Sanjeev Sanyal, Member of the Economic Advisory Council to the Prime Minister (EAC-PM), spoke on ‘Process Reforms: Big Impact from Small Changes’ at FLAME University, Pune. Sanyal, a renowned expert in urban dynamics and economic policy, explained how small, targeted changes can lead to significant positive impacts on economic performance.
What on earth are process reforms? Now, you know that we have been reforming our economy since 1991. Most of the time you hear the term structural reforms. So, if there are structural reforms, it stands to reason that there must be other kinds of reforms also, because after all, why qualify the word reform with the term structural? But unfortunately, in the economic literature, in fact, in most of the conversations, you never hear of any other kind of reform. You only hear structural reform.
So structural reforms are reforms where you actually attempt to change the structure of the economy in some fundamental way i.e. the underlying architecture of the system has to be changed. The original 1991 reforms, the de-licensing and liberalization was a structural reform. It’s a fundamental shift in the way things are done. More recently, the reforms that you have, for example, the GST is a fundamental change in the architecture of how indirect taxes worked in this country. We went for a system where there were all these interlocking systems, to a national system, effectively a free trade agreement that India signed with itself.
Process reforms are actually mostly the nuts and bolts boring reforms that you may read about on the fifth page of the newspaper. Somebody in that particular sector may actually know what happened, but these are not reforms that at least most academics bother to write about.
But there is no focus on this as a class of reforms. In fact, it may surprise you to know that I have actually invented the term process reforms. It came out in the economic survey about four years ago, and since I’ve tried to popularize its use. But the reason I want to focus on this is because unless anything is written about and institutionalized as a, a way to think about things, it does not become something that’s a matter of course.
Now, process reforms, although they are small, their impact may be very large. And the purpose of a process reform is not to change the structure, but to take a given structure and to make it that much more efficient.
And very often the cumulative impact of doing this can be very large. And in fact, over a period of time, you may actually end up actually changing the structure of the system as well. Nuts and bolts reform, small changes that very microeconomic, sometimes very focused perhaps on a specific sector, but ultimately, hundreds of these small reforms that have been done, and the reason the economy suddenly feels like it’s more efficient comes from these small changes. And there are literally thousands of them to be done.
Well, the simplest one is to just take an existing administrative system and process and just make it more efficient.
Second, change the regulation given the law i.e. there’s a law under which an activity is happening, but the administrative regulations have to be changed. So, just so that you are aware, basically, when a law comes out of parliament, it’s not like the law is what is actually affected under that law certain rules, regulations, et cetera, forms, processes are created by the ministry and the activity, whatever it is, happens under those rules and regulations.
The third type of thing is that you have to go back to changing the law itself. So, this is a little more complicated. There has to be a parliamentary committee then, or whatever at the state level, it’s a legislative committee, whatever. Then it’s debated. Finally, it goes through the president. Then the new law comes. Then on the basis of that, some new regulation comes.
Fourth, adding capacity of some level of government to remove bottlenecks. There just aren’t enough people, processes, capacities, institutions. You may actually need to create capacity at some level of government to open out that bottleneck. So that’s another kind of change you can make.
And finally, removing a requirement or some state mandated activity, which is becoming a bottleneck. So, one is to add some capacity or somewhere actually removing a process or capacity, which is getting in the way of other people.
So, this is administrative streamlining. There’s the simplest kind of process reform, and it’s carried out by merely streamlining a process. So, I’m going to take the example here of voluntary liquidation of companies. This is not companies that go to the insolvency in bankruptcy code because they’ve gone bankrupt or something bad has happened to them. These are perfectly good companies. Thousands of companies every year want to just shut down, but voluntarily shutting down companies, even when there is no case, there is no tax, there’s no problem. Doing this, sadly, is not an easy thing to do. In India, it can take years to shut down a company just because the process is very complicated.
Now, there are two ways in which companies can be shut down in India voluntarily. One of them is the section 248 of the Companies Act of 2013. This is the more important route because this is the simpler one. And then there is section 59 of the insolvency in bankruptcy code. So, although the insolvency in bankruptcy code is meant largely for companies that are insolvent or bankrupt, there is a segment for voluntary shutting up.
Now, in June, 2021, there were 28,536 companies pending with the Ministry of Corporate Affairs who wanted to shut themselves down. And out of this, 10 of them were pending for more than a thousand days. And 54% of them were pending for more than one year. So why can’t they be shut down? Where are the bottlenecks? And we discovered that there were two reasons why things were getting stuck. One was that you, it took a lot of time getting permissions and no objection certificates. And you had to do it in sequence. So, you had to go to get permission from the tax department guys, the GST people, various other people you needed NOCs to shut down the company. You need to get a NOC from the tax department to shut it down. But you had to do it in a certain sequence. There is no particular reason why this should be done in sequence. After all, if you know, the registrar of companies saying it’s okay, why does it require him for various different tax departments to why does GST need to know whether income tax has a problem? And vice versa, they can do it parallelly. But that is not how it was done. There was a certain process. It was not, it was done sequentially and not as a parallel.
But there was a bigger problem, is the most ridiculous of all. You see, in order to shut down a company, you have to actually publish this in a newspaper. The idea being that if there is any creditor or anybody who’s owed something by that company, they can come and make a claim because they know the shut company’s being shut down. And turned out that this was the biggest bottleneck. It took literally years sometimes for the ministry of Corporate Affairs to publish the name. Now, there were many reasons why this took long time. Not the least we discovered that it required you to let’s say use the word ‘encourage’ the junior official who published these advertisements in the newspapers. I’ll leave it to your imagination, how the encouragement went. But the fact is, this particular bottleneck meant there were thousands of companies in the country that couldn’t shut down because the ad had not come out. And there was no reason that the ad couldn’t come.
The Secretary in the Ministry of Corporate Affairs of that time put in an extra effort, provided budget, got around the various excuses, usually given for delay, and then there was a burst of publication of these company names. So as a result of this, what has happened is that there’s been a dramatic speeding up of the process. The same thing happened with the IBC. It turns out that the no objection certificates that were being asked for, first of all, were not even required by the IBC route. And even if you wanted it, they could all be done parallelly instead of sequentially. So, the impact was very dramatic. So, what happened is, as of July, 2023, just in two years, the pending number went down from 28,000 plus to 8,800, and only about 12% of them down from 54% that are pending for more than a year.
Now, this is a very small thing in the system. It didn’t require changing anything, just needed to find out the section officer who happened to issue the advertisements, and that was it. And there are thousands of people who benefit from this. Now, this is not earth shattering. But it has suddenly made one small part of the system radically more efficient. So that’s what this process reform is about.
ABOUT THE AUTHOR
Sanjeev Sanyal is a member of Prime Minister’s Economic Advisory Council. He has worked on several editions of the Economic Survey of the Ministry of Finance. He has authored several books, including ‘Revolutionaries’, that was recently released by Home Minister Amit Shah.