Dr. Bimal Jalan - Governor, Reserve Bank of India     


State of Indian Economy and the Emerging Role of the Regulator
- Central Electricity Regulatory Commission, New Delhi, July 24, 2014

I appreciate the CERC invitation to share some thoughts with members and officials of CERC on the State of Indian Economy and the Emerging Role of the Regulator. This is an extremely important subject - particularly in India, which is the world's largest democracy and, until lately, also figured among the fastest growing countries in the developing world.

  • Naturally in a democracy like ours, the primary role of the regulator in different segments of our economy is to ensure that all public utilities as well as public and private enterprises serve the interests of the people as a whole. Economic growth, which dominates media headlines, is certainly important to generate opportunities and availability of adequate goods and services, but what is even more important in a poor country like ours, is the provision of basic components of human development specially nutrition, health, literacy, sanitation and affordable electricity to the people, irrespective of their levels of income.
  • This is a big challenge, which can not be instantly resolved but we must do our best to ensure availability of all the essential services within a time bound period. And, this is where the role of regulators, both at the macro-level in providing growth with monetary and financial stability, as well as at the micro-level in ensuring availability of essential services such as affordable electricity becomes crucial.
  • On the state of economy, I don't have much to add to what I am sure all of you are already familiar with. Until two months ago, when the new government took over, there was tremendous concern about the state of the economy - low growth, high inflation, relatively high fiscal deficit and substantial delay in project implementation and inadequate capital expenditure. It is interesting to note that UPA 2 was so different in delivering growth and financial stability compared with UPA1. Post-2009 policy paralysis, there was reversal of some decisions taken, retrospective taxation, high corruption, failure in public delivery and so on.
  • After the elections 2 months ago, the outlook has changed and expectations are currently very high. We have a new government - first time after 25 years with a majority in Lok Sabha and it has made very positive declarations on its desire to introduce administrative reforms and boost growth. Some signs are already visible - higher IIP, high growth, lower inflation, positive response of the corporate sector and so on. But these are, of course, early days and we have to wait for outcomes and further policy reforms to boost growth and investment. Our fundamentals are very strong - high savings/investment rates, high foreign exchange reserves, accountability of government for performance, skilled manpower - so there is nothing to stop India from achieving growth rate of 7-8% along with inflation rate of 4-5%. As I mentioned, it is of course, too early to say whether all this will actually happen.
  • Let me now say a few words about the "Changing Role of the Regulator" in the context of our economy which, as I mentioned, has some tremendous advantages, but also suffers from several challenges from time to time because of low growth and/or high inflation, high fiscal deficit and budgetary limitations.
  • In the electricity field regulated by CERC, the primary challenge, as all of us are aware, is how to provide sufficient electricity not only in large cities like Delhi but also in smaller towns and rural areas at reasonable cost to the poor. The first task is to increase the supply of electricity at lowest cost in existing power plants and the second important task is to improve the transmission network to ensure maximum efficiency at low cost. If investment and growth pick up, this task would become even more important as demand for electricity would also increase.
  • Achievement of these tasks in our country is, of course, not easy because of lack of autonomy of many regulators and excessive ministerial/political intervention. Several regulators (and here I am not talking about CERC) face tremendous problems because of some recent changes in the working of our political system. Let me just mention a few developments which affect the functioning of our economic and regulatory system.
  • One important development, which has gathered further momentum in recent years, is the politicization of India's bureaucracy. In theory, under Indian system of executive responsibility, there is supposed to be a clear division of roles between the permanent civil service and the political leadership. Government's policy priorities and its work program are set by political leaders in office. However, bureaucracy is supposed to ensure that implementation of the approved program is done according to the laws and procedures in force, without fear or favour, for the benefit of all the people regardless of their political affiliations.
  • As emphasized by several former cabinet secretaries and other high level officials in their memoirs, most of the administrative powers which were earlier in the hands of the civil servants have now been taken over by political masters at the ministerial level who have no direct or indirect experience of administration. As politics has become more combative and personalized, transfers of civil servants have also become very frequent.
  • Some years ago in U.P., for example, where two parties resolved to have a 6-monthly tenure in government, there were as many as 1000 transfers within a year amongst members of the IAS and the IPS. First head of government transferred senior officers at an average rate of 7 per day. The second head of government, who took office after the expiry of 6-month period, decided to beat this record and transferred officials at the rate of 16 per day! Recently also, there has been some uncertainty about postings. As a result of frequent transfers, administration has naturally become weak. What is even worse is that civil servants, instead of being independent of political leaders or parties in power, have now become sub-servient to them.
  • In view of growing political corruption and administrative apathy, it is no wonder that India today has one of the worst rankings in the Corruption Perception Index and Global Corruption Barometer compiled by Transparency International. In the latest perception index for 2013, India's score is 36 on a scale of 0 to 100 where zero is supposed to be highly corrupt and 100 is very clean. What is even more disturbing is that, according to TI's corruption barometer, in the past 3 years, nearly 75% of those polled said that corruption in India had increased and only 10 percent thought that it had gone down.
  • Can something be done to improve the working of our political and administrative system in the future? To cut a long story short, let me just highlight a few points where urgent action is necessary for India to realise its full potential as an emerging economic power:
    • Within the framework of parliamentary form of government, an important priority is to further reduce the political role of the government in the economy, particularly the power of multiple ministries and governments at the Centre and States over public sector enterprises. Privatisation is not the only answer. The real question is whether we can create an "arm's-length" relationship between the government and these enterprises (i.e. UPSC-type arrangement, where the board is appointed through an autonomous agency, such as PSEB, and has the power of supervision over the CEO).
    • Another important priority is to give autonomy to the regulator and separation of powers between civil services and ministers for carrying out administrative functions is essential. Greater empowerment of the civil services must, of course, go hand-in-hand with greater accountability of civil services for their performance and ethical conduct.
    • There is also need to change the distribution of powers between the Union and states under articles 245 to 255 of the Constitution. It will be desirable to give states exclusive economic powers, but transfer inter-regional or inter-state law and order issues for implementation and regulation to the centre.
  • The over-arching points that I wish to convey for consideration are really three-fold. First, as I mentioned earlier, growth of GDP is certainly important and we must do all that is needed to put India on a high growth trajectory. At the same time, high growth is not an end in itself. We must also ensure that the benefits of growth reach all the people, particularly the disadvantaged sections of our society. Second, in order to achieve this objective, reforms have to be broad-based. Highest priority has to be given to some urgent political reforms to enforce collective accountability of governments in power combined with administrative reforms to reduce corruption, simplify rules, and easy access of citizens to public services. Third, autonomy of Regulatory institution, once policy is decided.
  • I believe that India today has the capacity to achieve its full potential as an emerging global power, provided we have the necessary will and determination. Despite some current problems in governance and the working of the political system, the innate ability of our people is immense and has been demonstrated beyond reasonable doubt. The open and participative democratic system ensures that a change where necessary can be delayed, but it cannot be avoided altogether.

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