Regulators have been an important part of the reforms of the 1990s. One of Manmohan Singh’s earliest acts was to transfer the regulation of stock markets from the finance ministry to Sebi. This regulator, which had been set up in 1987 but given nothing to do, was suddenly woken up from slumber and loaded with considerable responsibility. The insurance regulator was appointed long before there was anything to regulate. TRAI was set up when licences were given to private telecom operators. More recently, the CERC has been set up to regulate the power industry; and as if one is not enough, every state is being cajoled into setting one up.
However, there are other, older regulators; the only reason why they are not recognized as such is because the term did not exist then. Reserve Bank is the oldest regulator. Set up in 1934, it was explicitly set up to manage currency and regulate banks. Comptroller and Auditor General is also a regulator: he is supposed to keep government accounting straight.
These old regulators were set up before 1950; the new ones have come up after 1990. Why was there such a long drought in the creation of regulators? The reason is that the executive arm of the government came to be conceived as a super-regulator. Thus, industrial licensing was introduced in 1956; it could have been given to a regulator. Instead, a ministry administered it. Import licensing too could have been treated as a regulatory function; instead, it was given to a Chief Controller of Imports and Exports. In fact, what is called a regulator today was called a controller by the British: there was and is a Controller of Drugs; and the Controller of Capital Issues was meant to be a regulator.
Thus, both the British and the Congress socialists freely confused regulation and administration; but their reasons for doing so were very different.
The British political theory was and is that government is the application of law to administrative decisions. The decisions may be numerous and repetitive, and may not therefore require such elaborate procedures as employed in courts; but they must be taken in the same fashion as a court would. They must apply the law fairly, without regard to whom it is being applied to. The theory is that Parliament lays down the law and the government only applies it. There are, of course, exceptions to this mechanical application of law. In foreign policy, for instance, a government pursues national interest, and gives little weight to justice or precedent. In immigration policy, governments blatantly discriminate against particular types of immigrants. Taxation is levied on principles that have only a tenuous basis in fairness. These are the areas that are decided on the basis of majority. A party gets to power by virtue of majority in parliament, and takes such arbitrary decisions as long as it holds majority. Thus one can imagine a variety of administrative decisions involving law and discretion in different proportions. The entirely discretionary decisions would be taken by or in the name of a minister; a controller would take the entirely mechanical decisions. Where the line was drawn was arbitrary; but whether a minister took a decision or a controller, it was supposed to be taken in a judicial spirit.
The Congress socialists, on the other hand, absorbed regulators into the government because they believed in revolutionary justice. They thought it fit to punish British industrialists because they were British, and later, the big business houses because they had backed the wrong side in the struggle between Indira Gandhi and the old Congressmen. They thought it fit to favour those born in scheduled castes and tribes because the higher castes had been unjust to them. They denied licences to established importers because they indulged in sinful importing without doing any virtuous manufacture. Revolutionary justice aims at correcting historical injustice. But those to whom history was unjust are long dead; the compensation and the retribution are visited upon quite another set of people. And the quantum of either bears no relation to the historical injustice. Hence revolutionary justice creates fresh grievances and discredits the government that dispenses it. Its revolutionary rule discredited the Congress; people did not trust it any more.
That is why the Congress started appointing regulators – to give new policies a semblance of independence and objectivity. But appointing a regulator is not enough; a regulator has to be independent and objective. For this, three things are necessary.
First, the task of a regulator must be clearly defined. Elsewhere, regulators are set up in industries where competition is inadequate, and are expected by law and custom to mimic competition. In India there is no general commitment to competition. This is why the courts have allowed DoT and MTNL to ride herd over TRAI, and why the overriding aim of the insurance commissioner is to push up premia, on the excuse that insurance companies should be solvent; the fact that high premia reduce competition and help the government companies is incidental.
Second, the authority of a regulator should be commensurate to the task. In India, there are too many regulators, and they have been set up without proper division of territory. Thus Reserve Bank and Sebi fight over who is to regulate bonds; DCA holds on to powers which it cannot properly use and which were best given to Sebi. Having separate SERCs from CERC is a sure way to conflicting decisions.
Third, a regulator comes into being because the government cannot be trusted to be fair or objective; it comes about as a compromise between the party in power and the opposition. It is the function of the opposition to ensure the independence of the regulator. The house committees of US Congress routinely hold discussions with the chiefs of regulatory organizations; in India, the government does not permit it, and Parliamentarians do not ask for it. They are more interested in what benefits them than in what befits the country.
Fourth, a regulator must not be beholden to the government. This is almost never true of Indian regulators. They are almost all civil servants, active or retired. Either way they have expectations of the government; they expect extensions or further plum jobs. In Britain, the power regulator is a professor of economics; in America, the chief of SEBI is a financier. Regulators must be expert, not red.
Finally, the regulator must have powers of instant punishment. The SEC in US is all the time debarring brokers from business, or fining financial agents for misdemeanour. In India, powers of punishment and deterrence are inadequate and often ill defined, and few regulators use the powers they have.
Before we set up any more regulators, we should set up a commission to deliberate on a general enabling law covering all regulators, which would give them authority, autonomy and clear objectives, govern the appointment of regulators, and give them protection from government. We have far too many regulators doing too little regulation; this is a clear sign that the government does not know what regulators are for.