Somasekhar Sundaresan: Where smooth governance is masked failure

Falling in line without an attempt to stand up for principle within the framework of law is a trait of obedient regimes
 Jerry Brown, the governor of California, has picked up the gauntlet thrown by US President-elect Donald Trump’s proposed policies that would underplay the reality of climate change. Referring to federal budget cuts for earth-monitoring satellite programmes, he is quoted as having said: “If Trump turns off the satellites, California will launch its own satellite… We’ve got the scientists, we’ve got the lawyers, and we’re ready to fight.” 


A few pointers are relevant here. First, a stand-off between the Centre and a state is not unique for India. Second, such a stand-off is not a bad thing. There may be short-term pain and awkwardness about two government instrumentalities not seeing eye to eye. However, inter-institutional tension is the stuff that checks and balances in governance is all about. Falling in line without any attempt at standing up for principle within the framework of law is a trait of obedient regimes. And obedience without reason is not healthy for a democracy.


Take the case of regulators in India. The laws that govern regulators contain a ubiquitous provision that enables the government to issue directions to regulators on what to do on matters of policy. In such provisions, what constitutes a matter of policy is the prerogative of the government. This sole provision is adequate to keep regulators in check and to ensure they are never out of line with the thinking of the government in power. The effect of such a provision is that the regulator would never be formally told what to do — a verbal indication is adequate to make the regulator fall in line.


Few regulatory chairmen have had the spine to ask the government to issue a formal direction using the power to issue such a direction. More importantly, few regulatory governance boards have had the courage to stand up and be counted if they were to disagree with the government. There is one known example of the capital market regulator taking such a position — when it came to regulating unit-linked insurance plans offered by insurance companies. According to the capital market regulator, these plans were mutual fund schemes in addition to being insurance schemes and therefore, would need dual regulation. The government was forced to take a stance. The then finance minister first asked the two regulators to fight it out in court. When it got unseemly, a Presidential Ordinance was brought in to override the objections of the capital market regulator.


With demonetisation, one is not yet sure of how events turned on November 8. The central board of the Reserve Bank of India (RBI) is required to make a recommendation to the government to change the denomination of currency. Public records available so far suggest that the central board of the RBI indeed made such a recommendation. That the proposed demonetisation was a closely-guarded secret until just before it was announced, is also well known. The central board of the RBI would have met just a few hours, if not minutes, before the announcement. One does not know what information members of the RBI central board sought to put their signatures in endorsement. Who proposed the measure with what supporting material, and whether it was satisfactory to all the directors are unclear. 


Chances are that the directors endorsed the measure unanimously. Chances are that if they had had a different view, the government could have issued them a policy directive to make the recommendation. Whether the government used its power to direct the RBI is not known. If it did, the notifications ought to have said so. They do not. Perhaps no one in the RBI’s central board was at all alarmed enough to think of the side effects of demonetisation, or capacity constraints in executing the outlawing of 85 per cent of the floating currency, or the technical ability of the banking system to cope with the burden that was to be unleashed on it without notice. That is the power of having the right to dictate terms. The power never has to be formally used.


However, any attempt at reforming the regulatory system to bring in accountability for regulatory action is usually attacked as interference with regulatory autonomy. For example, there is no performance appraisal for any of the senior management — even at the level of the governing boards of the regulators. It is another matter that regulators mandate appraisal of board effectiveness and intra-board self-appraisal among peers within the boards that govern the institutions regulated by the regulator.


On the federal structure in India, too, we have some parallels with the US political system. The “Delhi government” — a euphemism of sorts, since it is not a conventional state government (more like a municipal government without even policing powers) — often wants to creatively create and handle jurisdiction, armed with a massive mandate in the elections. Almost every step from the Delhi government is tripped by a sole bureaucrat appointed by the central government. The constitutional dispute is in the courts.


The story is no different with the corporate sector. Regulations that deal with corporate governance err on the side of being overly concerned with composition of the boards rather than effectiveness of their functioning. But that is a story for some other column.


This column was published Without Contempt in the Business Standard editions dated December 21, 2016 

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