Raghuram Rajan cautions against ‘appellate raj'

Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan has cautioned against what he termed as “appellate raj”, saying that although there’s a need for checks and balances, it should not be overdone.

“Let me emphasize, we need checks and balances, but we should ensure a balance of checks. We cannot have escaped from the licence permit raj only to end up in the appellate raj,” Rajan said in a speech on democracy, inclusion and prosperity at an event in Goa.

While discussing the issue of democratic accountability, Rajan pointed out that India’s experience is different from countries where strong governments emerged first and then were restrained by rule of law and democratic accountability.

“In India, we have the opposite situation today, with strong institutions like judiciary, opposition parties, the free press, and NGOs(non-governmental organizations), whose aim is to check government excess,” Rajan said.

“However, necessary government function is sometimes hard to distinguish from excess.”

India will have to strengthen governmental and regulatory capability, while resisting the temptation to implant multiple layers of checks and balances even before capacity has taken root, the central bank chief said.

“We must choose a happy medium between giving the administration unchecked power and creating complete paralysis, recognizing that our task is different from the one that confronted the West when it developed, or even the task faced by other Asian economies,” he said.

This is not the first time Rajan has cautioned against excessive oversight.

At a banking conclave in June last year, Rajan invited debate on some of the recommendations of the financial sector legislative reforms commission, saying that excessive oversight can reduce regulators like the RBI to paper tigers.

Among the commission’s many recommendations was a proposal to set up a financial sector appellate tribunal to hear appeals against all financial sector regulators including the central bank.

“Easing the appellate process will invite appeal. This will not be a problem in a developed country with well-established regulations, a case history of judgments and speedy delivery of justice. But in India, where the financial system is developing and many new regulations have to be framed, and where the tribunals will have a significant amount of learning to do, the encouragement to appeal could paralyse the system and create distortions, as needed regulations are held up and participants exploit loopholes,” Rajan had said in his 17 June speech.

In his Goa speech on Friday, Rajan argued that if a multiple appellate process is created against governmental or regulatory action that is slow and indiscriminating, there’s a risk of halting necessary action.

“If the government or regulator is less effective in preparing its case than private parties, we ensure that the appellate process largely biases justice towards those who have the resources to use it, rather than rectifying a miscarriage of justice,” said Rajan, adding that proposed reforms must take into account how the actual Indian situation works rather than focus on a theoretical ideal.

The speech, which drew on political scientist Francis Fukuyama’s three pillars of a liberal democratic state, also touched upon issues of equitable distribution of economic capabilities.

According to Fukuyama, liberal democracies, which seem to be best at fostering political freedom and economic success, tend to have three important pillars: a strong government, rule of law, and democratic accountability. Rajan noted that a free system should be thought of as the fourth pillar underpinning liberal market democracies.

Rajan said as education makes the country’s youth more economically mobile, public support for free enterprise has expanded and the political dialogue has moved from giving handouts to creating jobs.

Rajan argued that as long as the pace of liberalization is modulated to the pace at which the country broadens economic capabilities, the public will be supportive of reform.

“This also means that if we are to embed the four pillars supporting prosperity and political freedom firmly in our society, we have to continue to nurture the broadly equitable distribution of economic capabilities among our people. Economic inclusion, by which I mean easing access to quality education, nutrition, healthcare, finance, and markets to all our citizens, is therefore a necessity for sustainable growth. It is also, obviously, a moral imperative,” said Rajan.