The local bullying of businesses (REODB 1)
Haryana wants to reserve 75% of jobs in private sector for the residents of the state. Andhra Pradesh came up with a similar law a little while ago. These are deeply ironic developments. Local politcians and governments bully local businesses and this makes it difficult for the businesses to put up factories and other places of employment. Local politicians also make it very difficult for many businesses to employ locals. Now the same politicians are coming up with laws to force the businesses to employ state residents. An apt metaphor would be if someone were to kick a human being and when they cried out in pain, put a tape on their mouths because they were making too much noise! This is what I want to talk about in this post — Bullying of businesses by local authorities.
Around a year back, I travelled to many cities in India and talked to leaders of businesses of all sizes and in different sectors. The conversations started with my question, ‘What stops you from growing faster?’ Many themes bubbled up across these long unstructured conversations and one of the prominent ones was their reluctance to employ local people.
With a few exceptions, factory managers across the country told me that they preferred not to employ locals. An auto component business owner in Chennai ‘preferred to employ people living more than 25 km away from the factory.’ This was because he was afraid that the local employees would take the support of local leaders and ‘create trouble’. The phenomenon was not limited to factories. Once, I got talking to a waiter in a five-star hotel in Jhansi. It turned out that he was from Uttarakhand. I imagined that most other employees of the hotel would be residents of Jhansi but it was not so. The hotel owner preferred to employ outsiders because local employees were likely to ‘create trouble’ for him. Locals would ‘create trouble’ was almost an accepted wisdom in many of my interviews. All the interviewees knew of cases where the trouble had gone out of hand and the impacted business had to shut down.
Employees are not the only people bullying businesses. Local politician-businessmen intimidate successful businesses to give them a ‘cut’. An ex-manager of a Fast-Moving Consumer Good (FMCG) Multi National Company (MNC) spoke about his experience of setting up a factory in a hill state. The company, with the aid of its formidable management, its lawyers and its connections executed as per its plans. However, one of the hurdles it could not overcome was harassment from local politician-businessmen. The company was told very clearly that only ‘local’ trucks would reach the gate of their factory. The raw material and the finished goods of the company had to be transported by locally owned businesses. This led to a strange and inefficient situation that the ‘local partner’ would pick up deliveries from the factory gate and take them to the state border and the company’s national partner would then take over from there. A pharmaceutical entrepreneur had a similar story in a different hill state.
Factory owners are not the only victims of such bullying. The founder of a consulting company was setting up office in the Mumbai Metropolitan Region. Even before the office was inaugurated, representatives of the local politician paid them a visit and advised them that it was in their interests to give them the contract for catering as well as for the filtered water bottles. Or take the case of a construction contractor in Mumbai. His work in a Mumbai suburb evaporated overnight when the newly elected MLA of that suburb informed all builders that he would be providing the labor for construction in that area. In a third instance, a large grocery chain manager described in detail scenes of intimidation that sounded straight out of a Bollywood gangster movie! This intimidation continued till they shifted their workers to contracting companies owned by politicians.
Some of my interviewees talked about how when they tried to use their political connections at the national level, they were advised to sort the matter out themselves. Prominent national leaders across political parties were unable to intervene effectively.
I must point out here that many employers do not think that this kind of bullying is their biggest problem. Neither the FMCG nor the Pharma company leader thought that using local trucking companies was a very high cost to pay. The consulting company gave the distilled water supply contract to the local politician. All three were running high margin businesses and the cost impact of the measures was a small fraction of their selling price. The business leaders could shrug off this cost as the ‘cost of doing business in India.’ However, any business with margins lower than these does not find these costs trivial. Unfortunately, labor intensive industries such as garment and leather manufacturing, usually have much lower margins and are particularly vulnerable to such local tyranny. Smallest businesses like street vendors — again big employers — are particularly vulnerable. This is tragic as unemployment is possibly India’s biggest challenge.
The harassment by local power brokers gets really bad when you are setting up a new capacity or if you are looking to expand. Business owners across the country suggested that whenever they wanted to expand, getting the permissions from local authorities and politicians was the hardest. There was an excellent article on this topic by one Mr. Rohan Shah. The author detailed his experience of starting a new manufacturing business in Sangli in Maharashtra. The conversion of his own agricultural land to non-agricultural land could not be done even after more than a year of hard work. The Revenue Department first asked him to fill seven forms and then asked him to get 11 No Objection Certificates (NOC) from 11 different agencies. Each of these NOCs in turn required further NOCs and filling of even more forms. In his post, Mr. Shah is very clear that the NOC from Gram Panchayat — which was required for 4 out of the 11 NOCs — was extremely challenging.
In summary, local bullying of businesses can be one off three types. First, Local employees can intimidate businesses creating a strong incentive for them to not employ locals. Secondly, local business politicians demand a ‘cut’ from large businesses. Thirdly, whenever a manufacturing entity wants to set up a new factory or expand, getting permissions from local authorities is the most difficult. So, what can we do about this?
Answering this question — What can we do about the tyranny of local — is not easy. Making laws and procedures simpler is the most obvious part of the answer. A few rogue employees can use some of the more draconian laws to manipulate their employers. Reforming such laws while providing adequate protection to employees, while challenging, is a relatively simple task that the central and / or state governments can undertake. One of the NOC that was needed by Mr. Shah was from the Udyog Kendra — an office set up to facilitate investment in the district. I repeat this so that the irony can sink in — An office set up to facilitate investments was making the entrepreneur work harder to get clearances. Making procedural changes to remove such nonsense would be another obvious step. However, other instances of bullying are not so easy to tackle.
If local politician businessmen intimidate businesses to get a cut or if local bodies like gram panchayat refuse to give permissions arbitrarily, what can be done? This is not a matter of changing or simplifying rules as the bullies are not using those rules. They are in fact breaking laws while intimidating businesses. Why do elected officials discourage businesses in this way? Why does an MLA or a Sarpanch not encourage a business that would create more employment in their constituency? It is because job creation is not their priority.
I have discussed in detail why even an honest representative would rate job creation as low priority. In short, representatives have little power to make positive change and more importantly they believe that they get votes for visible action like agitating for a common good. A Gram Panchayat officer is more likely to get noticed for a road that benefits everyone rather than for helping set up a factory which employs just a few people. The incentives for permanent, non-elected government officers are even worse. There is no benefit for giving fast clearances and there could be penalties for not following process, however cumbersome and idiotic that process may be.
So how do we get elected and unelected officers in the government to respond positively to job creating businesses? I don’t have the answer to this question but may be the beginning of this answer can be found in another theme that bubbled up in my conversations with the business leaders. Other countries do it.
My interviewees spoke admiringly of many of our nearby countries. How Sri Lanka was very responsive to garment manufactures. How in Thailand, a port side manufacturing facility could be set up in less than 60 days. The most impressive stories come from China of course. Many of the business leaders I talked to, gushed about how local officials treat any businessman thinking of setting manufacturing in their district or provinces. The officers escort the business person to suitable sites, explain the rules and procedures and even wine and dine the business person in order to motivate them to invest. In short, they act like salespeople for their district and not gatekeepers.
My preliminary understanding is that this happens because districts and provinces in China are actually in competition with each other. Promotions of both government officers and Chinese Communist Party (CCP) leaders depend on the amount of investment (and hence jobs) they can attract in their provinces. How can we do something similar in our democracy?
That is the big question isn’t it? One thing though that we all can agree is that reserving jobs for locals is not the answer. It will only create new avenues for bullies to torment the already tormented businesses.
My conversations with business leaders about doing business in India were very different from what media reports as Ease of Doing Business. For example, as I have covered in this article, a factory owner looking to expand is most concerned by his interaction with local authorities. Business media however, is usually focused on actions of the central government. Agencies like World Bank that measure Ease of Doing Business also do poor job as they have to rely on published statistics and regulations as they are written, not the reality on ground.
This is the reason I have started this series on Real Ease of Doing Business. An attempt to draw broad patterns from actual lived experiences of business people. If you are a business leader, please do share your story. Here in the comments section or as a direct message to me on Twitter.
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If you liked what you read, please do share. You may find my past writings on this job creation interesting.
1. Automation and the German underwear effect
3. Festivals and job automation in a labor surplus country
4. Why would your MP work on job creation?
As always, comments, criticism and praise are all welcome — preferably on the comments section of this blog!
