The Hindu Business Line : Needed regulators, not controllers

A 2005 World Bank study of 145 countries found that the cost of complying with regulations is three times higher for businesses in poor countries than those in rich nations, and affect the cost of entry of new entrepreneurs, and indirectly the women, the youth, and the low-skilled worker. Regulation and control look alike, but so do chalk and cheese. Regulation is meant to release competitive energies in a smooth manner; it is like traffic rules and signals that ensure even and smooth flow of traffic. Control is similar to permissions needed before you can buy land or start a firm. The former protects and enables the citizen to have free access to opportunity and prevents malpractice or misuse; the latter sits in judgment on the economic activity itself and uses arbitrary allocation criteria as with the now defunct FERA legislation and the oppressive structure of the monopolies law of yore.

Increasingly though, it is evident that the regulatory mechanisms established in India after 1991 are tending to become permit-raj by another name. This is sad, indefensible and, in the end, counterproductive for the economy; this must be arrested. Productivity improvement studies have shown impressive growth in industries allowed to grow as fast as the ingenuity of their managers. India's justly famed software businesses, auto-components, as well as the many other sunrise services, such as the outsourced and Internet enabled ones, are good examples. There is some truth in the joke that the reason why high technology businesses grew so rapidly in the 1990s was that ministers and civil servants could not understand them, nor realise their extraordinary employment, and therefore political, potential. They learnt soon, however.

This, unfortunately, cannot be said of the finance and related fields, where regulation is an old and familiar game played in most countries by the central bank and the ministry. The independence of the central bank, while playing its dual role as banker and advisor to the Finance Ministry, is a knotty problem that continues to depend on personalities and chemistry. The Reserve Bank of India together with various other authorities regulates several sectors vital to this phase of India's growth — insurance, telecommunication, stock exchanges, and commodities. Not a week has passed without the affected or protected industry alleging one or the other as being too harsh, one-sided, unsupportive of competition or unrealistic in pricing related matters. The ministries seem to be enjoying a revival of their role as the owners and providers in the way they step in now and again to revise rules — not just guidelines — so that every conceivable matter finally ends in the Supreme Court, which has then to act like CEO and final arbiter combined.

The remedy is for the proper choice of able regulators, giving them a brief and then leaving them to it. If former civil servants, raised on the economic philosophy of government controlling the commanding heights, now use regulatory agencies to flex their new-found muscle, then the future of regulated competitive growth is dismal indeed.

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