Rethinking the role of regulators

India has repeatedly seen regulators playing catch-up as industry satisfies consumer needs in unregulated spaces


Photo: Bloomberg
Photo: Bloomberg

In a novel approach to regulation, the civil aviation regulators in UK have permitted Amazon to explore the viability of drone flights that extend beyond a pilot’s line of sight in rural and suburban settings, and to test sensors that enable collision avoidance. This is at a time when delivery drones are running into regulatory hurdles all over the world, including in Amazon’s home turf, the US. The UK experiment compels us to think more deeply about the role of regulators in a constantly evolving world, particularly because of the digital-physical mix most new technologies work in.

The regulatory state came into its own in India in the post-liberalization era, starting with the securities and capital markets. From there, it has extended its reach to diverse sectors such as banking, electricity, insurance and telecommunications. Despite this diversity, the regulatory approach to sectoral innovations has consistently been a wait-and-see policy. On many occasions, complete business models have been operationalized on the street prior to the regulator stepping in and acting in public interest.

The Reserve Bank’s regulation of non-banking financial companies and subsequently microfinance institutions, the Securities and Exchange Board of India’s response to crowdfunding and the obstacles faced by novel initiatives in this space, and the recent draft guidelines issued by the Directorate General of Civil Aviation to regulate drone activity—all point to a uniform narrative of the industry satisfying consumer needs within an unregulated space and the regulator playing catch-up. Even at the state level, this is the story as seen from the plight of e-rickshaws and cab aggregator services in various parts of the country.

A possible explanation for this is that the concerns raised by any novel problem-solving initiative, and their actual impact on the public, can only be gauged after the deployment of the initiative. Unfortunately, this is often an excuse for the regulator to avoid anticipating the future and participating in a constructive rather than purely critical project. Moreover, in India, there exists the real danger of the all-powerful judiciary stepping in with its own regulatory proposals at the behest of public interest litigation, and bringing any measured policy response to a standstill.

To avoid regulatory paralysis, India needs to reimagine the regulator’s role. Currently, regulation is largely conceptualized as a legal issue and the questions crowding the regulator’s mind are primarily those of licensing, input-control, price-fixation, advertising to the public, liability and the like. We need to transition to a more dynamic regulatory environment where the regulator is equally focused on potential innovations in its sector—and to a distinctly different regulatory structure where sectoral innovators are encouraged to attempt early pilots of their innovations with the regulator’s involvement and guidance.

The relationship between the regulator and the regulated should essentially move from one of industry dos and don’ts to cooperation for the purpose of exploring path-breaking solutions. This way, the prospect of novel solutions is organically meshed with the rules framework governing the sector in question, and the regulator ends up facilitating ideas as much as regulating them.

This facilitative state model can bring enormous potential benefits to regulated industries and the public at large. For starters, it sensitizes regulators to innovations and novel problem-solving approaches within their sector, and raises the overall quality of forward-looking policymaking. It reduces regulatory tardiness because the regulator is clued in on a real-time basis to the direction the industry may take, and the concerns it may pose to the public. This can also facilitate feedback to the state to consider the early modification of existing rules that hinder the progress of technology to its logical end. For example, consider the Aircraft Rules, 1937, which prohibit the dropping of items from an aircraft, thereby stymieing the growth of the delivery drone industry in India.

Sharing of pilot results with the regulator can better inform the actual framing of regulations and rules to govern the activity in question. Industry benefits because they get firsthand regulatory input before scaling up the pilot into a business model, and can tweak their solution accordingly. Industry innovators, who get a sense of what works and what would be impermissible while running trials and pilots, can reduce compliance costs at a later stage when new regulations fall in place. Early-stage involvement of the nodal regulator also potentially keeps at bay less qualified, more powerful institutions such as the judiciary—and in certain cases, local bodies—from premature intervention with the innovation at hand.

To fully develop this model, some changes to current regulatory laws may be required. These changes should broadly dictate the nuances of the route through which industry innovators can seek out regulatory involvement for early-stage innovations; a fair procedural mechanism through which the regulator decides whether to invest time and resources towards guiding the proposed innovation; appropriate non-disclosure safeguards to guarantee that business-sensitive information shared by industry innovators is not leaked; and safeguards to protect interests of those targeted by the pilot.

However, more than legislative changes, this model demands an attitudinal change on the part of bureaucrats and regulators. With the pressing demand for quality solutions and the huge challenges in last-mile delivery, the facilitative state model could be particularly useful in India. The present central government has taken some initiative in this direction by involving state bodies such as the department of industrial policy and promotion in the early-stage activities of start-ups. The need of the hour is to scale up this thought and reinvent the regulatory state.

Ananth Padmanabhan is an associate at Carnegie India.

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