Nov 04, 2024 08:26 PM IST
Over the past three decades, Indian policymakers have devoted a lot of time and effort to setting up new regulatory agencies. Now they need to fix their accountability deficits
This year has been a tough one for financial regulators. The market regulator, the Securities and Exchanges Board of India (Sebi), has faced flak for being soft on the Adani group. Its chairperson, Madhabi Puri Buch, has faced questions of conflict of interest from investors while battling rebellion from her own staff. A parliamentary panel is now waiting to grill her. The Reserve Bank of India (RBI) has faced criticism for penalising fintech firms. Its critics argue that RBI is soft on banks and turns a blind eye to the mis-selling of financial products by them.
Such questions about the conduct of regulators will become increasingly common as India’s economy grows into a high-stakes battlefield. The evolution of regulatory agencies mirrors the growth of democratic capitalism over the past two centuries. The earliest regulators were set up in the United Kingdom (UK) and the United States (US) in the 19th century to establish a level playing field in industries such as railroads and waterways. Rapid industrialisation in these economies raised the demand for transport services, allowing freight operators to make a killing. Lawmakers in both countries felt that regulators could correct market failures in the transport sector.
After the great stock market crash of 1929, the need for regulating markets was felt more intensely. In the Great Depression that followed the crash, several new regulatory agencies, including the Securities and Exchange Commission (SEC), were set up. The ambit of regulatory interventions increased over time, as government intervention in the economy became routine in the post-World War II era.
The pushback came in the 1970s as the global consensus on the State’s role in the economy collapsed. Amid rising prices and soaring unemployment rates, regulators came under fire for raising the costs of doing business. Consumer activists alleged that regulatory agencies were in bed with regulated entities; a phenomenon economists labelled as regulatory capture. Politicians began demanding greater accountability. The Federal Reserve Act was amended in 1977 to increase Congressional oversight over the US Fed. The amendment limited the Fed chair’s term to four years while mandating that the appointee must be approved by the US Senate.
The history of regulation suggests that autonomy must go hand in hand with accountability. Regulatory agencies make more careful decisions when their performance is reviewed regularly by a non-partisan body. They tend to be even more careful when they are mandated to explain their decisions publicly.
Indian lawmakers need to monitor regulatory agencies systematically, and not just as a reaction to a scandal. All regulatory agencies must be brought under the purview of the respective parliamentary standing committees, as recommended by the Second Administrative Reforms Commission (ARC) in 2009. Chiefs of regulatory agencies should be asked to provide regular briefings (say on a quarterly or bi-annual basis) to the parliamentary committees. The committees should be empowered to enlist the help of other constitutional bodies to assess regulatory performance.
For instance, a regulatory review wing could be set up in the Comptroller and Auditor General (CAG) to help Parliament assess regulatory performance. This wing could draw up guidelines for reviewing regulatory work, and provide independent impact assessments of key regulatory decisions. It could lay down norms for regulatory consultations with stakeholders. It could also be asked to prepare guidelines on selection, termination, and pay of regulatory staff, and suggest measures to mitigate conflicts of interest.
Financial regulators will need special attention and care. Given the complicated relationship between RBI and the finance ministry, a thorough reappraisal is needed. Both RBI and the finance ministry need to cede some of their current functions to be able to regulate the financial sector more effectively, as this column had argued earlier (Reimagining how the Reserve Bank functions, January 10, 2023). A new contract between RBI and the finance ministry, enshrined in a 21st-century RBI Act, will help lower friction between the two.
The new Act should mandate clear reporting and transparency norms for the central bank. Even when it conducts consultations with stakeholders before designing new regulations, RBI doesn’t share the details of these consultations publicly. RBI’s opacity did not matter much in a small closed economy. It has become a pain point in a large and diverse economy.
As suggested by the Financial Sector Legislative Reforms Commission (FSLRC) in 2013, it may be worth considering a merger of the insurance, equities, and pensions regulators to prevent regulatory arbitrage among financial firms. The FSLRC report had suggested a common redressal agency for consumers cutting across financial sectors. This proposal should be considered seriously.
Over the past three decades, Indian policymakers have devoted a lot of time and effort to setting up new regulatory agencies. Now they need to fix their accountability deficits. Bringing in greater transparency and accountability in the working of regulatory agencies will help them function with greater authority.
As the 2nd ARC report put it, a regulatory agency “can retain its legitimacy and credibility only if it is accountable for how it uses the powers that have been delegated to it by the legislature… the greater the level of autonomy, the more critical it is to have credible accountability mechanisms”.
Pramit Bhattacharya is a Chennai-based journalist.The views expressed are personal
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