Did central planning end in July 1991?

Government picking winners is alive and well

The 30th anniversary of the July 1991 Budget speech is a sombre reminder of the limited progress that India has made, towards greater freedom for the people and towards greater state capability on the legitimate functions of government. A recent ban on the storage of customer card data by the Reserve Bank of India (RBI) helps us think about the problems of central planning and of state capacity in regulation. July 1991 was a beginning that has yet to be translated into a full-fledged intellectual toolkit about how the Indian state should function.

The essence of Indian socialism, as initiated by Nehru and deepened by Indira Gandhi, lay in state domination. The state became the most powerful economic actor. The state-directed firms and individuals on how to behave. People living in remote places, leading their own life in peace, were forced to comply with the diktat of the state, backed by threats of punishment.

The phrase “central planning” was born. In a market economy, decisions about the design of products and processes are made by private people under the influence of customer preferences and competition in markets; under central planning, the government chooses such technical details. In a market economy, it is the market which decides who wins. Under central planning, the winning technology, the winning product category or the winning firms are those blessed by the government. We, who praise the growth of the 1991-2011 period, fail to call out the central planning that is casually practised and accepted in the Indian policy thinking. The abolition of the Planning Commission was important as a symbol of retreating from Indian socialism, but the philosophy of control remains widespread.

Leaks of personal data from online websites have been in the news. This is a matter of concern. The RBI’s response has been to put out a regulation, effectively banning the storage of customer card data by payment aggregators (PAs), payment gateways (PGs) and merchants. In a recent paper “Should consumers be prohibited from storing card data on the internet?” (https://xkdr.org/releases/­SaneShahZaveri2021_­card_data_storage_prohibited­.html), my co-authors and I argue that the ban is excessive, has not emerged out of a cost-benefit analysis, and has followed a weak public consultation process.

Individuals have been storing card details on merchant websites to make regular payments, or to enjoy the convenience of shopping without having to enter their card details each time they visit the website. Firms have invested in designing processes and products that offer ease of service to their customers. The new RBI regulation disrupts consumers: Additional time will be spent on supplying information every month for millions of transactions. It forces costs upon firms in technology development. The regulation tilts consumer preference towards certain payment technologies. We run the risk of technological choices being substantially shaped by the RBI, of a government that picks winners. We then risk the stagnation that is induced by central planning systems.

Illustration: Ajay Mohanty

The regulation imposes constraints on private persons, and should therefore be implemented, only if the benefits to society from the regulation outweigh the costs. RBI did not demonstrate how the potential benefits of the card data storage prohibition will outweigh the costs this imposes on customers and payment intermediaries. For example, we do not know either the volume or value of data breaches or the monetary loss that has resulted from the storage of card data with PAs/PGs/merchants. The regulation does not demonstrate how it meets the proportionality test laid down by the Supreme Court (SC) in the case of Internet Mobile Association of India v. Reserve Bank of India (2018) for delegated legislation.

When unelected officials write law, there is the problem of democratic legitimacy. The first pillar of due process, through which democratic legitimacy is achieved, is consultation. The public consultation process of the RBI has been lacking. The discussion paper released by the RBI in September 2019 did not offer a complete ban as a potential policy choice. The card data storage prohibition appeared as a sudden fait accompli to merchants and consumers. The document announcing the ban did not show the alternatives to the ban, which were considered by the regulator. How did the industry and consumers respond to the proposal for such an intrusive intervention? What was the kind of feedback received by the RBI in response to the consultation process? What part of the feedback was accepted and rejected, based on what intellectual arguments? Answers to these questions require the RBI to publish the results of the consultation process. The SC, in the Cellular Operators Association of India vs. TRAI (2016) case, emphasised these norms to ensure that regulatory consultation processes are transparent and meaningful.

A cost-benefit analysis by the regulator, and an effective public consultation process, are particularly required when introducing a measure as intrusive and expensive as a ban. It is always useful to ask what would the least coercive tool have been to achieve the same result — that of protecting consumers. Alternative tools such as liability frameworks and higher security standards are quite effective at achieving the desired consumer protection, at a lower cost to society. If sophisticated thinking was present inside the RBI in considering these choices, this has not been published. Possessing and displaying technical expertise is the second pillar through which regulators achieve democratic legitimacy.

Getting back to high growth in India requires freedom and state capacity. The regulators of today have power, bureaucracies, and intricate control that was unthinkable in 1991. Regulators in India achieve extreme power by combining legislative, executive and judicial powers. A substantial literature has demonstrated the failures of the work taking place in these organisations. Under conditions of low state capacity, regulation in India has often veered into central planning and control, enforcement has been selective and weak, and the actions of regulators raise concerns about the rule of law. An emerging Indian jurisprudence has started questioning the working of regulators and the checks and balances surrounding the powers of officials in regulatory agencies.

The writer is an independent scholar