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India’s Regulatory Framework
Context:
India’s economic liberalisation in the 1990s was built on certain fundamental assumptions regarding how an economy should function and grow sustainably.
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- One of these key assumptions was that the private sector should be allowed to operate in areas previously monopolised by state-owned enterprises.
- Under this framework, the government would continue to formulate policies for these sectors, while independent regulators would be responsible for enforcing them through rules they devised.
Emergence of Independent Regulators
- Telecommunication Sector: A notable example of this approach was India’s telecommunications sector, which was opened to private players in the early 1990s.
- This was followed by the establishment of the Telecom Regulatory Authority of India (TRAI) a few years later.
- Additionally, basic telephone services, previously managed by a government department, were transferred to a newly created state-owned enterprise.
- Other Sectors: Similar developments occurred in sectors such as insurance, airports, and power.
- CCI: The Competition Commission of India (CCI) was also established to regulate market competition and prevent monopolistic practices.
- The core principle remained clear: while the government would frame policies, independent regulatory bodies would enforce them, free from political or bureaucratic influence.
Role of Experts in Regulatory Leadership
- Selection of Leaders: Another crucial assumption underpinning this regulatory framework was the selection of leaders for these regulatory bodies.
- To ensure autonomy and independence, the government aimed to recruit a diverse pool of talent, including experts, private-sector professionals, and even retired members of the judiciary.
- The goal was to insulate regulatory institutions from direct government control.
- Examples: For instance, the first chairperson of the Central Electricity Regulatory Commission was an economist, while TRAI’s initial leadership included a retired judge and a banker.
- Similarly, the first capital market regulator was a banker, and the inaugural head of the insurance sector regulator was a former chairman of the Central Board of Direct Taxes.
- The CCI’s first full-fledged chairperson was a retired Indian Administrative Service (IAS) officer.
- This mix of professionals from both government and the private sector helped maintain regulatory independence and credibility.
Guardrails Against Conflicts of Interest
- Rules: A third key aspect of the regulatory framework was the establishment of clear rules to prevent conflicts of interest.
- Barred from Government’s Role: Regulators were typically barred from taking up government roles after their tenure to ensure they could act without bias or future career expectations.
- One regulatory body, until recently, explicitly prohibited its members from accepting government positions post-tenure.
Erosion of Regulatory Independence
- However, over the years, these principles have been significantly eroded. This shift did not occur suddenly but developed gradually over multiple administrations.
- While concerns are now being raised about a former financial sector regulator assuming a senior government position, such transitions have happened before.
- Several financial regulators in the past accepted government assignments soon after their tenure ended.
- While the nature of these roles may have differed, the broader principle of ensuring a clear separation between regulatory and government functions has been undermined over time.
Growing Influence of Civil Servants in Regulatory Roles
- Beyond legal adjustments, another concerning trend has been the increasing preference for retired civil servants, particularly from the IAS, to head regulatory bodies across sectors.
- While efforts were made to appoint professionals and experts from outside the government, these experiments led to some controversies.
- In response, the government has increasingly favoured civil servants for regulatory leadership roles.
- Consequently, many of the country’s top financial regulators in recent years have been former bureaucrats.
- Although there is no inherent issue with appointing civil servants as regulators, concerns arise when they are influenced by government priorities rather than focusing solely on industry regulation and consumer protection.
- The fundamental danger lies in blurring the distinction between policy formulation (a government function) and regulatory enforcement (an independent function).
- If regulatory bodies become extensions of the government, their ability to function autonomously and serve the public interest could be compromised.
