Regulators don't need constitutional status

Accountability and transparency are effective ways of ensuring that they remain truly independent

Should Indian regulatory agencies be given constitutional status? Many people argue that Indian regulatory agencies are often unable to withstand political pressure from the elected government of the day, which affects the way they perform their functions. They argue that hard-coding regulators in the constitution would “restore symmetry” between regulatory agencies and the elected government. This argument is as tenuous as it is tempting, and should be buried lock, stock, and barrel for three reasons.

Purpose of a Constitution

Why are some public bodies hardwired in a Constitution, but not others? Should every public agency that is supposed to be apolitical be given constitutional status? For instance, we detest government intervention in the affairs of higher educational institutions, stock exchanges (also mini-regulators) banks. Should we then confer constitutional status on the IITs, stock exchanges and public sector banks? Theoretically, we could. But since Constitutions are (and should be) harder to amend than parliamentary law, would we want to give permanence to every apolitical institution by hard wiring it into the Constitution? That would make for a bulky and potentially an easily amendable Constitution.

Mature constitutions cement the place of two types of entities in society. First, those bodies that make laws and must be elected by the people. These bodies are hardwired into the Constitution to secure the people’s right to elect their representatives. The Constitution will, for instance, lay down how the central and state legislatures are to be elected, the majority needed to form the government, the composition and tenure of both houses of the legislature, and so on. Second, the Constitution fortifies institutions that are designed to exercise checks and balances on elected bodies and safeguard against majoritarian tendencies. For instance, it fortifies the position of the higher judiciary, the comptroller and auditor general’s office and the election commission, all of them meant to exercise checks on an elected government.

Regulatory agencies do not comprise elected representatives of the people. In fact, many argue that they comprise technocratic elites who make regulations that have the binding effect of the law, license and regulate intermediating firms.

Why do we allow the parliament to delegate substantive law-making powers on such agencies and escape accountability? Two answers have generally been offered in response to this question. First, to build-up expertise and capacity to regulate complex areas. While expedient, this explanation hardly demands regulators’ insulation from the government. In India, for instance, we have seen several high capacity agencies, such as the UIDAI, that were not (in their original form) entirely insulated from the government.

The second answer is the idea of credible commitment. When the government sets up a regulator, it cedes its sovereign powers to govern that area of the economy. By doing so, it signals its commitment to policy stability. Sticking to this credible commitment elicits confidence in the public that policymaking in that sector will be driven by public interest and not election cycles. Even with the most extreme interpretation of the credible commitment theory, regulators are not meant to act as a “check” on the elected government. In fact, in a democracy, it is the legislature’s prerogative to decide whether to cede its sovereign power to regulate a sector, how much power to cede, and the constraints within which regulators must work. Since regulators exercise law-making and enforcement powers without having to ever face an election, making them accountable to the elected representatives is effectively the only way to hold them accountable to the people at all.

This is not to say that regulators are not supposed to be “independent”, but merely to illustrate that they do not perform a function that should be hardwired in a Constitution.
 

Does constitutional status affect outcomes?

Now turning the argument to appeal to the readers’ utilitarian instincts. A key argument for conferring constitutional status, specifically on the Reserve Bank of India, is to allow it to conduct monetary policy independently. The evidence to substantiate this claim is weak. For instance, in a 2009 report, the Bank for International Settlements (BIS) found that none of the common law countries set up their central banks under their Constitutions. Out of the 35 odd civil law countries that did so, the Constitutions of eight specifically noted the independence of their central banks. These were: Switzerland, Chile, Mexico, Russia, Sweden, Slovakia, Hungary and South Africa. It is hard to argue that the Constitutional provisions of these countries somehow impacted their overall inflation experience. The absence from this list of several central banks that are perceived to have the “gold standard” of independence, such as the Reserve Bank of New Zealand, Federal Reserve, Bank of Canada, reinforce the point.

In fact, some of the best governed banks, such as the Bank of Japan and the Federal Reserve have private shareholders, such as banks and financial institutions. The shares of Bank of Japan and some well-governed central banks of countries in the EU are traded on the secondary market. Early findings of researchers at the Bank of England show no connection between a central bank’s legal form and the achievement of its public purpose (Bholat and Gutierrez, 2019).

Better alternatives to secure independence

In the absence of constitutional hardwiring, how “independent” are regulators set up under laws passed by parliament? The answer is that it depends on the terms of the law setting up the regulator.

Securing the de jure and de facto is better achieved by asking for “fair contract terms” for these agencies under their governing law, aligning the incentives of the persons heading the regulatory agencies with public interest and requiring them to consistently explain their actions to the public. When an agency is required to explain its actions to the public or its representatives, it may seem like its independence is being compromised. On the contrary, transparency of conduct is one of the most effective ways of incentivising the agency to act in public interest. A classic example is that of the provisions built into the Reserve Bank of India Act in 2015, requiring the regular publication of the minutes of the monetary policy committee’s meetings, individual votes of each member and the requirement to explain to the government the failures in maintaining the inflation target. This is a powerful provision that simultaneously secures independence and accountability, as it would be hard to explain decisions and votes that do not align with public interest.

To sum up, provisions to secure transparency and public accountability in enforcement powers will go a longer way in securing true independence for a regulator than conferring constitutional status on it. After all, experience has shown that institutions fortified by the Constitution are also fallible.

The writer is a PhD candidate at the National University of Singapore.

Archer, D (2009, May). Issues in the Governance of Central Banks. Bank for International Settlements. Bholat, D, & Gutierrez, K.M. (2019, October 24). The ownership of central banks