Tuesday, May 26, 2009

The achievements and adverse effects of regulatory framework in the course of India’s industrialization

Critically analyze the achievements and adverse effects of regulatory framework in the course of India’s industrialization.

India's experience with regulation in the sense of control is not new. Till recently, all sectors of the economy were regulated. For example, in the infrastructure sectors, the governments or their instrumentalities owned, operated, and regulated services. The central government, the Central Electricity Authority, state governments, and state electricity boards regulate the power sector under the authority of the
Electricity (Supply) Act, 1948 and Indian Electricity Act, 1910; the Department of Telecommunications regulates the telecom sector under the Indian Wireless Telegraphic Act, 1933 and the Indian Telegraphic Act, 1885; the central government, state governments, Directorate General of Shipping, and dock labour boards regulate the port sector under the Ports Act, 1908, the Major Port Trusts Act, 1963, the Merchants Shipping Act, 1958, and the Dock Workers (safety, health and welfare) Act, 1986. In addition, there are other regulators created under various other acts relating to environment, safety, labour, etc. Regulation as it existed then, and still continues to exist in several areas, is rooted in the belief that only the public sector can provide basic infrastructure services, that the entry of the private sector should strictly be regulated if it cannot be altogether prevented, and that the public sector agencies providing services should serve the interests and compulsions of the government. There was no attempt to distance the government's role as the policy maker and
protector of public interest from its role as operator or provider of services. In fact, considerations of efficiency, productivity, and consumer interests were not of any importance. There was also the implied belief that accountability to the government and through the government to the Parliament or the legislature was adequate to ensure transparency and that no objectivity in regulation or disclosure to the public was necessary. This form of regulation or control inevitably resulted in unlimited discretionary powers to the service providers operational inefficiency and poor quality of service lack of transparency in the decision-making process and of accountability high barriers to entry and negligible flow of private capital
financial mismanagement lack of protection of consumer interest with non-competitive prices at the consumer end and highly restricted consumer choices.
Reforms and liberalization of the Indian economy started in 1991/92 with the power and telecom sectors being thrown open gradually to private investment and competition.
The telecom sector was opened up in 1991 with private investment being permitted in
the manufacture of telephone equipment. Value-added services were thrown open for
private investment in 1992, and in 1994, the National Telecom Policy reiterated the
government's commitment to further liberalize the sector. The guidelines of 1991
allowed private sector entry in the generation of power. This was followed by several
initiatives to attract and facilitate private investment in the power sector. Private sector
participation by way of leasing port facilities was permitted in 1994 and investment in
the creation of new facilities in the existing ports or establishment of new ports in 1996.
However, regulation in the power and telecom sectors was not contemplated or
provided for as a part of the initial reforms process, unlike in the UK where the
electricity industry restructuring and positioning of the regulator were simultaneous. In
the case of the telecom and power sectors, the regulators came much later, whereas in
the case of the port sector the decision to set up a tariff regulatory authority was
announced as a part of the policy statement in 1996. In the insurance sector, the
regulatory authority has preceded the opening up of the sector. This sequence would
seem to indicate that progressively there is a realization in the government that reform
cannot be put into force without independent regulation and that a regulatory authority
should be set up. In the hydrocarbons sector, where the pace of reform is rapid, the
regulator is not yet in sight. To what extent do the laws setting up these regulatory
bodies incorporate the requisites of a sound regulation? Annex 1 sets out the
provisions of the TRAI (Telecom Regulatory Authority of India) Act, 1997; the PLA (Port
Laws [Amendment]) Act, 1997; the ERC (Electricity Regulatory Commissions) Act,
1998; and the IRA (Insurance Regulatory Authority) Bill, 1998 under the categories of
scope, autonomy, accountability, and powers. The scope of regulation in the four
sectors differs widely. Whereas TRAI has been specifically mandated to regulate the
telecom sector as a whole and advise on the timing of entry of players, licensing
conditions, technical capability, etc., the CERC (Central Electricity Regulatory
Commission) is essentially set up to regulate tariff for central generating agencies and
for interstate transmission of power. On the other hand, TAMP (Tariff Authority for
Major Ports) is only a tariff regulatory authority on the lines of a tariff commission and is
not a regulator of port activities at all. The IRA is being assigned a bigger mandate,
which is comparable with that of TRAI, in the insurance sector. Also TRAI and the IRA
at the bill stage have been specifically mandated to protect the interests of the
consumers, monitor the quality of service, and ensure compliance of minimum service
obligations, whereas in the case of the CERC, these have been left as objectives of the
CAC (Central Advisory Committee), without any clear indication of the value of the
advice of the CAC or how such advice would be heeded. In the case of TAMP, these
issues have not been addressed at all.
The regulatory laws do not provide for any flexibility for speedy and effective response
to changing circumstances. Since a regulator facilitates the process of transition from
the monopolistic market to a competitive economy, its form, functions, and scope
cannot be static. It is possible that as services are unbundled and competition

increases, certain areas presently regulated may at some future date call for no
regulation. For example, in the power sector it is possible that at some stage
generation or distribution may not require tariff regulation. Secondly, as an economy
matures and becomes sophisticated, the approach to regulation may have to change.
The traditional practice of regulating the rate of return of the utilities is already
undergoing a change with concepts like performance-based regulation or marginal cost
approach being introduced. Technological advances may also alter the boundaries of
regulation, a possibility that is looming large with telecommunications and broadcasting
beginning to use the same pathways. Ideally, therefore, there should be some provision
in the laws or mechanisms to ensure that the scope and nature of regulation is
continuously under review.
India has had robust economic growth since 1991 when the government reversed its
socialist-inspired policy of a large public sector with extensive controls on the private
sector and began to liberalize the economy. Liberalization has proceeded in fits and
starts since then, mainly due to political pressures, but the economy has responded
well by posting strong growth in many sectors. A 2003 report by Goldman Sachs
predicts that India's economy would be the third largest by 2050.
With a GDP of $550 billion ($2.66 trillion at PPP) India has the world's 12th largest
economy in US dollar terms and the 4th largest in PPP terms. However, the large
population means that per capita income is quite low. In 2002 the World Bank ranked
India 145th in PPP per capita income and 159th in real terms, among 208 countries.
About 60% of the population depends directly on agriculture. Industry and services
sectors are growing in importance and account for 25% and 50% of GDP, respectively,
while agriculture contributes about 25.6% of GDP. More than 25% of the population live
below the poverty line, but a large and growing middle class of 300 million has
disposable income for consumer goods.
India embarked on a series of economic reforms in 1991 in reaction to a severe foreign
exchange crisis. Those reforms have included liberalized foreign investment and
exchange regimes, significant reductions in tariffs and other trade barriers, reform and
modernization of the financial sector, and significant adjustments in government
monetary and fiscal policies.
The reform process has had some very beneficial effects on the Indian economy,
including higher growth rates, lower inflation, and significant increases in foreign
investment. Real GDP growth was 4.3% in 2002-03, mainly due to a severe drought.
Growth in 2003-2004 is expected to be above 6%. Foreign portfolio and direct
investment flows have risen significantly since reforms began in 1991 and have
contributed to healthy foreign currency reserves ($85 billion in August 2003) and a
moderate current account deficit of about 1% (2002-03). India's economic growth is
constrained, however, by inadequate infrastructure, cumbersome bureaucratic

procedures, and high real interest rates. India will have to address these constraints in
formulating its economic policies and by pursuing the second generation reforms to
maintain recent trends in economic growth.

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