State Regulation in India - The Art of Rolling Over Rather Than Rolling Back

State regulation in India – the art of rolling over rather
than rolling back

Regulatory bodies were created to de-politicise decision making. But in
India, something di erent has happened.
DEVESH KAPUR and MADHAV KHOSLA
4 April, 2019 11:01 am IST
Representational image | The North Block of the Central Secretariat buildings| Anindito Mukherjee/Bloomberg
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R
ecent controversies ranging from the independence of the Reserve Bank
of India to the reach of the Aadhaar programme have raised important
questions about regulation in India.
Since economic liberalisation, India’s political and legal landscape has changed
significantly, and questions are increasingly being asked about the principles of
regulation, the authority of independent and quasi-independent agencies, and
the place of expertise in a democracy. Yet, despite its importance and much
public commentary, the regulatory state in India remains poorly understood.
A key rationale underlying the creation of independent regulatory bodies is to de-

politicise decision making. Certain domains of activity require technical
decision-making, and such domains require insulation from the vagaries of
politics and pressure from interest groups, especially big businesses. While no
modern economy can exist without a robust regulatory apparatus, the structure
and functioning of such an apparatus raise questions about both democratic
accountability and the rule of law.
Also read: Year after historic circular, debate over RBI’s regulation making powers
still mired in confusion
The liberalisation of the Indian economy in the early 1990s was expected to
reduce the overbearing hand of the state on the Indian economy. The state would,
it was anticipated, play a more managerial role. But the rise of the regulatory state
in India has far from limited state power. Rather than rolling back, the state has
in fact rolled over. The one change that has, however, emerged is a change in the
character of the state. The creation of regulatory authorities, with varying degrees
of autonomy and power, has contributed to a more diffused state apparatus.
There are five features of the regulatory state in India that are striking and, in
some ways, distinctive. The first is a considerable legal incoherence and
uncertainty. Unlike the United States, which has the Administrative Procedure
Act, 1946, there is no overarching administrative law statute in India. This has
meant that traditional constitutional doctrines and structures have been used to
judicially develop rules and principles for an entirely new apparatus,
encompassing regulators, tribunals etc., often in ways that have come at the cost
of coherence and clarity. Indeed, core features of India’s constitutional
framework, such as the principle of collective responsibility, are yet to be fully
reconciled with the presence of regulatory bodies.
A second notable feature is structural weaknesses that have led to regulatory

incapacity. India’s regulators are often required to make technical
determinations, but a large number of posts dedicated to expert members lie
vacant. As Shibani Ghosh has noted, the Central Pollution Control Board has
nearly 20 per cent of its sanctioned posts lying vacant as per its last annual
report, and at least one State Pollution Control Board (Karnataka) has more than
half of its posts unfilled.
Also read: Draft data protection bill pays little attention to the dangers of state
power
Without sufficient capacity, regulators cannot proceed with effective standard-

setting, and measure and penalise behaviour based on transparent parameters
that seek to enhance public welfare. Even in the case of institutions like SEBI,
which fares much better than other regulators, the enforcement wing lacks the
capacity to respond to sophisticated market evolution, a fact that has led it to
prefer blunt enforcement remedies rather than other more nuanced and complex
alternatives.
An investment in state capacity is likely to provide returns only over the long-
term, and this might discourage political spending or interest in building
capacity. More insidiously, deliberate understaffing, and the general perpetuation
of weak capacity, might be a way for government ministries to disempower
regulatory bodies and see that control remains with ministries rather than the
regulators. After all, a body with less capacity is a body that will be weaker – and
hence easier to control.
The design of regulatory bodies more generally is a third and crucial feature of the
Indian regulatory state. To return to the example of SEBI, the institution has had
to fight major turf battles with the Ministry of Corporate Affairs even though it
falls within the oversight of the Ministry of Finance. Questions over who can set
corporate governance norms have had major ramifications for the possibility of
effective regulation.
There are also concerns regarding the vertical division of power, as seen in India’s
power sector. Akshay Jaitly’s work on the power sector has shown how the
implementation of the Electricity Act, 2003, has been severely affected by the
interaction and misalignment between the state and central governments.
The presence of different objectives and incentives has undermined the ambition
of the statute. The problem of regulatory design has, of course, been most visible
in India’s banking sector. Even though public sector banks hold two-thirds of the
deposits in the formal banking sector, the RBI’s powers are limited, and its
ultimate authority is confined to the regulation of private and cooperative banks.
When the government is both owner and regulator, a conflict of interest is
inevitable and a level playing field unlikely.
A fourth issue that defines India’s regulatory state is the presence of old and
dated laws, a matter that has become all the more significant with new
technological changes. The telecom sector is, for example, still governed by the
Indian Telegraph Act, 1885, despite radical changes in technology and in the
character of the sector. There is a crying need to update such dated laws, but why
that does not occur is unclear.
Also read: Both BJP and Congress are complicit in expanding state surveillance
without legal basis
Indeed, the mismatch between the rapid pace of technological change and the
lethargic crawl of laws and regulatory frameworks is increasingly evident. The
case of the regulation of data is another good example. The Information
Technology Act, 2000, was enacted at a time when data storage was the main
concern, although over time a key worry has been not only data gathering but also
data processing. The Aadhaar project, for all its strengths and weaknesses,
highlights the concerns of regulatory design, with the UIDAI being both the data
custodian and regulator, leading to a misalignment of incentives.
Finally, India’s regulatory state has grown in the context of international

standard-setting. International regulatory standards have become instruments of
governance, and most standards come from non-market private bodies, often
international nongovernmental organisations that have the backing of
governments, but with the strong participation of market actors. Prominent
examples are the International Organization for Standardization (ISO) and the
International Electrotechnical Commission (IEC), which jointly account for about
80 per cent of all international product standards.
Global standard-setting has emerged in the context of the Agreement on

Technical Barriers to Trade, that obliges all WTO member states to use
international standards as the technical basis of domestic laws and regulations
whenever international standards exist. One implication of international
regulation is the de facto outsourcing of regulation. A prominent example is
India’s airline industry, which expanded rapidly, but raised major safety concerns
after a 2012 audit by the International Civil Aviation Organization (ICAO). This
led to the Indian rules being aligned to the ICAO’s norms, and thus external
pressure forced changes that the Indian regulator was either unwilling or unable
to do on its own accord.
Two issues need urgent addressing in order to improve the performance of

regulators in India. One, regulatory capture in India does not always refer to its
capture by those it seeks to regulate, but rather by the powerful judge-IAS lobby
for whom it has become a highly sought-after retirement post. There are good
reasons why they should be included in regulatory bodies, but only in the normal
course of their careers where they must choose between continuing with their
careers or resigning and becoming a regulator. The Japanese practice of
amakudari, or “descent from heaven”, where senior bureaucrats are almost
guaranteed high-profile post-retirement positions, has been a bane for that
country – and for India as well. Expertise matters for regulatory performance and
without it, babudom will again triumph.
A second challenge stems from the peculiar congruence of powers – executive,

legislative and judicial – within regulatory bodies. For regulators to function well
they must have autonomy.
But then how does one ensure their accountability? Any long-term solution must
incorporate greater accountability to Parliament, both to preserve the democratic
framework and to strengthen India’s representative institutions.
Devesh Kapur is the Starr Foundation South Asia Studies Professor and Asia
Programs Director at the Paul H Nitze School of Advanced International Studies
(SAIS) at Johns Hopkins University, Washington, DC. Madhav Khosla is a Junior
Fellow at the Harvard Society of Fellows. Their book, Regulation in India: Design,
Capacity, Performance, has recently been published by Hart Publishing /
Bloomsbury. An Indian edition will be available in April.
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State regulation in India – the art of rolling over rather

than rolling back

A key rationale underlying the creation of independent regulatory bodies is to de-

A second notable feature is structural weaknesses that have led to regulatory

Without suﬀicient capacity, regulators cannot proceed with eﬀective standard-

Finally, India’s regulatory state has grown in the context of international

Global standard-setting has emerged in the context of the Agreement on

Two issues need urgent addressing in order to improve the performance of

A second challenge stems from the peculiar congruence of powers – executive,

Subscribe to our channels on YouTube & Telegram

Why news media is in crisis & How you can ﬁx it

Support Our Journalism 

SHARE YOUR VIEWS

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