Economic Regulation in a Liberalized Economy: Relevance and Challenges in India

India's regulatory structure, though much improved since liberalization began in 1991, ''continues to be plagued by problems such as overlapping jurisdiction, unintended market distortion, and poor enforcement.'' According to Economic Regulation in a Liberalized Economy: Relevance and Challenges in India, a paper by Nathan India (download link is on the left), these problems create uncertainty among investors and can hinder economic growth. Raghuram Rajan, the economic adviser who became governor of India's central bank in September 2013, said earlier in the year that regulatory obstacles have delayed economically important projects valued at almost 2 trillion rupees.

Drawing on Nathan India's experience in analyzing and recommending improvements to Indian regulations and competition law, the paper examines cross-sector regulation, such as antitrust enforcement by the Competition Commission of India (CCI), and regulation specific to agencies overseeing airlines, banking, public utilities, and telecommunications.

The paper traces how the roles of the CCI and the industry-specific regulators in mergers and acquisitions give rise to uncertainty and conflict. The central bank, the Reserve Bank of India (RBI), no longer has sole responsibility for banking mergers. CCI must also grant approval, except when a failing bank is involved. The telecommunications agency, TRAI, and CCI regulate mergers and acquisitions using different criteria. Jurisdiction in the power industry also is ''uncertain.''

In addition, priority sector lending, a requirement that banks in India lend to certain sectors, increases the number of nonperforming assets, erodes bank profitability and, ultimately, ''reduces the credit supply and general economic growth,'' according to the report. Indian airlines have a limited ability to enter the international market because of regulations, even though the regulatory objective is to promote competition and growth.

Other impediments to efficient regulation include political interference, a lack of personnel with the technical expertise, and a lack of data to inform rulemaking.

Among the report’s recommendations:

  • Define and harmonize each regulator's functions and jurisdiction
  • Consider giving CCI sole authority over matters of competition
  • Conduct formal regulatory impact analysis (RIA) as done by various members of the OECD, including Mexico
  • Design programs and courses on regulatory economics for Indian schools.

The paper was presented December 6 at an event in New Delhi marking the fifth anniversary of Nathan India. Dr. Pronab Sen, chairman of India's National Statistical Commission, released the paper and gave his observations, saying that ''there is a very large element of potential micromanagement'' in the way most regulations are drafted.

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