Thursday, September 24, 2015

Regulating the regulators

Relations between the finance ministry and the Reserve Bank of India (RBI) have, for the moment, settled down. Is this a durable equilibrium? A certain degree of tension is inherent and may indeed be desirable in the dynamics of economic management. Unseemly public controversy, however, detracts from cohesive economic management.
RBI is India’s oldest regulator and was set up under the Reserve Bank of India Act of 1934. Historically, it has always been an autonomous entity even though the governor and the deputies are appointed by the government. Following the economic liberalization of 1991, the autonomy has been progressively strengthened and sought to be benchmarked with the best prevalent international practices.
RBI’s mandate until recently was somewhat opaque. Apart from setting interest rates, it was only in a nebulous sense that it felt obligated to promote growth as well. The government has recently concluded an arrangement with RBI for managing inflation in the band of 2-6%. RBI would like to interpret this as its overriding mandate.
Relations between the finance ministry and RBI have recently been strained on account of two factors. First, the manner of determining interest rates. The Indian Financial Code (IFC) proposed a seven-member monetary policy committee (MPC) with representatives from the Union government and RBI. The issue of whether the governor should have a final veto has, for the present, been settled given the somewhat broad-based composition of the MPC.
The second relates to the constitution of an independent debt management office. This was in accordance with recommendations of the Narasimhan Advisory Group on Transparency in Monetary and Financial Policies, 2000, suggesting separating debt management from functions of monetary policy.
In a more generic sense, RBI’s functions may involve conflict of interest. Setting interest rates, managing foreign exchange reserves, acting as a banking regulator and the government’s debt manager—all these do not entail responses that are symmetric. Reforming RBI is an ongoing process. Inculcating domain knowledge and managing an orderly transition is a continuing challenge.
Continuing economic reforms necessitated the constitution of independent sector regulators. It was necessary to ensure a level playing field, promote a predictable regulatory environment, democratize decision-making and balance conflicting interests. Thus, the Telecom Regulatory Authority of India (Trai), electricity regulatory commissions (CERC/SERC), the Insurance Regulatory and Development Authority of India (Irda) and the Securities Exchange Board of India (Sebi), among others, were constituted. More regulators for real estate, transportation and railway tariff are in the offing. There is also the Competition Commission of India with a broader remit to promote fair practices.
The sector regulators have been constituted by acts of Parliament vesting powers earlier exercised by the executive. Invariably, there are provisions for the Union government to give directives on matters pertaining to public policy such as Section 25 of the Trai Act, Section 107 of the Electricity Act, Section 16 of the Sebi Act and Section 18 of the Irda Act. In fact, even in the case of RBI, the old Act under Section 7 empowers the Union government to give directions to the bank in overall public interest.
These are enabling provisions to be used in exceptional circumstances. In practice, they have scarcely been used. The broader issue is the balance between autonomy and accountability.
When these functions were part of the executive, legislative superintendence was exercised through parliamentary questions, special debates on issues pertaining to various departments, detailed consideration of the demand for grants in the respective standing committees and the audit reports of the Comptroller and Auditor General of India. These mechanisms are not ordinarily available in respect of independent regulators.
In other parliamentary democracies, special institution procedures have been created to fill the void. In the US, for instance, the house committee on financial services and the senate committee on banking, housing and urban affairs have jurisdiction over matters pertaining to the US Federal Reserve, banks and banking, federal monetary policy and price controls.
No doubt excessive parliamentary interference would undercut their functional autonomy and may destroy their basic rationale. Judicious decision-making, depoliticizing decisions for fixation of tariffs, user charges and interest rates improve productivity and growth.
What are some of the options we need to explore to strike a balance?
1. The existing departmental standing committees of Parliament do not per se examine the working of independent sector regulators. Explicitly extending the reach of these standing committees to include sector regulators and submit periodic reports to parliament would be beneficial.
2. The standing committee on finance and planning is overburdened by legislative scrutiny, including the Finance Bill and other important items of legislation. One option could be to create a special committee to be called the committee on financial and regulatory management that can periodically interact with the RBI governor and other regulators in the financial sphere such as Sebi and Irda. Their periodic reports to Parliament would provide better understanding and hopefully augur more informed debates in Parliament.
3. In the non-financial sphere, the concerned parliamentary departmental standing committees could constitute specialized sub-committees designed to interact with sector regulators on policy-related issues.
The issue of who should regulate the regulators is an unsettled one. As liberalization proceeds further, the need for structured institutional mechanisms becomes compelling. Balancing accountability with autonomy is a learning curve.
A former Rajya Sabha member and current member of the BJP, N.K. Singh has held key bureaucratic assignments and has been secretary to the Prime Minister and a member of the Planning Commission.

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