By Professor Satya Narayan Misra in Bhubaneswar, November 16, 2023: With the rise of globalization and increased inflow of foreign capital, India has moved from ‘planning driven economy ‘of the 1970s to ‘regulator driven economy’ now. Many of the policies governing our lives are being written within these regulatory bodies.

In many ways, regulators are emerging as the fourth branch of the Indian government, combining functions of the other three, legislature, executive and judiciary. They are perceived as a speed breaker to the untrammeled march of market economics. As a society we have not yet thought hard and long enough about the implications of this shift in our democratic system.

Indian regulators are structurally different from regulators in other parts of the world. The evidence is rather mixed. While some regulators have made their sectors more efficient and better governed, others are showing signs of being mercurial, opaque and undemocratic.

Regulatory bodies are meant to house experts, who have the right technical skills and are protected from undue government or private sector influence. It frames rules and laws, thus performing a legislation function. It enforces these rules and investigates whether businesses were complying with them, thus performing an executive function. If it finds any violations it imposes penalties and fines, thus performing a judicial function.

First, the laws that set up these regulators are often not tightly written. For example, according to payments regulations from 2007 the RBI shall be designated authority for the regulation and supervision of Payments systems. There is no outcome that the regulator is meant to achieve. In contrast the US securities regulator identifies the protection of investors, efficiency, greater competition and capital formation as its objectives.

Second, most regulators in India are not transparent about their functioning. Annual reports filed by SEBI lack details about its strategic goals, targets, and performance results, all of which are part of the US securities regulator’s annual report. RBI, the most important regulator came out with 1064 policies from 2014-2016 of varying importance. Only 1.4% of these were preceded by a public consultation. Similarly, the SEBI came out with 175 policies, of which only 10.3% were open for public consultations. In contrast, many regulators in the USA and UK are required by law to respond to the suggestions they receive and to provide a rationale for those that they do not incorporate in to final policy.

On the third principle of independent oversight, institutional performance has been mixed. Courts have been reticent to evaluate decisions of regulators and have stepped in only occasionally. The RBI is one of the regulators that has successfully resisted such oversight. The former RBI governor Raghram Rajan has been very critical of the recommendations made by BN Krishna committee on financial sector regulations (FSLRC), calling them ‘schizophrenic’. Regulators in the field of banking to securities markets and insurance are wary of the government usurping their powers or the judiciary becoming more interventionist.

Our economic growth is at stake when trust is missing. A research conducted by a reputed Indian think tank found that the Indian food safety regulator is unpredictable and produces inconsistent regulations that have increased compliance costs for businesses. The RBI has been accused of undue haste in ordering that all data related to digital payments be stored in India and giving businesses only six months to implement it. Entrepreneurs in different sectors have also complained about the unpredictability of regulators that hamper their growth.

These institutional lacunae are hard to justify. While regulators were intended to bring sectoral experts into policy-making process, most of them are occupied by generalist bureaucrats. Regulatory bodies are often derisively called ‘parking lots’ for retired government officials. The lack of relevant skills is even more acute for other functions of regulators. Even though they adjudicate disputes and fines, they do not have a judicial background.

This means that nuanced interpretation of law is sometimes done by people, who are not trained to do so. This contributes to decisions of regulators being challenged before higher authorities. A study found that 62% of the orders by the telecom regulator (TRAI) was challenged. This calls into question the credibility of Indian regulators as effective decision makers in their respective sectors.

Despite the challenges, regulators have played an important role in post-liberalisation India. The TRAI has stewarded the telecom boom and upheld consumer interest. For example, in being the first in the world to champion net-neutrality. The year 2018 saw an intense and public struggle between two of them most important institutions in modern India – the central government and the RBI. To boost sluggish growth, the government wanted RBI to reduce the interest rate.

The government also wanted to access RBI reserves so that it could boost its own spending before the Lok Sabha elections in 2019. In a speech in October 2018, Viral Acharya, then deputy governor RBI said “Governments that do not respect central bank’s independence will sooner or later incur the wrath of financial markets, ignite economic fire and come to rue the day they undermine an important regulatory institution.” Within two months Urjit Patel the RBI governor resigned and Acharya followed suit within a few months.

As India moves to a regulator driven economy it should set up robust, predictable, qualified and well-resourced regulators. They need to be independent of governments and accountable to the public. This can be achieved if their appointment and removal are not left to the sole discretion of government but a bi-partisan committee. India can no longer afford to turn a blind eye to these important institutions that shape our lives, from the food we eat to the mobile phones in our hands&shares that we trade.

Of the myriad ways that governments hold back aspiring India, their unchecked control over regulators is the most perceptible and most pervasive phenomena. In the orchestra of Indian democracy, regulators are like the bass players – their presence is critical but often their absence is felt. It is time we rejuvenate them.

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