’re also tinkering with, then you have a slight problem. 

They should actually dramatically pare down on how many interventions take place and these broad-based things, which is basically pricing, tariffs, taxes. These are the three big things that distort everything in the economy. You know this pricing separate for captive power plants versus whatever is produced by the state, and then what an industrial manufacturer will pay, but there are some industries which have special exceptions. First for tracing it as researchers makes our brain melt, which is why we keep ranting. The other part of it is, it goes back to what you guys have been saying, it can’t be done easily.

That also links to this ease of business question. They’re trying so hard to make the ease of business work, but it can’t be done. I think this is the big lesson for me from all the past work we’ve done, which is when we had License Permit Raj and that kind of tinkering, it didn’t work very well then either, but the economy was smaller and less complex, with fewer goods and services being produced and lesser integration into the global economy. Now having that same approach of tinkering and intervening actually makes things worse. You have to constantly intervene and tinker. That’s all you can do because now things have gotten so much more complex.

Then after all those tinkering and streamlining reforms, when FDI doesn’t pick up, when manufacturing doesn’t pick up, people are scratching their head and saying, but why didn’t this happen? Well, it didn’t happen because the economy’s too complex. I think, yes, those are the sorts of things, I don’t know if you can solve that in this conversation.

Regulation of Big Tech Companies 

NARLA: Speaking of tinkering, Shruti, notwithstanding that the economy is complex and it’s getting more intensive with things that are happening, one area I think the government should definitely keep itself out is going after big tech companies and trying to regulate their competition in digital markets. We have reviewed the digital markets competition bill, the draft of which has been floated earlier this year. 

Just look at the wording of the bill. They’re saying that there are these nine core digital services, whether in terms of online communication platforms and things like that. Whichever firms that have a significant presence or a significant command over these certain services will not be allowed to do a few activities. For instance, Google is in the business of providing operating software for mobiles, which means it comes with certain apps. We have the Google Play Store app, which comes with its own apps that Google has developed.

Per this bill, if Google asks the manufacturer to use its OS, it cannot ask the mobile manufacturer or put it in the contract to also float the Play Store, to also float the apps that Google has produced.

This is what the bill is trying to curb because the notion is that there are these few big dominant tech firms, they have in a way so-called captured the market, and therefore we need to control them so that we can allow and somehow enable smaller firms to come up. I mean, this is textbook License Permit Raj in its sense when we had small-scale manufacturing reservation list, and we had all kinds of ways in which we tried to curb large firms. This is what’s happening with the new bill as well.

SHAH: I was going to ask why this is happening. I’m a little confused on this.

NARLA: Yes. That’s the thing. I wish I had the answer for what the government’s thinking behind this is, but this is part of the global chatter that’s happening about big tech firms that, especially in mature economies like the U.S. and the EU, where, in a way, Amazon, Apple, Google, have really become very dominant players. 

For India, it’s a very different story given the nature of our economy and the digital economy, the way it’s expanding. With something like our India Stack and UPI, which have these very interoperable open platforms, our digital economy works slightly differently compared to EU and the U.S.

Our responses are so interventionist with at least the digital economy right now that we have just imitated the EU’s Digital Competition Act almost as is, probably aggressively so, because at least in the EU law it lists out certain obligations very specifically what the digital firms should do when they operate in the market, in terms of the conduct and activities and how they float their services. In India, we don’t have that provision in the bill. It only says that the regulator will specify later through regulations our favorite device—

RAJAGOPALAN: If you want to hear Shreyas ranting, say delegated legislation. If you want hear me ranting, just say tariffs and GST.

NARLA: Or now what we call uncharitably the disguised legislation because we have just left it to the executive to issue regulation after regulation where you can keep tinkering, as we said, as you wish about what should be done. What these firms should do, how they should conduct their business, how their operations should be, what kind of agreements they can enter into with other platforms, how they can actually float their services. A bill and its consequence subsequent regulations is going to tell these big tech firms how to do their business. That’s literally the bottom line of this.

RAJAGOPALAN: Kadambari, to answer your question from a slightly broader point of view, I mean, Shreyas and I are geeks on competition law and regulation and all that, but basically digital goods and platforms, these things operate slightly differently. They’re network goods, so they’re not competing in the market, they’re competing for the market. Now there’s an increasing understanding that these kinds of companies which compete for the market need to be regulated in a slightly different way. Now, be that as it may, we also need to recognize that because the nature of the firm is different, or the nature of the utility or the network that’s being provided is different, the nature of the harm is also different.

Earlier, we would always measure harm based on: is the consumer being forced to pay more, or is the consumer going to be given some teaser rates and big discounts to earlier pay less, and then they start sneakily increasing the rates later. Especially when it comes to subscription services, is the consumer being forced to purchase additional things they don’t want to purchase? Maybe I just use Microsoft Word, you guys know my hatred for Excel, it makes me bananas, but am I going to be forced to also purchase Microsoft Excel? Does it make sense to bundle Microsoft Office, all of it together and so on? These were the sorts of questions that were asked earlier. 

Now, some kind of bundling is obvious. With the TV comes a remote, even if you can buy a separate universal remote and things like that. Some kinds of bundling is like, hey, this is a bit of a forced thing. You’re really forcing people. For instance, cable came with voice, which is a telephone. Now we don’t have cable, also we don’t have telephone, so now everything is dead, but just to give you an example. 

One is the way we started thinking about how to navigate this digital space, they just continued the same old thing, which is, oh, the way we used to figure out antitrust and competition issues in traditional goods, pricing, collusion, predatory pricing, bundling. We’re going to go after these goods in the exact same way. Whereas it doesn’t make sense. 

Most of these network goods are actually zero-priced for the consumer. That’s one big part of it. The second big part of it is, these firms are by definition large because they compete for the market and not in the market. You’re never going to get a Facebook or a Meta or an Instagram that is not that size, then it won’t be what it is. It would be a completely different kind of good. It’s like the postal service, it’s a network good. But we already have baked into the Indian mindset that anything big is bad. This is what Shreyas has discovered more from the discretionary aspects of the regulators.

Now, no matter what the law says, when they actually start with the delegated legislation and then they start interpreting what’s happening—this is happening at the competition commission level. If a firm is big, it is automatically problematic. This mindset comes obviously from our License Permit Raj days where a firm was big only because the government protected it through a permit, and it was by definition uncontestable. It was uncontestable because the government did not issue permits for anyone to be able to contest that firm, and it was a relatively autarchic regime, so there was no competition from abroad.

Now, in the modern world saying that any firm that’s large is necessarily bad is a little bit nutty. In the case of network goods, by definition, only the successful firms will be large. The small firms have failed. They haven’t passed the market test. Now we’re in this really weird and perverse situation. Shreyas can give you example after example, which again makes me a little bit crazy. I try and focus a little bit at the big-picture level because when we go to the examples, Shreyas and I, when we were writing that paper, we just look at each other and I’m like, this can’t be real. Are you sure about this? Have we checked this? Have we double-checked this? This can’t possibly be what they mean.

Now they’re like, oh, if you’re a large firm and you’re doing well you are a significant service provider. If you’re a significant service provider, we’re automatically going to shove you in a slightly different category and we’re going to punish you for being a big firm. Which in the current context, largeness means success. It means they have done well globally. They have competed globally with other platforms, they have managed to gain in the market and actually become the market in many of these cases because they have done well. It’s not because of some other regulatory reasons or something else.

I’m not in any way saying that large tech firms never abuse their position. That’s not what I’m saying, but what we have in Indian competition law and the new draft legislation that Shreyas was talking about is we don’t even wait to see what the harm is. We don’t even need a petitioner who’s been harmed. Standing has been diluted. Another thing that will make me and Shreyas rant. Just say diluted locus standi and just watch the meltdown that ensues after that. Basically they’ve diluted standing so much that now anyone can show up, and guess who’s going to show up and say, oh, this firm is being anti-competitive? Their competitor. Most of these cases are actually filed by the competitor against a large firm. Who is a competitor to Google and Google Travel? It’s makemytrip.com.

I’m not taking sides on whether Google is better or MakeMyTrip is better. I’m very happy that all these platforms exist. My point is, it’s not like my dad was trying to book a ticket, and because the IRCTC website is so ghastly, went to MakeMyTrip for Google and tried to figure something out and Google actually mispriced something for my dad, and actually, MakeMyTrip did better. Now my dad and MakeMyTrip are taking Google to court. That’s actually not what’s happening at all. You don’t even need a customer like me or my father to actually say, here there was harm. When the court proceedings happen, you don’t even need to show that there was harm. No harm is required. It’s just if you’re big, a case can be made that this is a vaguely anticompetitive practice, we’re done. 

NARLA: to just give you another example on this, Kadambari. When you go into a Google search and you look for flights, Google obviously gives you the search result of its Google Flights upfront and above, and it gives you the possible dates and what’s available and everything. Now, here’s my question. Do you end up booking from the Google Flights search results on the Google platform?

SHAH: No.

NARLA: Not really. It takes you to the other platforms, right?

SHAH: Yes, exactly.

NARLA: This aspect of Google of giving preference to its Google search result for flight information was seen as anticompetitive vis-a-vis MakeMyTrip and other online platforms under the existing law, which, by the way, regulates market competition after the actions are done. The new bill is presuming that because you’re so big already, you shouldn’t get involved in certain aspects. We are going into what’s called ex-ante regulation. It’s a double whammy for big tech firms that are under the existing law already they are scrutinized for activities that necessarily are not anticompetitive.

Simply by virtue of the fact that these are these big dominant firms, just the fact that these are big firms or large firms, this is that bias that exists and that these are the kind of awkward outcomes that come of it. I’m not joking. Literally Uber, I think entered sometime in 2013 or 2014, and by 2015 they were already up for scrutiny by the competition regulator. Why? Because they were giving discounts and heavy discounts, and some market study showed that a fleet which had maybe about four cars or nine cars, something of that sort, it was running about 200 rupees a loss per ride because of the discounting and everything. This matter went up to the Supreme Court in appeal. It just assumed that because we are talking about Uber here and it’s able to operate despite giving the discounts, there is some kind of an abuse of its dominant or the largeness of this big cab-riding company that’s entered the Indian market. For six years, Uber was constantly being investigated by the competition regulation, eventually for them to realize that the cab market is not anticompetitive.

It’s pretty competitive and that’s the thing. When you subject large firms to any kind of such scrutiny based on some kind of bias that exists in the regulation, in the system, you are really punishing them for doing what they do best. The outcome of this is, as Shruti was mentioning, and she pointed out earlier, is what comes after. Once you’ve been held anticompetitive, what are you subjected to?

RAJAGOPALAN: Oh boy. Get ready for this, Kadambari. Clear your ears.

NARLA: Under the existing law, and this has also been touted for in the tech bill that I was talking about earlier, the penalty is one, the regulator can say cease and desist, which is that whatever activity you’re being scrutinized for you stop it immediately. The worst is that you can be levied a penalty of 10% on your company’s turnover. Now, this provision went into effect in 2009, and the regulator has interpreted this turnover three different ways in the last 15 years since this law has been in effect. 

First, it said it’ll be on the total turnover. All the operations of the firm will be factored in, and the turnover that comes from all the operations of the firm will be taken into consideration and calculating the penalty, regardless of whether those services or the goods being provided by this firm had anything to do with the anticompetitive practice that is being penalized.

RAJAGOPALAN: To give you an example, the Gmail revenue will also be included in Google’s total turnover, YouTube will also be included, even if it’s only a Google Flights and search question. It’s Google’s total turnover.

SHAH: Oh, wow. I didn’t know any of this.

NARLA: Eventually, thankfully in 2017, Supreme Court in a judgment said, okay, no, we will look at what’s called a relevant turnover. By this point in time, the regulator itself had gone back and forth between how it was interpreting. By relevant turnover is if it’s an anticompetitive practice related to Google search or Google Flights, it’ll focus only on that part of it and the turnover that comes from that transaction. 

This is the thing, this is about the capacity of the regulator to be able to make these calculations, but that doesn’t mean that a problem of capacity should translate into a situation that, okay, we can’t figure this out, so let’s punish the whole firm for all its operations. That’s what’s happening, which is why you get an amendment in 2023 that brings in a clarification that says that for all purposes, turnover will mean global turnover of the firm.

RAJAGOPALAN: Google’s worldwide turnover, not just India’s. I know.

NARLA: We have cases with something like Grasim Industries, which is our largest producer of viscose fiber. By the way, that’s a global firm, it’s not just a domestic firm. It’s a domestic firm in the sense that it’s housed here and it’s here in India, but it has global operations because it’s one of the largest exporters of that fiber. Now, given the fact that they have had run-in trouble with the competition regulator, by this new definition, their operations globally can also be penalized for some anticompetitive practice that may have happened, I don’t know, in Nagpur or something, just as an example. 

RAJAGOPALAN: With one supplier or one competitor.

NARLA: With one, exactly.

RAJAGOPALAN: The normal way of punishing is you have to have proportionality. Which is, if you have benefited from anticompetitive practice in one area, then we will penalize you in that area such that it prevents you or deters you from engaging in that again. You don’t burn down the whole company and say it’s going to be 10% of global turnover. The market cap of some of these big tech companies is the size of the Indian economy. The whole thing is crazy.

SHAH: Yes, it’s huge.

NARLA: I think Shruti and I did a calculation where we said, let’s assume that if Google, Amazon and Apple, if they are penalized for 10% on their global turnover, if you do the math of those penalties, they will equal the budgetary allocation for infrastructure development in the last interim budget.

That’s how convoluted the whole practice is. Now they have come out with the penalty guidelines under the current law where they’re saying that, okay, the cap will be 10% of global turnover, and then depending on the practice and the anticompetitive conduct that is being reviewed or scrutinized, they will factor in all the relevant issues and maybe look at relevant turnover, but that’s the thing. In the parent law, you’re still saying that turnover means global turnover.

Whatever calculation and scaling you may do in practice, the message you’re sending out to the firm and to the industry and to the markets is that you have this inconsistent standard and that if all balls drop, then you’re going to come after them, come what may because the provision exists to that effect. Of course, my favorite of the entire lot of penalties is that the Competition Act has something called Section 28, which basically says that the regulator can break up a large firm—

RAJAGOPALAN: Our CCI commissioner will be Elizabeth Warren. There is no difference. We are all in the business of breaking up large firms.

NARLA: For the few handful large firms that we have in this country, we are going to go after even those. One might say that okay, but the regulator has never actually given this penalty, so what’s there to fear? The fact that it exists in the act, that it exists on paper. We’ve had some recent scholarship written by some of our prominent economists who have been reviewing the country in the last 75 years, in their papers because they’re talking about market concentration. They’re very happily recommending this. There’s no trepidation in also recommending the idea of breaking up conglomerate groups in India.

RAJAGOPALAN: It’s obviously coming from domestic firms because they find it hard to compete with these. It’s almost like the whole thing is untethered from reality. How do we think about policy when the three of us are writing a paper? The first thing we always talk about is what if we were the entrepreneur or we are the firm that is starting manufacturing and need to hire labor or whatever it is. You try and think about it from that point of view. Basically, if you go back to the travel example that Shreyas gave, Google and MakeMyTrip, and all these aggregators are actually making travel more competitive.

Now, the end user is not consuming the search. The end user is consuming the information that will lead to them buying a cheaper ticket or a more competitive ticket. Actually, all these aggregator firms, whichever way they prioritize, actually make air travel overall more competitive, which is honestly what the end consumer cares about.

The end consumer doesn’t care about, “Did I have to see this first or second?” The second is we’re still doing digital goods like physical goods, as if the third search result is so far away that I can’t look at it while I’m looking at the first two search results. They think about it as advertising in a magazine, or a newspaper, or a billboard, that, oh, a few people won’t be able to see the third result, which is less priority or something in a smaller box, which is less priority. We see these things.

How many browsers do you guys have open right now? If you’re like me, you have 25 browsers open right now. When you’re checking for something, when you’re searching for something—I buy something simple like ChapStick, I have three browsers open to figure out which ChapStick I need. They haven’t yet understood how minimal the transaction costs are, how frictionless the digital marketplace is, that actually that’s what’s making it competitive and contestable.

It is not this whole prioritizing business and people are not stupid. That’s problem one. The second is with things like Uber. Again, it’s just confusion. Now, I know you guys, when we travel, you were the ones who were telling me about every new car company. Recently, Shreyas told me there’s something new called Empower in the D.C. area because Uber kept canceling on us. We all have Uber, Lyft, Empower, plus we have every other mode of transportation open to us.

They’re still saying Uber can’t give discounts as if it’s those old taxi companies where you had to actually call the company. It would take 20, 25 minutes for the car to show up. If they messed with you on price or something else, you don’t have an alternate option, or if they give you too many discounts, then another cab company can’t set up in the same town and so on and so forth. First is that mindset is totally messed up because it’s simply untethered from reality.

The second part of it is it also doesn’t align with all their other goals, which is in a country which is as starved of public transportation, which has very few buses per capita and so on, and with as poor customers as India, if you can have a company that’ll globally absorb the losses and extend the benefits to Indian consumers in a marketplace where there are such few frictions, and the consumer is so responsive to price, they’ll switch to another person the second the price increases. Why would you regulate that? It just makes no sense.

It reminds me of that typical antitrust classes every law professor will start with this example of there are three people in jail. They’re all chatting with each other. They’re like, “Hey, what are you in for? What are you in for?” The first guy says, “Oh, I’m in for charging a very high price which is monopoly markup.” The second guy says, “Well, that’s interesting. I’m in jail for charging a very low price which is predatory pricing.” The third guy is like, “Oh, that’s hilarious because I’m in jail for charging the exact same price as everyone else which is collusion.”

Competition policy is trying to attack all of these things, but the core of each of these attacks is you understand the market structure and you want to improve contestability and consumer surplus. Without actually analyzing do these actions of the bill and of the big company, the significant service provider, the regulator, do they actually increase contestability and increase consumer surplus? That is simply not part of the conversation. The only part of the conversation is, “Is this too big? Are they global? Are they making lots of money?”

Now, we’re basically attacking large firms and profitable firms, which means you punish people who are successful. What you should be doing is you should be kicking out the losers, and you should pick the winners. Now, we are kicking out the winners, and we’ll pick the losers who go to competition court and drag things around for years because they’re not actually competitive against Google or someone else. I think that’s the bigger thing in all of this.

NARLA: As we wrote in our paper, if you don’t know how to prune a few tall trees, we’ll burn the whole forest down so that everybody is equally burnt on the forest floor. 

RAJAGOPALAN: Yes, that’s what they’ll do. Basically, they’re like, “Oh, trees cast a big shadow and they won’t let the smaller trees grow.” This is the language that all these guys use. We’re like, “Be that as it may, this is all a little bit crazy because the way you guys are functioning is you can’t tell the difference between a palm tree and a banyan tree.” A palm tree does not have this huge shadow that prevents smaller plants from growing. A banyan tree is obviously going to kill everything under it. First, at least identify is this a palm tree or a banyan tree? Then identify, does it need any pruning or cutting? Then decide to set the forest on fire, whereas I think they have gone straight to setting the forest on fire. That’s where we are. I don’t know. This is depressing, Kadambari. Sorry, we’re ranting, but we are very upset about this as you can tell.

SHAH: No, no, I’ve learned so much from this, thank you. What you were talking about in terms of big is bad actually reminded me about labor regulations.

RAJAGOPALAN: Shreyas, now it’s Kadambari’s turn. She will depress us.

NARLA: Yes, please.

India’s Labor Regulations

SHAH: Just placing it in the context of India’s regulatory environment, combining central and state laws, India has 1,536 laws, 69,233 compliances and 6,632 filings, which is a huge number when you add it all up. When a firm is thinking about setting up shop, they go through this process of, “What are the compliances required? What laws do I need to follow?” it is a huge amount.

The problem with this regulatory cholesterol, as Manish Sabharwal likes to call it, is that it encourages firms to remain small rather than grow. This happens in two ways. One is in terms of thresholds that the thresholds where these laws and compliances  start to apply are very low. They kick in at 10 workers, 20 workers, small numbers. And the second is in the details, in terms of what these laws cover. What the firms need to do to comply with the laws. There’s a lot of micromanagement that goes on. 

RAJAGOPALAN: Kadambari and I have a list just like you and I have, Shreyas. On our competition paper, we were talking about the crazy cases and I was like, “These are too crazy,” and they were just garden variety. Kadambari and I actually have an email thread listing absurd labor provisions. That’s the subject line. We should take a screenshot—

SHAH: Exactly.

RAJAGOPALAN: —of that and send it in. Yes, we keep adding how crazy the regulation is.

Before Kadambari tells us about this crazy regulation, so just to back up. We’ve been talking about this big debate going on in India, should India focus on manufacturing? Should India become industrial, manufacturing, export growth economy the way South Korea, China, Malaysia, Taiwan did it, or should India be doing something different?

This is basically you have Raghu Rajan and Rohit Lamba, who came on the show, on one side and you have pretty much most other economists on the other side who say no. Raghu Rajan and Rohit Lamba, Dani Rodrik, these guys are like, “I think that industrial export-led growth is over. The world has changed. The geopolitics has changed. What India should do is really focus on producing the high end of the value chain. It should focus on services and so on.”

Now, we know how badly India is doing on that regulation. Shreyas has already told us how we punish tech, how we punish SaaS, all of that stuff. On the other hand, if we still think, and Kadambari and I are squarely on the side of, “Hey, the numbers in India are too large, the skilling level is too low, we need some kind of industrial employment-led growth.” Otherwise, you’re talking about a billion people at sub-Saharan levels. This was kind of the premise. We started thinking about these questions, and we said, “Okay, what kind of firms do we have in India?” This is the most staggering thing that came up in our research.

Basically, micro, small and medium enterprises, which is the MSMEs what we call them, they are 96% of India’s industrial firms or units. Micro firms employ fewer than 10 people. Your small and medium enterprises we’re talking about small is up to 50 people and medium enterprise I think is up to 250 people, something like that. 99% of MSMEs are micro-enterprises and MSMEs themselves are 96% of all industry units which means only 4% of India’s firms units which means only 4% of India’s firms are at a size where you’re employing—

SHAH: More than 250 people?

RAJAGOPALAN: —exactly, more than 250 people which is already like unbelievable to us. Kadambari and I had this great idea. We said we are going to write this amazing paper and look at all the things that punish scale in India. That’s where we started. Now Kadambari is laughing me. We started there and then we said, “Oh, labor punishes scale, land punishes scale, this punishes scale, that,” and then we realized that we actually need to write six different papers, which we hopefully eventually will.

We started with labor and that’s where the list of absurd regulations was born because we were like, “Okay, labor is the worst of the offenders when it comes to scale.” If there’s a singular reason that firms remain small in India today, it’s labor. Twenty years ago, it was because we had that small-scale industry reservation list which the Vajpayee government repealed. If you go before that, if you go 30 years before that or 10 years after that, it might be because credit constraints, firms can’t easily get credit to scale.

Now we solved all those problems so right now, the binding constraint is just it is so costly in regulatory terms to employ labor that most firms prefer to remain under 10 workers which means no matter how long and successful a firm has been, they wish to remain small. Because the second they become big, they’ll become unprofitable, which is normally not the case in the rest of world.

Like if a firm is doing really well you scale, and that’s why it’s called the economies of scale. It’s almost like India is the economy of not scale like we are against the economies of scale. Sorry. Now, Kadambari will tell us all the crazy regulations. Sorry for the long preamble. It’s weird how these papers get written, right? We didn’t land on labor just on our own.

We landed on labor for a completely different reason. Big firms in India also don’t employ too many people, actually because they end up being very high-tech. India is a weird country where we are labor surplus and once upon a time, we used to be capital scarce, and yet all our large industry is capital intensive and not labor intensive. That’s how badly we distorted the labor market. Anyway, coming to the volume and type of absurd, Kadambari, please, off you go because now we have to entertain Shreyas now with this. 

SHAH: No. It’s just really crazy. It’s the scale of these regulations. When you were saying labor is the worst offender of this regulatory environment, that of those large numbers that I mentioned labor-related laws are actually the biggest. They are 30% of all laws. They are 47% of the compliances, and I think 46% of the filings which is a huge number.

It’s almost half the entire compliance environment. All of these different laws, they begin to apply to firms at very, very small numbers, so 10 workers, 20 workers, 50 workers. Actually 50 is at the higher end, its actually more  likely 10 or 20. For example, the Factories Act kicks in with 10 workers using power, as in firms with 10 workers using power and firms with 20 workers without using power. 

RAJAGOPALAN: This was written in the 1948 that’s why there is a with and without power exception.

SHAH: And it still continues today. You will have things like the Maternity Benefit Act, Payment of Gratuity Act, Sexual Harassment of Women at Workplace Act, all of these different laws, very important, but they apply to firms at 10-plus workers. And the Provident Fund Bonus and Contract Labor Laws, they all apply at 20-plus workers. These are just some examples, it’s actually a huge list of laws that apply. If a firm wants to move from nine workers to 10 workers, research has—this very nice paper by Amirapu and Gechter has actually found that it increases the unit labor cost by 35%, just from nine to 10 workers, adding that one additional worker which is when the labor laws start to apply. This is just in terms of regulatory cost, it is not a small amount. 

RAJAGOPALAN: That’s the country average.

SHAH: Exactly. Some states will be much worse, some will be much better. Then, obviously, firms think, “Okay. Why should I scale? Why should I increase the number of people I employ? I can just be under 10 workers, and I’ll carry out my business as it is.” This is just one part of the problem, this low threshold that prevents firms from scaling. The other issue is the details mandated in these different laws. The micromanagement that comes with these laws.  For example, the Factories Act— 

RAJAGOPALAN: This is a worst offender, by the way. If there’s one thing that can be also repealed in India, it’s the Factories Act.

SHAH: Exactly. The Factories Act literally says his is the kind of paint that you should use, this the kind of drinking water you should provide, this is the height of the urinal that’s needed. It’s just odd.

RAJAGOPALAN: Yes, the height of urinal. You heard correctly. Shreyas is looking alarmed. Sorry, Shreyas, we said urinal.

NARLA: No, this is unreal.

RAJAGOPALAN: Yes, spittoon. My favorite is spittoon. Have you heard that word, spittoon?

SHAH: Yes, spittoon.

RAJAGOPALAN: I had to look up what it means.

SHAH: So did I.

RAJAGOPALAN: woh paan thookte hain naa [the place where you spit out your paan] That it’s that, that is the thing in which you spit.

SHAH: That is also mandated, where it is, how it is, where it’s supposed to be, all of this stuff.  It’s all literally detailed in this act. And this is just one example. There are so many others where you need to have, it specifies the amount of bonus, what kind of register you need to use, the amount of gratuity, all detail at such very, very tiny levels. And  the other thing is that if you don’t comply, you can go to jail. The penalties for these labor laws. 

There’s actually a very nice ORF report. It’s called “Jail for Doing Business” where it outlines the criminal penalties applicable to doing business laws. You don’t maintain the register in the way you’re supposed to, you could literally go to jail for that. Why would firms want to scale when they are subject to so much scrutiny and so much additional burden?

It’s like Shreyas said, then there are no economies of scale, output is low, productivity is low. And interestingly, government documents like the Annual Survey of Industries and the Economic Survey in 2018 or 2019, I believe, show that when firms have increased their thresholds, they have actually performed better. They have higher output, they have higher investment. These documents literally show that. That larger firms do perform better. The Annual Survey of Industries shows that larger firms do have higher investment, higher output.

There is evidence to show that firms should be allowed to scale, but for some reason, that is just not happening.

NARLA: If you want to benefit the worker—and I’m imagining that’s one of the reasons why you have this cornucopia like just the labor regulation and complex structure. If your firm is not in a position to actually provide you any of these benefits, it’s a loss-loss for everyone in the scheme of things.

SHAH: Yes, and that’s a difference in formality.

NARLA: Only if your firm is large.

RAJAGOPALAN: The weird thing is small firms—we got this from the ASI 2022 report—small firms have worst capital utilization. All of that stuff we know but in the industrial employment, they account for only 12.5% or 12.6% of employment generated. Okay?

SHAH: Yes, exactly.

RAJAGOPALAN: Remember, small firms of up to 50 workers, small and micro enterprises are the largest bulk of what we’re talking about. Now large firms, which is over 5,000 employees, they are 0.3% of the total number of firms but they employ 9.5% of workers. This is the thing, economies of scale. When things are allowed to scale, they actually employ so many more people.

Of course, there’s no question that their capital utilization is better, their fixed costs are low. All that stuff we already know but even on employment, they end up doing much better because there’s so much cost saving on everything else. They can actually formalize and so on. 

But Kadambari talked about, first of all, the thresholds, which are very low, right? They kick in at 10, 20. I think one law, I think trade unions or something kicks in at seven even. This maternity benefit, the creche we’re talking about. This is not 50 women who are pregnant or of reproductive age, any 50 workers. If you have 50 workers, if even one woman has children, you need to have a creche, so this is the craziness, right? Kadambari, did I get that right?

SHAH: Yes. You did.

RAJAGOPALAN: Because we checked this. Again, I’m driving you guys crazy. Right? When something seems unbelievable, I ask Kadambari, “Can we check it again? Can we check it again? Can we check it again?” The same thing with Shreyas, I’m like, “This Grasim thing doesn’t seem right. Can we check it again? This Google thing doesn’t do that.” That turns into something crazy, but the second thing is, again, I think what Kadambari and I eventually found is it’s a mindset problem, right?

SHAH: Yes.

RAJAGOPALAN: Now, none of us want an unsafe environment for workers, obviously. Everyone wants some basic occupational safety.

SHAH: Of course.

RAJAGOPALAN: Now the question is, do you mandate standards of occupational safety, or do you mandate how to get there? We were looking into why do they have this whole paint discussion in Factories Act, the kind of paint. Apparently, because some kinds of paint are flammable. So is paper. So what, our offices can’t have books anymore? We’ll shut down. Yes. We can’t produce what we produce if we didn’t have books and we didn’t have paper. Paper’s also flammable. 

So I think the bigger question is what fire code or safety code you need to have. The government also needs to do other things like providing a fire service, which frankly, with its state capacity, it’s not able to do. Should you have a fire extinguisher? Now that might still make sense, because what we can definitely agree upon—this is why economists get into trouble.

Because we say things like the optimal number of fires is not zero. Now, maybe we can make an argument, especially in most parts of the world, that the optimal number of fire fatalities is very low or tending toward zero. We really should prevent that, but what we’re now trying to prevent is fires caused only by a particular kind of paint. Now, if you said there can be no flammable material, I’ll be living in a cave.

My home is flammable, our office is flammable, the flooring is wood. You guys can see behind my wall, it’s like hundreds of books in our libraries. All of it can catch fire. Is my office an occupational hazard because we’re tripping over books and paper and anything can catch fire? The whole thing seems a little nuts, so that’s the level at which they’re regulating, they’re micromanaging. Right?

Now, of course, you don’t want a situation where people spit, but there are many ways to make sure that people don’t spit, and dictating the number of spittoons—that word is hilarious—and how many you have and where they are placed, it’s a level of crazy that can’t be explained easily, except it feels like the inspector wrote it. This is not written by people who truly care about the health and safety. This is written by inspectors who want to extract more and more, right? I think most of us can agree that some minimum wage law existing makes sense, and it’s not the end of the world.

All of that stuff, right? The weird thing is not only does it specify the level or how you calculate the minimum wage, it tells you what the font size and the color of the paper and the color of the register the minimum wage should be announced in. As if the workers who work here are stupid.

They make it seem like everyone who’s working in this factory has no mind of their own. Same thing, Payments of Wages Act. It prescribes the font size on the wage slip. Motor Transport Workers Act will prescribe the driver’s uniform, not just that they must have a uniform, they’ll prescribe the colors of that uniform. It’s just each of these things becomes crazier and crazier.

What happens, basically that study that Kadambari was talking about, which shows that at the nine workers to 11 workers, when you move, there’s this big discontinuity and there’s this increase in cost of 35%. Now, some of it is following the laws, but some of it is also bribing, right? 

SHAH: Yes.

RAJAGOPALAN: Because if you have this regulation, any labor inspector, whether they inspect you or not, you know you’re going to be in violation of something. It could be something as stupid as misplaced spittoons or not having spittoons because no one is chewing pan. If you are working in textile and dye, you can’t have people spitting or eating pan or any other kind of colored [substance] . Your dude who’s your labor inspector can still show up and ask for all the bribes. That’s actually where a part of the cost is.

In that same paper—I think this is by Amirapu and Gechter, it’s an excellent paper—where they show the discontinuity, when they show the India average, they also tell us that in places like Bihar, it’s much higher. You can also get a glimpse of in places that are more corrupt, have worse state capacity, have actually lower amount of total number of manufacturing units and all, you actually have higher labor costs. This is our most labor-surplus state, so to speak, in modern days.

The whole thing is a little bit funky. When we started looking at this, we were losing our minds and you know they’ve streamlined the things into these four labor codes, which I know improves our ranking in ease of business by streamlining things and not having it across 500 different statutes, but a lot of this is still in there. The Factories Act has not been repealed, this spittoon stuff—and not just spittoon, but all of it.

It goes into occupational and workplace safety code or whatever that code is called, right? Each of these things has now gone into a relevant code and it’s just amalgamated this. And you know how the sausage is made in the law ministry, Shreyas. The sausage is made through Ctrl + C and Ctrl + P, right? We are just copy-pasting laws wholesale.

NARLA: Absolutely.

RAJAGOPALAN: This is exactly what we find. So in terms of recommendations, now, even though we agree that moving toward this streamlined code is better, Kadambari and I can’t put our weight behind that either because that’s also crazy. Just putting it in one place doesn’t reduce the cost burden.

Yes, so what do you recommend we do, Kadambari? What can be done in this crazy situation? Something must be the solution, right?

Solutions to India’s Regulatory Environment

SHAH: One thing also, just to add to what you said before I get to this, is that what touched on earlier, that a lot of these acts and laws were put into place decades ago, and they haven’t been updated since. Maybe all of this was relevant at some point, but it isn’t today, but it’s still enforced today, which is what’s causing so many different issues. The ideal solution would be overhauling the entire labor regulatory system and keeping a few different laws that would benefit workers, like minimum wage, occupational safety, and so on, but without micromanaging everything else.

For that there are too many political economy issues and I don’t think it’s going to happen anytime soon, but the next best solution could just be increase thresholds, allow firms to scale. Instead of 10 workers, 20 workers, keep all the thresholds at 1,000 workers. Firms that can be productive at 22 workers, 35 workers, they’ll be able to grow and continue their business.

The ones that need to grow further will be ability to do that, but point is you’ll have that scale. You’ll be encouraging that scale. A firm that that could be productive at   20 workers will not stop at nine because they don’t want to face the compliance burden. They’ll be able to grow. Having these thresholds, keeping these laws, having these thresholds at 1,000 workers that will make a difference and it will be possible—Shreyas can correct me if I’m wrong—but the law states that when central and state laws differ, the central law will prevail and labor is concurrent list subject.

Increasing the thresholds is not something that goes against the central law. Because if the state decides to increase the threshold, that is not in conflict with the central law. What is needed is presidential ascent to allow that to happen. So Rajasthan actually did this  for the Factories Act., They increased it from 10 to 20 workers using power and 20 to 40 workers not using power. That’s the new law that applies there. Actually, this the one that the Economic Survey showed, the one that I mentioned earlier, that increasing the thresholds improved output productivity in Rajasthan. There is this evidence to show that larger firms were able to do so much more.

RAJAGOPALAN: Again, I know I keep pulling back to the larger idea or the philosophical idea, but the people who wrote these laws, they were well meaning and they weren’t stupid, right?

SHAH: Of course.

RAJAGOPALAN: If we try and put ourselves in their shoes, it’s like what were they imagining? They were imagining the typical Charles Dickens’ kind of world, or the Karl Marx world. You have capital concentrated among very few people, and you have lots of labor. It’s a labor-surplus economy. Now, these very few people who control the capital are going to employ a large number of workers. Because there’s an asymmetry between the number of people who control the capital and the number of laborers, the laborers will end up having this huge collective action problem, coordination problem.

They’re also competing with each other for those jobs, whereas the capital has in some sense colluded. If I had to put it in a modern economics language, it’s a prisoner’s dilemma. Each individual worker is better off competing and accepting lower wages or worse employment conditions or less secure employment, and it ends up being a race to the bottom. If you have a way of solving that collective action problem, then as a group, the labor can actually counter this very powerful group of small capital concentration owners.

That’s the philosophical underpinning of this. When we think about when these agitations started in India, they actually started in the late 19th century, early 20th century, when we’re talking about the textile mills in Bombay, which really took off after the civil war disruption and so on. We are talking in the late 19th century, I think 1890 or something. There were about 90 mills that employed over 125,000 workers. We’re talking about each firm having thousands of workers with no phones, no digital economy, very high transaction costs for people to communicate. Bombay is a melting pot, people don’t speak the same language, and all these other kinds of problems. You need this crazy level of regulations such that people can coordinate and workers will not be able to easily coordinate and figure out what is the safest option for them, so you start mandating all these things. That’s the idea. 

Now, let’s say you buy into that world. I’m not saying everyone must, but let’s say that’s the philosophical underpinning and we buy into it. It still shouldn’t apply 10 workers and 50 workers and 100 workers and 300 workers, because there is no universe in which a small firm with 10 people, your capitalist is not one of your Charles Dickens’ villains who’s so concentrated and who is so powerful and so on and so forth. Now, maybe there’s an exceptional case in a particular village where there is, but typically you don’t try and regulate outliers.

The second is, 10 people can very easily coordinate, 50 people can coordinate, 200 people can coordinate. We have evidence from things like gram panchayats. You have hundreds and a few thousand people easily being able to coordinate and solve a collective action problem, as long as they have a forum. This idea that we have to mandate things and regulate and micromanage at this degree, there is something broken at the ideas level. I don’t think anyone has really sat down in a long time.

Like Kadambari said, all this stuff is outdated. It’s not just outdated because we’re assuming you need spittoons and power looms. Everything’s on electricity now. It’s also outdated because your view of the world is that capital is so tightly concentrated amongst a few people and the labor is just so massive and that our firms are so massive. 

This Rajasthan 10 to 20 is laughable for me. I know it showed a positive impact. We use it as evidence. It’s wonderful, but our employment problem, the scale of it is just so huge. We actually need to increase the thresholds to 1,000 workers for most laws. I would say we need to increase the threshold to 10,000 workers or 20,000 workers for things like Industrial Disputes Act, where the government needs to get involved and issue a permit before a firm is allowed to close and all of that stuff.

That’s the scale at which the government should get involved. The whole thing feels a little bit crazy and no one’s doing anything about it because they’re like, “Oh, a few unions and this, that and the other.” I think if we increase the thresholds, and this is the last point I want to make, unions will actually strengthen. Today, there are hardly any unions and they’re weakening because you hardly have any firms of scale. What will seven people, eight people do in a union anyway? Everything is being done through middlemen and contractors and informal workers and things like that.

RAJAGOPALAN: If you actually increase the thresholds, then there will be large number of workers, they’ll have more security of tenure and then they will also unionize. This is actually increasing the thresholds, according to me is the most pro-labor move. I can’t believe I’m the one who’s recommending something like this. That will be an important first-order effect that you have a large number of workers and they unionize. I do think people should be allowed to unionize. I’ll stop talking here. 

Kadambari, anything else on the labor thing? I know we had so much stuff. We had to start breaking up the papers into labor, land so many of our laws. We never talked about any of it. Hopefully, you guys can come back and we can set up time to record.

NARLA: Absolutely.

RAJAGOPALAN: Kadambari, did I miss anything out on labor?

SHAH: No, no. There’s a lot more which people can read in our paper.

RAJAGOPALAN: Oh yes, we have a lovely table, which we added to some of the work that Amirapu and Gechter had done. We also combed through labor laws on our own. We have a very long table, which tells you the thresholds of all these crazy laws and how low the thresholds are. Please do look at our beloved table, which took a lot of work and doing. 

What else guys? Is this the list of reforms we leave it at today for this budget and maybe talk about other things later, or do we have anything else?

NARLA: As you guys were giving me insights on the whole labor regulation, I couldn’t help but think of how it sounds like how in social sciences and law schools, you are asked to follow either the Blue Book or the Chicago style. We go from 15th edition to 16th edition, but no one’s asking, “Why do we have these citation manuals in the first place? Why are we having these?” The Indian regulator system just sounds exactly like that at the moment.

RAJAGOPALAN: Yes, copy-paste. Exactly.

NARLA: Copy-paste. I think it really goes back to that point you were raising, Shruti, about where are these fundamental questions and how we think about. We’re going from budget to budget every year and then we’ll discuss other things. Even when you discuss the budget, it’s never about these really more fundamental questions about what’s really the first principles behind how we are making these policies.

RAJAGOPALAN: Absolutely. I think that’s a good and depressing note to end on. 

Thank you so much for coming back. I’m sure we’ll have more conversations given the slate of papers that’s coming out. It’s always awesome and such a joy to see both of you even when we are driving each other crazy and the checking and double-checking and triple-checking. Is it right? This doesn’t sound right. We keep doing that, but thanks so much for doing this. I will see you very soon.