Federalism in the Regulatory Era: Haseeb Drabu

The threat to federal India is more from the political economy than realpolitik. True, under a majoritarian-minded political government with a strong democratic mandate, centralisation is taking place at a faster pace. A strong Centre in the Indian federal system has already become much stronger vis-à-vis the sub-national entities, i.e., the states. Along with much else, this is also because of economic liberalisation that started in the mid-eighties. The bigger and more long-lasting threat to federalism in India, in that sense, is structural. The pulls of the economy and the pushes of the market have directionally put the governance system on a path of overt and covert centralisation.

With socialism giving way to business liberalism, a parallel institutional structure of “control” has evolved: the regulators. The government has, over the last three decades, increasingly ceded operational supervision and control over business to the regulators. The new Indian economy is not a closed, control and command economy but a regulated, open market economy. The 30-odd regulatory bodies with varying degrees of power and autonomy have replaced direct ministerial and bureaucratic control with indirect regulatory regimes. This has resulted in the rise of the regulatory state run by the bureaucrats, technocrats, and professionals, parallel to the sovereign state run by the political class.

The regulatory state has spread itself far and wide across the economy: from landscape regulators like the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) to sector regulators like the Telecom Regulatory Authority of India (TRAI) and Insurance Regulatory and Development Authority of India (IRDAI), quality regulators Food Safety and Standards Authority of India and Central Drugs Standard Control Organisation to standards regulators like the Central Pollution Control Board or the Advertising Standards Council of India.

While the implications of the rise of the regulatory state with its diffused apparatus are deep and wide for the economy, it also has serious implications on the existing federal construct. At present, most of the regulatory powers have been appropriated by the Union government. The Indian regulatory state is nothing but an extended arm of the central government.

The Constitution does not explicitly provide for a regulatory design or framework, but the Union draws its regulatory powers from the Seventh Schedule, Articles 246, 248, 286, 301-307, to regulate diverse economic activities. The states have similar powers over local matters under the State List and the Concurrent List, but these are not just constrained but severely curtailed and limited by Union supremacy in this space.

The states have, of course, established some state-level regulatory bodies, but these largely operate under the authority delegated by the central laws to regulate specific sectors within a state’s jurisdiction. Most of the state-level regulators focus on localised implementation, licensing, and enforcement in sectors such as electricity, drugs, education, real estate, and more.

Be it the state electricity regulatory commissions or the state pollution control boards, or the state drug control organisations/state licensing authorities set up by state legislatures, they complement central regulatory authorities. Their mandate is enforcing regulations at the local level, ensuring compliance with both state and central laws, and addressing region-specific issues.

Unlike elsewhere, not only the control, but even the design of regulatory bodies is extremely union-centric. Of late, for a variety of reasons, the central civil services have monopolised the important regulatory position in post-retirement engagement. The incumbent RBI governor is the former Union revenue secretary; the retired Union banking secretary is the chairperson of Sebi, and the chief of IRDAI is a former finance secretary. Another retired civil services officer heads the TRAI as well. Earlier, many of these positions were held by professionals or technocrats. The bureaucratic capture of the regulatory state is almost complete.

Indeed, increasingly, there is a blurring of the lines between regulators and the regulated, with Union ministries functioning as the regulators; the Central Board of Direct Taxes and the Central Board of Indirect Taxes and Customs are both tax authorities and regulators.

The problem of regulatory design is, of course, most visible in India’s banking sector. Here, the central government is both owner and regulator, and a conflict of interest is inevitable. There are also serious concerns regarding the vertical division of regulatory power, best seen in India’s power sector. For instance, the Electricity Act, 2003, has been severely affected by the interaction and misalignment between the state and central governments. The presence of different objectives and incentives has undermined the ambition of the statute. It is instructive to study the Insolvency and Bankruptcy Code process in the country. The highest court in the country is now functioning like a resolution professional in the stressed asset space.

In the new congruence of powers, the trioka of the executive, judiciary, and regulatory, the balance of powers between the Centre and the states is getting one-sided. Federalism must outgrow fiscal federalism and move towards a broader-based sharing of powers. A step towards regulatory federalism will restore the semblance of a balance.

Ideally, in the regulatory space, the authority to set the standard must rest with the Centre, while the state governments meet the standard. They can choose the combination of policies to meet the standard. It is well-established research finding that the form of delegation in which state governments choose their standards, which the central government then decides how to meet collectively, tends to be the most efficient. The broad principle is for the Centre to exercise leadership instead of control, and economic support instead of dominance. 

 

Views are personal.