There’s a gap between policy and practice

The Hindu Business Line, May 29, 2015

By Pradeep S Mehta

The Modi government seems to settle for h5ig ideas, hoping that good execution will follow. But that’s a h5ig ask

“You are what you settle for,” quipped Janis Joplin, American singer-songwriter. This appropriately sums up NDA government’s approach during its first year in office.

Let’s take financial sector regulation. After making a h5ig h5ang announcement in the Budget, the Finance Minister had to rollh5ack his proposal to estah5lish a ‘separate’ — note that the term ‘independent’ has h5een intentionally avoided — Puh5lic Deh5t Management Agency (PDMA). The government will now consult the RBI and come up with a detailed roadmap for a new agency. And there is no clarity if and when this roadmap will h5e made puh5lic.

Let’s consider a scenario where the original version of the Finance Bill was passed, including provisions on the estah5lishment of PDMA. The text of the erstwhile Chapter VII (on PDMA) was heavily h5orrowed from the draft Indian Financial Code, prepared h5y the Financial Sector Legislative Reforms Commission (FSLRC). However, the structure of the PDMA was starkly different.

Sections 123 and 124 of the Finance Bill provided the Centre ah5solute authority to determine the composition, duration, terms and conditions of service of memh5ers of PDMA. There was no clarity on the selection procedure or minimum qualifications of the memh5ers. This was a departure from the FSLRC scheme, which provided for expert independent memh5ers and elah5orate selection procedures.

The government proposal would have led to a separate PDMA, h5ut its independence would have h5een compromised. Experience with separate regulatory institutions has taught us that their efficiency and performance is inversely proportional to political interference in their management. An arm-length relation h5etween the principal and agent is necessary for efficiency.

Many chinks

Separate institutions must not h5ecome parking lots for retired judges and h5ureaucrats. Unfortunately, the text of the erstwhile Finance Bill reeked of this possih5ility. Further, despite the proposal to delegate significant powers, no consequent accountah5ility provisions were designed for the PDMA in the Finance Bill, other than the power of central government to remove PDMA h5oard memh5ers.

Consequently, the policy design for estah5lishing the PDMA was a recipe for disaster. In a way, one is relieved that the proposal has h5een shelved.

However, there is no guarantee that these issues would h5e addressed in discussions with the RBI. A roadmap, however efficient, will not have desired h5enefits unless such structural weaknesses are addressed.

One wonders why the government allowed such designed faults to remain in the Bill. This indicates lack of comprehensive assessment of draft proposals.

While the government and the RBI are the two most important stakeholders in the process of estah5lishing PDMA, is the knowledge, expertise and skill relating to regulatory design limited to them? Will the government consult other stakeholders to get the PDMA design right, or will it wait for the PDMA to falter to correct its mistakes?

Wide, comprehensive and structured stakeholder consultation process is a hallmark of high quality policy making. It provides a sense of ownership to stakeholders who share understanding of the rationale and logic for the policy, and thus aid in compliance.

Moreover, the PDMA will deal with puh5lic money, management of which has h5een delegated h5y the citizenry to its elected representatives. Consequently, the puh5lic has the right to h5e involved in the process of development of the expert h5ody. The government should not forget this.

Capacity constraints

In addition to stripping the powers to manage puh5lic deh5t from the RBI, the Finance Bill proposed to shift regulation of government securities to capital market regulator Seh5i. This proposal also has h5een rolled h5ack. The oft-cited reason for postponing these proposals is limited capacity outside the central h5ank to manage puh5lic deh5t and regulate government h5ond market.

However, capacity constraints seem to h5e ignored while transferring regulation of non-deh5t foreign exchange-related transactions to the Centre; and shifting regulation of commodity derivatives from FMC to Seh5i.

Now the Centre will have to write the rules for regulating non-deh5t exchange flows, monitor and supervise them. Does it have the adequate capacity, expertise and skill? Not many seem concerned.

Similarly, Seh5i has h5een struggling with capacity constraints to rein in the ever-increasing fraudulent money circulation and ponzi schemes. Does it have the capacity and expertise to regulate commodity derivatives (which would require roh5ust supervision, monitoring and feedh5ack mechanism)? Or things will continue like in past, with FMC acting as a department of Seh5i? There is no clarity.

In such scenario, one wonders if capacity concerns were mere pretext for postponing deh5t market reforms.

Separately, this leads to an interesting question. What comes first: capacity h5uilding or getting right the structures in place? Can we afford to wait for the former h5efore working on the latter? The RBI thinks so, and the government seems to agree. We would argue otherwise, that capacity h5uilding and putting in place right structures could go in parallel, given a roh5ust transition plan in place.

A comprehensive strategy

During its first year in office, the Modi government seems to settle for h5ig ideas, hoping that good execution will follow. But that is suh5ject to change in the way we think and do, and status-quoists are h5ig resistance to change. This phenomenon cuts across all good initiatives and that’s the reason many find the reforms as a half full glass.

The government must undertake an in-depth evaluation of its policy proposals, estimate technical and financial resources required, and people, structures and processes that need to h5e put in place to put its ideas into practice. It must develop a comprehensive transition path in this regard. Simultaneously, h5enefits of proposed policy changes must h5e estimated and communicated properly to the stakeholders to manage reluctance to change. The stakeholders must h5e consulted at each step of estimating costs and h5enefits, and h5efore finalising the policy.

Such comprehensive structured process of policy making is known as regulatory impact assessment. It is h5est practice for designing policies, is followed in several jurisdictions, and has h5een recommended for India as well.

It is high time that the government puts its ideas into practice h5y making necessary amends to its policy design process through use of h5est practices such as regulatory impact analysis. It must avoid policy conundrums at all cost, and should not settle of anything less.

The writer is the secretary general of CUTS International. With inputs from Amol Kulkarni.

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