India needs fourth pillar of economic governance: Regulatory Reforms

Economic Times, August 29, 2021

By Vijay L Kelkar and Pradeep S. Mehta,

India’s economic governance rests on four principal pillars: legislative, executive, judiciary and regulatory agencies. A fourth pillar is needed: reforms of regulatory agencies.

India now has enough experience regarding the workings, and less than-satisfactory effectiveness, of our regulatory institutions due to badly drafted laws and regulations, level of human capital, selection of top functionaries, absence of legislative oversight and degree of independence vis-à-vis the administrative ministries. Fortunately, there are successful examples that offer valuable pointers towards the reforms required. Legislative oversight and interaction will provide safeguards against the gross interference of administrative ministries.

The recent brouhaha over the Electricity (Amendment) Bill of having selection committees for state electricity regulators dominated by central government members is an example of this malaise. It’s proposed that there is no bias in selecting the best possible persons, and this arrangement was thought of considering that most state regulators have been unsuccessful in arresting the alarming financial rot in the electricity sector.

But before the creation of ‘independent’ regulators, a government department was the regulator. However, one of the needs for such ‘arm’s length’ regulators came about with liberalisation in 1991, offering a level playing field to private sector players. Thus, many service sectors, such as telecom, broadcasting, insurance, petroleum and natural gas, airports, ports and electricity saw the arrival of independent regulators.

Additionally, independent market regulators like the Competition Commission of India (CCI) were created, while Sebi already existed. The problem was that the subject ministries were responsible to administer them, and, thus, the regulators were hardly independent. After all, even in the civil services, attempts are being made to bring in good professionals as lateral entrants. So why limit the selection in regulators to retired bureaucrats and judges? Some have done excellent work as regulators. But they are an exception.

To attract good professionals from the market, candidates will need to feel that they are truly empowered to function, rather than be dictated by ministries. Good lawyers, for instance, do join the bench at a considerable loss of income, but are compensated by the prestige and independence of the judiciary.

For these reasons, legal amendments will be required in all regulatory laws where several limiting conditions will need to be scrapped. First, the power of the administrative ministry to issue policy directives without any checks. Second, the qualification criterion of regulators to have been a secretary-level officer of the government. Of course, the criterion does allow non-government professionals with requisite experience to apply and be selected. But the practice has been to only look at retired civil servants.

Some more reforms need to be conducted regarding how GoI functions, in addition to being in command of the sector regulator. For example, in the telephone sector, the department of telecommunications decides the policies, regulates the players through the Telecom Authority of India (Trai), and also operates businesses like Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL). It was quite a pot pourri, and GoI treated Trai’s recommendations as merely advisory. The adjusted gross revenue (AGR) dispute, which has caused a huge disruption in telecom, was one of the startling examples of failure of the system.

The transport sector does not have independent regulators yet. For railways, an independent regulatory authority was proposed several times, but never materialised. Now that private sector passenger trains will be running, it’s time to establish such a regulator. There is an ‘independent’ Commission of Railway Safety. But it reports to the civil aviation ministry, not railways, respecting the arm’s length principle and, thereby, remaining quite independent.

India could adopt the US system, where the selectees will need to appear before the subject legislative committees for confirmation. This will help everyone. Also, like judicial system funding, the regulators must get their funding on a charge basis from the consolidated fund of India without any control by the administrative ministry. After all, all laws are creatures of the legislature.

Vijay L Kelkar Former chairman, Finance Commission &
Pradeep S Mehta, The writer is secretary general, CUTS (Consumer Unity and Trust Society), a global public policy research and advocacy group.


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