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Statutory regulatory authorities need autonomy in staffing their organisations with specialists who have integrity and knowledge

Newspapers reported recently the call of the chairman of the National Financial Reporting Authority (NFRA) for a “standalone legislation”. NFRA is a relatively new regulator —largely invisible to the general public—constituted in October 2018 under Section 132 of the Companies Act 2013. The chairman reportedly said that this section does not provide comprehensive coverage of all the functions and powers that are required to constitute the NFRA as a corporate financial reporting regulator. As the way forward he said “… in the interest of functional financial and administrative autonomy of the NFRA there is a compelling need for a standalone legislation”. This according to him will be the key to build the regulatory capacity of the NFRA.

The need for establishing the NFRA had arisen on account of the requirement across jurisdictions in the world in the wake of accounting scams to establish independent regulators for enforcement of auditing standards and ensuring the quality of audits and thereby enhance investor and public confidence in financial disclosures of companies. The design and structure of the NFRA and the distribution of responsibilities between the NFRA and the government calls for a more detailed discussion. The focus of this piece will be on the general issue of autonomy of regulators in the area of human resources of their organisation.

Regulation is defined more broadly as the intentional and direct interventions by public agencies in the economic activities of a target population usually in the private sector. The way this has evolved in India is creation of a statutory regulatory authority (SRA) and fusing the powers of two or all three organs of the state namely the legislative executive and judiciary in that authority for that specific domain. This not only renders the SRA very powerful but also requires it to develop the capabilities required to discharge these onerous functions in domains that require specialised and continuously updated knowledge.

As an example the Reserve Bank of India (RBI) in its role as the banking regulator requires people With specialised knowledge of banking. The Securities and Exchange Board of India (Sebi) as the regulator for capital markets requires specialists in financial markets and corporate and securities markets legislation. A few years ago the RBI would not have needed large numbers of specialists in the area of fintech payment systems or digital currency. Likewise Sebi would not have needed specialists in algorithmic trading or high frequency trading some years ago. But now both these regulators require specialists in these areas who not only understand the domain but also understand the use and potential abuse of these new opportunities and the consumer protection measures that are necessary to be put in (by writing regulations on the subject) and enforcing these measures. If there are adjudicatory activities associated with these then another arm of the regulator will also need to have the capacity to judge the violations of these measures and take remedial and penal actions.

In this sense regulatory capacity building is more complex than capacity building in government departments. Even conceding that the knowledge of economics and finance required in the parent Ministry of Finance needs updating the scale and depth of the knowledge required are hugely different. Hence SRAs need the flexibility to recruit retain and substitute talent as dictated by developments in the markets they regulate. The normal governmental system of personnel does not deal with such specialised areas or with such requirements in terms of speed etc. In addition given the opportunity cost of these specialists the government remuneration systems turn out to be inadequate to attract the right talent. This is the primary argument for SRAs in the area of human resources.

However the solution may not come only with a special legislation. For example Sebi the Insolvency and Bankruptcy Board of India and many other SRAs have been created by Parliamentary legislation. These explicitly empower the SRAs to appoint personnel as considered necessary by the SRA for the efficient discharge of its functions and on terms it decides. In practice however the situation is very different across SRAs.

The problem therefore is elsewhere. The General Financial Rules (GFR) of the government mandate that organisations that receive more than 50 per cent of their recurring expenditure in the form of grants-in-aid should formulate terms and conditions of service of their employees in a way that they are not higher than those applicable to similar categories of employees in government. In exceptional cases relaxation may be made in consultation with the Ministry of Finance. Another rule of the GFR requires that all proposals for creation of positions in such bodies shall be submitted to the sanctioning authority.

Given the weight of history and the general risk aversion of civil servants notwithstanding explicit provisions in a parliamentary legislation in practice the executive instructions contained in GFR triumph over the provisions of statute. Sebi escapes this tyranny today as it is not a grant-in-aid institution and generates its own resources in accordance with the law establishing it. It is interesting to note that even in its initial years when the GoI had given Sebi an interest free loan the GoI acted in accordance with the Sebi Act departing from the provisions of GFR. Given that India will need organisations which may not have a natural and direct source of income (like the NFRA and IBBI) the longer-term solution will lie in the direction of differential treatment of SRAs in the GFR.

Modern governance is challenging and requires multiple forms of state organisations. The mandate and nature of the functions of the organisation rather than only the ability to generate its own resources should be the basis of classification of organisations. SRAs are a category that need autonomy in the area of human resources for ensuring both capability and integrity required to avoid capture. The Financial Sector Regulatory Reforms Commission recommendations in this context fully empowering the board of the SRA on these matters along with appropriate changes in the GFR is the way forward. This will ensure SRA autonomy with accountability.

The writer is professor NCAER member of a few for-profit and not-for- profit boards and former civil servant.

With better transport and communication facilities this region has the potential to grow trade with bordering nations.

The ‘Look East’ policy of 1991 gave way to the ‘Act East’ policy” of 2015. The objective of the latter is to promote economic cooperation cultural ties and strategic relationship with countries in the Asia-Pacikc region. This would involve providing enhanced connectivity to India’s North Eastern Region (NER) with our bordering countries.

In contrast to global experiences the border districts in South Asia tend to lag behind others especially in the East. There is a vast amount of literature to show that transport and connectivity are among the major challenges to improving trade ties in the East especially the chicken neck area in the Siliguri corridor. This corridor falls in the North Bengal region of West Bengal.

Several of the districts in the region which border Bangladesh Bhutan and Nepal had been classiked as “backward” by the erstwhile Planning Commission.

The focus here is on the potential of the services sector in North Bengal and NER. While it is challenging to think of the services sector in a pandemic the idea is to be future ready.

The key services sectors that hold potential are:

Producer services: Each of the border districts must develop a perspective plan identifying their comparative advantages and sync them with schemes like District Export Hubs and One District One Product. Scaling up of key sectors will require signikcant enhancement of what economic literature calls ‘producer service’ sectors which include management services research and development knancial and accounting services and marketing.

A related recommendation is that all States should produce district level statistics using the latest 2011-12 base year so as to facilitate economic analysis.Financial services: Barring Sikkim the NER lags behind in terms of knancial inclusion (NCAER DBT Research). The sector can spur regional growth and it has both e÷ciency and equity implications. The innovations from the kntech sector can be another line of export.

ICT connectivity: The nature of this sector is similar to knancial services. Poor connectivity plagues the NER which is largely due to its geographical terrain (NCAER DBT Research). If India can tap into Bangladesh’s submarine cable networks then a combination of optical kbre satellite and microwave technologies could be used to provide digital connectivity in NER. Cooperation trade and innovations in this area will also help our neighbours.

Tea and Bamboo: Eighty-one per cent of Indian tea is produced in Assam and West Bengal. The most signikcant product of the North Bengal economy is tea. NCAER research on border tea trade in North Bengal shows that Nepal and Bangladesh also provide competition to Indian tea producers. However India’s tea infrastructure and regulations are far superior to those of its neighbours.

Online Indian tea auctions provide transparent prices. If Nepalese and Bangladeshi tea are sold in India via Indian tea auctions the “tea services” industry can be further enhanced.

The branding of tea products from each country will benekt India. Similarly the Tripura Bamboo Mission is one-of-a-kind model which can be applied to the eastern region. 

Tourism: Improved connectivity will boost tourism in this region. The natural beauty combined with its religious and historical sites can spur tourism.

NCAER research has found that Nepali citizens living in border regions come to Siliguri for shopping. Day trips for shopping/picnicking from neighbouring countries could be encouraged and monetised. Both short and long trips can generate foreign revenue. The border haats between India and Bangladesh must be enhanced.

Education: The NCAER has found that the share of educational services in Darjeeling district West Bengal is relatively large. It houses good quality boarding schools which can attract international students from bordering districts with spillovers in tourism.

Similarly other districts could identify their respective comparative advantage. Higher education especially through research institutes and edtech companies could be another potential area of service exports. Same languages being spoken in districts across neighbouring international borders may be an enabling factor.

The current infrastructural investment will boost demand for logistics services. India is developing several airports in the region. Bagdogra airport Darjeeling is the only international airport in North Bengal and it is close to many districts in Bangladesh and Nepal. There are plans to expand this airport and it could potentially cater to passengers from neighbouring countries.

Both North Bengal and NER o½er tremendous potential in terms of growth of the services sector. The unique nature of each of the border districts in the region needs to be identiked developed and scaled for sustainable growth and development of these areas.

The writer is a Senior Fellow at NCAER. Views are personal

India should maintain an appropriate level of reserves avoid excessive volatility of the exchange rate and prepare banks and firms to handle greater volatility.

In recent months tapering seems to have become the buzzword again.’Tapering’ refers to the phenomenon when the central banks of advanced countries particularly the US Federal Reserve Board (FRB) start withdrawing liquidity and how this action – or its anticipation – impacts emerging markets. The first time we saw it was in 2013 when Fed chairman Ben Bernanke mooted the possibility that the FRB may begin to reduce its asset purchases. The announcement resulted in a large en masse exodus of capital flows and a sharp negative impact on exchange rates and financial markets in emerging markets.

While nearly 30 countries were impacted during this ‘rebalancing episode’ the maximum impact was felt in five of them – the ‘Fragile Five’. India belonged to this group along with Brazil Indonesia South Africa and Turkey. The average exchange rate depreciated by 9% while the equity price declined by 5%. Foreign reserves declined by 7% and the average bond yield increased by more than 50 basis points (bps) in the Fragile Five.

Taper to Torpor?

The largest exchange rate depreciation occurred in Brazil the largest decline in stock prices in Turkey and the largest reserve loss in Indonesia. India had the second-largest exchange rate depreciation (nearly 16%) and the second-largest decline in reserves (about 6%).

Central bankers scrambled to contain the impacts on their financial markets and economies. The most vocal among them at the same time also criticised and mounted pressure on the Fed to pay heed to the impact of its policies on emerging markets. Since then the FRB seems to have become more mindful of this externality and more forthcoming and transparent in its announcements. It is perhaps in this spirit that the Fed now seems to be gradually building the case for tapering its ultra-loose monetary policy rather than announcing it abruptly.

The question is whether this now somewhat anticipated event will still impact emerging markets the way it did in 2013. What would be the exact repercussions for emerging markets when it eventually happens? Will India be impacted? What can it do ex ante or ex post to insulate itself or to mitigate the impact?

In my research with Barry Eichengreen (including ‘ Tapering Talk: The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets’) analysing the tapering event of 2013 and similar other emerging market sell-off episodes I have distilled the following lessons.

First what mattered the most in determining the impact of tapering across different countries was the size and depth of their financial markets. Investors seeking to rebalance their portfolios concentrated on emerging markets with relatively large and liquid financial systems because these were the markets where they could most easily sell without incurring losses and where there was the highest scope for portfolio rebalancing.

Second the impact of tapering was felt more by countries that had attracted large volumes of capital flows and allowed exchange rates to appreciate in prior years.

In contrast there is little evidence that countries with stronger macroeconomic fundamentals in the immediately preceding period experienced smaller impacts on their financial markets. There are two implications of these findings: one that completely open capital accounts can be a mixed blessing for this can accentuate the impacts of financial shocks emanating from outside. Two by virtue of being a large and liquid market India is likely to be impacted by the next tapering event.

More Juices From the Sluices

India had traditionally maintained a closed capital account. Following the 1991 balance of payment (BoP) crisis it adopted an incremental and calibrated approach to liberalising its capital account. Over time these incremental measures have cumulated and India is now considered an open and large emerging economy with a deep and liquid financial market rendering it vulnerable to capital flow reversals during the emerging market sell-off episodes.

How can India address the impacts of such events? India’s response to the 2013 sell-off included monetary policy tightening higher import duties on gold expansion of a swap line with the Bank of Japan a scheme to raise resources from the diaspora creation of a special facility to accommodate the demand for foreign exchange from oil-importing companies and reassuring communications from the RBI to the markets regarding India’s sound fundamentals.

Similar measures were then implemented in response to a subsequent 2018 sell-off episode and may be used in similar episodes in future as well. Nevertheless new capital control measures can backfire – as they did in 2013 – and ought to be avoided.

Besides India should continue to hold an appropriate level of reserves avoid excessive appreciation or volatility of the exchange rate through the use of reserves and macro-prudential policy and prepare banks and firms to handle greater exchange rate volatility. While such ex ante measures can help limit adverse impacts they still do not offer a guarantee against sell-offs.

Thus it will also pay if India were to change the capital flow mix toward FDI flows find ways to diversify the investor base toward investors with a longer-term view and strengthen the current account including by improving the competitiveness of exports. Eventually a complete insulation can only be ensured if India graduates from the emerging market asset class.

While some headline economic indicators suggest a recovery we must not overlook weaknesses in employment-intensive sectors and still-worrisome joblessness that point to persistent distress.

The official estimates of India’s gross domestic product (GDP) for the first quarter (Q1) of 2021-22 together with other recent information enable us to form a fairly comprehensive picture of how India is doing and the outlook going forward on different aspects of the economy: growth employment inflation investment trade and so on.

The second wave of covid was four times worse than the first wave in terms of peak levels of new daily cases and daily deaths. There was great concern about how it would impact economic activity. Hence the high 20.1% growth registered during Q1 of 2021-22 brought great cheer all around. The high growth was no doubt helped by the absence of a stringent nationwide lockdown as seen during the first wave. However it largely reflected the base effect of the unprecedented 24.4% contraction during Q1 of 2020-21. The level of Q1 GDP in 2021-22 at ₹32 trillion was still nearly₹4 trillion less than the ₹36 trillion GDP registered during Q1 of 2019-20 the last normal year before the pandemic.

Since the contraction itself was reduced during the second third and fourth quarters of 2020- 21 the base effect will also be weaker in these quarters. Hence the year-on-year growth may be progressively lower during the next three quarters. By the end of the year India’s GDP for 2021-22 will probably have just caught up with the 2019-20 level with two years lost to the pandemic. If the Reserve Bank of India’s (RBI) forecast of 9.5% growth in 2021-22 turns out to be correct the level of output might even be a little higher than it was in 2019-20. But that assumes no major adverse impact of a third covid wave an optimistic assumption.

Underlying the aggregate Q1 growth rates there are significant inter-sectoral variations. Agriculture was not much affected by the pandemic. It grew by 3.5% during Q1 last year and 4.5% in Q1 this year. With the rainfall deficit more or less made up by now we can expect a normal rabi harvest and annual agricultural growth of around 4%. In industry all sub-sectors registered very high growth during Q1 led by manufacturing and construction. However the high growth rates again largely reflected the strong base effect of the huge contraction during Q1 of 2020-21. The contraction was also very large in services but less than in industry hence the base effect in 2021-22 is also weaker. The output level of the services-sector is trailing well behind that of 2019-20’s Q1 mainly on account of a shortfall of ₹2 trillion compared to Q1 of 2019-20 in the sub-sector ‘trade hotels transport communications & broadcasting’ (THTC).

The slow recovery of THTC is particularly concerning because this is an employment- intensive sub-sector with many of the employed comprising low-wage informal workers who have been hit hardest by the pandemic. At the aggregate level the Centre for Monitoring Indian Economy data as of 13 September indicates that India’s unemployment rate is still hovering around 8% with the urban rate even higher at over 9%. In some states the unemployment rates are astonishingly high: 36% in Haryana and 27% in Rajasthan for example. Thus the prevailing level of distress is not difficult to imagine even though high- frequency indicators suggest that economic recovery has been sustained even during Q2 in most sub-sectors of industry and services.

On the prices front the wholesale price index (WPI) is now rising at the double-digit inflation rate of 11.4% year-on-year. The headline consumer price Index (CPI) inflation rate and core CPI inflation (excluding food and fuel) are significantly lower but close to the RBI target ceiling of 6%. RBI is confident that the price situation will ease. Hopefully it is right. Because if inflationary pressures persist while the output level is yet to catch up with the pre- pandemic level two years ago that will make macroeconomic policy very challenging.

India’s growth outlook going forward will depend on some key drivers. A rise in the investment rate from 24% to 32% of GDP marks a revival of the investment cycle and it has to be sustained. Consumption demand is still trailing the 2019-20 level and this too needs urgent revival. For this to happen the compression of government expenditure needs to be reversed during the rest of the year keeping in view the buoyant growth of tax revenues (including GST). In this context expenditure by state governments which is collectively much larger than central government expenditure but subject to hard budget constraints is even more important than central expenditure. Despite a rapid rise in revenues governments may still need large borrowings. Hence RBI will need to maintain its accommodative monetary policy stance but this needs to be carefully calibrated to ensure that inflation is contained within its target band. Finally robust global growth especially for India’s major trade partners is essential to sustain high export growth and turn the trade deficit around.

I have emphasized demand-side factors because recent data sets do not point to any critical supply-side bottlenecks at the present juncture. However there is still the risk of a third covid wave. To minimize that risk an aggressive vaccination drive will remain the most critical determinant of an economic revival.

Sudipto Mundle is a distinguished fellow at the National Council of Applied Economic Research. These are the author’s personal views.