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The politics of regulation
The Economic Times, May
01, 2008
By Suresh P Prabhu
The relationship between politics and regulation has
been the subject of both public and political discourse
for quite sometime now. Broadly speaking, so-called
independent regulators are subject to government
supervision and a system of scrutiny. But, over the last
few years there have been an increasing number of
instances in which government supervision has morphed
into “political intervention”.
For instance, when established in 1997, the Telecom
Regulatory Authority of India (Trai) used the rulebook
without appreciating the
political economy.
Further, Trai reported to the Union ministry of
communications, which itself was in the business of
telecom as the biggest player. As a result the law was
amended in 2000, which turned the regulatory authority
mainly into an advisory body, and created an appellate
and disputes
settlement tribunal to deal with contentious issues
arising out of regulatory and market practices.
This is not an isolated incident. On several occasions,
the concerned ministries have tried to ‘clip the wings’
of the so-called ‘independent regulator’. For a
regulatory agency to be effective, the regulator ought
to be independent from political influences,
particularly when it comes to the regulator exercising
its legitimate mandate independent of the ministry
concerned.
In this context, the political origins of regulation in
India also have a significant bearing. In India the
independent regulator took over the functions which were
earlier exercised within the governance system at the
ministerial level. This transfer of regulatory functions
from a ministry to an independent regulator has probably
not been an easy development to accept and adapt to.
It has to be appreciated that the time horizons of
politicians and regulators who want to maximise benefits
from a particular sector are different. In India, the
democratic set up in place requires politicians to face
elections every five years. In contrast, the regulators
face a long time horizon to ensure economic growth
through
efficient markets.
Often the contrasting lengths of time horizons have led
to a rift between the two. For instance, a politician
like me may not be willing to hike power rates
immediately before the elections. On the contrary, the
power sector regulator may be inclined to take such a
decision, as it would be helpful for the investors to
recover their cost of
investment.
Conflicts are thus inevitable. And when politicians
emerge as winners in such clashes of interests, it is
the interest of the potential investors which is
affected. In India, regulatory reforms have largely been
concentrated in the public utilities and infrastructure
sectors. In order that these sectors do not starve
development it is essential for regulatory agencies to
be insulated from overriding political considerations.
Such issues make the study of political economy of
regulation crucial and relevant.
Interestingly, a study by a leading economic policy
research and advocacy group, CUTS International, titled
‘Competition and Regulation in India, 2007’ also
concluded that political intervention is a bane on the
existence of a regulator. When politicians attempt to
influence regulatory policies, potential
investors suffer, which in turn affect the
development of the sector. The study takes an in-depth
look into the competition and regulatory scenario in the
country through a general index, which assesses the
perceptions of people about these issues.
The independence of the regulator is of paramount
importance, as it determines the quality of regulation.
A good regulatory framework is one which adheres to the
six principles of representation, participation,
transparency, due process, accountability and
availability of a redressal mechanism. But generally,
this has not been the case so far in India.
The decade long experience of independent regulation
suggests that in practice, regulators have to deal with
a territory over which the state has considerable
control. Their functions are shaped by administrative
and political practices. As a result what we have is an
agency that is full of opportunities for political
intervention.
Amidst all gloom, there is still some hope that the
regulatory climate in India can improve. However,
certain conditions have to complied with for that to
happen. For any regulator to be effective he has to keep
an arm’s length distance not just vis-à-vis the
government but also vis-à-vis the market players.
Second, the regulators must report directly to
Parliament, and not to line ministries. This will enable
the government to take the rap should there be some
wrong or unpopular decisions taken in a sector. Third,
regulators must be truly empowered to both discharge
their duties without fear or favour, and to attract good
talent.
Our regulators are not even independent enough to
implement their decisions. The extent to which the
procedures of appointment, removal, remuneration and
budgets are controlled by ministries reduces the whole
idea of independent regulation to a myth. In practice,
the hand that really controls the regulator still
remains the government.
Last, they must be paid salaries, which reflect the
important responsibilities they are entrusted with.
There is a need to allow market-linked compensation
packages. Some forward movement on this front has been
exhibited by the Sixth Pay Commission. But as already
argued, this is a necessary condition not a sufficient
one.
On the government front, there is a dire need to
strengthen the decision-making ability of the
policy-making community. For instance, parliamentarians
do not have any research assistance, unlike in various
other countries where they do have government funded
research staff, to help them understand issues,
articulate their views more cogently and participate in
related decision making. If we want our Parliament to
function properly in the interest of long-term growth
and development, issues like these need to be addressed.
To sum up, it could be said that the regulatory
landscape in India is neither too vibrant, nor too bad.
Regulation is needed not only for proper functioning of
markets, but also for their very survival. In the words
of Prime Minister, Dr Manmohan Singh, “it is good
regulation that will ensure that while engines of growth
are allowed to move at full speed, there is no space for
manipulators in the system.”
States often act as manipulators by creating weak
regulatory institutions, over which they continue to
exert control and further their interests. It is high
time to put an end to this practice of consciously
politicising regulation.
The news item can also be
viewed at:
http://economictimes.indiatimes.com/
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