Regulators should take expert advice

One of the most celebrated deputy governors of the RBI, SS Tarapore, retired on September 30, 1996. I happened to be in Bombay that day and went to call on him.

Just before he ended the meeting, he said he wanted to give me a gift. I made the usual noises but he called Alpana Killawala, the communications head of the RBI at that time, to fetch guess what. Three bound volumes of RBI circulars.

He presented me those bulky and heavy volumes very solemnly and said: “We have ended the days of the weekly circular. Keep these safely”. About ten years ago I handed the volumes over to the NCAER library. I hope it has kept them safe.

The reason I tell this story is that the RBI seems to be almost back to the weekly circular. And SEBI is ahead of it, if that’s possible. It also keeps publishing discussion papers which is fine, except that most of them are trivial.

Even if I am exaggerating for effect, which I am, it seems clear that we are back to the days of excessive fine tuning. In 2023 around 80 out of about 300 editorials in this newspaper were devoted to the tinkering efforts by these two regulators. Some of course make sense. But most don’t. It looks like a lot of activity for the sake of activity, like those ineffectual but highly irritating traffic barriers that the police put out to catch terrorists.

This is consistent with the NDA government’s overall approach of excessive intervention in economic activity. It’s not very clear whether the guys in the RBI and SEBI who do this are driven by a motive to prevent something going horribly wrong or by a motive to protect themselves in case something does go wrong. But one thing is clear: there’s a lot of confusion in both, especially over conceptual issues. This is an important hallmark of bureaucracies. Idle minds are the devil’s workshop.

Conceptual fog

One of these conceptual issues is caveat emptor. Another is market efficiency. There are other concepts, too, that the RBI and SEBI are either not aware of or choose to ignore because that way lies institutional safety. It’s the Nike ad exhortation: Just do it.

Caveat emptor means buyer beware. Another, ruder, way of saying this is that a fool and his money are soon parted. Due diligence is the buyer’s responsibility. Market efficiency means the lowest possible transaction costs. All the huffing and puffing by the two regulators tend to lower efficiency by increasing transaction costs. This happens time and again. But market players always game the regulations because they don’t want to add to transaction costs. Then we get a fresh set of rules.

Arbitrary compliance requirements and arbitrary ceilings or floors are the two main manifestations of the urge to play both nanny to the customers and safe bureaucratically. It helps no one.

Law and economics

So what should be done? Two things only. First, the regulators should consult accomplished theoretical economists. The Indian Statistical Institute in Delhi has lots of them. And two, they should listen to the advice. It’s a low cost effort with very high returns. I am not joking. The truth, I think, is that although the two regulators have good economists they are rarely consulted over regulatory matters. The left hand not knowing what the right hand is doing is the problem.

It was to sort out the problem of economically illiterate laws that 70 years ago some economists, like Ronald Coase, Richard Posner, George Stigler and a few others tried to develop a branch of economics called law and economics.

The idea was to sensitise rule makers to economics. The purpose was to show legislators that superior outcomes can be achieved that way. There is even an old established journal called Law and Economics but it isn’t taken very seriously.

In India for a time Kaushik Basu, when he was teaching at the Delhi School of Economics, tried to breathe some life into the subject. It’s hard to say what went wrong but the subject never took off. As Raj Krishna said in 1978, bureaucracies are ‘knowledge proof’.

Undeterred, in 1994 Ashok Desai who was the chief economic adviser, set up Project LARGE (Legal Adjustments and Reforms for Globalising the Economy). It was headed by Bibek Debroy. Again, its recommendations fell on deaf ears.

Since then Debroy has been ploughing a lonely furrow campaigning for regulation that respects the laws of economics. RBI and SEBI could make a start by consulting him.

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