Arm's-length regulators need protection from executive interference

The notion that "democratic accountability" justifies conferring such unfettered power on Executive is not just incorrect, but also shows inadequate understanding of modern structures of governance

Recent reports from the United States indicate that President Donald Trump has attempted to fire Governor Lisa Cook of the Federal Reserve. This action is unprecedented and has prompted a lawsuit from Ms Cook, who has refused to step down. The legality of the move is being (apparently successfully) challenged, as the law allows the President to remove a governor only “for cause”. The Trump Department of Justice had earlier initiated a criminal investigation against her, and Mr Trump has claimed that’s sufficient grounds to sack her.  

These events serve as a timely reminder of a foundational principle of governance in democracies, namely the separation of powers and its obverse, checks and balances. While this spectacle is uniquely American, the underlying debate it ignites — about democratic accountability versus institutional autonomy — is one that resonates deeply in India.  

The notion that “democratic accountability” justifies conferring such unfettered power on the Executive is not just incorrect, but also shows inadequate understanding of modern structures of governance. Before looking at the modern structures, it is useful to note that in India we have built a constitutional framework that is designed to prevent such  concentration of power.  

Our system recognises distinct and separate spheres of authority, each with its own forms of accountability. The Executive is accountable to the Legislature, which in turn is accountable to the people through elections. The Judiciary, a separate branch, is accountable for its actions through a rigorous, if sometimes slow, process of judicial review and, in extreme cases, parliamentary impeachment. The Executive’s power to appoint judges does not extend to the power to remove them at whim. This crucial distinction is the very essence of judicial independence.  

We see the same design in the context of other “guardian institutions” like the Election Commission of India, the Comptroller & Auditor General (CAG) of India and the Union Public Service Commission (UPSC). When it comes to removal, the first two are on a par with Supreme Court judges. UPSC members can be removed by the President on grounds of misbehaviour only after the Supreme Court (SC) has conducted an inquiry and reported that the member ought to be removed. 

The Constitution does not explicitly refer to what is called the “fourth branch” of government in other parts of the world and statutory regulatory authorities (SRAs) in India. However, the principles noted above apply equally to SRAs. SRAs are created by Parliament to perform specific functions that require expertise, continuity, and political neutrality. As markets developed and the need for consumer protection became stronger, arm’s length agencies were created by enlightened Indian parliamentarians. By design, SRAs like the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), and the Telecom Regulatory Authority of India (Trai), are not appendages of the government of the day. In fact, very often, they regulate entities owned by government. 

Their operational autonomy is not a matter of choice, it’s a structural necessity. Consider the role of the RBI. Its primary objective is to maintain monetary stability and manage inflation. This often requires it to take politically unpopular decisions, such as raising interest rates to curb inflation, even if such a move slows down economic growth in the immediate term and is disliked by the ruling dispensation. If the Executive could fire the RBI governor for disagreeing on interest rate policy, the central bank would lose its credibility and the ability to act in the long-term interest of the economy. The markets would quickly see through this façade, leading to a loss of investor confidence and, ultimately, economic instability. 

Likewise, decisions on access to the securities markets, regulation of mutual funds, mergers and acquisitions, allocation of spectrum, among others have been consciously kept away from day to day politics and entrusted to expert SRAs. 

The Indian legal framework, while not as explicitly clear on the removal of all regulatory heads, generally reflects this principle. However, only one piece of SRA legislation — namely, the Competition Commission of India Act — has an explicit requirement of a SC inquiry similar to that required before the removal of a UPSC member. In practice, however, we have not had a situation similar to the recent events in the US. 

The argument that democratic accountability demands executive control over these bodies is a specious one. True democratic accountability is not about the Executive having absolute power. It is about holding all agencies, including SRAs, accountable for their performance within a system of checks and balances. SRA accountability has to be designed, as recommended by the Financial Sector Legislative Reforms Commission (FSLRC), on multiple pillars. 

Like any body-corporate, SRAs need to be first accountable to a carefully constructed board. India has a long way to go on this. Regulatory boards, like listed company boards, need a large number of directors independent of government. Orders of all SRAs need to be appealable before an expert tribunal. Legislative actions of SRAs need to be subject to detailed scrutiny by parliamentary committees. The full institutional accountability of SRAs should be to Parliament based on the annual report of the SRA and comprehensive audits by CAG. Independent researchers and academic critics constitute the last of these pillars.

The erosion of institutional independence is a slow and insidious process, often masked by the rhetoric of efficiency and accountability. The US case serves as a cautionary tale. It demonstrates what happens when the lines between the Executive’s political agenda and a regulator’s technical function are blurred. The damage is not just to the institution but to the economy and the public’s trust. 

In India, we have, for the most part, had a strong tradition of institutional independence. However, recent years have seen increased political pressure on regulatory bodies. We must resist the temptation to centralise power and instead strengthen the institutional safeguards that ensure our regulatory authorities can do their jobs without fear or favour.  

The independence of the “fourth branch” is not a luxury, it is a vital pillar of our democracy and a non-negotiable prerequisite for a stable and prosperous India.

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