Kerala has unveiled its Industrial Policy for 2023, which places a strong emphasis on attracting investors and enhancing the business environment in the state. However, its current 15th rank in the Ease of Doing Business (2022) within the country suggests there’s room for improvement in the overall business ecosystem.
To thoroughly assess Kerala’s business environment, it is crucial to evaluate its friendliness to businesses and whether the existing legislative and policy framework attracts investors. The presence of various laws governing business activities in the state prompts us to consider whether these laws facilitate or hinder the growth of the entrepreneurial ecosystem in the state.
The Government of India has been focusing on simplifying and streamlining existing regulations to improve the efficiency and effectiveness of governance and the ease of doing business. In this regard, the Lok Sabha passed the Jan Vishwas (Amendment of Provisions) Bill 2022 during the monsoon session of the parliament. The Act proposes to decriminalise 183 provisions in 42 pieces of legislation, including several outdated colonial-era laws, with the aim of improving the ease of doing business.
While there are additional provisions that require scrutiny and other laws that may need similar decriminalisation to attract investments, this Act can serve as a valuable model, particularly for states like Kerala, which have been perceived as less conducive to business.
Business laws in Kerala
There are approximately 113 state laws that affect businesses in Kerala, either directly or indirectly. Out of these, 74 state laws have imprisonment clauses that criminalise and provide jail terms or carry a fine, or both, for non-compliance with procedures or trivial acts/omissions. These laws affect different stages of businesses, i.e., from the start of a business to operating to scaling up to closure. In numerous cases, penalties extend to even the smallest actions, like failing to maintain registers in the prescribed form, which can lead to employers facing imprisonment. The threat of imprisonment for non-compliance is not conducive to fostering a climate of free enterprise.
Treating minor violations as criminal acts strains the judicial system and diverts attention from grave matters that warrant scrutiny. Imprisonment should be reserved for offences that pose a genuine threat to life, property, or limb. The presence of punishable offences in business laws entails legal action for each violation, burdening both businesses and officials of the department and contributing to the overload of the court system.
According to 2019 data, there are 12.51 lakh criminal cases pending in various courts in the state, reflecting overcriminalization, characterised by an excessive reliance on criminal punishments within the legal system. These penalties are often outdated and disproportionate to the offences committed. Therefore, a thorough review of these laws is necessary to assess the rationale behind retaining criminal liability.
The Kerala government has taken a few measures to identify criminal provisions within its business laws. One such initiative involved the appointment of an External Committee (Sunny Committee) to scrutinise legislation that is relevant to business and to decriminalise the criminal provisions in the business laws. The committee was instituted with the aim of recommending necessary amendments to outdated provisions and the repeal of redundant laws.
Incorporating the committee's recommendations, the State Law Reforms Commission has drafted amendments to 40 laws that impact businesses within the state. The bills drafted by the Commission propose to replace the imprisonment of minor offences with a higher revised fine. While this gives the perception of improving the business environment, eliminating imprisonment alone may not take away the corruption often linked with fine impositions.
Why decriminalise businesses?
Criminal charges, even if not proven, can harm a business's reputation. This can have cascading effects on relationships with customers, partners, and investors, affecting the overall business environment. It can also create opportunities for enforcement officers to engage in rent-seeking behaviour, potentially leading to harassment and corruption.
The existence of such provisions in the state creates a climate of fear and uncertainty for new businesses, thereby stifling investments and innovation due to the perceived risks associated with unintentional legal violations. In addition to decriminalisation, to truly enhance the overall ease of doing business, the focus should also be on streamlining compliance procedures and simplifying the processes that businesses must navigate. Priority should be given to exploring alternative mechanisms that can improve operations and facilitate business growth.
Prominent global economies such as the United Kingdom, Singapore, and the United States are witnessing a significant trend in regulatory frameworks that involves a concerted effort to cut red tape and create a more business-friendly environment. Governments in these countries are actively engaging in initiatives such as the Red Tape Challenge (UK), smart regulation (Singapore), and various deregulation efforts (US). The focus is on identifying and eliminating unnecessary regulations through periodic reviews, with a commitment to reducing administrative burdens on businesses.
Such initiatives are further driven by the widespread adoption of digital technologies, such as online platforms and electronic systems, to simplify compliance processes. In light of these global practices, it is imperative to take a determined approach to identifying and addressing an over-regulative mindset. Fostering more extensive public dialogue and awareness that highlights the significance of economic openness would be crucial in advancing favourable perceptions among potential investors, thereby positioning the state as an attractive business destination.
(The author is Senior Associate - Research, Centre for Public Policy Research)