Indo-US ties in a regulatory bind; aligning regulations can be a challenge

As US and Indian companies, private and government, come together to explore sectors ranging from high-tech defence to space, energy and a range of IT services, they will likely force several regulatory changes, too.

A model for this can be seen in what has begun to happen between the US and the European Union (EU) with the establishment of their Joint Regulatory Forum. Every six months all the financial sector regulators on the two sides of the Atlantic come together to fine-tune their regulatory arrangements including two areas that will be most salient for India. These are rules for digital finance and “regulatory and supervisory cooperation in capital markets”, where each has given the other side equal national treatment to operate.

In the India-US relationship one of the first examples of these changes could happen in the minerals sector. India plans to bring in amendments to the Offshore Areas Mineral (Development and Regulation) Act, 2002, as early as the upcoming monsoon session of Parliament to allow the private sector to mine the seas. The operative provisions may now need to be aligned with the Mineral Security Partnership that India has just signed to join, which includes the US among 14 countries. The regulatory regime for the sector will have to allow the same space to foreign companies to invest in these mines as those on offer for Indian companies. This will have a consequential impact on the foreign direct investment (FDI) limits for the sector, which is currently nil.

More significantly, India’s equation with the International Seabed Authority (ISA) may also have to change. The Jamaica-headquartered organisation is the one through which all signatory countries organise and control all mineral-resources-related activities in their respective areas including India. The US has had a difficult relationship with it. Deep sea mining is being seen as a critical but contested solution to the energy transition. As a member of the Mineral Security Partnership and also of ISA, India will find the need to find a difficult balance between the alternatives.

Such hesitancy is a common trait across most Indian regulators. While almost all of them have signed on to international clubs of regulators (stock market regulator Sebi, for instance, is a member of International Organization of Securities Commissions), aligning of the operative standards has taken time.

This will likely have to change as a result of the far-reaching agreements signed between India and the US. A major part of these changes will be in two areas.

The first is the rules for foreign investment in the respective sectors. It helps that in most sectors caps for foreign investment are mostly 100 per cent so most of the changes envisaged will not have to travel through the long-drawn process of Parliament for approval.

The second is the set of rules that the regulators have surrounded themselves with that makes them operate like courts. This is particularly true of the Indian energy sector regulators such as the Central Electricity Regulatory Commission (CERC) and the Petroleum and Natural Gas Regulatory Board. As one former regulator put it, “They are not regulators as one understands in a market economy.”

Yet this is one sector where the largest number of collaborations is envisaged in the India-US dynamics. These include bringing together the Indian National Green Hydrogen Mission and the US’ Hydrogen Earth Shot. “The United States welcomes India’s decision to co-lead the multilateral Hydrogen Breakthrough Agenda to make affordable renewable and low carbon hydrogen globally available by 2030,” reads the White House fact sheet issued after the meetings between Prime Minister Narendra Modi and President Joe Biden.

There are others, such as the private finance at scale for renewable energy, battery storage, and emerging green technology projects in India.

As yet, India does not have a regulator for the hydrogen mission, now being run across the ministries of new and renewable energy, petroleum and natural gas, and NITI Aayog. In the US, energy issues, including emerging technologies such as green hydrogen, are all bundled under the Federal Energy Regulatory Commission, which defines its role as consumer-focused. As its mandate says, the Commission is supposed to “assist consumers in obtaining reliable, safe, secure, and economically efficient energy services at a reasonable cost through appropriate regulatory and market means, and collaborative efforts”.

As a comparison the CERC describes its primary role as intending to promote “competition, efficiency and economy in bulk power markets, improving the quality of supply, promote investments and <advise government> (italics added) on the removal of institutional barriers to bridge the demand supply gap”. Consumers come at the tail.

The dissonance will be the most glaring in the role of the Competition Commission of India, or CCI. Even though CCI is modelled on its counterparts in the EU or the US, key differences have surfaced. One of those relates to the role of market power. Just a day after the Modi-Biden summit, Amazon has announced plans to invest an additional $15 billion in India over the next seven years. As the company’s journey vis-à-vis CCI has so far shown, all of these have pivoted on what determines market concentration and leadership.

This is the key reason Google has decided to open its global fintech operations centre in GIFT City, Gujarat, to be away from the intrusive regulatory purview of CCI. Although senior officials in CCI aver that their position is not in dissonance with that of the European Commission, the fact is that the competition regulator’s approach is quite distinct from the position adopted by the US FCC. “CCI and the Act for only antitrust issues. For online markets and platforms a new law is already being framed under the Digital Markets Act. So I suspect there will be a separate regulatory commission for the new markets,” said former CCI member Geeta Gouri. One of the reasons Amazon is getting enthusiastic again could be this development in India.

These challenges have arisen because although Indian regulators in the financial sector have built up their positions largely in consonance with that of the US, nudging them to adopt best practices, the non-financial ones have travelled away towards protectionism over the years.

As the US seeks to deepen its economic involvement with India, it is this regulatory bind that will need to be unwound. How far this happens will also determine how well the impact of the economic handshake spreads.