Union-state power imbalance grows as regulatory bodies erode federalism

The exercise of legislative power by statutory regulatory authorities undermines federalism and needs to be corrected

The Constitution of India divides the work of the state into four parts: (a) The Union list, (b) the state list, (c) the concurrent list, which is a joint responsibility of the Union and the states, and (d) Schedules 11 and 12, which define the role of village and city-level governments. We often think that matters in the Union list are fully under the purview of the Union government and the Lok Sabha.

 

A moment’s reflection will show that this is not the case. The Constitution envisioned a bicameral legislature. In addition to the Lok Sabha, there is also the Rajya Sabha. The Rajya Sabha is composed of “representative of the states” who are elected by the members of the states’ legislative bodies. The Rajya Sabha is formed out of all state legislatures through a system of proportional representation.

 

Under the Constitution of India, conferment of coercive powers to government agencies must be authorised by Parliament. Other than Money Bills, all laws must be approved by both the Lok Sabha (which has direct elections) and the Rajya Sabha (which reflects the views of political parties of the states). In this sense, the Union does not stand pristine and aloof from the working of the states. The electoral structure of all state legislative assemblies also shapes all parliamentary law.

 

The contours of Indian federalism were intensely discussed in the Constituent Assembly, leading to this system of checks and balances that was put into place to avoid the excesses that come from concentrated power.

 

Union level regulators changed this

 

In this setting, we saw the rise of statutory regulatory authorities (SRAs). Today, there are over 20 SRAs at the Union level in India, each empowered by law to create and enforce law (called “regulations”) in their respective domain.

 

For example, there are nearly 50 operational Securities and Exchange Board of India (Sebi) regulations. They cover wide-ranging substantive issues, including listing obligations and disclosure requirements, regulation of portfolio managers, depositories, exchanges and more. In the absence of Sebi, such subjects would be governed by dedicated parliamentary legislation. Further, regulations are subject to frequent amendments. For example, Sebi’s regulations concerning portfolio managers — issued in 2020 — have been amended four times in the last three years. Without Sebi, such amendments would be individually contingent on parliamentary approval.

 

Parliamentary legislation is a time-consuming and not entirely predictable process. Given that the issues in domains like securities markets need expertise and quick responses to market situations, Parliament created a skeletal framework law called the Sebi Act, and this Act gave (unelected) officials in Sebi the power to write binding law. The same is true for most other Indian SRAs.

 

The regulatory literature recognises the obvious democratic deficit in this design of SRAs. This emanates from the fact that SRAs exercise legislative powers that would otherwise have been exercised by democratically-elected legislatures. Increasingly, in judicial orders in the developed world, this deficit is coming under greater scrutiny. In some regulated areas in the US, this has even led to the rollback of regulatory powers of SRAs on the grounds of excessive delegation.

 

In India also, the unbridled authority of regulators to make law while lacking in democratic legitimacy is increasingly being questioned by courts, which are drawing on the global regulatory toolkit of transparency, notice-and-consult mechanisms, and cost-benefit analysis.

 

What has not been widely noticed is the ways in which Union government regulators have induced a modification of the federal bargain that undergirds the Constitution of India, reducing the power of the states. When the Union government works through parliamentary law, the states have a say in what is being done. This scrutiny is lacking in the case of regulations by SRAs, as the issuance of regulations is not subject to explicit parliamentary approval.

 

The legislative framework for SRAs sought to remedy the democratic deficit by providing for post-facto placement of regulations before both houses of Parliament and scrutiny by the respective committees on subordinate legislation. Potentially, this could also help remedy the federal deficit. A quick analysis shows that over the 23-year period between 1999 and 2022, the Rajya Sabha committee on subordinate legislation has reviewed four regulations by SRAs. For context, the securities regulator has issued 661 regulations since its inception in 1992. In other words, the federal deficit is real.

 

Here is an example of how this matters. Urban local bodies (ULBs) require the approval of their respective state governments for borrowing money. With the growth of bond markets, increasingly municipal bonds are replacing institutional borrowings as the mechanism for providing debt to ULBs. Sebi’s regulation of municipal bonds implies that the regulatory arm of the Union Ministry of Finance is exercising control over a subject in the state list. So, the deficit is also material in its impact.

 

The point of this article is to draw attention to the ways in which the emergence of Union regulators in India is not consistent with the finely calibrated federal scheme envisaged by the Constituent Assembly. This divergence from the system of checks and balances needs to be called out and understood in exactly the same way we would address any other aspect of the evolution of the Indian state where Constitutional checks and balances are undermined. In 1809, the American thinker Thomas U P Charlton said, “Eternal vigilance is the price of liberty,” and so it is for us in India.

 

Solutions

 

What is to be done? Thinkers need to debate multiple pathways through which these problems can be ameliorated. These include: (a) Less expansive powers for regulation making by the administrative state; (b) improved working of Parliamentary Standing Committees and checks upon subordinated legislation by the Rajya Sabha; (c) regional representation,  e.g., the equivalent of the monetary policy committee in the US, which has regional members who bring knowledge of the local economy into their voting.

 

The author is an honorary senior fellow at the Isaac Centre for Public Policy, and a former civil servant