Published: The Hindu Business Line, July 23, 2003

By Pradeep S Mehta, Rajan R. Gandhi

“It is better to light a candle than curse the darkness.” ā€” Chinese proverb.

I NDIAN regulatory reforms have not quite outsmarted other institutional reforms in terms of tardiness. But this in itself may be salutary and afford time for constructive reflection as to why they have not succeeded and how best to implement them.

Let us start from the basics. Reformers and non-reformers alike have good reason to believe that sound regulation will enhance economic efficiency by facilitating economic activity and protect consumers’ interests by moderating the wedge between costs and market prices. Ironically, though a majority of the people have faith in the utility of regulatory reforms, their successful implementation has still eluded policymakers and administrators. Two reasons come readily to mind: Regulators’ incompetence and governments’ inability to get over the “command and control” mindset.

On the recent telecom sector imbroglio, the RBI Deputy Governor, Mr Rakesh Mohan, advised that the Government must “restrain itself from undercutting the regulatory body”. The wing-clipping of the insurance regulator by depositing all its earnings into the treasury is a case in point.

Also, Mr Rakesh Mohan pointed out the serious lack of technical skills among the regulators. One can characterise most other sectors in the Indian economy similarly. The electricity sector provides a glaring example of the system’s ingrained inefficiencies.

Analysis reveals that 50 paise out of every rupee that a consumer pays for electricity goes for the inefficiency costs. And still, to cover the gap between cost and recovery, the electricity regulators embrace the expedient of raising tariffs rather than cutting costs.

This is called for at all levels: Generation, transmission and distribution. That this is a glaring wrong goes without saying. What ought to be said, however, is that there is an urgent need to build the regulatory regime’s capacity as a whole.

Failure to realise this will have insidious consequences for the ongoing regulatory reforms. The immediate danger is that the regulators’ incapacity may become the bane of reforms at large in that people may lose confidence in them. To avoid such an outcome, it is incumbent on regulators to upgrade their skills and learn the nuances of the 21st century market place, coupled with realpolitik as it prevails.

This can be done in a variety of ways. For example, regulators can forge alliances with research institutions and civil society organisations to:

  • Develop the types of competence and expertise that these institutions could furnish, and
  • To reach out to the public at large as to what it does and why.

Second, and more important, India needs to evolve a system of appointing regulators on the basis of merit ā€” the lack of which is the single most important factor bedevilling the regulatory process’ success. This is apart from the proverbial resource constraint.

It is curious why retired civil servants are deemed to be a lot more suitable than such professionals as economists and lawyers. The biggest challenge for any regulatory reform is not just to establish a regulatory institution, but endow it with enough intellectual capability and professional competence to enable it effectively discharge its responsibility of providing healthy economic regulation.

A beginning in this direction may be made by appointing people with a track record of probity and expertise as leader regulators. Such experts can help establish a regulatory benchmark of skills, behaviour and performance for others to emulate. As of now, there exists no such benchmark. An interesting exception, however, is the Election Commission, thanks to the former Chief Election Commissioner, Mr T. N. Seshan, who compelled political parties to comply strictly with the election aachar-sanhita (code of conduct).

Till the Seshan regime, the Election Commission was seen as a mere extension of the government. There is one subtle lesson from the Seshan case study also: It highlights the significance of individual responsibility, initiative and, most important, capacity.

More than anything else, these attributes help set national standards that other regulators may strive to achieve. A living example of this can be seen in the current CEC, Mr James Lyngdoh, who has been voted as one of the 25 stars of Asia by BusinessWeek. He was selected because of the successful conduct of elections in Gujarat and J&K.

Thus, two salient points emerge from foregoing: One, we need model regulators who can set standards of regulation for others to catch up with. For this it will be necessary to make the recruitment system transparent and merit-based, and give regulators enough independence. Two, the Government needs to focus on the area of its core competence, that is, governance. At present, the mood is to stop controlling, and allow independent institutions develop their own culture and gain the peoples’ confidence.