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Welcome to the IVM Podcast Network.
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It's nine o'clock on a Saturday.
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The regular crowd shuffles in.
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There's a babu sitting next to me from the excise department of sin.
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He says, son, can you give me a bribe, please?
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I'm not really sure what it's for.
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There are so many rules that I use as my tools.
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Pay me up if you don't want a war.
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You're the restaurant man.
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Give me a bribe tonight.
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We are all in the mood for some chai paani and you've got me feeling all right.
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Now you might think you can get away if you simply follow the law.
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Let me light up your joint because you're missing the point.
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While I'm at it, let me break your jaw.
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Our laws, you see, are contradictory.
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There's simply no way to comply.
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All regulation is just exploitation of my power to bleed you dry.
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You're the restaurant man.
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Give me a bribe tonight.
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We are all in the mood for some chai paani and you've got me feeling all right.
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You've got me feeling all right.
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Welcome to The Seen and the Unseen, our weekly podcast on economics, politics, and behavioral
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Please welcome your host, Amit Verma.
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Welcome to The Seen and the Unseen.
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I'm Amit Verma and my subject for today is restaurant regulations.
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Now all regulations have great intentions, but many often have terrible outcomes.
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Restaurant regulations are a great example of this.
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There are many of them.
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Some of them contradict each other and they are basically just enablers of rent seeking.
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That is, they're nothing more than an instrument for government inspectors to extract bribes
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To discuss the subject with me, I have in the studio a close friend of mine, Madhu Menon.
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Madhu ran a great restaurant in Bangalore called Shiok for seven years and is a well-known
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restaurant consultant today.
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He's experienced restaurant regulations firsthand and I couldn't think of anyone better to
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talk about the subject.
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Madhu, welcome to the show.
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Thank you for having me.
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Madhu, you ran one of my favorite restaurants called Shiok in Bangalore for seven years
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and I really enjoyed eating there, especially your infamous blogger's beef.
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So tell me, what was your experience with government regulations in all these years?
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First of all, Amit, I don't want you to get me in trouble for mentioning international
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dishes like beef, but yes, that was a good dish and I made it just for bloggers, so hey.
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I know a lot of people think that restaurants all about serving good food and of course
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that was my favorite part in the kitchen, but a major chunk of my time was actually spent
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being compliant with government regulations of which there's plenty and there are lots
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of departments, some you don't hear of till they come knocking on your door.
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You have departments like the police, the labor department, the BBMB, which is the municipal
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corporation, fire requirements and a whole lot more and all of these have license that
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All of them have inspections that can happen at any time.
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So yeah, there were a lot of compliance issues from time to time and not because we weren't
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compliant with the rules, it was just that some of them were so vague that it was completely
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left to the interpretation of the official in charge.
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So tell me something, in all the time that I've known you and I first met you when you
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were actually running your restaurant and you were obsessive about giving your customers
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the best service and the best value for money that they could get and you had so many loyal
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customers and it was a great restaurant.
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So you already had all the incentives you need to deliver on all those fronts.
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Now one would imagine that government regulations, why are they needed then?
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The best way to ensure that a restaurant keeps running is to make sure that customers come
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back and the only way you'll do that is if your food is served in a hygienic fashion
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by service staff who know what they're doing and the food of course has to be good quality.
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I think a lot of the regulations, the scene effect, it's noble intent that you comply
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with safety standards, that you comply with business standards, that you're not running
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an illegal business and that someone has actually signed off on all the checks and measures
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for you to make that happen.
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But that's just the scene effect.
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What are the unseen effects?
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The unseen effects, unfortunately, in this country is that laws are written to be very
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They are often left to the interpretation of the officials themselves and there are
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lots of incentives for them to actually come knocking on your door, rent seeking really
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and or maybe a grease palms and find some flaw that you seemingly have overlooked but
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is such a trivial issue or it's actually not an issue at all.
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It's just that someone's made it up and made it out to be an issue.
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So Madhu, can you give me some examples of specific regulations and the unseen effects
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Let me explain to you something that's very close to my heart and that's making cocktails.
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Now we can all agree that someone who serves spurious liquor is actively involved in harming
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So you want to prevent adulteration of alcohol, a noble intent.
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But when you put in a rule saying that all alcohol must be pure and not adulterated,
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you also introduce the possibility of interpretation and that interpretation sometimes that a cocktail
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Now that's ridiculous or say a chef tries to be a little more creative and he decides
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to make a gin that's infused with a few herbs and spices.
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That can be adulteration and that's ridiculous again.
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It's completely up to the excise inspector to come along and if he says this is adulteration
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then well he can fine you and that fine can be an arbitrary amount or he can say that
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you have to seize operation and you have to then negotiate with him on how to get back.
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Can you appeal against these decisions or are you appealing to him himself?
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You can appeal but your appeal is heard by the same person who's actually fining you.
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That should be fun or you had to take it to court.
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Now imagine what happens to a restaurant if you had a shutdown for a couple of months
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and appeal a certain issue like your alcohol is adulterated or that 30ml of your stock
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These kind of things they create a perverse incentive for inspectors to come and harass
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So many of our laws the effect is that most officials just come around knocking on your
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door to make a little extra money and if they feel like they're short of cash on a particular
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month they can just come by and say hey look you're violating this law or that law and
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hey here's a fine and you eventually end up negotiating and settling for a smaller amount
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and people think okay hey this is part of doing business but look what happens you know
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all these bribes monthly payouts that you have to do all the cost of compliance it's
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a business cost and what happens in any business whether there's a business cost it eventually
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gets added to the cost of the product that you have.
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So just imagine it this way 100 rupees was the actual burger and the service that you're
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getting and 50 rupees is probably the cost of doing business so actually it's coming
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So it's eventually just hurting the customers.
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Yes hurting businesses, hurting profitability, it is hurting customers and it is creating
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a mess of paperwork that is simply not needed most of the time.
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Now another aspect of this is like recently a friend of mine was talking about the shutdown
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of illegal slaughterhouses in UP and I told him that listen you know you're using the
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word illegal in a wrong way the fact of the matter is that pretty much every single business
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in India is illegal in technical terms in terms of compliance because a web of regulations
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is often so convoluted that certain regulations end up contradicting others.
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So if you comply with one you're automatically breaking another yes you have any experience
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Absolutely I can tell you okay no one will argue that say a fire regulation is needed
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right a fire safety is needed I won't say regulation let's say fire safety is needed
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that's a given and now what happens if say your building catches fire you have an entrance
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and say the entrance is blocked because of the fire.
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Fire regulations say you need an emergency exit and no one's going to oppose that that's
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a sensible regulation except that the excise law in Karnataka says you can only have one
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entrance to the premises why so that there is no pilferage or there is no introduction
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of alcohol through another entrance and that only one entrance can be monitored.
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Now what happens is that these two requirements are completely contradictory you cannot have
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two entrances and have a legal license.
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And therefore you end up giving a bribe to one or the other and probably both anyway
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because that's pretty much it actually there's a monthly fee that goes out to the excise
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office that is basically a way of telling them to look the other way because we all
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know that this is going to happen this it's simply logically impossible to achieve.
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And some of the most absurd laws you know regarding restaurants are actually laws around
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alcohol because they also lend themselves to moralistic reasonings.
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Yes we are a funny nation.
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The state has a moral obligation to prevent alcoholism and tries to do things so that
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people don't get alcohol issues and stuff like that.
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So they have restrictions like not issuing any bar licenses.
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This is true in Karnataka since 1993 there have been no fresh bar license issued.
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So basically if you want to start a bar you have to buy a bar license from someone who's
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closing their bar which has resulted in the cost of bar licenses gradually going up to
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Imagine that that's the cost of acquiring a license from someone else who has it.
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And unfortunately for state the largest revenue for state excise actually comes from alcohol.
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So we have both no new bar licenses.
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You can't have no new licenses given and still keep alcohol sales going along right.
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So they introduce laws like short lifting which means that if you run a bar you have
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to lift a minimum of 52 cases of alcohol every month.
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Yes to put in perspective 52 cases each case is 12 bottles of say vodka right.
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So that's 12 into 52 and that's the minimum you need to sell every month.
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If you don't do that they penalize you.
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So if you're a small restaurant or a medium sized restaurant that just wants to have a
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bar on the side as a service to make it a fine dining restaurant it's a completely unviable
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business model because the excise department penalizes you for it.
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And instead of just giving out new licenses right they could have done that.
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The population of Bangalore has more than doubled from 1991 and it's ridiculous that
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they're not giving out any fresh licenses.
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And the original rationale for limiting bar licenses was we'll have one bar per x number
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of people and the population has more than doubled and they haven't done it.
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It was meant to be a limited number of licenses per number of people and that formula even
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that formula doesn't hold anymore.
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So even their twisted rationale for having that and think about why they had that restriction
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because if you had more than that you would encourage people to drink and like I said
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earlier the state makes a lot of money from alcohol.
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So these two are actually at odds with each other so they instead punish restaurants for
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not having sold enough liquor.
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And it seems to me the regulation in the first place was a protectionist regulation the interest
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groups behind it would have been existing bar license owners who would have wanted to
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restrict the competition and it's worked even better for them because not only have
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they restricted the competition the licenses have itself gone up so much in value.
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Let me put that into perspective for you.
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I started my restaurant in 2003 and at the time this rule was still in effect and I actually
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bought the paper quote unquote as they say from another bar for about eight and a half
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Of course I had to then pay a transference fee which is a government regulation and a
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Again these are further avenues for making revenue both official and unofficial.
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That eight and a half lakhs figure has now crossed one crore it's one point two crores
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last time I checked and that keeps going every month it just keeps going up.
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That's 2003 versus 2016 so what is eight and a half lakhs then is one point two crores
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So that's a straight up a capital investment of one point two crores just to start a bar.
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And that's an artificial scarcity absolutely there's no reason for having that and when
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someone actually invests that kind of money in getting a bar license they have no option
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but to pass the cost on to the consumer.
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Absolutely so if I spend eight and a half lakhs to get a bar license whereas I spend
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one point two crores now each drink of yours has that government tax added to it.
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So if you want to complain about high prices of liquor or food in a bar you know why it's
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And what then inevitably happens is that if the liquor at a bar is too expensive people
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who want liquor want it anyway they'll get it from elsewhere and there might be less
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safe sources you know and so on.
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It creates incentives for people to create adulterated liquor for sure and that's how
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all these accidents happen people are buying it from illegal sources and people are dying
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and it's to me that's disgusting.
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Now I read a few years ago that when the Four Seasons Hotel opened in Mumbai they had to
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get more than 250 licenses including separate licenses for the weighing scales in the kitchen
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and in the bedrooms which sounded completely crazy and which sounded just absolute rent
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seeking you give a lot of discretion to the government and then each regulation they'll
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pull out that much from you.
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In terms of restaurants how bad is it and is it something that just gets worse and worse
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can it possibly get better because why would governments give up power.
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That's true when you think about it right the idea of those weights and measures again
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noble thing that it is from a certified source and that the merchant is not cheating anyone
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except in your kitchen if you're on a restaurant you want those things anyway you want to make
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sure that a vendor coming in saying that he's giving you a one kilogram of broccoli is not
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giving you 90 grams so you have to have those.
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The best incentives come from the marketplace themselves people are looking after their
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Right and unless you're in turn selling broccoli by the kilo to customers which doesn't really
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happen in restaurants you don't really need to worry about portions being weighed accurately
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and sold so I don't understand it at all.
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I don't expect the issue to get any better because you know it creates an entire ecosystem
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of officials who are making money from bribes and middlemen who act as consultants to facilitate
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The government does suffer from a severe shortage of inspectors the labor department I think
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has less than 30 inspectors across the city and imagine each business that needs a shops
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and establishment act license which is a labor license they have to be inspected by these
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inspectors so can you just imagine each inspector going each person has to do about 40 to 50
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inspections a day that's not humanly possible so you might have to wait a few months for
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that to happen and you know your business can't run without it they won't come and
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inspect unless your premises are ready you had to wait months for them to come around
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so what's the actual solution the only reasonable solution is to expedite the issue and that
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is you pay a little bit of money they come around in three four days they inspect it
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I put quotes on around inspect because well sometimes you can get health inspectors to
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come in and certify your premises without even having a kitchen ready because really
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what else are you going to do so sure on paper they they have inspected the place and certify
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the place to see but that's no guarantee of anything uh perversely the people who are
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most likely to benefit from this are the dishonest businessmen you know if you want to take shortcuts
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you know you just pay a little more money and someone comes and certifies without looking
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and hey you're fine you look the other way there's no proper drainage system look the
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other way pay him another 50 000 and in a sense I've even heard the argument that because
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of this web of regulations compliance is impossible and therefore thank god for corruption otherwise
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the system would grind to a halt absolutely I mean we efficient government is the worst
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kind of government we have actually redefined bribery I mean we in bribery used to be money
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you pay to get favors you know that was not usually possible in India bribery is something
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that you'd have to do to get things that you are owed anyway which is just perverse to
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me which is crazy now I want to go back to something you said earlier on the show where
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you said that look if I'm selling a drink for a hundred bucks because of all the government
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regulations and the costs of compliance and so on that's 150 bucks I'm passing it on to
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the consumer which seems to me to be a massive cost to bear and I'm sure a lot of restaurants
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therefore at the margins either shut down or don't open in the first place purely because
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of the heavy hand of government that's true I want to actually point out an interesting
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free market angle to this you know demand and supply like I mentioned earlier when you
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have a restriction on the number of licenses that are given out and it's artificially limited
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so there is an increase in demand from restaurants and bars that are starting up but there's
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only so many licenses when the economy booms and there are more restaurants starting up
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an interesting free market and I use free market ironically court marks of course is
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that the cost of compliance also goes up in that all the money that you have to give also
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the amounts keep going up because hey look earlier there were 10 restaurants opening
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in a month now there are 50 everyone makes a little extra money so it's demand and supply
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in the bribe market as well Madhu thank you so much for being on the show thanks for having
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me Amit one more thing you should probably know and this will scare the living bejesus
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out of everyone did you know this bit of trivia that the exercise department has limits on
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the amount of alcohol you can legally possess at home are you kidding me at my own personal
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home absolutely I mean again noble intent you know you can't run an alcohol business
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at from home and guess how much that liquor amount actually is in Karnataka that is just
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2.3 liters of whiskey vodka rum brandy or gin that means if you have four bottles of
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liquor sitting at home which almost anyone with a well stocked bar has you are legally
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breaking the law so if you have four bottles of vodka at home you're breaking the law
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absolutely Madhu I'm staying with you right now and I've looked inside your wine closet
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and you know something we need to get back home right now and do some serious drinking
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to make you a law abiding citizen absolutely let's do this it's five o'clock somewhere
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in the world let's just start drinking now in this whole ecosystem of rules and regulations
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meant purely for the extraction of bribes there are two unseen effects one the high
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cost of compliance is passed on to customers and are more expensive as a result too many
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restaurants that would otherwise be marginally profitable don't exist at all and this robs
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us of choice all in all the people who suffer are the consumers which is usually the case
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with most regulation on business if you enjoyed this episode do hop over to the online magazine
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I edit Pragati at thinkpragati.com and search for an article written by Madhu named no tomato
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left behind you can also follow Madhu on twitter at madmanweb besides being a celebrity chef
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and a restaurant consultant he also does magnificent food and portrait photography check out his
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site bigshotphoto.in also if you liked the introduction of the show the guitar was played
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by my interpret producer Josh Thomas we'll do more such stuff in the weeks to come until
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next week on the scene and the unseen Amit Varma will be talking to Vivek Kaul about
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right to education or RTE for more go to scene unseen dot in
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if you enjoyed listening to the scene and the unseen check out another show by IVM podcast
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Simplified which is hosted by my good friends Naren, Chuck and Shriketh you can download
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it on any podcasting network
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excuse me bhaiya excuse me
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menu mein scene unseen hai, podcast hai, on course hai, Cyrus hai, Marry in India, rediscovery
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project, empowering series, sex vex hai, IVM likes hai, Simplified hai, keeping it queer
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hai, tings and destinations hai, my neighbor sucker bug hai, and the fan garage hai, aapko
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ek baar repeat kadege kya?
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repeat repeat nahi karta hum, aap jaao IVM podcast dot com pe aur suno yeh sab, yaafi
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