Undermining the Bureaucracy

Regulation, the primary function of the bureaucracy, is a response to market failures. If there were no market failures, there would be no need for any state intervention and, hence, no need for a bureaucratic regulation. Examples of market failures abound:

·      Presence of monopolies, especially private monopolies. This is not to imply that public monopolies (e.g. Indian railways or the telecom sector till the 1980s) do not matter but that the distinction between the regulator and the regulated gets blurred in such cases.

·         Presence of externalities (e.g. pollution)

·         Pricing of natural resources when the markets required to reveal prices are missing (e.g. coal blocks, spectrum)

To safeguard bureaucratic autonomy, it is important to ensure arms-length regulation so that the regulator is not influenced/cajoled/bribed by the regulated. The alternative to this – sometimes called “embedded bureaucracy” in East Asian economies such as Japan and South Korea – has been tried out but was found wanting. The Asian crisis of 1997 exposed the embedded bureaucracy approach to charges of crony capitalism.

Regulatory capture is a situation where arms-length regulation is compromised: it is a process through which special interests affect state intervention in any form ( See Ernest Dal Bo). Much regulatory capture is accompanied by corruption, some of it in the form of instant gratification (inducements/bribes) but a more subtle form of corruption offers the security of an income stream after the retirement of the bureaucrat. If the bureaucrat is free to take up a job with private business after retirement, arms-length regulation comes under severe threat. The quid pro quo between the regulator and the regulated in such a scenario takes the form of diluted regulation in exchange for a deferred reward (after the bureaucrat’s retirement). 

This is the reason why the All India Service Rules of the Indian bureaucracy require a “cooling-off” period before a retired bureaucrat takes up employment with the private sector. The cooing-off period used to be two years but now stands at one year after much pressure from the bureaucracy (See here). Of course, the Service Rules had the usual escape route where the cooling-off period could be waived with the prior sanction of the government.

It is not just in the private sector that retired bureaucrats have found jobs. Numerous chairmen of the Telecom Regulatory Authority of India (TRAI) have been retired bureaucrats. Among the various regulatory bodies created during the last two decades, many are headed by retired bureaucrats, for example, Comptroller and Auditor General, Central Vigilance Commission, Human Rights Commission, and the SC/ST Commission to name a few (See here).

Since retired bureaucrats have also been finding employment in various regulatory or other government bodies, is it sufficient to restrict the cooling-off period to only the private sector? What about the quid pro quo between the government and the bureaucracy? Isn’t the autonomy of the regulator/bureaucrat compromised by the inducement of a government job after retirement? This is not regulatory capture in the sense discussed above but it certainly impinges on bureaucratic functioning. The lure of a government appointment could possibly compromise the independence of the bureaucracy. It is precisely to prevent such a possibility that the TRAI Act of 1997 had the following provision:

“The Chairperson or any other member ceasing to hold office as such, shall —— (a) be ineligible for further employment under the Central Government or any State Government or (b) not accept any commercial employment, for a period of two years from the date he ceases to hold such office”

[Curiously, the version of the TRAI Act on the TRAI website uses the word “eligible” instead of “ineligible” (point (a) above), which has to be an error. Were it not an error, there would have been no need for the amendment recently passed by the BJP government (see below).]

The TRAI (Amendment) Ordinance of 28 May 2014 introduced by the BJP government has now amended this provision in the TRAI Act which now reads as follows (see here): 

“In the Telecom Regulatory Authority of India Act, 1997, in section 5,—

(i) for sub-section (8), the following sub-section shall be substituted, namely:—

‘‘(8) The Chairperson and the whole-time members shall not, for a period of two years from the date on which they cease to hold office as such, except with the previous approval of the Central Government, accept—(a) any employment either under the Central Government or under any State Government; or (b) any appointment in any company in the business of telecommunication service.’’;

While the original act completely prohibited employment for a period of two years, the amendment allows the government to waive this requirement. I think this change is a very retrograde step taken by the BJP government. Let me hasten to add what I don’t mean by this statement of mine.

1.      I am not objecting to the use of an ordinance when the parliamentary session is to be held shortly. I am more concerned with the principle involved in the amendment rather than the procedure adopted.

2.      I am not objecting to the Prime Minister’s perceived urgency in appointing a serving Chairman of the TRAI. If Mr. Narendra Modi felt that Nripendra Misra was the best person for the job of Principal Secretary to the Prime Minister, I am willing to respect his judgment

My objection is that an institutional mechanism has been diluted for a personal need of the Prime Minister however justifiable and urgent this need might be. I had been very pleased  when Mr. Modi stated the following in his interview with TimesNow TV: “...I still believe that every idea must be institutionalised and then that institutionalised activity will work” (see transcript of interview). But the recent amendment sets a very bad precedent since it dilutes an institutionalised provision at the altar of expediency. One of the problems that has been faced in India is the lack of independence of the bureaucracy in the face of ministerial diktat. In this context, the TRAI Act had made a contribution of profound importance in original provision quoted above. It had clearly recognised that the threat to bureaucratic autonomy can come, not only from private commercial interests, but also from the government of the day. Alas, this important contribution of the TRAI Act has now been compromised.

Finally, also note that the amendment has also made it possible for the private sector to employ any TRAI member (after obtaining government approval, of course). Does this open the way for regulatory capture? Is that an intended or unintended consequence of the amendment?