Agenda for regulatory reform

Improving the governance of omnipotent regulators who currently dominate the economy and the lives of Indian citizens should be at the top of the new government's priorities

Regulation impacts our lives much more than we realise. From the coffee we have at breakfast, the e-platform-based taxi we use to go out, the e-payment we make for that journey, and our medicines and nutritional supplements — all these activities take place in regulated markets. The performance and soundness of each of these sectors is undergirded by the level of state capability of one or more regulators.

Today, there are over 20 Statutory Regulatory Authorities (SRAs) at the Union level, spanning sectors such as finance, telecommunications, electricity, water, food safety, competition, warehousing, airports, major ports, insolvency, medical professionals, dentists, nurses, auditors, and valuers, among others. Many SRAs also operate at the state level. Collectively, these directly regulate over 75 per cent of India’s gross domestic product (GDP). The performance of these organisations, or the lack thereof, is now of strategic import for the future of the Indian development project.

In many respects, regulation has yielded good outcomes for consumers and society at large. Most regulators have been successful in maintaining a certain level of safety and quality in the goods and services that are delivered by regulated entities. However, this has not been an unmixed blessing. Alongside these triumphs, there are many problems that have arisen. The initial optimism about setting up specialised regulators has given way to concerns about their working. The concerns can be classified under the buckets of the rule of law, competition, consumer protection, and economic dynamism.

Many equate the performance of a complex organisation with the individuals at the top and thus place an emphasis on recruiting the best people as the path to performance. Recruitment decisions do matter: The character of the persons at the top has a substantial impact upon the skill, strategy, morale and ethics of the team. But sustained high performance by organisations cannot emerge only from bringing in the best people. Organisational performance is shaped by organisational design that creates checks and balances, which shape the incentives of the personnel (including the best people).

Regulators are very unusual public organisations in that they fuse the powers of the legislature (e.g. the parliament drafts the IPC), the executive (e.g. the role of the police and the public prosecutor), and the judiciary (the judge who writes the order). This gives them sweeping power over one sector at a time, the likes of which has not previously been witnessed in the Indian state. Regulators such as the Securities and Exchange Board of India or the Reserve Bank of India have detailed and intrusive control over their regulated entities in a manner that was not present anywhere in pre-reform India of 1991, and is not present in any advanced economy. While regulation by such bodies has helped in market development and deepening, this level of power has now begun to hamper private sector confidence, hinder innovation, and potentially hold back India’s emergence as a successful economy.

Such immense power needs to go with immense care in designing checks and balances in the formal processes that must be followed at the SRA. This takes us to the organising principles of people, autonomy, process, and accountability. Such a reforms agenda will create conditions that are good for economic development and beneficial for the people.

People: Technical expertise and subject matter knowledge of the regulated domain are supposed to be the reasons why regulators are created. At present, the senior level people in almost all SRAs are largely former/serving government officials. In part, this is because the appointment process is dominated by the executive government with nominal external expert participation. The tenures of these appointees are also varying and unpredictable. The idea of a diverse group of subject matter experts with predictable and fixed long tenures to go about regulation in an essentially technical manner, with minimal political consideration at play, is still some distance away.

Autonomy: Operational autonomy, a distance from the department of government, is a foundational argument for SRAs. We need to harmonise different legislative provisions to empower all SRAs to make regulations without government approval. This domain autonomy, in turn, requires a degree of human resource and financial autonomy. But these legislative provisions need to combine resource autonomy with checks-and-balances to protect against mission creep, self-aggrandisement and other abuses.

Process: The regulations written by regulators are law. In democratic societies, the power to make laws is with elected bodies that are formally accountable to the people. One would therefore expect elaborate safeguards on the exercise of this power when it is delegated to non-elected bodies. Most Indian statutes do not write down the processes through which regulators will exercise this power. There is thus a “democratic and legitimacy deficit” in regulation-making, where the task of writing laws has shifted from the hands of the elected representatives of the people to the hands of unelected officials. Similarly, formal processes need to be written down by the legislature on how the executive and judicial functions of regulators should be carried out.

Accountability: All public agencies have to be accountable for their operations and outcomes through the parliament to the people. This is a standard principle of constitutional democracies. The primary accountability designed in most Indian SRA statutes is a parliamentary oversight of the working of these authorities, secured through open discussions on the annual performance and financial report of the SRA. This sort of discussion has not happened even once in the Indian Parliament for any SRA. Accountability requires three reforms: A correctly structured board with clarity of functions and role, appeals at a tribunal, and audit by the Comptroller and Auditor General of India.

Over a decade ago, a comprehensive report on the reform of SRAs was written in the context of financial sector SRAs by the Financial Sector Legislative Reforms Commission. Headed by a former Supreme Court judge with subject matter experts drawn from different backgrounds, the Commission presented a detailed report on sector-agnostic governance reforms for all SRAs in India. It is time to take this report out of the proverbial closet, update it to meet current-day needs, and swiftly act upon its recommendations.

The writer is an honorary senior fellow at the Isaac Centre for Public Policy, and a former civil servant