Regulation they say is more of an art than a science. And this seems so true for India. As part of its transition into a market economy, India established several sectoral regulators with the goal of ensuring competitive markets and protecting consumers. Sadly, that goal seems to get compromised, as a review of these bodies in electricity, telecom, education and energy shows, largely because the government seems reluctant to grant them ‘real’ independence. That’s not all. The continued presence of (wholly or even partially) state-owned players even where private entry is allowed has complicated matters further.
Take the example of telecommunications. Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) are wholly-owned by the government and coexist with sizeable private investment. The Telecom Regulatory Authority of India (Trai), created by the government, drew most of its staff from these incumbent operators—in the early phase of liberalization, telecom-related expertise in the country was scarce and largely available only with the state-owned operator. But allowing this resource pool to return to the incumbent compromised the regulatory process.
Naturally, if officers know they will go back to their ‘parent company’ eventually, there would be greater tendency on their part to overlook unfair market practices by that company. Most of us would shudder at the thought of officers of an Airtel or a Reliance on secondment to the regulator, so why should there be special treatment for BSNL and MTNL?
In fact, in the initial years of telecom liberalization, the incumbents did not have to pay licence fees and were also able to avoid many of the regulatory requirements as they were state-owned. This would be officially justified as a way to ‘compensate’ BSNL which was ‘burdened’ by social obligations (rural telephony)! But, that is not the point. Regulation needs to be non-discriminatory and independent of ‘ownership’—this alone improves effectiveness, efficiency and transparency, which are important for investors.
The case of higher education, especially postgraduate management education, is similar. We have seen a proliferation of management institutions in the private sector, not least because of their commercial attractiveness. The All India Council for Technical Education (AICTE) is the regulatory body charged with ensuring quality and protecting consumer interest. AICTE has trained its guns on all private institutes but leaves IIMs out of its ambit. No doubt, IIM standards are worthy of emulation, but the broader signal is one of discrimination. Ironically, this exemption from sector regulation has not meant respite from state interference! It is unlikely that the ministry of human resource development, which currently oversees IIMs, would defer to AICTE. After all, the reservation issue shows how strong a political instrument IIMs can be.
Even when it comes to retailing of petro-products, where no regulator is yet in place but private entry is, the state has used public sector enterprises (PSEs) to control prices for populist reasons at the cost of efficiency. While government bears part of their resultant losses—reported at crores of rupees a day—the private players are mulling exiting the market to cut losses.
The solution? Privatization of state-owned enterprises is perhaps one, but it’s naive to think that will happen soon. The other is to impress upon the government to eschew the temptation of using PSEs and regulatory bodies as instruments of political benefaction—another doubtful prospect. Thus, the status quo is likely to persist, with institutional independence in form and practice of PSEs and regulators remaining a knotty issue. The extent of independence will be determined by how vulnerable these institutions are to government influence, thus making regulation, and running public enterprises, much more of an art than ever before.
Comments are welcome at email@example.com