There’s a gap between policy and practice

Good intentions The finance ministry should go beyond that. Prashant Nakwe   -  The Hindu

The Modi government seems to settle for big ideas, hoping that good execution will follow. But that’s a big ask

“You are what you settle for,” quipped Janis Joplin, American singer-songwriter. This appropriately sums up NDA government’s approach during its first year in office.

Let’s take financial sector regulation. After making a big bang announcement in the Budget, the Finance Minister had to rollback his proposal to establish a ‘separate’ — note that the term ‘independent’ has been intentionally avoided — Public Debt Management Agency (PDMA). The government will now consult the RBI and come up with a detailed roadmap for a new agency. And there is no clarity if and when this roadmap will be made public.

Let’s consider a scenario where the original version of the Finance Bill was passed, including provisions on the establishment of PDMA. The text of the erstwhile Chapter VII (on PDMA) was heavily borrowed from the draft Indian Financial Code, prepared by the Financial Sector Legislative Reforms Commission (FSLRC). However, the structure of the PDMA was starkly different.

Sections 123 and 124 of the Finance Bill provided the Centre absolute authority to determine the composition, duration, terms and conditions of service of members of PDMA. There was no clarity on the selection procedure or minimum qualifications of the members. This was a departure from the FSLRC scheme, which provided for expert independent members and elaborate selection procedures.

The government proposal would have led to a separate PDMA, but its independence would have been compromised. Experience with separate regulatory institutions has taught us that their efficiency and performance is inversely proportional to political interference in their management. An arm-length relation between the principal and agent is necessary for efficiency.

Many chinks

Separate institutions must not become parking lots for retired judges and bureaucrats. Unfortunately, the text of the erstwhile Finance Bill reeked of this possibility. Further, despite the proposal to delegate significant powers, no consequent accountability provisions were designed for the PDMA in the Finance Bill, other than the power of central government to remove PDMA board members.

Consequently, the policy design for establishing the PDMA was a recipe for disaster. In a way, one is relieved that the proposal has been shelved.

However, there is no guarantee that these issues would be addressed in discussions with the RBI. A roadmap, however efficient, will not have desired benefits unless such structural weaknesses are addressed.

One wonders why the government allowed such designed faults to remain in the Bill. This indicates lack of comprehensive assessment of draft proposals.

While the government and the RBI are the two most important stakeholders in the process of establishing PDMA, is the knowledge, expertise and skill relating to regulatory design limited to them? Will the government consult other stakeholders to get the PDMA design right, or will it wait for the PDMA to falter to correct its mistakes?

Wide, comprehensive and structured stakeholder consultation process is a hallmark of high quality policy making. It provides a sense of ownership to stakeholders who share understanding of the rationale and logic for the policy, and thus aid in compliance.

Moreover, the PDMA will deal with public money, management of which has been delegated by the citizenry to its elected representatives. Consequently, the public has the right to be involved in the process of development of the expert body. The government should not forget this.

Capacity constraints

In addition to stripping the powers to manage public debt from the RBI, the Finance Bill proposed to shift regulation of government securities to capital market regulator Sebi. This proposal also has been rolled back. The oft-cited reason for postponing these proposals is limited capacity outside the central bank to manage public debt and regulate government bond market.

However, capacity constraints seem to be ignored while transferring regulation of non-debt foreign exchange-related transactions to the Centre; and shifting regulation of commodity derivatives from FMC to Sebi.

Now the Centre will have to write the rules for regulating non-debt exchange flows, monitor and supervise them. Does it have the adequate capacity, expertise and skill? Not many seem concerned.

Similarly, Sebi has been struggling with capacity constraints to rein in the ever-increasing fraudulent money circulation and ponzi schemes. Does it have the capacity and expertise to regulate commodity derivatives (which would require robust supervision, monitoring and feedback mechanism)? Or things will continue like in past, with FMC acting as a department of Sebi? There is no clarity.

In such scenario, one wonders if capacity concerns were mere pretext for postponing debt market reforms.

Separately, this leads to an interesting question. What comes first: capacity building or getting right the structures in place? Can we afford to wait for the former before working on the latter? The RBI thinks so, and the government seems to agree. We would argue otherwise, that capacity building and putting in place right structures could go in parallel, given a robust transition plan in place.

A comprehensive strategy

During its first year in office, the Modi government seems to settle for big ideas, hoping that good execution will follow. But that is subject to change in the way we think and do, and status-quoists are big resistance to change. This phenomenon cuts across all good initiatives and that’s the reason many find the reforms as a half full glass.

The government must undertake an in-depth evaluation of its policy proposals, estimate technical and financial resources required, and people, structures and processes that need to be put in place to put its ideas into practice. It must develop a comprehensive transition path in this regard. Simultaneously, benefits of proposed policy changes must be estimated and communicated properly to the stakeholders to manage reluctance to change. The stakeholders must be consulted at each step of estimating costs and benefits, and before finalising the policy.

Such comprehensive structured process of policy making is known as regulatory impact assessment. It is best practice for designing policies, is followed in several jurisdictions, and has been recommended for India as well.

It is high time that the government puts its ideas into practice by making necessary amends to its policy design process through use of best practices such as regulatory impact analysis. It must avoid policy conundrums at all cost, and should not settle of anything less.

The writer is the secretary general of CUTS International. With inputs from Amol Kulkarni

Published on May 28, 2015

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