The politics of regulation

The Economic Times, May 01, 2008

By Suresh Prabhu

The relationship between politics and regulation has been the subject of both public and political discourse for quite sometime now. Broadly speaking, so-called independent regulators are subject to government supervision and a system of scrutiny. But, over the last few years there have been an increasing number of instances in which government supervision has morphed into “political intervention”.

For instance, when established in 1997, the Telecom Regulatory Authority of India (Trai) used the rulebook without appreciating the political economy. Further, Trai reported to the Union ministry of communications, which itself was in the business of telecom as the biggest player. As a result the law was amended in 2000, which turned the regulatory authority mainly into an advisory body, and created an appellate and disputes settlement tribunal to deal with contentious issues arising out of regulatory and market practices.

This is not an isolated incident. On several occasions, the concerned ministries have tried to ‘clip the wings’ of the so-called ‘independent regulator’. For a regulatory agency to be effective, the regulator ought to be independent from political influences, particularly when it comes to the regulator exercising its legitimate mandate independent of the ministry concerned.

In this context, the political origins of regulation in India also have a significant bearing. In India the independent regulator took over the functions which were earlier exercised within the governance system at the ministerial level. This transfer of regulatory functions from a ministry to an independent regulator has probably not been an easy development to accept and adapt to.

It has to be appreciated that the time horizons of politicians and regulators who want to maximise benefits from a particular sector are different. In India, the democratic set up in place requires politicians to face elections every five years. In contrast, the regulators face a long time horizon to ensure economic growth through efficient markets.

Often the contrasting lengths of time horizons have led to a rift between the two. For instance, a politician like me may not be willing to hike power rates immediately before the elections. On the contrary, the power sector regulator may be inclined to take such a decision, as it would be helpful for the investors to recover their cost of investment.

Conflicts are thus inevitable. And when politicians emerge as winners in such clashes of interests, it is the interest of the potential investors which is affected. In India, regulatory reforms have largely been concentrated in the public utilities and infrastructure sectors. In order that these sectors do not starve development it is essential for regulatory agencies to be insulated from overriding political considerations. Such issues make the study of political economy of regulation crucial and relevant.

Interestingly, a study by a leading economic policy research and advocacy group,

CUTS International, titled ‘Competition and Regulation in India, 2007’ also concluded that political intervention is a bane on the existence of a regulator.

When politicians attempt to influence regulatory policies, potential investors suffer, which in turn affect the development of the sector. The study takes an in-depth look into the competition and regulatory scenario in the country through a general index, which assesses the perceptions of people about these issues.

The independence of the regulator is of paramount importance, as it determines the quality of regulation. A good regulatory framework is one which adheres to the six principles of representation, participation, transparency, due process, accountability and availability of a redressal mechanism. But generally, this has not been the case so far in India.

The decade long experience of independent regulation suggests that in practice, regulators have to deal with a territory over which the state has considerable control. Their functions are shaped by administrative and political practices. As a result what we have is an agency that is full of opportunities for political intervention.

Amidst all gloom, there is still some hope that the regulatory climate in India can improve. However, certain conditions have to complied with for that to happen. For any regulator to be effective he has to keep an arm’s length distance not just vis-à-vis the government but also vis-à-vis the market players.

Second, the regulators must report directly to Parliament, and not to line ministries. This will enable the government to take the rap should there be some wrong or unpopular decisions taken in a sector. Third, regulators must be truly empowered to both discharge their duties without fear or favour, and to attract good talent.

Our regulators are not even independent enough to implement their decisions. The extent to which the procedures of appointment, removal, remuneration and budgets are controlled by ministries reduces the whole idea of independent regulation to a myth. In practice, the hand that really controls the regulator still remains the government.

Last, they must be paid salaries, which reflect the important responsibilities they are entrusted with. There is a need to allow market-linked compensation packages. Some forward movement on this front has been exhibited by the Sixth Pay Commission. But as already argued, this is a necessary condition not a sufficient one.

On the government front, there is a dire need to strengthen the decision-making ability of the policy-making community. For instance, parliamentarians do not have any research assistance, unlike in various other countries where they do have government funded research staff, to help them understand issues, articulate their views more cogently and participate in related decision making. If we want our Parliament to function properly in the interest of long-term growth and development, issues like these need to be addressed.

To sum up, it could be said that the regulatory landscape in India is neither too vibrant, nor too bad. Regulation is needed not only for proper functioning of markets, but also for their very survival. In the words of Prime Minister, Dr Manmohan Singh, “it is good regulation that will ensure that while engines of growth are allowed to move at full speed, there is no space for manipulators in the system.”

States often act as manipulators by creating weak regulatory institutions, over which they continue to exert control and further their interests. It is high time to put an end to this practice of consciously politicising regulation.

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