APPRAISAL VALUE. Our regulatory apparatus is a mess

Recently, one of the CEOs in the meeting of 200 young entrepreneurs organised by NITI Aayog, lamented to the Prime Minister about regulatory obstruction to growth and development of the sector. Liberalisation of economies, opening up of sectors, unleashing of market forces and withdrawal of direct intervention gave birth to regulations, regulators and regulatory regimes. The economists described it as the transition of the government’s role from positive intervention to arm’s length superintendence.

The manner in which the regulatory state has performed its duties is a moot issue. There have been various pulls and pressures, as well as a lack of transparency and accountability of the regulators concerned. This anomaly needs to be probed. But first the background.

In 1991 India shifted gears and transited from ‘command’ to ‘market driven’ economy. The license and permit raj have been slowly yet steadily dismantled in sector after sector and government’s positive interventions are being replaced, albeit partially, by market forces of demand and supply.

In fact, in some of the industrial sectors, government owned institutions continue to operate in competition with private sector organisations, including other State undertakings. The examples in this regard are petroleum, banking and non-life insurance industries.

Over a period of time number of regulatory bodies, ranging from RBI, SEBI, IRDA, PFRDA to TRAI, electricity regulators, CCI, FDA have sprang up. There is a proposal to create a regulator for the aviation and rail traffic business as well; and many more may follow.

These regulators have been empowered to set the policy agenda, outline regulations, punish non-compliance and garner resources to manage their affairs. The policy direction pursued by every regulator has to support the development of the market of the allocated jurisdiction.

However, in Indian democracy, social and political populism often overtake the economic agenda. This casts a shadow on regulation. Whenever major market misconduct unfolds, the politicians and eventually the legislature go into overdrive to framing restrictive policies and denouncing the regulators and regulatory bodies; micro finance is one such example.

Economic agents have the propensity to discover kinks and unfairly profit from it.. Harshad Mehta and Ketan Parikh scams are instances of capital market upheavals adversely affecting the India’s economic growth. Such events happen in every domain and often and have to be dealt with pragmatically. However, the politicisation of such events has made the regulators in India overcautious. The gradualism of the RBI is believed to have its origins in the Harshad Mehta scam.

Apart from populist pressures, there are three areas of regulatory concern. First, the selection of non-experts to lead the regulatory bodies and instinct of protecting their skin has led to regulatory frames being over crowded by protective approaches. In the process, development of the mature, well regulated markets takes a serious beating.

Second, the review mechanism of the functioning of the regulatory bodies, including under the aegis of parliamentary committees is not very robust. It does not include the role of the regulators in the development of the market, in particular. In fact, even a constructive criticism of the policy approaches of one of the regulators is not viewed kindly. The complaint of the young CEO to the Prime Minister may not be wholly unjustified.

Third, a liberalised marketplace is influenced by a host of factors emerging out of the social, political and economic environment. The inventions and innovations in the sector as also in the society at large influence the direction of the market. Designing regulatory interventions that can effectively control risks and deal with the pattern of non-compliance while balancing the development of the market and protecting the interest of innovators is a challenging task.

The divergent interests of the participants create fissures in the objectivity of the regulator. The regulatory principles of alacrity, informed approach (research), appropriate tool selection, democracy, transparency and accountability thus assume foremost significance.

It’s time that the Government institutionalises the review mechanism of the functioning of the regulatory bodies. Their track record needs to be assessed in areas such as regulating the market, protecting the interest of investors and more particularly development of the market. It is also important to review the accountability frames of the regulatory bodies; assessed from: (a) giving reasons for decisions, (b) exposure to public scrutiny, (c) possibility of independent review and (d) cost benefit analysis.

The review of the functioning of the regulatory bodies must be a transparent process. In some of the countries like the United States, the review of the functioning of the regulatory bodies including US Fed is televised and objectives of the directions of the regulatory regime expressly stated.

A regulatory state was conceived as a fast and flexible alternative to the cumbersome and bureaucratic frames of the replaced era. However, questions about the democratic governance and accountability of regulators, in particular, are being raised across geographies, including in India because substantial power to make laws has shifted from elected representatives to unelected technocrats.

There is an urgent need to review the democracy as well as the accountability so as to obviate ‘regulatory capture’, ‘regulatory inflation’ and establish the ‘legitimacy’ of the regulatory state. A half way house of just creating independent regulatory regimes does not deliver optimal benefits to the economy of the country; inefficacious regulation can make a sector (globally) uncompetitive.

The Government should consider appointing a high-level task force immediately to delve deep into these issues and recommend a path to be pursued so that the shift to arm’s length superintendence becomes an effective facilitator.

The writer is former chairman, LIC & SEBI