REGULATORY FAILURES

Governments in India have for long regulated many economic and other activities within the framework of the Constitution and the laws passed by the Central or state legislatures. Since no law can be so detailed that it covers all the complexities of implementation, rules and regulations are framed to enable governments to give flesh to the skeletons of overall policies. During the four decades or so when India was committed to a “socialistic pattern” of society, ministers and their bureaucrats developed regulations that controlled almost every aspect of economic activity. There was much abuse of these powers; favours were given to some, bribes smoothed the way for many, nepotism was common, financial and other support to political mentors was the price for some. This continues despite liberalization and the withdrawal of government from many areas of control. This is because decisions that could enable large profits were taken in an opaque manner. There was considerable discretion given to ministers and bureaucrats, easily subject to misuse.  Independent regulators were created to get over this difficulty. The first regulator who took over many of the government’s powers was the Reserve Bank of India, though it remained ultimately subservient to the finance minister and his office. The RBI determined monetary policy. Though there is no legislation that gives it the mandate, it uses monetary policy (money supply, interest rates) to keep inflation within limits. It also manages the external value of the rupee by buying and selling foreign currencies and increasing and decreasing the flow of rupees. It also regulates the different financial institutions.