Opinion The regulators strike back
Are Indias regulators liberating themselves from the neta-babu complex?
Regulatory institutions evolve in a capitalist system necessarily through a robust interface between the state and market forces. Twenty years of economic reforms in India have seen some fascinating see-saw battles between the state and market forces,scripting a fascinating journey for various regulatory institutions. Since regulators do not exist in a vacuum,their conduct also reflects the spirit of the times,especially the imperatives of the political economy. For instance,the Comptroller and Auditor General (CAG) can also be broadly seen as performing a regulatory function examining the terms on which government resources are handed over to the private sector,either through auctions or through public private partnerships.
In the past,the CAG would come out with scathing criticisms of public sector asset sales but its reports would hardly be noticed even by the media. But today every word of the CAG is lapped up by the media and opposition alike,even when the former gets into uncharted territory,advising the government on policy matters. A decade ago,when the consensus was to push economic reforms vigorously,the general discourse in policy-making circles was that public sector units must be insulated from the CAGs petty accounting interpretations so that they could function more autonomously in the marketplace. Today,given the combative political climate built around the issue of corruption,nobody dares to question the CAG,even when its findings are prima facie exaggerated. A decade ago,the government would have ignored the CAG and moved on. Not any more.
So are the regulators striking back? In the past,the chairman of the Securities and Exchange Board of India (Sebi) had to keep the powerful corporate houses and brokers of Mumbai in good humour. Otherwise,these well-connected businessmen would constantly give negative feedback about Sebis top brass to the finance ministry. But Sebi members seem to have come into their own. Recently,one member of its board wrote to the prime minister directly requesting that anonymous complaints against Sebi from corporate houses be filtered through the Central Vigilance Commission (CVC) before the finance ministry decides to send them to the market regulator for an inquiry. It would have been difficult to imagine a Sebi board member writing directly to the PM some years ago. In recent times,Sebi has also passed bold punitive orders against politically well-connected business houses,the latest one being against the Sahara Group.
The Competition Commission of India (CCI),which was a toothless body until a few years ago,is now fully empowered to consider cases of abuse of dominance by monopoly businesses. They can also examine with a fine-toothed comb mergers and acquisitions which may be detrimental to the development of the market. The CCI has come a long way in its struggle to get these powers. Around 2001-02,the top economic policy-makers firmly believed that it was too premature to have a fully empowered CCI to check the rise of monopolies,because Indian businesses were too small compared with the size of big global companies. It was then argued that keeping low import duties was enough of a check on domestic businesses trying to abuse dominance. The consumer could simply import from abroad.
However,this discourse has also changed as Indian businesses have built scale rapidly over the past decade. Besides,low import duties have not prevented an oligopoly-like situation in many sectors.
Many of these regulatory bodies had to wage intense struggles,especially in the initial years of reforms,to wrest much needed autonomy from the neta-babu complex. Experience showed the bureaucrat-politician combination would try to undermine the regulator by encouraging the public sector units to lodge complaints of favouritism to private players. This happened particularly with the Telecom Regulatory Authority of India (Trai) which was initially seen as forcing PSU behemoths like VSNL and MTNL to compete on a level playing field with private players. This led to ugly battles between the government and the regulators,with the entire Trai board being replaced summarily on one occasion. In due course,the government made some peace with the regulators by creating another tier of appellate authority where judicial appeals could be made against the regulators orders. This was a successful model,and implemented with most regulators,including the CCI.
Interestingly,the Indian Administrative Service (IAS) initially saw the regulatory authorities in various sectors as a threat to its own existence. But the IASs cockroach-like survival instinct eventually converted into an opportunity the proliferation of regulatory authorities in various sectors. Today,these regulatory bodies are largely populated with the IAS lot.
The debate over the autonomy of the regulator is by no means over. Some time ago,Finance Minister Pranab Mukherjee made a provocative statement that regulators do not fall from heaven. The FM was suggesting that the regulators are no special creatures and must stay within the limits set by Parliament which returns elected representatives. Indeed,it is Parliament which enacts regulatory laws giving quasi-judicial powers to a regulator,like in the case of Sebi.
Though many regulatory institutions in India have evolved and matured over the years,they still have to deftly manage the politicians and bureaucrats who wield the power to appoint them. Yet,within these constraints,India has evolved a reasonably strong regulatory culture over the past 20 years. There are certainly many shortcomings still; the glass can be seen as half-full or half-empty. For example,on the negative side,the government has still not resolved the owner-as-regulator syndrome in some critical sectors.
Classically,the regulator should be seen as developing the larger industry or market by providing a level playing field to public and private sector players. However,in the upstream oil sector,the director-general for hydrocarbons,an important regulatory functionary,remains a part of government. This anomaly has landed the DGs office in all sorts of problems. He is seen as adopting a different standard for ONGC,a government oil company,as opposed to the private oil companies.
The owner-as-regulator also afflicts the oldest financial regulator,the Reserve Bank of India. It feels obliged to protect the public sector banks in various ways in the name of maintaining overall financial stability. PSU banks still have over 75 per cent market share in bank assets.
Clearly,Indian regulatory institutions have come a long way,but they are still a work in progress.
The writer is managing editor,The Financial Express; mk.venu@expressindia.com
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