Micro Compliances, Macro Trouble: Why India Must Rethink Compliances for MSMEs

India’s growth story is often told through the lens of innovation, capital access, and market expansion. However, beneath the headlines lies a silent, systemic friction of petty compliances that rarely enter mainstream policy discourse. For nano and micro enterprises, which make up the vast majority of the country’s business landscape, economic activity is governed not just by demand and supply but by a set of granular regulations. 

Many of these enterprises, which operate out of modest spaces with limited managerial bandwidth, have to navigate a regulatory jungle crafted in the industrial context of the mid-20th century and riddled with rules that can be cumbersome. 

This not only leads to inefficiency but also distorts entrepreneurs’ time and money as compliance becomes an end in itself rather than a means to safeguard workers or society.

Outdated compliances

Rishi Agrawal, co-founder and CEO of compliance management solutions company TeamLease Regtech tells FE Aspire that a large portion of around 400 compliances in the Factories Act is ongoing, repetitive, and some compliance activities don’t produce any physical or document-based proof such as periodic observations or verbal checks, making it difficult for businesses to demonstrate that they have complied.

This sheer volume creates information asymmetry and can trip entrepreneurs. Some of these compliances may appear outdated. For instance, “there is a provision of having spittoons in the premises. These made sense probably a few decades back, but not in modern facilities equipped with running water and wash basins. In fact, in pharmaceutical or food industries, a spittoon would violate global hygiene norms. Yet, the absence of one can still invite penalties from factory inspectors,” notes Agrawal.

These are not isolated relics. There are also rules specifying the distance between machines in a premise, the height of staircases, and even the frequency of whitewashing walls in latrines used by contract workers — in some cases, once every four months.

“All of these are examples of micro prescriptions that can cause entrepreneurs to make mistakes. In case of failure in compliance, there are provisions for jail terms as well,” says Agrawal.

A 2022 study by the global think tank Observer Research Foundation echoes these concerns. Out of around 69,233 business compliances spread across centre and state laws, 26,134 clauses impose prison terms for non-compliance.

Surat-based Prashant Patel, Director at chemical manufacturer Prashant Industries, has experienced these burdens firsthand. His chemical manufacturing business operates seven micro-units in Gujarat. “As per law, we have to paint each unit twice a year and maintain registers with full details. That means 14 paint jobs a year across our units. We lose production time, incur direct costs, and assign staff just to keep up with this requirement,” he says. “And the problem isn’t just cost — it’s the mindset that prioritises compliance for its own sake over outcomes.” 

Another point of contention is the fire safety regulations. Patel says there was earlier a requirement to install underground water tanks for the fire hydrant system, even for a facility measuring just 250 square feet. “That’s physically not possible. Yet the regulation doesn’t differentiate between a micro-unit and a large industrial plant.”

Amit Kapoor, Chairman of the Institute for Competitiveness, which offers research and advisory services along with academic and executive courses, believes the cost is not just operational but strategic. “In Punjab, small manufacturers are required to use a specific type of paint in factory premises. If we can reduce this small compliance burden, which seems to be high currently, it will improve the competitiveness of small businesses.” 

Industry advocates like Mukesh Mohan Gupta, President at MSME Body CIMSME have also called for urgent reforms. “Old acts, which are irrelevant, should be removed. The compliance burden should be as minimal as possible.”

Need for graded approach

While businesses may not shut down because of these micro regulations, the latter are used as levers for harassment by the inspectors. This burden is compounded by the lack of a principle-based approach in compliance architecture. 

“There is a need for a principles-based or graded approach. These trivial, microscopic, and didactic provisions, which lose their relevance over a period of time, must go. They need to stay in tune with the changing times and the compulsions of the changing times,” says Agrawal.

Importantly, data from the World Bank's Doing Business Report, prior to its discontinuation, consistently placed India low on parameters like "Dealing with Construction Permits" and "Starting a Business" compared to global peers, largely due to compliance complexity at the sub-national level — something that affects MSMEs the most.

While India has made notable strides in simplifying taxation and formalisation via initiatives like GST and Udyam registration, regulatory reform at the micro-enterprise level remains a blind spot. Even as technology is transforming work, many Indian enterprises are still bound by archaic laws. 

Reimagining the compliance framework, hence, gains significance as a strategic enabler of the enterprise. Until then, the real challenge for its nano and micro enterprises won’t be competition or credit but the compulsion to paint walls, install spittoons, and manage other micro compliances.