Solutions

Given the barriers to formalization, this section of the paper deals with an analysis of steps taken by various countries to promote formalization. It further tries to analyze the effectiveness of these policies in India.

One-stop shop reforms in registration
Colombia introduced reforms by establishing "Business Service Centers" in several municipalities to ease registration burdens. The measures adopted included introducing a one-stop-shop registration to ensure that registration procedures were completed in one place and in the same day at minimum cost. This led to, raising business registration by about 5 percent. Brazil also simplified procedures for small businesses by introducing “one-stop shop”, a popular way of streamlining the registration process for firms worldwide. In India, however this will not be very effective means as the charges for one-time setup fee of a new enterprise ranges from Rs. 7,000/- upto even Rs. 75,000. Apart from this high fee, there is an additional yearly maintenance charge. Therfore, Registration procedures continue to be very expensive in India in relation to the benefits that the enterprise would receive by formalizing.

Fast-Track Business Creation System
In India, the average number of days required to register is as high as 71 and this acts as a barriers to formalization and entrepreneurial activity. Mexico, however, has progressed and increased its formalization rates by 4 to 8 percent by introducing Fast-track Business Creation System in 2002. This reduced the length of registration procedures from eight to two days. Learning from Mexico’s success ,similar procedure should be adopted in India as well.

Municipal licensing reform in Lima, Peru
Reform increased number of provisional licenses issued to informal firms. A municipal license is often the first license that informal firms receive, and because it typically then requires only a small annual license fee, but no sizeable local tax payments, it is less expensive for firms than registering with the national (and state) governments for business taxes.

Tax Simplification
Argentina is noteworthy for its tax simplification, e-government and single service window initiatives in municipal and provincial governments (2003-2013).
E-filing of tax returns can reduce administrative and compliance costs and offers good opportunities for capacity-constrained governments to cooperate with the private sector. For eg; tax payments via mobile phone-based banking systems could allow businesses to pay taxes and fees directly, thus reducing interactions with tax collectors and ensuring that payments arrive at their destination. E-governance in India however, seems to be very difficult to achieve. It requires heavy capital investments for the purchase of hardware and software. Information needs to be provided in the local language, i.e. Hindi and other regional languages. Therefore, it further requires the cumbersome task of using technology for transliteration from English to other languages. While numerous steps have been taken towards e-governance, the lack of awareness, and the adoption and use of government services electronically by the larger community makes it inefficient.

Amendments to Chapter VB, Industrial Disputes Act, India
Chapter VB of industrial dispute act imposes various restrictions regarding hiring and firing of workers. The act originally enacted to protect the workers rights has instead, discouraged firms for hiring in the formal sector because compliance is expensive and cumbersome. Analysis using the World Bank’s Doing Business database suggests that firms hire informal workers and pay them under the table so that they can avoid giving health and other benefits. The World Bank study finds that labour reforms that would work well to encourage formalization include increasing length and scope of term contracts, introducing apprentice wages, allowing flexible working hours, and removing administrative approvals for dismissals.
The Rajasthan government has already taken a step towards amending Chapter VB of the Industrial Disputes Act (IDA), raising the exemption limit in the law that restricts laying off workers without government permission to firms with more than 300 workers.

Streamlining Labor Laws: Spain’s Experience
Spain’s experience in the 1990’s, shows that informality can be curbed. It streamlined labour laws and lowered taxes on employment. This led to a massive job creation in the formal sector, fall in unemployment by over 40% in the next six years. Also revenue collection from small-scale units went up by 75% even with a decline in corporate tax rates. The policy has aimed at reducing the social security costs for new service contracts; reducing income taxes and setting up of new employment contracts enabling more flexible employment relations within the formal economy, hence, encouraging work within the formal economy.
Reforms in labour regulations should, focus not only on deregulation to reduce protection of workers in the existing regulated sectors and employment, but should aim at reducing dualism in the regulatory regime. Learning from Spain’s experience, breaking down of stringent labour laws in India is a must to encourage formalization.

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[ 1 ]. Entry Regulation and Formalization of Microenterprises in Developing Countries, Miriam Bruhn David
[ 2 ]. Recent experiences of formalization in Latin America and the Caribbean, ILO, Pg 10

The Labor Reform Myth, Pranab Bardhan Barriers and facilitators to transitioning of SMME’s from second to first economy in South Africa, Frank Aswani, pg 24
[ 3 ]. human dignity & the future of global institutions Mark P. Lagon, pg 110
[ 4 ]. The Labor Reform Myth, Pranab Bardhan
[ 5 ]. Barriers and facilitators to transitioning of SMME’s from second to first economy in South Africa, Frank Aswani, pg 24