Regulation in India: Design, Capacity, Performance

Devesh Kapur, Madhav Khosla, Devesh Kapur, Madhav Khosla

• Publisher: Hart Publishing
• Year: 2019
• Print ISBN: 9781509945696
• eBook ISBN: 9781509927739
• Edition: 1
• Topic: Jura
• Subtopic: Verwaltungsrecht

The rise of the regulatory state has been a major feature of modern constitutional democracies. India, the world's largest democracy, is no exception to this trend. This book is the first major study of regulation in India. It considers how the development of regulation in India has altered the nature and functions of the state; how it is reshaping the relationship between business and the state; how it has called for the refashioning of established legal principles; and how it has raised new questions about the relationship between technical expertise and the rule of law. The chapters cover topics ranging from the foundations of the Indian regulatory state to the form of regulation across different sectors to regulation in practice. Together, the chapters reveal the challenges, promise, and limitations offered by contemporary regulatory practices, and they capture the close if sometimes fraught relationship that regulation must inevitably share with the political economy and constitutional schema within which it operates.

Part I

Introduction

1

The Reality of Indian Regulation

DEVESH KAPUR AND MADHAV KHOSLA*

INTRODUCTION

The modern state has emerged as the most powerful territorially centralised form of organisation that shapes human affairs. Its focus has grown from minimalist ‘night-watchman’ goals to those that are far more wide-ranging. While the expanding goals of the state have been deeply contentious, with ‘neoliberal’ policies seeking to roll back the state in recent years, another dimension of contestation has been about means rather than ends – that is, how best to allocate economic resources, redistribute income and wealth, and affect the rate of economic growth. States have sought to achieve their goals via classic tax and expenditure policies, trade policies, expanding public sector employment and – especially in countries at earlier stages of economic development – building state-owned enterprises to promote economic development. The retreat of the state has been most pronounced in the direct production of goods and services (as distinct from their provision), where it has been replaced to a very large extent by the private sector.

While a principal goal of economic liberalisation has been the greater role of market forces and the private sector, it has also led to significant changes in state structures and market governance.¹ One of the ways in which state structures have undergone significant transformation is the astonishing growth of regulatory agencies. The rise of the ‘regulatory state’ is both part of a greater legalisation of the state and the judicialisation of the economy and society, as well as a part of greater formalisation of the relations between various actors in the capitalist economy. The redirection in the state’s role from production to regulation has been mirrored in shifts in governments being organised around traditional branches – namely, the legislature, the executive and the judiciary – to governments that now encompass, in addition, regulatory institutions with varying degrees of independence that incorporate elements of all three branches of government in their mandates.

We define regulation here as interventions by public agencies in the activities of a target population. The interventions that we have in mind are intentional and direct – involving binding standard-setting, monitoring and sanctioning – and which are exercised by public sector actors on the economic activities of private sector actors.² Regulatory agencies are thought to centre around four dimensions.³ The first dimension relates to regulatory responsibilities: the extent of powers that agencies possess. The second dimension relates to managerial autonomy: to what extent do agencies have autonomy in their staffing, in their organisational structure, and in financial and budgetary matters? An important feature of the autonomy question is the separation between agencies and existing ministerial structures. The third dimension is concerned with political independence. What protection exists, such as perhaps the protection from being removed from office at will, that allows agencies to be immune from political forces? Finally, there is the question of accountability. What are the various forms of accountability that exist for agency behaviour? Are the forms of accountability vertical – that is, to the executive and/or legislature – or are they non-hierarchical forms of accountability that might exist, such as forms of accountability to stakeholders via participatory mechanisms?

While the rise of the regulatory state is a global phenomenon, its specific characteristics are rooted in distinct national contexts and the constellation of forces that led to the creation of specific regulators. As one might expect, the roots of the regulatory state lie in industrialised democracies. In the case of the US, regulatory institutions are deliberately ‘politicised’, with an underlying design philosophy that partisan political debate best ensures democratic accountability. Because they are faced with a powerful Congress intent on oversight, agencies are constantly exposed to the influences of majoritarian democracy. In contrast, the regulatory state movement in Europe has been driven by a very different force: the desire to ‘depoliticise’ contentious politically partisan issues and insulate technical matters from political pressures.

In the case of developmental states, such as in East Asia, the regulatory state rose in the context of democratisation and the crisis of the developmental state amidst financial globalisation. Pressures from the West and global forces called on the discretionary and collusive modes of doing business that were integral to the developmental state to be replaced by transparent and formally specified rules, which was effectuated by way of new regulatory agencies that would formulate and police those rules. Beyond developmental states, the rise of the regulatory state in the Global South, more broadly, has been shaped by three common contextual factors:⁴ international pressures, especially from international financial institutions, to adopt the institutional innovation of regulatory agencies, particularly in infrastructure and financial sectors; a greater intensity of redistributive politics in settings where infrastructure services are deficient (and often non-existent); and limited state capacity. The first of these has resulted in weakly embedded regulatory agencies within the local political and institutional context; the second has inevitably drawn in other actors, especially courts and civil society; and the third encompasses a ‘thin’ and ‘thick’ dimension, the former covering organisational concerns of budget, personnel and training, and the latter the pressures on the state to manage multiple forms of engagement with diverse stakeholders in order to balance the competing concerns of growth, efficiency and redistribution.

The Indian experience is somewhat akin to that of other developmental states and the Global South. A dirigist state that was heavily interventionist found itself facing an economic crisis that led the state to withdraw from the direct control of large areas of economic life. The state subsequently moved in the direction of relying heavily on reformed, or newly created, regulatory agencies to manage economic life. These agencies were constructed to attempt to ‘depoliticise’ areas of economic life that had hitherto been heavily politicised. Since the liberalisation of the Indian economy in the early 1990s, the nation’s governance structure has become increasingly regulatory in character. The admission of private actors into several domains meant that the prior model of administration, where the state had a monopoly and an executive ministry performed a managerial role, needed alteration. A notable feature of the new ‘regulatory’ structure was, and remains, the presence of regulatory agencies that operate with varying – and sometimes ambiguous and controversial – degrees of independence from the traditional political executive. Indeed, if economic liberalisation was meant to roll back the state, the rise of the regulatory state is a testament to the fact that, far from rolling back, the state has simply rolled over. It has, however, led to a more fragmented state apparatus. The emergence of the ‘independent regulatory agency’ has been a defining element in this institutional fragmentation, both in India and elsewhere.⁵

The principal reason cited for the rise of the regulatory state – the desire to de-politicise certain decision-making processes – and the concerns that have arisen with such regulation are familiar, both in India and elsewhere. Delegation to specialised agencies is a ‘hand-tying’ strategy that insulates ‘technocratic’ decisions from politically expedient ones. Agencies hold the potential to make determinations and exercise judgement based on expertise, as well as address issues on an ongoing basis. However, their structure and operation raise a range of questions relating to both democratic accountability and the rule of law.

Delegation has long occurred in constitutional democracies, and executive ministries have long engaged in regulation. But one consequence of the emergence of the independent regulatory agency is that now, more than ever, a great deal of policy-making is performed outside of the legislature, inviting questions over the precise means through which such policy-making can be made accountable.⁶ It is widely understood that regulatory states around the world must negotiate different kinds of tensions: the tension between the demands of the rule of law and formal constitutional principles; the demands of representation and accountability required by the democratic process; and the demands of economic efficiency.⁷ In addition to these normative questions, there are a range of positive questions relating to the ‘regulatory process’ – these include agenda-setting; the negotiation of standards; and the implementation, monitoring and enforcement of actions through a welter of legal statutes, executive orders and judicial decisions, as well as the directives of regulatory agencies.

This volume is the first major study of regulation in India. Although several valuable studies of India’s overall regulatory framework, as well as studies focused on specific sectors, have emerged in recent years, the scholarship on regulation in India is relatively sparse, especially given the growth in the scale and scope of the regulatory state in India.⁸ A rare exception by economists examining the conduct of regulation in infrastructure and securities sectors in India asked whether regulators in the country were ‘white knights that came to the rescue of sectors that were being mismanaged by public sector monopolies’ or instead ‘insidious de facto agents of government, perpetuating public sector control under a veneer of competitive forces’.⁹ The authors concluded that performance varied across regulators, partly due to faulty design, but mainly because of ‘lack of attention to the reform of the market structure and an inadequate understanding of the nature of interaction between the market structure and the effectiveness of the regulatory process’.¹⁰

The state of such a hypothesis today, well over a decade after it was made, is an important question and, in some ways, an open one. This volume considers an array of themes ranging from the legal and conceptual foundations of the Indian regulatory state, to its features across different domains, to aspects of its functioning and performance.¹¹ A significant portion of chapters concentrate on the legal architecture and framework at work. This focus is intended: the regulatory state is, after all, not merely structured and governed by law; the institutions and concepts that it involves are constructs of the law.¹² The rules that shape different sectors as well as the absence of rules in particular cases are constituted by the law, and underlining this fact is vital not merely in order to understand them but also to seriously pose the question of reform. Regulation in India is, perhaps even more than elsewhere, deeply embedded within the legal (and constitutional) framework operating in the country.

In this introductory chapter, we have chosen to resist exploring some of the general themes associated with regulation, from its capacity to respond to market failures and market limitations, to the ways to make it accountable. Instead, we have chosen to turn to certain features of Indian regulation that are distinctive. Our basic premise is that, for all the legal ambiguities and institutional weaknesses, studying the Indian regulatory state is unavoidable, and may even be the inevitable starting point for numerous other issues, from economic growth to inequality to democratic accountability. This premise is only strengthened by the fact that, despite the legal questions that critics pose, the reality remains that – as has been the case in many advanced democracies – Indian constitutionalism has ‘accommodated’ the rise of the regulatory state.¹³

I.DOCTRINAL INCOHERENCE AND UNCERTAINTY

In modern constitutional democracies, the executive, legislative and judicial branches of government are central actors in shaping the functioning of public institutions. However, in India, as in several other democracies, there has been a creeping expansion of judicial power.¹⁴ The role of the judiciary with regard to the operation of regulators has been even greater given the absence of an overarching administrative law statute, such as the Administrative Procedure Act, 1946 in the US. As Raeesa Vakil’s chapter shows, the Indian Supreme Court’s approach began with a relatively thin conception of administrative law that was thickened over the years with the overlay of broad and somewhat ambiguously framed constitutional principles and rights jurisprudence.¹⁵ Vakil captures how a field that is deeply embedded and nurtured with formal constitutional structures and practices has been translated to a new and complex arena – tribunals, regulators, agencies and authorities – with limited consensus among either scholars or the judiciary on even the most basic questions. Often, the dominant rights-based understanding of administrative law advanced by courts during the process of review deploys the language of fundamental rights violations, thereby limiting the growth and damaging the internal coherence of non-rights based – significant and distinct – grounds for review such as the doctrine of ultra vires or of legitimate expectations.¹⁶

A further feature noted by Vakil is that the much-needed renegotiation of the separation of powers doctrine has not occurred in India, with the Supreme Court continuing to be an overarching ‘good governance’ court while providing limited clarity on the permissibility and scope of delegation to the executive, on the specific demands from the legislative process, and on the norms involved in the establishment of regulatory agencies.¹⁷ The idea of participatory rule-making, a major theme in the study of regulation globally, and one broadly seen as vital for democratic accountability and responsiveness, remains underbaked in the Indian context. Because the status of regulatory institutions in the three-branch separation is not adequately defined, such institutions often perform quasi-legislative functions without appropriate accountability and participatory mechanisms. The fact that Indian administrative law, crudely put, is ‘missing in action’ is further underlined by Farrah Ahmed and Swati Jhaveri’s study of how the common law review of administrative action has been eclipsed by constitutional law, thereby resulting in doctrinal gaps and misalignments in addressing administrative failures and in providing guidance for administrators and citizens alike.

K Vivek Reddy takes the sub-optimal state of Indian administrative law one step further and provocatively questions its constitutionality. The constitutionality of the administrative state has, of course, been a matter of impassioned recent debate in the US.¹⁸ Reddy notes, for example, that the separation of powers principle has only been applied to the regulatory state in narrow contexts such as judicial independence. In this context, the courts have certainly been vigilant in assessing the place that regulatory tribunals occupy within India’s constitutional structure. A considerable degree of judicial doctrine has addressed the structure of regulatory tribunals (dispute settlement bodies to which regulatory decisions are appealed) in terms of their composition and their staffing of judicial members, as well as their jurisdiction and how it relates to the jurisdiction of the Supreme Court and the High Courts under Articles 32 and 226 of the Constitution.¹⁹ However, the constitutional legitimacy of other aspects of the regulatory state has not been sufficiently addressed.

Reddy points out, for instance, that the principle of collective responsibility – a core constitutional and political principle in parliamentary systems – has not been fully reconciled with the existence of regulatory agencies, which operate with varying and often unclear degrees of independence from the political executive. Courts often extend the same degree of deference to such agencies as they do to actions by traditional government ministries, an approach which has its justifications, but does not take into consideration the accountability vacuum present in the case of agencies. Traditional common law doctrines, such as the doctrine of ultra vires, have been less effective at regulating agency action than we might hope, for the mandates under which agencies operate are often defined in open-ended and even troublingly vague terms. Regulatory agencies in India thus operate under the blanket of ambivalent or antiquated doctrine, at times enjoying vast bundled powers of law-making, investigation, adjudication and enforcement, and resorting to new instruments such as close day-to-day supervision, inspection, detailed queries, advisory correspondence and guidance supervision.

There have, one should note, been some positive and important judicial interventions over time. The Supreme Court’s recent decision in Cellular Operators Association v Telecom Regulatory Authority of India is one example.²⁰ This case involved both constitutional and legal challenges to a Telecom Reg...

Table of contents

• Cover
• Title Page
• Acknowledgements
• Contents
• Notes on Contributors
• Table of Cases
• Table of Legislation
• Table of Secondary Legislation
• Table of Statutes
• Table of Other Materials
• Table of EU Material
• Table of International Material
• Table of National Material
• PART I: INTRODUCTION
• PART II: FOUNDATIONS
• PART III: REGULATORY DOMAINS
• PART IV: REGULATION IN PRACTICE
• Index
• Copyright Page