Source: Ideas and Institutions Issue #26
Analysis
Does decriminalization lead to Jan Vishwas?
Is excessive criminalization of economic activity holding India’s economy back? In December 2022, the Indian government introduced the Jan Vishwas Bill, 2022 in Parliament. The bill intends to decriminalize offences in Indian central government statutes. Forty-two central laws are being amended to reduce the compliance burden on individuals and businesses to build "trust-based governance.”
The assumption behind this proposal is that the excessive use of criminal law, especially that affecting economic conduct, inhibits entrepreneurial spirits. This piece lays out the arguments for and against decriminalization and speculates whether it could actually lead to improving the ease of doing business.
The forty-two central laws sought to be decriminalized include those on press and registration of books, forests and environment, agricultural marketing, food and warehousing, drugs and cosmetics, industries and patents, shipping, railways and motor vehicles, and rubber and spices. The bill does not propose to "decriminalize" simply by removing imprisonments for offences or deleting crimes from the statute books. Instead, proposed imprisonment terms in many of these laws have been replaced by financial penalties. Additionally, fines have been replaced with penalties of a higher amount, and penalties and fines in many laws have been increased. Furthermore, the bill proposes to revise them upward automatically by 10 percent every three years.
This bill is in continuation of the effort to decriminalize criminal laws that affect business in India. As per a press release of the Indian government, in 2021, forty-six penal provisions of the Companies Act, 2013 and twelve offences under the Limited Liability Partnership (LLP) Act, 2008 were decriminalized. In her budget speech in February 2023, the union finance minister stated that more than 3,400 legal provisions have been decriminalized since 2014. This is a large volume of legal change, and the Jan Vishwas Bill, 2022 makes many more such changes. But does decriminalization actually increase the ease of doing business?
To understand the benefits of decriminalization is to delve into the problems of "overcriminalization," or the argument that legislatures are passing an excessive amount of laws with criminal penalties, leading to the overall detriment of the society and the economy. As one scholar, Paul J. Larkin Jr., explains, "The principal form that overcriminalization takes is the passage of unnecessary criminal statutes. Some . . . expand the criminal code to …conduct not historically considered morally blameworthy, others will be redundant because they just duplicate criminal laws . . . some will increase the penalty for conduct already outlawed."
How many criminal offences does India have, and how do they affect business? A report by Gautam Chikermane and Rishi Agrawal titled "Jailed for Doing Business" estimates a total of 26,134 imprisonment clauses in India’s 843 business laws. State legislatures account for more than three-fourths of these clauses, at 20,895. Interestingly, the report states that five states—Gujarat, Punjab, Maharashtra, Karnataka, and Tamil Nadu—account for almost a third of the total of 6,170 imprisonment clauses.
Labor laws account for one-third of all business laws, and roughly half of all labor-related compliances are subject to criminal penalties that lead to jail terms. Some criminalized regulations under the Factories Act, 1948, for example, include the painting of the inner walls of canteens and the provisioning of spittoons. Contract labor legislation and the law governing interstate migrant workmen cover another chunk of these penalties that lead to jail terms. Social security legislation on gratuity, minimum wages, and maternity benefits also criminalize non-compliance.
The report, however, does not draw a causal link between these criminal penalties and the ease or difficulty of doing business. Other literature (here and here) has, however, highlighted the problems caused by overcriminalization that may not be easily apparent. These include:
- an increasing difficulty in understanding applicable criminal law, making it inaccessible. The sheer volume of criminal law makes it difficult to be aware of all conduct that has been criminalized.
- a chilling effect on the behavior of individuals who are likely to be prosecuted under these laws. Excessive criminal penalties in business laws have a chilling effect on businesses.
- the arcane or trivial nature of many criminal provisions, such as imprisonment for not providing a spittoon in a factory. These "debase the moral moment of the criminal sanction.” In other words, the profound moral character of a criminal penalty is attenuated because of the number and kinds of trivial conduct that are criminalized.
These are serious problems. Overcriminalization, framed in this way, is not just an economic issue but also has normative consequences for the character of society. Decriminalization seeks to undo the damage of overcriminalization by reducing the number of criminal offences. But whether removing criminal offences actually leads to greater economic freedom and entrepreneurialism is a normative as well as an empirical issue.
Normatively, decriminalization reduces the number and/or severity of criminal offences. This allows economic actors, in theory, to act with fewer inhibitions about the threat of criminal sanctions. The proposed reduction of criminal penalties from imprisonment to monetary penalties in the Jan Vishwas Bill, 2022 will reduce inhibitions for economic actors. At the same time, the bill also increases monetary penalties and the amounts of fines significantly. Therefore, the bill seeks to not only decriminalize but also rationalize many criminal laws. While it reduces the threat of imprisonment, it increases the possibility of stiffer monetary penalties. On the one hand, this could lead to greater entrepreneurialism among businesses, but on the other, it may embolden the state to enforce these provisions more energetically.
This brings us to the issue of enforcement and lived experience. Most people are not affected by most laws on the statute books. Rather, they are usually governed more intensively by a subset of laws depending on their jobs and socio-economic profiles. Most lawyers in partnership firms would, for example, be more affected by the decriminalization of the law on limited liability partnerships than that on shipping. When we consider the utility of decriminalization from the perspective of economic growth, we should inquire whether the laws being decriminalized are actually impediments to the same. That is, do these laws govern parts of the economy that are constrained by overcriminalization?
The harshness of criminal sanctions often has more to do with aggressive enforcement rather than the creation of new criminal offences. For example, the Indian government, specifically the Enforcement Directorate, has aggressively enforced the money-laundering law in India since 2019. As I have written earlier: "Between 2012-13 and 2018-19, the central government’s Directorate of Enforcement (ED) . . . took up an average of around 180 cases per year for investigation. From 2019-20 to 2021-22, the ED has taken up about 908 cases per year on average, quadrupling its case load."
It is to be noted that it is sometimes possible to have both—more criminal law with less enforcement. According to Paul Larkin Jr., the U.S. Congress added one new crime every week between the years 2000 and 2007. However, criminal prosecutions fell to their lowest levels between 2001 and 2016. In addition, in 2019, the U.S. incarceration rate fell to its lowest levels since 1995. Criminal law enforcement has been becoming less aggressive even though more crimes were getting created.
The addition of criminal offences therefore need not necessarily lead to more prosecution in society. Politicians find it easier to signal their seriousness about a particular issue to constituents by passing legislation rather than undertaking more resource-intensive enforcement.
This does not, however, mean that all of these laws are enforced, or enforced with equal vigor at the same point of time. It is probable that this behavior also explains some level of criminalization in Indian law. If so, discussions on criminalization in India should differentiate between the normative and indirect consequences of excessive criminalization of human behavior and the ability to make doing business easier through decriminalization. The latter requires a careful targeting of criminal offences that are actually hindering economic activity—not just because they exist but also because they are enforced.
—By Anirudh Burman
Review
The Necessity and Sufficiency of Economic Growth
To frame such debates, it is important to understand the empirical relationship between GDP per capita and other measures of development. A recent paper by Lant Pritchett and Addison Lewis goes a long way in explaining the association between economic growth and indicators of “basic material wellbeing.” They consider the following measures of basic material wellbeing:
- Material resources: Poverty rate at national poverty lines, poverty rates at $1.90 a day, $3.20 a day, and $5.50 a day, households with a refrigerator, and the ability to live on household income and to source emergency funds
- Nutrition: Availability of adequate food, undernourishment, wasting in children aged under five years, and stunting in children aged under five years
- Shelter: Availability of adequate shelter, housing deprivation, access to clean fuels and technologies for cooking, and indoor air quality
- Basic services: Access to electricity, basic water services, piped water, basic sanitation services, unsafe water, and sanitation or hygiene.
- Connectedness: Access to a bank account, use of digital payments, access to a cellphone, rural access to roads, satisfaction with public transportation, and satisfaction with roads and highways
- Protection from harm: Death and injury from road traffic accidents, death and injury from forces of nature, unintentional death and injury, and occupational mortality.
B. Health
- Preventive interventions: Diphtheria immunization, measles immunization, hepatitis immunization, contraceptive prevalence, antenatal care coverage, and existence of national screening programs
- Health care services: Healthcare coverage, health facilities, health practitioners and staff, births attended by skilled staff, tuberculosis treatment coverage, antiretroviral HIV therapy, and satisfaction with healthcare
- Physical health: Physical pain, health problems, communicable diseases, non-communicable diseases, and raised blood pressure
- Life expectancy: Maternal mortality, under-five mortality, five-to-fourteen mortality, fifteen-to-sixty mortality, and life expectancy at sixty.
C. Education
- Pre-primary: Pre-primary enrolment (net)
- Primary: Primary enrolment, primary completion, and primary education quality
- Secondary: Secondary school enrolment, lower-secondary completion, access to quality education, and the quality of secondary education
- Adult skills: Adult literacy, education level of adult population, women's average years in school, education inequality, and digital skills among population
The paper uses the Legatum Prosperity Index for data on these measures of basic material wellbeing and presents four key findings.
First, all these measures of basic material wellbeing are highly correlated with GDP per capita. Nearly all cross-national variation in these measures is associated with variation in GDP per capita.
Second, the relationship is nonlinear, with a stronger elasticity of basic material wellbeing at lower than higher levels of GDP per capita. So, the improvements in GDP per capita are associated with much larger improvements in measures of basic material wellbeing in lower-income countries than in higher-income countries.
Third, economic growth is empirically necessary for improvements in basic material wellbeing. There are no countries with (very) low levels of GDP per capita with high levels of basic material wellbeing.
Fourth, economic growth is empirically sufficient. At any level of GDP per capita, there are countries with somewhat higher or lower values on other measures of basic material wellbeing, but there are no countries with high level of GDP per capita that are at a low level on basic material wellbeing.
The paper does not make causal claims between economic growth and improvements in basic material wellbeing. The causal pathways are likely to be complex, as improvements in some measures of basic material wellbeing may boost economic growth or give impetus to other processes that in turn boost economic growth. However, the authors clearly state that it is very difficult to achieve significant improvements in these measures without also raising GDP per capita. There is a genre of argument in the development discourse that the authors are trying to counter—the one that downplays the role of economic growth in achieving other developmental outcomes.
Now, let us consider India’s standing on these measures. In 2021, according to the IMF’s latest World Economic Outlook, India’s GDP per capita in purchasing power parity terms was at the 32nd percentile (ranked at 130 among 193 countries). The following is India’s standing on the measures of basic material wellbeing as reported in the Legatum Prosperity Index 2021:
A. Living conditions
- Material resources: 27th percentile
- Nutrition: 5th percentile
- Shelter: 29th percentile
- Basic services: 31st percentile
- Connectedness: 62nd percentile
- Protection from harm: 14th percentile
- Preventive interventions: 45th percentile
- Healthcare services: 29th percentile
- Physical health: 29th percentile
- Life expectancy: 33rd percentile
- Pre-primary: 23rd percentile
- Primary: 29th percentile
- Secondary: 28th percentile
- Adult skills: 24th percentile
On eight out of fourteen sets of measures of basic material wellbeing, India’s performance is what its GDP per capita predicts (plus or minus 5 percentile). Only on two sets of measures—nutrition and protection from harm—India’s performance is much worse than expected at its level of GDP per capita. On two other sets of measures—pre-primary education and adult skills—India’s performance is somewhat worse than expected. However, on connectedness and preventive interventions, India does much better than expected.
One way to put such analysis to use is by making it the basis for making the medium-term developmental priorities. Priority should be given to areas of basic material wellbeing where India is doing worse than expected at its level of GDP per capita. Since these measures are strongly associated with GDP per capita, a country that is doing much worse than predicted for its level of GDP per capita should focus on addressing the problems that may be leading to this phenomenon.
The main takeaway from the paper is that without raising GDP per capita, it will be difficult to achieve significant improvements in most of the measures of material wellbeing. Keeping this broader perspective in mind is useful when we debate the many issues in development. Being in the bottom three in the world in terms of GDP per capita, India must achieve sustained economic growth if it is to achieve significant improvements in other measures of basic material wellbeing.
—By Suyash Rai