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This article was first published 6 years ago  » Business » Who will regulate the regulators?

Who will regulate the regulators?

By A K Bhattacharya
March 16, 2018 09:01 IST
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It would be a good idea to create independent oversight committees for each regulatory institution and indeed, even for their appellate bodies, says A K Bhattacharya.

Illustration: Dominic Xavier/

Finance Minister Arun Jaitley has said that in India while the political leadership is held accountable for all its actions and inaction, the regulators are not accountable in the same way.


Jaitley’s comment came in the wake of the letter of undertaking (LoU) scam that has engulfed the state-controlled Punjab National Bank.

A few days prior to the finance minister’s statement, the lack of an oversight mechanism in India for key policy-framing bodies and institutions was highlighted by Montek Singh Ahluwalia, who was the deputy chairman of the Planning Commission before it was wound up by the current government.

Ahluwalia made his comment while discussing the role of independent evaluation of the International Monetary Fund at a seminar organised by the Indian Council for Research on International Economic Relations.

The context of the two statements was completely different.

Jaitley’s observations came in response to the need for government action after the PNB was allegedly duped of $2 billion.

And Ahluwalia’s desire for a discussion on an oversight of policymakers in India arose out of the largely positive outcome of the Independent Evaluation Office set up by the IMF board to oversee its own functioning.

Ahluwalia was the first director of the IEO set up by the IMF board in 2001.

Yet, issues raised by both of them are relevant and critical for governance.

How do you make regulators accountable?

Is there a need for an oversight body to evaluate how fiscal policies or monetary policies are being implemented by the finance ministry under the Fiscal Responsibility and Budget Management Act and by the Monetary Policy Committee under an amended Reserve Bank of India Act?

To begin with, it is not entirely correct to assert that regulators in India are not accountable.

Most regulators at present have appellate bodies that sit in judgement over orders issued by them and also have the powers to overrule them.

Appeals against all decisions taken by regulatory bodies overseeing the stock markets and the insurance sector can be heard by the Securities Appellate Tribunal.

The electricity regulator has an appellate body and so has the telecommunications regulator.

Similarly, the National Company Law Appellate Tribunal hears appeals against decisions of the Competition Commission of India and the Insolvency and Bankruptcy Board of India.

A notable exception is perhaps the Reserve Bank of India, which combines in itself the two primary roles of regulating banks and formulating monetary policy.

There are ombudsmen in the central bank, but they only redress complaints from bank customers.

But beyond this, there is no other appellate body for the RBI and none of its decisions on regulating banks, in particular, can be challenged before a higher appellate authority.

So, what did the finance minister mean by saying that regulators in the Indian system are not accountable?

All regulators, except the RBI, have an appellate body above them and their decisions can be challenged.

The RBI, for good reasons, has a unique place in the hierarchy among all regulators. Any sudden change in a system that has served well in the past is inadvisable.

Yet, the question of regulating the regulators and making them accountable has been bothering governments for quite some time.

But it must also be realised that merely setting up an appellate body does not ensure accountability.

Appellate bodies do serve a purpose in some sectors by ensuring that the regulators are aware that their actions can be reviewed and even be overturned.

However, a more effective way of ensuring regulatory accountability will be to create independent oversight bodies for all regulators or policy-making institutions.

What Ahluwalia said is relevant for the government to ponder over.

Instead of chasing the goal of making them accountable, it would be a good idea to create independent oversight committees for each of these regulatory institutions and indeed even for their appellate bodies.

The dangers of not creating these oversight bodies are many.

In their absence, there would be an increasing demand from the political establishment to make the regulators accountable, which as a consequence is likely to enfeeble them apart from making them subservient to the government’s wishes that are often inspired by short-term political considerations.

Another danger could be an expansion in the brief of the existing auditing bodies that report to Parliament on the manner in which the government and its arms spend the resources allocated to them.

Auditing how effectively and efficiently the resources have been spent is an important function.

But problems may arise when the same financial auditors expand their role and start evaluating the appropriateness and efficacy of policy.

The yardsticks or the mindset cannot be the same for both judging policy implementation and evaluating financial practices or expenditure efficiency.

It is, therefore, necessary to have dedicated oversight bodies to evaluate how the government has fared in terms of adhering to its predetermined road map for fiscal consolidation and whether the Monetary Policy Committee has succeeded in achieving the twin goals of reining in inflation within the target while ensuring growth and stability.

More importantly, these oversight bodies could advise both the finance ministry and the RBI on what corrective action they need to take for achieving the goals.

Independence of these oversight bodies is crucial to their playing a meaningful role in governance.

They may report their findings to the finance ministry or the RBI, for that matter, but they should be allowed to function independently even though their funding could come from the government.

The erstwhile Planning Commission did set up an independent evaluation office at the fag end of its existence.

That office was abolished once the Planning Commission was dissolved.

It is time the concept of independent evaluation offices for different regulators and even for the administration of fiscal and monetary policies was revived.

Taxpayers or citizens of India deserve no less.

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A K Bhattacharya
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