Regulation vs governance

We need good governance, no doubt, but we also must have truly independent regulators and regulation.

In 2001 or so the Central government abolished TRAI because Parliament objected to the chairman, Justice Sodhi, announcing higher rates for rural telephone calls. This was said to be ‘anti-poor.’ A revised Act for TRAI made it a purely recommendatory body. Many of the huge scams of recent years might have been avoided if TRAI had been allowed to take decisions on tariffs, sale of spectrum, etc, as an independent body. Instead the final authority is vested with government allowing ministers and bureaucrats to play ducks and drakes with national resources.

Vallabhai Patel made one major mistake at independence, when he accepted the British ‘iron frame’ as it was. He did not modify the IAS and other services to recognise that an independent India would spend vast sums of money on development. These would have to be administered by the bureaucracy which was created to collect revenues and enforce law and order, not to plan, oversee, implement vast development projects and disburse huge sums of money.

There was an argument that these independent regulators were non-elected bodies and must not have such powers to determine tariffs, issue licences, etc. As a result, different regulatory bodies had varying powers in these areas. Electricity commissions determine tariffs; the Petroleum and Natural Gas Advisory Board does not. Many state electricity regulatory commissions are subservient to the local government when they are supposed to be independent of them.

In recent months we have seen the conflict between the financial regulators and the finance minister. The RBI is focused on moderating inflation. The government would like growth not to be adversely affected. Yet government will do little to eliminate factors that cause inflation. RBI rightly sticks to its stance and holds interest rates at high levels, even though by itself it is not an adequate instrument to moderate inflation. The previous finance minister created an oversight body with himself as chairman. There have been similar differences between government and the other financial regulators, SEBI and IRDA.

Fortunately some of the regulators are created by the Constitution and cannot be interfered with --the Election Commission, CAG, being the prime examples. The information commissions under the Right to Information Act are statutory, not constitutional bodies. They are a great source of annoyance to governments who would like to restrict the right but are unable to because of public agitation against interference.
 The Election Commission is independent but is hesitant to use its powers to keep criminals out of legislatures and Parliament, to demand full accounting of sources of funds, to audit political parties, etc. The CAG has also from time to time been very independent and effective, as it is today. The government would like to curb its powers.  

India is in a state of flux in governance. People in power are still of a generation when they enjoyed unbridled powers. There are no real curbs to their authority. After governments began to lease or sell national resources and substantially increased its expenditures, there was little questioning of how these powers were exercised. The constitutionally appointed regulators and the newer statutory ones are great irritants to these authoritarian ministers and bureaucrats. They would like nothing better than to go back to the earlier system where there was no institution to questions them. That time thankfully will not come. We have created the institutions. Now we must make them function truly independently.

For this to happen, the people appointed to these positions must be selected carefully. At present they are almost invariably retired IAS officers or from other central services. After a lifetime in government they are expected to change roles. Few are able to make the adjustment and so become subservient to ministers and their former colleagues in government. Selections to these positions must explore for the best and most independent people, who are not necessarily from the government.

There have been retired bureaucrats who have redefined the roles of the regulators. Seshan, Venugopal Reddy, Subba Rao the present Governor of RBI, Vinod Rai, the present CAG are some examples of bureaucrats who have changed roles and made their regulatory positions truly effective. But most who have been appointed have little understanding of their changed roles. Hence a selection process that is inclusive and has eminent and respected people on it, is essential to select the best talent for these independent regulatory bodies.

At the same time, these regulators also must have an oversight body that looks at their performance (timeliness of decisions, number of times when their decisions are overturned by appellate bodies, allegations of nepotism, corruption, etc). This oversight body must also be able to take action when necessary. It must not however sit in judgment on the decisions of the regulatory body. It should not be a legislative body. The legislatures might ask the regulator to appear before its committees periodically to say what they are doing, but not why. The oversight body should preferably be a judicial one.

I have no doubt that in coming years the role of governments will be circumscribed by these independent regulators acting transparently, openly, in consultation with the affected parties, and answerable to an oversight body. As the present generation of politicians gives way to a new one that has accustomed itself to such independent regulation, there will be less possibility of the present day conflicts.

We need good governance but we also must have truly independent regulators and regulation.