Regulating the regulators: Less diversity may weaken reform principle

Looking back at India’s reforms story of more than three decades, it is worthwhile to recall that economic liberalisation of the 1990s had a few implicit assumptions of how an economy should function and grow on a sustainable basis. One of those assumptions followed from the government decision to allow the private sector to operate in areas that were hitherto monopolised by state-owned enterprises. Under such liberalisation, it was assumed that while the government would continue to frame policies for areas opened up to the private sector, the regulation or enforcement of those policies would be undertaken by independent regulators through rules framed by them. 

A classic example of this thinking was India’s telecommunications sector that was opened up to the private sector in the early 1990s. This was followed by the setting up of the Telecommunication Regulatory Authority of India or Trai a few years later. Subsequently, the business of basic telephone services, run in large parts of the country by a government department, was hived off to a newly created state-owned enterprise. Something similar, in varying degrees, happened in other areas such as the insurance, airports, and power sectors. In addition, the Competition Commission of India (CCI) was set up to regulate and adjudicate upon issues of market dominance and practices that undermined competition in various sectors. The principle was clear: Let the government frame the policy (and not run a business), while independent regulatory bodies could enforce the policy by framing necessary rules. 

Another implicit assumption behind such a separation of responsibilities between the government and the regulators was about who should steer those regulatory bodies. To impart autonomy and independence to these institutions and insulate them from government interference, the pool of talent for hiring key personnel was widened. Experts and private-sector professionals in related fields, along with even retired members of the judiciary (though under some pressure as was seen when the legislation for setting up the CCI was framed), were among those the government believed could be hired to head these regulatory institutions. 

Thus, the first chairperson of the Central Electricity Regulatory Commission was an economist. Trai was set up under the chairmanship of a retired judge and its next chairperson was a former banker. Even the first capital market regulator was a banker in the late 1980s, and the first chairperson of the insurance sector regulator was a former chairman of the Central Board of Direct Taxes. The first full-fledged chairperson of the CCI was a retired Indian Administrative Services (IAS) officer. So, there was a mix of regulatory heads chosen from a pool of experts from both the government and the private sector. In spite of a few civil servants heading these institutions, the idea that continued to be pursued was to insulate regulation from the stranglehold or influence of the political executive.  

The third significant aspect of regulation in the early days of economic reforms was the framing of rules for appointing heads of regulatory bodies in a way that effectively ruled out conflicts of interest. Thus, a regulator would usually not be considered for another job in the government system after the completion of his or her term. The idea was that the regulator should be able to act freely and fairly without any expectation of future assignments from the government or the private sector. Indeed, one of the regulators under the law was, until recently, barred from accepting any government job after having served in that regulatory post. These were guardrails to preserve the integrity and independence of regulators.  

However, the situation with regard to the last two assumptions behind the regulatory framework has changed significantly in the last few decades. Note that the erosion of these principles followed in the early years of reforms did not happen suddenly or only now. This occurred gradually over the last many years. There may now be legitimate questions over a former regulator in the financial sector occupying a key position in the government. But remember that in the past as well there were at least three venerable regulators of the financial sector who, soon after the end of their tenure, accepted assignments offered to them by the government of the day. You may argue that those assignments were different in nature, but the fact is that the principle of a regulator not occupying a position after the end of his or her term has been set aside in the past on quite a few occasions. That this has happened again is problematic, but such problematic appointments were also made by different governments in the past. Of course, the changing of the law to facilitate a regulator to join the government in a key position was done by the current dispensation in its first term. The obvious question is: Have the guardrails enforced by the lawmakers for regulatory appointments lost their relevance? 

  Even before the tweaking of these guardrails, there have been politically motivated questions on the powers and responsibilities of regulators. The debate often centred round the powers and responsibilities of a popularly elected representative versus those of unelected regulators. That question did unsettle the old equilibrium between the government and regulatory independence. Fortunately, that debate has not been revived of late.

  A more problematic trend in the sphere of regulation has been the increasing preference for retired civil servants, principally from the IAS, to occupy regulatory jobs in different sectors. It is not that governments have not tried appointing professionals and experts outside the government system. However, that experiment has led to a few avoidable controversies. The government’s reaction to those controversies has been to double down on its preference for civil servants to head the regulatory bodies. In the process, the civil servant has become a preferred candidate for all fresh appointments in regulatory bodies in recent years. For instance, in the last few months, the country’s top financial sector regulators have all been civil servants. 

There is no harm per se in having a civil servant head a regulatory body, except that a civil servant can be a little conflicted and may be influenced to pursue the government’s agenda, even though the job as a regulator would require him or her to be more focused on regulating an industry effectively with the consumer interest in mind. The real danger of having only civil servants occupy these regulatory posts just before or after retirement is that it could dilute the basic premise of creating regulatory institutions — the idea of the government framing policies and the regulators framing rules to implement them. The line separating the two functions should not be allowed to be blurred.